The FT Says It’s Time for the Bank of England to Start Direct Funding of the Government: Modern Monetary Theory Has Won the Day

Yves here. One of the big differences between the UK and the US after the crisis was that the Bank of England under Mervyn King (along with Adair Turner at the FSA) was openly critical of the banks and attempted to break them up, but was thwarted by the Treasury. The Bank has also gone so far as to publish primers that support Modern Monetary Theory notions. So it may not be as big an intellectual leap in the UK to embrace Modern Monetary Theory as it is in the Peterson Institute/CBO/deficit-scold-addled US.

But having the central bank fund the government is a bit too straightforward for this Administration. Having the Fed create over $4 trillion of lending power via unaccountable special purpose vehicle serves their looting aims much better than the transparency of direct Federal spending.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

The FT is continuing to face reality as it considers what to do in the face of the coronavirus crisis. It has an editorial today that concludes:

The scale of today’s downturn means even the most direct monetary financing, such as “helicopter money”, or handing cash to the public, should remain an option.

That’s pretty radical, and I rather strongly suspect suggests that this editorial reflects the views of Martin Wolf, who has always had sympathy with helicopter money, when I have had my doubts, believing it for government to manage our social safety net.

Rather more importantly, they go out of their way to make clear that they support direct monetary funding (DMF) of the government by its central bank. As they say:

There is no clear distinction between quantitative easing and monetary financing.

They clarify this by suggesting that the only obvious difference is whether unwinding is possible, or not. But as they then note, the original national ‘debt’ of 1694 was not unwound. Nor has any UK QE been unwound, and the idea that very much of that now in existence in the world might be unwound  is now ludicrous: the capacity to do so simply does not exist. Most QE is DMF already.

So the risk in new DMF is not really messaging, which they think was Andrew Bailey’s concern in his bizarre article that I noted yesterday. Rather, they think that the risk might be inflation. As they note:

Without limits, allowing a government to finance itself by creating money can lead to hyperinflation. But these risks can be manageable: the quantitative easing of the past decade, despite predictions, has not lifted inflation above the main central banks’ 2 per cent targets. The money pumped into rich-world economies has been met by increased demand, perhaps permanently, for precautionary saving.

Private wealth has, in other words, been increased. That, of course , was not the aim, and needs countering now with weaklth taxes. But in any case, as they also note:

If trends restraining inflation go into reverse, central bankers have tools to combat rising prices, whether through raising interest rates or unwinding QE. The present crisis may even be deflationary and central banks’ targets are, with the exception of the European Central Bank, symmetric in promising to tackle inflation that is both below and above their stated goal.

I think the note about deflation particularly apt: I really fear the likelihood of this right now.

So, is direct money funding (‘money printing’ in common parlance) on the FT’s agenda right now? It definitely is. As it should be on the Bank of England’s agenda. Our economy is going to need all the help it can get for a long time to come. I am talking years here. The availability of money is the last thing that should constrain it.

I hate to say it, but my 2015 prediction that this would be required by 2020 has been proved to be right. Modern monetary theory and People’s QE have won the day.

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  1. Ignacio

    I have always had respect for Mervyn King. I would like UK readers to chime in but he looks to be one that sticks to good intellectual traditions in the UK as if he was the Governor of a Royal Society.

  2. notabanktoadie

    They clarify this by suggesting that the only obvious difference is whether unwinding is possible, or not. Richard Murphy

    Of course unwinding is possible even with direct monetary finance (DMF) – via negative interest.

    The problem is that the non-rich cannot currently be shielded from negative interest except by using grubby physical fiat, coins and Central Bank Notes.

    So, that too is a needed reform – allowing all citizens to have inherently risk-free accounts at the Central Bank itself where they can be shielded from negative interest to a reasonable account limit.

  3. James E Keenan

    We should note, however, that in his blog post today Richard Murphy excoriates the current governor of the Bank of England, Andrew Bailey. Murphy quotes Bailey:

    The BoE will not hesitate to take all necessary actions both to support British businesses and households through this period of uncertainty and to ensure inflation is consistent with the 2 per cent target in the medium term.

    About which Murphy comments:

    In other words, the Bank will help just so long as the neoliberal thinking that establishes the priority of stable money to preserve the value of debts owing to the wealthy is not prejudiced.

    So while the Bank of England has somewhat acknowledged its money-creating capacity, it’s still framing its thinking in the Phillips-curve-style neoliberalism which MMT critiques.

    1. Susan the other

      Thank you for RM’s quote “In other words … ” So let’s add the quote from above when RM says it is absurd to try to propose to unwind debt because it cannot be unwound. Much like time cannot be unwound? RM says the capacity to unwind debt “Does not exist.” Not even with negative interest rates because that just winds up time in the opposite direction – no? Time is the important thing here. DMF is the only way forward without creating an economic quagmire. The best argument is don’t do it if you can’t fix it. (don’t create debt for profit in the first place).

    2. Colonel Smithers

      Thank you, James.

      I worked with Bailey a decade ago and caught up with him last summer. He’s affable, but an establishment bootlicker, if truth be told. He should not be governor, but was owed a favour and the Saj prevailed over Magic Johnson when Dominic Cummings championed free thinker Andy Haldane, who I have also worked with.

      One hopes Harry chimes in as he’s ex BoE and would have worked with not just Bailey, but Health Secretary Matt Hancock, private secretary to deputy governor Paul Tucker, and Labour spokeswoman Rachel Reeves.

