The Great Debate UK

Savings and the alchemy of credit

– Ann Pettifor is Director of Advocacy International and a Fellow of the New Economics Foundation. The opinions expressed are her own –

The governor of the BoE argues that: “We will have to save more, even though the immediate concern is to ensure a recovery in demand.”  This is contradictory because saving will lower demand. It is also a counsel of despair. Most economists argue that savings drive capital investment, lower interest rates, and allow firms to create jobs. As Professor Victoria Chick notes, this confusion arises from our early experience of bank money. We leave school, get a job and then find a deposit in the bank.

Apparently our effort created that deposit.  The reverse is true: we were able to work because credit, or bank money, created deposits in the first instance. And this credit (created through a process closest to alchemy) starts with ‘Quantitative Easing’ (QE). If the banking system functions well, QE cascades through the commercial banking system.   The employer borrows, invests, and creates jobs.

Sadly, the British banking system is now dysfunctional, and neither the BoE nor government dare  fix it. Credit creation was until recently mysterious. Then we heard of something apparently new – ‘QE’. Money or credit, we realised, was not mobilised from savings of individuals, or taxpayers.  It was simply conjured out of thin air. Governor Ben Bernanke explained how on CBS’s ’60 Minutes’ .  Asked “was the $160 billion for the AIG bail-out raised from taxpayers?” he replied:

Will they have the nerve to call the next phase QE2?

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Laurence_Copeland- Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. -

It is hard to be too pessimistic about the economic outlook for the rich countries, and impossible as far as the UK is concerned. With every day that passes, it becomes clearer that, far from being out of the woods, we are once again plunging into recession and possibly crisis.

from Commentaries:

So that’s why the Bank buys all that government debt

I've found the answer to the monetary puzzle de nos jours. The ritual of the UK Treasury's DMO issuing new government debt one day, only to have the Bank of England buy similar amounts of almost identical stock the next, has puzzled me ever since Quantatitive Easing began.

How much simpler it would be for the Treasury to borrow directly from the Bank - the modern equivalent of running the printing press faster - to pay the government's bills.

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