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Magic Money – Can We Print Ourselves Rich?

20th December 2020

18.12.2020

So, as we all gear up for Christmas in what has been probably one of the most testing years for a very long time, I thought I would ‘throw’ out of few of this week’s news headlines:

  1. Biden’s victory confirmed by electoral college
  2. Barnier says Brexit deal could be agreed this week
  3. London heading for Tier 3 rules
  4. Gas boilers to be banned within 15 years
  5. Government launches crackdown on social media  

Not really a ‘slow’ news week! Let us hope we have a Brexit deal to celebrate before Christmas and a return to a new normal in 2021.  

Considering the repercussions of the Covid crisis and the huge sums borrowed by Governments around the world, I am reminded of a conversation I had with a new client a few weeks ago. As my title suggests, I wanted to share with you an alternative theory reported in ‘The Week’ publication after my client discussion (pure coincidence) to increasing taxation to pay for the vast sums borrowed.    

Thinking back to my A Level economic classes (many years ago!) I am reminded of John Maynard Keynes, the famous Economist who advocated the use of fiscal and monetary policies to mitigate the adverse effects of economic recessions and depressions. The advent of the global financial crisis of 2007-2008 sparked a resurgence in Keynesian thought. Keynesian economics provided the theoretical underpinning for economic policies undertaken in response to the financial crisis of 2007–2008 by President Barack Obama of the United States, Prime Minister Gordon Brown of the United Kingdom, and other heads of governments.  

When Time magazine included Keynes among its “Most Important People of the Century in 1999”, it stated that "his radical idea that governments should spend money they don't have may have saved capitalism. The foundation to my economics qualification can now be tested with an alternative theory.  

The New Theory – in traditional economics the idea of printing money to solve a nation’s problems is near universally seen as a bad one. By contrast, Modern Monetary Theory or MMT – proposes that nations that issue their own currencies can freely create and spend their own money; and that this is a useful economic tool, which need not devalue the currency, create inflation or lead to economic meltdown. In the MMT worldview, the established idea that high public debt is a drag on economies and a burden on future generations is turned on its head. Proponents argue that, on the contrary, private citizens and businesses tend to do better in countries running high levels of government (or fiscal) debt. Taken to its logical extreme, MMT allows high spending without taxes or borrowing – a truly radical idea sometimes derided as the ‘Magic Money Tree’.  

As we move towards the Spring budget, it will be interesting to see if Rishi will follow the traditional economic route or embrace this new theory.  

On that note, I wish you all the very best for the coming festive season and new year.

David Buchan

David Buchan
Director

CII

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