If we can do it, surely we can pay for it ?

One of the most confused suggestions of my recent session with Positive Money (PoMo) was their stance in favour of PQE, which they are happy to admit is just printing money without first raising taxes. IE they are spending first.

So if they are prepared to justify it on that basis what do they propose to say to those who will undoubtedly point out that inflation will increase (some will be drawing comparison with Zimbabwe and so on)?

Additionally, surely Positive Money should be engaging with the multipier effects of both health and education spending, where government will get back more than they spend, or, in the admiitedly currently highly unlikely, scenario that inflation takes off, say that they would be prepared to increase taxes?

PoMo actually parked my questions on inflation and multipiers without answering them. Which I confess did not impress. When I persisted, they said simply that taxation was not part of their remit.

My contention is that the ‘Positive’ pole of money creation is by definition connected to the ‘Negative’ pole of taxation so if you are proposing creating money you really need to take on board the whole process of taxation.

It is, I would suggest, nothing to do with PoMo’s (self imposed) remit. Perhaps in their new found role as a think tank, and as they bid for research funding, they are over conscious that they don’t want to research taxation? But if they want to create money, unless they are happy to pump into the economy any part of the roughly 38% of GDP that is government expenditure every year without clawing any of it back, then tax and inflation are an intrinsic part of the process of money creation. Or as the Po Mo founder, now at the Bank of England, suggests ‘stability’ is an intrisinically important part of money.

Quite so.

Still, PoMo is due to launch a new website in the very near future, which will, they have indicated, have space for MMT economists to promote their policies.

That is to be commended. But if they accept that “balancing the budget” is an idea at odds with the needs of a nation, they also need to recognise the role of tax in a stable money supply.

Otherwise HM Treasury will be beating Positive Money to a proper understanding of how money works.

If Positive Money really believe that if we can do it, we can pay for it, then they have to recognise the role of tax.

Comments

  1. Vince Richardson -

    PoMo would say that tax is a political issue, to be decided by a gov of the day, not them. That is all. They do accept tax as a necessary balance in an economy. Just they do not want to peg themselves to saying what percentage level it should be, it’s not for them to say.

    What they do say is that a monetary policy committee could decide on how much money needs creating in any one year*(or destroying in a boom). They would then pass that figure over to the Treasury to decide where the added spending(or the spending cuts/tax rises) apply as that is a political decision.
    This means the central bank does not get to decide where cuts /spending/taxes are made and governments do it get to decide on the overall size of the stimulus/deflation. This is a prudent separation of monetary and fiscal power but crucially would provide a much more coordinated effort between Treasury and central bank.Since we have had the BoE applying inflationary policy(QE) since 2008 , going directly against the simultaneous deflationary austerity drive by the government.

    * The monetary committee would do this much as it now sets interest rates. There would, in this case, be no further need to set interest rates as they do now.

  2. Peter May -

    Aggree with your last sentence!
    Wasn’t suggesting that PoMo should be deciding on tax levels. My point has always been that as we spend first and tax second it is for the government (who ultimately create all the sterling money there is) to decide.
    In allowing the BoE to set interest rates – which itself is a potential cause of inflation (as Richard Werner proves interest rates usually follow, not lead) we are already giving away some democratic control but if we allow them to set a maximum limit on money that the economy can create in one year, we are back to spend and tax. If the government wanted to spend more than the BoE thinks they ‘should’ and, let’s face it the BoE are no more knowledgable than the government – otherwise they would have successfully kept inflation below 2% or refused the mandate because they had insufficient tools to use to do so – the government would be in the position of having to raise taxes if they required to spend more than the BoE permits. And presumably just refuse to create it if less.
    It gives the bankers control in either case – and we know how that turns out…
    The idea that interest rates would no longer be set by the BoE is new to me – is this PoMo policy? Or do they think interest rates should be nil?

    1. Vince Richardson -

      Firstly PoMo would point out that the gov does not “create all the sterling money” in circulation, since around 97 % of our money in use is actually created by private banks when they make loans.Gov spending(money creation) is largely negated by taxes(money destruction). What happened up till 2008 was that private banks greatly expanded the money supply via wreckless lending. Private debt levels soared and self-destructive bank leverage are our real problems, not gov spending/deficits.

