The most dangerous question in political debate in the UK is the one always rolled out by every journalist, on air or in other media, which is to ask a politician ‘How are you going to pay for it?' where ‘it' is whatever the politicians has just proposed to do.
Why is the question dangerous? Three reasons.
First it assumes that the government spends other people's money. It doesn't. It spends it's own. That's because it actually creates all money at the end of the day (even that put into circulation by private banks is done under government licence). And because it creates all money there is technically no limit on the amount it can produce if it so wants.
Second, this means that the assumption that the government behaves like a household with regard to debt is just wrong. Households can't create their own money out of thin air to repay debt but governments with their own currency and central bank (as the UK has) can. £435 billion of quantitative easing since 2009 proves this and yet everyone pretends that this has not happened, which is ludicrous. The fact is that governments and households are not the same at all because households may be constrained by the need to repay debt but governments are not.
Third, so long as the creation of government debt keeps pace with inflation and it does not overheat the economy by trying to create more than full employment then government debt is not a problem any more than having money in your pocket is a problem. And that's unsurprising because the money in your pocket is government debt. And all UK government debt is just a giant savings account for those who want an ultra-safe place to deposit their money, and what's wrong with that?
So, what's the answer to that question in no more than 100 or so words? Try this:
We're not going to pay for it. We're going to issue debt to pay for it. That's because people like pension funds, the banking system and prudent savers are exceptionally keen to buy that debt. But more than that, government debt is just money. Read what it says on any bank note and you'll realise that is true. And a growing economy needs more money and it's the government's job to create it. So we will. In that case who will pay? You could say it's the people who are queuing up to save with the government who will pay. And we're doing them a favour by letting them do just that.
And if the follow up question is ‘But what about repaying the debt?' the answer is:
I really think you should look at the history of government debt since 1694. It's grown, a lot, and almost continuously. And very rarely has any been repaid. And that's a good thing. Because government debt is what underpins the value of our money. So repaying it cancels money. If you don't want money I'm happy to take whatever you wish to donate, but most people see value in cash. And so do I. That's precisely why I don't want to repay government debt. It would cancel the money we all depend on to make our economy work. You may think that's a good idea. I definitely do not.
And then to the bemused comment ‘But who pays then?' which is bound to be the retort the answer is:
As I have explained the government does. It uses its money to pay. That's the money it effectively puts into the economy by creating debt that people want to buy and it's the money that people owe in taxes - which is then the government's money. So the government pays. But if what you're really saying is does this mean more tax the answer is no, it doesn't. It means we will create more debt because the economy needs it. Just to keep pace with inflation we need to create about £50 billion of new debt a year to provide pensioners, banks and other savings institutions with the government debt that they need to keep the economy going. I'm not going to risk a financial crisis by refusing them the debt they need when at the same time I'd also be creating unemployment, harming those in need, be denying health care and would undermine education as well as the security and the safety of our country. Thanks very much, but I'll keep the bankers and financiers of this country happy by creating the debt they need and by providing public services all at the same time.
And it you want a slogan then it's ‘Government debt meets everyone's needs'.
I can't see it getting much of an airing in this election, but I can hope.
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Like much of reality, maths & science, this is counter-intuitive. In a time of one-word ads on the Tube and the need to appeal to people who don’t want to think too hard it may be impossible to get this across. No matter how you word it, it comes across as a particularly good speech from Sir Humphrey.
As you point out in your book, we suffer badly from a lack of school education on tax.
The public are starting to accept the universe leaped out of nothing – what was formed Energy/Matter is balanced by Gravity, two sides of the coin. Just like Debt/Assets created – out of ‘nothing’. The concept is simple to accept and adopt, even if the math is a lifetime’s work.
The sad fact of the matter is that the public have had 40 year of agnotology, brainwashing, dumbing-down call it what you will by the neoliberal lobby. I’m keen to put some resources together on ProgressivePulse probably a bit less ambitious than Bill Mitchell’s MMT University http://bilbo.economicoutlook.net/blog/ but on similar lines
Would be good
Hi Richard
I’m new to this but deeply interested – particularly in the question of how you slowly get the scales to fall from the eyes of voters (and also politicians and the media). The next 2 obvious questions after your three will be
1. “if the government can pay for anything it wants by creating debt/money, why do we need tax”.
