Mourning call: people gather to remember pro-Russian militants killed in Odessa, southern Ukraine, 10 May. Photo: Getty
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Ukraine: as the death toll rises, a collective psychosis is taking hold

David Patrikarakos reports from Odessa, scene of the bloodiest incident of the Russia-Ukraine conflict so far. 

On 2 May, a fire in the historic city of Odessa in southern Ukraine killed dozens of pro-Russian separatists, increasing fears of an all-out war. At dusk, as pro-Ukraine activists stormed a trade union office occupied by separatists in the city centre, the building was set alight.

It was the bloodiest incident of this conflict so far. People choked to death on smoke or died jumping from windows as they tried to escape the flames. Russian TV aired graphic footage of the fire and its aftermath – charred bodies in pools of blood, including a woman who was reportedly pregnant – relentlessly over the weekend. Many fear that this could give Vladimir Putin, who already claims that Russia might be “forced to act” to “protect” Ukraine’s Russian-speaking population, the pretext he needs to begin an invasion. Others argue that he doesn’t need a pretext; if he wants to invade, he will.

The tragedy came amid mounting violence in the east as the Kyiv government launched its latest counterterrorism operation, the first that has seriously tried to clear pro-Russian separatists from their strongholds. Over the past weeks, the Ukrainian army has advanced steadily towards the occupied cities and fighting between the two sides has intensified.

In the small industrial town of Sloviansk, the centre of the east’s continuing crisis, Ukraine special forces engaged local separatists in hours of heavy gunfire on its northern outskirts on 5 May. Four Ukrainian soldiers and at least 20 separatists were killed. The defence ministry also reported that one of its helicopters had been shot down during the assault – the third to be downed by separatists in a matter of days.

The counterterrorism operation remains confused. Soldiers alternate between intense bouts of violence and long periods of inaction as the Kyiv government alternates between the need to restore order in what is still – barely – a sovereign state and the desire to avoid giving the Kremlin any excuse for further invasion. The army, underfunded and underequipped, also faces the problem of the local population, sections of which form human shields by mingling with the armed militia or gathering around occupied buildings, making it harder for the army to attack.

Back in Kyiv’s Maidan Nezalezhnosti (“Independence Square”), the scene of the February revolution that overthrew the then president, Viktor Yanukovych, the atmosphere has darkened. Maidan is still filled with members of the militia left over from the uprising who have refused to leave until the presidential elections on 25 May. Dressed in camouflage and carrying bats and sticks, they loaf on the streets by day and spend their nights in the tents around the square. Maidan remains cosmetically militarised – ringed by barricades of tyres and sandbags – but it has become little more than a tourist trap, selling souvenirs of the revolution to the trickle of foreigners who still visit.

Now the barricades are being reinforced and expanded. On 5 May, access into the square via a neighbouring street was controlled by a blonde militia girl of no more than 17, who manned a makeshift gate allowing vehicles access in and out. The armoured personnel carrier parked incongruously in the middle of the street – which some of the more enterprising militiamen had been charging people 50 hryvnias a turn to sit in and have their photo taken – was being cleaned and tested.

Both sides are adopting a war mentality, the most obvious – and ominous – aspect of which is the dehumanisation of the enemy. Pro-Russians describe the Odessa fire as “inhumanity . . . last seen by the Nazis in the Second World War”, while the more extreme pro-Ukrainian elements post memes that mock those who died.

A collective psychosis, born of machismo and paranoia and fuelled by rumour, is taking hold. The latest story gaining traction in the capital is that thousands of Russians – solitary males of military age – have begun to appear in Kyiv, renting rooms and just waiting. “Let them come,” says Maksym, my wiry and intense landlord. “I’ve got body armour and I’m cleaning all my guns.”

It is a phenomenon I have seen repeatedly: in Lebanon, in Congo, in Israel. Men sit in the cafés and bars of Kyiv vowing to smash “Putin”. Machine-gun-wielding sep­aratists tell me they will “cleanse” Ukraine of the “fascist junta” in Kyiv. “If the Russians come, I’ll be up there with my Kalashnikov,” an ex-soldier friend tells me, pointing to the gaudily lit roof terrace of my local sushi restaurant.

