I was asked the following question on People’s QE on the blog this morning:
Richard, if you use printed money to pay for investment, who is actually paying for the investment? Are you suggesting that no one is paying for it? As an economist, you should explain who is paying for that extra investment.
That’s a fair question. This is my expanded response:
The investment is paid for with money created out of thin air. I stress there is nothing unusual about this: all bank loans are created out of thin air in exactly the same way and the investment those bank loans permit are not paid for by anyone as a result.
He’s still missing the point about banks, isn’t he? That by 4.30 pm each day they must balance their books.
But what’s much more fun is to think through the implications of this idea, that money for bank loans is just invented. That no one at all pays for capital investment funded by bank loans. It is, effectively, just entirely free cash.
So, why would a developing country ever be short of investment money? All they need to do is set up a bank and start issuing loans. There would be no need to tax foreign corporates at all to fund public investment, would there? Need to invest in health care? Issue a loan from the government bank. Need to invest in education? Issue a loan from the government bank. This is just invented money that no one has to pay for. Roads? Issue a loan.
So, is this what Ritchie advocates? Well, no, it isn’t is it? Ritchie is in fact one of those uttering blood and thunder about how corporates must be made to pay tax so that those developing countries have the resources to invest in those lovely things.
And it’s not possible to believe both things, is it? Either capital sourced from loans is free and thus taxation isn’t needed or taxation is needed because capital from loans isn’t simply created and thus isn’t free.
Which puts Ritchie’s overall belief system into something of a bind. He’s not just believing but insisting on two contradictory things before breakfast.
The existence of the magic money tree means tax isn’t important: but Ritchie says that tax is important thus the magic money tree cannot exist.
BTW, the people who pay for People’s QE is everyone in the decline in the value of their money as inflation takes hold. And yes, creation of M0 to spend into the real economy is inflationary. for inflation is always and everywhere a monetary phenomenon.