Funding through the Federal Reserve may be controversial, but establishing a national public infrastructure and development bank should be a no-brainer. The real question is why we don’t already have one, like China, Germany, and other countries that are running circles around us in infrastructure development. Many European, Asian and Latin American countries have their own national development banks, as well as belonging to bilateral or multinational development institutions that are jointly owned by multiple governments. Unlike the US Federal Reserve, which considers itself “independent” of government, national development banks are wholly owned by their governments and carry out public development policies.

China not only has its own China Infrastructure Bank but has established the Asian Infrastructure Investment Bank, which counts many Asian and Middle Eastern countries in its membership, including Australia, New Zealand, and Saudi Arabia. Both banks are helping to fund China’s trillion-dollar “One Belt One Road” infrastructure initiative. China is so far ahead of the United States in building infrastructure that Dan Slane, a former advisor on President Trump’s transition team, has warned, “If we don’t get our act together very soon, we should all be brushing up on our Mandarin.”

The leader in renewable energy, however, is Germany, called “the world’s first major renewable energy economy.” Germany has a public sector development bank called KfW (Kreditanstalt für Wiederaufbau or “Reconstruction Credit Institute”), which is even larger than the World Bank. Along with Germany’s non-profit Sparkassen banks, KfW has largely funded the country’s green energy revolution.

Unlike private commercial banks, KfW does not have to focus on maximizing short-term profits for its shareholders while turning a blind eye to external costs, including those imposed on the environment. The bank has been free to support the energy revolution by funding major investments in renewable energy and energy efficiency. Its fossil fuel investments are close to zero. One of the key features of KFW, as with other development banks, is that much of its lending is driven in a strategic direction determined by the national government. Its key role in the green energy revolution has been played within a public policy framework under Germany’s renewable energy legislation, including policy measures that have made investment in renewables commercially attractive.

KfW is one of the world’s largest development banks, with assets as of December 2017 of $566.5 billion. Ironically, the initial funding for its capitalization came from the United States, through the Marshall Plan in 1948. Why didn’t we fund a similar bank for ourselves? Apparently because powerful Wall Street interests did not want the competition from a government-owned bank that could make below-market loans for infrastructure and development. Major US investors today prefer funding infrastructure through public-private partnerships, in which private partners can reap the profits while losses are imposed on local governments.

KfW and Germany’s Energy Revolution

Renewable energy in Germany is mainly based on wind, solar and biomass. Renewables generated 41% of the country’s electricity in 2017, up from just 6% in 2000; and public banks provided over 72% of the financing for this transition. In 2007-09, KfW funded all of Germany’s investment in Solar Photovoltaic. After that, Solar PV was introduced nationwide on a major scale. This is the sort of catalytic role that development banks can play, kickstarting a major structural transformation by funding and showcasing new technologies and sectors.

KfW is not only one of the biggest but has been ranked one of the two safest banks in the world. (The other is also a publicly-owned bank, the Zurich Cantonal Bank in Switzerland.) KfW sports triple-A ratings from all three major rating agencies, Fitch, Standard and Poor’s, and Moody’s. The bank benefits from these top ratings and from the statutory guarantee of the German government, which allow it to issue bonds on very favorable terms and therefore to lend on favorable terms, backing its loans with the bonds.

KfW does not work through public-private partnerships, and it does not trade in derivatives and other complex financial products. It relies on traditional lending and grants. The borrower is responsible for loan repayment. Private investors can participate, but not as shareholders or public-private partners. Rather, they can invest in “Green Bonds,” which are as safe and liquid as other government bonds and are prized for their green earmarking. The first “Green Bond – Made by KfW” was issued in 2014 with a volume of $1.7 billion and a maturity of five years. It was the largest Green Bond ever at the time of issuance and generated so much interest that the order book rapidly grew to $3.02 billion, although the bonds paid an annual coupon of only 0.375%. By 2017, the issue volume of KfW Green Bonds was $4.21 billion.

Investors benefit from the high credit and sustainability ratings of KfW, the liquidity of its bonds, and the opportunity to support climate and environmental protection. For large institutional investors with funds that exceed the government deposit insurance limit, Green Bonds are the equivalent of savings accounts, a safe place to park their money that provides a modest interest. Green Bonds also appeal to “socially responsible” investors, who have the assurance with these simple and transparent bonds that their money is going where they want it to. The bonds are financed by KfW from the proceeds of its loans, which are also in high demand due to their low interest rates; and the bank can offer these low rates because its triple-A ratings allow it to cheaply mobilize funds from capital markets, and because its public policy-oriented loans qualify it for targeted subsidies.

Roosevelt’s Development Bank: The Reconstruction Finance Corporation

KfW’s role in implementing government policy parallels that of the Reconstruction Finance Corporation (RFC) in funding the New Deal in the 1930s. At that time US banks were bankrupt and incapable of financing the country’s recovery. Roosevelt attempted to set up a system of 12 public “industrial banks” through the Federal Reserve, but the measure failed; so he made an end run around his opponents by using the RFC that had been set up earlier by President Hoover, expanding it to address the nation’s financing needs.

The RFC Act of 1932 provided the RFC with capital stock of $500 million and the authority to extend credit up to $1.5 billion (subsequently increased several times). With those resources, from 1932 to 1957 the RFC loaned or invested more than $40 billion. As with KfW’s loans, its funding source was the sale of bonds, mostly to the Treasury itself. Proceeds from the loans repaid the bonds, leaving the RFC with a net profit. The RFC financed roads, bridges, dams, post offices, universities, electrical power, mortgages, farms, and much more; and it funded all this while generating income for the government.

The RFC was so successful that it became America’s largest corporation and the world’s largest banking organization. Its success may have been its nemesis. Without the emergencies of depression and war, it was a too-powerful competitor of the private banking establishment; and in 1957, it was disbanded under President Eisenhower. The United States was left without a development bank, while Germany and other countries were hitting the ground running with theirs.

Today some US states have infrastructure and development banks, including California; but their reach is very small. One way they could be expanded to meet state infrastructure needs would be to turn them into depositories for state and municipal revenues. Rather than lending their capital directly in a revolving fund, this would allow them to leverage their capital into 10 times that sum in loans, as all depository banks are able to do. (See my earlier article here.)

The most profitable and efficient way for national and local governments to finance public infrastructure and development is with their own banks, as the impressive track records of KfW and other national development banks have shown. The RFC showed what could be done even by a country that was technically bankrupt, simply by mobilizing its own resources through a publicly-owned financial institution. We need to resurrect that public funding engine today, not only to address the national and global crises we are facing now but for the ongoing development the country needs in order to manifest its true potential.