Many members of the camouflaged militia are unemployed young men from small towns, who have a new purpose and sense of belonging. It’s hard to imagine them willingly returning to their previous lives now.

Whether or not the two sides will face each other in the coming weeks remains to be seen. What is clear is that the further destabilisation of Ukraine is Moscow’s goal, at least in the short term.

Central to Russian propaganda and the arguments of the separatists is that the Kyiv government is an “unelected junta”. By democratically electing a new president, some legitimacy would be restored, which is what Putin fears. One of his spokesmen recently said that it would be “absurd” to proceed with the polls.

Even if the elections do go ahead, the winner is likely to have only a slim mandate. Pro-Russian sympathisers in the east will boycott the elections on principle and it is difficult to see the militants who control the occupied cities allowing the citizens there to vote unmolested.

The two sides are now divided by un­mitigated hate. It is difficult to envisage a future for Ukraine free from further chaos and violence.

This article first appeared in the 08 May 2014 issue of the New Statesman, India's worst nightmare?

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We're racing towards another private debt crisis - so why did no one see it coming?

The Office for Budget Responsibility failed to foresee the rise in household debt. 

This is a call for a public inquiry on the current situation regarding private debt.

For almost a decade now, since 2007, we have been living a lie. And that lie is preparing to wreak havoc on our economy. If we do not create some kind of impartial forum to discuss what is actually happening, the results might well prove disastrous. 

The lie I am referring to is the idea that the financial crisis of 2008, and subsequent “Great Recession,” were caused by profligate government spending and subsequent public debt. The exact opposite is in fact the case. The crash happened because of dangerously high levels of private debt (a mortgage crisis specifically). And - this is the part we are not supposed to talk about—there is an inverse relation between public and private debt levels.

If the public sector reduces its debt, overall private sector debt goes up. That's what happened in the years leading up to 2008. Now austerity is making it happening again. And if we don't do something about it, the results will, inevitably, be another catastrophe.

The winners and losers of debt

These graphs show the relationship between public and private debt. They are both forecasts from the Office for Budget Responsibility, produced in 2015 and 2017. 

This is what the OBR was projecting what would happen around now back in 2015:

This year the OBR completely changed its forecast. This is how it now projects things are likely to turn out:

First, notice how both diagrams are symmetrical. What happens on top (that part of the economy that is in surplus) precisely mirrors what happens in the bottom (that part of the economy that is in deficit). This is called an “accounting identity.”

As in any ledger sheet, credits and debits have to match. The easiest way to understand this is to imagine there are just two actors, government, and the private sector. If the government borrows £100, and spends it, then the government has a debt of £100. But by spending, it has injected £100 more pounds into the private economy. In other words, -£100 for the government, +£100 for everyone else in the diagram. 

Similarly, if the government taxes someone for £100 , then the government is £100 richer but there’s £100 subtracted from the private economy (+£100 for government, -£100 for everybody else on the diagram).

So what implications does this kind of bookkeeping have for the overall economy? It means that if the government goes into surplus, then everyone else has to go into debt.

We tend to think of money as if it is a bunch of poker chips already lying around, but that’s not how it really works. Money has to be created. And money is created when banks make loans. Either the government borrows money and injects it into the economy, or private citizens borrow money from banks. Those banks don’t take the money from people’s savings or anywhere else, they just make it up. Anyone can write an IOU. But only banks are allowed to issue IOUs that the government will accept in payment for taxes. (In other words, there actually is a magic money tree. But only banks are allowed to use it.)

There are other factors. The UK has a huge trade deficit (blue), and that means the government (yellow) also has to run a deficit (print money, or more accurately, get banks to do it) to inject into the economy to pay for all those Chinese trainers, American iPads, and German cars. The total amount of money can also fluctuate. But the real point here is, the less the government is in debt, the more everyone else must be. Austerity measures will necessarily lead to rising levels of private debt. And this is exactly what has happened.

Now, if this seems to have very little to do with the way politicians talk about such matters, there's a simple reason: most politicians don’t actually know any of this. A recent survey showed 90 per cent of MPs don't even understand where money comes from (they think it's issued by the Royal Mint). In reality, debt is money. If no one owed anyone anything at all there would be no money and the economy would grind to a halt.