2. “Are there no constraints to this money creation beyond avoiding stoking excessive inflation? Then why doesn’t every country in the world (that has a vaguely reputable government) pay off its debts, build all the infrastructure it needs and feed its people”
Thanks for any help
I have to say these are answered in The Joy of Tax
We need tax to prevent inflation
Debt is not paid off because it is useful (as explained yesterday)
And infrastructure can only be built to the limit of our capacity – and it must be useful. We don’t want empty airports
“if the government can pay for anything it wants by creating debt/money, why do we need tax”
The easy way to consider this is to imagine a government which spends, say, £100bn each year (on public sector salaries, benefits and pensions, road repairs, the army, etc etc. It will spend that amount every year, because those salaries, pensions, services, etc, are necessary, and need to be paid for). It creates this money at a keystroke via its central bank – the BoE in the UK’s case.
But that money does not disappear once the Gov has spent it – it circulates around the economy as each recipient of that initial public spending, spends their money in turn… and so on, in a continuing progression, allowing transactions to take place throughout the economy. This flow of spending ensures that the goods and services we all require continue to be provided, and that creates jobs in the process.
Now… just imagine if the Gov didn’t impose *any* taxes. At all. On any of those initial and subsequent transactions.
By the end of the second year, there would be a total of around £200bn circulating around the economy, chasing roughly the same amount of goods and services that the economy was able to supply. By the end of the third year, there’d be £300bn, and so on…
Inflation would soon be massive, as prices increased dramatically to reflect increasing demand chasing limited supply.
So tax is absolutely vital, in order to hoover up that initial and subsequent Gov spending, so that the whole public spending cycle can continually re-occur *without* becoming inflationary.
As you can now see, taxes effectively *destroy* money, by removing it from circulation in the economy. They are certainly not required beforehand in order to fund Gov spending – the Gov (via the BoE) can do that at a keystroke.
The only limit to that Gov money creation, and spending, is – in order to avoid inflation – the amount of real resources (labour, materials, energy and land) that is available in the economy. And never the amount of money it has previously taxed (i.e. destroyed).
And the economy should always be run at near maximum output, because that is how the population at large will enjoy the highest possible, and most equal, standard of living. Anything less is *deliberately* condemning a percentage of the population to enforced un- and under-employment, misery and penury.
There are other very useful useful purposes to taxation, but please do read our host’s book (The Joy of Tax) for a fuller, and most highly readable, exposition!
Thanks
Hi
Just a question. If the government is “destroying” money by taxation, why does it need to create more money from the ether? Can’t it just collect the tax, use that to spend on public services, and negate the need for money creation? Or does the need for more money creation hinge on the fact that a) not all of the money gets collected in tax so the coffers are always a bit short and b) the needs of the country are always in flux and changing/growing so governments always need to create a bit more money to meet this demand?
I’m wondering if we’d do a better job of getting the message over to the general public if we stopped calling it the deficit or the public debt, as the word debt implies that something has to be repaid. However, this is simply not the case for this government-created money which will continue to grow as long as there are inflationary pressures and increasing demands for services and goods.
Have I understood things correctly?
Thanks!
Remain the destruction is simply electronic: a debt has been closed
This is not about destroying something tangible
I think the debt should be called capital – a positive
Thanks for that Richard, however I fear that the red-tops will continue to pump out propaganda that would make Kim Jong-Un blush!
Genuine question about debt: If what you say is the case how in recent history did the Zimbabwe currency fail leading to hyper-inflation? I know that country is different in many ways to the UK (I did live there for a while in my childhood, early 60s) but if a government just continues (as they like to say ‘print money’), will that at some point lead to buyers of debt our getting cold feet?
Zimbabwe failed because of gross corruption and genuine economic collapse mixed with money printing
I am assuming we are not facing gross corruption and almost complete economic failure
If we do our currency could collapse in value, money printing or not
A collapse of the productive economy caused by Mugabe handing previously well-run farmland to his supporters, who were not farmers, resulted in Zimbabwe needing to import food. Scarcity of food caused massive increases in prices, causing the government to print higher and higher denominations of currency to combat this, resulting in hyperinflation.
Pretty much the same thing happened to the Weimar Republic, who lacked the productive output (as a result of the French seizing the industrial Ruhr region when German failed to pay the an instalment of war reparations in 1923, and the German government encouraging workers to strike against this act), resulting in the cost of goods in Germany to rise, which the German government tried to cover by printing more money….
