Capital As Power.

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One has the Eric Fromm angle of consciousness as linear and directly proportional to exploitation as one of the strands of Marxian thinking, the non-linearity creeps up from epistemology on the technological side, with, something like, say Moore’s Law, where ascension of conscious thought is or could be likened to exponentials. Now, these exponentials are potent in ridding of the pronouns, as in the “I” having a compossibility with the “We”, for if these aren’t gotten rid of, there is asphyxiation in continuing with them, an effort, an energy expendable into the vestiges of waste, before Capitalism comes sweeping in over such deliberately pronounced islands of pronouns. This is where the sweep is of the “IT”. And this is emancipation of the highest order, where teleology would be replaced by Eschatology. Alienation would be replaced with emancipation. Teleology is alienating, whereas eschatology is emancipating. Agency would become un-agency. An emancipation from alienation, from being, into the arms of becoming, for the former is a mere snapshot of the illusory order, whereas the latter is a continuum of fluidity, the fluid dynamics of the deracinated from the illusory order. The “IT” is pure and brute materialism, the cosmic unfoldings beyond our understanding and importantly mirrored in on the terrestrial. “IT” is not to be realized. “It” is what engulfs us, kills us, and in the process emancipates us from alienation. “IT” is “Realism”, a philosophy without “we”, Capitalism’s excessive power. “IT” enslaves “us” to the point of us losing any identification. In a nutshell, theory of capital is a catalogue of heresies to be welcomed to set free from the vantage of an intention to emancipate economic thought from the etherealized spheres of choice and behaviors or from the paradigm of the disembodied minds.

Jonathan Nitzan and Shimshon Bichler‘s Capital as Power A Study of Order and Creorder

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Serge Galam’s Sociophysics: A Physicist’s Modeling of Psycho-political Phenomena

The Trump phenomenon is argued to depart from current populist rise in Europe. According to a model of opinion dynamics from sociophysics the machinery of Trump’s amazing success obeys well-defined counter-intuitive rules. Therefore, his success was in principle predictable from the start. The model uses local majority rule arguments and obeys a threshold dynamics. The associated tipping points are found to depend on the leading collective beliefs, cognitive biases and prejudices of the social group which undertakes the public debate. And here comes the open sesame of the Trump campaign, which develops along two successive steps. During a first moment, Trump’s statement produces a majority of voters against him. But at the same time, according to the model the shocking character of the statement modifies the prejudice balance. In case the prejudice is present even being frozen among voters, the tipping point is lowered at Trump’s benefit. Nevertheless, although the tipping point has been lowered by the activation of frozen prejudices it is instrumental to preserve enough support from openly prejudiced people to be above the threshold.

Serge Galam – Sociophysics A Physicist’s Modeling of Psycho-political Phenomena

 

Infrastructure and Asian Infrastructure and Investment Bank. Some Scattered Thoughts.

What is Infrastructure?

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Infrastructure, though definitionally an elusive term, encompasses an economic standpoint consisting of large capital intensive natural monopolies. The term attains it heterogeneity by including physical structures of various types used by many industries as inputs to the production of goods and services. By this, it has come to mean either social, or economic infrastructure, wherein, in the former, are schools, hospitals etc, while in the latter are energy, water, transport, and digital communications, often considered essential ingredients in the success of the modern economy. Conceptually, infrastructure may affect aggregate output in two main ways: (i) directly, considering the sector contribution to GDP formation and as an additional input in the production process of other sectors; and (ii) indirectly, raising total factor productivity by reducing transaction and other costs thus allowing a more efficient use of conventional productive inputs. Infrastructure can be considered as a complementary factor for economic growth. How big is the contribution of infrastructure to aggregate economic performance? The answer is critical for many policy decisions – for example, to gauge the growth effects of fiscal interventions in the form of public investment changes, or to assess if public infrastructure investments can be self-financing.

Let us ponder on this a bit and begin with the question. Why is infrastructure even important? Extensive and efficient infrastructure is critical for ensuring the effective functioning of the economy, as it is an important factor determining the location of economic activity and the kinds of activities or sectors that can develop in a particular economy. Well-developed infrastructure reduces the effect of distance between regions, integrating the national market and connecting it at low cost to markets in other countries and regions. In addition, the quality and extensiveness of infrastructure networks significantly impact economic growth and affect income inequalities and poverty in a variety of ways. A well-developed transport and communications infrastructure network is a prerequisite for the access of less-developed communities to core economic activities and services. Effective modes of transport, including quality roads, railroads, ports, and air transport, enable entrepreneurs to get their goods and services to market in a secure and timely manner and facilitate the movement of workers to the most suitable jobs. Economies also depend on electricity supplies that are free of interruptions and shortages so that businesses and factories can work unimpeded. Finally, a solid and extensive communications network allows for a rapid and free flow of information, which increases overall economic efficiency by helping to ensure that businesses can communicate and decisions are made by economic actors taking into account all available relevant information. There is an existing correlation between infrastructure and economic activity through which the economic effects originate in the construction phase and rise during the usage phase. The construction phase is associated with the short-term effects and are a consequence of the decisions in the public sector that could affect macroeconomic variables: GDP, employment, public deficit, inflation, among others. The public investment expands the aggregate demand, yielding a boost to the employment, production and income. The macroeconomic effects at a medium and long term, associated with the utilization phase are related to the increase of productivity in the private sector and its effects over the territory. Both influence significantly in the competitiveness degree of the economy. In conclusion, investing in infrastructure constitutes one of the main mechanisms to increase income, employment, productivity and consequently, the competitiveness of an economy. Is this so? Well, thats what the economics textbook teaches us, and thus governments all over the world turn to infrastructure development as a lubricant to maintain current economic output at best and it can also be the basis for better industry which contributes to better economic output. Governments, thus necessitate realignment of countries’ infrastructure in tune with the changing nature of global political economy. Infrastructure security and stability concerns the quantity of spare capacity (or security of supply). Instead of acting on the efficiency frontier, infrastructure projects must operate with spare capacity to contribute to economic growth through ensuring reliable service provisions. Spare capacity is a necessary condition for a properly functioning system. To assure the level of spare capacity in the absence of storage and demand, the system needs to have excess supply. However, no rational profit-seeker will deliberately create conditions of excess supply, since it would produce a marginal cost lower than the average cost, and to circumnavigate this market failure, governments are invested with the responsibility of creating incentives ensuring securities of supply. This is seeding the substitutability of economics with financialization. 

