Politicians (of all parties) are woefully ignorant about where money comes from, according to this new poll commissioned by Positive Money.
There really is, in fact, a ‘’magic money tree”,’ but it is in the hands of privately-owned commercial banks like Barclays. NatWest and HSBC, who create new money out of nothing whenever they make loans.
Tragically, this (un-earned) privilege is used in ways which don’t benefit – and actually harm – most of society. Over 80 percent of new bank lending is directed towards property and financial markets, pushing up the value of assets like houses, shares, and corporate bonds. . This is making housing unaffordable, increasing inequality, and resulting in more and more people being crippled by debt.
In order to address the problems of rising inequality, the housing crisis and record levels of personal debt, MPs surely need to grasp the basics of how the economy works…..don’t they ?
How the actual magic money tree works
Guardian article by Zoe Williams.
How is money created ? Some is created by the state, but usually in a financial emergency. For instance, the crash gave rise to quantitative easing – money pumped directly into the economy by the government. The vast majority of money (97%) comes into being when a commercial bank makes a loan. Meanwhile, 27% of bank lending goes to other financial corporations; 50% to mortgages (mainly on existing residential property); 8% to high-cost credit (including overdrafts and credit cards); and just 15% to non-financial corporates, that is, the productive economy.
What’s wrong with that ? On the corporate financial side, bank-lending inflates asset prices, which concentrates wealth in the hands of the wealthy. On the mortgage side, house prices rise to meet the amount the lender is prepared to lend, rather than being moored to wages. The lender benefits enormously from larger mortgages and longer periods of indebtedness; the homeowner benefits slightly from a bigger asset, but obviously spends longer in debt servitude; the renter loses out completely.
Is there a magic money tree ? All money comes from a magic tree, in the sense that money is spirited from thin air. There is no gold standard. Banks do not work to a money-multiplier model, where they extend loans as a multiple of the deposits they already hold. Money is created on faith alone, whether that is faith in ever-increasing housing prices or any other given investment. This does not mean that creation is risk-free: any government could create too much and spawn hyper-inflation. Any commercial bank could create too much and generate over-indebtedness in the private economy, which is what has happened. But it does mean that money has no innate value, it is simply a marker of trust between a lender and a borrower. So it is the ultimate democratic resource. The argument marshalled against social investment such as education, welfare and public services, that it is unaffordable because there is no magic money tree, is nonsensical. It all comes from the tree; the real question is, who is in charge of the tree ?
What could we do instead ? We could do QE for the people, overt monetary financing in which a government creates money for social benefit, such as green infrastructure or education. Or helicopter money, a central bank distributing it to everyone, either in a one-off citizen’s dividend or a regular citizen’s basic income. The nature of centrally created money should itself be opened up for debate, whose starting point is: if we agree that commercially created money is skewing the economy, can we then agree that it should be created by a public authority, even if we don’t yet know what that authority would look like.
A FEW QUOTES ON BANKING : https://mpbondblog.wordpress.com/2014/01/10/a-few-qoutes-on-banking/