Magic Money Tree

“If we can find the money to kill people, we can find the money to help people.”

― Tony Benn

Magic Money Trees. Truth Lies and Deception.

Benn was right to ask such a question as many often do. Indeed, it is prudent to maintain a healthy scepticism when confronted with claims of insufficient public funds. As the late Tony Benn astutely observed, if resources can be allocated to destructive endeavours, then they can undoubtedly be allocated to constructive ones as well.

The question arises: why is it that we face hurdles when it comes to providing fair wage increases to doctors, nurses, teachers and civil servants?

Why do we falter in investing in the essential agencies and institutions required for a thriving 21st-century economy? And why do we not simply remove the shackles of the debt ceiling, as is done with the U.S. budget?

These quandaries expose a complex interplay of political priorities, economic ideologies, and the exercise of power.

The government’s decision-making process, heavily influenced by political considerations, often reflects choices that prioritise certain sectors or initiatives over others.

While some argue for austerity measures and limited spending, invoking the notion of scarce resources, it becomes imperative to scrutinise the underlying motives and examine whether such claims hold true.

Mark Blyth on Austerity.

Mark Blyth Quote: Spirit Level.

The kicker is that those social services that used to be state funded, will be sold off to the privatised free market.

Why should we be forced to sell off our safety net to those who crashed the economy in the first place, Is this fair? The free market very rarely creates genuine price realisation, just Ponzi growth created by monopolisation, funded by toxic banks, resulting in very little infrastructure investment.

Privatised energy and transport markets are a prime example of this here in the UK……we get completely ripped off.

Mark Blyth

It is worth noting that governments possess the ability to shape fiscal policies and make financial decisions that align with their priorities and politics.

The argument that there is a scarcity of funds should be met with scepticism, as it may conveniently serve to advance particular agendas or perpetuate the status quo.

Regarding wage increases for vital public service workers, the assertion that there is insufficient money begs the question of where societal priorities truly lie. It is a matter of choice and political will to allocate resources towards the remuneration and support of those who tirelessly serve the public.

Similarly, investing in the agencies and bodies necessary for a vibrant and prosperous economy should be seen as an investment in the nation’s future. The claim that funds are lacking obscures the potential benefits of such investments, both in terms of economic growth and societal well-being.

Funds have certainly not been lacking since the financial crash for those that caused the crash in the first place.

Quantitative easing…

The first QE programme in the UK was launched in 2009 when the financial crisis was threatening the economy, unemployment was rising and the stock markets were in freefall.

The Bank subsequently launched new rounds of QE after the eurozone debt crisis, the Brexit referendum and the coronavirus pandemic.

As for the debt ceiling, the United States has employed a practice of raising it to ensure the functioning of government operations. The Treasury Department reached its debt ceiling of $31.4 trillion in January 2023, and after months of debate, lawmakers voted in June of that year to suspend the ceiling until January 2025.

The question arises as to why similar flexibility and adaptability cannot be embraced in other contexts. It is a matter of policy and political inclination to reassess and recalibrate our approach to debt, particularly when the circumstances demand it.

In essence, we must challenge the government narrative when it portrays a scarcity of funds. By scrutinising political choices, questioning priorities, and demanding accountability, we can aspire to build a society where resources are allocated equitably and responsibly.

The potential to find the money to address pressing social needs and invest in our collective future exists. It is a matter of political courage, vision, and a genuine commitment to the well-being of the people.

It is the political will of both major parties to make this happen that doesn’t exist.

So how is money really made?

And here we are, the enigmatic concept of the “magic money tree.” Allow me to shed some light on the intricate process of money creation within a sovereign country like the United Kingdom. While it may not involve mystical foliage, it does possess a certain air of intrigue.

In a nutshell, money creation in the UK occurs through a combination of actions by both the central bank, which is the Bank of England in this case, and private commercial banks. This process revolves around the creation of new money supply in the form of digital currency.

Let us start with the central bank. The Bank of England, as the institution entrusted with maintaining monetary stability, has the authority to create money. It does so through a mechanism known as “quantitative easing” (QE).

In times of economic need or crisis, the central bank may decide to inject new money into the economy by purchasing financial assets, such as government bonds or corporate securities, from commercial banks or other financial institutions. These transactions are typically conducted electronically, resulting in the creation of new money in the accounts held by those institutions.