So far, so good, but then, so what? This is where social analysts need to be incisive in unearthing facts from fiction and this faction is what constitutes the critique of development, a critique that is engineered against a foci on GDP-led growth model. This is to be done by asking uncomfortable questions to policy-makers, such as: What is the most efficient way to finance infrastructure spending? What are optimal infrastructure pricing, maintenance and investment policies? What have proven to be the respective strengths and weaknesses of the public and private sectors in infrastructure provision and management, and what shapes those strengths and weaknesses? What are the distributional consequences of infrastructure policies? How do political forces impact the efficiency of public sector provision? What framework deals best with monopoly providers of infrastructure? For developing countries, which have hitherto been plagued by weaker legal systems making regulation and enforcement more complicated, the fiscally weak position leads to higher borrowing costs. A most natural outcome is a systemic increase in financial speculation driven by deregulation transforming into financial assets. Contrary to common sense and what civil society assumes, financial markets are going deeper and deeper into the real economy as a response to the financial crisis, so that speculative capital is structurally being intertwined with productive capital changing the whole dynamics of infrastructure investment. The question then is, how far viable or sustainable are these financial interventions? Financialization produces effects which can create long-term trends (such as those on functional income distribution) but can also change across different periods of economic growth, slowdown and recession. Interpreting the implications of financialization for sustainability, therefore, requires a methodological diverse and empirical dual-track approach which combines different methods of investigations. Even times of prosperity, despite their fragile and vulnerable nature, can endure for several years before collapsing due to high levels of indebtedness, which in turn amplify the real effects of a financial crisis and hinder the economic growth. 

Role of Development Banks and AIIB

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Where do development banks fit into the schema as regards infrastructure investment? This question is a useful gamble in order to tackle AIIB, the new kid on the bloc. As the world struggles to find funds to meet the Sustainable Development Goals (SDGs), development banks could be instrumental in narrowing the gap. So, goes the logic promulgated by these banks. They can help to crowd-in the private sector and anchor private-public sector partnerships, particularly for infrastructure financing. However, misusing development banks can lead to fiscal risks and credit market distortions. To avoid these potential pitfalls, development banks need a well-defined mandate, operate without political influence, focus on addressing significant market failures, concentrate on areas where the private sector is not present, monitor and evaluate interventions and adjust as necessary to ensure impact, and, finally, be transparent and accountable. All of these are the ideals, which more often than not go the other way. China-led Asian Infrastructure Investment Bank (AIIB), despite having no track record still enjoys the highest ratings on par with the World Bank. This has fueled debates ranging from adding much-needed capital augmenting infrastructure to leniency in observing high standards of governance, and possibly ignoring environmental and societal impacts.

The AIIB was officially launched in Beijing on January 16th, 2016, with 57 founding members, including 37 in Asia and 20 non-regional countries. Being the largest shareholder of the AIIB, China has an initial subscription of $29.78 billion in authorized capital stock in the AIIB out of a total of $100 billion, and made a grant contribution of another $50 million to the AIIB Project Preparation Special Fund on January 16th, 2017. India is the second-largest shareholder, contributing $8.4 billion. Russia is the third-largest shareholder, contributing $6.5 billion, and Germany is the largest non-regional shareholder (also the fourth largest shareholder), contributing $4.5 billion. While being open to the participation of non-regional members, the AIIB is committed to and prioritizes the ownership of Asian members. This is reflected in the capital structure requirement and the requirements for the composition of Board of Governors in the AIIB’s Article of Agreement (AOA), which requires no less than 75 percent of the total subscribed capital stock to be held by regional members unless otherwise agreed by the Board of Governors by a Super Majority vote. The AOA also requires that 9 out of the AIIB’s 12 members be elected by the Governors representing regional members, and 3 representing non-regional members. The prioritization of Asian-members’ ownership of the AIIB does not necessarily mean that the AIIB’s investment is restricted only to Asia. According to its AOA, the AIIB aims to “improve infrastructure connectivity in Asia,” and it will invest in Asia and beyond as long as the investment is “concerned with economic development of the region.” The bank currently has 64 member states while another 20 are prospective members for a total of 84 approved members. 

The AIIB’s EU/OECD members potentially could have some positive influence over the institutional building and standard setting of the young institution. The European Commission has recognized that an EU presence in China-driven institutions would contribute to the adoption of best practices and fair, global standards. Adherence to such standards will be promoted by the AIIB entering into partnership with existing Multilateral Development Banks. It has also been argued that joining the AIIB would give the European countries access to the decision-making process within the AIIB, and may even allow the European countries to play a role in shaping the AIIB’s organizational structure. As an example of EU/OECD members’ activism in monitoring the AIIB’s funds allocation, both Denmark and the UK, who are AIIB’s OECD members, proposed that contributions to the AIIB would qualify as official development aid (ODA). After a thorough review of AIIB’s AOA, mandate, work plan and other available materials, the OECD’s Secretariat of the Development Assistance Committee (DAC) recommended including AIIB on the List under the category of “Regional development banks,” which means the OECD would recognize the AIIB as one of the ODA-eligible international organizations. Once approved, the Secretariat of DAC will be able to “monitor the future recipient breakdown of the AIIB’s borrowers through AIIB’s future Creditor Reporting System and thereby confirm that the actual share of funds going to countries on the DAC List of ODA Recipients is over 90%.” That is to say, if approved, there would be additional external monitor to make sure that the funds channeled through the AIIB to recipient countries are used properly. 

