One of the most common claims of recent years is that 'there is no magic money tree'. David Cameron did it:
He claimed to tell a plain truth that there was no magic money tree. He said those who thought there was put at risk the whole future of the economy.
But David Cameron lied about this. As the Telegraph has said:
The well repeated line that “there is no such thing as a magic money tree” is heard almost everywhere. Even Prime Minister David Cameron has uttered this phrase.
But it's completely untrue. If the will exists, the central bank can issue unlimited amounts of currency.
And they have been doing that. Since 2009 money has been produced in large quantities:
QE is money printing by another name. And as that chart shows, there's been more than £6 trillion of it in about eight years. That is, however you look at it, a pretty amazingly productive magic money tree.
And we did not get inflation as a result.
Nor did we get mass unemployment.
Or rocketing interest rates.
All the predictions as to what would go wrong were themselves wrong.
But, because by choice, in the UK and EU at least, the benefit was targeted at the finance sector and those who use its services the most, who are already wealthy, what we did get was three things. They were asset price inflation, speculation and increased inequality.
No one can say that was not predictable. I was talking about it in 2010. That means the outcome was a choice. Whatever the words used, if a policy is persisted with when an outcome is highly predictable the consequence can be presumed to be the one intended. In this case, asset price inflation, increased speculative trading to boost the balance sheets of banks and increased inequality were then the policy goals, and they were achieved.
So why the continuing lie about the magic money tree? There is only one possible explanation. That is that its use to fund investment to meet real need, like housing, or to boost productivity by investing in infrastructure and so promote earnings growth, or to boost our green future and so provide hope, would mean that its use for funding asset price bubbles, speculation and growing inequality would have to be curtailed: I would agree that there are limits to the use that can be made of the magic money tree. But limits require choices. And the wrong ones are being made.
And the opposition parties in the UK are going along with this. So Labour does not call the current government QE programme out for what it is. And Wales, Scotland and Northern Ireland are not demanding that their share of QE funds be used to provide them with a local infrastructure investment fund. That would have been £5 billion for Scotland this year. Only the Greens call for Green Infrastructure Quantitative Easing.
I wish I knew why so many politicians fail on this issue. Because they do, time and again.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
I am truly mystified by this issue. It’s as if QE was the government’s guilty secret, or something that is best kept under wraps.
If we used QE to support green initiatives surely we could replace our lost manufacturing industries and make a difference in the world. Why would we not do that?
Why is there such an intractable desire to benefit lobby groups who have no interest in the greater good, but only in their own agendas? If I have one new year’s resolution it is that this situation transforms in 2017.
Why are the opposition politicians not challenging myth-making about QE? Why is Mark Carney not stepping up to the plate? And why is the progressive press not opening up real debate?
Richard, one point for my own edification, what are the limitations of QE, the magic money tree? (apologies if I did not pick up on this point when I read your books).
The limit is full employment: after that the MMT delivers inflation
‘That means the outcome was a choice. Whatever the words used, if a policy is persisted with when an outcome is highly predictable the consequence can be presumed to be the one intended.’
Hear Hear!
Another thing opposition parties should be saying is: Austerity is a con-trick based on a lie.
The bankers caused the crash – nobody else. And the party of the bankers has used the crisis as an opportunity to redistribute wealth upwards & shred the public sector, to create a state within a state, run by mutinational corporations. Stop calling Austerity a failure – that misses the point. It has been a huge success.
Agreed
The ‘magic money tree’ is of course land. Massively inflated with the help of QE. Green QE would probably do the same. Infrastructure should be funded via Land Value Capture. We’ve seen how home owners have captured the infrastructure costs of Crossrail along the route, via higher house prices. Home owners along the Thames that floods will capture the cost of flood defences (paid for by everyone) in the same way. Homeowners do not create the value in the land their houses stand on, it is created by the State and the community as a whole, and this inequity needs addressing
I hear this time and again
And no one can tell me how to do it
Not realistically
I agree it is not so easy. How about replace council tax with a national tax which is a percentage of current property value, (as I think you said recently we have reasonable data on current values based on sales of similar nearby properties), you might have a threshold but there would be no cap at the upper end? Properties vacant for more than one year pay additional penalties. Hoarders of undeveloped land pay the rent that couple be obtained from that land – either develop it or sell it to someone that will. Agricultural land is treated differently.
This would address regional inequality and make the UK economy more competitive overall, as housing costs become less of a constraint on wage costs and consumption.
Allow a 10 year switch over such that the market can adjust.
I can live with that
http://www.labourland.org/wp-content/uploads/2015/09/JonesWilcoxLVTpaperFinal-V2.pdf. That’s the way to do it.
@ Carol Wilcox – I’ve always wondered how your LVT thing would work in practice, so thanks for sharing your paper with us. Having read it a few times now, I’m forced to conclude that it simply couldn’t work in practice.
