There is a magic money tree – don’t let politicians tell you otherwise

£’s. Petras Gagilas / Flickr. Some rights reserved.

Few aspects of our economy are as poorly understood among politicians and the general public as our monetary system. This becomes particularly obvious – and dangerous – during general election campaigns.

Last night Theresa May responded to a nurse’s concerns over pay in the NHS by saying “there is no magic money tree” to provide “everything that people want”. Other Conservative politicians have used the same line to attack Labour’s plans to increase public spending.

It’s an old trope. The argument goes like this: the UK has lived beyond its means for too long. The national debt now stands at an eye watering £1.7 trillion, meaning that we have saddled future generations with unsustainable debt and interest payments. We simply can’t go on spending money that we don’t have. Money doesn’t grow on trees – duh!

The only responsible course of action, the story goes, is to rein in spending and make “difficult choices”. Free school meals? Not anymore. Those new homes that we were promised? Forget about them. Investing in the technologies of the future? Don’t be so irresponsible. Upgrading creaking infrastructure? Come off it.

This narrative is incredibly powerful, as it chimes with peoples’ experience of managing a household budget. But in the context of a national government, it is almost entirely wrong.

It is true that the national debt stands at £1.7 trillion, or around 87% of GDP. But this is not particularly high by historical standards – after the Second World War the national debt stood at 243%. Imagine if Clement Attlee had listened to those who insisted that this meant Britain had to cut back public services. There would be no NHS, and no welfare state. Britain would be a very different place.

But despite its ominous reputation, the national debt is not all that it seems. The national debt is simply the sum total of all the government’s IOUs – the promises it has made to pay money back in future, plus an agreed amount of interest. Unlike a household, the UK government has its own central bank and its own sovereign currency. This means that the government borrows and spends in a currency that it controls. Here’s where things get interesting.

Since 2009 the Bank of England has purchased £453 billion of government debt from the private sector through a process called ‘quantitative easing’ (QE). Put simply, QE is the technical name for what happens when a central bank creates new electronic money and uses it to purchase assets from financial institutions.

Yes, that’s right – newly created money. Alas, the magic money tree does exist!

As a result, over a quarter of the total national debt is now owed to the Bank of England. But hold on, who owns the Bank of England? Well, the UK government does.

To put it another way, the UK government owes £453 billion to itself. This raises the obvious question of whether it really exists at all. As Jim Leaviss, a bond investor for M&G Investments recently remarked to the Financial Times: “Is there any difference in it being in a musty old drawer in the Bank of England, or saying it doesn’t really exist?”

Confused? Bear with me – things get a little more confusing yet. When a government borrows money it has to repay the principal amount that it borrowed plus interest. In the UK, around £50 billion of the annual government budget currently goes towards interest payments. Because of QE, the government has to pay interest to the Bank of England on the £453 billion of government bonds that it holds.

But in late 2012 George Osborne announced that the interest payments that the Bank of England receives from the government will be remitted back to HM Treasury to help pay off the national debt. Since then the Bank of England has transferred £62 billion – money that it received as interest on bonds purchased with newly created money – back to the government. So thanks to QE, the government isn’t paying any interest at all on over a quarter of the national debt. Talk about funny money!

The result is that today the government spends less on interest payments than at any point in history. The national debt has never been so affordable.

You may have noticed that issues of “affordability” never arise when the proposed spending relates to activities like going to war or bailing out the banks. That’s because for a country like the UK which has its own central bank and borrows in its own currency, financing government spending is never a problem. The “magic money tree” attack is simply a convenient way to mask an ideological crusade to shrink the state.

This does not mean that governments can spend without limit, or that governments should spend money unwisely. Government spending has consequences for inflation, employment, capital formation and many other things. Sustained over-spending can have serious consequences.

But right now the UK economy is crying out for public investment. From addressing climate and demographic change, to tackling inequality and the housing crisis, the UK’s long-term prosperity depends on having a government that is willing to direct investment into the areas of the economy most in need.

Don’t let politicians tell you otherwise.

  • Thanks. Like Coleridge’s ancient mariner, I’ve been stopping “one of three” with this argument for some time. Not sure if most politicians understand how it works. Or are they simply bent on misleading the public, as you say, for ideological reasons?

    • BC

      I think it’s a combination of the two, Jeremy. I’m quite sure Osborne and Brown understood it. I very much doubt if Blair, Cameron or May did. In fact, I suspect that there is some wilful refusal to understandit on moral grounds on the part of many. It contradicts the Protestant ethic of thrift and prudence.

