What’s the Problem with Money?
The money banks create isn’t the paper money you keep in your wallet. It’s the electronic money that flashes up when you check your balance at an ATM.
By fuelling our economy through ever-rising levels of household debt, we are repeating the mistakes that led to the 2007-08 financial crisis.
Ever since that crisis, the Government and Bank of England have tried to encourage further consumer borrowing via further lending by banks. As former FSA chairman Lord Turner put it, this was a “hair of the dog” strategy for economic recovery, treating the cause of the financial crisis – excessive borrowing – as though it could also be the solution.
However, household debt can only grow faster than salaries for so long before the weight of the debt becomes excessive. With household debt already close to its highest level in history, and set to rise further as a result of Government policy and easier lending by banks, we believe the current economic recovery is unsustainable. Just as the economy is running on borrowed money, the recovery is running on borrowed time.
There is therefore a need for an alternative strategy for a more sustainable economic recovery. This paper proposes this alternative, a new solution called Sovereign Money Creation (SMC).
Similar ideas have recently been proposed by Lord Adair Turner, under the name Overt Money Finance. The March 2013 budget included a review of the monetary policy framework, which expressly permitted the Bank of England to use ‘unconventional policy instruments’ to support the government’s objectives for growth and employment, meaning that SMC could be used within the current operating framework.
The creation of money by the state often leads to concerns about inflation, but there is no reason why it should be more inflationary than the creation of money by bank lending (which typically creates inflation in the housing market). In addition, whereas most money created via bank lending goes into the property market, the money created via Sovereign Money Creation would go directly into the real economy, boosting GDP and employment. By boosting the capacity of the economy, SMC should actually be less inflationary than consumer lending, and the use of SMC can be restricted should it start to be inflationary.
We believe that ultimately, it is a matter of when, not if, this policy will need to be implemented for the long-term sustainability of UK economic growth.