Monday, 20 October 2008

Old fashioned Keynsianism?

This is from Liberal Consipracy: "Darling now appears to be promising a return to good old fashioned pump priming economics, in a manner of which JMK would have approved."

They also quote this: "We used to think that you could spend your way out of a recession and increase employment by cutting taxes and boosting government spending. I tell you in all candour that that option no longer exists, and in so far as it ever did exist, it only worked on each occasion since the war by injecting a bigger dose of inflation into the economy, followed by a higher level of unemployment as the next step ~ Prime minister James Callaghan, Labour Party conference speech 1976"

The problem with both approaches is that they don't control the money supply in the right way. Darling's pumping cash into the economy is fine, but where is he getting the money from? Borrowing it from whom? If he is borrowing it from banks and other financial institutions then is he increasing the money supply or simply moving it around?

If he is borrowing the money from private companies, then are they lending from their own reserves or are they creating un-backed loans? Lending from their reserves does not increase the money supply, lending by newly created loans increases the money supply, but why would you get private companies to do this when the Bank of England can do it for free?

A plan for successful restarting of the economy and for the money to be channeled into tackling the problem areas (e.g. energy and climate change) should look like:

1. The power of injecting new money into the economy should be transfered from commercial banks to the Bank of England, with commercial banks banks taking on a credit broker role for customers wanting new loans.

2. Government borrowing should be transferred to the Bank of England.

3. Electronic money should be made legal tender making its creation by anyone other than govt akin to counterfeiting.

4. The Bank of England should control the amount of money it lends to commercial banks to contract or expand the economy.

Leaving the economy in the hands of private, commercial banks has got us to where we are now. History is littered with examples of failed economies where governments have simply printed money; the above plan is not that, it is about tightening the control of the money supply.

History is about to be come littered with failed economies that have followed the commercial road to monetary policy and Iceland seems to have been first.

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