In this video, I challenge one of the most deeply embedded assumptions in modern economics: the idea that there is a shortage of money.
The reality is very different. The world is awash with cash. Investment funds, pension funds and wealthy savers are sitting on enormous piles of money that they cannot find productive uses for. Berkshire Hathaway alone is holding hundreds of billions of dollars in cash because it cannot identify investments that offer acceptable returns.
At the same time, societies face urgent and obvious needs. We need new housing, better public transport, upgraded energy systems, flood defences, schools, hospitals and environmental restoration. The resources to fund these investments exist, but the connection between savings and social need has broken down.
I explain why this is happening, why stock markets increasingly look detached from reality, why bond markets are sending warning signals, and why governments are choosing not to create the investment opportunities that both savers and society need.
Most importantly, I argue that the problem is not financial. Currency-issuing governments can always facilitate investment. The real obstacle is political. Fiscal rules and neoliberal assumptions are preventing money from being directed where it is most needed.
As a result, I also suggest practical reforms to ISAs and pension savings that could release more than £100 billion a year for socially useful investment and help rebuild the UK economy.
The money exists. The need exists. What is missing is the political will to connect the two.
This is the audio version:
The Debate Ammunition for this video is available here.
This is the transcript:
Most people in the world think that there's a shortage of money. That's not true. The world is awash with cash right now. There is no shortage of money in the modern economy. People are sitting on enormous piles of it. The world's savers, who are admittedly the world's wealthy people, hold billions at present in pounds, dollars, yen, and euros, and all of that money is sitting dormant, doing nothing.
The world is awash with cash as a result. Money is sitting in bank accounts, and the real problem that these people have is that there is a shortage of places in which they wish to invest their money with any confidence.
Investment funds across the UK and the USA are reflecting this fact. They are sitting on enormous cash piles. Berkshire Hathaway, the investment company that was run by Warren Buffett for so many years, and he's still its chairman now at the age of 95, is holding $380 billion in cash right now. It can't find anything to do with that money.
UK investment funds are doing the same thing. They're leaving their money on deposit rather than investing it because they can't find a use for money. This is the paradox at the heart of today's economy. It is the problem that we need to solve. We need to put money to use, and at present it is doing nothing. That is what this video is about.
The conventional story we're told is that capital is scarce. Governments claim they are constrained by a lack of money, and the neoliberal narrative is that investment funds are hard to find and they must be carefully rationed, and yet evidence at this moment points in exactly the opposite direction. Money exists in abundance. The world's wealthy have vast amounts of it, but they have nowhere responsible that they can put it. Understanding why requires looking at two connected failures, which are characterising the economy at this moment.
The first failure is with regard to shares and stock markets. Share prices are at or near record highs across major markets around the world right now. They are becoming detached from reality. It's a point I've made many times. And much of the exuberance that is underpinning the valuation of stock markets is driven by excitement around artificial intelligence. At the same time, there are thankfully prudent managers who are reluctant to commit new money to these massively overvalued markets. You need to pray that your pension fund manager is one of them. Your future may depend upon that. Even central bankers have flagged concern about excessive valuations. The Bank of England has said so, and history is clear.
Speculative booms of this kind very rarely end well, and this is not caution for its own sake. Those who are sitting on piles of cash right now are undertaking a rational response to disconnected markets. They're saying they don't want to take the risk that these markets are offering them. They're saying they prefer to leave their money in cash instead.
The issue is not about the technology that is on offer, or that AI is at fault when they decide not to invest. The problem is that current valuations imply extraordinary future profits from these investments, and those profits are incredibly unlikely when most of what passes for innovation these days is simply marginal improvement in existing assets or a form of rent extraction, which is what AI is going to be. It's taken other people's property, it's put it into a database, and now it is charging us for the right to access the information they put into a database, but which frankly they did not create. That is a perfect model of rent extraction.
