What is the most economically positive thing we can do for our post Covid-19 society? Keith Clancy FRSA argues we should educate ourselves that governments can print wealth and that it is time every UK citizen of voting age understood how new money is created.
The way we are brought up to view money is so deeply engrained that it is almost impossible to understand that governments can print wealth. For generations before radio, hearing the voice of a person speaking from the other side of the world would have appeared as some sort of devious magic. Now mobiles mean that radio transmission is in almost all of our hands. But if someone like me tries to explain that governments can print wealth, like early radio scientists, we are not trusted as credible.
Do not be surprised if printing wealth does not sound logical. I had not understood the idea of printing money until after the financial crash of 2008 and all the talk of quantitative easing. But those days are long behind us and a growing body of people across the globe now understand that printing wealth is entirely possible for any developed nation with its own government issued currency.
The history of money shows that in the UK silver was at one time the main constituent of our currency but was then replaced by gold. Gold did not last as our trusted currency of exchange. Now the majority of UK money floats around on phones and balance sheets as digital bits. Money evolves because our brains evolve. The question we need to ask is this whether a gold sovereign is the same as this new digital currency? Apart from being physically different, what other fundamental differences are there now from modern money transactions compared with 200 or 500 years ago? And as money has changed how can the way we use it also adapt? And how could this change our economics?
The Prudent 5
Recently, Covid-19 EU discussed what levels of financial assistance should be given to each of the member states. You may recall that the so-called ‘Prudent 5’ of Austria, the Netherlands, Denmark, Sweden and Finland were vehemently against large grants to the southern member states of Italy and Spain. Their case was loans rather than grants would be a far more sensible way of financing the economic shocks to the southern countries. The real fight here is that northern EU states do not think it is fair that their contributions to the EU budget should be distributed to southern member states without those funds being paid back. But this prudent view does not seem logical if one understands the true nature of what can be achieved by printing the Euro currency wisely in the form of printing wealth.
Think of it like this; imagine you have bought a house for €1million and then there is an earthquake which destroys your house completely. All that value has disappeared. But what if you were a central bank like the European Central Bank and could print the €1million and rebuild the house? As long as you only replace the value that has been lost, there will be no inflation. What you will have done is replace what has been lost through natural disaster. The Prudent 5’s view is that the person who lost the house through earthquake, must borrow the money and pay it back. This means in your lifetime you have paid in total €2million resulting in only €1million of value.
The Prudent 5's view is the logic of money being finite where EU states must take funds from their own domestic budgets and redistribute those funds to other states. Of course, using that logic, it is natural for the northern states to want their money repaid. The logic the southern EU states were trying to express is that money is not finite and that replacing value that has been lost is entirely possible if you have a sovereign currency. The European Central Bank simply prints the value that has been lost through disaster; as long as there is no possibility of causing unwanted inflation, replacing the lost value is a far better solution for everyone.
Current common economic thinking from the UK, US and EU governments still tell us the story that money is a finite resource, like gold is a finite resource. We are told that to balance budgets governments have to either rein in spending with austerity measures such as cuts to the nation’s spending or we must borrow huge sums of money that future generations must pay back through taxes. This finite money story is simply not true. At every moment of every day, new money comes into existence.
One of the most misunderstood aspects of money is borrowing from banks and the fact that private lending creates new money. The common conception is as follows: a bank has £10 and you want to borrow £5. The bank lends you £5 from its volts; now you have £5 and the bank has £5 left. But that is not how modern banking works. If a bank has £10 and you borrow £5 the bank keeps the £10 and writes the new amount £5 in its balance sheet meaning the bank now has assets of £15. All the bank has to do is make sure you do not default on paying back your £5, plus interest of course. It is clear to see here that a new £5 has appeared in the world. Every time a private bank lends money new private money is created. You borrow a million pounds from a bank a new £1million comes into the world.
Central banks create new money simply by going to a laptop and writing any number that suits. The Bank of England could write £1 or £100 billion or £1 billion billion, if it wishes to.
In his 2015 book, Between Debt and The Devil, Lord Turner describes why governments are reluctant to print huge amounts of money. Turner’s theory is that politicians cannot be trusted with printing money because politicians use printed money unwisely, spending it on projects to get re-elected, which often leads to inflation not progress. But is there a way to print money more wisely, in a way that does not cause inflation? Or even better, is there a way to print money that brings wealth to our nation whilst at the same time puts more spending power in the pockets of people? Print wealth not cash!