  4. Jeff Ewener

    Yves and Lambert and everyone,

    It’s always dicey to criticize an article based on the impression created by its headline. But still.

    Modern Monetary Theory (MMT) was preceded by a long, long lead by Modern Monetary Practice (MMP? Can I start this?).

    The oligarchs have never had a moment’s hesitation about the government printing money to give to THEM. And our ideologues in the “economics” faculties and their transmission vectors in the media have never mumbled a word of criticism about it.

    It’s only when the government might give away money that they can’t get at that (we are told) the pillars of civilization get a-rockin’.

    Like most things in the politics of a class society, the WHAT is much less important than the WHOM – to whom, from whom, for whom.

    Stay safe and strong as ever, people,
    Jeff Ewener
    Alcamo, Sicily

  5. Andrew Thomas

    I’m afraid that, at least in the USA, we will have DMF as soon as we get a NHS, a fully-funded, intact version of which has also won the day. If Lambert is right about the pitchforks coming down from the haylofts, maybe. And, when we all are staring at the National Guard and militarized police, and they get the command to fire away, they don’t. A big ask, but it can happen. As the TR captain showed.

  6. Sound of the Suburbs

    Suddenly they have to spend, and the myth is exposed.
    It happened during WW2, but they somehow manage to hide everything that was learned before and we have to find it out again.

    What did they know in the 1940s?
    In the paper from 1943 you can see …..
    They knew Government debt and deficits weren’t a problem as they had seen the massive Government debt and deficits of WW2. (Mario seems to have suddenly remembered)
    They knew full employment was feasible as they had seen it in WW2.
    After WW2 Governments aimed to create full employment as policymakers knew it could be done and actually maximised wealth creation in the economy.
    Why don’t the business community like it?
    Really it’s just about control and they want to be in control, you can read the 1943 paper for more details.

    In 1943, Kalecki even foresaw the problems that full employment would bring.
    But, at that time, policymakers were only too aware of the problems unemployment and economic hardship had brought in the 1930s. (The sort of problems austerity produced recently)
    These were the problems they were looking to solve.
    The problems of full employment wouldn’t materialise until the 1970s.

  7. Colonel Smithers

    Thank you, Yves.

    There was a good discussion about this, including having private individual access to the BoE, this morning. As you may expect, my former bankster lobbyist colleagues are on the case, heading it off at the pass. The left has yet to mobilise, sadly.

  8. Howard Switzer

    Indeed, Modern Money, that is; a privately owned system creating money as debt for private profit, is winning the day but then they’ve won all the days before as well so no surprise nor celebration warranted. Americans seem to be best at self delusional theories to make themselves feel good as private power steers their government and economy into the Sea of Debt.

  9. Mikel

    “Private wealth has, in other words, been increased. That, of course , was not the aim, and needs countering now with wealth taxes.”

    So not having hyperinflation includes more taxes on wealth? Every crisis for around 40 years has been taken advantage of to lower taxes. This one is supposed to be the crisis that reverses this?
    Good luck, to all!

  10. RBHoughton

    All sounds very convivial but no mention of extending banking from the high street behemoths to the old variety of banks – trust banks, municipal banks, Post Office banks, Savings banks, the Co-op. Banking choice, with a full range of services, is a feature of a free and vibrant economy

  11. Oregoncharles

    “Private wealth has, in other words, been increased. That, of course , was not the aim”

    Really? Little spot of naivete, there.

  12. K teh

    they just told you that all high risk patient deaths with accompanying virus are tallied as virus. at some point, there is going to be a comparison to total deaths previous. then its going to get ugly.

    you might want to get that last one pulled back from the moderators. You are going to need it.

    build a floating gantt chart to get a working model.

    Best wishes,


  13. rob

    ” the bank”, went to far as to publish primers that support MMT notions?.. That says it right there.. it would be akin to the FED “letting people know”…. they can create money for them at will….
    You mean the central bank is OK with the people knowing they can get a little piece of something…. Sounds like a marketing campaign.
    Too bad they what they are selling is the ability for the public to get “money made from nothing”… While the group that makes it from nothing.. gets the interest on the debt they created when they made that money FOR the public; from nothing.
    That is why banks would LOVE for people to get primers on MMT… IT DOESN’T tell them the reality… THAT the “PUBLIC”, could have money made from “nothing” WITHOUT the debt owed to bankers…. if they just changed the LAW.
    IN the US, It is the federal reserve act, that REQUIRES the banks to make the money, and allows the debt to be assigned to “the PUBLIC”, ie debt.
    As opposed to a more rational national objective, wherein the FED BELONGS to the treasury, and all functions of fed, are done BY the treasury, and NO debt need be assigned to the PUBLIC.This would require a change in THE LAW>>>
    My guess is the central banks WON’T be printing “primers” , on that idea.

  14. Chauncey Gardiner

    Yves’ comment in the intro was spot on:

    “… But having the central bank fund the government is a bit too straightforward for this Administration. Having the Fed create over $4 trillion of lending power via unaccountable special purpose vehicle serves their looting aims much better than the transparency of direct Federal spending.”

    And all without audits. Why?

  15. Francesco

    MMT is a plan, probably a good plan anyway, almost surely the only one possible plan now. But plans are easy, execution is key, execution is difficult, execution in bad times must also be run very very fast. A good plan poorly executed implies a much worst plan will be executed later. But a good plan perfectly executed in really bad times do also needs good luck. Will Covid-19, an unstable RNA virus come back in autumn the same as today, or we’re training him to be much harder to challenge ? We can try only once, now, and I have not a good feeling.

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