The magic money tree does exist, according to modern monetary theory

Youssef El-Gingihy in The Independent


After seven years of austerity, we are accustomed to thinking of the economy as a household with the nation’s credit card maxed out, to paraphrase David Cameron. The fetishisation of debt translated into massive cuts to UK spending on public services. At the same time, there remains widespread public anger that the big banks continued to make record profits and bonuses in spite of George Osborne’s assurances that we would all be in it together.

That was then though. Both Cameron and Osborne have since departed. This year, the political climate turned on its axis. The Conservative majority of 2015 gave way to a hung parliament with 40 per cent of voters opting for Corbyn’s Labour. The electorate’s acceptance of austerity mantras had evidently reached its limit.

Against this backdrop, the publication of Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal Worldcould not be more timely. It is written by 65-year-old Australian heterodox economist William Mitchell and the journalist and author Thomas Fazi. The book’s introduction is topically titled “Make the Left Great Again”; a sentiment that will no doubt chime with many progressives.

It diagnoses that neoliberalism was not just a right-wing Thatcherite-Reaganite prospectus. The centre-left, as embodied by Mitterrand’s socialists in France, Blair’s New Labour and the Democratic Party in the US, was complicit in its imposition. This consensus culminated in the decimation of manufacturing, decline of union membership, the expansion of financial services, wage flattening, falling living standards and the privatisation of public services. At the heart of neoliberalism was the assertion that the free market is the supreme arbiter with the economy managed by technocratic expertise. The flip side of this depoliticisation resulted in ordinary people becoming alienated and disillusioned with the social democratic parties that formerly represented them. Instead they turned to anti-establishment (usually hard right) parties.

Margaret Thatcher and Tony Blair both knelt at the altar of neoliberalism (AFP/Getty)

Furthermore, Mitchell and Fazi point out that the notion that neoliberalism is anti-state is a misconception. In fact, the state has been essential to the neoliberal project as became evident in the aftermath of the 2008 financial crisis. The state is not only required to bail out corporations and banks but to create new markets and in an authoritarian mould to police its citizens. However, Mitchell and Fazi intend to reclaim national sovereignty as part of a 21st century progressive vision. This is where modern monetary theory (MMT) comes in.

Bill Mitchell is one of its key proponents. MMT is one of those Alice in Wonderland, down the wormhole kind of concepts that neutralises every received wisdom – from that childhood conversation when your father sat you down to explain banks using saving deposits to invest in other businesses right up to politicians telling us that the UK is broke. In other words, prepare to be blown away and forget what you think you knew about money.

MMT essentially proposes that money is created ex nihilo or out of nothing. Whether it is private banks, central banks or governments, money is an abstract concept of ones and zeros. Thus, when your bank lends you a mortgage, it essentially creates money by typing it up on a computer. Similarly, the government has the power to create “fiat money” – that is money established by government regulation or law as opposed to currencies with intrinsic value, such as gold.

In effect, the usual dictum of “tax and spend” is inverted to “spend and tax” with spending stimulating jobs and growth, which can later be taxed. Taxation is not therefore a way of raising revenue but a tool for either controlling the money supply or shaping policy through incentives. Of course, it is much more complicated than that as certain conditions must be met. Public spending cannot be unlimited and must be commensurate to the capacity of the economy amongst other things in order to avoid hyper-inflation.

Ecomomist William Mitchell argues that the notion that neoliberalism is anti-state is a misconception

Both authors have been on a global book tour taking in the US and Europe. In London, Mitchell and Fazi gave their talk at the Newington Green Unitarian Church – one of Britain’s oldest nonconformist churches. Mary Wollstonecraft was the most famous member of its congregation and was inspired by the sermons of the radical minister Dr Richard Price in her thinking on the new French republic and the rights of women.

The setting is certainly suitable for the preaching of a heretical doctrine. In fact, I am reminded that it is the 500th anniversary of Martin Luther pinning his 95 theses to the door of a Wittgenstein church. The parallels are hard to overlook; then as now Europe was in crisis with Britain exiting the established order.

Huddled on a church pew for the interview, I ask Mitchell what exactly is MMT? He answers that it is “a lens through which we can understand the monetary system”. Remarkably, the elemental question – where does money come from? – does not have a settled answer amongst economists, experts and policy makers. Organisations such as Positive Money have already embarked on the process of demystifying money creation. I am reminded of the chapter “The Great Money Trick” in Robert Tressell’s The Ragged-Trousered Philanthropists in which loaves of bread are used to illustrate how the concept of money and surplus value (profit) guarantees perpetual penury for the working class and concentration of wealth for the ruling class.