  • “the government borrows and spends in a currency that it controls”

    That would be the case in a healthy system but currently it’s only partially true. The fact that the medium of exchange maintains its nominal value even when it is effectively taken out of circulation means that, in fact, the monetary authorities don’t – and can’t – have proper control of the money supply.

    Underlying the problem is the fact that there’s an incompatibility between the different functions of money. As medium of exchange, its value rests on it circulating; but, as a store of wealth, its value rests on holders’ ability to take it out of circulation. As long as those functions are conflated, anyone with a surplus can take the medium of exchange out of circulation and (through interest on savings) charge others for the use of it. The result is a constant flow of wealth from the poor to the rich, and governments have a permanent uphill task trying to mitigate the ill-effects of that.

    A healthy monetary system would separate those functions. In the meantime, yes, the government could create more money than they do at the moment. But, unless they also have plans to address the underlying problems, doing so will almost certainly lead to significant inflation.

    • Russell

      Did the quantitative easing for the banks cause inflation?

      Given the obvious benefits to millions that modest ‘people’s quantitative easing’ would bring it’s hard to see a downside.

      After all the Government was perfectly happy to get the Bank of England to pour in hundreds of billions for the richest amongst us. Not much comment on inflation then.

      • Did QE cause inflation? Almost certainly, I’d say – but so far only of asset-prices. Once stock-markets start falling, though, that’ll probably turn into consumer inflation (which will limit the scope for Labour’s PQE).

        I’m not suggesting that ‘people’s quantitative easing’ isn’t preferable to the Tories’ austerity. I’m simply pointing out that unless the fundamental problems are addressed it will simply be storing up a different set of problems which would quite likely lead to a swing back to the right at the next election.

        And, actually, quite a few people have been saying for the last few years that the Tories’ quantitative easing was inflationary.

      • Zen9

        Rather I suspect it’s ultimate outcome is the same as all efforts at printing money. Namely lowering the value of the Pound against other currencies.
        QE is a back door means to devalue the Pound.

        This has it’s most severe consequences for the poor and low paid. Especially when so much contains imported elements and it’s transported using fuel ultimately priced in dollars.

    • Malcolm, with respect this is not how it works. Although under a fractional reserve banking system (which is what we have) commercial banks can “create” money, in reality the central bank can exercise control of (‘excess’) money supply (or inflation) by altering reserve requirements and interest rates. On the ability of holders’ of wealth to take funds out of circulation, this is simply not the case. They can’t charge interest to other users (or holders of their deposits) unless the funds are being used – which means they are in circulation. Bank deposits are not kept in vaults. Wealth can be stored in “unused” non-monetary assets, of course, but then such assets are not money. In reality government debt – via the central bank – is critical to the functioning of a national economy. Without it we would be back to barter.
      Only when there are shortages of employees and/or goods & services will additions to the money supply produce unwanted levels of inflation. Neither holds at present, which is why the funds pumped into the ecnomy via QT have had no inflationary impact.

      • Russell

        I would love to see the Bank of England simply write off the debt it holds so saving the U.K. tax payers from enormous repayments and freeing up that tax money to be directed to public services.

        What would be the positive and negatives of this Debt Jubilee approach?

        • I suggested that in a letter in the Financial Times two or three years ago, and several other people have suggested it. The effect would be essentially zero, nothing, non-existent, zilch.

      • It is widely recognised that people’s ability to hoard cash is a significant constraint on central banks’ ability to control the money supply, Jeremy. That’s why central bankers like Andy Haldane at the Bank of England and others have discussed various options for either withdrawing cash from the system or causing it to lose value. This article by Ken Rogoff outlines the arguments.

        Yes, savers only receive interest when money is being used but implicit in that is a flow of wealth from people who don’t have money to people who do – a flow which only happens because of that ability to take the medium of exchange out of circulation. That’s a purely monetary phenomenon, which is at odds with the natural world in which holding onto things generally has a ‘carrying-cost’. Basically, that feature of money makes it a significant driver of the rentier economy.

        And inflation is more complex than you suggest. Prices rise when the amount of money in active circulation rises beyond the capacity of the economy to use it productively. QE has created more money but it hasn’t gone into active circulation – as far as I can tell, it’s gone into limited circulation in long-term asset markets (where prices have been rising) and it’s gone into storage, with people maintaining high levels of liquidity. It’s like a big block of ice hanging above a pool of water – it doesn’t make the pool overflow until it melts.

