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RA Werner: 3 Beneficial allocation of money

The issuing of credit feeds economic growth. What could the Coalition Government do to promote growth? Professor Werner says that the credit creation which provides the new money needed for an economy is neutral when made, but its uses bring good or bad outcomes. Good outcomes without inflation arise when the new money is fed to productive uses, which might for example use new technology to provide products or services with a greater value that the total value of the inputs used. Bad outcomes arise when the new credit is made available for consumers who use it to buy goods and services and this brings price inflation as more money chases the same goods. Another bad outcome is feeding credit to speculative markets in assets such as stock markets, derivative markets or property markets. Here the flow of funds is merely creating an inflationary bubble which inevitably turns into a crash as prices of these assets cannot rise without new credit creation feeding them. Whilst good productive credit creation produces its own income stream to fund the investment costs, speculative booms produce no such income and are not sustainable. He says that there is need for intervention to allocate money in the right direction and curtail it in the bad. He says that the outcome of letting ‘the market’ decide such things has manifestly failed as seen in the recent global crash. Unregulated credit creation allocation tends to produce bigger and bigger banks that seem for a while attractive in

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