Last week Ann Pettifor complained that the tax gap agenda I have promoted has become too dominant in left wing thinking. She has a point, not that I am apologising for giving at least some on the left a long needed narrative. But tax is not the only way to address the deficit or to raise funding for the new economy we need. As she has said in the Huffington Post:
George Osborne, the British Chancellor, has publicly disagreed with his prime minister on a fundamental issue of monetary policy - in an official Treasury report.
The prime minister recently argued that "There's no magic money tree to fund" what he called "this ever more wishful borrowing and spending".
But his Chancellor, George Osborne, disagrees.
The disagreement is aired in one of the documents tabled by the Chancellor on budget day. It's titled: "Review of the Monetary Policy Framework." - and is tucked away in the bundle of documents issued last Wednesday.
In paragraph 3.34, the Treasury makes plain that the monetary authorities could finance increased government spending on infrastructure "through the creation of money".
Taxpayers, the Treasury makes clear, are not the only source of finance for governments - as neoliberal economists would have us believe.
There is a money tree, and it's called the Bank of England.
Precisely, and a point I of course recognised in the Green Quantitative Easing idea.
Or as Ann points out:
Here is how the Chancellor explains Bank of England financing of public investment in his Review of the Monetary Policy Framework:
"central banks could go beyond the range of unconventional instruments deployed ... in advanced economies since the 2008-09 financial crisis. For example, it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money. In theory, this could allow governments to increase spending or reduce taxation without raising corresponding financing from the private sector."
Quite so.
And is there an inflation risk? No, not at all. Not unless the policy continues when we have full employment. And right now we have plenty of time to prepare for that. Which means now is the time to put the Bank of England to work.
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I would suggest that full employment is misrepresented. If every potential Hawking or Michaelangelo or Beethoven or Beatle (50th anniversary right now of the release of the Please Please Me album, by the way) or Rowling were stacking shelves in Poundland as Iain Duncan-Smith would have them, would that be full employment? I’d say not. We need to help people discover their human potential and then shake that ol’ money tree till enough falls out to help them to realise it. Put the aforementioned to work at what they’re good at and the country has more wealth. I’ve been saying for sometime now, create money from nowhere and then create proportionate wealth with it and there’s no inflation. We’re heading down the same path here. So, the more human potential we can identify the more money we can legitimately create to realise it without fear of inflation. It appears to me we might do this infinitely as we discover more about ourselves. Want to build a new Hubble? Money no object. Want to investigate why water (which is largely what we’re made of), if you play it certain sounds, will form different kinds of crystals when frozen according to what kind of sounds are played to it? Money no object. Off we go. Humanity has never been able to do this as lack of funding has always been a barrier. This is how much the banksters have been holding us back. Time that stopped.
Great idea Bill Kruse… and no return to the Gold standard that held us back prior to 1971 and monetarism.
Richard,
I’d be very interested in a more detailed piece on this, specifically a debunking of myths surrounding quantitative easing. I’ve read a fair few pieces on this topic but I would find something more comprehensive very interesting, especially concerning inflationary and other risks.
Blog New Economic Perspectives have done a very thorough series of articles on the Modern Money Theory; i.e how money works in contemporary situations (or how it doesn’t work if you look at it like that). It looks in relative detail at sovereign nations, monetary and fiscal policy and the nature of money not as a commodity (i.e. finite resource) but as an IOU (i.e. not hard currency but can be converted to precious metal in the future – e.g after tax receipts).
http://neweconomicperspectives.org/p/modern-monetary-theory-primer.html
The author has now written a book with all this info in, but of course the blog is a free web resource.
Hi Benzo, have a read of these posts by MMT economist Bill Mitchell:
Printing money does not cause inflation (http://bilbo.economicoutlook.net/blog/?p=13834) and Zimbabwe for hyperventilators 101 (
http://bilbo.economicoutlook.net/blog/?p=3773 )
Thanks guys!
In a closed economy, monetising the deficit in an economy below full employment should not cause inflation. However, in an open economy (and even more so in an economy like the UK that imports basic goods and exports services), monetising the deficit that leads to currency depreciation can cause inflation. We have been protected so far in the UK with sterling being seen as a safe haven
I don’t agree
I have seen this twice before as an argument against debt free money creation but not why it is not workable. It is usually dismissed as ‘looney or dangerous’ so that it is not debated.