The premise is a good one… but the assumptions it makes are impractical and unfair. Say for example you own a home in London, which you bought in 1985 for £50,000. It’s a three-up-two-downer in West London… thanks to neoliberal asset bubbling and the promise of Crossrail, this property has a market value of around £1m. (Why anyone anywhere on Earth would ever accept that £1m is an aceptable price to pay for a ROOF OVER YOUR HEAD is entirely beyond me… I’m not arguing the rights and WRONGS of tht here… let’s just accept that it IS the case and move on with a sour taste in our mouths). Council Tax on that property is about £1600 (we’ll say it’s a band E). Per LVT, we’ll apply a rate of 0.85% of current market value. That’s £8,500.
Say this house is owned by a family with a total income of £50,000. They’ve got one child and another on the way. There’s perhaps only £5000 left on the mortgage and they’re doing OK. LVT has just added £570 per month (£138 Council Tax rising to £708 under LVT) to their household bills… and they’re still paying Income Tax, NICs and VAT. Sorry, that’s monstrous.
And then the market reacts to LVT… house prices start to plummet. Our family aren’t in any danger of going into negative equity (unlike squillions of others who recently bought their homes), but the value of their asset will reduce and reduce and reduce. Say it eventually reduces to the LVT envisaged original cost plus RPI (or somesuch) each year… for argument’s sake let’s say it drops to… ooh, £150,000. Let’s say that process takes 10 years. That means our family will start off paying £570 more per month under LVT, which reduces as the years go on so just below what they were paying in council tax in the first place. on a straight line basis (i.e. reducing the market value of the house by £85K pa to reflect a drop to £150K over 10 yrs) and keeping the LVT constant at 0.85%, the total payable over the period would be £53762.5. By comparison, if rates remained unchanged from today, Council Tax payable over the same period would be £18216. That’s a difference of £35,546.50. And what has our family got for that, given that after 10 years the property process have equalised? That’s right… absolutely NOTHING. They’re on the same economic footing as the rest of the country, but only after having paid £35.5K over the odds for the privilege, with ZERO economic return.
I accept the above example might be peculiar to London because of the numbers involved, but the rest of the country has enjoyed/suffered unrealistic uplifts in market values over the last 30 years of neoliberalism, so the argument stands.
The only way this system could work would be if there was an immediate debt jubilee and everybody starts off on a level playing field. And THAT could never happen… your mortgage lender is wealthy precisely because you couldn’t pull a needle out of it’s arse with a tractor – there is no way on this earth they’re ever going to let that income go. Even if they did, good old Human Nature would get in the way… people would see others getting something for nothing, the outrage would be enormous and it’d be stopped.
As described, LVT to me sounds HUGELY unfair. If the Poll Tax started riots, this would have the pitchforks out unless pretty much the entire basis of domestic economics was re-written.
So instead, let’s invest in good, strong compliance with existing tax laws. Let’s ride the wave of growing opinion that tax dodging isn’t big and isn’t clever – let’s make it as acceptable as drink-driving. Let’s reward people for their time and let them live happy lives, so they’re more likely to want to participate in the Game of Life, through fair taxation and all the benefits that brings.
@Geearkay, I’m afraid you haven’t understood at least 3 things:
1. The initial implementation will see LVT replace Council Tax on a revenue neutral basis … for each local authority. So Londoners will not see the dramatic rise in liability which you envisage.
2. LVT is based on rental or capital value. Capital value includes tax paid, so although house prices may decrease the LVT liability will not.
3. As implementation proceeds (LVT rate increasing gradually, perhaps for over 25 years) other taxes will decrease, especially standard rate income tax and VAT (a benefit of Brexit). LVT is MEANT to replace other taxes which reduce economic efficiency.
‘Eyes wide shut’ comes to mind – it took me 35 years to fathom this out, prompted when I moved from Labour to a freer thinking Green (thanks Molly Cato). There are however real threats – the global establishment [can pretend] to save or topple a sovereign Govt financially – e.g. this month in 1976 the IMF forced Dennis Healy to cede to its terms and even the Tories had a shock on John Major’s ‘Black Wednesday’ in 1992. During the IMF crisis in 1976 we were busy Labour activists, we knew he IMF was raw power at work, but not so sure about money trees as inflation ripped during the 70s and printing presses were painted as inflation monsters. I do remember most of us felt life was comfortable, we had jobs, homes and opportunity. My mortgage was shrinking fast, not so much angst and stress, less wall-to-wall advertising to accumulate your own trove of ‘stuff’ and large pay rises to boot – how times have changed.
Labour politicians either do not understand Money or those who do keep quiet.
It boils down to class and control of power, two little words need adding Richard ‘FOR YOU’. ‘There is no magic money tree FOR YOU’.
Agreed…well said
And right about the 70s too
The Green Party (and Molly in particular) supports LVT.