        • Not so simple Malcom. The first part of your reply above seems to me self-contradictory. If hoarding is a problem because it withdraws money from the system, why would central bankers want to engage in further withdrawal? While it is true that not all of the QT has reached the “market”, there has also been a large increase in household debt which, in turn, has helped to keep the economy afloat. Household debt, mind you, is not the same as government debt…. The way to withdraw cash from the system is to control debt – but it’s risky both economically and politically – and can be seriously problematical in a democracy. Household capital debt – mortgages – is different from consumtpion debt – but I’d better stop here because, as you say, it’s complex, and not really suitable from pithy comments (beginning to feel I shouldn’t have started on this!) All the best.

          • Ah, sorry Jeremy, I didn’t express that very well. Central bankers have discussed (in fairly abstract terms) the possibility of eliminating physical cash – or, more realistically, replacing it with something which loses its value after some specific time – because it limits their ability to impose negative interest rates on bank deposits. Without that ability, their power to control the money supply is severely constrained – the ‘zero lower bound’, they call it.

            As you say, this isn’t an ideal place to explore the fundamental problems of the monetary system but you may be interested in my analysis and proposals for fundamental reform. However, they are aimed at long-term reform rather than the question of how we address immediate problems.

            If Labour had a strategy for long-term reform, their proposals would be fine. But, without that, I’d say the Tory criticisms are quite valid. The fact that the Tories’ proposals are incoherent and self-serving doesn’t change that.

          • ANGRY_MODERATE

            The elimination of physical cash implies the end of democracy and citizens’ rights. It would also result fairly quickly in economic contraction and politico-economic crisis — as has been seen in India, where they removed larger currency notes as legal tender more or less overnight. Moreover, it is far from clear to me that the central banks should control the money supply. That belief rests on a view of the economy that is not proven and thus far (e,g, the horrendous monetarist experiments of inter alia Thatcher) have turned out to be a disaster.

          • As I said above, my own proposals (which, for the record, are not for totally eliminating physical cash) are aimed at long-term reform, and I put them forward alongside a set of constitutional reforms which would eliminate the glaring faults that, in our current political system, lead people to view government with suspicion.

            If you have no interest in looking beyond the current system, that’s fair enough – but as far as I’m concerned that’s a bit self-indulgent. Personally, I’m interested in understanding how a healthy society would function and, in that context, I’d say it’s clearly not a function of the monetary system to protect people from the state. For that, you need political systems which both enable the public to empower people of integrity, and provide ways to spontaneously remove leaders who are corrupt or negligent. But if we don’t bother getting the politics right, we don’t have any chance at all of getting our economic and monetary systems right, and blinkered arguments about which set of flawed economic policies are worse don’t really get us anywhere.

            The monetary system exists as a mechanism to mediate the complex web of debt relationships that people create when they trade with each other. It shouldn’t be treated as part of the political infrastructure. And it is quite obvious, to anybody who has given any serious thought to the issue, that the ability of individuals to take the medium of exchange out of circulation is a problem, both in theory and in practice. A healthy system would need to prevent that happening, at least for whatever money the state accepts in taxes (which, in practice, in a healthy society, is likely to be what everybody else will use too).

            But, as I said above, this isn’t an ideal place to explore the fundamental problems involved in that.

          • ANGRY_MODERATE

            You state: “And it is quite obvious, to anybody who has given any serious thought to
            the issue, that the ability of individuals to take the medium of
            exchange out of circulation is a problem, both in theory and in
            practice.”

            Well, I disagree. Since it was first created, money has been both a medium of exchange and a medium of saving. This for thousands of years. So you have to ask yourself the question why it is considered as a problem now.

            One likely answer is that deregulated banking has failed to deliver the reliability that is demanded, and people are afraid to trust electronic records of their monetary assets. Another is that governments are out of control, especially in the developed world: Cyprus banks had a bail-in (effectively stealing their Russian customers’ money) and Greek banks have capital controls — stopping you from accessing your money. I would not be in hte slightest surprised if the UK imposed capital controls in the near future, if Brexit goes as badly as anticipated. Of course, the Bank of England dislikes large cash hoarding, because it has lost some control over the UK economy.

            As for what is a “healthy system” I defy you to define that. I do not think you can. You will merely assert an unproven and untested opinion — like so many UK experiments with the economy, potentially plunging the UK population in yet another unnecessary crisis and continuous real income deterioration.