The AIIB’s initial total capital is $100 billion, equivalent to about 61 percent of the ADB’s initial total capital, 43 percent of the World Bank’s, 30 percent of the European Investment Bank’s (EIB), and more than twice of the European Bank for Reconstruction and Development’s (EBRD). Of this $100 billion initial capital, 20 percent is to be largely paid-in by 2019 and fully paid-in by 2024, and the remaining 80 percent is in callable capital. It needs to be noted that according to the AOA, payments for paid-in capital are due in five installments, with the exception of members designated as less developed countries, who may pay in ten installments. As of any moment, the snapshot of AIIB’s financial sheet includes total assets, members’ equities and liabilities, the last of which has negligible debt at the current stage since the AIIB has not issued any debenture or borrowed money from outside. However, to reduce the funding costs and to gain access to wider source of capital, the AIIB cannot rely solely on equity and has to issue debenture and take some leverage, particularly given that the AIIB intends to be a for-profit institution. In February 2017, the AIIB signed an International Swaps and Derivatives Association (ISDA) Master Agreement with the International Finance Corporation (IFC), which would facilitate local currency bond issuance in client countries. Moreover, AIIB intends to actively originate and lead transactions that mobilize private capital and make it a trusted partner for all parties involved in the transactions that the Bank leads. In the long term, the AIIB aims to be the repository of know-how and best practices in infrastructure finance. 

It is widely perceived that the AIIB is a tool of Chinese foreign policy, and that it is a vehicle for the implementation of the Belt and Road (One Belt, One Road) Initiative. During a meeting with global executives in June 2016, the AIIB President Jin Liqun clarified China’s position, saying the AIIB “was not created exclusively for this initiative,” and that the AIIB would “finance infrastructure projects in all emerging market economies even though they don’t belong to the Belt and Road Initiative.” It is worth pointing out that despite the efforts on trying to put some distance between the AIIB and the Belt and Road Initiative, there is still a broad perception that these two are closely related. Moreover, China has differentiated AIIB projects from its other foreign assistance projects by co-financing its initial projects with the preexisting MDBs. Co-financing, combined with European membership, will make it more likely this institution largely conforms to the international standards” and potentially will steer the AIIB away from becoming solely a tool of Chinese foreign policy. This supports China’s stated intention to complement existing MDBs rather than compete with them. It also means that the AIIB can depend on its partners, if they would allow so, for expertise on a wide range of policy and procedural issues as it develops its lending portfolio.

Although AIIB has attracted a great number of developing and developed countries to join as members and it has co-financed several projects with other MDBs, there is no guarantee for any easy success in the future. There are several formidable challenges for the young multilateral institution down the road. Not all the infrastructure investment needs in Asia is immediately bankable and ready for investors’ money. Capital, regardless it’s sovereign or private, will not flow in to any project without any proper preparation. Although Asia faces a huge infrastructure financing gap, there is a shortage of ‘shovel-ready’ bankable projects owing to the capacity limitations. The young AIIB lacks the talent and expertise to create investor-ready bankable projects, despite that it has created a Project Preparation Special Fund thanks to $50 million by China. The AIIB aims to raise money in global capital markets to invest in the improvement of trans-regional connectivity. However, infrastructure projects are not naturally attractive investment due to huge uncertainties throughout the entire life cycle as well as unjustified risk-profit balance. Getting a top-notch credit rating is just a start. The AIIB has to find innovative ways to improve the risk-adjusted profitability of its projects. This issue itself has been a big challenge for many MDBs who engage in infrastructure financing for a long time. It is uncertain if the AIIB could outperform the other much more matured MDBs to find a solution to tackle the profitability problem in infrastructure financing. The highest rating it has received from ratings agencies could pose a challenge in itself. The high rating not only endorses the bank’s high capital adequacy and robust liquidity position, but also validates the strong political will of AIIB’s members and the bank’s governance frameworks. A good rating will help the AIIB issue bonds at favorable rate and utilize capital markets to reduce its funding costs. This certainly will contribute to AIIB’s efforts to define itself as a for-profit infrastructure investment bank. However, there is no guarantee that the rating will hold forever. Many factors may impact the rating in the future, including but not limited to AIIB’s self-capital ratio, liquidity, management, yieldability, risk management ability, and its autonomy and independency from China’s influence. 

Global Significance of Chinese Investments. My Deliberations in Mumbai (04/03/2018)

Legends:

What are fitted values in statistics?

The values for an output variable that have been predicted by a model fitted to a set of data. a statistical is generally an equation, the graph of which includes or approximates a majority of data points in a given data set. Fitted values are generated by extending the model of past known data points in order to predict unknown values. These are also called predicted values.

What are outliers in statistics?

These are observation points that are distant from other observations and may arise due to variability in the measurement  or it may indicate experimental errors. These may also arise due to heavy tailed distribution.

What is LBS (Locational Banking statistics)?

The locational banking statistics gather quarterly data on international financial claims and liabilities of bank offices in the reporting countries. Total positions are broken down by currency, by sector (bank and non-bank), by country of residence of the counterparty, and by nationality of reporting banks. Both domestically-owned and foreign-owned banking offices in the reporting countries record their positions on a gross (unconsolidated) basis, including those vis-à-vis own affiliates in other countries. This is consistent with the residency principle of national accounts, balance of payments and external debt statistics.

What is CEIC?

Census and Economic Information Centre

What are spillover effects?

These refer to the impact that seemingly unrelated events in one nation can have on the economies of other nations. since 2009, China has emerged a major source of spillover effects. This is because Chinese manufacturers have driven much of the global commodity demand growth since 2000. With China now being the second largest economy in the world, the number of countries that experience spillover effects from a Chinese slowdown is significant. China slowing down has a palpable impact on worldwide trade in metals, energy, grains and other commodities.

How does China deal with its Non-Performing Assets?

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China adopted a four-point strategy to address the problems. The first was to reduce risks by strengthening banks and spearheading reforms of the state-owned enterprises (SOEs) by reducing their level of debt. The Chinese ensured that the nationalized banks were strengthened by raising disclosure standards across the board.