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This article was first published on Truthdig.com.

The post Why Germany Leads in Renewables: It Has Its Own Green Bank appeared first on P2P Foundation.

The Federal Reserve alone could do the job. It could buy “Green” federal bonds with money created on its balance sheet, just as the Fed funded the purchase of $3.7 trillion in bonds in its “quantitative easing” program to save the banks. The Treasury could also do it. The Treasury has the constitutional power to issue coins in any denomination, even trillion dollar coins. What prevents legislators from pursuing those options is the fear of hyperinflation from excess “demand” (spendable income) driving prices up. But in fact the consumer economy is chronically short of spendable income, due to the way money enters the consumer economy. We actually need regular injections of money to avoid a “balance sheet recession” and allow for growth, and a UBI is one way to do it.

The pros and cons of a UBI are hotly debated and have been discussed elsewhere. The point here is to show that it could actually be funded year after year without driving up taxes or prices. New money is continually being added to the money supply, but it is added as debt created privately by banks. (How banks rather than the government create most of the money supply today is explained on the Bank of England website here.) – while leaving the money supply for the most part unchanged; and to the extent that new money was added, it could help create the demand needed to fill the gap between actual and potential productivity.

The Debt Overhang Crippling Economies

The “bank money” composing most of the money in circulation is created only when someone borrows, and today businesses and consumers are burdened with debts that are higher than ever before. In 2018, credit card debt alone exceeded $1 trillion, student debt exceeded $1.5 trillion, auto loan debt exceeded $1.1 trillion, and non-financial corporate debt hit $5.7 trillion. When businesses and individuals pay down old loans rather than taking out new loans, the money supply shrinks, causing a “balance sheet recession.” In that situation, the central bank, rather than removing money from the economy (as the Fed is doing now), needs to add money to fill the gap between debt and the spendable income available to repay it.

Debt always grows faster than the money available to repay it. One problem is the interest, which is not created along with the principal, so more money is always owed back than was created in the original loan. Beyond that, some of the money created as debt is held off the consumer market by “savers” and investors who place it elsewhere, making it unavailable to companies selling their wares and the wage-earners they employ. The result is a debt bubble that continues to grow until it is not sustainable and the system collapses, in the familiar death spiral euphemistically called the “business cycle.” As economist Michael Hudson shows in his 2018 book And Forgive Them Their Debts, this inevitable debt overhang was corrected historically with periodic “debt jubilees” – debt forgiveness – something he argues we need to do again today.

For governments, a debt jubilee could be effected by allowing the central bank to buy government securities and hold them on its books. For individuals, one way to do it fairly across the board would be with a UBI.

Why a UBI Need Not Be Inflationary

In a 2018 book called The Road to Debt Bondage: How Banks Create Unpayable Debt, political economist Derryl Hermanutz proposes a central-bank-issued UBI of one thousand dollars per month, credited directly to people’s bank accounts. Assuming this payment went to all US residents over 18, or about 241 million people, the outlay would be close to $3 trillion annually. For people with overdue debt, Hermanutz proposes that it automatically go to pay down those debts. Since money is created as loans and extinguished when they are repaid, that portion of a UBI disbursement would be extinguished along with the debt.

People who were current on their debts could choose whether or not to pay them down, but many would also no doubt go for that option. Hermanutz estimates that roughly half of a UBI payout could be extinguished in this way through mandatory and voluntary loan repayments. That money would not increase the money supply or demand. It would just allow debtors to spend on necessities with debt-free money rather than hocking their futures with unrepayable debt.

He estimates that another third of a UBI disbursement would go to “savers” who did not need the money for expenditures. This money, too, would not be likely to drive up consumer prices, since it would go into investment and savings vehicles rather than circulating in the consumer economy. That leaves only about one-sixth of payouts, or $500 billion, that would actually be competing for goods and services; and that sum could easily be absorbed by the “output gap” between actual and forecasted productivity.

According to a July 2017 paper from the Roosevelt Institute called “What Recovery? The Case for Continued Expansionary Policy at the Fed”:

GDP remains well below both the long-run trend and the level predicted by forecasters a decade ago. In 2016, real per capita GDP was 10% below the Congressional Budget Office’s (CBO) 2006 forecast, and shows no signs of returning to the predicted level.

The report showed that the most likely explanation for this lackluster growth was inadequate demand. Wages have remained stagnant; and before producers will produce, they need customers knocking on their doors.

In 2017, the US Gross Domestic Product was $19.4 trillion. If the economy is running at 10% below full capacity, $2 trillion could be injected into the economy every year without creating price inflation. It would just generate the demand needed to stimulate an additional $2 trillion in GDP. In fact a UBI might pay for itself, just as the G.I. Bill produced a sevenfold return from increased productivity after World War II.

The Evidence of China

That new money can be injected year after year without triggering price inflation is evident from a look at China. In the last 20 years, its M2 money supply has grown from just over 10 trillion yuan to 80 trillion yuan ($11.6T), a nearly 800% increase. Yet the inflation rate of its Consumer Price Index (CPI) remains a modest 2.2%.

Why has all that excess money not driven prices up? The answer is that China’s Gross Domestic Product has grown at the same fast clip as its money supply. When supply (GDP) and demand (money) increase together, prices remain stable.

Whether or not the Chinese government would approve of a UBI, it does recognize that to stimulate productivity, the money must get out there first; and since the government owns 80% of China’s banks, it is in a position to borrow money into existence as needed. For “self-funding” loans – those that generate income (fees for rail travel and electricity, rents for real estate) – repayment extinguishes the debt along with the money it created, leaving the net money supply unchanged. When loans are not repaid, the money they created is not extinguished; but if it goes to consumers and businesses that then buy goods and services with it, demand will still stimulate the production of supply, so that supply and demand rise together and prices remain stable.

Without demand, producers will not produce and workers will not get hired, leaving them without the funds to generate supply, in a vicious cycle that leads to recession and depression. And that cycle is what our own central bank is triggering now.

The Fed Tightens the Screws

Rather than stimulating the economy with new demand, the Fed has been engaging in “quantitative tightening.” On December 19, 2018, it raised the fed funds rate for the ninth time in 3 years, despite a “brutal” stock market in which the Dow Jones Industrial Average had already lost 3,000 points in 2-½ months. The Fed is still struggling to reach even its modest 2% inflation target, and GDP growth is trending down, with estimates at only 2-2.7% for 2019. So why did it again raise rates, over the protests of commentators including the president himself?