            So, your aim is to alter UK public opinion of government. Not a cat in Hell’s chance. The self-interested behaviour of all politicians in power in Westminster in recent decades has damaged the credibility of democracy beyond repair. It will be a real achievement for democracy to survive at all, but politicians will continue to be despised for anything other than the very long run.

          • Corey

            We too often fetishize money. A new science sees the computer modelling of economies, and what you start to notice is that the outcome is always like the Monopoly boardgame; indeed, the sheer math of transactions (leveraging land and commodities to make a profit) shows that money, a representation of energy, is bound to thermodynamic laws. Money must impoverish the majority (you see this now, with 80 percent of the planet in poverty), profit and wealth creation here must lead to its opposite elsewhere (in so far as we gauge “wealth” in a strictly monetary sense, independent of subjective value) and, indeed, money only has value because billions don’t have it; if they did, your dollar would be worth less.

          • ANGRY_MODERATE

            When you live on or near the poverty line, money is not a fetish: it is your means of survival. In aggressively money-obsessed Britain, without money you will be homeless, starving, depressed and possibly dead in a short period of time.

            You need to get to grips with the real world, instead of floating around fancifully in the ether.

          • “Since it was first created, money has been both a medium of exchange and a medium of saving. This for thousands of years. So you have to ask yourself the question why it is considered as a problem now.”

            Do you imagine it hasn’t been a problem throughout that time? Why do you think societies around the world adopted fiat money in place of the commodity-based money that they had before? And why do you think people get paid interest when they put money aside for future use, when pretty much every form of natural wealth either loses value or imposes carrying costs of some kind?

            Using a medium of exchange which anyone with a surplus can take out of circulation allows the rich to hold it to ransom. That’s why people receive interest on savings. That creates a steady flow of wealth from the poor to the rich, as it has done throughout history. And you don’t consider that to be a problem? As far as I’m concerned, it’s one of the root causes of inequality.

            You challenge me to define a healthy system and say that I ‘will merely assert an unproven and untested opinion’. Actually, I’m not that ambitious. My aim is simply to identify the most glaring deficiencies in the current system, analyse the reasons for them and suggest fundamental reforms which would remove them.

            “So, your aim is to alter UK public opinion of government. Not a cat in Hell’s chance.”

            Well, you could say that’s my aim, I suppose, since I’ve spent the last few years trying to persuade people that our system of government needs to be fundamentally reformed. And you may be right to say ‘no chance’. But that’s not just because of the self-interested behaviour of politicians, it’s also because so many people prefer to put their energy into complaining about how bad our politicians are, rather than thinking about how the system could be reformed.

        • “It is widely recognised that people’s ability to hoard cash is a
          significant constraint on central banks’ ability to control the money
          supply,” Not true. If people in the UK hoard an additional million under their mattresses, that money is still part of the money supply. However IT IS TRUE to say “It is widely recognised that people’s ability to hoard cash is a
          significant constraint on central banks’ ability to control aggregate demand.” I.e. if people save cash (as Keynes pointed out) that cuts demand all else equal.

          • Yes, of course it’s still part of the money supply, Ralph. But, while it’s under the mattress, the monetary authorities clearly don’t have any control over it and it’s not performing its function as a medium of exchange. But it’s existence, and the fact that it can come back into circulation at any time, constrains the central bank’s ability to ensure there is sufficient money in active circulation – because, if they create more in order to to meet demand, there might suddenly be too much in circulation, compromising its function as a standard of value.

          • Yup: pretty much what I said just above. To repeat, saving reduces demand as explained by Keynes.

          • No, Ralph, that’s not what I was saying and it’s only superficially true; underlying demand isn’t actually reduced, when interest rates are high, it’s just frustrated.

            It’s important to recognise that monetary authorities only try to manage aggregate demand as a means of keeping the value of money stable, and it is precisely because they don’t have proper control of the money supply that they’re obliged to try and influence real-world behaviour in order to achieve a purely monetary effect.

          • Who said anything about interest rates? I didn’t. Second, what’s the difference between “reducing” demand and “frustrating” it?

          • “Who said anything about interest rates? I didn’t.”

            I did, Ralph – in the comment you originally replied to, which is about the monetary authority’s ability to control the money supply. I took it for granted that you were aware that adjusting interest rates is one of the few tools they have for doing that, and I assumed that was why you raised the subject of reducing demand. I take it you had some other purpose in mentioning it but I’m afraid I’m unable to guess what it was.

