• Finding the Money

    So, the chickens are coming home to roost – and with a vengeance.  The tragedy for the new government is that the chickens were bred and raised by the previous government, and are only now flying in, in large numbers and with hefty price tags.

    We are now getting some idea of the price that has to be paid for those “business-friendly” policies that were celebrated for their success in producing a “surplus” (at least for the government).

    That price includes large numbers of underpaid public servants – nurses, teachers, midwives, care workers, Inland Revenue workers – and underfunded public services – health care, schools, keeping our water and rivers clean, and bio-security at our borders.  The bio-security failure alone will cost the current government around $900 million – the amount awarded by the courts for the previous government’s negligence in allowing PSA to decimate the kiwifruit industry (and that’s to say nothing of the cost of the myco-plasma bovis outbreak).

    Through no fault of its own, the new government is having to pay up for the mess made by its predecessor, and that costs money that cannot, it seems, be easily found.  Every dollar paid to clean up the mess is said to be a dollar less for the government’s real aims – to improve our public services, to rescue our environment, to save families from poverty, to provide recent housing for everyone.

    But is that really the case?  There may be other shortages – labour or land, or skills or technology, or materials – but a shortage of money should not be one of them.  How do we know that?  Because, as an increasing number of experts recognise, and as our own experience teaches us, the government of a sovereign country need never be short of money.

    This is because money, in a developed economy, is what the government says it is.  Indeed, it is often called fiat money because it exists only by the say-so of the government – and, as the economist, Ann Pettifor, says, that means that “we can afford what we can do.”

    Most of the money in our economy sits in bank accounts, and a large proportion of that money is created by the banks when they makes loans, usually on mortgage.  The fact that the commercial banks create over 90% of the money in circulation out of nothing is still disputed by some (including by those who should know better) but is now attested to by the world’s central banks, by top monetary economists (such as Lord Adair Turner, former Chair of the UK’s Financial Services Authority and a leading advocate of “helicopter money”) and by leading economic journals such as the Financial Times and The Economist.

    This raises the question – if the banks are allowed to create money out of nothing (and then to charge interest on it), why should governments be inhibited about doing so?  And indeed, they are not so inhibited – governments all around the world have over recent years pursued policies of “quantitative easing”, and on a very large scale – and “quantitative easing” is just another way of describing the creation of new money.

    The money created in this way has been directed to building up the balance sheets of the banks in the wake of the Global Financial Crisis, but there is no reason why it should not be applied to other (and more productive) purposes – as it has been in many countries, as well as New Zealand, in the past.  Japan, for example, both today and immediately after the Second World War, used this technique to get their economy moving and to build the strength of their manufacturing industry ; in doing so, they followed the precepts of the great Japanese economist, Osamu Shimomura, who is virtually unknown in the West.

    The Chinese government today follows similar policies.  President Roosevelt in the US did likewise, before the US entered the Second World War, so as to build the strength of American industry and military capability; and, in New Zealand, Michael Joseph Savage authorised the Reserve Bank to issue interest-free credit in the 1930s so as to take us out of recession and finance the building of thousand of state houses.

    All that inhibits our current government from using this technique is the fear that some will disapprove and regard it as taking risks with inflation.  But, as John Maynard Keynes observed, “there may be good reasons for a shortage of land but there are no good reasons for a shortage of capital.”   He went on to say that, if an increase in the money supply is applied to productive purposes so that output is increased, it cannot be inflationary.

    As the new Labour-led government faces financial constraints not of its own making, why not emulate Michael Joseph Savage and authorise the issuing of interest-free credit to be applied to investment in stimulating new production?   The Provincial Growth Fund would seem to be an ideal vehicle; funding investment in new infrastructure in this way would free up financial resources that could then be applied to current expenditure, such as paying the nurses and teachers what they deserve.

     

9 Comments

  1. Tom Hunsdale says: July 4, 2018 at 7:37 amReply

    Hi Bryan

    Great stuff, you have summed it up very well here.
    Call me a conspiracy theorist but I believe our government won’t do it because we are basically controlled by overseas interests. Same with the UK, US and most governments in the West. We are owned and run by sociopaths who decide what governments will and won’t do. The US is an oligarchy and we basically do what the US pressures us to do. TPPA is a great example, I know they aren’t in it. YET.

    • Bryan Gould says: July 5, 2018 at 2:45 amReply

      Thanks Tom. I still hope that rational argument will prevail. Bryan

  2. Jeremy Callaghan says: July 4, 2018 at 8:50 amReply

    If any Government will do it, a Labour controlled one with a strong Waikato woman at the helm will!. I certainly wouldn’t describe Jacinda Ardern as a sociopath (although I don’t think you meant that Tom). David Lange showed the way when it comes to opposing US domination.

    I think that once again Bryan has shown clearly how a small country with determination can challenge conventional economic thinking and craft its own future in ways that larger democracies can’t. Let the world listen!

    • Bryan Gould says: July 5, 2018 at 2:47 amReply

      Thanks Jeremy. I agree that there is some ground for hoping that Jacinda and her government will have the strength to break free from orthodoxy. Bryan

  3. Tony Simpson says: July 5, 2018 at 3:26 amReply

    Quite right Bryan, but there is a sequel to the actions of the first Labour government. When Walter Nash went to London to re-negotiate our overseas loans in 1939 (previous governments had foolishly allowed the bulk of them to fall due at the same time) the then Governor of the Bank of England refused to underwrite the renewal unless Labour dismantled its nascent welfare state. He said in effect that he wasn’t going to agree to underwrite profligacy in the form of socialism. Fortunately for us a man called Hitler invaded Poland, war resulted, and Britain suddenly found they need us for both food and cannon fodder, so all bet s were off and we got as much credit as we wanted. Not a solution I would recommend but that’s what happened.

  4. Jon says: July 5, 2018 at 8:13 amReply

    Jacinda is too busy hanging out with jess mulligan and the crew of the project at his house. No way this government advocates sovereign money. Kiwibuild is designed to increase house prices as required by the debt money system.

    Question for Bryan. Many suffering blue collar workers voted trump. If we remove trump and get hillary in the white house this year through impeachment how do you suggest reconciling with blue collar trump voters.

    And finally how can we get labour to help male suicide and boys education and get women to marry down as well as having more blue collar non tertiary educated people In the house of Representatives? Or are you a fuedilist snob.

    People like you created trump voters and you can’t even take a step back and try to understand it.

    Shame on you

  5. mikesh says: July 5, 2018 at 10:31 amReply

    The more money the banks create, the less scope the government has for creating money itself. The best way we have of controlling money creation by the banks is the fractional reserve system, but it requires government regulation of the actual reserve ratio as it is this ratio that sets the limit to how much money can be created; the lower the ratio the more the money supply can increase – in fact, as the ratio approaches zero, the capacity for money creation approaches infinity. This seems to be what has happened in recent times times. In Muldoon’s time he set ratio at between 20 and 25 percent, which was probably a lot higher than the banks would have wished. It seems a pity that more recent governments have abandoned that useful tool.

    The Bank of England’s claim that the banks create money, and the banks’ counter-claim that they don’t but simply lend demand depositors money are probably both correct. They are just two different ways of looking at the same phenomenon.

  6. mikesh says: July 25, 2018 at 8:58 pmReply

    The country’s capacity to create money, whether by the banks or by the government, is probably limited by the country’s income potential.

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