So how might all of this play out post-Brexit? Mitchell and Fazi seem to be making the progressive argument for Brexit (nicknamed Lexit). This is in keeping with the old-left position that the EU does not represent genuine international solidarity. They acknowledge that it is difficult to make progressive arguments for sovereignty as nationalism has been condemned to a default reactionary position.

John McDonnell and Jeremy Corbyn have pledged to take private finance initiative contracts back into public hands, but how would financing of infrastructure work under a Corbyn government? (Getty)

Yet polling demonstrates that sovereignty was the most common reason for people voting Brexit. Mitchell and Fazi reformulate a progressive definition of sovereignty as having democratic control over the economy rather than simply within ethno-nationalist parameters. According to Mitchell, sovereignty is absolutely fundamental in order for countries to exercise power over their money creation. As long as a country has its own central bank and currency then it is free to spend. While Greece, bound by the constraints of the European Central Bank and the euro, does not have this freedom. After the talk, Mitchell tells me that sovereignty entails having a currency issuing monopoly: “The reality is that national governments are the monopoly issuers of their own currency.”

Mitchell also debunks the idea that governments borrow money from international markets and with it the notion that they are hostage to the market. He has recently written a blog on how Corbyn should not be afraid of global markets. Mitchell cites the 2001 Argentinian debt default as demonstrating that a country can get away with it and recover. Similarly, Iceland imposed capital controls (measures to regulate capital flows in and out of a country) in order to steer the economy through rough waters after its banking system crashed.

In the same vein, Mitchell proposes that governments do not use bonds and gilts to raise revenue. He cites a previous Australian Conservative administration issuing debt when they were running surpluses as an example of the use of bonds as corporate welfare thus “exposing the game”.

At the recent Labour conference, Shadow Chancellor John McDonnell stated that Labour would take private finance initiative (PFI) contracts back into public hands. So how would financing of infrastructure work under a Corbyn government? At the start of the year, this question might have appeared absurd yet only this month The New York Times published an op-ed piece titled “Get ready for Prime Minister Corbyn”.

Milton Friedman said money supply must be controlled in order to limit inflation, so government debt must be prioritised

Here is where quantitative easing (QE) comes in. QE was intended to stimulate bank lending in the aftermath of the financial crisis. However, growth levels have remained stagnant in Britain and Europe. In reality, the banks simply said thank you for the free lunch and used QE to restore their balance sheets. Studies have shown that much of QE ended up contributing to stock market and property bubbles.

Economist Richard Murphy – whose work has focused on tax avoidance and the offshore world – proposed what came to be termed “people’s QE”. For a while, this was a central tenet of the Corbynomics programme. Murphy’s basic idea was that if QE could be used for the banking system, then why not use it to build new homes or create climate jobs? As long as sufficient value was created then the nemesis of hyper-inflation could be avoided.

It therefore appears that Theresa May’s oft-repeated refrain attacking Corbyn on the grounds that there is no such thing as a magic money tree is not exactly true. So if money can basically be created with the press of a button, then suddenly our world appears to be (pacePanglossian disciples) the craziest of all possible worlds.

At this point, you might understandably be asking why on earth we do not just spend our way out of the current mess. And while we are it – give the NHS more money, shelter the homeless and feed the poor of the world. This is where we come up against the ideological edifice of neoliberalism.

Monetarist doctrine states – as per the Chicago School’s Milton Friedman – that the money supply must be controlled in order to limit inflation. Thus, government debt must be prioritised. The Maastricht treaty, which founded the EU, stipulated limits on public spending. Greece is the textbook example of austerity in which debt repayments are prioritised in order to appease creditors (mainly banking institutions).

Banks used quantitative easing to restore their balance sheets (Getty)

However, even mainstream economists feel that the logic of austerity is somewhat fallacious. Keynesian economics posits that public spending stimulates growth with debt as a secondary consideration. As the New Economics Foundation think tank points out, Britain has historically seen much higher levels of public debt. The debt/GDP ratio was higher during a whole century between 1750 and 1850 (at the time of the Napoleonic wars and the height of Britain’s imperial glory) as well as in the aftermath of the Second World War when the welfare state was created.

While a landmark 2014 study demonstrated that the UK coalition government’s welfare changes enabled tax cuts for the wealthiest thus cancelling out any impact on the deficit. Former Greek finance minister Yanis Varoufakis has also argued that the austerity strategy applied to Greek debt has been extremely counterproductive. The combination of bailouts with cuts has depressed the economy resulting in an increase of the debt (as a percentage of GDP).