The purpose of such quantitative easing is to stimulate economic activity, encourage lending, and maintain price stability. By injecting money into the financial system, the central bank aims to lower interest rates, increase the availability of credit, and boost overall liquidity.

Now, let us turn our attention to commercial banks, the primary actors in money creation. When individuals, businesses, or other entities seek loans from commercial banks, these banks have the power to create new money in the process.

When a bank approves a loan, it simply credits the borrower’s account with the agreed-upon amount, effectively creating new money out of thin air. This newly created money then enters circulation and can be used for various purposes, such as investments, purchases, or debt repayments.

It is important to note that this money creation by commercial banks is not unlimited or unchecked. Banks are required to adhere to regulations and maintain sufficient reserves to support their lending activities.

The Bank of England, as the regulatory authority, sets guidelines and safeguards to ensure that banks maintain a sound financial position and mitigate risks associated with excessive money creation.

So, while the notion of a “magic money tree” may be more metaphorical than literal, the process of money creation in the UK involves a delicate interplay between the central bank’s actions through quantitative easing and the lending activities of commercial banks. This dynamic relationship shapes the money supply and plays a pivotal role in the functioning of the economy.

The Magic Money Tree

In fact, Professor Emeritus Mary Mellor, from the University of Northumbria explains how there are two Magic money trees and how money is created…

That’s right there are two magic money trees. Both the state and the banks can create money out of thin air.

States do this by having budgets. Despite the myths that have been told time and time again, states are NOT households – they run armies and banks and schools and police forces and so on. They allocate expenditure in expectation of getting an equivalent amount of money back through taxation. There is no direct connection between public expenditure and public income. There is no state piggy bank or house-keeping allowance.

Despite the claim that states ‘printing’ money is automatically inflationary, this is not the case. What matters is the relationship between state income and expenditure and the condition of the wider economy. The skill is to balance the money created with the money recovered via taxation. In any case, public deficits can be a good thing. They put fresh money into the economy that is then free to circulate.

The other magic money tree is the banking sector. Banks do not simply look after the money in people’s bank accounts and “lend it out”, they actually create money out of thin air by creating new accounts or putting new money into existing accounts – with no democratic accountability.

The neoliberal era saw a massive increase in bank lending (student, consumer, mortgage, financial speculation) with banks becoming the major source of new money in modern economies. The magic money tree of the banks is far more destabilising than the magic money tree of the state. Unlike state magic money which can be created free of debt, bank magic money always has to be repaid with interest.

This creates the dilemma that the banks always want more money back than they lend out. Where does the extra money come from? Either extra loans constantly being taken out, or ‘leakage’ of debt free money from the state, that is public deficit. In fact, the use of public money was much more direct following the 2007-8 crisis.

‘Quantitative easing’ – a fancy term for new electronic money from central banks – put billions of pounds, dollars and euros into the banking sector to stave off collapse. This and other rescue measures did little to stimulate the core economy but made a small elite very rich.

So when we are told social welfare, education, housing, health cannot be afforded because there is no magic money tree, this is a lie. New money is constantly pouring into the hands of the already rich as they gamble and speculate. Ordinary people are burdened with debt as they try to keep their heads above water.

The right of states to directly fund public services (“people’s quantitative easing”), is denied. It is falsely claimed that all new money is ‘made’ by the market sector. This is not true, money is accumulated in the market. It can only be created by states or banks. The claim that all state income comes from taxing the private sector is also false. The public sector also pays taxes – much more reliably than the private sector.

Let us have no more myths about the lack of magic money trees. They do exist – what matters is who owns and controls them. And it should be all of us.

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Indeed, to bring about meaningful change in our society, it is imperative that we reshape our perspectives on money and its utilisation. Money, in its essence, is a tool that can be wielded to shape the destiny of nations and the lives of individuals. By reevaluating our relationship with money and adopting a more holistic approach to its use, we can strive for a society that prioritises the well-being of its people and invests in the collective progress of the nation.

Simultaneously, investing in our country is vital for its long-term success. This encompasses infrastructure development, technological advancements, research and innovation, and sustainable practices. By directing resources towards these areas, we can create a solid foundation for a viable 21st-century economy that thrives in an ever-evolving global landscape.