Contrast that with the genuinely transformative innovations of the past decades. Washing machines transformed lives for women in the 1950s and 60s. They were freed from the drudgery of Monday washing day. I remember that as a small child. My mother with a twin tub washing machine and a ringer, and it was hard physical work. The automatic washing machine got rid of that. She went to work. Vacuum cleaners did the same thing. Cleaning houses was so much easier. Women were liberated to join the workforce.
Reliable cars transformed the way we moved around.
The internet, mobile phones and PCs. These really changed how people lived.
This was innovation and investment with a purpose.
In contrast, today's investment pipeline is weak, and investment managers know it. That's the problem that stock markets face at present. For all the talk of AI innovation, what is it really? It's just a giant database designed to control us.
Bond markets are also sending out warning signals. The traditional alternative to share investments is government bonds, but bond markets across developed countries have been behaving very strangely for the last few months. Bond prices have fallen everywhere, I mean worldwide in all the major markets, meaning that effective interest rates have risen everywhere. This is not just a UK phenomenon. It's being seen in the USA. It's being seen in Europe, and Japan, and beyond. Investors have been selling government bonds rather than buying them.
This is a striking signal of a loss of confidence in governments as well as markets right now. Fund managers appear reluctant to trust either stocks or shares with their money, and so they're keeping it on deposit. I think that this is a sign of a deeper failure. Cash accumulation is not simply a sign of caution or risk aversion. It is not even a sign of prudent management in itself. It is evidence that something has gone seriously wrong in our economy.
Responsible savers have money available for good reason. They put it aside because they want something in the future and they need something to do with it now, but they can't find anything or anywhere to put it which might provide them with the sort of return that they want by investing in real economic activity.
At the same time, society has obvious and urgent investment needs. Government has the capacity to facilitate the connection between these two, savers and investment needs, and yet that connection has broken down completely.
The investment needs of our society are obvious and unmet. Across the UK, there is a need for investment in housing and energy systems, flood defences, transport infrastructure, schools, and hospitals. All of these are underfunded, as is environmental renewal, which requires sustained long-term capital commitment. The social return on these investments would be enormous, and the economic returns could be substantial too. But the money to fund all of this does not exist in the way that we need it because it's sitting in bank accounts instead, and why is that? That is because governments are choosing not to act.
The constraint is not a lack of money. Currency-issuing governments can always create money by their spending. They can always find money to fund their investment plans, but even within fiscal rules, the real constraint is political and not financial.
Fiscal rules rooted in neoliberal assumptions are blocking necessary investment. These rules are preventing the governments of the world from creating the very opportunities that investors seek. They want to partner with governments in creating the investments that will provide us with a better future, of that, I am sure. But the governments are saying they can't do that because it will increase the size of their balance sheets. And as a result, money is left as money sitting useless in bank accounts, and none of this is an economic necessity. It is a political choice, and political choices can be changed.
The fact is that there are three elements that need to connect here. Savers with long-term money are looking for responsible investments. Society has communities, infrastructure and environments that urgently need rebuilding, and governments have both the capacity and the mandate to bring these two together. But right now, all three exist in isolation from one another. That is the failure that I'm talking about.
This is the central political economy problem of our moment. Solve this, and much of the rest of the economy would fall into shape. We need then to redirect savings towards socially useful investment.
Pension funds, ISAs, and other long-term savings vehicles could be directed differently. All we have to do is change the rules with regard to savings and pensions to encourage investment in real projects, rather than feeding speculative financial activity, which is what most savings do now, even though they have tax subsidy through tax relief, and we could rebuild our communities. We just need to make the proper social use of funds saved a condition of the tax relief that so many people enjoy as a consequence of the savings that they place with financial institutions.
The funds exist. The needs exist. What is missing is the political will to change the rules of saving. I set out detailed proposals for the changes to these rules in the Taxing Wealth Report. You can download it. There's a link down below. Read chapters 25 and 26. The result could be substantial new flows of funds into the places that markets are currently neglecting.
We have a tragedy that is a solvable problem. That is my point. The resources to transform our societies are available right now. Investment managers are sitting on mountains of cash with nowhere to put it. But they could direct it towards societies that are struggling with housing shortages, failing infrastructure and environmental threats. It simply requires a change in tax rules to require this.