As I have written before, our country needs 300 thousand new homes each year to meet our worsening housing crisis. To tackle this, we could set up a National Housing Fund, which is arm’s length from government control and is tasked with distributing printed money to the many thousands of housing associations across the UK who then build the 300 thousand new homes we need each year. How we turn this printed money into printed wealth is simple; we restrict these new homes from being sold into the open market. This policy is known as retained equity and could result in the UK being 300 thousand new homes wealthier each year.
Think of how many infrastructure projects there are across the UK that are crying out for funding but will never get anywhere near the money they require. The national grid has asked for £600 billion to meet our carbon reduction commitments. Are we going to borrow that in addition to our Covid-19 index linked bonds that are paying for furlough? What about all the thousands of billions of funds we need to sustainably retrofit our existing homes? What about vehicle electrification both public and private? Restoring biodiversity? How about schools and hospitals, city redevelopment, town planning and rural programmes plus sea defences, flood defences and literally thousands of other things we could do with sprucing up?
Will we ever have the money to tackle these problems? The answer is that the UK already has the money to tackle all of these problems and many more of our nations' most pressing issues because we have our own government-issue currency which we can use to print wealth without raising inflation.
In her new book The Deficit Myth, the American economist Professor Stephanie Kelton explains how she came to realise that she had been interpreting national deficits completely the wrong way round. Like the UK, US and EU governments Kelton believed the finite money story that we had limited choices between austerity on one hand or rising national debt on the other. She shares how she came to realise that inflation was the enemy, not a rising national deficit.
To illustrate how useful changing our views on national deficits could be, we can return to the issue of housing need. Currently existing models of funding mean that when making choices about how they build new homes developers choose cheaper building materials; they prioritise profit and affordability over quality and beauty. Printing wealth allows us to choose a better option; to build the highest quality homes that will stand the test of time. This is possible because cash and wealth do different things to inflation. Huge amounts of cash injected into the open economy causes prices to rise. Huge amounts of money printed specifically for housing that is kept in trust for the nation by never being allowed to be sold on the open economy does not cause inflation. If we can restrict infrastructure funding from causing inflation, the amount of money we print to build each home is irrelevant. This means your children and the generations to follow could live in sustainable homes of the highest technical and aesthetic quality.
It is not mathematically possible for all of us to earn more than the average salary and if average salaries do not allow young people to afford a family, then we have to rethink how to deliver them more spending power. The question is, how to give people more spending power without giving people more cash? The answer is to reduce lifelong living costs as much as possible for as many people as possible. Think free public transport, free energy, free internet connection inside and outside the home, free national care service for seniors and the disabled who need it, support for good food and agriculture. This can all be achieved if we print wealth in the form of making sure the assistance given to these sectors is managed strictly to keep inflation in check.
There will always be push-back on ideas that aim to transform. Before furlough one could hardly imagine mainstream politicians, economists and commentators advocating gigantic wage subsidies for virtually every sector whilst workers stayed home. But now the furlough logic appears obvious to most.
Current economic thinking wants to eliminate national deficits altogether by the UK exporting more than we import. But even if we did achieve this positive balance of payments, achieving the more ambitious goal of leading the world in architecture, infrastructure, health, social care, education, environment, climate change and disaster preparedness would have to monumentally dwarf imports. No Economist in the world is predicting this level of export growth for a UK recovering from a pandemic and heading into climate change.
If we do not grasp the benefits of printing wealth as each humanitarian disaster resulting from climate change and future pandemics hit, the UK will lurch from emergency financial measure to emergency financial measure, our balance of payments in a completely unmanageable state and our infrastructure in constant decline.
Appreciating that running a huge national deficit is not a problem if we are not causing inflation, a new economics can emerge around how we can make life as beautiful as possible whilst meeting our carbon emission targets. To this end, we need to set up specialist development bodies at arm’s length from government with costed, robust and imaginative visions for the future.
Keith Mortimer Clancy FRSA has spent more than 15 years on the Boards of large London housing Associations where he advocates for countrywide cooperation on revamping UK housing policy. He is author of Dignifying the Nation and Rebalancing the Economy (2016).
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