Bankugintza, gero eta argiago
Gutxienez, Britainia Handian, haren banku zentrala dela eta, batzuek badakite:
The truth is out: money is just an IOU, and the banks are rolling in it
The Bank of England’s dose of honesty throws the theoretical basis for austerity out the window
Back in the 1930s, Henry Ford is supposed to have remarked that it was a good thing that most Americans didn’t know how banking really works, because if they did, “there’d be a revolution before tomorrow morning”.
Last week, something remarkable happened. The Bank of England let the cat out of the bag. In a paper called “Money Creation in the Modern Economy1“, co-authored by three economists from the Bank’s Monetary Analysis Directorate, they stated outright that most common assumptions of how banking works are simply wrong, and that the kind of populist, heterodox positions more ordinarily associated with groups such as Occupy Wall Street are correct. In doing so, they have effectively thrown the entire theoretical basis for austerity out of the window.
To get a sense of how radical the Bank’s new position is, consider the conventional view, which continues to be the basis of all respectable debate on public policy. People put their money in banks. Banks then lend that money out at interest – either to consumers, or to entrepreneurs willing to invest it in some profitable enterprise. True, the fractional reserve system does allow banks to lend out considerably more than they hold in reserve, and true, if savings don’t suffice, private banks can seek to borrow more from the central bank.
The central bank can print as much money as it wishes. But it is also careful not to print too much. In fact, we are often told this is why independent central banks exist in the first place. If governments could print money themselves, they would surely put out too much of it, and the resulting inflation would throw the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, say, by buying treasury bonds, but instead fund private economic activity that the government merely taxes.
It’s this understanding that allows us to continue to talk about money as if it were a limited resource like bauxite or petroleum, to say “there’s just not enough money” to fund social programmes, to speak of the immorality of government debt or of public spending “crowding out” the private sector. What the Bank of England admitted this week is that none of this is really true. To quote from its own initial summary: “Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits” … “In normal times, the central bank does not fix the amount of money in circulation, nor is central bank money ‘multiplied up’ into more loans and deposits.”
In other words, everything we know is not just wrong – it’s backwards. When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There’s really no limit on how much banks could create, provided they can find someone willing to borrow it. They will never get caught short, for the simple reason that borrowers do not, generally speaking, take the cash and put it under their mattresses; ultimately, any money a bank loans out will just end up back in some bank again. So for the banking system as a whole, every loan just becomes another deposit. What’s more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with “quantitative easing” they’ve been effectively pumping as much money as they can into the banks, without producing any inflationary effects.
What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there’s no question of public spending “crowding out” private investment. It’s exactly the opposite.
Why did the Bank of England suddenly admit all this? Well, one reason is because it’s obviously true. The Bank’s job is to actually run the system, and of late, the system has not been running especially well. It’s possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.
But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.
Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that’s what’s happening here, we might soon be in a position to learn if Henry Ford was right.
“What actually happens is all private bank lending creates money ex nihilo in a similar fashion (keystrokes producing entries in a spreadsheet) as the Bank of England creates money out of thin air to enable the government to spend. Don’t take my word for it though, try this from the Bank of England back in 2014:
As another commentator has mentioned earlier, the video leaves the detail of private bank money creation out to avoid undue confusion to newbies. However, it is really pretty simple since it follows similar principles to the process of government money creation by the Bank of England or the Fed in USA. The big difference is that instead of a government tax-redemption-IOU being created and then a changeable amount of tax being imposed at some later date where tax may be greater, equal-to or less-than the number of tax-redemption-IOUs created by the initial government spending private-IOUs are created alongside an exactly equal entry on the other side of the bank’s balance sheet at the moment the loan is created along with a contract stipulating the time period within which the loan must be repaid (and thus the IOU destroyed). In that sense money created privately has a built in self-destruct timer ticking from the moment the loan agreement is signed.
