Time for the Magic Money Tree

One of the great things my children tought me was that, when you are playing a game with defined rules, if the rules are not working well you change them. The meta-game of manipulating the rules is itself of value, and extends the life of the game. This has application in real life!

It seems not long since UK politicians were proclaiming that the magic money tree does not exist, and there was no alternative to austerity. Yet it turns out that it does indeed exist, and is being deployed by central banks to help governments to handle the financial crisis erupting in the wake of covid-19. Money is created, by the central bank, at the stroke of a key on a keyboard, is used to solve the problem, and may get paid back eventually. There is now no alternative to the magic money tree.Read More »

So there is a Magic Money Tree

The status quo is not working, and there is increasingly insufficient money to fund adequate public services in many countries. Let’s try a simple thought experiment.

Suppose that the Central Bank takes back control of the creation of money. Instead of most new money being created by banks as debt, it is just created centrally by the sovereign power – and then loaned at a very low rate to accredited banks to lend on to customers. Let’s call this very low rate delta. Alternatively, delta is taken as a levy on bank lending/debt creation activities – the effect is the same.

Now, if delta is small enough, I would suggest that there will be little or no effect on either bank lending or confidence in the currency. But the sum of a lot of all these small deltas can be quite large. All this money could be passed on to government and would be available either to finance public services or to provide the beginnings of a basic income – and maybe bankers would be not be quite so rich.

Of course, there would need to be adequate safeguards around delta to prevent unscrupulous use by politicians. In the UK, we know how to do such things, eg monetary policy committee.

So there is a magic money tree, after all. Of course, there are others, eg Tobin Tax on financial transactions, as mentioned in an earlier post Magic Money Trees.

Magic Money Trees

“There’s no magic money tree”

Tory general election campaign slogan.

Well there are lots of them, actually.

How about the ability of banks to create money out of thin air and charge interest on it, gaining profits in the process? Why do you think banks have the biggest buildings in towns and cities and reliably generate huge salaries, bonuses and profits? Central banks could take over all money creation, to the benefit of all. See discussion at Positive Money.Read More »