Saturday, 19 July 2014

How to Fuel the Economy Without Increasing Debt

Ben Dyson, Founder of Positive Money, speaking at the Positive Money 2014 conference. He recapped how the nature of money has changed since the Bank Charter Act of 1844, which outlawed bank creation of paper money. Most money today is electronic. There had yet to be a democratic debate on the consequences of this. Indeed, there had hardly been any democratic debate on the consequences of Quantitative Easing (QE).

In terms of where this private bank money went -- 40 per cent went into the property market, 37 per cent to financial markets, 10 per cent to credit cards and personal loans and only 13 percent to productive business.

In our system today, "more money means more debt". If we have a crisis and we want less debt then we have to accept that we will end up with less money circulating, because when the loans are repaid, the money disappears from the economy.

Under the present system, there are two ways to get more money into the economy: 

The first way is to get the private banks creating new money by creating new debt. That is the situation where "more money equals more debt." So, interest rates were lowered to 0.5% in the expectation that "lower interest rates will get people to borrow more." There have also been various "funding for lending" schemes.

The second way is to get the Bank of England to create money. It has initiated QE, whereby it creates money and buys bonds from pension funds and insurance companies.

This money floods into the bond market and some floods into the stock market. It artificially increases bond prices, in the same way that the banks' privately-created money pushes up mortgage prices.

The idea behind QE is that those who see the value of their bonds go up will then spend more on the High Street. But in reality, it means that the relatively small number of people who have the money in the first place, take their money and put even more of it into the bond market. In short, QE is a scheme which has made the very wealthy much better off, but has done very little to create jobs and get the real economy going.

Incredibly, around £375 billion has been created but there has been very few questions asked in Parliament about the wisdom of this process, about how the money is created and where it is spent. This is remarkable considering the tortured debates in Parliament about the spending of sums which are a mere fraction of this figure!


Ben explained that the alternative is Sovereign Money. 

The idea of Sovereign Money is that instead of the BoE creating money and putting it into the financial markets, it should be put into the real economy, through spending on infrastructure, through tax cuts, or through the simple expedient of giving it to people. This would allow us to escape from the debt trap where, if we need more money then we must have more debt.

He said that for every £10 billion which gets added to the government account and spent into the economy then we would get £6 billion coming back in taxes, and that for every £1 which goes in, we would get £2.80 of spending throughout the economy. He suggested that a Sovereign Money creation of £10 billion would lead to 28 billion spending, up to 284 000 jobs and 5.6 billion tax revenue, and lower personal debt. (These calculations come from CBI figures.)

Furthermore, this is a policy which can be done now. Private banks will still lend, but Sovereign Money will, to an extent, offset the negative effects of debt. Once it can be shown that Sovereign Money works, then we can point to the full solution, outlined in Modernising Money which is stopping banks creating money in the first place.

Positive Money is a not-for-profit research and campaign group. They work to raise awareness of the connections between our current monetary and banking system and the serious social, economic and ecological problems that face the UK and the world today. In particular they focus on the role of banks in creating the nation's money supply through the accounting process they use when they make loans - an aspect of banking which is poorly understood. Positive Money believe these fundamental flaws are at the root of - or a major contributor to - problems of poverty, excessive debt, growing inequality and environmental degradation.

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