That is why MMTers say “only the government’s central bank can create net savings in the private sector” – because only money created by government spending is free of this self destruct mechanism and so can lead to aggregate savings once all private debts are taken into account. In reality private loans sometimes do go bad and never get repaid so some privately created money escapes its designed destruction date but most gets paid back and thus destroyed as scheduled. Taxes will get the rest in the end anyway.”
Zergapetzea, gero eta zehatzago
Gutxienez, zenbait kazetariren artean badago zehaztasun minimo bat
While some of us are pretty conscious of the importance of using the correct terminology when it comes to issues of social justice, race, gender and sexuality, when it comes to addressing inequality, we are still using language straight out of the neoliberal handbook.
Governments like those of the US, UK, China, Australia, Canada, etc run spend & tax economies, not tax and spend. They do not need your taxes to pay for anything. You might be angered to know that, actually, your taxes are not used for anything after you pay it. Not at a federal level. Your taxes are essentially destroyed upon receipt. Taxation is the act of taking currency out of the economy. Using your taxes to pay for public services would keep that money in circulation, thus serving the very opposite of its purpose.
There are some exceptions here which are important to underline: Taxes pay for services at state and local levels, but that is only because they are themselves inadequately funded by federal governments and therefore raising taxes becomes necessary to make up the revenue shortfall. Taxes also nominally pay for spending in countries whose governments adopt foreign currencies (most EU member states, for example), or peg their gold to a foreign currency.
(Hobea izango litzateke EBZ-ri eskatzea defizit publiko handitu dezan, kasu austeritateari erabat lotuta dagoen %3tik %8ra, gutxienez!)
– To stabilise aggregate demand.
– To discourage bad behaviours (taxation on cigarettes, for example, are designed to discourage smoking and reduce the burden on health systems) & encourage good behaviours, (like promoting sustainability through a tax on carbon and investment in renewable energy).
“Taxes on the rich might take ‘resources’ from people who have too much — in that their demand deposit account is debited,” he writes for Naked Capitalism. “But taxation does not ‘give resources’ to people who have too little.”
“Rather, government spending directed to those who ‘have too little’ is what gives the poor access to resources. (They can use their demand deposit credits to buy food, clothing and shelter, etc). They are functionally two separate entities.
Our acceptance of this lie is, to quote anthropologist David Graeber, “collectively acquiescing to our own enslavement.”
The very myth that the vast majority of us have settled on is the very thing preventing full and gainful employment, and guarantees a future (and a present) where the only way to buy our way out of public squalor is through rising private debt.
In his recent book, Bullshit Jobs, Graeber describes modern day capitalism as a system of ‘Managerial Feudalism’, a form of social and political control achieved through corporate bureaucracy: the proliferation of middle-managers, supervisors, administrators all employed to ‘appropriate labor through usury’, stealing wealth, resources, opportunity and power from the working and middle class and transferring ownership to the political and elite classes and the idle rich.
Language is important. You can be as woke as you like about gender and racial politics, but using the wrong terminology for taxation is kryptonite for social justice. We cannot subvert the neoliberal playbook while continuing to use the very same language invented to ensure a permanent economy of inequality and austerity.
Dirurik ez dagoela?
Badakigu. Euskal Herrian dena nahasten da: errenta banaketa, soldaten banaketa, lanpostu banaketa, pentsioen banaketa, oinarrizko errenta unibertsala (sic), zergak handitzea inbertsioak finantzatzeko, …
Eta horrela doa gure herria, amildegi baterantz eta abiada handi batez.
Politikan, Espainiak salbatuko gaitu (hego Euskal Herria, noski, ez Iparraldea) Espainiarekiko konfederazio baten bidez.
Ekonomian, alta, badauzkagu kazetariak (gehi progreak, ekonomialariak eta politikariak, noski) oso trebeak gu salbatzearren.
Ikasiko ote dugu inoiz?
1 Ikus Money creation in the modern economy: https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy.