From 1979-1990 the official Thatcherite theory of Monetarism assumed that the government's finances should be run like household finances. It stated that a government must borrow money from the private sector in order to fund public services. The debt to the private sector would paid through general taxation of the profits. Thus, the economy was set on course for a 'smaller state' which was diametrically opposed to the 'planned economy' of the Soviet Union. Monetarists believed that the amount of money that the Government printed should be restricted; this would have the net-effect of increasing the value of their currency on international markets; leading to lower interest rates and higher growth; with a tolerable level of unemployment being maintained to keep inflation down.
Thatcherite economics were largely credited at the time with winning the Cold War. From their stubbornly high 8%-18% levels up until 1989, UK interest rates dropped to 4%-8% after the fall of the Berlin Wall. The expansion of the European Union eastwards, and stable inflation rates of 2%-5% in the US, ensured a plentiful supply of high quality cheap labour for private investors to exploit. The UK lost its industrial base as the City of London led a period of steep growth in the UK.
This period of prosperity came to end with the Credit Crunch in 2008. The crunch started in the US where the low paid, low skilled, workforce were provided with huge amounts of credit, with very little security, that they were never going to be able to repay. The US lenders sold this debt on to private investors around the world who only realised that they had bought into ahuge pot of 'negative equity' when the US workforce started to default on their repayments. This led to a fall of confidence in the stock market the collapse of the financial system: all the investors wanted to take their money out of their investments at the same time, with no-one willing to pay anyone else back, so all 'promises to pay the bearer of this note' became devalued. UK GDP per capita has not risen above 2007 levels since then.
The pendulum had now swung against the Thatcherite model of growth. The currency owning democracies of the World came togther to take control of the debt through a temporary rebalancing of the World economy that was referred to as Quantitative Easing. The worst affected private lenders were nationalised thus ending any further speculation of their stock, and the Government's Central Banks took on the markets, printing vast quantities of money at the same time as droping their interest rates to 0%. This effectively set-up a pincer movement against Monetarism, balancing any inflationary pressure on their currencies because of the debt devaluation with an increased supply of private investment to replace the devalued stock. To almost everyone's amazement, Quantitative Easing worked, but the elecorate were either unconvinced or did not understand. Despite the devaluing of Monetarism the shadow of communism was still used to win the next election.
In 2010 a coalition centre-Right government seized power by the narrowest of magins, which meant that by 2015 the Thatcherite narrative that had caused the crash was returned to power unchallenged. Civil society was led to believe that the previous centre-Left government had relied on a 'magic money tree' to fund unproductive public services. It now appears that the reverse of this narrative was probably true: growth in private sector capital could not be sustained indefinitely through the exploitation of cheap labour at home and abroad. The swing to the Right from 2010 to 2019 resulted in an increasingly hostile enviroment towards immigrants and foreign investments, with a protracted period of asset stripping of public services, to pay-off the debts that were consistently being amassed by failure in the private sector. When the pandemic hit in 2019 the UK along with the rest of the global economy was ill-equipped to meet the demands of a public health crisis that many scientists and business leaders had been predicting for a long time. Fifteen million people died unecessary and painful deaths.
On the retreat, the Right-Wing carried out a 'slash and burn' rear-guard action, blaming all their victims, until they could find no-one else to blame but themselves: from 2016 to 2020 they blundered through an exit from the European Union, promising the electorate it would reduce net migration, only for it to soar to record levels. In 2022 the dying swan of Thatcherite politics named 'Trussonomics' promised billions of pounds worth of unfunded tax-cuts to stimulate growth. But it did exactly the opposite. The markets lost confidence in the lack of detail and disposed of their government assets, devaluing the currency to its lowest ever level against the US dollar. Two-years later the electorate voted for change. Fourteen years of Monetarism had left the UK broken and bleeding. And yet, large numbers of the electorate still put their faith in the Monetarist model.