            “what’s the difference between “reducing” demand and “frustrating” it?”

            I distinguish between demand that’s driven by an active desire of a creditworthy buyer to purchase some good or service, and demand that stems from someone having surplus money and looking around for something to spend it on. The first, which is what I meant by underlying demand, is frustrated when the monetary system fails to provide the medium of exchange necessary for the exchange to take place. The second is reduced when surplus money is diverted into savings rather than competitive spending.

    • “As long as those functions are conflated, anyone with a surplus can take the medium of exchange out of circulation..”. Not true. For example if I use cash to buy a form of saving, e.g. house, the seller of the house then has the cash.!!!!!

      • Spending cash doesn’t take it out of circulation, Ralph. The problem comes when people don’t spend it – i.e. when they put it under the mattress.

  • Russell

    Awesome article.

    Please write an article explaining why the Bank of England doesn’t cancel this debt and instantly remove a quarter of debt repayment.

    Is it destabilising? Surely it couldn’t be given the Bank of England isn’t a commercial firm.

    This is information that is so hard to come by. Despite following politics for many years it’s brand new info and quite surprising.

    • Tony Weston

      It cant cancel it. That would be against EU rules about printing money to cancel debt….

      So, they print money, to swap for the debt. And keep the debt…. until it matures and cancels on its own.

      BUT, economically, its the same as been canceled.

  • Pat

    Oh my god

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  • William MacDougall

    “This does not mean that governments can spend without limit” you rightly write. And if in the eight year of economic recovery the government is still running a large deficit, what will it do in the next recession? Osborne exaggerated the constraint, but don’t pretend there is no constraint.

    • ANGRY_MODERATE

      I notice that you have nothing at all to say about trade deficits, and the parlous state of the UK current account. Could that be because you passively follow mainstream neoliberal dogma, and they consider these massive problems not to be problems?

      • William MacDougall

        I didn’t mention them because the article was about something else, i.e. budget deficits, but yes trade deficits can be a serious problem and spending money you don’t raise in taxes can contribute to them.

        • ANGRY_MODERATE

          My point was that trade and current account problems are far more serious than a fictional national debt. This is not to promote borrowing as a panacea, but merely to point out that managed debt is far preferable to many other problems — collapse of the manufacturing sector, for instance. This is something that Tories since 1979 seem incapable of grasping.

          • William MacDougall

            More borrowing would if anything make the trade and current account problems worse; that’s one of the problems with national debt that the author ignored.

          • BC

            “More borrowing would if anything make the trade and current account problems worse”

            That depends on the purpose of the borrowing. If it is instrumental in creating more wealth than it costs, then it would clearly not make matters worse. Austerity on the other hand, will make matters worse, no matter what. Indeed, that is exactly what it has done.

          • William MacDougall

            It might or might not be good for the economy, but it would be bad for the trade and current account deficits.

          • ANGRY_MODERATE

            Nope. Very right wing (and wrong) economic viewpoint,.

          • William MacDougall

            On the contrary, there are some right wing economists who think the deficit spending would have no affect on growth (because people would save more to plan for future taxes and inflation). Left wing and Keynesian economists on the other hand think it would increase demand and that at least some of that would leak into greater imports and therefore a worse trade deficit.

          • ANGRY_MODERATE

            Very old-fashioned thinking, which is why it is wrong.

          • BC

            “…because people would save more to plan for future taxes and inflation”

            That was the mantra of the Republicans before Obama was elected. It turned out to be absoute bollocks.

            “Left wing and Keynesian economists on the other hand think it would
            increase demand and that at least some of that would leak into greater
            imports and therefore a worse trade deficit.”

            Really? Who thinks that? Or is the second part of that sentence your extrapolation? To begin with, it is not simply a matter of stimulating demand. The spending itself would have beneficial effects on the economy.

            Secondly, when you force wages up you force wages up, you also force capitalists to invest and increase productivty and innovation. Instead of a low wage economy producing low value goods you start producing high value goods which people in other countries want to buy.

          • William MacDougall

            1 – I agree that full Ricardian Equivalence is unlikely, but no more so than your confidence that more money on education will dramatically increase productivity. And to the extent there is any truth to the latter, surely diverting expenditure from worthless subjects like Media Studies would be as effective as more money on education overall.
            2 – I repeat: except for a few right-wing economic models, every model I’ve ever seen has leakage from deficit spending into imports. Show me a respectable model that doesn’t.
            3 – Increasing wages is a fresh subject entirely, but your theory that increasing wages leads to increased productivity rather than increased unemployment is extraordinary and surely wrong. What’s your evidence?