For its barometer, the Fed looks at whether the economy has hit “full employment,” which it considers to be 4.7% unemployment, taking into account the “natural rate of unemployment” of people between jobs or voluntarily out of work. At full employment, workers are expected to demand more wages, causing prices to rise. But unemployment is now officially at 3.7% – beyond technical full employment – and neither wages nor consumer prices have shot up. There is obviously something wrong with the theory, as is evident from a look at Japan, where prices have long refused to rise despite a serious lack of workers.

The official unemployment figures are actually misleading. Including short-term discouraged workers, the rate of US unemployed or underemployed workers as of May 2018 was 7.6%, double the widely reported rate. When long-term discouraged workers are included, the real unemployment figure was 21.5%. Beyond that large untapped pool of workers, there is the seemingly endless supply of cheap labor from abroad and the expanding labor potential of robots, computers and machines. In fact the economy’s ability to generate supply in response to demand is far from reaching full capacity today.

Our central bank is driving us into another recession based on bad economic theory. Adding money to the economy for productive, non-speculative purposes will not drive up prices so long as materials and workers (human or mechanical) are available to create the supply necessary to meet demand; and they are available now. There will always be price increases in particular markets when there are shortages, bottlenecks, monopolies or patents limiting competition, but these increases are not due to an economy awash with money. Housing, healthcare, education and gas have all gone up, but it is not because people have too much money to spend. In fact it is those necessary expenses that are driving people into unrepayable debt, and it is this massive debt overhang that is preventing economic growth.

Without some form of debt jubilee, the debt bubble will continue to grow until it can again no longer be sustained. A UBI can help correct that problem without fear of “overheating” the economy, so long as the new money is limited to filling the gap between real and potential productivity and goes into generating jobs, building infrastructure and providing for the needs of the people, rather than being diverted into the speculative, parasitic economy that feeds off them.

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This article was first published on Truthdig.com. 

The post Universal Basic Income Is Easier Than It Looks appeared first on P2P Foundation.

To understand them and what they’re fighting for, it’s important to understand the system they’re challenging.

Our money system is underpinned by national central banks and treasuries that issue foundational “base” money. This includes the physical cash in our wallets and also reserves, the special forms of digital money that commercial banks hold in their central bank accounts, which are inaccessible to us.

These commercial banks then boost the money supply by issuing a second layer of money on top of the central bank money layer, through a process called credit creation of money (sometimes called “fractional reserve banking”) to create commercial bank money, which we see as bank deposits in our bank accounts.

The details are subtle and complex ― especially at the international level ― but the interaction of these players issuing money and taking it out of circulation makes the money supply expand and contract as if it were breathing. Monetary reform groups target different elements of this. Here are five of them.

1. Government Money Warriors

Stephanie Kelton, professor of public policy and economics at Stony Brook University, is one of the leading lights of modern monetary theory.

We say that the sun rises, but in reality the sun stays fixed and the illusion of sunrise is created by the Earth turning. Modern monetary theory argues that a similar delusion occurs in our thinking about government money ― we often claim that a federal government “raises money” through taxation and then spends it, but actually it is government institutions that originally issue money by spending it into existence and then withdrawing it from circulation by demanding it back in taxation. If the government issues money, then why would it have to raise money by asking for it back?

The idea that a federal government can run out of money like an ordinary household or business is an illusion, argue advocates of modern monetary theory. A government can only run out of money if it either does not issue its own sovereign currency (like the European nations, which have opted for the euro) or if an artificial political limit has been placed on how much money it can issue. In the latter situation, governments must first recall money via tax (and other means) before reissuing it elsewhere.

This is why modern monetary theory advocates are incredulous about conservatives who want to block spending on education and health care by saying we don’t have the money to pay for it. “Governments with monopoly control over their currency can always pay for their policy priorities,” says Pavlina Tcherneva, an economics professor at the Levy Economics Institute at New York’s Bard College.

Under modern monetary theory, if there are unemployed people who want to work and material resources for them to work with, a federal government can issue new money without causing inflation because the increase in money supply will be met with an increase in production. “The goal is to use the public purse to serve the broad public interest without accelerating inflation,” said Stephanie Kelton, professor of public policy and economics at Stony Brook University and former senior adviser to Sen. Bernie Sanders (I-Vt.).

2. Bank Money Reformers

Bank money reformers want to target the powers of commercial banks to create money.

Other reformers target the commercial bank money system. They argue it creates economic instability, over-indebtedness and concentration of power in the hands of banks ― the very banks that led us into the 2008 financial crisis.

Bank money reform groups include the American Monetary Institute, Positive Money, and the International Movement for Monetary Reform.

Commercial banks create new money when they issue loans. The moderate wing of the bank reform movement argues that, because the government grants them this privilege, banks should be subject to greater democratic scrutiny over their lending. The hard-line wing believes bank creation of money should be banned altogether.

The movement to curtail bank money is politically more diverse than modern monetary theory; it’s been supported by certain libertarians, including the late economist Murray Rothbard, neoclassical economists such as Irving Fisher, as well as left-wing proponents, such as the U.K.’s Green Party, which believes bank money-creation leads to environmental crises and corporate domination.

Their prescriptions are not uniform: Positive Money, a research and campaigning organization in Britain, calls for the power to create money to be granted exclusively to a democratic, accountable and transparent public body, creating a “sovereign money” system in which we might all have our own accounts at the central bank. This is distinguished from full-reserve banking, which would require your bank to have the reserves to fully back your account.

3. Cryptocurrency Crusaders

The Bitcoin logo on display at the Consensus 2018 blockchain technology conference in New York City on May 16.

Cryptocurrency crusaders not only reject both national and bank money systems, but also reject the entire concept of credit money (money that is “created from nothing” through law or social agreement), calling for it to be replaced with “commodity money” (money that is “created from something” through production). They have inherited the baton from “goldbugs,” who called for gold to be money.

The movement, which began with Bitcoin, argues that the best money system is one that’s outside of human politics. This comes from a philosophical tradition that says systems should be governed by the boundaries of God, physics or math, rather than laws set by politicians. With gold, for example, these natural boundaries would be geology: how much gold can be found and extracted. In Bitcoin’s case, the boundary comes from the fact that the digital system sets a hard limit on how much digital money can be issued and then forces participants to “mine” it as if it were a commodity.

Because Bitcoin hard-liners believe true money is a limited-supply good that must be extracted through production, they claim that fiat money ― created by banks or countries ― is artificial or deceitful money under the control of corrupt powers. There’s a puritanical edge to these cryptocurrency crusaders, who mistrust human institutions and trust in an abstract ‘godlike’ order of mathematics and markets.

While theories like MMT hinge on collective human political institutions, crypto crusaders see politics as foolish. This distrustful attitude shows: The movement sometimes seems as much at war with itself as with the fiat money system, with bitter in-fights between supporters of different crypto-tokens.