The second important measure was enacting laws that allowed the creation of asset management companies, equity participation and most importantly, asset-based securitization. The “securitization” approach is being taken by the Chinese to handle even their current NPA issue and is reportedly being piloted by a handful of large banks with specific emphasis on domestic investors. According to the International Monetary Fund (IMF), this is a prudent and preferred strategy since it gets assets off the balance sheets quickly and allows banks to receive cash which could be used for lending.

The third key measure that the Chinese took was to ensure that the government had the financial loss of debt “discounted” and debt equity swaps were allowed in case a growth opportunity existed. The term “debt-equity swap” (or “debt-equity conversion”) means the conversion of a heavily indebted or financially distressed company’s debt into equity or the acquisition by a company’s creditors of shares in that company paid for by the value of their loans to the company. Or, to put it more simply, debt-equity swaps transfer bank loans from the liabilities section of company balance sheets to common stock or additional paid-in capital in the shareholders’ equity section.

Let us imagine a company, as on the left-hand side of the below figure, with assets of 500, bank loans of 300, miscellaneous debt of 200, common stock of 50 and a carry-forward loss of 50. By converting 100 of its debt into equity (transferring 50 to common stock and 50 to additional paid-in capital), thereby improving the balance sheet position and depleting additional paid-in capital (or using the net income from the following year), as on the right-hand side of the figure, the company escapes insolvency. The former creditors become shareholders, suddenly acquiring 50% of the voting shares and control of the company.

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The first benefit that results from this is the improvement in the company’s finances produced by the reduction in debt. The second benefit (from the change in control) is that the creditors become committed to reorganizing the company, and the scope for moral hazard by the management is limited. Another benefit is one peculiar to equity: a return (i.e., repayment) in the form of an increase in enterprise value in the future. In other words, the fact that the creditors stand to make a return on their original investment if the reorganization is successful and the value of the business rises means that, like the debtor company, they have more to gain from this than from simply writing off their loans. If the reorganization is not successful, the equity may, of course, prove worthless.

The fourth measure they took was producing incentives like tax breaks, exemption from administrative fees and transparent evaluations norms. These strategic measures ensured the Chinese were on top of the NPA issue in the early 2000s, when it was far larger than it is today. The noteworthy thing is that they were indeed successful in reducing NPAs. How is this relevant to India and how can we address the NPA issue more effectively?

For now, capital controls and the paying down of foreign currency loans imply that there are few channels through which a foreign-induced debt sell-off could trigger a collapse in asset prices. Despite concerns in 2016 over capital outflow, China’s foreign exchange reserves have stabilised.

But there is a long-term cost. China is now more vulnerable to capital outflow. Errors and omissions on its national accounts remain large, suggesting persistent unrecorded capital outflows. This loss of capital should act as a salutary reminder to those who believe that China can take the lead on globalisation or provide the investment or currency business to fuel things like a post-Brexit economy.

The Chinese government’s focus on debt management will mean tighter controls on speculative international investments. It will also provide a stern test of China’s centrally planned financial system for the foreseeable future.

Global Significance of Chinese investments

BASEL III: The Deflationary Symbiotic Alliance Between Governments and Banking Sector. Thought of the Day 139.0

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The Bank for International Settlements (BIS) is steering the banks to deal with government debt, since the governments have been running large deficits to deal with the catastrophe of BASEL 2-inspired mortgaged-backed securities collapse. The deficits are ranged anywhere between 3 to 7 per cent of the GDP, and in cases even higher. These deficits were being used to create a floor under growth by stimulating the economy and bailing out financial institutions that got carried away by the wholesale funding of real estate. And this is precisely what BASEL 2 promulgated, i.e. encouraging financial institutions to hold mortgage-backed securities for investments.

In comes the BASEL 3 rules that implore than banks must be in compliance with these regulations. But, who gets to decide these regulations? Actually, banks do, since they then come on board for discussions with the governments, and such negotiations are catered to bail banks out with government deficits in order to oil the engine of economic growth. The logic here underlines the fact that governments can continue to find a godown of sorts for their deficits, while the banks can buy government debt without any capital commitment and make a good spread without the risk, thus serving the interests of the both parties involved mutually. Moreover, for the government, the process is political, as no government would find it acceptable to be objective in its viewership of letting a bubble deflate, because any process of deleveraging would cause the banks to offset their lending orgy, which is detrimental to the engineered economic growth. Importantly, without these deficits, the financial system could go down the deflationary spiral, which might turn out to be a difficult proposition to recover if there isn’t any complicity in rhyme and reason accorded to this particular dysfunctional and symbiotic relationship. So, whats the implication of all this? The more government debt banks hold, the less overall capital they need. And who says so? BASEL 3.

But, the mesh just seems to be building up here. In the same way that banks engineered counterfeit AAA-backed securities that were in fact an improbable financial hoax, how can countries that have government debt/GDP ratio to the tune of 90 – 120 per cent get a Standard&Poor’s ratings of a double-A? They have these ratings because they belong to a apical club that gives their members exclusive rights to a high rating even if they are irresponsible with their issuing of debts. Well, is that this simple? Yes and no. Yes, as is above, and no is merely clothing itself in a bit of an economic jargon, in that these are the countries where the government debt can be held without any capital against it. In other words, if a debt cannot be held, it cannot be issued, and that is the reason why countries are striving for issuing debts that have a zero weighting.

