Does Angela Merkel Know Where Money Comes From?

When you create your money supply as interest-bearing debt, you basically have two options:

A:- Have more money, but also more debt.

B:- Have less debt, but also less money.

To solve a debt crisis, we would like to have an option C:- more money and less debt. Unfortunately, in the absence of the sorts of reforms Positive Money is proposing to create debt-free digital money, option C is impossible.

In a recent address to parliament, German Chancellor Angela Merkel stated that:

“Growth through structural reform is sensible, important and necessary”

whereas

“Growth through debt would throw us back to the beginning of the crisis, and that’s why we haven’t done it and won’t do it.”

Even if we accept the dogma that growth is ipso facto desirable (which I certainly don’t…) there are some pretty fundamental issues with Ms Merkel’s comments above.

Let’s look at each half of Ms Merkel’s statement. First, what is the meaning of “structural reform”? It’s basically a euphemism for the kind of austerity plan the UK government is currently following. The three-step plan goes something like this:

1:- Slash public sector funding in a misguided attempt to slow growth of the national debt.

2:- Assume that the private sector will invest to fill the gap.

3:- Don’t ask any hard questions, such as “where does the money for private sector investment come from?”

Here at Positive Money, we do our best to answer hard questions for you. More private sector money means more private sector debt (that was option A, remember?). But the private sector is already heavily indebted – much more so than the government (especially in the UK) – and so is not in a position to take on even more debt. Which means that step 2 of the government’s plan is a complete fantasy and consequently step 1 will be a painful sacrifice made in vain. The “structural reforms” described above look a lot like the IMF’s old “structural adjustments” to me. If they continue to be applied in the UK, perhaps it will start to look a lot like a third world country? I’m not sure why that’s “sensible, important and necessary”.

Now onto the second half of Ms Merkel’s statement. This is even more vexing. In rejecting “growth through debt” Ms Merkel suggests she thinks that “growth without debt” is possible. But is it? Growth requires an increase of investment – more money. Ms Merkel seems to want more money and less debt (option C). Sadly, option C is impossible without debt-free money. Does Ms Merkel understand this? If she does, why is she recommending impossible policies? If she doesn’t, it’s time she asked the hard question “Where Does Money Come From?” Now I’m no expert in the minutiae of European financial regulation – far from it. All I’m asking is this: Ms Merkel clearly knows a lot more than me about “the trees”, but is she aware of the existence of “the forest”?