They are, however, the richest of all monetary reformers, with many crypto users having ironically become millionaires in the fiat currency they claim to dislike so much.

4. The Localists

A note worth 10 Brixton pounds, an alternative currency in London, is illustrated with an image of David Bowie.

There’s a whole history of alternative non-government money prior to cryptocurrency. These original alternative currency variants include mutual credit systems, timebanks (where time is used to measure how many credits you earn), local community currencies, such as the U.K.-based Brixton pound, and systems like the Swiss Wir, a currency used between businesses.

The tradition is also skeptical of large-scale government-bank money systems, but rather than calling for them to be replaced by a robotic algorithm, they believe small-scale communities should take control to issue money locally.

Unlike cryptocurrency advocates, they have no problem with money being “created out of nothing.” Rather they have a problem with who gets to do that and at what scale. They believe large-scale systems alienate people and dissolve close-knit communities.

A mutual credit system like Sardex in Sardinia, for example, does not reject the idea of money expanding and contracting, but it brings together an island community to decide on what terms that occurs.

While the other movements are outspoken, local complementary currency enthusiasts are often humble and below-the-radar, working for low pay to build resilient community structures.

“Local currencies change how money is issued,” says Duncan McCann of the New Economics Foundation, “how it circulates and what it can be spent on in order to re-localize economies, encourage environmental behaviour, and promote small businesses.”

The crypto-credit alliance looks to merge older, alternative currency systems with blockchain technology.

5. The Crypto-Credit Alliance: Mutual credit meets blockchain technology

This is the least-known or developed of the movements, but is perhaps the most exciting. Nascent initiatives, such as Trustlines, Holochain, Sikoba, Waba and Defterhane, seek to hybridize older alternative currency systems like mutual credit with the blockchain architectures that underpin cryptocurrencies. They share common ground with both modern monetary theorists, who also see commodity money as regressive, and cryptocurrency advocates, who wish to bypass the government.

Cryptocurrency unleashed a lot of creativity, but much has been wasted on toxic speculation. On the other hand, localist mutual credit movements have powerful ideas but often struggle to get heard or to spread. Crypto-credit innovators are exploring the creative possibilities of merging these two to solve flaws in both.

Originally published in the Huffington Post

The post These 5 Rebel Movements Want To Change How Money Works appeared first on P2P Foundation.

In May 2017, a team of researchers at the University of Oxford published the results of a survey of the world’s best artificial intelligence experts, who predicted that there was a 50 percent chance of AI outperforming humans in all tasks within 45 years. All human jobs were expected to be automated in 120 years, with Asian respondents expecting these dates much sooner than North Americans. In theory, that means we could all retire and enjoy the promised age of universal leisure. But the immediate concern for most people is that they will be losing their jobs to machines.

That helps explain the recent interest in a universal basic income (UBI) – a sum of money distributed equally to everyone. A UBI has been proposed in Switzerland, trials are beginning in Finland, and there is a successful pilot ongoing in Brazil. The cities of Ontario in Canada, Oakland in California, and Utrecht in the Netherlands are planning trials; two local authorities in Scotland have announced such plans; and politicians across Europe, including UK Labour Party leader Jeremy Corbyn, have spoken in favor of the concept. Advocates in the US range from Robert Reich to Mark Zuckerberg, Martin Luther King, Thomas Paine, Charles Murray, Elon Musk, Dan Savage, Keith Ellison and Paul Samuelson.  A new economic study found that a UBI of $1000/month to all adults would add $2.5 trillion to the US economy in eight years.

Welfare can encourage laziness, because benefits go down as earned income goes up. But studies have shown that a UBI distributed equally regardless of income does not have that result. In 1968, President Richard Nixon initiated a successful trial showingthat the money had little impact on the recipients’ working hours. People who did reduce the time they worked engaged in other socially valuable pursuits, and young people who were not working spent more time getting an education. Analysis of a similar Canadian trial found that employment rates among young adults did not change, high-school completion rates increased, and hospitalization rates dropped by 8.5 percent. Larger experiments in India have reached similar results.

Studies have also shown that it would actually be cheaper to distribute funds to the entire population than to run the welfare services governments engage in now. It has been calculated that if the UK’s welfare budget were split among the country’s 50 million adults, each of them would get £5,160 a year.

But that is not enough to cover basic survival needs in a modern economy. Taxes would need to be raised, additional debt incurred, or other programs slashed; and these are solutions on which governments are generally unwilling to embark. The other option is “qualitative easing,” a form of central bank quantitative easing in which the money flows directly into the real economy rather than simply into banks. In Europe, politicians are taking another look at this once-derided “helicopter money.” A UBI is being proposed as monetary policy that would stimulate productivity without increasing taxes. As Nobel prize-winning economist Joseph Stiglitz, former senior vice president of the World Bank, explains:

. . . [W]hen the government spends more and invests in the economy, that money circulates, and recirculates again and again. So not only does it create jobs once: the investment creates jobs multiple times.

The result of that is that the economy grows by a multiple of the initial spending, and public finances turn out to be stronger: as the economy grows, fiscal revenues increase, and demands for the government to pay unemployment benefits, or fund social programmes to help the poor and needy, go down. As tax revenues go up as a result of growth, and as these expenditures decrease, the government’s fiscal position strengthens.

Why “QE for the People” Need Not Be Inflationary

The objection  to any sort of quantitative easing in which new money gets into the real economy is that when the money supply grows too large and consumer prices shoot up, the process cannot be reversed. If the money is spent on a national dividend, infrastructure, or the government’s budget, it will be out circulating in the economy and will not be retrievable by the central bank.

But the government does not need to rely on the central bank to pull the money back when hyperinflation hits (assuming it ever does – it has not hit after nearly nine years and $3.7 trillion in quantitative easing). As Prof. Stiglitz observes, the money issued by the government will return to it simply through an increase in fiscal revenues generated by the UBI itself.

This is due to the “velocity of money” – the number of times a dollar is traded in a year, from farmer to grocer to landlord, etc. In a good economy, the velocity of the M1 money stock (coins, dollar bills, demand deposits and checkable deposits) is about seven; and each recipient will pay taxes on this same dollar as it changes hands. According to the Heritage Foundation, total tax revenue as a percentage of GDP is now 26 percent. Thus one dollar of new GDP results in about 26 cents of increased tax revenue. Assuming each of the seven trades is for taxable GDP, $1.00 changing hands seven times can increase tax revenue by $7.00 x 26 percent = $1.82. In theory, then, the government could get more back in taxes than it paid out.