Richard, the right often go on about the left’s belief in a magic money tree as a way to discredit sensible economic analysis. Though the right to have their own magic money tree which they have successfully ingrained into what is largely believed to be sensible economic analysis. The Laffer Curve and the belief that cutting the taxes of the riches will increase revenue is the magic money tree of the right.
Yes – the MMT DOES exist.
The problem is with the poor quality of the politicians our democracy has its disposal too many of them are too thick to use it or they are just there to represent vested interests of the rentier elite who see an opportunity to extract more rent from lending money when real base money from MMT could be used instead.
Look at the biographies of some Tory politicians and then ask yourself “Whose your Daddy?”. Do they really turn their backs on their mates in City? I’m sure this happens in the other Big Two too.
Of course the rentier elite will love it when traditional QE – released through the private banks – is issued to swell their coffers.
But to give money to the hoi polloi – those people who actually get their hands dirty doing real work – never! What a waste!
I do also think that as a result of 70’s any inflation is feared almost beyond reason. We could certainly do with wage inflation now as it seems to me that the link between wage inflation and general inflation is not a simple relationship as we have been led to believe. Inflation is not just down to people asking to be paid a living wage.
With low interest rates (which only really help the over-leveraged institutions with their huge debt liabilities and those who wish to purchase ‘assets’) the current economy is not deployed to help ‘hard working families’ at all.
The cliched quote “If you tell a lie big enough and keep repeating it, people will eventually come to believe it” comes to mind. I used to give the Magic Money Tree proponents the benefit of the doubt assuming they were just economically illiterate. And doubtless many are. (I have no evidence whatsoever but I rather suspect Margaret Thatcher did in fact believe government finances function in the same way as those of a grocery store).
However, it really isn’t possible for anyone with responsibilty for the economy not to understand the fundamentals as to how a fiat economy functions in the 21st century. Is it? Hence persistent use of the analogy is clearly deceit for political gain. It simply provides a false rationale for the oppression and control of Theresa May’s ‘ordinary people’ under the banner of ‘austerity in the national interest’. It is a strategy consciously employed by the Tory sociopaths who have no concern for the destruction of lives among the precariat and ‘working poor’. That the policy also simultaneously enriches the 10% is an added and irresistible bonus. Christmas comes every day for hedge fund owners! That the Labour Party publicly subscribed to it is utterly shameful. For this act alone they deserve to be punished at the polls.
It may seem outdated phraseology but it’s time to get back to an agenda of ‘class warfare’. The Tories are waging economic war on communities across the nation via their salami-slicing public sector cuts. Nobody should be under any illusion as to what their motive is. The Magic Money Tree myth provides them with a popularist & credible rationale. It seems not inappropriate to end with another WW2 quote, from the Rev. Martin Niemöller: “First they came for the Socialists, and I did not speak out because I was not a Socialist. Then they came for the Trade Unionists, and I did not speak out because I was not a Trade Unionist…..” You know how it ends.
My guess is that the Tories are ideologically attached to denying the existence of the “magic money tree” – calling it QE tends to mystify most voters. That Labour is unable to articulate an alternative QE that has resonance with voters is a mystery – whatever we may think about McDonald etc they are not stupid people, perhaps they think the UK population is too stupid, too deluded, or too lazy to consider & reflect on alternatives.
Back in the 17th century the Puritans believed that Sunday was a day for reflection. They tried to force this view on a pop’ that tended more towards err… other things. Perhaps we are in a similarish situation – the population are all of the above plus too occupied with other things. This allows stupidities to propagate.
What should be very noticeable to the UK electorate but isn’t is that there is no coherent and complete official explanation of how money is created for the economy. The reasons for this are very obviously greed but not entirely. If it was widely known there is a government “magic money tree” the electorate would want very low interest rate government house mortgages and house mortgage supply is the main profit source for commercial banks. The super-rich would not have a Treasury Bond “safe haven” for their considerable wealth that makes interest for them while they sleep. Treasury Bonds may not get issued if governments decide to use taxation and not interest rates to control inflation and this would see the removal of very safe collateral for financial borrowing. Note also that pension funds would no longer have a “safe haven” for our pension investment unless government provided an alternative.
I found the book Where does Money Come From : A Guide to the UK Monetary and banking System
by Josh Ryan-Collins; Tony Greenham, Richard Werner, Andrew Jackson Foreword Charles Goodhart
very useful.
It’s good
I am not sure I agree with it all
But it’s good
“the magic money tree” = mmt = Modern Monetary Theory
Being able to point to some other successful practiser of MMT would help.
So is there any Government, any country, anywhere in the world, currently implementing any kind or form of Infrastructure/Green/People’s QE ?
If not, why not ?
And who would be most likely to do so ?
MMT is QE and Keynesianism mixed
So of course there is evidence it works
They really need to do something. This is shocking http://www.hamhigh.co.uk/news/outcry_over_haringey_labour_plans_to_privatise_2bn_of_council_estates_and_land_1_4825626
Ignorance?