There is a "Magic" Money Tree....

Written by Fran Boait on June 3, 2017.

Amber Rudd, who stood in for Theresa May on the BBC debate on 31st May had a new line of attack for Jeremy Corbyn, accusing him of believing in a ‘magic money tree.’ She told the audience, ‘there is no magic money tree’.
The Prime Minister Theresa May then used the same phrase in response to a nurse who hasn’t had a pay rise for 8 years. She said: “There isn’t a magic money tree that we can shake that suddenly provides for everything that people want.”
The thing is, there sort of is. Money can be created out of nothing, and her government has a lot of control over where it goes.
But sometimes when you start talking about how money is created, and how it works it can feel like opening a can of worms with no bottom. Not surprisingly, no one on the panel dared to pick up on it. And to be honest I don’t blame them. Only one out of ten politicians actually know how money is created. (See the results of a poll)

So what is the magic money tree?

Well as many Positive Money supporters know, there are two main money trees: commercial high street banks and the central bank, the Bank of England.
The vast majority of money is created out of nothing, by banks when they make loans.
The Bank of England is currently running a programme where it creates £445 billion of new money, through a programme called Quantitative Easing (QE).
The main problem with these money trees is the vast majority of new money goes into financial and property markets, boosting asset prices, stock prices, and making the rich richer. While, very little is used to boost wages, create jobs, and invest in the things we need.
So there is a money tree, the question is whether it can be used more effectively? There is no reason why some of the money created through QE shouldn’t be invested through the government into things society really needs (find out more here).
Through our work we have found a tendency for politicians to see monetary policy outside of their knowledge base, thinking it is just something to be left to the central bank. Monetary policy has impacts which are of enormous political significance, and it is up to Parliament to scrutinise the wider effects of monetary policy on the economy and society. These comments by Theresa May and Amber Rudd were another sign politicians are stepping further away from this conversation.
So the government can spend what it collects in taxes, can borrow from financial markets, and can spend money created through the Bank of England.
Right, that sounds simple. It also goes against a lot of what we have been told over the last seven years since the crisis; i.e. that cutting government spending is inevitable, that we can’t afford the things we need.
So why is it like opening a can of worms?
Well, it is like opening a can of worms because money isn’t neutral and has many different aspects; economic, political, social, cultural, moral, and more. It has many different characteristics, depending on what we are doing with it – spending, saving, or lending it to others. For example, we could have a long conversation about the difference between money, credit, and debt.
Anthropologists like David Graeber understand the power of how the things we take for granted are socially constructed – e.g. money, and the idea that there is no magic money tree.
Pretending money isn’t complex is like pretending the Earth doesn’t go round the sun. Most academic economists, politicians, and policy makers, and other ‘people in power’ don’t really know what they think money is, which is fine, to an extent, but it becomes a problem if they don’t want to start to think about it.
Positive Money exists because we believe a public debate about how money is created, the problems it causes, and alternatives for reform is well overdue. The Bank of England has the power to create money, and we need to make sure that it’s used in the most effective way possible.
Although politicians are hard to engage with on monetary policy, we’ve demonstrated that despite money creation being a seemingly abstract and technical debate, there is a large appetite in the public to be engaged. We have over 60,000 supporters and that number is growing. Please join us by signing up in the form below.
And for now please share this video with your friends to help our politicians learn the truth about the magic money tree.

People’s QE goes mainstream

  

......It is very refreshing indeed that Jeremy Corbyn is willing to make the People's QE a reality if he ever became PM. Ofcourse, it stands to reason if sufficient amounts (monitored by conventional Indicators) of new non-repayable money are created directly into the Economy it could help many people.........But this is only the BEGINNING. What needs to happen next is the introduction of super flexible electronic controls over inflation to really ensure that future amounts of new money could be gradually phased in safely, and successfully. For that to occur, we would need to understand the Economy in Real-Time. With the arrival of Big Data, and Supercomputers/Quantum Computing such a proposal could become increasingly likely, and credible. It would if it succeeds be a massive leap in human evolution. See my evolving project http://www.p2pfoundation.net/Transfinancial_Economics

