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Should UK government monetary policy be reordered? The American Monetary Institute conference takes British thinking a step further

At the recent AMI conference, Dr Michael Kumhof, deputy head of Research at the International Monetary Fund summarised his paper and the rapporteur commented:


One powerful conclusion of Dr. Kumhof’s study, is that the potential for inflation is much much smaller when money is created by the government instead of by the banks.  This confirms Professor Yamaguchi’s study of the HR 2990, which concluded that it pays off the national debt as it comes due, provides the funding for infrastructure (thereby solving the unemployment problem) and does so without inflation. People – this confirmation by the two different studies, is really dynamite!”


Like pouring oil on a seized engine


Robert Peston – according to the FT – and Sir Simon Jenkins have reported that Adair Turner’s private opinion is that Britain should consider whether debt should now be “monetised”, financed by blatantly printing money rather than buying bank bonds in order to boost demand. Turner points out that actually printing money would involve “no increase in government debt and therefore no increase in future debt servicing”.


Jenkins: “At very least, this should be discussed”


The FT comments: “We need to ask ourselves why governments finance their deficits through the issuance of bonds in the first place, rather than just asking the central bank to print money, which would not add to public debt”.


Ultimately, the answer is the fear of inflation


FT journalist Gavyn Davies explains that, at present, by selling bonds to cover the deficit, private savings are absorbed, leaving less for private investment and reducing private expenditure today – a combination of factors which he calls the “restraining effect” of bond sales.

If the government did not sell bonds to finance the budget deficit, but asked the central bank to print money instead, private savings would not be absorbed, there would be no tendency for interest rates to rise, and no expected burden of future taxation . . . He concludes that in such a case:

The restraining effect does not apply. Obviously, for any given budget deficit, this is likely to be much more expansionary (and potentially inflationary) than bond finance.


But would not the private surplus become `effective demand` for goods and services, stimulating production and increasing growth?


To read more about the AMI conference click here.