In most (if not all) cases of hyperinflation, printing money is rarely the cause. It is typically caused by a collapse in production, which results in an increase in printing money, and those two together cause the hyperinflationary spiral.
Don’t forget that, above and beyond the loss of its productive capacity, the Weimar’s reparation debt was imposed in gold and foreign currency, which the government then printed excessive amounts of its own Marks in order to buy.
Anyone who compares the Weimar situation to that of the UK, whose so-called “debt” (i.e. private savings) is in its own currency, can be safely ignored – or better still, ‘re-educated’!
Quite right
I so agree, as they say. The Weimar Republic and Zimbabwe are such specious journalistic point scoring against creating money for our economy.
What you say about debt and money is true, and so are general relativity and quantum physics (as far as we currently know). All these things are difficult to explain to the general public because they are counter-intuitive. In everyday experience, things are either there or not there, space and time are fixed frameworks and whatever is spent has to be paid for from earnings. People by and large understand household budgets, and just assume that what is the case at one scale is true for all scales. From what studies I recall seeing, even very few MPs actually understand the dynamics of currency and debt, let alone those who have the task of explaining the economy and politics to the wider public.
It is obviously not an easy thing to change received ‘common sense’, but it has been done. The neoliberals spent a couple of decades undermining the welfare state — full employment consensus of the 1950s and 60s and replacing it with their own ideological framework, from which we have suffered for nearly forty years. OK, they had a lot of money behind them but at least they showed that, given time, it can be done. So, perhaps what is needed is a sort reverse ‘Road to Serfdom’ and a sort of anti- Mont Pelerin Society?
A lovely idea
Sign me up
The MPS was bankrolled by wealthy organisations and individuals who stood to benefit from their philosophy. Unfortunately Conservatism speaks louder because Conservatism speaks with more money.
This is good stuff Richard, what a shame you don’t have more exposure on the mainstream media as I suspect you would do a better job than many in getting this across and brushing aside that banal comments of so-called economics journalists.
The way I see it:
Two ways we get money: from Exports or Government spending
We’ve got a trade deficit (net loss of money) so that’s no good
So we need Government money as the ONLY source otherwise
banks create it and drain the economy by burdening people with
debt which deflates the economy.
‘We’ve forgotten that money doesn’t grow on rich people. We make our own money via the institution of government and it’s time we remembered how to use it properly. Sorry billionaires, you’re actually not so important after all.’ (http://patrioticmillionaires.org/2016/08/30/money-doesnt-grow-on-rich-people/)
THERE IS NO ALTERNATIVE!
@ Richard
That is a great reply to that frustrating question. However, I could imagine most journalists not being able to comprehend your reply, as it is so different to the current narrative regarding government debt.
I think this is must be one of the most important issues of our time and until real progress is made in changing people’s perception of money there can be no expectation of a shift in the way the country – indeed the world – is run.
From a marketing perspective the word ‘debt’ is an (almost) insurmountable psychological negative trigger. And right now I can’t think of a way around it. And telling people all money is debt makes no sense to them at all. I think maybe graphics could help. As you probably know, J D Alt has been working on this communication problem for a while over in the US, and way back in 2014 wrote this arrticle in New Economics Perspectives, using diagrams to simplify th message: http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html. More recently he published his book ‘The Millennials Money ..’ (https://www.amazon.co.uk/Millennials-Money-Generation-Afford-Better/dp/1457545128). I don’t know of any similar work being done here in the UK – but hopefully there is.
If it was not for your demanding work-load you would be the ideal person to write a comparable bo0ok for the equivalent UK lay target audience. Anyhow, for now, well done for the above contribution. It’s a start!
Thanks
John, if you were to count the words Richard writes in one year in this blog alone, they would equal a fair sized book.
Five at least, actually
Any plans for a future book on this issue Richard? When I read Joy of Tax I got the impression that you had a great gift for simplifying concepts enough to convey them well without condescending to the reader – quite a skill.
This is an area that requires such an ability!
When time permits
This year is pretty much dedicated to research on academic projects and the resulting papers
Unfortunately, even the very use of the word “Debt” is capable of scaring the financially unaware person.
Alternatively, declaring (and constantly repeating, a la ‘strong and stable’ etc) that “The Government Will Pay for It by Spending the Money” might be more creative, and, ultimately, more effective.
