The supposedly hard-headed and realistic analysis of our current situation is that we are doomed to higher taxes and cut services until we can pay off our debts; and that no action by government can change this fact. This is the version of reality that suits the people who caused the crisis – big banks, hedge funds, billionaire speculators. It also suits the big parties in government who get donations to party funds from them.
So the people who caused the problem get to keep on getting big bail-outs at taxpayers’ expense while being able to avoid paying most tax themselves through tax havens and multinational corporate structures.
We are not dealing with a hard unchangeable reality, but with the confused idea that money and debt exist anywhere but in our heads. Banks can and do create money out of nothing as debt simply by issuing a loan or mortgage. Governments can create it out of nothing by printing it or by issuing loans or grants. These are the two main ways it has come into circulation for at least a century. Similarly lenders can “write off” some or all of a debt and it instantly vanishes.
And, no, there is no way to limit the amount of money issued to the value of goods and services created because that value is also a subjective judgement based on incomplete information – which is why stock market valuations go up and down constantly and lead to economic booms and busts.
To limit the amount of money in circulation to the value of the gold reserves of the world was one past method of limiting the supply, but it was a completely arbitrary one and the gold standard contributed to causing the Great Depression by limiting the amount of new loans that could be made by banks or grants by government.
So there is no amount of money which will accurately reflect the value of the economy.
Money and debt are not unchangeable realities but shared ideas. How much of them exists and how much can be created and how it should be distributed are all things that we can change in any way we want to if we collectively decide to. Getting enough people to realise this is the only hard part.
It isn’t too complicated for the majority of people to understand, as the banking lobby want us to believe. it’s simple. As the late American economist J K Galbraith, who served under President Franklin D Roosevelt, wrote “The process by which money is created is so simple that the mind is repelled.”
Governments printing money and issuing it as grants, or zero interest loans or low interest loans is no different from private banks issuing it as loans or mortgages, other than that government can take into account aims in lending other than it’s own fairly short term profit. It can consider what investments are important to develop our economy and society, reduce poverty or reduce environmental damage over the long term.
The usual scare story you will hear at this point is that if we print money it will cause hyper-inflation. It could, if you printed an amazing amount of it, but in reality hyper-inflation has pretty much never happened unless a country is also under economic sanctions (e.g Zimbabwe) or under occupation and with a large part of it’s economic output going to other countries after defeat in a war (e.g Germany after World War I when France occupied the Rhur valley and all steel and coal from there went to France) (1).
Studies done by the IMF and cited by Chang show no fall in growth rate from inflation until it reaches at least 8% per year, while less conservative studies put the rate at 20% (2).
While inflation devalues money it also devalues any debt, as debt is denominated in money – so the higher inflation is the faster debt shrinks; and that is why banks and other lenders want low inflation. The British and American governments are heavily in the pockets of banks and hedge funds who are major donors to the party funds of all the main parties.
The Conservative party in the UK for instance, gets more than 50% of it’s donations to party funds from banks, hedge funds and other financial sector firms (3). The new head of the Bank of England, which sets the official interest rate and regulates other banks, is a former Goldman Sachs executive (4). All three main UK parties leaders welcomed his appointment enthusiastically.
Australian economics Professor Steve Keen has also shown that a major cause of the financial crisis is most money having been created as debt by private banks, with a recession resulting when the amount of debt issued is so great that the debtors can no longer repay it and the lenders will no longer issue new loans or forgive it, resulting in a crisis of confidence among both consumers and lenders. He suggests government printing money and giving it to debtors to pay off their debts (5). This would certainly solve the immediate crisis, but it wouldn’t stop the cycle starting all over again.
Only nationalised banks printing money and issuing it as grants and low or zero interest loans can do that. Of course it would still be unwise to issue infinite amounts of money without any checks on whether money issued as a loan or grant will increase government revenues or reduce it’s costs in future. So government controlled banks, after helping debtors pay off their debts and paying off it’s own debts by printing money, would have to ensure that some of it’s loans were issued to get a return, while others would be issued as grants for purposes other than getting a financial return, with the former funding the latter in the long term.
This is an idea which transcends the normal political divisions – there are even some Conservative MPs in the UK who are proposing something very similar.
I’m not sure that the Money Reform Party are right in suggesting that private banks issuing loans should be made illegal. That could have it’s own risks in making it impossible for businesses that don’t donate to party funds to get loans at reasonable rates , but we certainly need at least one government owned bank in each country creating money as loans and grants for government spending, for loans to small and medium sized businesses and to help people out of debt.
The reality is that we have plenty of options for paying off the debt and reducing poverty and inequality in our society, just not ones that these dominant players like. They would much prefer we sign up to the idea that it’s all unchangeable and that the hard reality is that we have to keep on issuing and distributing money primarily in ways that benefit them, even if it’s at huge cost to everyone else.
They have even got governments to legalise a ‘futures trade’ in food which allows them to basically bet that the price of a particular type of food will rise, before buying and stockpiling lots of it to ensure it does rise. This is at a cost of increased food prices which can mean hunger or death for people across the world, including in Haiti where for many years it has become common for parents to buy ‘mud cakes’ of clay and salt to fill their childrens’ bellies when they can’t afford actual food.
While things are not nearly that bad for most people in the developing world we continue to see poverty at levels where people must often choose between for instance eating or heating their home many days in winter; and governments are taking benefits away from the genuinely disabled and forcing the unemployed to work unpaid for big companies. Most of those who can get full time work are working harder and longer hours for the same or less pay. Millions can’t get work at all, or can only get part-time work when they want full-time.
The billionaires and the big firms (including many newspaper owners), along with the heads of the big parties they donate to the election funds of, have successfully redirected many peoples’ anger at the situation away from themselves – those with the actual power and money who are actually causing the problem – and onto public sector employees and benefits recipients – including the unemployed and the disabled.
Every time you are told that we just have to face up to the reality that we and our grandchildren will have to pay off our current debts and suffer for the actions of the banks, you are being lied to and fed the line those banks want you to believe. Don’t believe it – and tell others the truth.
(1) = 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
(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) = BBC news 09 Feb 2011 ‘More than half of Conservative donors 'from the City'’,
http://www.bbc.co.uk/news/uk-politics-12401049 (headline is inaccurate, should read ‘donations’ not ‘donors’)
(4) = Guardian 03 Dec 2012 ‘New Bank of England head will have too much power, warns insider’, http://www.guardian.co.uk/business/2012/dec/03/bank-england-head-power-new
(5) = Steve Keen (2011) ‘Debunking Economics – Revised and Expanded Edition’, Zed Books, London and New York