2007 - 2021

Britains Corona Banking

THE big economic news is that the UK government has decided to fund itself simply by printing money – just like Mugabe did in Zimbabwe, or in the Weimar Republic in the 1920s, or in Venezuela today.  Excuse: The Treasury’s need to pay the bills for the Covid-19 lockdown.  Given that Tory ideologues such as John Redwood MP have been queuing up to denounce the Maduro regime in Caracas for printing money – US sanctions forbid anyone to lend to cash-strapped Venezuela – it is mega hypocritical for the Conservative right to do the same thing.
Technically, what has happened is that the state-owned Bank of England (with its bogus “independence”) has agreed to provide unlimited “overdraft” facilities to the UK Treasury using its so-called “ways and means” facility. The UK keeps its cash at the Bank of England and pays its day-to-day bills using this account.  But like any business, the Treasury can find itself short at the end of the working day, especially as tax receipts arrive in an uneven fashion. So, again like an ordinary business, the Bank of England provides an overdraft facility.  Normally, this is used only to ensure that, at the end of a day’s activity, the Government is never overdrawn.
Where does the Bank of England get its cash?  Simple: it invents it.  Technically, money in circulation (whether cash or electronic) is simply an I.O.U. from the Bank of England.  These I.O.U.s have value because… er, we accept them.  Actually, they have no intrinsic worth at all. It’s all an illusion based on the political stability of the regime.  That’s why we have a monarchy – to provide the hocus pocus to make folk think there is something concrete supporting these monetary illusions.  It is also why we have police, an army and a secret service to maintain order and property relations, if ordinary people start seeing through the illusion.
To repeat: The Bank of England makes up the money it lends to the Treasury through the ways and means overdraft facility.  In normal times, the amount the Bank “lends” in this way is limited (!) to a few hundred millions of pounds, so as not to draw too much attention to the game.  To complete this charade, the Bank of England actually charges the Treasury interest. That’s right, it makes up money, lends it to the Government, then gets it back with interest – paid by your taxes. Of course, the Bank of England is owned by the state, so the money stays in the family.
So why bother with borrowing money, in the ordinary way, through the Treasury selling bonds? Indeed, why bother with taxes if you can just print cash?
The answer is inflation – or its runaway version called hyperinflation. During the Weimar Republic in Germany, a loaf that cost 160 Marks at the end of 1922 was costing 200,000,000,000 Marks by late 1923.  During Zimbabwe’s peak month of inflation in 2008, the annual rate of inflation hit 90 sextillion per cent.  In Venezuela last year, price inflation was around 10,000%.  Reason: if you print too much cash, demand outstrips supply, and prices skyrocket.  Only the most hard-up and desperate governments print too much cash, triggering hyperinflation.  Because hyperinflation usually ends up with people abandoning the use of money and returning to barter.
Of course, the UK is not in that situation. City finance capital prefers that its client Tory (and Labour) administrations borrow in the normal fashion, so it can make profits from the lending.  Since 2010, the Tories have doubled the UK national debt and paid the interest on it from taxation – hence the need to impose austerity and cut public services, as a way of finding the dosh.
However, the coronavirus crisis has changed things dramatically.  With the economy in virtual cold storage, wages have to be paid and companies bailed out.  The banks are frightened to lend in these circumstances, in case they don’t get their money back.  So, the state has to step in and “guarantee” bank loans, pay wages and bailout industry.  Which is why the Bank of England is printing money.
Will we get hyperinflation like Venezuela? Unlikely, otherwise the Government would not risk going down this road.  The reality is that inflation has virtually disappeared in the big, Western industrial countries.  Why?  Global capitalism has over-invested during the past two decades, with the result that there is massive spare industrial capacity.  Any increase in demand can be met easily.  As a result, prices are depressed, and inflation has virtually disappeared.
Of course, if the coronavirus leads to a massive global recession, with firms going bust on a huge scale, then this industrial overcapacity might disappear, and inflation return.  But there’s no sign of that, as yet.  Which means the Tory Government thinks it is safe to print money to finance the virus emergency – at least for now.
Conclusion #1: Brexit is involved here.  The EU bans its member states from financing themselves by printing money.  The reason is pressure from Germany.  The German bourgeoisie – a century on – still remember the Weimar hyperinflation, which bankrupted the middle class and led to the rise of Nazism.  So, the UK would have found it difficult to start printing money on a major scale – in the jargon, “monetise the deficit” – if it was still a formal member.  I mention this because anyone who thinks the coronavirus crisis is going to delay or reverse Brexit is deeply mistaken.  The Tories have effectively turned their backs on Europe when they resorted to the printing press.
Conclusion #2: It is interesting to speculate whether the previous, anti-Brexit boss of the Bank of England, Mark Carney, would have been so ready to acquiesce to the Treasury demand to printing money.  Probably not.  However, the new BoE Governor, the pusillanimous Andrew Bailey, was clearly appointed by Boris Johnson and Sajid Javid (remember him?) because he would do as he was told.  The idea that the Bank of England is politically independent of the Tory Government has now been proved a nonsense.  We should remember this when an independent Scotland is creating its own central bank.
Conclusion #3: We should not rush to thinking that an independent Scotland could or should replicate monetising its public deficit, except in a dire emergency.  For starters, if the state simply prints cash for spending, it commands resources that would otherwise be bought by you and me (which makes us poorer).  In other words, it acts as a kind of hidden tax. I’d prefer to keep taxes out in the open, thank you. Indeed, I sense the Tories are resorting to the monetary printing press in order to avoid charging higher taxes up front – at least for now.  There are other, and better ways, of funding public spending in an indy Scotland.
Conclusion #4: hate to drag this up again, but can you imagine the situation an independent Scotland would be in if it had kept using sterling (pace the SNP Growth Commission)?  The English Treasury could now be printing pounds and using them to buy Scottish resources … for free.

