by Martin Odoni

An economically-illiterate rhetorical weapon right wing types use to oppose Government spending programs is one everyone must have heard a hundred times before. They always ask; –

“But how are we going to pay for all this?!?”

Now, it is always noticeable that these conservative types only care enough to ask this when money is spent on anything that other people – especially poor people – will benefit from more than they will. Only this week, the u-turn over free meals for vulnerable children was met with similar arguments from people all over social media. Many of the same people, I noted, spoke up happily in favour of the Government’s whimsical and utterly frivolous plan to waste a million pounds on having a plane repainted in Union flag colours, just to show off when on trips overseas. But I digress.

How do we pay for the free school meals? It will happen the way all Government spending is done – via the Bank Of England. Strictly speaking, as I have pointed out many a time before, we do not even need taxation to come in to cover the amounts involved, or even a fraction of it. In a manner of speaking, the money will be ‘borrowed’, but only in the sense that it is money investors are seeking to lend to the country, knowing that they can make a safe profit on the amounts when their accounts mature.

In practical terms, all the Bank Of England will be doing is pressing keys on a keyboard, and ‘creating’ the money out of thin air. Just like a commercial bank does when it assigns you a loan, or when it pays interest into your account, all that will happen is that the numbers on a ‘credit’ spreadsheet will go up, which means numbers on a computer network. No physical changes will happen.

All manner of banking transactions are really just about changing numbers on computer files in this way.  It is the digital era equivalent of ‘printing money’, and is how the system has worked for a long time. These pay-outs by the Bank Of England will pay for the school dinner vouchers.

“Ah, but we still have to pay the people we borrow from eventually!” protest the conservatives. Not really though. The Bank Of England will do that, as it is the ultimate source of all pounds sterling. It pays interest to its lenders by inventing it out of thin air, in exactly the same way as a High Street bank does, as mentioned above.

“But this will cause inflation without taxes!” protest the conservatives once more. Well, it might – although it is interesting to note when challenged on this that not all of the protesting voices can actually explain why that would happen – but then we do have taxes, which are not, despite what so many people obstinately believe, what is used to pay for Government spending.

Today has proven that this basic aspect of Modern Monetary Theory is true, and that the notion that ‘printing money’ is ‘certain’ to cause surging inflation is false. A fact kept quiet about in both The City and in Government circles, but that everyone should be told about, is that almost all Government spending since before the pandemic lockdown has been done by Quantitative Easing (which, although more complicated, boils down to the digital equivalent of ‘printing money’).

At the same time, current inflation figures for the lockdown period were published today. What do they show? Well interestingly, despite there being no corresponding increase in taxes to provide an ‘inflation-brake’, far from all this QE running the pound-sterling’s value into the ground, inflation in the UK has in fact hit a four-year low.

Printing money has NOT caused inflation in 2020

It is quite untrue that enlarging the money supply will automatically cause inflation.

Why is this? Well, in fact, it is rather simple and obvious. Since the middle of last year, the economy has been flatlining, and worse. With all the problems of destimulus brought on by years of Austerity, alongside the massive national self-harm caused by Brexit, the UK economy scarcely grew at all for much of 2019. And now this year, due to the lockdown, the UK is plummetting into the deepest recession on record.

Recessions compared

People need to be ready for this recession, it will make the Credit Crunch look like a period of affluence.

At a time of recession, people are not spending much, and businesses are not making enough money. When goods are not in demand, prices fall, not rise. So the low demand for goods can offset the depreciation effect of the new money injected into the economy. More than that, the extra money, if targeted at the right parts of the population, should even help to lift demand to healthier levels.

Ignore all the old scaremongering noises about the Weimar Republic or Zimbabwe. They are examples of hyper-inflation caused by circumstances very, very different to those the UK is currently experiencing, and in neither case was the printing of money the root cause of the inflation (although yes, it did play a role in accelerating the problems). Yes, an enlarged money supply can cause inflation. When demand is at a healthy level already, QE would be a disaster, because all the extra spending power spread around the population would increase demand still higher, pushing prices up. But that is not what is happening at the moment, because thanks to the three-way crisis of Austerity, Brexit and the Coronavirus, demand in the UK is decrepitly low.

So ignore the myopic cries of the economic illiterates. The school meals can and will be paid for by QE, and far from the country suffering for it, it will generate some much needed extra business for the culinary industry, as well as make sure we have a healthy, adequately-fed younger generation being educated to a standard that will make for a good workforce in a few years’ time.