All banks exist in order to create money out of thin air

I’m grateful to Graham for alerting me to this Guardian article on the report on Quantitiative Easing by the House of Lords.

Yes the report ‘asked the wrong people the wrong questions and got the wrong answers‘, but also, remarkably, included among its members Dido Harding, so what on earth could we expect?

The Guardian article is headlined ‘Bank of England ‘addicted’ to creating money, say peers’.

That set me thinking – what would a Bank of England look like that wasn’t ‘addicted’ to creating money?

Every single bank exists in order to create money out of thin air so if the Bank of England weren’t ‘addicted’ to money creation they would have no purpose.

And the profitability of commercial banks would be considerably curtailed.

As a first step to cutting out the bogus complexity and jargon inherent in the usual descriptions of the money system, surely a start would be to endeavour to lodge in people’s minds the simple fact that all Banks exist in order to create money out of thin air.

Comments

  1. Andrew -

    There is one very widespread notion that banks exist to take deposits from savers (that is, to borrow from the public) and then to lend the deposits to others.

    And another that government spending is either funded from tax revenues (confiscated by force of law from taxpayers) or by borrowing (from people with pots of cash, who chose to lend to the government).

    Both entirely wrong, but perhaps the report makes sense if that is your starting point.

    1. Peter May -

      I’m not sure it does because QE is as much about ‘borrowing’ (albeit from yourself).

      1. Schofield -

        “I’m not sure it does because QE is as much about ‘borrowing’ (albeit from yourself).”

        Equally if you borrow from yourself how can you owe to yourself?

        That’s like an Alchemist’s hallucination!

        Once you’ve read Christine Desan’s book “Making Money …” you realise the majority of British people haven’t got a clue about the UK’s economic and monetary history and effectively hallucinate that their country’s Treasury Department and Central Bank operate as two separate entities. I’m sure most don’t even know the BoE is nationalised.

    1. Peter May -

      Agreed, But it is a mystery how Robert Sidelsky was himself a member of the same Lords Committee, which wrote such eyewash.
      Then his own article tells it like it is.
      Very odd.

      1. Schofield -

        Yes agreed it is odd. Particularly that he didn’t write a disclaimer to the report. I’d love to know the reason/s why there could be quite a few reasons. Nevertheless those two sentences are the most on the nail sentences I’ve ever read of his. The British economists Keynes and Shackle would be proud of him. Of course for many voters who have a minimal understanding of economics and currency creation they have little understanding uncertainty underlies both activities and human beings, like all life forms, are driven by a craving for predictability in their existence. Even the Covid virus is geared to extracting energy from cells!

  2. Schofield -

    When you look at the list of witnesses for the House of Lords QE report they’re virtually all individuals who’ve swallowed incoherent NeoClassical money creation arguments. No wonder the report was a waste of time it was a whitewash from the beginning!

  3. Schofield -

    In the very first paragraph on page 3 of the House of Lords report on QE they tell themselves and us the government can create new money to buy treasury bonds then further on a page later, on page 4, they contradict themselves by telling us the government needs to get spending power by selling treasury bonds! Is it any wonder the UK’s in a mess with this inability to do joined-up thinking?

    https://committees.parliament.uk/publications/6725/documents/71894/default/

    1. Peter May -

      Well spotted.
      As you say thinking not joined up….

  4. Schofield -

    On further reflection this HoL Economic Committee report is so indicative of the state of Britain with far too many people looking up to politicians at Westminster (and particularly the two main parties) as a fount of wisdom and this has now translated into these politicians basically being lazy in the job they’re well-paid to do because its now become somewhat of sinecure! This sloppy report is therefore a ringing endorsement of the need for the country to abandon its FPTP system so fresh blood can be injected into Parliament and hopefully democracy resuscitated!

    1. Peter May -

      Much agree about FPTP and yet as you say on the one hand people look up to politicians and think politics and economics is too esoteric for them to understand and on the other that politicians are all the same and useless.

      Maybe that whole actually reinforces the inadequacy of FPTP because it doesn’t encourage involvement when there are no shades of grey and winner takes all also discourages compromise and understanding…

  5. Schofield -

    One thing I think we all forget, or fail to know is, that QE began early on in the last century and not in this century as a response to the Great Financial Crash:-

    http://www.taxresearch.org.uk/Blog/2017/08/09/the-first-world-war-was-partly-paid-for-with-quantitative-easing/

    As to FPTP the glaring absence is the teaching of economics, the country’s monetary system and the implications of the electoral system on the country’s democracy as part of the National syllabus. The omission has to be political.

    1. Peter May -

      Agreed absolutely.
      The nation was conned in the First World War and I fear they are conned now.
      I’d suggest that while I broadly agree that the monetary system and economics should themselves be taught, I hope I’m going to suggest in due course that we should teach actual basic cooking and see how it goes from there..
      More thinking needed – but hopefully later this week…

  6. Graham -

    Another little gem I noticed in the report – they were quite worried that all this QE might undermine the BoE Independence which is respected all around the world. (probably “world beating” independence) As Andrew Bailey asserted early in the pandemic they will not indulge in naughty “monetary financing”; and again in January reiterated that there was no merit in the argument that it had “damaged its independence by purchasing government debt and lowering the government’s cost of borrowing”.

    I mean, who could ever imagine that the BoE, owned by the Government, would ever do exactly what the Treasury and the Chanceller instructed them to do?

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