Comments (18)

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  1. Mary MacCallum Sullivan says:

    ‘massive spare industrial capacity’ – this you will have to explain to me. Please?

    1. Black Rab says:

      I was just about to ask the same thing Mary.

  2. Alister Rutherford says:

    This has little to do with Brexit, despite Mr Kerevan’s glee to bring it into everything. Brexit has happened, just to remind MR Kerevan. There is no way it can be delayed or even reversed. What would be sensible would be for the U.K. to agree to an extension of the transition period. So sensible that may be beyond this government.

    1. Me Bungo Pony says:

      George Kerevan wrote:
      “I mention this because anyone who thinks the coronavirus crisis is going to delay or reverse Brexit is deeply mistaken”.

      He agrees with you Mr Rutherford.

  3. Malcolm Reavell says:

    “Zimbabwe, .. Weimar, .. Venezuela” … did not print money and cause hyperinflation. The causes of inflation are manifold and “printing money” is not one of them. The printing of the money only happens after the fact. What does cause hyperinflation? A collapse in productive capacity, large foreign denominated debt (not sovereign debt), unemployment, civil war/ unrest/ regime change. Pick a combination of any three. “Printing money” is a fairy story.

    I recommend you all look at this genuine explanation of hyperinflation: https://www.forbes.com/sites/johntharvey/2011/05/14/money-growth-does-not-cause-inflation/#95e693b42f58 and this paper on all world hyperinflations: https://www.cato.org/publications/working-paper/world-hyperinflations. Surprisingly in several of the cases of hyperinflation examined in that paper, the currency in question was not issued (“printed”) by the country experiencing the hyperinflation. You might also want to check out this explanation of hyperinflation NOT being caused by money growth: https://evonomics.com/moneysupply/.

    What does NOT cause inflation? Normal domestic deficit spending in the sovereign currency. To cause hyperinflation you need to have a combination of the factors above, and it has to happen over a period of time, and th

    “The UK keeps its cash at the Bank of England and pays its day-to-day bills using this account.” No, it doesn’t. There is no cash in the Ways and Means account. It is not in kept credit. Normal day-to-day expenditure and revenue is managed through the Consolidated Account at the Bank of England.

    The Ways and Means Account is an asset of the Bank of England issue department. The Bank of England banking department will fund government expenditure in excess of tax and debt sales. That sum will be offset by a ledger entry in the Ways and Means account. The Bank of England banking department then credits the payees account. When this liability is not offset by tax revenue or Debt Management Office cash management operations then it is offset by asset entry in Ways and Means account held in the Bank of England issue department.

