22 Mar 2013

Light at the end of the tunnel?

George Osborne's Budget this week was just as bad as expected. Absolutely no sign whatsover of any realistion that austerity cannot work. As I discussed previously, Olivier Blanchard the chief economist at the IMF has already admitted that the assumptions on which the politics of austerity are based are completely wrong. For every £1 billion of cuts, the country's GDP will drop by between £900 million and £1.7 billion.

But Osborne and co continue regardless - apparently because their real objective is to use the current financial crisis as an excuse to dismantle the welfare state - a point made very forcibly in Polly Toynbee in today's Guardian ("Do people get Osborne and co yet? Even Thatcher wouldn't have gone this far").

However, there was one good bit of news on Wednesday. Osborne used his budget to announce the  publication of a 62 page "Review of the monetary policy framework"  by the HM Treasury. As Ben Dyson from Positive Money noted, the document indicates that some parts of the government may be slowly moving in the right direction. Specifically, the document seems to raise the possibility of money creation by the state as part of a series of "unconventional monetary instruments".

Indeed, when I read through the document, I really did get the impression that there may be a chink of light at the end of the tunnel.

For example, on page 46 there is a chart that shows how the Central Bank balance sheet sizes have varied since 2006 for the US Federal Reserve, the Bank of Japan, the Bank of England and the European Central Bank.

As you can see from the graphs, the ECB's balance sheet increased from 13% of GDP to something like 33%, the Bank of England roughly quadrupled from 7% to 27% of GDP. And the Fed went from 6.5% to around 20%.

In other words, Central banks are perfectly free to expand the money supply - and they do.

We then read "In principle, central banks have unlimited scope to expand their balance sheets, creating central bank reserves with which to purchase assets or otherwise support nominal spending in pursuit of domestic policy objectives."

And then, on page 54, we read:

"In theory, central banks could go beyond the range of unconventional instruments deployed by central banks in advanced countries since the 2009-09 financial crisis. For example, it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money"

(at this point they cite Milton Friedman, 1948, and Ben Bernanke's famous "helicopter money" speech from  2002 "Deflation: Making sure it doesn't happen here"). And then they say:

"Adair Turner, Chairman of the Financial Services Authority, has suggested this could be a tool to used in extreme circumstances".

So, the question is - just how extreme do the circumstances need to be? Things are not critical enough??

The problem is that once people realize that there is absolutely no reason whatsoever why central banks could not replace the creation of the money supply by commercial banks and create the money supply debt free, we would be very close to killing the goose that has been laying golden eggs for the banking system for centuries. And the bankers have huge resources to bribe politicians, economists and journalists and prevent the subject being debated openly.

If even the UK Treasury is starting to put pressure on the Bank of England, then there may be hope that Mark Carney, the newly appointed governor of the Bank, may have a few new levers to pull on.

1 comment:

  1. On the Toynbee comment: it is hard to see that even if Osborne is no financial genius, there are not some in government, the Treasury, or the BoE who do not completely "get it" about financing the deficit by money creation. So one falls back on what might look like a conspiracy theory about them wanting to roll back the welfare state. While I try to avoid the more outlandish conspiracy theories, it can also be said that conspiracy theories abound because sometimes there genuinely are conspiracies!

    For example, if we accept Ellen Brown's account of what happened to Canada after 1974,( http://www.webofdebt.com/articles/canada.php ) we see that the BIS (truly "international bankers") forced Canada's government to stop borrowing from its central bank to fund public spending (which had been very successful since 1939), and from then on its national debt rocketed, and it has now been forced into austerity measures, although it is an incredibly resource-rich country.

    We also have the evidence of the former "economic hit-man" John Perkins.

    Getting back to the here and now, on 5th March 2013, the FT published a letter from Professor Richard Werner of Southampton University in which he called for the government to stop issuing bonds to finance its deficit, and instead borrow from commercial banks, This would kick-start bank borrowing, and lead to a recovery in 6 months.

    Now that I've had chance to properly read "Where does Money come from?" (NEF - my edition is the hardback 2012 one), I see that this is something he has been calling for since the early 90s, initially regarding Japan. It is also mentioned in papers of his one can download from the university website.

    It took me a little while to understand why this would be a good thing, but then it clicked that of course this would lead directly to an increase in the money supply. The money would be spent on public works and filter into the "real economy". The government is still a solid low-risk borrower, so the banks should not have any qualms about lending to it, and the interest rates should be very low, e.g. 1% over 3 years, which could be rolled over. There is apparently nothing in BIS or EU rules to stop it, so it could be done now, without any changes to the system (except that the government would stop issuing bonds).