It is a tragic irony that around the globe people are enduring unnecessary misery just because there is too little money in circulation. This money shortage is causing individuals, companies and governments to hoard money to repay debts rather spend on consumption or investment. It has resulted in vast amount of idle spare capacity and labour. It is the global equivalent of the malfunctioning babysitting cooperative described by Krugman.
This misery is self-imposed. Now that we have fiat currencies with floating exchange rates it is ridiculously easy to create money to introduce into the economy. Central banks could simply add numbers to the spreadsheets they keep which represent the government's 'bank account'. Governments could then increase spending and/or cut taxes so that people and businesses have more money available to spend, which will get all this idle spare capacity back to work. We have the people, the skills, the technology and the raw material that we need for a thriving economy. All that is missing is sufficient money. But we refuse to create it because of bad economic ideas that the global financial crisis has discredited.
Make no mistake there are genuine problems that we face that cannot be solved by creating money. Climate change. Species extinction. Peak oil. Disease. Conflict. Underdevelopment. Inequality. Discrimination. Persecution. These are difficult problems. The global shortage of money is, by comparison, a trivial problem to solve, because it is self-imposed. We have handcuffs on for which we have the key, but we refuse to use the key. We have created rules which effectively forbid governments and central banks from creating money, and instead leave all money creation to commercial banks. Banks create almost all new money when they make loans. But since this money needs to be paid back we can't all accumulate 'net' money - money somewhere is always matched by debt elsewhere. Huge amounts of money (and matching debts) were created by banks over the past three decades, generating an enormous asset price bubble. When this popped in 2007 all this private debt started being paid back, which 'destroys' the money. So the money we have available for spending is contracting as we pay back out debts accumulated during the boom. That is why demand is so low and the economies are stagnating.
In some countries (USA, Japan, the UK) central banks have countered this contraction in demand by creating money and using it to buy debt, to keep interest rates down (quantitative easing). They hope that by making borrowing cheaper they will stimulate more lending by banks. But people and businesses don't want to take on more debt. They want to pay off their debts. So this central bank-created money is not really entering the economy and restoring demand. When the economy is not growing and there is already spare capacity, and when companies and people are trying to pay back excessive debts, it is difficult and surely somewhat foolish to try to persuade them to stop saving and renew their borrowing. After all, that is what caused this problem in the first place. It is why sensible measures have been introduced to prevent banks lending too much in future. We are trying to do two contradictory things: pay off excessive private debt and increase lending by banks. This is absurd and impossible.
Fortunately there is another way to create money which bypasses this problem of high levels of private debt. Indeed it both solves the debt problem and restores demand. This is for the governments to use the created money to reduce taxes and/or increase their spending - i.e. increase their budget deficit. Unfortunately governments have been reluctant to to this because of misplaced fear that a government deficit is intrinsically bad. Political leaders and mainstream economists reinforce this view. How often has David Cameron said 'You can't solve a debt problem with more debt'. This sounds sensible, but it is wrong. There are two key facts you need to know to understand why. Firstly, it is impossible for the the private sector as a whole to accumulate savings without the government sector running a deficit. This is a unavoidable accounting reality. Think of it this way. A government deficit means it is spending more money into the economy than it is removing in taxes. So deficit spending actually ENABLES the private sector to pay off its debts and save. Secondly, deficit spending only results in government debt because of self-imposed rules that require governments to sell bonds equal in value to its deficit. What this means, in effect, is that the extra money that governments spend into the economy is kept by the private sector in savings accounts at the treasury. Government debt represents savings of the private sector. Unlike private debt, this 'government debt' can be sustained for ever, since there is no limit on overall private net wealth and the treasury can always repay these debts (by central banks creating more money). Governments with their own currency can never be forced to default on debts in their own currency
This misery is self-imposed. Now that we have fiat currencies with floating exchange rates it is ridiculously easy to create money to introduce into the economy. Central banks could simply add numbers to the spreadsheets they keep which represent the government's 'bank account'. Governments could then increase spending and/or cut taxes so that people and businesses have more money available to spend, which will get all this idle spare capacity back to work. We have the people, the skills, the technology and the raw material that we need for a thriving economy. All that is missing is sufficient money. But we refuse to create it because of bad economic ideas that the global financial crisis has discredited.