In practice, there will be a fair amount of leakage in these returns due to loopholes and deductions for costs. But any shortfall can be made up in other ways, including closing tax loopholes, taxing the $21 trillion or more hidden in offshore tax havens, or setting up a system of public banks that would collect interest that came back to the government.

A working paper published by the San Francisco Federal Reserve in 2012 found that one dollar invested in infrastructure generates at least two dollars in “GSP” (GDP for states), and “roughly four times more than average” during economic downturns. Whether that means $4 or $8 is unclear, but assume it’s only $4. Multiplying $4 by $0.26 in taxes would return the entire dollar originally spent on infrastructure to the government, year after year. For precedent, consider the G.I. Bill, which is estimated to have cost $50 billion in today’s dollars and to have returned $350 billion to the economy, a nearly sevenfold return.

What of the inflation formula typically taught in economics class? In a May 2011 Forbes article titled “Money Growth Does Not Cause Inflation!”, Prof. John Harvey demonstrated that its assumptions are invalid. The formula is “MV = Py,” meaning that when the velocity of money (V) and the quantity of goods sold (y) are constant, adding money (M) must drive up prices (P). But as Harvey pointed out, V and y are not constant. As people have more money to spend (M), more money will change hands (V), and more goods and services will get sold (y). Demand and supply will rise together, keeping prices stable.

The reverse is also true. If demand (money) is not increased, supply or GDP will not go up. New demand needs to precede new supply. The money must be out there searching for goods and services before employers will add the workers needed to create more supply. Only when demand is saturated and productivity is at full capacity will consumer prices be driven up; and they are not near those limits yet, despite some misleading official figures that omit people who have quit looking for work or are working only part-time. As of January 2017, an estimated 9.4 percent of the US population remained unemployed or underemployed. Beyond that, there is the vast expanding potential of robots, computers and innovations such as 3D printers, which can work 24 hours a day without overtime pay or medical insurance.

The specter invariably raised to block legislators and voters from injecting new money into the system is the fear of repeating the notorious hyperinflations of history – those in Weimer Germany, Zimbabwe and elsewhere. But according to Professor Michael Hudson, who has studied the question extensively, those disasters were not due to government money-printing to stimulate the economy. He writes:

Every hyperinflation in history has been caused by foreign debt service collapsing the exchange rate. The problem almost always has resulted from wartime foreign currency strains, not domestic spending. The dynamics of hyperinflation traced in such classics as Salomon Flink’s The Reichsbank and Economic Germany (1931) have been confirmed by studies of the Chilean and other Third World inflations. First the exchange rate plunges as economies pay for foreign military spending during the war, and then – in Germany’s case – reparations after the war ends. These payments led the exchange rate to fall, increasing the price in domestic currency of buying imports priced in hard currencies. This price rise for imported goods creates a price umbrella for domestic prices to follow suit. More domestic money is needed to finance economic activity at the higher price level. This German experience provides the classic example.

In a stagnant economy, a UBI can create the demand needed to clear the shelves of unsold products and drive new productivity.  Robots do not buy food, clothing, or electronic gadgets. Demand must come from consumers, and for that they need money to spend. As robots increasingly take over human jobs, the choices will be a UBI or to let half the population starve. A UBI is not “welfare” but is simply a dividend paid for living in the 21^st century, when automation has freed us to enjoy some leisure and engage in more meaningful pursuits.

Ellen Brown is an attorney, founder of the Public Banking Institute, a Senior Fellow of the Democracy Collaborative, and author of twelve books including Web of Debt and The Public Bank Solution. A 13^th book titled The Coming Revolution in Banking is due out this fall. She also co-hosts a radio program on PRN.FM called “It’s Our Money.” Her 300+ blog articles are posted at EllenBrown.com.

Photo by Mister Higgs

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Mary Mellor: That’s right there are two magic money trees. Both the state and the banks can create money out of thin air.

States do this by having budgets. Despite the myths that have been told time and time again, states are NOT households – they run armies and banks and schools and police forces and so on. They allocate expenditure in expectation of getting an equivalent amount of money back through taxation. There is no direct connection between public expenditure and public income. There is no state piggy bank or house-keeping allowance.

Public expenditure and income is a constant flow of money and it is only when the totals are totted up that it becomes clear if there is a balance. Deficits are simply evidence that states spend in advance of receiving any income. If they waited until the money rolled in, deficits would never occur.

Despite the claim that states ‘printing’ money is automatically inflationary, this is not the case. What matters is the relationship between state income and expenditure and the condition of the wider economy. The skill is to balance the money created with the money recovered via taxation. In any case, public deficits can be a good thing. They put fresh money into the economy that is then free to circulate.

The other magic money tree is the banking sector. Banks do not simply look after the money in people’s bank accounts and “lend it out”, they actually create money out of thin air by creating new accounts or putting new money into existing accounts – with no democratic accountability.

The neoliberal era saw a massive increase in bank lending (student, consumer, mortgage, financial speculation) with banks becoming the major source of new money in modern economies. The magic money tree of the banks is far more de-stabilising than the magic money tree of the state. Unlike state magic money which can be created free of debt, bank magic money always has to be repaid with interest.

This creates the dilemma that the banks always want more money back than they lend out. Where does the extra money come from? Either extra loans constantly being taken out, or ‘leakage’ of debt free money from the state, that is public deficit. In fact, the use of public money was much more direct following the 2007-8 crisis.

‘Quantitative easing’ – a fancy term for new electronic money from central banks – put billions of pounds, dollars and euros into the banking sector to stave off collapse. This and other rescue measures did little to stimulate the core economy, but made a small elite very rich.

So when we are told social welfare, education, housing, health cannot be afforded because there is no magic money tree, this is a lie. New money is constantly pouring into the hands of the already rich as they gamble and speculate. Ordinary people are burdened with debt as they try to keep their heads above water.

The right of states to directly fund public services (“people’s quantitative easing”), is denied. It is falsely claimed that all new money is ‘made’ by the market sector. This is not true, money is accumulated in the market. It can only be created by states or banks. The claim that all state income comes from taxing the private sector is also false. The public sector also pays taxes – much more reliably than the private sector.

Let us have no more myths about the lack of magic money trees. They do exist – what matters is who owns and controls them. And it should be all of us.

Mary Mellor’s new book Debt or Democracy is available now please click here

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What if those proto-chemists were found to be not ‘making gold’ but merely charlatans ‘taking gold’? Some sovereigns managed money better than others, but now that power resides with private corporations. The language of ‘wealth creation’ masks the real intention which is extract money from society as fast as possible, to lock it up in tax havens, and to drive the masses, deprived of a medium of exchange, back to the bank to borrow more! The social conseqences are increasingly acknowledged (although not by banks) to include the rich-poor divide, short-termism, erosion of democracy, the military industrial complex and, via the growth imperative, climate change itself.

