Friday, March 08, 2013

There is a magic money tree for governments with their own currency - and Cameron has already used it in quantitative easing for the banks - so why not for things that benefit everyone?

Prime Minister David Cameron is completely wrong when he says there is “no magic money tree” – there is for any government that has it’s own currency which it can issue in any quantity it likes; and for private banks which can create money – but only create it as debt. Cameron’s government, like the last government, has used it’s “magic money tree” repeatedly in “quantitative easing” to pad the banks’ reserves. There is no reason he can’t use it to create money for more worthwhile causes that benefit everyone.

Vince Cable is right that we need stimulus spending, but why should we borrow it from banks and hedge funds, increasing our debts, when the government can print it or issue it digitally instead? It’s created out of thin air either way. The financial crisis was the result of most money being created as debt - loans and mortgages - by the banks, combined with deregulation, as Australian economics professor Steve Keen points out (1).

The government should print money and spend it on green energy research, investment in infrastructure (transport, education etc), plus grants and zero or low interest loans to small and medium sized businesses. If that creates a little inflation, that's not so bad, as devaluation of the pound will also reduce the size of our debts denominated in pounds.

The British government’s 2% inflation target and reliance on borrowing rather than printing money are the result of over-sized banks that can donate to much to party funds. Nobel prize winning economist Ha Joon Chang points out that even IMF studies suggest inflation doesn't negatively affect growth till it reaches 8% - other studies say 20%. (2)

Some will immediately cry hyperinflation, but in actual cases of hyperinflation, like Weimar Germany or Zimbabwe, the causes were French military occupation and control of the steel and coal output of the Rhur valley, and international sanctions, respectively, combined with political crises, not printing money (3). The bank executives and hedge fund managers would like people to believe otherwise because they profit from other peoples’ debts and don’t want those debts shrunk by moderate inflation.

If the government won’t do that we still have one other option – set up lots of small local or regional savings and loans companies like the “Bank of Dave” (Burnley savings and loans) set up by businessman Dave Fishwick (4) – (5).

This also has implications for the debate on whether Scotland should become independent. One potential advantage of independence would be that Scotland could print it’s own currency and spend it how it chose whatever the City of London financial sector said.

(1) Steve Keen (2011) ‘Debunking Economics’, Zed Books, 2011

(2) = Ha Joon Chang (2010) ‘23 Things They Don’t Tell You About Capitalism’, Penguin / Allen Lane, London, 2010, ‘Thing 6’, page 55 of Allen Lane hardback edition

(3) = Ha Joon Chang (2010) ‘23 Things They Don’t Tell You About Capitalism’, Penguin / Allen Lane, London, 2010, ‘Thing 6’, pages 51-62 of Allen Lane hardback edition

(4) = Burnley Savings and Loans,

(5) = Guardian 01 Mar 2013 ‘Bank of Dave: Fighting the Fat Cats; The Wedding Shop – TV review’,

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