The Magic Money Tree does exist, and it’s paid £445 billion to guess who…

There’s a lot of talk in British politics about a ‘Magic Money Tree’. Theresa May first used the term as an insult to describe Jeremy Corbyn’s policies as unaffordable and fantastical. Then it was thrown right back at her as she miraculously found £1 billion or so to convince the DUP into joining her government, a sum larger than the combined cost of several of Corbyn’s “unaffordable” policies (see below graphic).

But a magic money tree does exist, it’s sat right under everyone’s nose and virtually no one is talking about it. And it’s far bigger than £1.5 billion…It’s called Quantitative Easing (QE). And so far it’s dispensed nearly half a trillion pounds to the banks. That is more money than the entire UK government spends in 8 months — that’s a big bloody tree!

How is QE a magic money tree?

QE was introduced in order to provide banks with much needed liquidity (i.e. cash) and to generate the moderate inflation that traditionally accompanies stable growth within our debt-fueled economic system. Effectively central banks embarked on a campaign to expand the money supply by purchasing financial assets, namely bonds in order to lower interest rates even for loans, which would make borrowing attractive for consumers and corporations.

When QE started a crowd of hyperinflation fearmongers arose, saying that we were doomed to repeat the experience of the Weimar Republic. As QE commenced, however, the inflation was minimal and transitory at best. When the US stopped its much bigger QE program we immediately saw increased deflation and a massive crash in the price of almost every commodity.

It was thought that the first program of QE would be the only one, but as moderate inflation failed to outlast the money printing, QE was extended again and again, in the UK throughout the world.

It is obvious that all this newly created money has merely offset deflation. But why has it failed to kick start the required inflation?

Kartik Gada has done widespread research on this phenomena and its potentially world changing ramifications.

Technology driven deflation

We are at the cusp of ‘good deflation’ driven by technological advancements. Traditional ‘bad deflation’ occurs because of a lack of demand, whereas good deflation occurs because innovation (usually technological) lowers the cost of providing a good or service. The most obvious example is a smart phone which can be bought for $200 and substitutes for what would have cost thousands of dollars 10 years ago….a music player, alarm clock, camera (still and video), remote controller, etc.

Gada stresses that we have hit a tipping point where digital technological innovations have become interconnected and are spreading throughout the economy at an exponentially accelerating rate, driving down the price of taxis, travel agents, shops, hotels, investments management, broadcast television and bringing a similar deflationary effect to sectors you would not have expected only a few years ago.

A sea change in transport is already on its way. Through a combination of Uber-style on demand services and self driving vehicles, ride-hailing should become so cheap and convenient that people forgo car ownership altogether, merging with urban public transport networks as buses become more ubiquitous, smaller and unshackled from strict routes. Helsinki is trialing a system that enable customers to plan and book journeys combining trains and buses with walking and private ride-sharing services.

Look at the effect fracking technology has had on reducing the price of energy, even thwarting OPEC attempts to drive up the price of oil. Genetics/telemedicine/wearables can radically personalise the delivery of health care, research by McKinsey Global Institute calculates the potential benefits of this could range from $2 trillion to $10 trillion on a global basis.

What will 3D printing do to construction? Buildings can be built by 3D printers that live in a factory and then their finished modules will be shipped to the site to be assembled with cranes, like stacking oversized Legos. Pie in the sky? It’s already happening. In the summer of 2016, the world’s tallest modular building at 32 stories high was completed at in Brooklyn, NY. Once the building’s apartment modules were completed at a factory located in the Brooklyn Navy Yard, they were transported to the development site and essentially stacked one on top of another into a high-rise building.

Drone technology is also overhauling the construction industry. Most big construction projects go way over budget and end in a lawsuit, mistakes made early on in a project may not be noticed until much later and cost time and money to rectify. . Buildings are designed in a flawless digital environment but must be constructed in the much messier real world. So the industry has been using technology to measure buildings precisely during construction and track the use of raw materials on site to ensure that everything is going according to plan. Drones are ideally suited to the task. Thousands of aerial photographs are crunched into a 3D site model, accurate to within a few centimetres, which can be compared with the digital model of the building. Drones can also streamline the process of grading — preparing the ground for constructing a building, road or railway. This involves measuring the original topography, which by conventional methods might take several weeks for a large site; using bulldozers and other equipment to move large quantities of earth; then “fine grading” the site to within an inch or two of the desired final shape. The great benefit of drones is that they can carry out a topographic survey in half an hour, and the 3D model is ready the next day.