Users of money and financial services seem to have very little influence in the matter. However much we disapprove of banks, boycotting them (as I do) makes normal life impossible. Banks are part of our social DNA, that’s what Too Big To Fail means.

The problem is not that saving and lending are critical functions which only banks can do. Indeed the idea that money is some kind of stuff which we rent is merely a misleading metaphor. The problem is that only a bank can underwrite your IOU so that everyone else will accept it. If all the banks and bank accounts were taken down in some Mr Robot scenario, the only money left would be a tiny volume of notes and coins. We wouldn’t be able to pay each other and the economy would stop dead.

You might think the alchemical fumes are affecting me when I say the way forward is in the collective relocating our trust. But it is worth considering just how much trust we place in banks, not only to guard our savings from theft and bail-ins, but to invest responsibly without the need for taxpayer bailouts, to set interest rates such as LIBOR fairly, not to launder money for international drug cartels, and indeed to manage the quantity of money in the economy. And compare that trust with the trust we place in our friends, family and business associates.

So the essence of bypassing banks, at least to the extent that we don’t use money to pay interest and taxes, is understanding how IOUs work. In the Irish banking strikes of 1970s, the whole economy ran on IOUs in the form of cheques. Allegedly pub landlords took the role of judging creditworthiness. It wasn’t the most efficient system but it worked. Similarly in Greece before the Euro, it was common practice for strong local businesses to pay their bills by cheque, and for that cheque to circulate as money before returning to the business. Both of these are examples of interest free money creation, and taken to scale, they create stable economies (no more boom and bust) in which credit is always available.

So how could this be instituted today? Its not enough to hope that all the banks fail at once, (and wish for the calamity that would cause). It can’t be expected that a whole culture would participate while banks are still omnipresent, But there are thousands of groups worldwide who practice forms of collaborative credit – the most numerous are business barter networks and LETS (Local Exchange Trading Systems). If only we had the collective sense to use them, not only would the economy’s liquidity problems be solved, but economic policy would devolve much closer to us, the people who actually back the money!

A key difference between these systems, which I call ‘collaborative credit’ systems and the mainstream economy is the principle of exchange. Conventional money is designed for saving, which means NOT exchanging. In fact by making debts more and more unpayable it can be shown even to prevent exchange. Many things can be used as a store of value, but a good medium of exchange requires that social consensus which is unique to money. Money which really facilitates exchange must be always available to be earned or borrowed, and it should be less valuable than real things to prevent its hoarding. The principle of exchange says that we should give and receive the same amount of value; that money isn’t valuable in itself, it is just a way of tracking the balance of my giving and receiving. By committing to give and receive favours in equal measure, we acknowledge that being owed favours doesn’t put one in a position of power, but brings with it an obligation to spend back. Taking responsibility for our own finances takes effort yes, but probably less than feeding a parasite! With money no longer scarce, competition (for money) gives way to collaboration. Collaborative credit implies that everybody’s promise has equivalent value, which in economics is called fungibility, an important property of money. Because every credit is balanced by an equal and opposite debit, aggregate supply and demand in the system are perfectly balanced by design. The simplicity and elegance of the exchange paradigm makes neoliberal economics look like the blind leading the blind up an alley without a paddle!

By forming what the Germans call ‘exchange circles’, narrow fields of reciprocation, we reduce our personal (and aggregate) demands for money; and within our own economic circles, we reclaim a measure of power of credit issuance and even monetary policy.

So why isn’t everybody doing it already? Even in Greece where the need is dire, the move to alternatives forms of production and exchange is almost imperceptible. I could list reasons all day about financial illiteracy, breakdown of trust, atomisation of society, but instead we should look to those who ARE doing it.

Fortunately collaborative credit does not require that ‘the masses’ participate, only that the circles have sufficient density. The bigger, and more connected exchange circles become, and the more goods and services move within them, the more they look and behave like money systems, spreading more risk more evenly, and allowing credit of greater quantities for longer durations.

If we use legal money, we do so for better or for worse, under the law. But the sentiment “I’ll scratch your back if you scratch mine” needs no law, no regulation, no taxation, and no money. Those who are serious about a fairer economy, are the ones finding, trusting and working for each other. There is no alchemy for creating wealth, but the obscuration of money creation is about appropriating wealth created by others.

Matthew Slater co-authored the Money & Society massive online open course with Professor Jem Bendell. Participation is free and it starts again on Feb 19th. See http://ho.io/mooc

Photo by Bev Anne

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More than 23,000 people in 20 countries were asked about who they think actually creates 95% of the money in circulation and who they think should create most of the money.

These questions were part of the Glocalities survey of Motivaction International and the Sustainable Finance Lab that was held in December 2013 and January 2014.

Here are the main results:

• Low knowledge in population of who creates money: Only a minority of 20% is aware that private/commercial banks create most money
• Even among financial sector workers there is a lot of misunderstanding about who creates money
• Only 13% of people want private/commercial banks to create more than 95% of the money in circulation, as is currently the case
• 59% want to assign the responsibility for creating most of the money to a public body (government/central bank)

The following graph shows the main results. See Appendix 1 and 2 for the scores of all countries surveyed:

Source: Glocalities survey Motivaction

“A necessary condition for informed debate on the future of our monetary system is that the public understands how it works. This research demonstrates that only a small proportion does so. It also demonstrates that, when they are taught the reality, most people do not like what they learn.”

Martin Wolf, Chief economics commentator, Financial Times

A minority of 20% is aware that private/commercial banks create most money

A significant proportion of people across the globe (80%) have no idea who creates most of the money in circulation. Half the people think it is a public institution (either a central bank or the government) that creates most of the money in the financial system. Only 1 in 5 respondents gave the right answer, that it is private/commercial banks that create more than 95% of the money. ‘’In the modern economy, most money takes the form of bank deposits. But how those bank deposits are created is often misunderstood: the principal way is through commercial banks making loans. Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money. Bank deposits make up the vast majority (97%) of the amount of money in circulation’’. Source: Bank of England paper on Money creation.

“Money affects every aspect of our lives, but as this survey shows, not enough of us really understand how it works. After the banking crises of the last few years, it’s time to ask whether banks should still be allowed to create our money.”

Fran Boait, Executive Director, Positive Money 

The majority of people want a public institution for creating most of the money and not commercial banks

When people are asked who they think should create most money worldwide only 13% prefers private/commercial banks to fulfil this responsibility (as is currently the case), against 59% who wish for a public institution (either government or central bank) to be the main creator of money. Among the minority of people who correctly state that private/commercial banks create most money in circulation, only 27% believe that this should continue to be the case, whereas 63% of them want to see this responsibility transferred to governments or central banks.

