Martin Wolf: “Lord Turner Thinks the Unthinkable”

By John Lounsbury
(Cross posted from

February 13th, 2013

Paul Kasriel alerted me in an email this morning to check out Martin Wolf’s column today (13 February 2013) in the Financial Times.  Wolf’s title:  “A case to reset basis of monetary policy.”  The widely read associate editor and chief economics commentator for FT is one of the world’s most influential writers on economics.  And he often swims at the edge of the mainstream and sometimes thinks completely outside the box that limits many economic thinkers.  So when you want a breath of fresh air, read Martin Wolf.  He can pull heads out of the sand; there isn’t much fresh air in that medium.

The 13 February column focuses on discussion of the the call by Mark Carney, incoming governor of the Bank of England (BoE), for discussion of flexible inflation targeting as an element if formulating a more effective monetary policy for the central bank.  The call for discussion should be renamed as a call for debate.  The Monetary Policy Commission of the BoE issued an unusual policy statement at the same time Carney was making his proposals before House of Common’s Treasury Select Committee last week.  Here is a summary of what transpired from Chris Giles and Patrick Jenkins 07 February in the Financial Times:

The bank’s monetary policy committee appeared to pre-empt Mr Carney’s proposed communication strategy while he was still testifying to the Treasury select committee, issuing a rare policy statement to accompany a decision not to change policy.

Expectations were dashed, however, that Mr Carney might be even more radical and propose an immediate sharp loosening of monetary policy to achieve “escape velocity” for the economy rapidly as he had hinted in recent appearances.

Without defining the rate of growth he hopes to be able to achieve, he said: “It is entirely possible … in fact probable that the current stance [of the MPC] is compatible with achieving escape velocity”.

He also rowed back from suggesting the BoE should target the level of nominal GDP, saying he was far from convinced of its merits as a monetary policy target and rejected suggestions from Lord Turner, current chairman of the Financial Services Authority, that it should engage in helicopter drops of money – money creation to finance government deficit spending. “I cannot envisage any circumstances where I could support that as a strategy,” he said.

Which brings us to Martin Wolf’s concluding paragraph on 13 February:

Yet I agree with Lord Turner that the even more important question is how to make any policy effective. This, inevitably, raises questions about how monetary policy works in an environment of ultra-low interest rates. Lord Turner thinks the unthinkable: namely, monetary financing of the fiscal deficit. So should policy makers. They have to think afresh. If not now, when?

Just one day earlier Wolf had another column that expanded on Turner’s thinking.  From that column:

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” This comment of Mark Twain applies with great force to policy on money and banking. Some are sure that the troubled western economies suffer from a surfeit of money. Meanwhile, orthodox policy makers believe that the right way to revive economies is by forcing private spending back up. Almost everybody agrees that monetary financing of governments is lethal. These beliefs are all false.

There we have it:  monetizing debt, long the unthinkable.  Five years ago I would have dismissed that idea as would many in the economics world.  It would have been a thought of scandalous immorality, leading to egregious debasement of money and a sure-fired pathway to a new Weimar Republic experience with hyperinflation.

I have since learned much about monetary systems as they have existed for the past 40 years.

I have learned what monetary sovereignty means and what are the consequences of debt-free monetary expansion really are.

I have learned that the system has operated to this date with all expansion in money funded by private bank debt that falls in two categories:

  • Loans to individuals, businesses and governments without monetary sovereignty which must be repaid or defaulted.  This is all temporary money which will disappear when each loan is closed.
  • Loans to governments sovereign in their own currencies.  This is either temporary money (if repaid at debt maturity) or permanent new money (if continuosly rolled over and never repaid).

These operation have been described by Modern Monetary Theory.  (It would better be called Modern Monetary Operations, in my opinion).

The creation of new money by financing new government debt with private bank credit expansion is the way fiat money has operated until now, a direct carryover from pre-fiat currency days.

This is a political choice, obviously vigorously supported by private banking interests.

If the choice were made, most recently proposed by Adair Turner, to change the political choice to one where at least some of the monetary expansion needed to support economic activity came from the issuance of debt-free money directly by the government, a Machiavellian arrangement would be broken.

“Too Big to Fail” would become “Too Big To Exist”.

Banking would again become a competitive playing field and Matt Taibbi’s giant blood sucking vampire squid would be removed from the face of humanity, replaced by efficient financial institutions no longer tethered by an umbilical cord to the public sector.

Just as the principle of separation of church and state has supported the prospering of a great county since its inception, isn’t it time for the separation of private and public finance to take it to the next level?

Added note: I do not think that the separation of private and public finance should be the equivalent of a divorce.  There are necessary functions in an efficient economy for privately held public debt.  Examples of such functions are risk free savings for individuals and businesses, intermediation of international trade and stabilzing loan portfolio functions for banks.  What is important is to have the balance of power over money for public use in favor of control by the public over public interests.

For more discussion on money and money creation read the following:


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