To the lay person, that phrase might sound ridiculous at first hearing, but that’s the point – the repetition of such a counter-intuitive declaration would ultimately stimulate curiosity – and also demand an explanation. And then you’re on…
The explanation could be put simply: Because taxes of various types *already* exist, any extra money that gets spent into the economy will return to the taxman in the normal way, by the taxes we have already.
And that’s because money doesn’t disappear in a puff of smoke when it first gets spent; it flows around the economy, getting taxed at each step along the way, as normal.
Yes, more money would be spent by the government – but then more money would be taxed – automatically. You won’t notice that extra tax, because it’ll be the normal result of those larger, and more frequent, transactions. Transactions and spending that the country happens to urgently need.
So no *new* taxes would be necessary to “pay” for anything. Nor would one area of public spending *necessarily* have to be curtailed to allow another.
And that’s it in a nutshell.
(You could expand on this to counter the usual ‘Zimbabwe’ gambit; that no new taxes would be needed *unless and until* the economy overheated – but that a boom is a very far-off prospect, for now – and even then, all that any new taxes would be, would be a brake to bring the economy back to normal conditions. And that a boom is the last of our worries at the moment, etc etc.
You could also tell people that there is a *great* legal way for them to avoid paying some taxes if they want to, and that’s by saving their money – perhaps in a pension, or a Premium Bond – so that, therefore, the big scary Deficit (i.e. money that hasn’t been paid to the government in tax) is nothing more terrifying than their savings – but that’s for more detailed discussions.)
Using this “Gov pays by spending” rhetorical device also allows glimpses into the ‘spending precedes taxation’ dynamic, as well as the ‘functional finance’ argument that a government should be guided by what the country *needs*, not by what its so-called ‘finances’ dictate.
And people *want* what the country needs: increased spending on the NHS, housing, education, transport, etc, so this description of the way that public finances actually work can offer a welcome opportunity for their lives to improve.
What’s not to like?
The apparent counter-intuitiveness, and reversed causation, described in MMT is what first caught and stimulated my curiosity, and enthusiasm for learning more. I’m not educated in any subject related to money or finance whatsoever, and it probably shows – but if MMT inspired and enlightened me, it can get also through to a lot of other, ordinary, non-financially educated people too.
People *are* curious; yes, some will mock, especially those with an agenda, but others will want to learn – especially if that learning can provide the tools for an escape route from neo-liberal tyranny.
But it needs exposure, even if that comes at the cost of initial incredulity.
The Labour Party (left and right) have wasted the best opportunity for change by not adopting these ideas and tactics. It’s heartbreaking.
It’s the counter intuitive but that’s, of course, the obstacle here
Yes indeed.
But, with a little persuading, we’ve managed to overcome ‘counter-intuitive’ in the past.
Like coming to terms with the disconcerting fact that the Earth is actually round. Or that the Sun doesn’t revolve around it.
Of course continuing to believe the opposite is fine, until you want to sail to India, or build a space station.
Or run a successful economy!
Accepted
Like MrShigemitsu, I’m a layman with no formal training in economics and related disciplines. And I came to it in much the same way as he did – out of curiosity.
It can be done, of course. But it will require time and money. I see it as a co-operative endeavour and ideally international. Do you have contact with any academics in the US, Canada, Australia or NZ? I know you don’t agree with everything Bill Mitchell advocates but he travels around a lot, doesn’t he? Or how about Steve Keen – do you know him? I’m just thinking off the top of my head. It’s a bit like the current GE problem – progressives need to come together in spite of peripheral differnces. However, like all projects, it requires a leader to co-ordinate it. But first a sponsor or sponsors – corporate or private. Any suggestions anyone? Could this be a major project for Progressive Pulse?
How many times has the topic been raised on your blog alone, and with so many excellent contributions? So maybe now really is the time to take the bull by the horns and simply do everything possible to get the message out into the general public. If my situation was different I’d gleefully get the snow-ball rolling. Maybe someone here would be up for it? Someone with an advertising / marketing background would be good, because ultimately it’s a marketing problem.
“The best time to do something significant is between yesterday and tomorrow.”
Bill and I have met
Steven and I get on
I know some of the MMT crowd
Re Progressive Pulse – anyone want to comment?
Paul Krugman might say that we are now on the other side of the looking glass, where prudence is folly and virtue is vice
In your first short answer you say “But more than that, government debt is just money.”