      PoMo is very much in favour of governments using printed central bank money to fund gov deficit spending if it is needed, via Overt Monetary Funding.It is not a case that the BoE would refuse such a request in a recession. It most certainly would do in the case of an inflationary boom though(one would hope). The BoE would only decide on the amount of stimulus and the gov on where that stimulus goes. The gov could not decide on the amount for sure, but the BoE could not have a say on where it is spent,thus maintaining a wise separation of monetary and fiscal powers. There would, however, need to be a much closer cooperation between the gov and central banks to control the economy in a more stable way. eg the BoE may allow more funding for non-inflationary projects. This would allow extra funding for say the NHS, education, environmental projects, social care and affordable housing. But in these would be political decisions for politicians, not central bankers.

      We also need to educate our politicians that this is entirely possible.

      In this way, money creation would only be allowed by the state(Treasury and central bank in tandem). Private banks would no longer be allowed to create money for lending into risky bubble creating assets….property and share markets in the main.

      As to setting interest rates, there simply would be no need to set them anymore at a central level. The current MPC could be reassigned to decide on what quantities of money to create in addition to that already circulating(depending on gov plans). So they would not, in fact, be deciding on the total amount of money in circulation just adjustments where possible. As you point out anyway interest rate setting is largely ineffective and behind the curve,so it is no great loss.
      PoMO has recommended tax cuts /citizens dividends as the best and most efficient way to pump money into an ailing economy but are at pains to point out that it this does NOT rule out increased gov spending if the gov of the day has a mandate to do so.

      It certainly is a big topic to grasp in one go,I have done my best here. I do however recommend reading their website from which you can gain much deeper detail….and no doubt more fully explained!
      PoMo also say this might take a while to implement but that it can be achieved in sensible stages.

      1. Peter May -

        Have ‘hidden’ the draft so I hope that makes things clearer.
        97% of the money is not created by private banks unless:
        1. you ignore QE
        2. you don’t accept that the private banks create their money with the specific government granted banking licence
        3. you think that tax is recycled rather than destroyed when collected.
        clearly you don’t think that no 3 is true and it isn’t – we don’t say to a policeman hang on you’ll get a pay cut next month because we haven’t collected enough tax yet. We pay him regardless ie create the money to do so.
        But since 40% odd of GDP is government expenditure that clearly cannot be created by private banks, so the majority of money might be created by private banks but never 97%!
        I hear what you say re BoE but I don’t underatand why monetary and fiscal powers need separation. Additionally we cannot get rid of bankers – they’re unelected and they’ve been the cause of our current problems. We can get rid of elected politicians tho’.
        And PoMo’s Positive pole of Money creation still ignores the importance of the negative pole of money destruction ie tax, which prevents inflation that the BoE is going to be concerned about!

  3. Vince Richardson -

    As I said its impossible to mention everything.

    1.QE has hardly made a difference in the money supply; in 2008 private bank created money stood at 97 %. It may be now around 95 % due to QE . But the vast majority of our money we use day to day is created by the banks. this figure is about the same in the USA and every other nation in the world that use fractional reserve banking.

    2.I do realise banks have a license to do this, just I did not think it necessary to say it . PoMo want to stop it is the point….

    3. I know tax destroys money,if the gov did not tax there would be no room for gov spending. Gov spending would then cause inflation. So we agree.

    40 % of GDP is 40 % of GDP. What PoMO is talking about is the money supply not GDP. Bank lending does not help GDP as approx 85 % goes into property and shares. which are not productive assets.

    The money supply is made up of a mere 3% coins and notes(state created) the rest exists as numbers in bank accounts. This is the money created by banks to lend on,it rose 4 fold in the 10 years leading up to the 2008 crash…due to mortgage lending. This was new money created by banks to lend to borrowers…and it caused a housing boom.

    PoMo do not trust politicians with the printing press..neither do I ,as politicians love nothing better than creating a boom before an election…that’s bad economics.

    The BoE collects all the economic data on the economy so it is is the expertise here, not politicians. They can work together and how much power one side gets is a moot point I realise this,but this is about sensible checks and balances.

    We need banks ,just not the type of banks we currently have. We need to take away their ability to create money,only the state should be allowed to do this. This will create a stable economy and financial sector;remove the need to bailout banks;allow money to be created for the benefit of the wider economy and not for financial markets and property markets.

    PoMo have estimated we would also save £21bn a year on lost seigniorage to the private banks…that’s quite a subsidy to the private banks.

    PoMO would agree with you on taxation. Raising taxes will cool an economy by reducing money in circulation,which cuts private spending and deflates the economy.

