Money is the Key

Professor Richard Werner pinpoints money creation as the arbiter of economic success or failure.

Professor Richard Werner is a world-renowned economist and thinker who has had a career in asset management and banking as well as hugely influential academic career. He will be interviewed in Edinburgh on the 3rd of September as part of Common Knowledge’s 'The Future of Money’ event. Tickets here.

Professor Richard Werner’s book The Princes of the Yen pinpoints definitively and comprehensively a truth that has long been known in the elite circles of banking but which has escaped the understanding of other ministries of government, also politicians, economists and even revolutionaries like Karl Marx, Lenin and Mao. The creation of credit as money determines the growth of the economy.

Where does money come from? Why is there so much of it? And what impact does the volume of it have? And…who controls it? These are basic questions about the ‘lifeblood of the economy’ that are seldom spoken about in the mainstream media or even, amazingly, in field of economics. Karl Marx famously but incorrectly made a stab at it as he described gold’s move from just another commodity to a medium of exchange but never convincingly got to grips with its functioning in a modern economy.

Prising out the truth of the matter from the iron grip of the keepers of economic truths is difficult because there is always a great deal of noise and passion surrounding economics: taxes need to be increased or cut; interest rates need to be raised or lowered; productivity must be higher, if we are to be richer; if lower, then we will be poorer. What is missed in these dead-end alleyways of debate is that the purpose of these actions and policies is to put disposable income, or not, in the pockets of consumers so allowing them to spend it. Ultimately, underneath the clamour and partisanship, it is about money - how much money is in the economy. This is what economists call Demand.

‘Demand’ is thought to be a single clear concept which is mysteriously never made clear. It means money to purchase. If people and businesses have money then they can buy things; there is ‘demand in the economy’. Without money, then ‘demand is lacking’. Why economists use the term ‘demand’ and not the term money is puzzling - as a conspiracy theorist, it is tempting to say that using the more accurate term would give the game away; however, there are genuinely economists, neo-classicists mainly, who spend lifetimes analysing economic models without factoring in the money supply so perhaps ‘demand’ help them avoid difficult questions, therefore they prefer the term.

Lowering interest rates, cutting taxes, adding government spending are all ways to put money into the economy and doing the opposite are all methods of removing it. Needless to point out, the volume of money in an economy has a huge determination on prices which in turn impacts productivity and employment. As J M Keynes pointed out in his The General Theory of Employment, Interest and Money, an increase in government spending can be used to lift an economy out of a recession; a point he summarised tidily in his introduction to the book that was less than a page and did not require the reader to venture any further.

Although his book was considered a revolution at the time, begetting the ideology of ‘Monetarism’, it should not have come as a surprise to economic historians. Britain became a world power by using a sink fund, government issuance of debt, to fund its wars and conquests; Keynes simply suggested that government debt be used to fund growth and that in turn would stimulate further growth as demand would return along with another vital factor: confidence. Money to spend and confidence to spend are the two crucial components of Demand.

Keynes was unafraid to follow the logic of his thought and famously used the illustration that people could be paid to put five pound notes into bottles and others could take them out and keep them. The important thing was to put money into the hands of those who would spend it and thus keep money circulating throughout the economic arteries.

This leads to another important point: velocity. For some reason over the past ten years, central banks have been reluctant to publish figures on how quickly money changes hands in an economy, yet it is as determining a factor as volume in economic growth. To illustrate: a man walks into a hotel and asks the owner for a room putting a £100 note on the table. The guest receives a call and steps outside. Immediately, the hotelier sends a member of staff to pay the butcher who he owes a £100 to; the butcher owes the local joiner a £100 so he quickly walks over to his workshop and pays him; the joiner owes the car dealer £100 so rushes over to settle; and the car dealer owes the hotelier £100 for his anniversary weekend with his wife and so he walks over to the hotel and places the £100 note on the front desk. The hotelier then takes that as payment just as the guest finishes his (long) phone call. The £100 can now be used as a demand on a range of goods and services, workings in the same way as described above. If money keeps moving then it can stimulate growth too, which is why Keynes also speculated that cash with some sort of time stamp and expiry date would be a means to avoid recessions or depression as well since people would be ‘forced’ to spend before the money became worthless - an idea touted for Central Bank Digital Currencies (no more saving!).

Banks, we all know, create money out of nothing based on a formula permitted to them by law. It is along the lines of, say, for every £1 of reserve, they can create £7 of credit (effectively money) - pre-2008 they stretched these ratios to absurdity. They lend with that model to people, businesses and other institutions on the basis of them being a credit-worthy risk. Problems arise when demand lessens, less money circulates, fewer borrow and the volume and velocity of cash decreases as debts are paid back (this extinguishes money from the economy) or called in by jittery banks who, at the same time, refuse to lend further leading to a credit crunch. At this point, as previously stated by Keynes, governments can step in to re-inflate.