‘’It is instructive to learn that the majority of people internationally think that most money is created by public bodies and not by private/commercial banks, while in fact the opposite is true. Even among financial sector workers the majority is not aware of the key role that commercial banks play in creating money and only a minority of them would naturally assign this task to commercial banks. Now the world is facing numerous challenges that can only be tackled by smart investment policies it is time to rethink how the responsibility for creating money should be assigned and monitored.‘’

Martijn Lampert, Research Director Glocalities at Motivaction 

Most people in the financial sector do not know that private/commercial banks create money

The awareness in the financial sector about who actually creates most of the money is only moderately higher than in the general population. The answers of people who work in the financial sector in Western economies (Europe, USA, Australia, Canada) reveal that only 26% know that private/commercial banks create most of the money in circulation. When asked who should create most of the money the majority (61%) of financial sector workers also choose a public body and only 16% choose to assign this responsibility to private/commercial banks.

“The current financial system is still prone to crisis. Giving public bodies a larger role in money creation can help to stabilize the system and give governments the much needed funds to invest in sustainability”. Instead of embarking on an unprecedented and uncertain transition it might be wise to start with experiments.”

Rens van Tilburg, Director Sustainable Finance Lab

Download the report here

Photo by badgreeb RECORDS – art -photos

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When then-Fed Governor Ben Bernanke gave his famous helicopter money speech to the Japanese in 2002, he was talking about something quite different from the quantitative easing they actually got and other central banks later mimicked. Quoting Milton Friedman, he said the government could reverse a deflation simply by printing money and dropping it from helicopters. A gift of free money with no strings attached, it would find its way into the real economy and trigger the demand needed to power productivity and employment.

What the world got instead was a form of QE in which new money is swapped for assets in the reserve accounts of banks, leaving liquidity trapped on bank balance sheets. Whether manipulating bank reserves can affect the circulating money supply at all is controversial. But if it can, it is only by triggering new borrowing. And today, according to Richard Koo, chief economist at the Nomura Research Institute, individuals and businesses are paying down debt rather than taking out new loans. They are doing this although credit is very “accommodative” (cheap), because they need to rectify their debt-ridden balance sheets in order to stay afloat. Koo calls it a “balance sheet recession.”

As the Bank of England recently acknowledged, the vast majority of the money supply is now created by banks when they make loans. Money is created when loans are made, and it is extinguished when they are paid off. When loan repayment exceeds borrowing, the money supply “deflates” or shrinks. New money then needs to be injected to fill the breach. Currently, the only way to get new money into the economy is for someone to borrow it into existence; and since the private sector is not borrowing, the public sector must, just to replace what has been lost in debt repayment. But government borrowing from the private sector means running up interest charges and hitting deficit limits.

The alternative is to do what governments arguably should have been doing all along: issue the money directly to fund their budgets. Having exhausted other options, some central bankers are now calling for this form of “helicopter money,” which may finally be raining on Japan if not the US.

The Japanese Trial Balloon

Following a sweeping election win announced on July 10th, Prime Minister Shinzo Abe said he may proceed with a JPY10 trillion ($100 billion) stimulus funded by Japan’s first new major debt issuance in four years. The stimulus would include establishing 21st century infrastructure, faster construction of high-speed rail lines, and measures to support domestic demand.

According to Gavyn Davies in the July 17th Financial Times:

Whether or not they choose to admit it – which they will probably resist very hard – the Abe government is on the verge of becoming the first government of a major developed economy to monetise its government debt on a permanent basis since 1945.

. . . The direct financing of a government deficit by the Bank of Japan is illegal, under Article 5 of the Public Finance Act. But it seems that the government may be considering manoeuvres to get round these roadblocks.

Recently, the markets have become excited about the possible issuance of zero coupon perpetual bonds that would be directly purchased by the BoJ, a charade which basically involves the central bank printing money and giving it to the government to spend as it chooses. There would be no buyers of this debt in the open market, but it could presumably sit on the BoJ balance sheet forever at face value.

Bernanke’s role in this maneuver was suggested in a July 14th Bloomberg article, which said:

Ben S. Bernanke, who met Japanese leaders in Tokyo this week, had floated the idea of perpetual bonds during earlier discussions in Washington with one of Prime Minister Shinzo Abe’s key advisers. . . .

He noted that helicopter money — in which the government issues non-marketable perpetual bonds with no maturity date and the Bank of Japan directly buys them — could work as the strongest tool to overcome deflation . . . .

Key is that the bonds can’t be sold and never come due. In QE as done today, the central bank reserves the right to sell the bonds it purchases back into the market, in order to shrink the money supply in the event of a future runaway inflation. But that is not the only way to shrink the money supply. The government can just raise taxes and void out the additional money it collects. And neither tool should be necessary if inflation rates are properly monitored.

The Japanese stock market shot up in anticipation of new monetary stimulus, but it dropped again after the BBC aired an interview with Bank of Japan Governor Haruhiko Kuroda recorded in June. He ruled out the possibility of “helicopter money” – defined on CNBC.com as “essentially printing money and distributing payouts” – since it violated Japanese law. As the Wall Street Journal observed, however, Bernanke’s non-marketable perpetual bonds could still be on the table, as a way to “tiptoe toward helicopter money, while creating a fig leaf of cover to say it isn’t direct monetization.”

Who Should Create the Money Supply, Banks or Governments?

If the Japanese experiment is in play, it could settle a long-standing dispute over whether helicopter money will “reflate” or simply hyperinflate the money supply.

One of the more outspoken critics of the approach is David Stockman, who wrote a scathing blog post on July 14th titled “Helicopter Money – The Biggest Fed Power Grab Yet.” Outraged at the suggestion by Loretta Mester of the Cleveland Fed (whom he calls “clueless”) that helicopter money would be the “next step” if the Fed wanted to be more accommodative, Stockman said:

This is beyond the pale because “helicopter money” isn’t some kind of new wrinkle in monetary policy, at all. It’s an old as the hills rationalization for monetization of the public debt – that is, purchase of government bonds with central bank credit conjured from thin air.

Stockman, however, may be clueless as to where the US dollar comes from. Today, it is all created out of thin air; and most of it is created by private banks when they make loans. Who would we rather have creating the national money supply – a transparent and accountable public entity charged with serving the public interest, or a private corporation solely intent on making profits for its shareholders and executives? We’ve seen the results of the private system: fraud, corruption, speculative bubbles, booms and busts.

