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6.5. Summary This chapter has described the role of governments and foreign exchange in the money creation process, and in particular to what extent they can directly or indirectly influence the money supply through fiscal and monetary policies. EU legislation prevents member governments from expanding credit creation directly by borrowing from the central bank, or ‘monetising government debt’. QE is sometimes seen as a means by which central banks get round these strictures, since the effect of buying up large quantities of government bonds with the creation of new reserves can be viewed as the monetisation of debt ‘via the backdoor’. However, the effectiveness of QE has been widely contested, including by the authors30, 31, 32, 33, 34 and in particular regarding its effectiveness in stimulating credit creation and GDP (see section 4.7.3). Furthermore, with independent central banks governments have no direct control over such policies. The eurozone takes the Impossible Trinity to its logical conclusion, as the euro system is essentially a system of permanently fixed exchange rates. When a country adopts a fixed exchange rate regime with free capital flows, it must use monetary policy to manage the exchange rate rather than domestic credit creation. In the case of Eurozone members, they cannot use monetary policy for anything at all as they no longer have their own currency or central bank. Fiscal policy remains with national governments within the Eurozone (for now), who can raise funds through the issuance of bonds. The effect in terms of the money supply is neutral – funds are simply moved from one part of the economy to another. It may be possible to stimulate growth if the Government invests in a way that is significantly more productive than the private sector, but this is certainly not a given. This method of funding government deficits makes them dependent on the appetites of investors for purchasing government bonds; a deliberate feature of the system intended to subject governments to the fiscal discipline of international financial markets. However, there could be other options for governments even under existing rules. An overview of alternative monetary systems is given in section 6.7, but it is worth highlighting two methods of direct government intervention in the credit creation process. Governments can expand the effective money supply by borrowing from commercial banks via loan contracts, as happened in the UK during World War II. It is also possible to issue government money directly as happened in the UK from 1914 to 1927 and in England from 1000 to 1826.35 These methods both align fiscal and monetary policy more closely, as the act of government spending directly expands the money supply, and would therefore be considered unconventional in terms of the current orthodoxy. However, the distinction and separation has come under intense strain since the financial crisis of 2008 and subsequent EU sovereign debt crisis. It would appear that previously

Andrew Jackson - Where Does Money Come From - Positive Money pdf from epub  

Andrew Jackson - Where Does Money Come From - Positive Money pdf from epub

Andrew Jackson - Where Does Money Come From - Positive Money pdf from epub  

Andrew Jackson - Where Does Money Come From - Positive Money pdf from epub

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