ISAs should, for example, be invested entirely in bonds that are used for the purpose of dealing with these social investment requirements. They could become the capital foundation of our new society.
Change pension rules so that a quarter, only a quarter, of new contributions each year must be used this way in exchange for the tax relief that is given on pension fund contributions, and I believe that sum could also be added to the pool of money available for that purpose.
How much money is available a year? Change the ISA rules in the UK, and maybe £70 billion a year could be available for social investment. Change pension rules, and I think over £30 billion a year could be available for this purpose as well. We could find more than £100 billion a year to invest in the UK from our savers in a way that would transform saving, and which would transform our society at the same time, and which would reconnect saving with investment and which would not impose a burden on government, although it would have to guarantee the return on these sums, which is a small cost to pay for the gains that would be provided, and we would have a transformation as a result.
We've been told that scarcity is the problem we face with regard to investment. What I'm saying to you is it is not. The real problem is a political system that refuses to connect money to need. Changing fiscal rules, using savings, incentives, and investment frameworks, to actually promote social benefit could transform our world.
The case for doing this is both economically sound and socially urgent. We do not have to accept the current failure to connect money with investment as a permanent condition. This does not need to happen because it is a choice, and we can change choices. We can decide to change the rules; quite literally, that is what government is for, changing rules. And the government could change the rules on pension saving and ISA saving, and as a consequence, we could invest the money that could transform our society now. In every town, every village, every city, every area of the UK, there could be the money that is required to make life better.
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[…] The video to which this Debate Ammunition relates is available here. […]
Changing the rules. This is what Chantal Mouffe’s point was about Carl Schmitt’s observation ‘ Sovereign is he who makes the exception’ when she was ruminating about the Left’s inability to push through. The Neo-liberal Tories were not scared to change the rules in 1979 nor 2010. Why is it that sovereignty these days is about destroying things rather than making them?
And waking up this morning we have Reform making hay out of police stupidity and tragedy (Zia Yusuf hate speech given a platform) – because simply services are being cut every where, setting groups of people against groups of people because they are angry and scared.
This lack of agency at the root of modern English government is as you say the problem, driven by the irrational fear of there being no money, but also I’m afraid, because those managing the system are rewarded by the rich and their pet hatreds and biases. This is NOT politics. This is an oligarchy. But there is also another problem in this country. No one wants to pay for anything. As long as the ISA gives them a return, who gives a damn how it us used? Neo-liberalism tells us that tax pays for stuff and yet low taxation is used as a carrot for voter turn out; we are promised world class services. Neo-liberalism has us tied up in knots, in love with money, but blind to its agency in helping us all, making us salivate like underfed Pavlov’s dogs at few pounds more for ourselves. Despicable.
Thank you
Well, as TIARA says, I’d like to add another possibility (surely it’s simplistic and lacks the experience behind it, that you have and put to use, but could at least be food for thought):
Make it so, that every person can only have a maximum amount of wealth.
Let’s say 5 Million € / person.
(Or Pounds of you so like, I just don’t have that sign easily available on my keyboard “^^)
You will have everything in it:
Housing, Mobility, Luxury, Food….
Most people will not have to think even once about this limit.
Those that do will be most likely poorer but not poor at all.
On the contrary, they’ll be richer because they’ll feel truly more useful to society itself.
And, most importantly, finally will feel included in society.
Hopefully even start caring about it.
No need to build private bunkers when you just help to make the world safe as a whole.
If one has a house like e.g. the royals their castles, well, they can keep staying there.
At the condition that they open them up for a whole bunch of families, that will have their own share of the castle.
And it seems possible to gather this data about wealth.
Forbes seemingly does that every year.
And if a private company is able to do that, the government doesn’t have an excuse at all.
Indeed, Richard. Just yesterday a 91-year old lady popped into the office as her 1-year fixed rate ISA account is maturing, so we helped her find another one that can be operated by post (she is not an internet user, like many of her age). So, in a years time, her ‘savings’ will be worth £105,000, tax-free. I know she has ample income, having been in receipt of generous pensions since age 60 herself and having inherited pensions from her late husband, too.