          • BC

            ” but no more so than your confidence that more money on education will dramatically increase productivity.”

            A better educated ( even in media studies) , better housed and healthier workforce will be more productive. Even Victorian Tory reformers understood that.

            “I repeat: except for a few right-wing economic models, every model I’ve
            ever seen has leakage from deficit spending into imports.”

            It ain’t necessarilly so. It depends on where the spending is directed. Granted, there would need to be a rebuilding of an economy where goods and services are produced domestically.

            “Increasing wages is a fresh subject entirely, but your theory that
            increasing wages leads to increased productivity rather than increased
            unemployment is extraordinary and surely wrong. What’s your evidence?”

            It is not a fresh subject. Part of the point of intelligent deficit spending would be to move from being a low wage, low skill economy to one based on a highly skilled and well paid workforce. The evidence that this works is manifest in the economies of most Scandinavian countries.

          • BC

            I’m certainly not bothered about the current account deficit. In the long run, the benefits of the spending will neutralise that by increasing productivity. Why would it be bad for the trade deficit? I would have thought that the decrease in productivity caused by austerity would be worse for it.

          • William MacDougall

            Why would productivity go up with increased demand? Why would it go down with a reduced deficit that is still a deficit?

          • BC

            If it is used to put a healthier, better educated, better housed workforce into better paid work it will increase productivity.

          • William MacDougall

            Doubtful, speculative, long term, and there would be opposing affects: higher long term taxes might reduce productivity.

          • BC

            You have evidence that this has happened in other countries? Norway? Sweden?

          • ANGRY_MODERATE

            He has no evidence of anything: it is all neoliberal propaganda and nonsense.

          • ANGRY_MODERATE

            The neoliberal claim that taxes reduce work effort is not proven. Several things that do clearly affect productivity have been deliberately damaged by recent (mostly Tory) governments. These include educational standards, work satisfaction and psychological health, employment rights, affordable housing near your workplace, etc etc. On just education, the Tories have managed to reduce literacy and numeracy skills, impede creativity and innovation, and have obliged students to study for immediate employment careers in order to pay off massive student debts. In plain language, they have destroyed the UK’s historical comparative and absolute advantage of innovation, and replaced it with exam-passing skills appropriate for low-level factory and office workers.

          • ANGRY_MODERATE

            Incorrect. Proper management of the economy would borrow primarily to stimulate production over consumption. The problem is that politicians think short term and choose to prioritise consumption because (i) it makes the electorate happy, and (ii) it feeds into GDP data, and mainstream economic analysis claims that economic growth per se is good (when clearly it is not).

          • William MacDougall

            In every Keynesian model I’ve ever seen, government borrowing stimulates demand not production.

          • ANGRY_MODERATE

            1950s demand management is not what I am advocating. Neo-Keynesian economics is where the future lies, and it is rather more sophisticated than things 60 years ago — even including monetary policy.

    • There is indeed no constraint (apart from inflation). If you think there is another constraint, it’s up to you to tell us what it is.!!

      • William MacDougall

        The author put it well in the next sentence after the one I quoted: “Government spending has consequences for inflation, employment, capital formation and many other things. Sustained over-spending can have serious consequences.”

        • You haven’t explained why “overspending” has serious DIRECT negative consequences for “employment” or “capital formation”. Obviously it’s possible that excess inflation has negative consequences for employment and capital formation. I.e. there is a possible INDIRECT effect there. But I mentioned inflation.!!

          • William MacDougall

            Well you could ask the author, Laurie Macfarlane, who I’m quoting. But I think she’s right; if spending boosts demand, it can boost inflation.

          • I’ve already said excess spending leads to excess inflation.!!! Obvious to a ten year old.

          • William MacDougall

            So what was your question then? Excess spending is another way of saying overspending.

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  • J Robert Schwarz

    Quantitative easing is in my opinion stealing from the poor and middle classes, and giving to the rich. The reason is simple – it creates inflation, and inflation punishes those who have got a fixed income and are holding their assets in cash or bonds. Both are the case for lower and middle classes, especially for young people as they will usually not have acquired real estate yet.

    The rich, who have got a highly flexible income (eg caused by bonuses) and who hold most of their assets in real estate or company shares are not threatened by inflation, they may even profit by it because of exploding real estate prices. Also, it is easier for them to escape virtually or physically to countries with stable monetary environment.

