Of all the initiatives proposed by Jeremy Corbyn, the one least discussed by the media but most threatening to the political and financial establishment is his QE for the people. It remains to be fleshed out. However its basic premise is that, rather than austerity, what Britain needs is for the Bank of England to “print” money, but instead of giving it to the banks to extend as yet more cheap credit/debt, that it is instead given to the government of the day to spend into the economy directly in support of any number of infrastructure, housing and socially beneficial projects. The financial institutions are bypassed. It is debt free. No government borrowing. No growing annual interest bill.The effect of the money on the economy and jobs is immediate and direct, rather than indirect and dependent on both the willingness of banks to lend and people to borrow as is the current QE.
The fact is, despite the widely accepted narrative of politicians, economists and economic journalists worldwide, including New Zealand, a government’s budget is not analogous to a household budget. A household cannot create money so the less it spends, the more it can save or pay down debt. It makes sense for a household or individual to balance their books. If a government spends less ie austerity, the monetary difference has to be picked up by the private sector/public or a recession ensues. There will be less money in the economy.
Where does the public or the private sector get this money? In the absence of a large trade surplus ie substantially more exports than imports; and even more importantly a current account surplus ie a more money/profits paid to domestic entities than remittances to foreign owners, shareholders and corporations; this money must come from further debt, credit generated by a bank which is accepted as money.
At present, in most Western nations including Britain and New Zealand, about 5% of the “money” in bank accounts is from a central or reserve bank. The remaining 95% has been created by someone taking on a debt, a mortgage, a business loan with a trading bank. There is virtually no limit to the amount of this credit money that can be created apart from a bank’s own willingness to lend and its risk management; and the private sector/public’s willingness or capacity to borrow. Bank’s no longer have hard reserve requirements, only softer capital requirements. This is why bank “credit money” has exploded in the last 30 years with financial deregulation. It has not been officially inflationary because most of the things this easy money has flowed into, property, shares and other speculative “investments”, are not adequately captured by official CPI statistics.
This also explains why after the GFC, government borrowing and spending had to pick up to compensate for the private sector/public reducing their borrowing (creating new credit money) and paying down debt (destroying credit money). Without that government spending a severe recession, perhaps a depression as in parts of Europe, would have ensued in Britain and New Zealand.
Successive British and New Zealand governments, both Labour and Conservative/National have been content to see the economy flooded with low interest credit money, mostly from mortgage debt, and sit back and extol their wonderful economic management. Who knew encouraging every man and his dog to borrow so much money and spend it was economic genius? If something like the GFC throws a spanner in the works, pause then double down again. Kick the can. Extend and pretend. Sell a few assets.
The winners are always the financial institutions and their political cronies who get to create credit money from nothing, extend it as debt and collect fees and interest for the privilege. Not only that, if it all goes horribly wrong, they shout financial instability or declare “too big to fail” and get bailed out with more “money” created somewhere else but to be re-payed by everyone.
This is why Corbyn’s QE, or more accurately, Public Credit proposal is so threatening.
It threatens to replace a lot of bank created credit money with central bank money.
It would replace borrowed money with potentially debt free money.
It would go direct to the government to spend on real things rather than be inter-mediated through any number of financial institutions and consultants, clipping the ticket in the form of fees and interest at every opportunity.
It would reduce the influence of financial corporations and their political lackeys.
It would bring to a halt the real estate and share market gravy train driven by misdirected, unregulated credit.
It would place real government backed money in the hands of real businesses, making real things with a low but fair return rather than massive, short term, speculative profits on often intangible or unimproved assets.
It is what is required to start to bring Western economies back into balance, to start to direct activity away from debt funded consumption and speculation.
It is what the First Labour Government did in New Zealand in the late 1930’s. It is time for Andrew Little and the current New Zealand Labour Party to follow Jeremy Corbyn’s lead, to revisit their own history, and offer a financial alternative that will not take New Zealand to the brink of a debt deflationary depression.