Written by Fran Boait on August 18, 2015. Positive Money      

           

Labour leadership candidate Jeremy Corbyn has sparked a major debate about monetary and economic policy by calling for what he calls a ‘People’s QE’.
He argues that ‘The Bank of England must be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport’. People’s QE is similar to proposals called for by Positive Money. We call the idea ‘Sovereign Money’. Ideas in a similar vein have been advocated or at least suggested by notable economists including J M Keynes (1), Milton Friedman (2), Ben Bernanke (3), William Buiter (4) and Martin Wolf (5).  Most recently, Lord Adair Turner (6) has proposed similar ideas, highlighting that ‘there are no technical reasons to reject this option’.
Like Quantitative Easing (QE), Sovereign Money relies on the Bank of England creating money and putting this money into the economy. But whereas QE relied on flooding financial markets and hoping that some of this money would ‘trickle down’ to the real economy, Sovereign Money works by injecting new money directly into the real economy, via government spending, tax cuts or rebates.
Sovereign Money (or People’s QE) tackles the current government’s flawed growth strategy, which is to grow the economy through ever rising household debt. As former FSA chairman Lord Turner put it, this is a “hair of the dog” strategy (7) for economic recovery, treating the cause of the financial crisis – excessive borrowing – as though it could also be the solution. The Office for Budget Responsibility predicts household debt to income ratio surpassing pre crisis levels by 2019 (8).
The pivotal advantage of Sovereign Money is that it requires no increase in either household debt or Government debt. In fact, Sovereign Money can actually reduce the overall levels of household debt. This deleveraging would also make banks more liquid and the economy fundamentally safer.
A common concern with Sovereign Money is that cooperation between the fiscal and monetary authorities is seen as a ‘taboo’ and that it would undermine the Bank of England’s independence. However this argument fails to acknowledge that fiscal and monetary cooperation has already been carried out by recent policies including:  Funding for Lending, Help to Buy, and Quantitative Easing. The difference with Sovereign Money is that the monetary and fiscal cooperation will have to be more explicit.
Another strong concern is that it will lead to the power to create money being excessively used, resulting in high levels of inflation. A strong governance structure is vital, whilst there are several to structure the process Positive Money advocates the Monetary Policy Committee (who decide how much money to create), is separated from the decision of how to spend the money (the government). The simplest way to ensure that the central bank does not create too much money is for monetary policy to continue targeting inflation (on its own or as part of a broader set of targets).
In addition, there is no reason why it should be more inflationary than the creation of money by bank lending (which typically creates inflation in the housing market).  Whereas most money created via bank lending goes into the property market, the money created via Sovereign Money creation would go directly into the veins of the real economy, boosting GDP and employment.  By boosting the capacity of the economy, Sovereign Money should actually be less inflationary than further consumer lending, and the use of Sovereign Money can be restricted should it start to become inflationary.

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1) Keynes, J. M. (1933). An Open Letter to President Roosevelt. New York Times
2) Friedman, M. (1948). A monetary and fiscal framework for economic stability. The American Economic Review, 38(3), 245-264
3) Bernanke, B. S. (2003). Some thoughts on monetary policy in Japan. Speech before the Japan Society of Monetary Economics, 31 May, Tokyo, Japan
4) Buiter, W. H. (2003). Helicopter money: irredeemable fiat money and the liquidity trap (No. w10163). National Bureau of Economic Research
5) Wolf, M. (2013). The case for helicopter money. Financial Times. 12th February 2013
6) http://www.ft.com/cms/s/0/8e3ec518-68cf-11e4-9eeb-00144feabdc0.html#ixzz3IjZNT6bq
7) http://www.bloomberg.com/news/2013-10-28/hair-of-dog-policy-risks-u-k-housing-boom-repeat-turner-says.html
8) http://www.telegraph.co.uk/finance/economics/11770654/Is-the-UK-economy-on-another-credit-fuelled-binge.html