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How economic miracles are funded - is SA taking the opposite course?

Feb 17 2017 05:01
Edward Ingram and Riekie Cloete*

IF, LIKE most people, you don't know all of this - it may shock you. Governments can print as much money as they need. They never need to borrow money. And they can avoid creating inflation even if they spend more than they take in revenues. But if they try to balance their budget, that can be one of the fastest ways to slow an economy.

They will have to either:
1. Increase taxes or
2. Borrow money through the issuance of treasury stock, otherwise known as bonds/gilts.

The above actions take spending money out of an economy.

Government borrowing money from abroad is not a good idea either; it can destabilise the currency and the borrowers, and it removes money needed by others from the foreign exchange market.

The South African government does all of these things.

THE GOOD NEWS

The shocking truth is that:

  • A government can create as much money as it needs to spend, and that is in fact what happens. It doesn't have to spend tax and other revenues. It is free to destroy that money if it wants to.
  • Having banks and governments creating new money and lending or spending it wisely to enable competent people to create new jobs is what creates a booming economy. Most national  'economic miracles' have been created in that way.

How then does a government avoid creating inflation?

First, it decides how much percentage of output it wants to take from the economy. The remainder is shared by everyone else. This government share of the economy does not have to be increased in order to speed up a slowing economy.

HOW THIS WORKS

The above theory comes from Modern Monetary Theory, MMT, (1) which can be understood by watching this video of Professor Mitchell; and in more detail by reading this script from Warren Mosler, pages 13- 30.

When new jobs are created, there are more things to buy and more people with incomes to spend. The resulting larger economy needs additional spending money. If prices generally rise, more money is needed. If all that extra money is not created, the economy slows.

HOW TO BOOST ECONOMIC GROWTH

1. Make sure that the stock of money put into circulation will be rising fast enough to accommodate the potential growth of the nation's output.

2. A little extra will be needed to allow for past inflation or for ongoing inflation of prices - not too much. What causes inflation to rise is lending new money (all money lent by banks is new money) to people who are not going to use it to create more output. Remember that when those bank loans are repaid, that money goes out of circulation.

THE WAY FORWARD

Make sure that when banks lend, as much as possible goes into creating new businesses and more employment. Here's how:

An economy needs small banks with local managers with local knowledge. This is because, according to one source, 70% of the growth and employment of an economy comes from small and medium enterprises (SMEs).

As Bill Mitchell says in this video, what the larger banks do is to maximise profits by taking deposits from outlying areas and lending them to major projects in prosperous areas, or worse still, to inflationary and unproductive investments. This is counter-productive. Put the new money where it can do the most good. Employ bank managers who know what is going on around them to support local SMEs nationwide. Let them allocate the loans. It is the foundation for growth.

Governments can also create new money to spend on creating new jobs in the private sector. The employees do not necessarily have to work for the government. They can, and if government is getting too big that way, those new businesses can be sold off to the private sector. They can hire teachers or create or support businesses that send trainees to colleges and universities. Or they can spend the money to reduce taxes like VAT.

Around 5% more money needs to be created every year just to allow incomes to rise. Even more new government money is needed if people are worried and they reduce spending, save money, and pay off their loans faster without borrowing more.

The way forward then is to reduce VAT and replace the lost revenue with new money, and subsidise all other regular non-VAT spending. People then have more spending power while stocks last - until the recovery comes. Their spending continues to provide employment where it is needed.

THE SAME STORY IN PICTURES


FIG 2 - The real economy where money is saved, taxed, destroyed/removed, created, and job creating investment plays a crucial role:





(1) ACKNOWLEDGEMENT: MMT was drawn to my attention by Redge Nkosi. Many thanks. It clarifies many things.

-----------------

For more about macro-economic design and management, here are some links:

Peer reviews and background

Course website

Main research website

General equations for lending

* Edward Ingram is a leading thinker on the world stage of  macro-economic designand has written a series of essays for Fin24. Views expressed are his own. His course in Macro-economic Design and Management is revolutionary. The first module is free to the public and can be found here. The main research website which predated that can be found here.

* Riekie Cloete is an economic consultant and teacher of economics, whose current projects include work for the Swaziland Economic Policy Analysis and Research Centre and the International Labour Organisation. She writes in her personal capacity and expresses her own independent views.


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edward ingram  |  macro-economics  |  opinion

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