The ascendancy of neoliberalism was such that its ideology became an all-pervasive atmosphere. During the event, Mitchell asks how many in the audience have heard of the Powell memorandum. Only a couple of hands go up. Lewis Powell was an American lawyer – later appointed as a Supreme Court justice by Richard Nixon – now indelibly associated with his eponymous 1971 memorandum. This outlined a blueprint for the American conservative movement and the network of think tanks funded by business interests. It recommended that the business class should close ranks in order to present a united front. It also stipulated that lobbyists would be needed to influence policy makers and legislators. And it suggested that infiltration of the media and academia would be necessary in order to achieve the goals of unshackling free enterprise from government interference.

So what would happen if governments followed through on the logic of MMT? Well for a start the Goldman Sachs, JPMorgans and HSBCs of this world would not be as rich or powerful and in the worst-case scenario they might even cease to have any purpose. A recent comprehensive survey from the pro-market Legatum Institute confirms that significant majorities of the British public are in favour of renationalisation of utilities and railways. The public is equally split on nationalisation of the banks with 50 per cent in favour. Corbyn and McDonnell have proposed a national investment bank with a network of regional banks in order to help rebalance the economy and encourage lending.

Whether or not one accepts MMT, it is increasingly apparent that public and democratic oversight of finance and money is becoming a central pillar of progressive postcapitalism alongside public control of public services, a green economy, full automation and the four-day week.

There is a magic money tree. But only for the Queen and the DUP

Owen Jones in The Guardian


There is no magic money tree, say the Tories: unless it’s to bribe extremists to keep them in power, or to renovate the palaces of multimillionaire monarchs. Today nurses take to the streets to demand an end to a pay freeze that has slashed the living standards of these life-saving, care-giving national heroes. One such nurse confronted Theresa May – whose lack of emotional intelligence is only matched by her lack of authority – on national television before the election. There was no magic money tree, was May’s robotic response. If the nurse had been met with a middle finger, it would scarcely have been less insulting.

Let’s be absolutely clear. The Tories’ programme of cuts – austerity, whatever you want to call it – is a con, a lie, an ideologically driven act of sadism that has caused immeasurable and unnecessary hurt and pain. The Tories are keen to portray Labour as shambolic and wasteful spendthrifts. In this they are aided and abetted by the party’s post-crash failure to defend its own spending record. Then the Tories lost their majority, and lo! They did conjure up the magic money tree to shower gifts on their homophobic, anti-choice, climate change-denying, sectarian friends.

While nurses are driven to food banks in one of the richest societies that has ever existed, the Tories have almost doubled the Queen’s income. We live in a country that cannot provide affordable, comfortable and safe homes for millions of its own citizens, but the Tories can suddenly find tens of millions more each year to help renovate Buckingham Palace. There is a magic money tree for palaces, but not people.


The money soon to be showered on Northern Ireland will undoubtedly help the Six Counties

The cost of the Tories’ calamitous failure will be significantly more than £1bn, of course. As Nick Macpherson – a former Treasury official, puts it – this is just a “downpayment. DUP will back for more ... again and again.” And neither can they be trusted with taxpayers’ dosh, having wasted nearly half a billion on a failed energy scheme.

But do you know what? The money soon to be showered on Northern Ireland will undoubtedly help the six counties. It will improve public services, education, the health services and infrastructure. It will undoubtedly lift living standards and fuel economic growth. That is what public investment – so mercilessly slashed by the Tories – achieves.

And if it’s good enough for Northern Ireland, it’s good enough for the rest of us. We can ask the most well off, for whom the crash was only ever something they read about in newspapers, to pay a bit more money; the same with booming big business. The billions are there: for housing, education, infrastructure, police – and, yes, to pay our nurses a decent wage.

The Tories are nothing more than a racket for their wealthy backers, a crude political instrument to defend the interests of Britain’s shameless vested interests. They will happily locate a magic money tree if it’s their own political survival that’s at risk. But what is good for the partisan interests of the Conservative party is not good for the nation.

The Tories’ Ulster spending spree should embolden all of us who always believed austerity was an ideologically driven con. On Saturday, thousands will march with the People’s Assembly to demand the end of the failed Tory experiment. The Tories have legitimised their arguments. Austerity is over for Northern Ireland, it’s over for the Queen, and now it must end for everybody else too.

