“There is no magic money tree…” or is there?

It’s a bit rich that the Conservatives should seek to target their fire at a costed Labour manifesto when they themselves have not costed their own.

One repeated refrain from both Theresa May and Amber Rudd – touted to succeed Philip Hammond as Chancellor – is that “there is no magic money tree” that Jeremy Corbyn can turn to in order to fund his manifesto commitments.

A leading economist commented online in response to Amber Rudd’s assertion during the recent televised debate that “there is a magic money tree. It created the £435 billion that the Conservative Government used to fund Quantitative Easing entirely without cost to the taxpayer” (my italics).

Let me just repeat the last bit again – entirely without cost to the taxpayer. Basically money was created out of thin air, it was not borrowed; it had no existence prior to its creation. It was not backed by assets of any kind. It was simply created.

To give you an idea of comparative costs – that is over three times the annual cost of the NHS which is roughly £120 billion a year

Now in case you think I am a bonkers, loony left idiot who doesnt know what they are talking aboutplease follow this link to the Bank of England website. On there you will read the following:

What is quantitative easing?

Quantitative easing (QE) is when a central bank, like the Bank of England, creates money and uses it to buy financial assets – mostly gilts (government debt) – from businesses like pension funds. We also buy a smaller amount of corporate bonds.
 

What is the aim of quantitative easing?

The aim of quantitative easing is to encourage spending, keeping inflation on track to meet the Government’s 2% inflation target.

Does quantitative easing involve printing money?

Quantitative easing doesn’t involve literally printing more money. Instead, we electronically create new central bank reserves – the money that banks use to pay each other – and use this to pay for the assets we buy.

Money created out of thin air!

In effect the Bank of England created the money out of thin air to buy  back government debt. And because the Bank of England is owned by the government and you cannot owe yourself a debt, the government in effect cancelled its own debt.
Stop and think about this for a moment. It contradicts everything we have been told by every major newspaper, TV pundit and Conservative politician about how an economy works, about how money works, how the banking system works (we are told it lends money based on deposits by savers) , and about the importance of fiscal rectitude by responsible government. Conservative politicians have repeatedly compared government spending to a typical household budget; as a responsible householder you would never borrow beyond your means so why should governments.  George Osborne  quipped that the Nation’s credit card is ‘maxed out’, that we have no more money, that we have no option but to cut public services to the bone in order to reduce public debt.
Then along came ‘quantitative easing’ which as the Bank of England says ‘is another tool we can use to stimulate the economy when demand is too weak’. It is used when, as the BBC says,  low interest rates fail to encourage people and businesses to spend money.
But quantitative easing failed in turn to stimulate the economy for the simple reason that the big bucks created out of thin air literally stopped with the high street banks and big pension funds. The banks did not pass on the money unleashed by quantitative easing to  the  small businesses desperate for cash.

 

Professor Werner who created the concept of Quantitative Easing as an economic tool is highly critical of the UK’s concentrated banking structure. He argues that it has made the economy more vulnerable:
“British banking is dominated by a small number of big banks – with just five banks controlling 90% of deposits,” he says.

“Big banks want to lend to big firms and do big deals that give big bonuses. Small firms are too much hassle, and the banks are absolutely not interested – even though small firms need the credit and account for 70% of UK employment. So these small firms are credit-rationed and that’s a problem.”

“In Germany, 70% of deposits are held by 2,000 banks,” says Prof Werner. “These local German banks lend a lot more to small- and medium-sized firms, and when the credit crunch happened most of them were fine.”

So why not just print money rather than raise it through taxation?

Now back to that so-called ‘money tree’:  what is clear from all this is that governments cannot be compared to households for no household has its own money printing press. Only government can create the money it needs but as this BBC explanation says, it must be  “just enough” growth in an economy – not too much that could lead to inflation getting out of control, but not so little that there is stagnation”. So why do governments  tax at all? Here I need to quote in full the economist Richard Murphy who I refer to in the third paragraph:

The answer is that although in theory a government does not need to tax there is in practice some very good reasons why tax still makes sense.. First of all, the best, and in reality the main reason to use taxation is that tax lets a government reclaim the money it has spent into the economy, in order to stop the money supply over-expanding….Taxation literally counterbalances government spending

Secondly, if you think tax as raising money, and therefore that government has to raise money in the first instance before it can then spend, you always, and automatically, presume that the capacity to spend is constrained by the amount of tax a government can raise but that is just not true. Government can always spend what it wants subject only to the constraints of inflation and the capacity of its economy to produce. Tax simply disappears as a constraint in that case, which should result in a radically altered mindset. (pg 61 to 63 The Joy of Tax by Richard Murphy)

I leave you with one final thought. Following the end of the Second World War, when our country was bankrupt, its infrastructure destroyed and its national debt double what it is now*, we found the means to create one of the best public health services in the world, a comprehensive welfare state and a large scale council house building programe that ensured no-one was homeless unless they chose to be so.

How is it that we could do it then but we are told we cannot do it now?

*note the national debt stood at just under 250%  of GDP well over double what it is today of GDP (today it is 103% see OECD table>> ). 

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