However, the first comment on your blog yesterday said “Is there a basic primer you can point me to that will help me understand this basic core phrase “debt is money”?” and you replied “And money is debt is the right way round”.
In the context of your short answer you were talking about debt so “money is debt” wouldn’t quite fit, but “government debt is just money” doesn’t necessarily suggest that all money is debt, just that some is, so perhaps something like “But more than that, debt and money are the same thing” would work?
Unfortunately no
Not all debt is money
So if it’s wrong to say ‘debt is money’ because not all debt is money, does that mean that the reason you say ‘government debt is money’ is because all government debt is money?
Government debt is money
That is what i was discussing
Your blog convinced me that governments create money (as debt) by spending and destroy that money by taxation, but explaining this isn’t enough for some people who are convinced that taxes fund government and the only way governments can get hold of money is taxes, borrowing, or selling assets. They tend to dismiss your blogs and the like as being theoretical but not backed by evidence.
Is there any conclusive study or evidence I could direct them towards that shows this is how it works, e.g. do the national accounts conclusively show that government spending creates money and taxes destroy it?
This isn’t helped by there being countries where taxes do fund the government as the government doesn’t control the money supply, e.g. Eurozone countries.
Richard Werner has done controlled studies in banking to show lending creates new money
There is no equivalent study in government spending and tax that I know of. We have to use logical thinking
It was actually the Werner studies I was thinking of when I made my comment, including the following quote about commercial banks which applies to a certain extent about central banks: “One reason why the dispute still remains unsettled after such a long time is that discussions had been based on assertions, implying different accounting operations of banks. But the respective merit of the three theories cannot be settled in theoretical models designed from first principles: theoretical worlds might be conceivable in which each theory is plausible. Instead, the dispute can be settled through empirical evidence on the actual operations and accounting practices of banking.”
Would it be theoretically possible to carry out a similar study for the Bank of England’s internal records as the government spends and taxes which would empirically show that money respectively materialises and disappears for individual transactions, carried out, like the Werner study, by taking a snapshot of the accounts before and after a single large transaction and then comparing the snapshots?
If it is theoretically possible then I would suggest it is worth pursuing the organisation of such a study as a long-term goal. Your friend and ex-BoE committee member Danny Blanchflower might have some helpful ideas about how to do it. When some future prominent politician (hopefully) says they know governments spend and tax because Richard Murphy told them, I’m sorry to say that some in the media and some economists do not have as high an opinion of you as I do and the response would be ‘where’s the evidence?’ so I believe if that politician and you could say ‘here’s the study’ or at least ‘well let’s do the study to find out’ then it would really help.
My biggest concern is that I don’t know if the accounts can show these things in a way that can only be interpreted in one way. Say the government spends £1m, which appears as -£1m in the account; simultaneously they collect £1m in tax, taking the account from -£1m to 0. There are two interpretations: the government creates £1m to spend and destroys £1m in tax, or the government collects £1m in tax and uses this to fund spending. We would therefore need to observe the data such that they could only be interpreted in one way.
Is it theoretically possible to show in the accounts for an individual transaction that spending creates new money and does not “draw down reserves (taxes, borrowing)”? (and also to show the true nature of ‘government debt’)
Is it theoretically possible to link in the accounts an individual tax deposit to previous spending while ruling out a link to current spending, and to show that it is destroyed and does not “increase reserves”?
The short answer is I do not think what you’re suggesting is possible
And candidly I don’t think it’s needed either
In this case there is an easy question and it is how can tax be paid in government created currency if it did not spend it into circulation first?
You say you do not think such a study would be possible but don’t say which of two possible reasons is the reason why: either the truth isn’t in the accounts or it is but it would be too difficult to find. If the former that would mean when the BoE spends new money is created but nowhere in the accounts is that money recognised as newly created — it’s just ghost money that appears without a trail or trace of its origin. If the latter then I accept that it would be extremely difficult to find and there are a few key differences between the bank Werner worked with and a central bank. But if the truth is located somewhere in the accounts then I have hope that someone someday will be able to find it.
I accept that you may be right and the study may not be possible, but you also say that you don’t think such a study would be needed. In terms of “need” I was suggesting commercial banks as a historical precedent worth considering due to the similarities between the theory that commercial banks create money by creating debt (lending) and destroy it by loan repayment and the theory that central banks create money, as debt, by spending, and destroy it by taxation.
