Ann Pettifor

The chicanery of this week’s economics

(Photo Source: CLASS)

Posted below is a piece I wrote on October 10 for the new Centre of Labour and Social Studies, where I serve on the National Advisory Panel. I discuss the chicanery of political party economics.  The original post can be read here:


 “Dear Chief Secretary, I’m afraid to tell you there’s no money left.”
                                      -Liam Byrne, Guardian, 17 May 2010

“The British government has run out of money because all the money was spent in the good years.  The money and the investment and the jobs need to come from the private sector…”
       -George Osborne, Chancellor of the Exchequer. Sky News.  27 February, 2012. 


This week’s Conservative Party proceedings were distasteful for their defence of the rich and for attacks on the poor. The Chancellor implied that the government could only find £10bn of ‘savings’ by robbing the most vulnerable in society of their benefits. That’s shocking and distasteful policy; but it’s the chicanery of the economics that I want to discuss here.

The Conservatives lead the drumbeat on a theme taken up unquestioningly by all of today’s political parties: namely, that ‘there is no money’ ‘the coffers have run dry’. A drumbeat echoed at the Labour Party conference and its fringe meetings too.

Let’s remind the advisers of both the Conservative, Lib-Dem and Labour Parties of some key facts known to us since the founding of the Bank of England in 1694.

The British government has a Bank that can create £10bn of credit credit/money out of thin air – indeed it regularly does so – and at negative rates of interest. (Negative rates mean that the Bank effectively pays the British government to borrow £10bn and more…)

This money can be used for the purpose of financing British government expenditure and investment.

The rate of interest paid on the money created by the BoE is a social construct – it is not determined by market forces. (The LIBOR scandal revealed something that had been forgotten: that interest rates are set by back room ‘submitters’ in private banks – and not by market forces.) The Bank of England rate is decided by a committee of men (sic) who consider the impact on the economy as a whole.

Both the Labour and Coalition governments have benefited equally from the creation of low cost money by the Bank of England – a form of credit-creation known as Quantitative Easing and practiced in different forms since 1694.

British Chancellors of the Exchequer (both Alastair Darling, but subsequently George Osborne) and the Bank of England’s Monetary Policy Committee have authorised the Bank to purchase up to a quarter of all UK Government debt – well in excess of £300bn. The Bank has done so with money it has created out of thin air.

Since 2009, QE has therefore effectively financed the Coalition government’s deficit and made it less reliant on ‘the international bond markets’ or ‘bond vigilantes’ for funding. This explains why interest rates are low – because bond vigilantes have not been able to compete with the Bank of England’s ability to influence the price of UK government bonds in the market.

A couple of years ago, Ben Bernanke, of the US Federal Reserve explained how central bank credit/money is created. When asked where he had found $160bn to bail out a bank, and whether he had used taxpayer funds, he denied it had come from taxpayers:

“The banks have accounts with the Fed, much the same way that you have an account in a commercial bank. So, to lend to a bank, we simply use the computer to mark up the size of the account that they have with the Fed.” 1

To lend to the British government both the Bank of England, but also commercial banks ‘simply use the computer to mark up’ the amount of money transferred.

Given that we have a well-developed banking system (the envy of many other less developed economies); and given that Bank of England computers are adequate for the purpose, there is absolutely no reason for either the economy or the government ever to have ‘no money’. There is no reason for the government to be short of £10 billion.

Secondly, the government has the means to generate income. Raising £10bn from the Bank of England is the easy part. The hard part is planning for investment in sound, capital projects (e.g. infrastructure, energy efficiency measures, etc). Sound public investment is necessary at this time, because the heavily indebted private sector is reluctant to invest, and lacks confidence in the economy.

As a result fewer tax revenues are flowing into the government’s coffers. The answer? Generate new tax revenues, by the only known means possible: job creation.

Public investment will create employment that will generate the income (via tax revenues from wages and profits) needed to a) revive the private sector and b) pay back the low-cost debt issued by the Bank of England. (Employment will also reduce benefit payments to the currently unemployed parents of poor children.)

The government will get back more than it invested, provided the investment does not leak abroad. This will happen because of something called the ‘multiplier’. And it can raise £10bn and undertake that investment deploying nothing more than the stroke of a computer keyboard housed at the Bank of England. And thereby avoid stripping the children of the poor of money needed for food, heating and clothing.



1 Ben Bernanke, Fed Reserve Governor, interviewed on CBS, 60 Minutes Show 15 March 2009, soon after Fed had made $160 billion available to AIG.


5 thoughts on “The chicanery of this week’s economics”

  1. Ann, I just watched the recent excellent presentation on this same subject from Stephanie Kelton and Warren Mosler – called “Modern Money & Public Purpose 2: Governments Are Not Households”. Highly recommended viewing.

    If only the BBC would live up to its reputation and report economics as truthfully as they and your good self.

  2. Ann, it seems we have a government using austerity as cover to implement Milton Friedman’s ‘Shock Therapy’ on the British economy i.e mass privatisation and outsourcing of the public sector, massive transfers of money away from poor to the already over indulged rich.

  3. Anne,

    Another EU paper, dated 2005, which also asserts that there are countries in recent times that have experienced growth, even accelerated growth, using non-Keynsian methods, i.e. following fiscal consolidation:

    As before I’d like to understand this better. Hopefully it doesn’t justify present UK government policy?


    David Murray

  4. Surely non-Keynsian fiscal policies, such as austerity/fiscal tightening/fiscal consolidation will work in the boom-times, when there is naturally vast growth in the economy to the extent that the increase in the private sector vastly exceeds the contraction in the public sector, and therefore overall growth would be maintained while balancing the GDP or even creating a surplus. This is exactly what happened during the first 5 years of Blair’s government, with Brown maintaining control of the treasury, until Blair thought spending would win more votes. Of course Labour started believing their own propaganda (“end of boom and bust”) thereby creating their own downfall. Perhaps the secret is: save when things are good then spend it when things go bad, much like the Chinese. Of course the global recession is continuing and therefore even China will see the end of their savings and growth.

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