Now, the unenviable task of plotting a course out of the financial bomb-crater has fallen, once again, to the centre-Left. The tail-end of the centre-Right givernment have done a reasonable job at stemming the initial bleeding, as UK inflation rates have been reduced from their initial peak of 11%, to meet the Bank of England target of 2%. However, the new administration has still inherited a flat-lining economy, with massive investment needed in public services. Rather predictably they have made growth their number one priority. With few other means of leveraging it, probably the single most attractive option open to them now is a repeat of the sort of Quantitative Easing that proved so successful in the last recession. But doing this unilaterally comes with risks.
The Modern Monetary Policy (MMP) that lay behind the success of Quantitative Easing assumes that governments do not need to run their balance sheets in the same way that households or businesses do. As long as they are in charge of their own currency, and their currency is not anchored to the price of any other commodity, i.e. their gold reserves, then the value of their currency is solely based on the trust. This is the trust that their investors have that the government will do what they promised the electorate that they would do or be voted out.
Thus, the new administration can request the Bank of England to print as many pounds as they need to make the new investments in inifrastructure that they promised the electorate in 2024. The government can then spend its money, by paying sub-contractors to deliver its projects. The payment can even be in the form of guaranteed interest through government bonds. This would stimulate growth through innovation within a 'planned economy' - taking a lesson from the People's Republic of China, with some important caveats that come with being a liberal democracy. As long as the government is making the right calls, it permits any dissenting voices are heard, and the currency continues to become popular in new markets, then the main threat to its succes - inflation and inactivity - should remain under control. There are three main regulatory mechanisms the government can use to stay on target. If inflation starts to go up, taxation can be increased, thereby reducing the amount of credits available to private speculators within the economy. If the value of the currency starts to fall, more government bonds can be issued, to soak up any excess credit from the supply chain. And if inactivity increases, then the planners need to create some room for more speculative investments.
So MMT is effectively the mirror image of Thatcherite policies that have become the orthodoxy for Western markets. This is mainly because MMT says that there is no limit to the deficit a government needs to run against its GDP. However, if I understand its critics correctly, then the weakness in this system is its inability to regulate any falls in the value of government bonds, and the interest paid on the sale of these bonds in the government's currency. If the private investors remain outside of the government'seconomy they will have no need for the government's plans to succeed, or the currencyvyo hold its value. Thus, the private investor, not the government remain in control of the value of the country's assets in the bond market. This may be true, however, the counter-argument is that as long as the private investors still believe that they can increase their rate of return on their bonds, over and above the interest the government is paying them on it, then there is no reason why they would want the value of these assets to fall.
Thus, my view is that govenrment bonds should really only be sold to raise funds for specific projects that the government has invested its human capital in. These would be projects that the private investors and sub-contractors believe they can make a profit on, in addition to the baseline the government is offering as a security on their investment. Thus, both the MMT proponents and their critics can be correct. But only when they factor in the most important element to this whole debate, that is the intentions and purpose of central government, in their commitment to grow the human capital of the Nation State, over and above the financial interests of any specific market.
In conclusion, there is consistent and coherent historical evidence that monetary theory has evolved since the Cold War era. Political extremes have started to centre on a hybrid model of Monetarism and Modern Monetary Theory. This supports the application of Hegel's dialectics and Gadamer's hermeneutics to western liberal democracies. If the proposed synthesis of positions, is correct the hybrid model may prove the way forward for this country as it seeks to stimulate growth by stealing fruit from another one of its magic money trees. But, the value of the credit notes that the government issues in the form of money will have to be regulated in order to avoid inflation or devaluation. By assuming that the goal of a government is to increase the human capital of all who trade in its currency, we can see that only if it fails to keep its promises will the value of its currency, relative to the price of other goods and services, ever be likely to decrease. Promises that a government makes generally involve creating new products and services, or health and wellbeing, for those who accept its currency as good tender, and so the value of a currency is linked to the value of the government in the eyes of the people, in a self-fulfilling prophecy. Likewise, the value of the currency will increase if demand for the currency increases, as any new markets the government creates begins to soak up it's monetary supplies. Perhaps we should start to think about Pound Sterling as a digital currency that can be used to fund massive infrastructure projects in developing economies. Targetting a net increase in the human capital of other countries should legitimise the printing of money to stimulate growth in new markets, but only if the private investors and sub-contractors, along with the rest of the taxpaying electorate, believe that we can all work together to maximise a return for the UK on those initial investments.
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