    If the money gained by the state through quantitative easing is spent mainly on the welfare of the poor, they may profit for a time, on the balance. But experience teaches that this happens on the back of the middle classes, destroying the morale of the most productive section of the population. And the more money is spent in this direction, the faster inflation becomes.

    This is no argument for austerity. I believe the money spent with one hand must be gained via taxes by the other hand. And what would be better to tax than real estate, which cannot flee the country? A progressive real estate tax would be one suggestion, not hitting the small home owner but those who own multiple houses or large estates.

    • BC

      “If the money gained by the state through quantitative easing is spent
      mainly on the welfare of the poor, they may profit for a time, on the
      balance. But experience teaches that this happens on the back of the
      middle classes, destroying the morale of the most productive section of
      the population”

      It depends on how that money is spent on the welfare of the poor. If it is spent on improving housing, health, education, training and job opportunities then the poor will become less poor and consequently take less from the Exchequer in benefits, cost it less in the poor health outcomes consequent to poverty, be less likely to turn to crime, give more to the Exchequer in taxes and, because they would not be as able to “save” as the rich, they would be circulating more money into the economy to employ others and the mean and whinging ( as well as the generous and enlightened) middle class would also benefit from improved profits and career opportunites.

    • ANGRY_MODERATE

      QE is a suboptimal policy response to depression, used currently when a monetary instrument is chosen but fiscal policy (state borrowing and spending) would be more appropriate, provided that the latter is done in a focused and controlled manner. The fact is that the neoliberal governments which created the global financial crisis that we are still suffering from, consider that neo-Keynesian policies are lunacy and the crazy nonsense of austerity policies is sane. Black is now white and vice versa. This is what happens when you allow crooks, charlatans and nincompoops to run the political system. (Trump is all three, of course.)

    • It would quite possibly make sense to take QE much further and buy back the entire national debt. Milton Friedman and Warren Mosler advocated a “zero debt” regime. If they weren’t right, they were very near being right in my view. Re the inequality increasing effects of that, that’s easily dealt with via increased income tax and/or enhanced social security. As to how to attain the optimum amount of national debt, see:

      http://ralphanomics.blogspot.co.uk/2017/05/the-optimum-national-debt-gdp-ratio.html

  • Leviathan

    What a wizard wheeze! If only they’d tried that in the Weimar Republic or, indeed, today in Venezuela.
    Unicorns for all!

    • ANGRY_MODERATE

      Actually, that was (more or less) what was done eventually to rescue the German economy — by a certain A. Hitler. You should try reading some economic history: you might learn something. A large part of the rise of the Nazis is attributable to economic mismanagement by the victors of world war I and the weimar republic. Keynes even wrote a small book about the stupidity of the post-war economic management — and his structures apply today, with some modifications.

    • BC

      Ah! So the Weimar hyper-inflation was caused by its irresponsible commitment to an unaffordable Socialist political economy? Er, no. It wasn’t. You need to take Angry_Moderate’s advice and actually find out what caused it and what stopped it. A little knowledge is a seriously dangerous thing.

      • Leviathan

        Of course the Weimar Republic wasn’t Socialist; I should have been clearer. The root problem was the unaffordability of war reparations. The government printed money to pay them back. Unfortunately their underlying productive capacity could not support that increased money supply and hyper-inflation followed. Pegging the new Reichsmark to gold stopped the immediate bleeding but Germany really only began to get back on its feet as its productive capacity grew (helped, in due course, by Hitler’s re-occupation of the Rhineland).
        That’s a long-winded way of bolstering my opinion that a central bank’s printing of money does NOT constitute a magic money tree, at least not in the long term.

        • BC

          “The root problem was the unaffordability of war reparations. The government printed money to pay them back.”

          Nope. That’s not what happened. It was speculation on the international money markets which drove the the currency down. The Weimar experience is completely irrelevant to this issue.

          • Leviathan

            Well yes of course the Mark fell against foreign currency; that was because the supply of Marks had expanded far beyond the country’s productive capacity. This was exacerbated by accelerated expansion of the money supply after the French occupation of the Ruhr in 1923 (which, of course, further impaired productive capacity). It is doubtful whether currency speculation would have occurred to quite the same extent if, for example, instead of simply printing money the German government had raised domestic taxes or practised austerity.
            The point is, Germany did not have the means to pay its debts – principally war reparations. A forest of money trees was no help. In the end of course there was an element of debt forgiveness as Germany did not pay back the whole reparations bill – something the Greeks must look at today with a slightly jaundiced eye.
            The relevance to today’s situation is that, in the end, a country’s production (or assets – this current government seems keen on cashing in on infrastructure) must be sufficient to pay its debts.