But where does government get the money from? From the unacknowledged master of the economy, the central bank. The government issues bonds which the central bank buys in return for money that it has simply just created. They do not need to have a certain amount of reserves to create cash. They can just do it. A point that Richard Werner was making and writing about in the 1990s using the example of the Bank of Japan, however, it took until 2014 for him to receive an acknowledgement from the Bank of England that this is in fact what they also do. as does the Federal Reserve and the ECB.

Presently, through this capability alone, the central banks have a complete grip on their own individual nation states’ economies. With this money, they have power to purchase debt paper issued by firms, buy bad assets from banks, or good ones, lend to the government directly, buy government bonds, by local municipal bonds, buy real estate, and print money and put it into the pocket of every person in the country. All this can create a boom, alternately, the reverse can create a bust: raise interest rates, redeem government bonds, sell real estate, call in debts and sell assets in a fire sale. Usually, they opt for somewhere in between: they allow for modest growth or stymie it when it threatens to get too ‘hot’.

Demand suffers in the latter instance of a shrinking economy as people are pressed by debt, scramble for less money, then employment falls and confidence deteriorates. A prolonged recession will see an increase in suicide, mental health issues, physical health issues, abuse, alcoholism, family and social breakdown and other paralysing, sometimes irrecoverable, consequences. Why would any government allow a recession to happen, for, as Professor Werner notes, ‘it is a choice’, and although there has to be a balance between money creation and genuine growth, the excoriating Depression of the 1930s and, the subject of Professor Werner’s very interesting case study, the ‘lost decade’ of Japan - which is now actually thirty years of depressed growth - are cataclysmic events that need not have been as long or as deep as they eventually became?

In The Princes of the Yen, Richard Werner explains how the Bank of Japan continually gave contradictory and disingenuous reasons for the lack of growth in the economy, while at the same time keeping its ability to expand credit and effectively intervene a topic beyond the permit of discussion. In fact, it had been keeping this power hidden for years. What the BoJ did was justify recession in the name of achieving ‘structural reforms’, reforms that gathered more power into the hands of the Bank of Japan, defeating then dissolving its rival, the Ministry of Finance, to become the undisputed hegemon of the second largest economy in the world at that time. (Professor Werner recounts how he faxed and telephoned every representative of the Japanese parliament to warn them of this power grab when the legislation to enhance the BoJ at the expense of others was to be voted on, but few got back to him. Anyone who has tried to deal with any of the UK parliaments will know how he felt!)

Within this legal framework was the setting-up of another body, the Financial Services Authority. Sound familiar? Tony Blair and Gordon Brown both gave the Bank of England its independence and created a FSA to regulate financial bodies. In each instance, both countries allowed the central bank to become pre-eminent without rival and in full control of all economic levers. A good illustration of this paramountcy was the ousting of Liz Truss as prime minister over an issue that the Bank of England could have resolved as it wished, but instead chose to blame the markets. (Simply put, they did not like Liz Truss’ policy of tax cuts and ‘dash for growth’ as it is not part of their agenda. An agenda that looks like a re-structuring of the economy towards a neo-feudalistic model.)

In 2016, Professor Werner warned about the development of Central Bank Digital Currencies. His research showed him how central banks actually operate: the clandestine manoeuvring of the ‘Princes’ in the Bank of Japan, their opaqueness with regard to truth, their manipulation of the economy; it has taught us that central bankers cannot be trusted since they are determined to aggregate power for themselves in line with their own priorities and, with CBDCs, achieve a tyrannical control over the economic lives of nearly individual person on the planet, if they can get away with it.

The power to build bridges to cross open rivers, to transform landscapes with roadways, railways and infrastructure, to lay down the necessities of material civilisation and make towns and cities spring-up out of nowhere belongs to the Central Bankers already. (It is a form of magic in some ways, a point Goethe acknowledges in his epic poem Faust Part Two.) People’s lives can be improved or impoverished by central banks. It is already too much power accumulated outwith democratic control and answerable only to an international ‘elite’. Now, the threat is that the same class of people could possibly lay down protocols which decide who eats what, where, when; lives where; works where and at what level they decide; and so on. It offers complete control to those in charge of money.

Professor Werner’s analysis of the culture and the aims of the Japanese central bank, an analysis he has carried over to other countries’ central banks in his work, should give us cause to worry. The banks are too dominant; that is a worry. They are already showing bad faith by their refusal to assist troubled people in difficult times despite it being a simple flick of a finger to do so. Are we prepared to let them have absolute dominance over us?

Understand money and its future so you can make the best decisions possible. Come to Common Knowledge’s ‘The Future of Money’ event on the 3rd of September, Edinburgh, where Professor Richard Werner, Professor Michael Northcott and CEO of Valhalla Network, Oliver Studd, will be interviewed and take your questions. Tickets here.

If you like the light-hearted and the irreverent Common Knowledge is hosting The Speakeasy Comedy Club on the 24th of August, in Edinburgh, where comedy will re-assert its right to speak truth to power. Join us. Tickets here.