Adair Turner, former chairman of the UK Financial Services Authority, is a cautious advocate of helicopter money. He observes:

We have been left with so much debt we can’t just grow our way out of it – we should consider a radical option.

Not that allowing the government to issue money is so radical. It was the innovative system of Benjamin Franklin and the American colonists. Paper scrip represented the government’s IOU for goods and services received. The debt did not have to be repaid in some other currency. The government’s IOU was money. The US dollar is a government IOU backed by the “full faith and credit of the United States.”

The U.S. Constitution gives Congress the power to “coin money [and] regulate the value thereof.” Having the power to regulate the value of its coins, Congress could legally issue trillion dollar coins to pay its debts if it chose. As Congressman Wright Patman noted in 1941:

The Constitution of the United States does not give the banks the power to create money. The Constitution says that Congress shall have the power to create money, but now, under our system, we will sell bonds to commercial banks and obtain credit from those banks. I believe the time will come when people [will] actually blame you and me and everyone else connected with this Congress for sitting idly by and permitting such an idiotic system to continue.

Beating the Banks at Their Own Game

Issuing “zero-coupon non-marketable perpetual bonds with no maturity date” is obviously sleight of hand, a convoluted way of letting the government issue the money it needs in order to do what governments are expected to do. But it is a necessary charade in a system in which the power to create money has been hijacked from governments by a private banking monopoly engaged in its own sleight of hand, euphemistically called “fractional reserve lending.” The modern banking model is a magician’s trick in which banks lend money only a fraction of which they actually have, effectively counterfeiting the rest as deposits on their books when they make loans.

Governments today are blocked from exercising their sovereign power to issue the national money supply by misguided legislation designed to avoid hyperinflation. Legislators steeped in flawed monetarist theory are more comfortable borrowing from banks that create the money on their books than creating it themselves. To satisfy these misinformed legislators and the bank lobbyists holding them in thrall, governments must borrow before they spend; but taxpayers balk at the growing debt and interest burden this borrowing entails. By borrowing from its own central bank with “non-marketable perpetual bonds with no maturity date,” the government can satisfy the demands of all parties.

Critics may disapprove of the helicopter money option, but the market evidently approves. Japanese shares shot up for four consecutive days after Abe announced his new fiscal stimulus program, in the strongest rally since February. As noted in a July 11th ZeroHedge editorial, Japan “has given the world a glimpse of not only how ‘helicopter money’ will look, but also the market’s enthusiastic response, which needless to say is music to the ears of central bankers everywhere.” If the Japanese trial balloon is successful, many more such experiments can be expected globally.

_________

Ellen Brown is an attorney, Founder of the Public Banking Institute, and author of twelve books, including the best-selling Web of Debt. Her latest book, The Public Bank Solution, explores successful public banking models historically and globally. Her 300+ blog articles are at EllenBrown.com. She can be heard biweekly on “It’s Our Money with Ellen Brown” on PRN.FM.

Cross posted from Web of Debt

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Austerity reflects an ideology that sees the public sector as a drain upon the activities of the private sector. And that is the biggest myth of all. It is the public capacity to create and circulate public wealth, and guarantee a public currency, that sustains commerce. We need an economic policy that understands that.

Mary Mellor, writing for the Independent, breaks down “handbag economics” and the ideology of austerity:

The basic justification for austerity is that the public sector must “live within its means”. We already know that real households do not live within their means; if they did, the economy would grind to a halt. Modern prosperity is built upon debt, and the main aim of economic recovery is to get the banks lending again to both households and businesses.

It is a myth, and it is propping up austerity politics. Another myth is that there is a shortage of money. This implies that there is a fixed pool of money, or some other external factor limiting supply. That might be true if money was made of a scarce resource, such as precious metal, but modern money is mainly held as bank records: only 3 per cent of modern money circulates as cash. The amount of money in existence depends on commercial, political and personal choices.

The widespread concern that there will be too much money in circulation causing inflation has blinded modern economies to the danger of too little money, or that the available money will be hoarded by the rich.

If you ask the question, ‘who can create our currency’, most people would answer that the state creates money and that the commercial sector circulates it. Yet that general understanding contradicts the political notion that our economy functions well because the private sector “makes money”, while the public sector must on no account be seen to “print money”. So, where does money come from?

It is now broadly acknowledged that banks create money by making loans. The myth that they only act as a link between savers and borrowers has been exposed for what it is. The failure to recognise the dangers of banks’ capacity to create new money through lending lay behind the 2008/09 financial crisis and its lasting legacy. Debt piled upon debt, until the whole system gave way.

What rescued the financial sector was a combination of states spending money and central banks issuing new money through loans and policy measures such as quantitative easing (using new money to buy financial assets from the financial sector). The austerity myth that damaged the public sector most significantly was the claim that states could not create money, they could only borrow from the banking sector.

There is no reason a public monetary authority should treat the public sector as if it were a private borrower. The ideology of neoliberal ‘handbag economics’ ensures that the public capacity to create money must only be exercised through the financial sector; that is, money can only be borrowed into existence. This leads to austerity, for two reasons.

The collapse in debt issue during a crisis leads to a shortage of money which shrinks the commercial sector and thus the tax take, while at the same time increasing pressure on public welfare. The assumption that the surplus public expenditure needed to rescue both people and banks is being “borrowed” in some way drives up overall public debt. Even where money was clearly created to buy back public debt through quantitative easing, the debt was not cancelled. It still sits on the government books, justifying ever increasing austerity policies.

Austerity will not drive out deficit spending, despite all the pain, and the threat of deflation is leading to radical measures. Years of virtually free money, and even negative interest rates, are not reviving flagging economies. Measures such as ‘helicopter money’ – creating new money and giving it directly to the people or the government to spend – are being considered just to put money back into people’s pockets. Ideas such as the universal basic income are being tested through pilot projects, for example in Utrecht. What is important is that this should be new money, not based on tax or public borrowing.

We are repeatedly told that states need to “balance the books”, in the sense that they must limit expenditure to the tax take. The public capacity to create money shows that this is not the case. And as government expenditure occurs alongside tax payments, there is always uncertainty about the final balance. Rather than tax take determining public income, the level of available tax money can be seen as determined by the level of public spending. Rather than austerity, the balance between expenditure and tax can be high, creating public wealth in terms of goods and services as well as commercial prosperity.

Austerity reflects an ideology that sees the public sector as a drain upon the activities of the private sector. And that is the biggest myth of all. It is the public capacity to create and circulate public wealth, and guarantee a public currency, that sustains commerce. We need an economic policy that understands that.

Mary Mellor is an emeritus professor of social science at Northumbria University and the author of ‘Debt or Democracy: Public money for sustainability and social justice’

Photo by Snaptotes.com

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