April 20, 2020

How are we going to pay for all of this? I know, there’s still hundreds of people dying every day — including NHS workers — so it seems wrong to thinking about money. And yet the question must be asked.

For the Government to do “whatever it takes” will require it to spend whatever it takes — both to beat back the pandemic and to revive a devastated economy.

This year it’s projected that the US Treasury department will issue $3 trillion (i.e. three thousand billion dollars) of new bonds (a bond, by the way, is basically an IOU).

In the UK it’ll be hundreds and hundreds of billions of extra borrowing.

In the EU things are horrendously complicated by the single currency, but there’ll be colossal borrowing requirements there too — and across the world.

Interest rates are at record lows right now, but economic recovery implies that that they will at some point come back off the floor. So how will governments cope then? Will public finances be chewed up by the cost of servicing these loans? What if multiple countries default, sending the global financial system into meltdown? One way or another, the recovery could be crushed by the sheer weight of debt.

However, there is a way out: monetisation. This means that central banks, like the Bank of England, will be the biggest buyers of the extra debt. They will simply create new money (by electronic means rather than physically printing banknotes) and use it to buy government bonds.

Given that a central bank is owned by the state, the state effectively borrows money from itself and owes it to itself. So no sovereign debt crisis.


That’s how western governments get out of the economic frying pan, but in doing so will they plunge into a political fire?

The radical Left — excluded from power across the West — sees an opportunity here. In fact, it believes that it is on the brink of a historic breakthrough. We were told that there is no “magic money tree” to pay for the lavish spending plans of politicians like Jeremy Corbyn and Bernie Sanders. So how will voters react when neoliberal governments admit that these arborial wonders do exist after all?

If the limits on what a government can borrow are much looser than what we’ve been previously led to believe then the political implications are profound. This is how Thomas Fazi puts it in his recent article for UnHerd:

“All the pain, suffering and misery imposed on millions of people as a result of austerity was entirely a political choice. All the cries of “How are you going to pay for that?” were simply a way to maintain the deeply unequal relations of power in our societies. To dramatically restrict our ability to imagine economic and political alternatives. But “all of these excuses that we have been given as to why we cannot treat people humanely have suddenly gone up in smoke”, as Alexandria Ocasio-Cortez said. If money can be created out of thin air to fight a ‘ war’ against a deadly virus, doesn’t it follow that the same can be done to ‘ wage war’ on poverty, unemployment, inequality, ecological collapse – all of which are much deadlier evils than Covid-19.”

It’s a powerful argument. All the more so because unlike many of his fellow radicals Fazi recognises that the EU is an institutional roadblock to the new economics and new politics he believes in. In particular the Eurozone and European Central Bank mean that member states no longer control their own currencies — and thus can’t monetise their debt without the say so of the other member states (and some countries, like Germany and The Netherlands, aren’t keen).

But though he makes a compelling case, I don’t agree with his conclusions.

Let’s start with austerity. I’m not going to defend the entirety of UK economic policy since 2010. In particular, I think the early decision to stick to the plans of the previous Labour government and slash capital expenditure was one of the great policy mistakes of the 21st century. To cut investment in vital infrastructure doesn’t save anything at all, it just runs up a different kind of debt — while depriving an ailing economy of much-needed stimulus.

But that doesn’t mean we should finance big increases in current expenditure and/or tax cuts through even more borrowing. Think what a no-holds-barred borrow-and-spend economic policy actually means: even if the government in question is impeccably socialist, it becomes utterly dependent on the international money markets.

Those markets have a habit of punishing fiscally unrestrained governments, by charging them higher rates of interest, in effect making further borrowing unaffordable — and even provoking a sovereign debt crisis. Britain in 2010, with its crisis-hit financial sector and depleting North Sea oil reserves, was especially vulnerable.

OK, but what if the UK government had monetised its debt instead — borrowing from the Bank of England not the money markets? If this is what’s going to happen in 2020, why didn’t we do it in 2010? The answer is that if we had, Sterling would have crashed in value sending the price of imports surging upwards and causing an inflation crisis. Interest rates would have surged too, meaning mass mortgage defaults, bankruptcy and unemployment.

Now is different because monetisation, if it happens, will happen in many countries not just one. If they monetise their debt to a roughly equal extent, then their currency values, relative to one another, will stay roughly the same.

That’s why we got away with quantitative easing (QE) when we first started using it, in the wake of the global financial crisis. Though it was a novelty back then, Britain was in the same boat as other countries.


Quantitative easing, by the way, can be seen as a dress rehearsal for the kind of debt monetisation that’s on the cards now. So, a quick word about how it works (or is supposed to):

First of all, the central bank magics up some new money and uses it to buy government bonds. However, in the case of QE these are previously issued bonds purchased from the money markets, not new debt purchased directly from the government. That’s because the objective isn’t to finance government spending, but to stimulate the economy.