    When the Bank of England issues money, either reserves or notes it wants a corresponding asset on its balance sheet. Most often this is gilts or Treasury bills. The Ways and Means account is officially another form of government security which only the Bank can hold. So when it issues money on HM Treasury’s request it marks up the Ways and Means account as an automatically adjusting Treasury security.

    Sounds complex? Yes it’s intended to so that people don’t understand how a government is actually self-financing, and how our monetary system really works. The UK Government is a monetarily sovereign currency issuer. It has the power to issue as much £ as it needs. It can never run out of £, it can never be forced to default on its sovereign debt, and it can never go bust. Ever. The same is true of the USA, Japan, China, Australia. It is NOT true of the Eurozone countries. Their currency really does have to be traded for, taxed, and borrowed to fund their governments. The Euro is not issued by any one state, it is issued by the ECB. Eurozone countries are not currency sovereign.

    “City finance capital prefers that its client Tory (and Labour) administrations borrow in the normal fashion, so it can make profits from the lending.”
    City finance is not in charge. The government only sells debt to the markets because the markets want safe investments. It’s a form of corporate welfare, yes, but it also provides somewhere safe for our private pension finds to put their money.

    Borrowing is not needed – the fact that the government can create currency ex nihilo has proved that. And it carried no risk of default or repayment because it is internal – owed only to itself. In fact that is how our money system works in normal times. It’s just that the current crisis has exposed the lies we’ve been told all along of fiscal constraint on government spending.

    “Since 2010, the Tories have doubled the UK national debt and paid the interest on it from taxation – hence the need to impose austerity and cut public services, as a way of finding the dosh.”
    Complete nonsense I’m sorry to say. The “national debt” is nothing more than the currency our government has created and spent into the economy and not yet been taxed back. (taxation is the opposite of spending. Government spending is the act of money creation. Taxation is the reverse – it destroys money). The interest paid on the “national debt” it is not funded by tax revenue in the same way the original creation of the currency was not. There is no “burden on the taxpayer”. It’s all a myth to make us think we cannot have nice things. We can, and they are not funded by “the taxpayer”.

    All money is debt. In order to have a credit balance in your account, by the international accounting convention called double entry bookkeeping, there has to be a matching debit balance somewhere else. It is impossible in our money system for a net financial asset to exist in a vacuum. There must always be a net financial liability somewhere. If the people in this country all want to hold savings, have money to spend, pay the bills, businesses need money to pay wages and suppliers, the only way that the private sector gets this money abd enjoy a net surplus is if the government is willing to sustain a net deficit position. And it can do. Indefinitely. We, as currency users cannot do that. Only a currency issuer can sustain a net deficit position indefinitely and not run out of money or go bust. The “national debt” ? it is the net financial liability that is equal to the penny, to the private sector surplus.

    But how much debt can the government sustain? The size of the deficit is not important. The things it has been spent on is. What it is spent on is policy choice. Not spending is also a policy choice. Austerity is a policy choice. There is NO economic case for austerity in the UK. It is absolute nonsense.

    “the Bank of England is owned by the state”
    Correct. It is not independent. The Banking Act 1998 clarifies this and states that the government can instruct the BoE to do its bidding if it wants, as it is doing now.

    “if the state simply prints cash for spending, it commands resources that would otherwise be bought by you and me (which makes us poorer).”
    This is the theory of ‘crowding out’. It is nonsense. As long as there is spare capacity in the economy and there is unemployed labour and resources then there’s no way this will happen. Given the situation at present, we are far from government crowding out private sector employment of resources. In fact the unemployment situation would benefit from something like a national Job Guarantee scheme to provision the country with necessary resources and services.

    This is all I have time for. If you’ve read this far you might like to pop across to this Facebook page for more information on how economics really works.: https://www.facebook.com/groups/1466864300089196/?ref=group_header

    1. Bill Ramsay says:

      “The Euro is not issued by any one state“
      Germany surely?

    2. Me Bungo Pony says:

      If you ask 100 economists for advice, you’ll get 100 different answers …. all of them wrong. Reading stuff like this makes me despair of the dismal science. They all believe they are right while the others are idiots and everything is both simple and extremely complex with nothing being what it patently appears to be. Is it any wonder people switch off? It’s either that or be woken from involuntary slumber by the pain of your head hitting the desk in front of you.

