Letter to theEditor Thursday, January 24, 2008
Frank Taylor raises some thought provoking points in his Carousel article (December 07).
In particular he endorses the hypothecation of all ‘new seigniorage money’ to capital investment in public assets and all running and staffing costs to taxation – with the possible exception of depreciation. I agree absolutely, for if money enters circulation other than in full payment for a new physical asset it will be seen as a ‘free lunch’ or at best deemed inflationary.
It is also the case that the present annual increase in bank credit averaging £118.5 bns (11%) per annum (2001-06) is incremental and although individual loans are repaid as rolling credit, the money supply increases year on year. The graph shows this historically. Look at the velocity of circulation compared with GDP forty odd years ago when ‘financial services’ meant Building Societies and Life Insurance companies which truly earned their reputation as ‘Institutions’. None of today’s inflationary credit is repaid by carousel or any other formula.
Where then does it go, apart from stoking inflation? It ends up as the raw material of the Financial Services Sector – the froth and bubbles which float on top of the real ale of economy. And so, Frank, if we are really going to make reform work and control inflation, then we shall have to do battle not only with the banks, but also with all these fancy investment vehicles which currently represent up to twenty per cent of GDP.
Reformers will not come up with a tight mathematical formula like e=mc2 but if we stick to fundamental principles and can convince enough people that the only way to secure our public services and cap the debt is to issue government money in payment for public assets (seigniorage) as a replacement for an equivalent sum in new bank credit, then we will at least start streets ahead of the status quo in terms of simple logic.