By taking a load of bonds off the market, thus reducing their supply, the government can get away with selling new bonds that offer a lower return. Not only does this cut the cost of public borrowing, it also encourages the money markets to lend to businesses because the return they get from lending to the state is so slim.

Furthermore, QE is supposed to be a temporary measure. As soon as the economy picks up again, the central bank not only stops with the QE, it reverses (or “unwinds”) the QE it’s already done — i.e. it sells the bonds it bought back to the market and destroys the money it gets for them. In other words, the money it created out of nothing (see above) is returned to nothing and everything goes back to normal.

Or at least that’s the theory. In practice, QE has not been unwound. All or most of the money that central banks have created since the Global Financial Crisis (£645 billion in the UK alone, and trillions worldwide) is still out there in the economy. And yet it hasn’t caused the inflation that a lot of economists expected.

As for all those bonds that were purchased through QE, the central banks are still sitting on them. The Bank of England, for instance, now owns a third of the UK’s national debt. It’s all deeply weird, but now accepted as the new normal.

So, having got away with permanent QE — and faced with the urgent need to stop the Corona-crisis turning into a global depression, why not do debt monetisation directly and honestly — the central banks openly creating money to finance emergency government spending?

Indeed, why stop at a one-off response to the current crisis? Why not make this a permanent arrangement — and finance the anti-austerity policies favoured by Corbyn et al. It could be argued that Labour’s 2019 manifesto, far from being too radical, was in fact overly cautious. If there’s no effective limit to government spending, why not embrace some truly radical policies — like universal basic income (as advocated by the Pope this Easter) or a full-on Green New Deal to stop climate change in its tracks?


The most obvious objection is that even if sovereign governments can create as much money as they like out of thin air, the same method doesn’t work with the things that money buys.

Whether it’s energy, raw materials, machinery, goods, services or people’s time — we still live in a world of scarcity. One can certainly argue that neoliberal economics has left the economy short of demand, but the supply of most of the things we want and need is finite. If you give government the power to create unlimited demand, then supply will be overstretched and hyper-inflation will result.

The advocates of Modern Monetary Theory (MMT) have an answer to that. This new school of economic thought argues that central banks should create all the money that governments need to spend, and that the tax system should be used to remove enough money from circulation to keep prices stable.

Modern Monetary Theorists, therefore, want to turn conventional economic policy on its head. Instead of using fiscal policy (e.g. tax) to raise revenues and monetary policy (e.g. interest rates) to control inflation, it would be the other way round.

The great advantage of this topsy-turvy system is that governments would always have enough money to fund their plans (within the constraints of what the economy can produce). It should also be a lot easier to ensure enough demand in the economy to head off the threat of deflation — which has been more of a danger over the 2010s than inflation.

The big problem with Modern Monetary Theory is that it’s just that — a theory. It proposes a radically different way of managing the economy that’s never been tried before. If we tried it now, we could easily miscalculate and send prices spiralling.

Mind you, that’s what they said about QE — and we still went ahead with that.


If the coronavirus does force us through the MMT looking glass — and if it doesn’t blow up the economy (two very big ifs) — is there any objection to Thomas Fazi’s argument?

Yes — and it’s precisely the thing that the radical Left most likes about this brave new world: it would give government unprecedented power.

The modern state already has a monopoly on the use of violence. By and large that’s a good thing , ensuring law and order. Yet tyrants throughout history have turned it against the people. The ability of free societies to constrain that power has been hard fought.

The reason why that struggle was won isn’t just down to the courage of those that fought for it — or to their sources of ideological inspiration. It is also thanks to the fact that governments depend on their people for money. As soon as rulers can’t enslave the ruled anymore — or make us their serfs — they have to persuade us, bargain with us, make concessions to us.

And so, step-by-step, our rights have advanced. Sure, things like education and urbanisation have also helped to solidify the power of the people — but ultimately it comes down to the fact that our leaders need our money, and for that we’ll have our say. No taxation without representation!

Indeed, it’s striking that where governments don’t rely on their people for revenue — perhaps because the economy isn’t developed enough for a modern tax system or there’s a state monopoly on the exploitation of valuable natural resources — there’s little or no democracy. Think Russia or the Middle East or much of Africa.

This is what worries me most about a state that gets its money from the central bank, not the general population. It’s what especially worries me about the idea of the state providing people with universal basic income or some equivalent system. As soon as we depend on them, the power relationship is reversed.

Democracy is what happens when the people pay the government, not the other way round.