Yes this really is the end of Tory austerity – because it was never about economics in the first place

Ben Chu in The Independent

“The crisis”, the economist Rudiger Dornbusch once noted, “takes a much longer time coming than you think. And then it happens much faster than you would have thought.” A similar dynamic describes the progress of Conservative austerity politics.

The stunning failure of Theresa May in last week’s general election signalled to Tory MPs that the public have had enough of spending cuts. Though the deficit still stands at £50bn and the national debt is £1,700bn (and rising), austerity is over, we’re now told.

Seven years of Tory lectures that eradicating the deficit for the good of future generations is paramount suddenly fall silent. Politicians who have tarred critics as criminally irresponsible for suggesting an increase in public borrowing have now, in an instant, changed their tune.

People who insisted that if we did not balance the budget at the earliest possible date Britain was destined to become an economic basket case, like Greece, apparently no longer fear such a gruesome outcome. The collapse of the citadel of austerity rhetoric is truly remarkable in its rapidity.

But it was a very long time coming. It became clear within a year of George Osborne’s 2010 “emergency budget”, which forced through huge cuts in capital budgets and an intense squeeze on Whitehall departments and welfare spending, that the austerity medicine was hurting, not helping.
The economy was flatlining, teetering on the verge of recession. Whether this was primarily due to the crisis in the neighbouring eurozone or because the negative knock-on impact of the government’s domestic spending cuts was bigger than initially thought is still debated by economists.

But it doesn’t really matter. Even the conservative estimates of the Office for Budget Responsibility suggest that GDP growth would have been around one per cent higher in both 2010-2011 and 2011-2012, if the Coalition government hadn’t slashed domestic spending on the scale and pace it did.

With interest rates as low as they could go and the Bank of England struggling to support demand through money printing, this was a time for the Government to ramp up capital investment spending to offset the general slowdown – something numerous distinguished academic economists, and even the IMF eventually, urged. It would have made us all better off, putting idle resources to use.

But despite such a capital spending stimulus being permitted under his own fiscal rules, the former Chancellor George Osborne refused to do it. He told us that the international bond markets would lose confidence in the UK’s creditworthiness if we deviated from his original plan – a risible claim given that UK borrowing costs were plumbing new depths as investors around the world ploughed money into government bonds.

The reality was that Mr Osborne didn’t want to do it because it would have meant losing face. He would have had to admit that his previous pigheaded insistence that he didn’t need a fiscal “plan B” was wrong. The credibility risk was not to the UK’s borrowing status but his own political stock.

With the help of a cynically conceived and distorting subsidy to the housing market, the Conservatives managed to eke out a surprise victory in the 2015 general election. Drawing the lesson that austerity had become an electoral asset and useful stick with which to beat Labour, the Chancellor doubled down. He tightened his fiscal rules in a way that virtually the entire economics profession regarded as economically illiterate, making no distinction whatsoever between day-to-day government spending and productive capital spending, and also unveiled a round of large welfare cuts for the working poor.

Hubris set in. And nemesis soon followed. Unexpected parliamentary resistance mounted to Osborne’s welfare cuts, prompting a humiliating reversal on tax credits. At the same time the impact of extensive cuts to policing, schools, social care and the NHS finally became apparent in the form of deteriorating services. It took longer than expected, but it finally arrived.
Yet when Theresa May replaced David Cameron as Prime Minister and Philip Hammond replaced George Osborne as Chancellor last year, they didn’t reverse any of the inherited departmental spending or welfare cuts. And they went into the 2017 election with the same old scare stories about Labour’s reasonable capital investment plans, the same old specious lines like “no magic money tree”. Only now has the dam of Conservative denial crumbled.

Reducing the UK’s deficit, which had ballooned to 10 per cent of GDP in 2010 due to the financial crisis, was a necessity. Cutting it without regard for the state of the overall economy and the feedback effects on aggregate demand was unscientific stupidity and wanton vandalism. Austerity, as practiced by the Conservatives, was a policy driven not by economics, but by politics and ideology. The politics was baiting Labour. And the ideology was the desire to reduce the size of the state.

Who was to blame? The prime culprits were George Osborne and David Cameron of course. But Treasury civil servants were also enthusiastic supporters. It was enabled by two senior Coalition Liberal Democrats, Nick Clegg and Danny Alexander. It was endorsed by economists in the City of London and cheered on by Tory-supporting newspapers. It was abetted by ostensibly neutral political journalists, who unthinkingly succumbed to the fatally misleading idea that a government’s finances can be compared to a household’s budget.
They say victory has a thousand fathers whereas defeat is an orphan. But if we look carefully it’s clear the austerity failure of the past seven years has a sprawling parentage.