In agriculture, drones are used to assess crop health by taking pictures using special multispectral cameras which pick up more than the human eye, helping to identify undernourished or diseased crops. A GPS-equipped tractor can then precisely spray water, fertiliser or pesticides only where needed, increasing yields and reducing chemical run-off.

As you can see this technological takeover isn’t about what apps to expect next. The most analogue, conservative industries are being digitialised with huge productivity gains throughout their value chains. Artificial Intelligence in particular will be exceptionally deflationary. We have reached a tipping point that isn’t going to be reversed.

Technological deflation, while easily accepted when one is a shopper for a new computer, is almost entirely ignored by macroeconomists, even as effects of this deflation on economic data are pervasive and rising. Classical economics cannot counter with weak assertions that technological progress always shows up in the rate of growth. But, as former FSA Chairman Adair Turner notes, these are the same economic models that try to explain the monetary system without incorporating the banking system.

Wonderful, but how does this create a magic money tree? Unless it’s 3D printed??

There’s no going back

Technological change, despite occasional deviations from the trendline, is exponential and accelerating. While this effect was too minor to matter until recently, with technologically-deflating products now comprising 2% of annual world GDP, this deflation now has significant macroeconomic effects.

The central banks of the world have been generating new money via QE, offsetting technological deflation. This cannot end. The amount of cumulative ‘QE’ by all the central banks of the world seems to be accelerating exponentially despite no apparent aggregate quota being agreed to by the banks. Each central bank is reacting to the conditions in its own country, but as this is an inherently global phenomena, the deflationary effect concentrates into countries with high technology density. Even if one central bank declares that it will not conduct more QE, others fill the gap, inadvertently ensuring that the combined total continues to rise.

Even today as the US and UK threaten to rip up the international order that has been the platform for huge economic gains, technology is countering the natural inflationary effects of these misguided policies. The US Federal Reserve believes runaway price increases lurk around every corner and on June 14th America’s central bank raised its benchmark interest rate for the third time in six months, even as inflation persistently lingered below its 2% target, confounding all expectations.

Even if central banks do turn off their QE programs, as most have muttered about, this won’t be permanent as the deflationary forces are too pervasive. Just as before, they’ll have to turn the spigot back on.

Now, as technology is rising as a percentage of world GDP, this could mean that the progression of the deflation rate is an ongoing trend. Gada believes the rate could double from -2% to -4%, and, amazingly, from -4% to -8% by the 2030s, merely by technology rising from the current 2% of GDP to 4%, 8%, and beyond. This sounds extraordinary, but unless one thinks that technology will shrink as a share of GDP, it is the course we are presently on. The level of monetary expansion needed to generate the necessary inflation is thus extremely high.

But where does the money go?

To become the fabled magic money tree of recent political lore is simply a matter of how and where the money is spent.

Right now, the manner in which QE is spent leads to the money accumulating disproportionately in very few hands, namely the largest banks and technology companies, leaving most other sectors and individuals missing out and vastly reducing its effectiveness. Current methods of bond-buying are well into the point of diminishing returns.

This is not the way to improve working class, middle class, and even upper-middle-class prosperity. It does not even benefit all wealthy people, but merely the small fraction of those who happen to be positioned closest to the central bank monetary spigot.

Alternatively the money generated by QE should be diverted to the ‘real economy’ in order to solve the big societal problems. It could fund an enormous housebuilding programme, increase capacity of the rail network by funding high cost projects such as HS2, or fund any of the “unaffordable” policies outlined within the Labour manifesto.

