Richard is a big fan of Modern Monetary Theory (MMT), and has made several videos on the subject. He even has a playlist that currently contains 14 videos, devoted to the topic.
The basic point is that the UK Government can effectively create as much money as it wants by telling the Bank of England to create it. It did precisely this when it generated hundreds of billions to tackle the financial crisis in 2008-9 and also to cope with the COVID pandemic.
I would agree with this. However, Richard goes further when he claims that ALL the money in circulation is created by the government. Actually, what he says that the money is either created by the Government via the Bank of England, or by commercial banks under license.
The critical question for me is whether the government really does control the amount of money created by commercial banks. In my opinion, there currently is no direct way for the government to control this. For a long time, I have been convinced by the arguments of the people at Positive Money who would say that roughly 97% of the money in circulation in the UK economy has been created by Commercial Banks when they make loans. Yes, the government COULD generate money via the Bank of England, but the reality is that it is commercial banks that do the money creation.
In other recent videos, Richard has been claiming that the government does not need to borrow money from the financial markets. Rather, selling bonds should be thought of as a way for the government to provide a safe place to for people to save financial resources. Effectively, if we accept that all the money in circulation has been created by the Bank of England, then providing a way to save that money is a very different way of understanding the situation to the standard view that our governments are forced to borrow. Richard would say that there is no need to borrow what you produced yourself.
This is all very nice. And I would agree that the UK government shouldn't need to borrow from the financial markets at all. Unfortunately, that is not the way the system works at the moment.
Currently, our governments typically emit bonds (gilts in the UK), which get bought up on the primary markets by a restricted set of Gilt-Edged Market Makers (GEMMs). Here is the current list
Individuals like you and me cannot buy gilts directly - we can only buy gilts on the secondary markets.
So, looking at this list, it seems clear that essentially all the GEMMs are commercial banks. And my question to Richard is - do those banks have to have any money to be able to buy the Treasury Bonds? If they don't, when they buy up those bonds, they may keep the bonds for themselves. Here are the figures for UK Treasury Bond issuance over recent years.
UK Gilt Issuance History (Annual Gross Issuance in £ billions)
Recent Years (Confirmed):
- 2025-26: £299.2 billion (planned)
- 2024-25: £299.6 billion (second-highest on record)
- 2023-24: £232 billion
- 2022-23: £169.5 billion
- 2021-22: £131 billion (approximately)
- 2020-21: £485.8 billion (record high - pandemic response)
Pre-Pandemic Period:
Pre-pandemic average (2015-2020): Approximately £125 billion per year
Now, in prinicple, those GEMMs are supposed to act as intermediatries to allow others to purchase the bonds. However, it is clear there is no reason why a GEMM could not hang on to the Bonds that it has purchased.
In principle, the GEMM could also use its own internal financial resources to purchase the bonds. But there is a crticial point. There is no obligation on them to use existing money to make the purchases. When they buy the bonds, they could perfectly well use the standard banking procedure of making a loan.
To be clear, if GEMMs can:
- Purchase gilts without using pre-existing funds
- Keep them indefinitely without selling to third parties
- Create the purchasing power through accounting entries
Then this would constitute money creation in a very real sense.The key insight is that when a bank (as a GEMM) purchases gilts, it could theoretically:
- Credit the government's account with newly created deposits (just as banks create deposits when making loans)
- Add the gilts to its asset side of the balance sheet
- Create a corresponding liability (the deposit) on the liability side
This is functionally identical to how banks create money through lending - they're creating purchasing power "out of thin air" through balance sheet expansion.
The whole GEMM system is supposed to allow the 18 different banks to compete to buy the bonds, thus ensuring that the UK Treasury gets a good deal. However; it seems to me to be clear that there is effecrtively no limit to the amount of money that could be created by the 18 GEMMs. It is hardly surprising that everytime the UK Debt Management Office auctions Bonds, there are typically plenty of buyers among the GEMMs. But again, I can't see any way of preventing the 18 GEMMs from simply taking turns to scoop up the bonds.
So, to return to my basic point of disagreement with Richard, I would agree that the UK Government COULD create all the money in the system. But the fact is that it is doesn't do that at the present time. Worse, I suspect that the bond markets could be a way of increasing the money in circulation that is effecrtively impossible to control. It would be much clearer if the entire bond market system was scrapped and the government do what Richard claims they can do accoriding to MMT - create the money supply directlly.
I mentioned the figure provided by Positife Money who claim that 97% of the UK's money supply comes from commercial bank loanss - and not the Central Bank. It turns out that this figure is still broadly correct. Here are the latest numbers
Central Bank Money (Base Money/M0):
- Notes and coins in circulation: Approximately £100 billion
- Bank reserves at BoE: Approximately £700-800 billion (hugely inflated due to QE)
- Total M0: Around £900 billion
Broad Money (M4):
- Total M4 money supply: Approximately £2.6-2.8 trillion
- In 2010, M4 was £2.2 trillion with only £47 billion in physical cash (2.1%)
The key calculation is that commercial bank-created money = (M4 - Physical cash) / M4 = (£2,600 billion - £100 billion) / £2,600 billion = 96.2%
In other words, approximately 96-97% of money in circulation is created by commercial banks through lending.
What's fascinating is how QE has distorted the traditional picture:
Pre-2008 (Normal times):
- Central bank reserves were tiny (£20-30 billion)
- Banks created most money through lending
- The 97% figure was stable
Post-QE (2009-present):
- Central bank reserves exploded to £800+ billion
- But this money mostly sits idle in the banking system
- It doesn't circulate in the real economy
- The public still uses bank-created money for 96-97% of transactions
The csritical point is that even though the Bank of England created £875 billion through QE (peak), this didn't change the fundamental fact that the money actually used in the economy is still overwhelmingly commercial bank-created money. The QE reserves mostly just:
- Sit in banks' BoE accounts
- Earn Bank Rate (currently 5.25%)
- Don't get lent out to the public
- Create a massive interest burden for the government
So, I agree with Richard that the UK government could create the money needed to finance everything - but it's not currently what happens.
No comments:
Post a Comment