Flying Blind – MPs, Money and the Economy

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By Scott Egner
A recent poll commissioned by London based money reform organisation Positive Money found that only 1 in 10 UK MPs actually understand that banks create money when they lend.

In the Poll comprising one hundred MPs, when asked who creates money into the economy, more than 70% got the wrong answer, most believing that the Bank of England or Royal Mint creates all of the money in our economy.

How can we trust MPs to run our economy when they have very little grasp of where money comes from?

This claim about money creation might be hard to swallow so here is a quote from the Bank Of England..

When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. …

Just as taking out a new loan creates money, the repayment of bank loans destroys money.”

Banks have used this privilege to create money (more than £1 trillion in 10 years) and direct most of it into mortgages and financial speculation with only approximately 12% being lent productively. This resulted in house price inflation of around 300% in a decade ultimately leading to the credit crisis of 2008 and subsequent bailout by the tax payer.

Alistair Darling might state that the pound belongs to the people of the UK, but in reality our money supply has been privatised to the extent that 97% of it comprises electronic bank credit. None of this seems fair or remotely democratic.

The failure of interest rates to stimulate borrowing after the credit crunch led to economic contraction. Understandably in times of recession, people are more inclined to pay down debt than they are to borrow which under the current set of arrangements leads to contraction of the money supply. This led to the government embarking on the unconventional monetary policy of quantitative easing (QE). As former Bank of England chairman Mervyn king quoted in a speech in 2012 “[A] damaged banking system means that today banks aren’t creating enough money. We have to do it for them.”

The success of QE has been questionable. This process of purchasing bonds from financial markets may boost the stock exchange but the trickle down effects into the real economy have been limited.

Six years on from the recession it would appear that the government are adopting the problem as the solution – using more private debt to solve a problem which was caused by private debt. The government actively encourages people using tax payer funded schemes such as ‘help to buy’ to take on more personal debt, further inflating house prices and pricing our young people out of the market. Ex FSA chairman Lord Adair Turner recently referred to these policies as a ‘hair of the dog’ strategy for economic recovery.

With the ratio of private debt to GDP already at an historic high, encouraging more private debt whilst salaries decline and the economy stagnates risks a future banking crisis. Of course the trusted tax payer will be left to pick up the pieces.

So we live in a situation where each pound in the economy has a pound of associated debt and any attempt to pay down debt on a large scale risks recession. Somewhere in the region of £200 billion per annum in interest payments flows into the city from the rest of the UK all from money that was created out of thin air.

So surely there has to be a fairer more democratic way of getting money into our economy?

Positive Money, has put forward some simple yet far reaching solutions. One of these solutions is to take away the money creation powers from banks and instead restrict money creation to a central bank. They also propose that any new money should be allocated debt free to the real economy. Instead of the austerity measures introduced in recent years, such direct stimulus would create new jobs, and provide opportunities to improve education and public services without the need for more of us to further increase the levels of our personal debt. These proposals are outlined in their paper on Sovereign Money Creation with a more detailed set of proposed reforms in their book Modernising Money.

Currency has attracted much attention in the independence debate with Better Together and the UK government insisting there will be no currency union between Scotland and the rest of the UK should there be a YES vote, but given the obvious flaws in the current system couldn’t Scotland prosper by learning from these mistakes and creating its own democratic currency?

On September 4th Positive money will be discussing how an independent Scotland could change the monetary and banking system. In Edinburgh, Common Weal founder Robin McAlpine and in Glasgow Cat Boyd will give short introductions on money reform which will be followed by simultaneous screenings of the film ‘97% owned’. The evening will culminate in a discussion via video link between Edinburgh, Glasgow and London where Positive Money’s founder Ben Dyson is joined by Josh Ryan Collins (New Economics Foundation) and Steve Keen (author of Debunking Economics). Tickets for the event can be found here.



Categories: Economics

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6 replies

  1. Anyone interested in how money works (or doesn’t) could also profitably watch Chris Martenson’s Accelerated Crash Course 2014. It relates primarily to the situation in the US but has global application. The ability of the Federal Reserve (a privately owned bank) in the US and the Bank of England to ‘create’ money out of nothing and then lend it at interest to speculators who, if things go wrong, will be paid back from the public purse, is the dirty secret everyone needs to understand. Martenson also makes the important point that there is no way that indebted countries can borrow their way out of debt. The only way to avoid a complete financial and economic meltdown is for created money to be used to stimulate activity which has a positive effect on the overall economy – including reducing energy expenditure and becoming more self-sufficient in food, for example. We’re currently living in a fool’s paradise (not much of a paradise for many!) and a major crash is just around the corner if fundamental policies do not change. A Scotland tied to corrupt finance and politics (mainly centred in the City, but we need to remember that Edinburgh is a world financial centre – one of the many reasons why the moneymakers don’t want to see an independent Scotland) will suffer the same fate. It may be already too late to change course, but independence at least gives us some hope of steering a radically different course.

  2. All MPs should read Stiglitz, Steve Keen and have a proper understanding of Minsky’s Financial Instability Hypothesis before they are allowed to take their seats . Same applies in Holyrood. The economy is still teetering between being a Ponzi scheme and … well… just instability.

  3. Interesting stuff. My wife and I hold some Scotcoin, a cryptocurrency like Bitcoin, this does away with the need for bankers all together by making each holder their own personal banker, each coin is fully tracable and cannot be forged, they are electronically “sent” for payment to the vendor from the buyer.
    There were 1 Billion Scotcoin “minted ” earlier this year. they are now being traded on international coin trading markets, perhaps their time is fast approaching !

  4. Pretty Good Stuff but, even though it’s a bit heavy for your average voter I’ll be sharing it with my brother and sisters (and in-laws) in Edinburgh.

    It is dead easy to get the Yes side of the family to look at different material. The no side seem more concerned about the Human Rights Act and getting out of the EU.

    Is this because they read the Scottish Daily Mail? If so I have an uphill task as the English version of the Daily Mail that I get is the only paper whose cold call to solicit a subscription received a curt ‘piss off’.

    If I am to convince my No relatives, and I’m not enamoured of their thought processes, I think I’ll have to get somewhat sneaky and get them to view innocuous material that will lead to something that subtly turns the tables on their perceptions. I think that might be possible by selecting a judicious selection of clips from YouTube that starts with a strong Better Together clip they will agree with. Once they have validated their perceptions with this first I’ll add a few ambiguous chats ( can think of at least one with Irvine Welsh that could provide a half-way house ) before moving on to a more chatty and positiveclip. Finally, I’d go for a positive Yes message followed by a strike at the jugular: Craig Murray’s interview re Kazakhstan and Iraq that will hopefully lead into an extended a chat about the hypocrisy at the heart of UK government.

    That could maybe do the trick. If not, it would at least give them pause for thought.

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