money does grow on trees

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The idea of printing money to solve society’s problems is understandably seen as a bad idea. Excessive spending/borrowing tends to trigger financial crises and creating money out of thin-air ultimately destroys any confidence in it. Notwithstanding, governments with their own currencies and central banks, do print money and create it digitally when it suits them and at one level, quantative easing (QE) has been practised, on pretty much an ongoing basis, since the financial crash of 2007/8. In its defence, QE is not viewed as a permanent course of action and its economic effects, interspersed with the inevitable bouts of austerity, are intended to be reversible. However, there’s a new economic kid-on-the-block and Modern Monetary Theory (MMT) is the innovative idea on the political left.

Contrary to traditional neoliberalism, MMT posits that a nation which issues its own currency can freely create and spend their own money in any way they choose and this will not necessarily lead to the inevitable devaluation of that currency, rampant inflation/hyperinflation and subsequent economic meltdown. In the MMT worldview, high public debt is viewed as a positive position and equally high public spending is undertaken without increasing taxes or borrowing. Money created under MMT guidelines is viewed as permanent and if this money is spent on public services, it is crucially not returned. Any negative impact, which advocates believe can only occur when long-term ‘full-employment’ exists, can be controlled by a progressive tax-policy.

In a little over a decade the Bank of England ‘created’ £895bn via QE and the conventional view is that this would lead to rapid inflation but, on the contrary, they’ve had to continually lower interest rates to counter deflation. Consequently, MMT is gaining traction as an appealing solution whereby governments can maintain exceptionally high levels of debt in the low-interest rate global economy. Taken to its logical extreme, a country could, for instance, create a truly green energy network, build any number of new hospitals, fund free university tuition, or rebuild its complete transport infrastructure. Whatever. Furthermore, it could create any number of guaranteed state-funded jobs for these entities and initiatives.

In the real world, Modern Monetary Theory, often derided as the Magic Money Tree, remains a radical untried, untested strategy and, whilst we may never see it being deployed in its purest form, I suspect we will witness scaled-down ‘lite’ versions in the near future. In fact, are we not already experiencing it first-hand? As the emperor of economic orthodoxy, Alan Greenspan, conceded “there’s nothing to prevent a federal government creating as much money as it wants”.