The next step is to state a ‘fault’ as a sufficient reason for not examining the concept any more. It is not. The status quo needs to defend its understanding in open debate.
In the 1930s the status quo view was very similar to the austerity economics we see today. Keynes gave another view. By the 1960s the near universal view was that Keynes was right and his policies gave the world a generation of growth.
This should teach us to look for alternatives to the received wisdom (it’s hardly been an outstanding success by a number of different measures)and debate them fully.
We need to turn away from a service economy and finance driven economy anyway and become a modern, sustainable manufacturing economy.
And though it is fairly meaningless, UK debt has been downgraded – something this Chancellor said would be a humiliation. If, as some predict, the sterling bond bubble pops and there is a dash to dump our bonds, we won’t be very safe then, will we?
We can do to things:
1) We do what we did after World War II and borrow massively. At that time, borrowing increased to 250 per cent of GDP or we borrowed two and a half times more than we produced. There was massive spending to rebuild the country, creating millions of jobs, creating the NHS and the Welfare State. Full employment was created. This massive borrowing did not cause massive inflation, in fact, inflation was quite low until the oil crisis of the 1970s. This borrowing and spending created probably the best period of prosperity this country has ever experienced.
2) As Richard says, the government can simply create the money we need and spend massively in areas here it is badly needed, like housing, infrastructure, intrgrated public transport and manufacturing. Creating the money means we don’t have to borrow from the banks at interest, saving the taxpayer hundreds of billions of pounds. Money can circulate from people spending money from their wages in the public works and the public sector rather than from borrowing. Supply and demand can rise together and prices should become more stable as there is less debt to cause volatility. To prevent inflation, money can be lent out at a small amount of interest or simply taxed out of the system if need be. As said above though, as long as demand meets supply, inflation is unlikely to occur.
There is no need for austerity. The government can create all the money we need, debt free and interest free!
And, indeed, this is exactly what it used to do as can be revealed in the booklet from the Economic Research Council called Government DEbt and Credit Creation. Written in 1981, the opening summary tells us “The power to issue banknotes has provided for the government, since 1945, about £19,000 million of revenue, of which £9,300 million arises from the increase in notes issued, and £9,800 million from the interest saved on government securities held as backing for the issue. In 1980, the Government borrowed £11,154 milion and spent £8,661 million paying interest on previous debts. The interest payments represented 10.6% of Central Goverment current expenditure. The power of the banks to increase credit has meant that the Government has foregone revenue, since 1945, of over £30,000 million, of which £14,000 million arises from the increase in credit, and £17,000 million from the interest the Government could have earned if the credit had been issued as notes. Under the present system the Government could have sold direct to the Bank of England Issue Department government stock and received notes in exchange. Interest paid on this stock would have gone to the Issue Department and in turn been credited back to the Treasury. The effect on total money supply and consequently on inflation would have been nil.”
Why did we stop this sensible practice? The malign influence of the private bankers, I’m afraid. The politicians who agreed to end this and handed the exclusive distribution of credit over to the private banking network should, in my opinion, be answering for their actions in the dock.
Creating debt free money is good news especially for a neoliberal chancellor.
I would be cautious however, because even debt free money will not help the real economy unless it is made available for people to earn so that they can spend it in the market and pay down their debts. Deflation in the high street and private debt at 400% GDP should be the target for debt free money. If George uses it on mortgage subsidies that end up at the bank it may just cause house price inflation.
Steve Keen and Richard Werner have both pointed out that the use of money is crucial to the outcome for the economy, as well as whether it is created as debt or not.
Sarah
Ann and I both agree with you
And Steve Keen
And Richard Werner
Richard
On the “monetising the deficit can create inflation through currency depreciation” point above: in the current global depression where pretty much all the major advanced economies are operating below full employment, if they all monetise the deficit, their currencies can’t all depreciate against each other! So if everyone monetises the open economy result comes out very much like the closed economy result.
Agreed
And then you will just get a massive surge in the value of real assets such as commodities, gold etc, and then you are back into causing inflation in the countries lacking raw materials.
Since the financial crisis hit, sterling has fallen 25%, and guess what – food, utilities, transport have all gone up 25-30% in price despite massive unemployment.