Tuesday, May 08, 2012

What is the alternative to austerity?

France and Greece have voted against austerity.
This is fine and dandy.

But what is the alternative to austerity?

We're buggered if we do austerity, and buggered if we don't, because basically, mainstream economics is buggered.

It is very simple. We all know the story: the Government has huge debts, so we must cut public spending, but this puts up the unemployment benefit bill which makes the debt worse, and also the cuts in public service has an impact on the rest of the economy (e.g. firms which service the public sector), so the whole economy slows down, so tax revenue falls and the debt gets even worse.

So austerity doesn't work.

The alternative prescription is classical Keynesianism where the Government "borrows to invest" in infrastructure building which creates employment which stimulates economic activity and starts a virtual circle of recovery.

This is more promising, but is blocked by Osborne when he says that we have already borrowed too much, therefore we cannot borrow to get out of a debt problem and the Markets Will Come and Get Us If We Do.

Sadly, our commentariat is too naive, dim and weak to challenge him

This despite the fact that the IMF,  OECD, World Trade Organisation and World Bank warned against relying solely on cuts to cure the UK economy.

So we are caught between a rock of austerity and the hard place of borrowing our way out of debt.

It looks bad. But there is a solution.

The key is in the emphasised phrase above: Government borrows to invest.

Government does not have to borrow from the banks to get money.
It is irrational to say it must borrow from the banks.

Government saved the banks in 2009 by covering their stupid debts (which is the main part of the problem of the UK economy, though Labour is too thick to say so) and has since saved their sorry asses since by creating  a total  of £275,000,000,000 (£275 billion) of Quantitative Easing (QE) money.

The banks have a bipolar problem.

Pre 2009 they were manically lending money to all comers.
Debt was not a problem: it was all "Leverage". 

Post 2009 the banks are depressed. It is all too too awful.  They have no confidence to lend.
So businesses cannot get money, and the recession continues.

The answer is for Government to exercise its sovereign ability to create money through its agent, the Bank of England (BoE).
The BoE can issue new money for real economy projects like energy conservation,  renewable energy projects, housing and a Green New Deal Plus, based on the Green Wage Subsidy.

Real investment in real economic projects that save the real environment from the real problems we face.

The BoE can provide the money by spending it into circulation - providing it directly to Green New Deal contractors.

Of course, this is where all the tinfoil hat orthodox believers blow their lids and start shouting about hyperinflation.

Hyperinflation comes about if there is more money in the economy than goods and services for it to buy, and it usually comes about in extreme circumstances like civil war.

The fact is that the BoE does create money, through notes and coins, just 3% of the total.
The fact is that the BoE also creates money through QE (see above).

BUT - and here's the killer fact - the very mainstream economists who will be screaming hysterically and hyperventilating over the suggestion that the BoE could take over and create the money for the required Keynesian stimulus, these same economists believe that money is created exogenously. That is, they believe that at the end of every trading day, the high street banks go to the BoE and say "We have given out £x million in loans today. Can you create the money for us please to balance our books?"

And they believe the BoE says yes, OK, and does it. Creates the money for the banks, retrospectively. Every day.

They have to believe this, because otherwise they would have to believe in the endogenous theory, which is that the banks create money at the point they make a loan.

And if they believed that, then the Positive Money campaign, and all the other students of money who have been isolated  and ignored over the years would have been proved right.
Banks create money when they make loans.
Governments also can create money, and they should do, in the present dire economic circumstances, provided that the projects they are investing in have positive ecological value.

Related posts:
How to get rid of unemployment
Globalised economy needs a global tax framework

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