You can print money, so long as it’s not for the people

Zoe Williams in The Guardian

In its broadest sense, the phrase “there’s no magic money tree” is just a variation on “money doesn’t grow on trees”, a thing you say to children to indicate that wealth comes not from the beneficence of a magical universe, but from hard graft in a corporeal reality. The pedantic child might point to the discrepant amounts of work required to yield a given amount of money, and say that its value is a social construction.

Over time, that loose, rather weak-minded meaning has ceded to a specific economic critique; Jeremy Corbyn – along with anyone who challenges the prevailing fiscal narrative – is dangerous and wrong, since he wants to print money. Money cannot be created from nowhere, because there’s no magic money tree. End of.

The flaw in that argument is that all money is created from nowhere. In normal circumstances, it is created from nowhere as credit, by private banks, and lent to us, usually (85% of the time) in the form of a mortgage on an existing residential property. Decades of credit extension have perverted the housing market to turn a mortgage into a lifetime’s bonded servitude. The economists Jordá, Schularick and Taylor argued convincingly last year that the causes of this economic crisis, the next and the one before are all, fundamentally, the extension of credit and its impact on house prices. So the magic money tree isn’t gushing cash in a socially responsible fashion (if it were used responsibly, it wouldn’t be magic) but the idea that we have a centrally planned, carefully stewarded monetary policy, with finite creation and demonstrable long-term aims, which some loonie leftie wants to come along and unravel, is simply wrong.

In abnormal circumstances, such as the ones we’ve lived through since the financial crisis, central banks are also magic money trees. In the bizarre construction of current economic orthodoxy, you’re not allowed to say so, even though the Bank of England has created £375bn in quantitative easing (QE); theFederal Reserve bought $1.25tn worth of mortgage-backed securities in its first round of QE; the European Central Bank had as a core principle that it couldn’t create money until, suddenly, in awesome amounts, it could; the Bank of Korea has a stimulus package, as does the People’s Bank of China; and Japan started it. Central banks typically justify money creation on the basis that it’s temporary, it’s unfortunate, it’s driven by the crisis and it will ultimately get back to normal.

None of that alters the fact that no bank had that money in savings. I recently said out loud, “we do have a magic money tree, it’s called the Bank of England” in a Newsnight debate with a former adviser to Blair, John McTernan. He made a face like a politician accidentally talking to a member of the public but what the camera didn’t catch was Evan Davis, who stuck his tongue out, like a cat taking a pill. It was days ago, and people are still tweeting me pictures of the Zimbabwean dollar and the Weimar Republic, saying “is this what you want? IS IT?”

Quantitative easing is bizarrely unapproachable, even though it’s happening right across the world and its unwinding will dominate the economic picture for years to come; one is allowed to reference QE, so long as one maintains at all times a technocratic tone, to indicate that one understands and approves of it as nothing more than a lever to create stability. It was the best idea ever, until you suggest something similar could be done for a social purpose, and then it’s the most perilous idea ever. To interrogate why the benefit must always go to the existing asset-holding class, why human ingenuity can’t devise anything more productive and equitable, is to reveal the shaming depth of your incomprehension. It’s not that you don’t understand money; it’s that you don’t understand the exigencies of the debate, which are that you sign up to a number of false principles before you start.

It turned out that the “no money tree” brigade meant: “If you create money infinitely, that will cause inflation” That is a really curious argument against Corbyn’s people’s QE, like going up to someone eating a banana and saying: “If you eat limitless bananas, you will give yourself potassium poisoning.” There’s a secondary argument about the independence of central banks from governments, which is actually rather an elegant example of our dishevelled politics: if the government issues no directive to the Bank of England, and all the gains of QE go to the wealthiest, that’s “independent”. If the government had said, invest this in, say, the green economy, that would have been independence lost. It has become normal to see upwards redistribution as a law of the physical universe, and anything else as the interference of a heavy-handed state.

None of this is to say that people’s QE is straightforward and unproblematic; Corbyn is talking about spending on infrastructure (housing, broadband), whereas that phrase as it was coined described helicopter money, or overt money financing, literally getting money into the economy by randomly giving it to people. They’re two discrete propositions – overt money financing and green and social investment – and rolling them into one doesn’t do much to promote understanding on this terrain.

However, the real barrier to debate is, as with so much in the realm of debt and austerity, that it’s conducted in bad faith, with infantilising aphorisms, aimed not at deepening understanding but at shooing away public interest with unavoidable economic realities. As a tactic, this has reached the end of its plausibility.