Let us take snippets across gradations of BASEL 1, 2 and 3. In BASEL 1, the unintended consequences were that banks were all buying equity in cross-owned companies. When the unwinding happened, equity just fell apart, since any beginning of a financial crisis is tailored to smash bank equities to begin with. Thats the first wound to rationality. In BASEL 2, banks were told to hold as much AAA-rated paper as they wanted with no capital against it. What happened if these ratings were downgraded? It would trigger a tsunami cutting through pension and insurance schemes to begin with forcing them to sell their papers and pile up huge losses meant to absorbed by capital, which doesn’t exist against these papers. So whatever gets sold is politically cushioned and buffered for by the governments, for the risks cannot be afforded to get any more denser as that explosion would sound the catastrophic death knell for the economy. BASEL 3 doesn’t really help, even if it mandated to hold a concentrated portfolio of government debt without any capital against it, for absorption of losses in case of a crisis hitting would have to exhumed through government bail-outs in scenarios where government debts are a century plus. So, are the banks in-stability, or given to more instability via BASEL 3?  The incentives to ever more hold government securities increase bank exposure to sovereign bonds, adding to existing exposure of government securities via repurchase transactions, investments and trading inventories. A ratings downgrade results in a fall in value of bonds triggering losses. Banks would then face calls for additional collateral, which would drain liquidity, and which would then require additional capital as way of compensation. where would this capital come in from, if not for the governments to source it? One way out would be recapitalization through government debt. On the other hand, the markets are required to hedge against the large holdings of government securities and so short stocks, currencies and insurance companies are all made to stare in the face of volatility that rips through them, of which the net resultant is falling liquidity. So, this vicious cycle would continue to cycle its way through any downgrades. And thats why the deflationary symbiotic alliance between the governments and banking sector isn’t anything more than high-fatigue tolerance….

17th Century England – Onwards to Restoration.

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In the 17th century England, the middle class had carried forward their rebellion against absolute monarchy based on divine rights. The Parliament was the representation of this class and its fight. The men who now fought the Stuart Kings were precisely those who had profited from Tudor absolutism, which now began to irritate them. The lower middle class then split from their upper counterpart and rallied Cromwell. So far as the untitled and unmoneyed class was concerned, they stood largely by the throne, although they had as little to gain by the King as by the Parliament. The middle class was so afraid of the poor people as of the King. When the parliamentarians talked of a government based on consent, they had no intention of extending the franchise to the people; it was to be their own consent. Right to property, which they held to be sacred, meant to them the principle that the King had no right to tax them without their consent; it also meant a denial of property to the people who were poor.

Coke, who was appointed the Attorney General (and also the Chief Justice) in 1594, was attacking the divine rights of Kings and he regarded both King and the Parliament, as subject to common law which, to him, was the truly sovereign power in the land. Common law had to be interpreted by the judges. Throughout Europe, absolute state was becoming the order of the day. Louis XI had first subjugated the feudal nobility. The Reformation then enabled the monarchs to better the Church. Henry VIII had claimed jurisdiction and powers, which earlier no British King had done. To the discomfiture of Hobbes, the cursed Puritans had undone the work so artistically done by Henry VIII and the price had to be redesigned so that the fabric may be saved from total destruction in the hands of the rabble. Someone, like Thomas Hobbes agrees with Machiavelli that man is selfish and that human nature is bad but insists that the state could transfer the man into a moral being by the exercise of the master’s rod.  He is indebted to Bodin for his concept of sovereignty, but, unlike Bodin, would impose no limitations of Divine, Natural or Constitutional law on his subjects. He agrees with Grotius that, reason is the basis of law but insists that it must be sovereign’s reason alone. He modifies the Divine Right theory by discarding the divine origin of state and by giving Divine Right to the State instead to the King. Hobbes like Machiavelli, subordinated ethics and religion to politics and was the first prophet of unlimited sovereignty.

Elizabeth (1558 – 1603)

Elizabeth was the daughter of Henry VIII and Anne Boleyn. She ascended to the throne at the age of 25 in 1558 on the death of Queen Mary. She was not only regal but also human. Like her father, she had courage, determination and self-confidence. She was willful and domineering in all matters. Like her mother she was fond of pomp and pleasure. Her great virtue was that she loved the people of England and for their sake she was prepared to make any sacrifices. Her conservative mind made extreme Protestantism suspect to her, separated the foreign policy from any enthusiasm and fitted her to be the real maker of Anglicanism.

When she ascended to the throne, she had to face many difficulties. There was the danger of the civil war in the country. The orthodox Catholics regarded Elizabeth as an usurper and they were prepared to take up arms against her in order to support the cause of Mary Stuart. The Protestants were also bitter. They were determined to carry the Reformation further. There was also a danger of foreign invasion and conquest. A lot of money had been wasted in the French war during the reign of Mary Tudor. The coinage had also been debased. The credit goes to Elizabeth that she not only surmounted all these difficulties but were also able to make her country great and strong.

Religion at her time of ascension

The first great achievement of Elizabeth was her religious settlement. The policy followed by her was that she stopped the burning of the people. The “Act of Supremacy” eliminated the authority of the Pope in England and made Elizabeth the head of the Church of England. She took up the title of “Supreme Governor” and not “Supreme Head” as had been done by her father. The monasteries were dissolved and their lands were passed to the crown. A Book of Common Prayer in English was issued. Extremists among the Catholics and the Protestants were not prepared to reconcile themselves with her religious settlement. However, Elizabeth did not take any strong action against them so long as the people attended the Church. The Church settlement got a setback after 1570, when the Pope issued an excommunication and deposed Elizabeth and declared her to be longer a Queen of England. Her subjects were absolved from their allegiance to her. In 1571, the British Parliament passed an Act, which declared to be high treason for anyone in England to call the Queen a heretic, and usurper or an infidel. The puritans also attacked the Church settlement. They were utterly dissatisfied by the moderate character of it. Most of the ceremonies prescribed by the Church were considered by them to be a relic of Popery and they would like to abolish the same. However, the fact remains that, Elizabeth succeeded in attaining a large unity in the Church and that is the reason why she was successful against Spain, when the Armada attacked England in 1558.

Her foreign policy

The foreign policy of Elizabeth was essentially that of peace. Since England had been weakened in the reigns of Edward VI and Mary Tudor, it was not in her interest to fight against any foreign power in that condition. Her great danger was an invasion from France or Spain, both Catholic countries. However, Elizabeth took advantage of the bitter rivalry going on between France and Spain and was successful in playing off the one against the other. Her foreign policy approach was not dogmatic, but was guided by enlightened national interest. The reign of Elizabeth saw the beginning of English maritime activity. It brought naval supremacy to England.

Her rule in general

Elizabeth can rightly be called as one of the greatest rulers of England. No other ruler was called upon to face so many difficulties and none else faced them so boldly and successfully. She addressed in these words a deputation of both the houses of Parliament: “Though I be a woman, I’ve as good a courage answerable to my place as ever my father had. I’m your anointed Queen. I’ll never be by violence constrained to do anything. I thank God that I’d been endued with such qualities that if I were turned out of the realm in my petticoat, I were able to live in any place in Christendom.” She was the child of the Renaissance rather than that of the Reformation. Skeptical and tolerant in the age of intolerance, she was born and brought up to re-establish the Anglican Church and to evade religious war by a compromise between the Catholics and Protestants.

Tudor rule 

Tudor rule was arbitrary and autocratic in nature. It was despotism, under more or less parliamentary forms. Though despots, their rule was not a tyranny. It was popular despotism based upon the assent of the people and it was assented to because in the main it identified itself with national interests. Their rule in nature was of the dictatorship. The rising middle class called for a strong ruler and was ready to overlook his violence and unconstitutional acts if he would maintain peace and order. The policy of the Tudors was to rule with the support of the subservient Parliament. As a result, Parliament was degraded into an instrument of royal will. The Tudors had broken the power of the great nobles. Monarchs could influence elections and so secure the return of members who favoured his views. Thus, as against the sovereign, Parliament had little influence. The Tudors, however, never sought to override the authority of the Parliament. On the contrary, they encouraged the parliamentary action of the commons. Grave and momentous questions were brought before it such as the anti-papal measures, which cut off Pope’s authority in England. As a consequence, the importance of Parliament increased. The commons grew more self-reliant and were gradually fitted to shake off their tutelage to the crown. There was little friction between the Crown and the Parliament. Parliament submitted to royal guidance and the sovereign in its turn never sought to override its legislative authority.

One of the most important characteristics of the Tudor rule was the growth of the strong monarchy built upon the ruins of the feudal system. That was partly due to the decline of the power of the nobility and the invention of the gunpowder. Another important point was the broadening of the people’s minds on account of the Renaissance movement. The new spirit paved the way for the Reformation movement.

James I (1603 – 1625) 

James I ruled from 1603 to 1625. He was born in 1556 and he came to the throne after the expulsion of his mother from Scotland. When his mother was a prisoner in England, he was the King of Scotland. He did nothing to support the cause of his mother. The result was that Elizabeth accepted him as her successor to the throne of England. He had been brought up under rigid Calvinist discipline. He failed as the King of England, even though he was a man of great learning. He was so fond of “unbuttoning his royal stores of wisdom for the benefits of his subjects” that Henry IV of France called him the “wisest fool in Christendom”. He was intolerant to any criticism. He believed that Kings should have supreme authority over all. He believed that people had no right to revolt. “The state of monarchy is the supremest thing on Earth; for Kings are not only God’s lieutenants upon Earth and sit upon God’s throne, but even by God Himself, they are called Gods…it is sedition in subjects to dispute what a King may do in the height of his power. I will not be content that my power be disputed on.” 

Here is an extract from the Vicar of Bray, an old ballad:

                  To teach his flock he never missed,

                  Kings are by God appointed,

                  And damned are they, who do resist,

                  Or touch the Lord’s Anointed.

He had fixed views about politics and the status of Kings. He believed in the Divine Rights of Kings. This view was that Kings were Kings because God made them Kings and they were responsible to God alone for whatever they did and the people had no right to either find fault with them or to challenge their authority. It was this concept of monarchy that was responsible for all his troubles. James I stood for universal peace. He raised the slogan of “Beati Pacifici” (Blessed are the peace makers). His ideas of religious toleration were a cry in the wilderness. In spite of his good intentions, he was a complete failure as a king.

His relations with the Parliament

The relations between James I and the Parliament were not cordial. He believed in the Divine Rights of Kings, but the Parliament claimed certain rights on the basis of tradition, customs and evolutionary growth. Parliament based its rights and privileges on the score of History. Parliament, during the reign of James I, asserted with success its right to impeach the ministers of the King. It protested against the new impositions. It passed its law against monopolies. It asserted its rights to discuss all the affairs of the State although the King strongly protested against the claim. It failed to secure the right of meeting regularly. From these relations, it was clear that the struggle between the two had begun.

Common law

No account of the reign of James I can be complete without a reference to the common law lawyers headed by the Chief Justice Coke. In 1594, Coke was appointed Attorney General. He was a great champion of the common law. His view was that the propriety of all actions must be judged by the common law. There was no place for the Divine Rights of the Kings. The judges alone could resolve the conflicts between the prerogatives and the statutes. The view of Coke was different from that of Bacon who held that judges were lions, but lions under the throne. It was during the reign of James I that many English colonies were established beyond the seas. In 1612, the English East India Company set up its factory at Surat (Gujarat, India). Thus, the beginnings of the future British Empire in India and America were laid during the reign of James I.

Charles I (1625 – 1649)

James I died on the 27th March 1625 and was succeeded by his second son, Charles I. Charles I loved those who were close near him, but was cold towards others. He was devoted to the Church of England and was punctual in his devotion to it. To Charles I, the Divine Right was the question of his faith, as deeply rooted as his belief in the Church. He was a bad judge of public questions and political men. He viewed them through the lens of his affections. He saw only rebellion in the critics of the Church of England. The reign of Charles I can be divided into four periods. The first four years of his reign from 1625 to 1629 covered the first period. During this period foreign wars were fought but lost and the relations between the King and the Parliament were bitter. The second period was covered by the years from 1629 to 1640. During this period, he ruled without a Parliament. The third period was covered by the years 1640 to 1642. It was also a period of short and long Parliament. The fourth period is covered by the two Civil wars (1642 – 1649). Charles I was executed in January 1649.

Relations with the Parliament 

The fundamental dispute between the King and the Parliament was that the Parliament was determined to become the sovereign of the country and was not prepared to allow the King to do whatever he wanted to do. The execution of Charles I shocked the people. The people were not in favour of Parliament going to such an extreme. The dignified behaviour of the King at the time of his execution also excited universal admiration. There was a strong reaction in favour of the monarch. Many called him the martyr who died for the Church of England. There were others who gave him the credit for having died for the laws and liberties of the English men. A few days after his death, a book entitled “Sikon Basilike” was published. It purported to give the views of the King on Government. It was felt that the dictatorship of the army was no guarantee to safeguard the popular institutions of England and the liberties of the people. The army could fight but could not reconstruct society. This execution was followed by military despotism, which was as bad as the tyranny of the King himself. The question has been asked whether the execution of Charles I was justified or not. From the legal point of view, there was no justification for trying the King as no process could be issued against the monarch. Moreover, the members of the court were partisans and did not come up to the ideal of impartiality as required by the judges. The only justification for the execution of Charles I was moral and political. Cromwell was right in saying that it was a cruel necessity. It was cruel because it was an extreme measure involving the execution of the King. It was a necessity because without it there would have been no liberty for Englishmen. Charles I was not at all prepared to accept any limitations on his powers. He was given many opportunities both by the Parliament and the army to come to reasonable compromise but he was declared dishonest by these very bodies and hence it was difficult to come to any sort of an agreement with him. The Parliament and the army always thought of him as extremely cynical and his dealings with these two constitutional bodies were inherently insincere in nature and thus no wonder such an insincere man was put to death.

Commonwealth 

The Commonwealth was established in England on January 4, 1649 by a proclamation by the Rump Parliament that “the people are, under God, the origin of all just power…that the commons of England in Parliament assembled, being chosen by and representing the people have the supreme power in this nation”. On February 5, the Rump decided that the House of Lords, being dangerous and useless, should be abolished. On February 6, it was resolved that “it hath been found by experience and this House doth declare that the office of the King in this nation and to have power thereof in any single person, is unnecessary and burdensome and dangerous to the liberty, safety and public interest of the people of this nation and thereof ought to be abolished”. On March 17 and 19, 1649, two Acts were passed by which the offices of the King and the House of Lords were abolished. Thus the House of Commons became the sole governing body of England. The chief organ of administration of the Commonwealth was the Council of the State. It was annually chosen by the Parliament. The council was concerned with the army, the navy, foreign affairs etc. In July 1649, was passed the “Treason Act”, which made it treasonable for anyone who published maliciously that “the Government is usurped or unlawful or that the Commons assembled in Parliament are not the supreme authority of this nation”. In September 1649, was passed the “Press Act” which muzzled the freedom of the press. The publication of any printed material without a license from the Government was forbidden. A special court of justice consisting of 12 judges was established to liquidate the enemies of the Commonwealth.

The members of the Parliament were Presbyterians and they insisted on imposing “certain fundamentals before a man should be free to propagate his opinions”. Cromwell was in favour of religious toleration for all except the Roman Catholics. Certain changes were introduced in the Church whereby it became less Presbyterian. It lost its autonomy and became subordinate to the State. Rump Parliament was “the first English Government to appreciate the importance of sea power”. It also was responsible for England a great sea power. The Rump Parliament also attended to foreign trade and the overseas empire of England. In 1651, was passed the “Navigation Act”. This Act was intended to strike a blow at the commercial power of Holland and no wonder it aroused the indignation of that country. The Rump had become unpopular with the army because it was a small body, which did not represent the whole nation. Moreover, many of its members were guilty of favouritism and corruption. Cromwell and his army urged the dissolution of the Parliament but the Rump refused to be dissolved. Cromwell could not tolerate the pride ambition and self-seeking of the members of the Parliament. On April 20, 1653, Cromwell himself went to the House of the Commons and turned out the members of the House and had the doors locked. The same afternoon, the Council of State also fell before military violence. After the dissolution of the Rump, Cromwell set up a new council of State which recommended that a Parliament of saints composed of 140 Godly men, 129 from England, 5 from Scotland and 6 from Ireland be summoned. This Parliament met in 1653. it is also known as Barebone’s Parliament. This Parliament was a unique one and it passed many laws like the solemnization of marriage a civil institution, public registration of births, marriages and death. Another law provided for the better custody of insanes. But this Parliament too failed. Cromwell was essentially a reluctant and an apologetic dictator. Lambert drew up a constitutional document called the “Instrument of Government”. It was the first and the last written English constitution. By this instrument, Cromwell was made Lord Protector for life with Council of State to help him. England, Scotland and Ireland were to be united in a single commonwealth with a Parliament representing the three countries. Parliament consisting of one House was to possess the legislative power and was to be elected every three years by a reformed electorate. This instrument gave Cromwell a limited monarchy for life. While the peculiarity of the English constitution was that it was flexible and unwritten, but the instrument tried to make it rigid and written.