But of course debt has to be owed to someone. These charts show who owes what to whom.

The crisis in private debt

Bearing all this in mind, let's look at those diagrams again - keeping our eye particularly on the dark blue that represents household debt. In the first, 2015 version, the OBR duly noted that there was a substantial build-up of household debt in the years leading up to the crash of 2008. This is significant because it was the first time in British history that total household debts were higher than total household savings, and therefore the household sector itself was in deficit territory. (Corporations, at the same time, were raking in enormous profits.) But it also predicted this wouldn't happen again.

True, the OBR observed, austerity and the reduction of government deficits meant private debt levels would have to go up. However, the OBR economists insisted this wouldn't be a problem because the burden would fall not on households but on corporations. Business-friendly Tory policies would, they insisted, inspire a boom in corporate expansion, which would mean frenzied corporate borrowing (that huge red bulge below the line in the first diagram, which was supposed to eventually replace government deficits entirely). Ordinary households would have little or nothing to worry about.

This was total fantasy. No such frenzied boom took place.

In the second diagram, two years later, the OBR is forced to acknowledge this. Corporations are just raking in the profits and sitting on them. The household sector, on the other hand, is a rolling catastrophe. Austerity has meant falling wages, less government spending on social services (or anything else), and higher de facto taxes. This puts the squeeze on household budgets and people are forced to borrow. As a result, not only are households in overall deficit for the second time in British history, the situation is actually worse than it was in the years leading up to 2008.

And remember: it was a mortgage crisis that set off the 2008 crash, which almost destroyed the world economy and plunged millions into penury. Not a crisis in public debt. A crisis in private debt.

An inquiry

In 2015, around the time the original OBR predictions came out, I wrote an essay in the Guardian predicting that austerity and budget-balancing would create a disastrous crisis in private debt. Now it's so clearly, unmistakably, happening that even the OBR cannot deny it.

I believe the time has come for there be a public investigation - a formal public inquiry, in fact - into how this could be allowed to happen. After the 2008 crash, at least the economists in Treasury and the Bank of England could plausibly claim they hadn't completely understood the relation between private debt and financial instability. Now they simply have no excuse.

What on earth is an institution called the “Office for Budget Responsibility” credulously imagining corporate borrowing binges in order to suggest the government will balance the budget to no ill effects? How responsible is that? Even the second chart is extremely odd. Up to 2017, the top and bottom of the diagram are exact mirrors of one another, as they ought to be. However, in the projected future after 2017, the section below the line is much smaller than the section above, apparently seriously understating the amount both of future government, and future private, debt. In other words, the numbers don't add up.

The OBR told the New Statesman ​that it was not aware of any errors in its 2015 forecast for corporate sector net lending, and that the forecast was based on the available data. It said the forecast for business investment has been revised down because of the uncertainty created by Brexit. 

Still, if the “Office of Budget Responsibility” was true to its name, it should be sounding off the alarm bells right about now. So far all we've got is one mention of private debt and a mild warning about the rise of personal debt from the Bank of England, which did not however connect the problem to austerity, and one fairly strong statement from a maverick columnist in the Daily Mail. Otherwise, silence. 

The only plausible explanation is that institutions like the Treasury, OBR, and to a degree as well the Bank of England can't, by definition, warn against the dangers of austerity, however alarming the situation, because they have been set up the way they have in order to justify austerity. It's important to emphasise that most professional economists have never supported Conservative policies in this regard. The policy was adopted because it was convenient to politicians; institutions were set up in order to support it; economists were hired in order to come up with arguments for austerity, rather than to judge whether it would be a good idea. At present, this situation has led us to the brink of disaster.

The last time there was a financial crash, the Queen famously asked: why was no one able to foresee this? We now have the tools. Perhaps the most important task for a public inquiry will be to finally ask: what is the real purpose of the institutions that are supposed to foresee such matters, to what degree have they been politicised, and what would it take to turn them back into institutions that can at least inform us if we're staring into the lights of an oncoming train?