Different parties will have different priorities, but ultimately this is a non-partisan policy that could be used by either a Labour or Conservative government, therefore resolving the dominant political conflict of the democratic age: the left/right debate loosely defined as “I need more money” vs “get off my money”.

But in order to become genuinely world changing I would agree with Gada that the money should be used to fund a Universal Basic Income (UBI).

Mother taught me to share

Gada proposes a disbursement of money directly to every person over the age of 18 in a uniform, equitable payment. Everyone gets the same amount no matter their situation, and the payment should be exempt from taxes.

For those that follow UK politics this will sound a lot like ‘People’s QE’, and it is.

Gada’s analysis provides an economic framework for how this need not be a single one-off payment, but rather a continuous programme for sharing the rewards from technological innovation.

The roadblock for most UBI programmes is affordability, as the proposal usually advocates funding through a significant increase in taxation. This is politically impossible. Funding it via the new money that is already being created, on the egalitarian premise that money is a common resource that should be shared amongst the people, similar to how jurisdictions as politically diverse as Norway and Alaska share the proceeds from their oil resources, is an altogether different prospect and much easier political sale. If you are not part of the fraction of 1% who benefits enormously from current QE, it is hard to argue against it.

As for how much each person should receive, Gada’s research is US focused but as the UK has a similar level of technology density within its society the estimates would be about the same, roughly c.$5,000 per eligible person for the year. And as technological advancement and subsequent deflation is accelerating exponentially, the UBI can rise each year as well, and at a speed much faster than the annual increases normally associated with inflation. Gada calculates the increase in money generation necessary to generate consistently moderate inflation would be 16–24% per year. The stipend would rise by the same amazing rate.

It’s all too good to be true, right?

As Gada says the money to fund this is already being created:

“this solution may seem very sanguine, but the individual components of it appear to be drifting in this direction already. Releasing $1.1 Trillion/year and rising in an economy of $19 Trillion may seem like a bit too much, but that is where the trend of cumulative QE against the deflationary force of technology has already brought us.”

If the economic forces underpinning this inexorable rise continue, it will even be possible to phase out income taxes. Since the stipend eventually replaces existing benefit payments (including pensions), it logically follows that when the new transfers supersede current payment programs you can begin to wind down the tax burden on individuals, making this a truly bipartisan policy.

More than one branch

Besides QE isn’t the only branch of the magic money tree (to keep flogging a tired metaphor to death). 97% of all the money in the economy today was created by private banks, not government. Surprised? So, staggeringly, are 90% of British politicians.

The money that banks create is the electronic stuff that flashes up on the screen when you check your balance. Every new loan that a bank makes creates new money. Most people think banks simply lend the money that has been deposited by their customers. Not true. Most of it they create themselves, out of thin air.

Watch this short video for the clearest explanation I could find:

Whilst this system may have worked for some time, it is now fueling the rapidly increasing financial meltdowns. Fortunately there is an alternative.

Positive Money is arguably the most important political campaign currently within the UK. It advocates that in order to deal with the big social, economic and environmental challenges that we’re facing today we must start by fixing money. This means taking the power to create money away from the private banks, and return it to a democratic transparent and accountable process. The economy would be more stable and society better off if the power to create money from the banks were transferred back to the State, probably the central bank. They call it ‘Sovereign Money’ and it incorporate much of what I’ve been talking about.

I’ll let them explain in their own words…

Conclusion

“We can easily forgive a child who is afraid of the dark; the real tragedy of life is when men are afraid of the light.” — Plato

I do not claim to have all of the answers, but if some of Kartik Gada and Positive Money’s ideas are refined and implemented, they may permit us to enter a new age of abundance and upliftment.

Currently British politics is stuck in a battle between the Conservative’s headlong pursuit of the 1950’s “glory years” that Brexit has become, and Jeremy Corbyn’s fascination with the 1970’s. This utterly fails to account for today’s reality, much less a rapidly approaching future. The technological change that is coming over the next few decades will deliver a self-sustaining, fully-automated economy, artificial general intelligence, life by design, and much more. Politics and government should be focused on preparing for this future for a change.

For more analysis you can follow me on Twitter @nickwasmuth