Desperately seeking economic health in the era of free money: Don Pittis

Central banks around the world are handing out free money, with the European Central Bank moving interest rates into negative territory. What would John Maynard Keynes have made of that?

Europe's decision to cut interest rates again augurs new experiment with free money

The English economist John Maynard Keynes, (1883 - 1946) attends a UN International Monetary Conference flanked by delegates from the U.S.S.R. and Yugoslavia He was instrumental in the establishment of the International Monetary Fund. What would he have made of Europe's free money? (Hulton Archive/Getty Images)

The European Central Bank is callin' your dad a liar.

"Money doesn't grow on trees," your father used to say, meaning that it wasn't just there for the plucking – especially out of his pocket.

But yesterday, the European Central Bank (ECB) decided that for the foreseeable future – months, if not years – money is free. And they are not alone. Central banks around the world, including Japan (which gave us "Abe-nomics") and the United States (home to quantitative easing) have all declared that money is free.

Not only did the ECB resolve to print extra money and use it to buy up private assets — a kind of quantitative easing lite — but ECB President Mario Draghi announced he would cut interest rates from 0.15 per cent to a token 0.05 per cent.

Although European inflation is very low (somewhere around 0.3 per cent), the interest rate is a fraction of that, meaning the "real" interest rate is negative.

Canadians really can't point fingers. This week, Bank of Canada Governor Stephen Poloz announced he was holding rates at one per cent, while Canadian inflation hovers around two.

So if you know how to get your hands on it, that money really is free. Which, for you and me of course, is the problem.

Intent is to make credit easily available

The intent is to make credit easily available, on the assumption that with interest rates at near-zero, anyone can borrow and invest, thus boosting the economy.

But that doesn't mean just anybody can access that money. Banks and financial institutions and people so rich that lenders are sure they'll pay the money back can get their hands on it. In fact, the prospect of all that money pouring into the economy sent European and even global asset prices shooting higher on the expectation that all that easy credit would be competing for a limited number of assets.
European Central Banker Mario Draghi would like the consumers of Europe to have the money to stimulate their own economies. (Daniel Ochoa de Olza/Associated Press)

For Mario Draghi, making money free (even freer?) seems like a move of desperation. He is terrified of deflation and almost frantic in his desire to restart investment in the European economy, which is still weak and tearing at the seams from the credit crunch of 2008.

Of course, not everyone agrees that Draghi has done the right thing. There is evidence that the attempt by Japanese Prime Minister Shinzō Abe to break his country out of stagnation by dumping trillions of yen into the economy has not worked. GDP has fallen sharply and real wages are stagnant.

But how do we begin to think about an economy where money is free? Maybe we don't have to, because someone did it before us. In his magnum opus, The General Theory of Employment, Interest and Money, 20th century economist John Maynard Keynes imagined such a time.

John Maynard Keynes on free money

To economists then and now, the important thing was economic growth, which for the most part was stimulated by private investment.

"For a large proportion of this growth we are dependent on the savings of the rich out of their superfluity," said Keynes.

But in the final chapter of his book (conveniently made available here by the University of Adelaide), Keynes proposed an idea that was so radical it seemed crazy.

The intelligence and determination and executive skill of the financier, the entrepreneur [would have] to be harnessed to the service of the community on reasonable terms of reward- economist John Maynard Keynes

"We might aim in practice (there being nothing in this which is unattainable) at an increase in the volume of capital until it ceases to be scarce," writes Keynes, foreseeing a time when just having money — that is, being rich — ceases to have value.

The rentier class, or "the functionless investor," will disappear, Keynes wrote. But not the entrepreneur.

"The intelligence and determination and executive skill of the financier, the entrepreneur," he wrote, would have "to be harnessed to the service of the community on reasonable terms of reward."

I don't propose to out-think Keynes, even if 95 per cent of people making web comments are sure they can. However, part of the world Keynes foresaw has come to pass, and having the disadvantage of being dead, he is unable to study the detail of the reality and help make it work. That is up to us.

It may be that we are in a transitional period. The idea of free money remains a concept so foreign that we have trouble putting it into our economic worldview. It is like Einstein's relativity in a Newtonian universe. It doesn't make sense at first.

But contrary to Keynes's imagining, the rentier class has not disappeared. Instead, as assets rise ever higher in value, it is the "functionless investor," and not the entrepreneur, who is benefiting most.

While Keynes proposed that with free money created by government "one of the chief social justifications of great inequality of wealth is, therefore, removed," the opposite seems to be happening.

Rich benefit from cheap credit

While the rich, who own most of the assets, continue to benefit from cheap credit, the poor are being left behind.

Some governments may not care about their poor, but Europe is not in that group. Draghi's hope, his intention, is not to make the rich richer. He wants to free the entrepreneurs. He wants to create a thousand Elon Musks.

Draghi wants Europe's economy to grow and its people to have jobs that provide them with a healthy life and one of relative equality.

In my quick re-reading today of Keynes's chapter 24, I don't see that he provides us with an easy answer. In the polarized world of economic debate on the web, there will be those who will begin with the premise that whatever he says, Keynes is wrong.

But whatever the solution to our current economic impasse, especially that in Europe, Keynes helped us imagine a very different world, a paradigm shift, where free money created by government is part of the answer.

But if you take the time to wade through this, one of Keynes' most accessible and imaginative pieces of writing, it will surely make you think that free money is not enough.


Don Pittis

Business columnist

Based in Toronto, Don Pittis is a business columnist and senior producer for CBC News. Previously, he was a forest firefighter, and a ranger in Canada's High Arctic islands. After moving into journalism, he was principal business reporter for Radio Television Hong Kong before the handover to China. He has produced and reported for the CBC in Saskatchewan and Toronto and the BBC in London.