  4. Paul Codd says:

    “…if the state simply prints cash for spending, it commands resources that would otherwise be bought by you and me (which makes us poorer). In other words, it acts as a kind of hidden tax. I’d prefer to keep taxes out in the open”.

    Well said George. The Bank of England always has printed money. Under normal circumstances precisely 3% of all GBP is printed into existence by BoE, the notes and coins in our piggy banks. The rest of our money, which is mostly digital 1s and 0s in bank accounts, known by economists as “M4”, is printed into circulation by private banks.

    The hidden tax always was there, even when Teresa May promised there was “no magic money tree”. However private banks have vastly slowed down this process of money printing as a result of not having appetite to issue new loans. Perhaps BoE should simply take up the slack and make a larger share than 3% of our pounds sterling?

    Everyone always brings up Weimar republic, Argentina, Zimbabwe, Venezuela and other failed states in relation to money printing. That is because state money printing means an end to the banking gravy train and brings heavy sanctions from IMF, global finance, and the governments under their control (like UK, USA, and EU) so only those who already have nothing to loose are able to consider it. Each of the 4 countries mentioned were also stricken with malignant corruption and deep structural problems in politics and industry. While you could argue the UK is no different, it is several logarithmic orders of magnitude better than those countries were at their worst. We can’t afford not to, and private banks are rightly abdicating responsibility. So perhaps this is an experiment that could be used for good.

    Why not bail out people and the real economy with bold moves like Universal Basic Income and a Green New Deal? If the real economy is in a good position to recover quickly and later thrive, eventually even the blood sucking parasites in the City will be better off. If the host dies, the parasites will too. Because of its global nature, the only safe haven is a speedy, peaceful and graceful transition to the new world we are birthing. The absolute best way to mitigate systemic risk now is to make sure no-one goes hungry, everyone gets a basic dignified guaranteed income. We’re in this together, and money is the best technology we have to keep the real economy on life support while that’s required, and also to get it moving again as we come out of the pandemic.

  5. Bignose says:

    I’d love to hear about the alternative, better way to deal with the current crisis Mr Kerevan. You’re right, the bill will have to be paid in the long term but I don’t see the short-term magic money tree myself. You spend a lot of time telling us how the approach is bad, and make vague statements about how an Independent Scotland shouldn’t follow this route but your proposed solution is conspicuous by its absence.

    1. Bill Ramsay says:

      “don’t see the short-term magic money tree myself.”
      Try the US Treasury’s response the the Imperial Japanese Navy’s attack on Pearl Harbour.
      Amongst other things it led to the creation of the American Middle Class’

  6. John M Bryden says:

    I like your piece George Kerewan! It also has the merit as agreeing with my own analysis!

  7. Paul McMillan says:

    So what currency would an ‘independant’ Scotland (that is still in the EU so not independant in any way) use?
    £, €, grotes, barter?
    Please clarify.

    1. Julian Smith says:

      None of these. A Scottish currency – name to be chosen after wide consultation with the people who will be using it; I.e. people who live in Scotland.

    2. Me Bungo Pony says:

      A comment so redolent of the “cringe” you can’t help imagining the author curled up in a dark corner, out of the way, lest his mere presence offends his “betters”.

      1. Bignose says:

        When they come looking for a perfect example of an ad hominem argument, we’ll know to come back and ask for you, Me Bungo Pony. Thank you for contributing.

        1. Me Bungo Pony says:

          Ad Hominem: “of an argument or reaction directed against a person rather than the position they are maintaining”.

          My comment was very much directed against the position that Mr McMillan maintained. The time for addressing such puerile, disingenuous questions with reason and respect is long past. If Mr McMillan wants a reasoned, respectful response then he should ask a reasoned and respectful question. “Grotes” …. “Barter” …. really????

  8. SleepingDog says:

    On Conclusion #3, what is the effect of state money-printing on virtual, say digital goods or services that cannot be commandeered in the same way as physical ones? What would happen if the government sought to fend off rebellion/nationwide cabin fever by buying us all subscriptions to the new Disney channel, or whatever?

  9. The Over Extended Phenotype says:

    16.8 million unemployed in US – in last 3 weeks.

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