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Aug 19, 2016

The Guardian | Business | Economics | Economics Business Live: UK Borrowing Falling Slower Than Hoped Despite July Surplus - Busines Live, by Nick Fletcher
Nick Fletcher
In simple terms, HM is “monetary financing of fiscal spending”, a central bank who prints money for its government to spend; a practice definitely not included in the Bundesbank’s instruction manual. However, we should keep an open mind after all - Mario Draghi sees it as a “very interesting concept” and Loretta Mester from the Federal Reserve Bank of Cleveland considers it a possible “next step if … we wanted to be more accommodative”.

It is therefore important that we analyse, in simple terms, how HM could work. The first step would be to assess whether this type of monetary financing is allowed under current laws and regulations. In most jurisdictions, rules exist and limit the actions of a central bank.

Examples include Article 123 of the Treaty of Lisbon (EU), Article 5 of the Fiscal Act (Japan) and the Treasury Fed Accord of 1951 (US). However, loopholes and safe harbour clauses are easy to identify as most central banks are allowed to do ‘whatever it takes’ to fulfil their mandate.

In practice, the central bank would deliver money to the treasury by receiving a meaningless asset (i.e. a zero coupon perpetual bond) in exchange, or – preferably - without any quid pro quo agreement. In either case, there would be no planned reimbursement for the sums extended. It is important that – at least for some time – this money creation is seen as permanent and irreversible, to avoid creating fears of challenging times ahead, and the associated desire to save, not spend or invest.
The more orthodox central bankers have nothing to fear as they would be in the driving seat. They would have the power to impose conditions and participate in the decision-making process of how this money should be spent.

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