Werner describes how the credit creation theory was put forward by various authors from 1855 to the 1920s. They had the right answer then but after the First World War a number of influential economists argued it was wrong and the fractional reserve theory became mainstream from the 1930s to 1960s, then the financial intermediation theory became mainstream from the 1970s-2000s.
The point is that 159 years after Henry Macleod got the theory right it was still being debated. We had the right theory but that wasn’t enough and other, incorrect theories became more prominent, because, according to Werner, all three theories used different axioms to build theoretical models and the only way to settle the issue is to leave behind the theoretical models and “consider empirical realty as the arbiter of truth”.
We currently have a theoretical model for tax and spend and a theoretical model for spend and tax, and like commercial banks, each is based on different axioms, and “theoretical worlds might be conceivable in which each theory is plausible”, so I wonder if this also means that like commercial banks the merits of the theories “cannot be settled in theoretical models designed from first principles”
159 years after Macleod got it right the theory was still being debated — it wasn’t settled until 2014 when Werner published his first study (or 161 years till 2016 and his second study). I am looking at the 159-year historical precedent and wondering if Beardsly Ruml getting it right in the 1940s means we will have to wait until the 22nd century before it’s considered mainstream. But there are two parts to the precedent — it was settled after 159 years and it was settled with empirical evidence, which in this case you say we don’t need.
You say the easy question is how can tax be paid in government created currency if it did not spend it into circulation first. This isn’t enough, as tax and spenders simply say “of course the money first entered the economy through the government spending it but now it just goes round and round the economy and the only way the government can get hold of it is tax, borrowing, or selling assets.” This is an accurate description of e.g. how Eurozone governments get money so this makes it harder to discount it for fiat currency governments. QE shows governments can create money from nothing but it doesn’t show all government spending creates money from nothing.
Without the study, tax and spend is so ingrained in the national consciousness that I would not be surprised if it took decades to shift. I believe that if the study was possible and done today then it would settle the debate today. But I’m not an expert and I am only on the outside looking in, seeing the vast majority of journalists, economists, and MPs being, as far as I am aware, overwhelmingly tax and spenders. You are an expert and are on the inside and spend a lot of time with MPs, journalists, and economists, so when you say the study isn’t needed then perhaps this means that in the last few years since you started banging the drum for spend and tax you have seen something I am not aware of, something that makes you disagree with Werner’s belief that empirical confirmation is necessary to build economic models, perhaps in this time you and other spend and taxers have convinced a sizeable proportion of MPs, economists, and journalists of spend and tax such that you would expect it to become mainstream within the next ten years or so. Maybe you are right and commercial banking isn’t an accurate precedent and your theoretical model can overpower the tax and spend theoretical model.
The truth is in QE
The money was created by loan to buy the bonds
Now that wasn’t tax
But the point us the government could spend without tax
That is the evidence
And we certainly could not close down government as Werner did a bank
The product of economic activity – goods,services, infra and superstructure.
This is always valued in money – GDP.
If growth was limited by a finite quantity of money (the private house-hold perspective) what would we have?
It can’t be counter intuitive to believe that credit / debt precedes growth, how else could it work. We can business plan’t create money arfter the productive fauct.
You go to the bank with your business plan and if it passes muster money is created to provide the necessary capital The bank does not credit its cash account, it is not limited in its lending by a finite amount of cash.
All the arguments opposed to this seem to believe that money creation is ok if created by the private sector ( albeit on licence)but not by the public sector.
The principle of repayment is clear in private credit creation, repayments cancel the money created. It is the repayment principle associated with money creation for public investment that needs to be clarified – the dividends of growth which would otherwise not be forthcoming.
What is needed is a single soundbite that can prompt wider discussion of the subject.
Something along the lines of: “As long as (limiting factors), a country can continue to create money to service any amount of debt”.
Assuming I have that right…?
What are those limiting factors?
Another Q:
What happens to money taken abroad or squirrelled away in offshore accounts?
Money in offshore accounts is dead money: useless unless recycled
In practice it is recycled: the banking system repatriates it
The limiting factors are full employment and productivity
But what about a society where we are tending towards lower employment but yet higher productivity through automation? What are the limiting factors there and how could Universal Basic Income be supported by such a model?
