Monday, March 3, 2014

George Osborne and his advisors re-discover what Keynes said 80 years ago.

George Osborne, the UK’s finance minister, and the plonkers who advise him have discovered or should I say re-discovered the fact that the government / central bank machine can print and spend money. Er….yes. Keynes pointed that out in the 1930s.
In fact many Kings and emperors since the world began have realised they have the power to print money and sometimes they’ve been tempted to print excessive quantities with Robert Mugabe being just a recent example.
Anyway, this UK Treasury publication tells us that “it is theoretically possible for monetary authorities to finance fiscal deficits through the creation of money.”
Theoretically possible??? The UK government / central bank machine has been printing money like there’s no tomorrow over the last two years. Where have Osborne and his advisors been during that time? On planet Mars perhaps.
To be more exact, the UK government (along with the US and other governments) have engaged in “Quantitative Easing” (presumably unbeknown to Osborne). Anyway, let’s run through the process via which QE equals money printing.
First, government borrows £X, gives bonds to those it has borrowed from and then spends the money. Then (and this is the QE bit) the central bank prints money and buys those bonds. Now that all comes to the same thing as the government / central bank machine simply printing money and spending it (and/or cutting taxes). So what’s all this about “theoretical possibilities” we get from the Treasury?
Now you could argue that that doesn’t exactly equal printing money and spending it since at the end of the roundabout process explained in the paragraph just above, the central bank is left holding bonds. And assuming the CB holds those bonds till maturity, then the Treasury in theory is supposed to give the CB suitable dollops of money. But suppose the Treasury just refuses. Suppose the Treasury just told the CB to throw those bonds on the fire? What would be the REAL ECONOMIC IMPACT?
ABSOLUTELY NONE  !!!!!  The CB wouldn’t go bust or anything. All that’s going on there is shuffling bits of paper, or should I say throwing bits of paper on the fire. There is no REAL IMPACT. No effect on the real economy.  And what’s really important here is the real impact. Whether particular bits of paper get burned or not is irrelevant.
Or put another way, until such time as those bonds reach maturity, the REAL EFFECT of the above “roundabout” money printing process is exactly the same as government simply printing money and spending it and/or cutting taxes.
Next, the Treasury paper tells us (in reference to money printing) that “Adair Turner, Chairman of the Financial Services Authority, has suggested this could be a tool to use in extreme circumstances.”
Sorry. Wrong again. To repeat, as Keynes pointed out, funding a deficit via printed money is a perfectly good alternative to funding it via borrowed money. No need to mention the word “extreme”.
Moreover, and possibly unknown to the UK Treasury, Milton Friedman advocated a system decades ago under which the government / central bank machine simply printed and spent money or cut taxes when stimulus was needed. Positive Money and other groups (e.g. MMTers) advocate the same policy. So there is nothing “extreme” about the idea.

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