Make no mistake there are genuine problems that we face that cannot be solved by creating money. Climate change. Species extinction. Peak oil. Disease. Conflict. Underdevelopment. Inequality. Discrimination. Persecution. These are difficult problems. The global shortage of money is, by comparison, a trivial problem to solve, because it is self-imposed. We have handcuffs on for which we have the key, but we refuse to use the key. We have created rules which effectively forbid governments and central banks from creating money, and instead leave all money creation to commercial banks. Banks create almost all new money when they make loans. But since this money needs to be paid back we can't all accumulate 'net' money - money somewhere is always matched by debt elsewhere. Huge amounts of money (and matching debts) were created by banks over the past three decades, generating an enormous asset price bubble. When this popped in 2007 all this private debt started being paid back, which 'destroys' the money. So the money we have available for spending is contracting as we pay back out debts accumulated during the boom. That is why demand is so low and the economies are stagnating.
In some countries (USA, Japan, the UK) central banks have countered this contraction in demand by creating money and using it to buy debt, to keep interest rates down (quantitative easing). They hope that by making borrowing cheaper they will stimulate more lending by banks. But people and businesses don't want to take on more debt. They want to pay off their debts. So this central bank-created money is not really entering the economy and restoring demand. When the economy is not growing and there is already spare capacity, and when companies and people are trying to pay back excessive debts, it is difficult and surely somewhat foolish to try to persuade them to stop saving and renew their borrowing. After all, that is what caused this problem in the first place. It is why sensible measures have been introduced to prevent banks lending too much in future. We are trying to do two contradictory things: pay off excessive private debt and increase lending by banks. This is absurd and impossible.
Fortunately there is another way to create money which bypasses this problem of high levels of private debt. Indeed it both solves the debt problem and restores demand. This is for the governments to use the created money to reduce taxes and/or increase their spending - i.e. increase their budget deficit. Unfortunately governments have been reluctant to to this because of misplaced fear that a government deficit is intrinsically bad. Political leaders and mainstream economists reinforce this view. How often has David Cameron said 'You can't solve a debt problem with more debt'. This sounds sensible, but it is wrong. There are two key facts you need to know to understand why. Firstly, it is impossible for the the private sector as a whole to accumulate savings without the government sector running a deficit. This is a unavoidable accounting reality. Think of it this way. A government deficit means it is spending more money into the economy than it is removing in taxes. So deficit spending actually ENABLES the private sector to pay off its debts and save. Secondly, deficit spending only results in government debt because of self-imposed rules that require governments to sell bonds equal in value to its deficit. What this means, in effect, is that the extra money that governments spend into the economy is kept by the private sector in savings accounts at the treasury. Government debt represents savings of the private sector. Unlike private debt, this 'government debt' can be sustained for ever, since there is no limit on overall private net wealth and the treasury can always repay these debts (by central banks creating more money). Governments with their own currency can never be forced to default on debts in their own currency
However, in the Eurozone, where governments do not have their own currency, deficits and debt are not sustainable unless the ECB steps in to support deficit spending and government borrowing in the way that other central banks support their own governments. The catch is that this requires the consent of all Eurozone governments, most notably Germany's, and they are dead against it. The ECB is creating very little money because of an obsessive German fear of inflation. This is ridiculous, like refusing water in case you drown. This is the main reason why things are much worse in the Eurozone than elsewhere. But this is still not appreciated. Instead the focus is on lack of competitiveness or a fiscal union. These are important but secondary issues. The key one is shortage of money. Make no mistake, if the ECB does not start creating money in massive quantities to support government spending the Eurozone is doomed. And no amount of structural reform to increase competitiveness or fiscal union could save economies in which the money supply is being allowed to contract. It the Great Depression all over again.
The problems threatening to unravel the Eurozone and damage the global economy are easily solved data entry problems. They could be solved within minutes at zero cost by allowing central banks to support deficit spending by adding number to spreadsheets. It is so trivial it is hard to believe it has not been tried.
The problems threatening to unravel the Eurozone and damage the global economy are easily solved data entry problems. They could be solved within minutes at zero cost by allowing central banks to support deficit spending by adding number to spreadsheets. It is so trivial it is hard to believe it has not been tried.
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