Cromwell

Cromwell was one of the greatest figures in the History of England. He was born in 1599 at Huntington. He was a son of a country gentleman and was educated in a college in Cambridge. He emerged as a leader of his country when she was plunged in a Civil war on account of the conflict between the King and the Parliament. He not only won victories for the Parliament but also restored law and order in the country. Cromwell was the first pronounced imperialist in the history of England. His objective was to extend the power of England overseas and he did not hesitate to use all possible means to achieve that end. In his foreign policy, he showed zeal for Protestantism, but while doing so, he did not ignore the trade and commerce of his country. He was himself a Republican, but circumstances forced him to act as a military despot. He tried to govern by a system involving the division of power between himself and the Parliament. When he failed in that objective, he ruled despotically. He levied taxes without the sanction of the Parliament. He imprisoned people without trial. As a matter of fact, he set up a military tyranny. He wished for the Parliament to be supreme and did not wish to take up the title of the King. His faith in God was both a source of his strength and his weakness. In all that he did, whether good or evil, in the three kingdoms, his conviction was that God would support him in everything that he undertook. What he judged to be necessary for the present, that he thought to be predestined for the future. His victories seemed to him, not the result of the means, which he employed, but proofs that his policies were also the will of the Divine. Although he is regarded by some as the greatest patriot and by others as the greatest traitor, he was without doubt one of the greatest men of his country. He possessed military capacity of a very high order. He organized and maintained an army, which was so efficient that he did not meet with any defeat. Oliver Cromwell died on September 3,1658. When his strong hand was removed, the country was plunged into confusion. The Levellers stood for a Republic in which the common people were to rule without Lords, Priests or Lawyers. They had a very treatment from Oliver Cromwell but now they felt that they could do whatever they pleased. Another set known as the Fifth Monarchy Men was led by Harrison. They foretold the immediate end of the world. According to their reading of Daniel, the four monarchies of antiquity, Babylonia, Persia, Greece, and Rome were to be succeeded by the fifth monarchy, now at hand, the reign of Christ and his Saints.

Oliver Cromwell had named his son Richard Cromwell to succeed as the Lord Protector. He lacked political capacity and had no advisers. The gulf between Richard and the army was widening. In order to strengthen his position, Richard decided to summon the Parliament and the members of the Parliament were hostile to the army. The army did not like the law, which forbade the army officers from having political meetings. Parliament was dissolved by force in April 1659 and the Rump was recalled. Richard resigned his charge. About the period between 1649 and 1660, monarchy had gone and the House of Lords was established as “useless and dangerous”. This “freedom” was to rise to a climax of Puritan democracy, to decline by reaction into military dictatorship and at last to expire through faction. But it left a legacy. Puritanism released an energy, which called for liberty in religion and every department of life with efficiency greater than anything England had seen. It took long strides towards union with Scotland and Ireland. Its administrative machinery pointed towards the cabinet and its economic doctrine led to the capitalist Britain of the next two centuries.

Restoration

The Restoration of Charles II to the throne of England in 1660 was not merely the restoration of the King but also of Parliament, the Anglican Church, the historic law courts and the old system of local governments in the country. It is wrong to say that the monarchy that was restored was the unlimited and absolute monarchy of Charles I and James I. The “Triennial Act” of 1641 had not been repealed and it meant that the King could not carry on Government without calling a Parliament at least once in three years. Thus, the “Triennial Act” put a check on the power of the King. The result was that Charles II had to be less arbitrary and act according to the law. The very fact that Parliament had made Charles II, the King of England implied that in the last resort Parliament could also unmake him. The Divine Right of Kings to rule was practically dead. A point of conflict between the first two Stuart Kings and the Parliament was the question of taxation. Charles I had levied taxes without the consent of the Parliament. Now it was clearly understood that new taxes could be levied only with the consent of the Parliament. It is clear that although monarchy was restored, it was restored with a difference. Restoration gave to Parliament its old form and organization, which had so radically been changed during the Commonwealth period. The two Houses of the Parliament were restored and the House of Commons became more powerful than the House of Lords. Charles II never questioned the privileges of the Parliament. As a matter of fact, most of his important laws were passed through the Parliament.

Restoration of the Church

Restoration was also the restoration of the Church of England. The Parliament, which was elected in 1661 after the dissolution of the convention Parliament, was predominantly Anglican in nature. The Presbyterian element had disappeared altogether. The so-called Cavalier Parliament ended the work of the Presbyterian majority and restored the Anglican Church to its former position. The “Act of Uniformity” of 1662 provided that all clergymen and teachers were to declare their acceptance of the Anglican Prayer Book. The “Conventicle Act” of 1664 forbade under severe penalties, attendance of any public worship, which was not of Anglican form, of more than four persons, unless they belonged to the same family. The “Test Act” of 1673 provided that all civil and military officers were to take the oath of allegiance and accept the supremacy of the Church of England. In 1679, was passed the “Parliamentary Test Act” which provided that no person was to be a Member of Parliament unless he belonged to the Church of England. 1679 was also the year of Hobbes’ death. It is clear that the Anglican Church was established as a State Church, but with the difference that the headship of the Church no longer belonged to the King as a prerogative right. The leadership of the Church lay with the King-in-Parliament. As has been rightly put by Sir D. L. Keir that the restoration of monarchy in 1660 was especially a return to Government by Law. In this period, the legislative union with Scotland and Ireland was dissolved.

The reign of Charles II

During the reign of Charles II, some constitutional progress was made. The system of appropriation of supplies was established. While granting money to the King, the Parliament laid down the specific purpose for which the money was granted. The responsibility of the Ministers of Parliament was also secured to some extent. During the reign of Charles II, parliamentary parties with definite political programmes were formed and that also added to the strength of the Parliament. The passing of the “Habeas Corpus Act” in 1679 has become a cornerstone of the liberties of the people of England. The Parliament, which placed Charles II on the throne, was known as the Convention Parliament because it was summoned without a royal writ. The lands of the Royalists, which were confiscated, were restored. The Royal revenue was fixed at a fixed sum. Feudal dues and purveyance were abolished. A permanent excise tax was granted to the King as a compensation for the loss of his feudal revenues. The Convention Parliament was dissolved in 1661 and fresh elections were held. The new Parliament, which met in 1661, sat for 18 years and is known as the Cavalier Parliament. It was so called because the cavalier spirit was present among its members. This Parliament was royalist in nature in politics and Anglican in religion. It hated the Puritans and stood for the strengthening of the Church of England. It is true that during the reign of Charles II, the court was corrupt and there were pleasures all around. However, during this period, humanity and refinement spread rapidly in England. Literature, art and science, architecture and etiquette and fashions were copied from the court off Louis XIV, the grand monarch of France. One of the most notable men of this age wasIsaac Newton (1642 – 1727). There were great strides made in the disciplines of Astronomy, Physics, Chemistry and Medicine.