Would inflation only be a real problem for those sectors in which the UK (or any monetary union) wasn’t tending towards abundance? I’m thinking in terms of the UK with Housing, Food and Energy, the last two we seem do be heavily dependent on imports and thus exchange rates.
Julian
NEC Member Transhumanist Party UK
(Technoprogressives)
Downham Market, Norfolk
PS Have just ordered your book Richard, so apologise in advance if you have broached these subject there.
Inflation is not, by and large, sector specific in its impact even if it can be in its cause
My background reading suggests that the limiting factors are:
(a) The currency must have a freely floating exchange rate. (e.g. US$ or Pounds Sterling. But not, say, the Hong Kong dollar which is pegged to the US$. Also, not the US$ pre-1971 when it was convertible to gold under the Bretton Woods system.)
(b) The debt must be denominated in the sovereign currency (Greece, for example, cannot create Euros and so cannot pay off its debt by ‘printing money’.)
Someone could perhaps confirm or refute (a), (b)?
I am not sure they are the limiting factors
They are conditions for it working
Hi,
I’m a total layman, keen on learning, and really enjoying your blog.
When people talk about Labour governments borrowing x amount and Tory governments borrowing y amount, what does that refer to in respect to the issuing of debt that you talk about above?
It means they issued that much debt
If you want to learn about the debt a good place to start is the DMO (Debt Management Office) – http://www.dmo.gov.uk/index.aspx?page=publications/Quarterly_Reviews
Their Quarterly Review give you all the information about who (which sectors), owns the debt – Quarterly Review October — December 2016 – http://www.dmo.gov.uk/documentview.aspx?docname=publications/quarterly/oct-dec16.pdf&page=Quarterly_Review –
Lets keep it simple.
Q – How are you going to pay for it?
A – We’ll print the money
Q – But won’t that cause Inflation
A – It hasn’t for the last 8 years
They then need to explain why printing £435 billion and spending it into the economy didn’t cause inflation, but will do in the future.
Printing £435 billion and spending it into the economy won’t cause inflation as long as the economy is depressed and there is not yet full employment and capacity constraints. See End This Depression Now by Paul Krugman for detailed and excellent explanations. In fact, he claims that not acting to rescue a depressed economy could cause, upon recovery, harm to long-term prospects by eroding job prospects of unemployed graduates, and capacity constraints could come about because of not enough investment by businesses and the public sector in necessary infrastructure
I suppose the question is exactly how much more “printed” money would have needed to have been spent into the economy over the £435 billion for any significant inflation to have been registered.
There was a spike in CPI of 5.2% in Sep 2011, but that was on the back of Oil price rises feeding into energy price rises.
Indeed after the initial £200 billion of QE Between March and November 2009, the MPC decided on further purchases of £75 billion in October 2011, £50bn in February 2012 and £50bn in July 2012 – all within 9 months of that peak, and none of it even touched inflation which fell from that peak in Sep 2011 down to 2.2% a year later in Sep 2012.
I’m sorry but you cannot be serious? While it is entirely correct what you point out, this explanation will not wash with the public, and will be leapt upon by the Tory press as someone who wants to get us into naive amounts of debt. Politics is about marketing, not telling the informed truth unfortunately.
I don’t work on the basis of lies
You might
But I am a Friend of the Truth
Richard, I have no doubt that was you say is exactly the truth, and in fact I accept and believe this is the case.
I think my comment may have been misunderstood, so I’ll try again.
Jeremy Corbyn has been said to not get his message across, so it would not be an option for him to offer this counter intuitive explanation (albeit correct) as a way of justifying paying for his policies. Someone mentioned a single sound bite earlier. This most be the approach?
I can only hope….
Quite a while ago I tried to persuade my MP to propose QE for the NHS.
I thought the advantage was that QE was theoretically a ‘known’ so wouldn’t have to be deeply explained and if it had to be it might be the bankers that had to do it!
My short suggested interview – which is not of the precision and profundity of the one above is here
http://www.progressivepulse.org/money/make-mine-quantitative-easing-please/
Starting with your contribution and enhanced by so many of the excellent contributions, I wonder if “Friends of the Truth” might as a sub-heading enhance the already excellent Progressive Pulse?
It’s actually the sub-heading of the Quakers!
Apologies for my ignorance; but it’s still a great byline.
I agree
I shamelessly used it!