Even the FT is gradually acknowledging where money comes from

There is an interesting letter published in the FT of 15 January from a Gary Prosser of Bristol:

Martin Wolf argues in “How the UK can finance the rising burden of public spending” (January 10) that “the country will have to raise taxes . . . impossible to do without courage, both intellectual and political”. As well as the intellectual and political courage required, I believe our country needs to think about the nostrums that preclude other options. I am referring to money creation.

Unless the economy was already operating at or close to full capacity, there would not necessarily be an issue with inflation. And is the north of England’s economy operating at or near full capacity? We need much better data than the Office for National Statistics currently provides on that matter. Foreign direct investment into the UK in 2017 was £81.9bn (ONS) — no one raises concerns about the inflation effect of that new money.

Finally, could interest payments on the foreign-held part of national debt (25 per cent in 2015) be met via created money since the inflation effect on the real economy would be minimal?

It is interesting that the FT publishes a letter mentioning ‘money creation’. It seems to me that is progress indeed. Indeed for the US FT Alphaville even has an article devoted to it (including our favourite radical US congresswoman Alexandria Ocasio Cortez).

It is interesting, too, that Martin Wolf who is normally a Positive Money fan (if there still are any?) is seemingly still firmly locked in to tax and spend. The letter writer is a bit more radical and suggests money creation for paying foreign-held gilts, which suggests to me he still doesn’t know that all money is created. Though of course it must be an appealing idea to create it just for foreigners  – almost as if at home we’ve got the real stuff! But really he suggests this to avoid inflation at home. Which as he correctly remarks, is not seemingly much influenced by the £81.9bn of Foreign direct investment.

Bristol has a big financial services sector so I surmise this is Mr Prosser’s background and the reason for his – entirely usual – inflation obsession. Inflation is invariably bad for lenders and usually good for borrowers. Inflation eats away at capital, which gradually reduces in value, so, provided you are getting some inflation on wages, the capital becomes gradually easier to repay.

I’d suggest we should be much less obsessed by it. Inflation is a bogeyman beloved of neoliberals who keep calling on the Weimar Republic and Zimbabwe in order to scare us. Some inflation is not harmful provided the labour market keeps reasonable pace.

The 2% inflation figure came from New Zealand and was plucked out of thin air – just like money itself. Not everyone was in favour of the idea – even one Janet Yellen who “worried that announcing an inflation target would make the Fed focus only on inflation and neglect its responsibilities to bolster growth and jobs. She worried that zero inflation could paralyze the economy, particularly during slumps, and felt that some inflation was necessary.”

How very prophetic.


  1. Michael Green -

    I have wondered if a substantially higher target rate for inflation, say 5%, would be a win-win. Firstly, higher interest rates would help to keep amounts borrowed within safer limits. Secondly, higher inflation would make a debt manageable much more quickly. Low inflation/interest rates make debt a permanent millstone.

  2. Peter May -

    Agree entirely that low inflation makes debt a permanent millstone. But not sure about the rest – is your suggestion that the amounts borrowed would be restricted by banks because they would think it likely to be inflated away or that housing would inflate while the loan is borrowed against a figure that will be historically lower?

  3. Graham -

    I remember when the interest rate on my mortgage went into double digits – it took a sizeable chunk of our salaries. We never paid less than 6 or 7% until we discharged it. When we started looking for a mortgage in the late 70’s it was 3 or 4 times the main salary and a proportion of the 2nd. We wanted to move house (early 80’s) but the Building Society manager said they wouldn’t give us one because we didn’t need a new house – the one we had was big enough. We eventually got one from the TSB – as it then was and is again.

    I wonder if there’s a lesson there somewhere?

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