When I asked her what is this money for she had no sensible answer. When I pointed out the wealth that is not being used may as well not exist, she agreed, but demurred when I gently suggested that she might give some away to grandchildren and great grandchildren – a standard mindset, I’m afraid. I’m making no personal criticism here, but I deal with dozens of people who have “too much money” that they will never use, in truth. So much useful stuff could be done with this, as you say.
Thank you
Yes, Yes, YES Mark!
That is what we’ve reduced money to – something to have, to cuddle, to hoard, to gloat about, to possess, to ‘manage’, to compare, to talk about. One thing is for sure – you can’t take it with you.
Whenever I think about ‘coming into money’ I think about the people I’d love help. Honest.
I agree. What might someone like your client might find attractive?
We all have different priorities and interests, but on the whole most of us care about something, other than ourselves. It might be the education of our grandchildren, the safety of our roads, pollution of our seas and rivers, the number of children in poverty, and a hundred more obvious targets for social investment.
Identifying those interests and priorities, and providing simple safe means of investing in them should not require the like of Einstein to develop.
I would join your client in moving my cash towards any of those objectives. Mea culpa again.
Over the last 3½ decades, Helen, clients have 1) Paid for the building and equipping of a village hall. 2) Given capital to ‘local’ charities 3) paid regular income and/or given capital to family members. 4) Given £10,000 to a stranger asleep in a shop doorway after buying him breakfast and listening – he built up a greengrocery (I believe) and long ago repaid the gift (which was regifted) 5) paid for a friend to undertake a PhD. 6) Set up a lunch club and paid for all the catering for years and years 7) Donated to “worthy causes” left, right, and centre.
In my experience, those who do this, as quietly and subtly as possible, are guilty of quite admirable behaviour. I’d say this kind of activity will (and should) increase.
Not everyone thinks things through as the sand grains run through their hourglass, alas.
Thank you fr sharing.
I like regifting.
How long will105K last when your client has to put herself into a decent nursing home for her final years? How much will she need for ‘urgent’ medical procedures which will have to be funded privately if she does not want to die on the waiting list?
When Richard’s wisdom finally prevails and these quality and timely services are provided by government, free at the point of delivery for everyone, her nest egg will not be so necessary, but for the time being it is. It sounds like she hasn’t fully realised this for herself, but I don’t believe anyone can be accused of being selfish for wanting that security for their last and most vulnerable years if they have the money for it. Obviously being able to put the money into nice safe NHS bonds would be the best of both worlds.
I didn’t say she was being selfish, just that as she has an income that puts her in the top quartile, she will be fine.
I am hoping (perhaps in vain) for the Scottish Government to start issuing retail bonds so I can do something useful with my savings. Thousands of Scots will be in the same position. Me and William Thomson are still waiting for Scottish Ministers to engage with us in response to our joint Scotonomics/Scottish Currency Group paper “Scottish Government Bonds and Investing in Ourselves” which argues the case for retail government and local authority bonds instead of the proposals to go to the bond market with an issue.
Good luck
Remember this pertinent song anyone?
Winter Song – Lindisfarne
Richard, your solution of using ISA’s, pensions and savings for social investment makes a lot of sense. Yet, the bonds to be invested that are the vehicle for this, would surely add to the so-called ‘debt’ that neoliberal thinking typically tries to scare us with? And so we’re back to failing to get to first base on this because of the prevailing (mis)understanding of money and economy.
Seems that unless we first develop an understanding of the circulation of sovereign money – its issue and its return – we’ll be scared for evermore by the ‘household’ analogy.
This change will only happen when we get a chancellor who does understand money
I lie your explanation about MMT and agree with it to a high degree. However, if we were as a country to expand the money supply in this way whilst other countries are not, and also against market doctrine, is there a real danger the pound would plummet? Could the markets actually be stronger than governments? Could you address this topic in a future podcast?
This is dealt with in my MMT Source book. See here. A free download. https://www.taxresearch.org.uk/Blog/downloads/