          • ANGRY_MODERATE

            All you have shown is what was already known — that the war debt imposed on Germany was unpayable and crippled the economy. This does not invalidate the point of this article, which is not to propose a mechanism for countries burdened with external debt but for a country like the UK which can raise money by printing it (effectively, by internal borrowing). So printing money is not a solution for contemporary Greece, which is in a comparable situation with 1920s Germany, as you point out.

          • BC

            ” In the end of course there was an element of debt forgiveness as Germany did not pay back the whole reparations bill”

            In the end of course, the Nazis introduced the Reichsmark which was not tradeable so could not be forced down by speculators in London or New York. Period.

            “The relevance to today’s situation is that, in the end, a country’s
            production (or assets – this current government seems keen on cashing in
            on infrastructure) must be sufficient to pay its debts.”

            No. They must be sufficient to service them while still gaining benefit from the spending they facilitate. Provided that remains true, the amount of the debt or the deficit becomes unimportant. The difference with Weimar is that there was no benefit from the debt – neither to the Germans who were enduring poverty to service it nor to the other Europeans who were pressing a debt which could never be paid.

            The comparison is utterly fatuous.

          • Leviathan

            Without wishing to seem a pedant the Reichsmark was introduced in 1924, some years prior to the Nazi’s assumption of power.
            However you make a good point about a country being able to sustain a debt burden for so long as it can service that debt. There is no doubt that the UK can indeed currently service that debt. Some debt is probably desirable anyway particularly if itis used to improve productivity. Just as with an individual or an individual business the objective is to borrow at a certain interest rate and use that money to generate returns at a higher rate. So long as Return on Capital Employed is higher than the cost of debt then that debt is indeed virtuous. However, as you imply, the question is how much debt is too much? I agree that the UK is not yet at a level where repayments are a problem but my central point, I think, still obtains: there comes a point where more borrowing, or more printing of money, becomes too onerous.
            In the long run there is no magic money tree.

          • BC

            ” However, as you imply, the question is how much debt is too much?”

            Keynes answered that: If you can do it, you can afford it. The point is that “debt” in the sense meant here is simply the act of using newly created money to stimulate economically viable and desirable activity. If used properly, the very act of doing so should result in there being more wealth at the end of the process than there was at the beginning. So it is indeed a magic money tree in the sense that May claimed it wasn’t.

  • Bill Ellson

    “Imagine if Clement Attlee had listened to those who insisted that this meant Britain had to cut back public services.”

    Who were the people who insisted “Britain had to cut back public services”? A specific example please.

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  • Helen

    So never mind that the banks have used QE to purchase assets for their own books creating a massive bubble that has “trickled down” to house prices, making them even more unaffordable for most. The cancelling of interest payments is also de minimus in this low interest rate context. Let’s not forget also that it was Gordon Brown who set this vicious cycle up – which is exactly how it will be remembered when the absurdly over priced FTSE and all related assets come crashing back down to reality. QE was never intended to be anything other than a cover up for the fact that the UK’s largest banks were – and still are – in effect, bust.

    Classic neo lib apology for the enrichment of the 1% masquerading as “Labour” support. Don’t forget these same people until last week were doing all they could in the Guardian to get rid of Corbyn. If he gets in he’s either been bought or will be removed in a matter of months. QE will never be used to reduce the wealth gap.

  • Richard

    this is all well and good but the uk printed money
    the value of the currency fell and now certain items cost more
    print enough to pay off the national debt and starve the population
    the uk cant produce its own food
    devalue the pound
    pay the police more
    pay teachers more
    pay everyone more
    in sterling
    when sterling is worth nothing how will you buy food and basic nececities
    wake up

    • Goinlike

      Yes it is a wonder that someone has the gall to put forward such an obviously flawed argument. If the government reduces the value of the currency through QE then it simply acts like an additional tax and if it borrows the money to pay off the interest then it is taking the money from us.
      Government money is our money .

  • Richard

    an excelelent technical discussion tn the intracacies of financial menovering
    but as a banker i have not seen any diference in my living standards
    food to me is a very small percentage of my earnings
    just paying for my sportscar to be tuned once a week
    for acceleration not economy could feed a family of four for a month

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