    But in this case the BoE would likely have spotted the trouble ahead and said that £Y needs removing from circulation but crucially they would not have a say in whether a gov raises taxes or cuts spending to achieve that. Likewise in a recession, the BoE would say they need £X injecting into the economy and the politicians would then be free to spend £X or lower taxes by £X, or a mix of both. But that would not be a decision for the BoE as it is a fiscal decision and the politicians could not decide on the amount of stimulus or money destruction since that is a moneary decision(as is setting interest rates)the gov does not get involved in that…so we maintain the split in powers.

  4. Peter May -

    Interesting..
    “40 % of GDP is 40 % of GDP. What PoMO is talking about is the money supply not GDP. Bank lending does not help GDP as approx 85 % goes into property and shares. which are not productive assets.”
    Agreed, but if we agree that tax destroys money (I hope PoMo does) then when 40 % of GDP is new govt money it seems highly unlikely that private banks are creating even 95% of new money. That seems to imply new money into the economy of 135% of GDP. I know housing is not in GDP but that amount of money implies inflation that we do not have – even in housing.

    That and giving power to the bankers is where we don’t agree. To me spend and tax is so empowering that I do not think a democracy should subject itself to a wunch of bankers to say how much money should be created in the economy. I also think it would, even for bankers! be an impossible task. And after all even the independant judicial system has a whole range of possible appeals.

    For me there are other ways of controlling banks – direct them as to lending goals and if they don’t comply, those loans would just be illegal and so unenforceable. Make all banking illegal except what is specifically permitted (rather than regulating).
    So you trust the bankers. I don’t.
    I trust the politicians. You don’t.
    But at least every five years or so I have the opportunity to get rid of my politicians.
    How do you get rid of bankers?
    The other problem I have

  5. Vince Richardson -

    I do agree tax destroys money as does PoMo.Rest assured.

    Gov spending is howevr negated by taxes…the new money the gov creates basically is then destroyed by the collection of taxes….ready for more gov spending..the net effect on the money supply is zero or very little money creation by governments. They also tend to borrow what they fall short on, which is neutral on the supply of money by and large, since that money is taken from UK investors in gov debt and respent. Of course, there is no real need to borrow money when a gov can create it for free….it is an absurdity we have been misled on.

    QE is the BoE actually creating some state issued money…which is really what we want to happen all the time.

    So if gov spending is a net zero effect on the money supply…..the rest of the money supply is either coins and notes plus what is held in bank accounts. Private banks are creating basically the WHOLE of our money supply……. and this is the problem.

    http://positivemoney.org/how-money-works/proof-that-banks-create-money/

    I do not trust private bankers at all..and is why we want to remove this money creation power from them. Central bankers are a slightly different issue, I don’t really trust them either, but being civil servants they can be held a lot more accountable than the average CEO of say HSBC or Barclays. Currently we have these esteemed CEO’s creating 95 % of our money supply and wrecking the economy into the bargain. Whilst our central bankers under politicla control create a mere 5%.
    I don’t trust anyone, which is why we need checks and balances. It is why we have a House of Lords.

    We just need to allow the state to create our money supply based on sound economic reasons not because some bank exec wants to maximize his bank’s profits…on that issue, the entire economy hangs…and its not working out too well.

    We don’t get rid of bankers we take the golden goose(money creation)away from them and give it back to the people…via the government….i.e politicians and central banks.

    We are in agreement regarding the gov being able to spend money as it wishes, there is no real obstacle to that with a cooperative balancing central bank,but the benefits will still be undermined by boom and bust economic cycles caused by our private banks wreckless lending habits…which the state is left to pick up….we can’t ignore that.

  6. Peter May -

    If you are going to say that government expenditure is now ‘negated’ rather than destroyed by taxes then it has to mean that 95% of the NET money supply is produced by banks. Personally, I still doubt that figure. I suspect it is an estimate and I wonder if it includes shadow banking?
    Currently, too, govt spends more money than it collects in taxes. So it chooses to borrow, which does, I assure you, still create money either immediately or with certainty for the future. See: http://www.progressivepulse.org/economics/even-when-government-borrows-money-it-still-creates-it
    There is inconsistency in agreeing taxes destroy money and once destroyed that new money needs to be created with the subsequent govt expenditure, and then also maintaining that govt expenditure is negated by taxes, so doesn’t count.
    If people are to understand PoMo these things need to be crystal clear, I’d suggest.
    I prefer that taxes destroy govt money creation as it puts the govt in charge. And that is where we disagree! I really don’t want any banker anywhere near independence!

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