Printing money to fund deficit is the fastest way to raise rates (Adair Turner, FT)

Printing money to fund deficit is the fastest way to raise rates and there are no technical reasons for rejecting this, only the fear of breaking a taboo, writes Lord Adair Turner in Financial Times, 10th November 2014.

Orthodox theory sees helicopter money as risky. But current quantitative easing policies are at least as risky, and have produced adverse side effects. In the UK the Bank of England has bought £375bn of government bonds to try to stimulate the economy through swollen asset prices and rock-bottom interest rates. It could instead have created new money to finance a smaller one-off increase in the fiscal deficit. If it had done so, a return to normal interest rate disciplines would now be nearer.

You can read the whole article here.

Adair Turner argues we should use newly created money to finance government spending in order to increase demand without also increasing household debt.

Many responses treat this proposal as if it were a form of Zimbabwe-style economics. But there is nothing exceptional about the creation of money: new money is created every single day. As the Bank of England recently explained in their March 2014 Quarterly Bulletin:

“Whenever a bank makes a loan, it simultaneously creates a matching deposit in the borrower’s bank account, thereby creating new money.”

In 2013, banks created over £20 billion of new money through mortgage lending alone.

Where Turner’s proposal is unique is with regards to (a) who gets to create the money, and (b) how that money is used. Instead of relying on private banks to create money as they lend, the state would do so directly, through the Bank of England. And whereas the bulk of the money issued by banks is used to fuel property bubbles and financial market activity, (which only marginally boosts GDP), money creation to finance government spending would go into the real economy, immediately boosting spending and GDP. Just £10 billion created and spent in this way could have the same effect on GDP as £375 billion of Quantitative Easing. (See Sovereign Money: Paving the way for a sustainable recovery, Andrew Jackson, 2013).

Crucially, Turner’s proposal would produce economic growth that doesn’t rely on getting an over-indebted household sector to borrow even more.

Parliament will hold a backbench debate into the topic of ‘money creation and society’ next Thursday 20th November. It will be the first time these issues have been addressed head on in the House in 170 years. Turner’s contribution to this public debate is invaluable.