I am so bored of hearing BBC journalists saying 'where will the money come from?' when discussing the DUP deal.
Out of thin air.
Like every penny the government spends.
Like every bank loan ever created came out of thin air.
Money is only made to be used.
Now there is a use and this money well be created by the Bank of England to be spent in to existence. And it will be recovered via additional tax paid.
That's how government works.
It really is time the BBC understood it.
And it is well overdue that its political correspondents did. Because their ignorance is becoming embarrassing.
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To be fair to my (full disclosure) former employer it’s not just them. It’s pretty much all media outlets.
It’s groupthink.No one wants to break the consensus
Dear Richard, the next time you’re on the BBC, please repeat precisely these words!
Richard – we need someone to do an animation that clearly explains this in simple terms that can go viral. I’m sure I can find someone who does this type of thing, but it’s get the text and explanation simple but accurate so anyone can understand. Ignorance of money creation is what keeps the people down these days.
I have had some offers of help
I need time now
Here’s an example https://youtu.be/-09ap6zIB6I
That is hopelessly and absolutely wrong about money and banking
The BoE now say so – but only since 2014
Fractional reserve banking does not exist
Will this not suffice in the meantime Tim/Richard?
https://www.youtube.com/watch?v=TDL4c8fMODk&index=3&list=LLqbH9ykqHagcHil92YOhY3g
It’s American but still applies doesn’t it?
There are issues with it….
It does not get tax right, in my opinion
With usual apologies to RM (because this is, I think, the third time I’ve put this up…and I know he doesn’t 100% agree with it, which makes me even more grateful for his forebearance!) – try this!
http://www.youtube.com/watch?v=p8OzJ0OgUXY
This is not ignorance, I think. The unchallenged “household budget” narrative serves a political purpose and it has proved extremely effective. Most of the population believe it is a self evident truth by now. The information which underpins the alternative (correct) view is widely available and even the Bank of England explicitly endorses it. So the failure to even present it is no accident.
Recently came across this blog and as such I want to understanding the concept of tax and spend (or spend and tax as I’ve read from you) more.
Just a question about recovery of the 1.5 billion by what you say additional tax, isn’t that were people will say they are still paying for it though ?
If you inject money into the economy someone gets it
They pay tax on the money they receive
They spend the rest
The recipient pays tax on that
And on and on
So the money comes back
And if it encourages other new economic investment it produces more tax than the original spend
The money does not disappear
Thanks for the simple explanation Richard, hope to be even more enlightened after reading a copy of the book.
Unless it ends up being spent with likes of Amazon,Starbucks,Shell,BP,Apple,Diageo,Vodafone,TopShop or even heaven forbid on Gary Barlow CD’s. These companies then decide they don’t wish to play by the rules the rest of us play by and syphon it off to an offshore haven or cut a cosy deal with HMRC.
Isn’t it a case that we need a major overhaul of the tax systems in order to share the burden in a more equitable manner?
Been a lurker here for a while – really enjoy reading the content & comments!
Not true
Even then much of your spend goes to pay the people who supply you
It is not just tax on profits that matters, even if it is important
Doesn’t this cause some side effects which would be bad? (such as hyperinflation)
If not why would we not just print infinite money to but everything we want?
Or is the argument we can create more money, but we need to do so in a careful way to avoid harmful side effects?
Of course we cannot make money without limit
We can create money until we have full employment. Continue and we have inflation. Because we have not created enough money we’ve had neither for a very long time
But of course I advocate stopping at full employment
Read more broadly what I writer, I suggest
Example: David Davis on the Andrew Marr Show:
“The simple truth is that when we came in we had a deficit of 151.7bn it’s now down to 51.7bn Every pound of that is taxes imposed on our children.”
Unchallenged by Marr.
And utter nonsense
The trouble the BBC and its reporters have, Richard, is that they have loudly and constantly followed this line ever since 2009-10, when the Tories (underscored by Liam Byrne’s stupid ‘there’s no money left’ note) and their media allies started hammering home this particular falsehood. And now its established as a deeply entrenched belief across the UK population, who in the BBC or indeed the organisation itself is brave enough to try to start undoing the lie? Think of the consequences for both individual reporters (having to admit they were either too stupid or too cowed, or both, to tell the truth), or the BBC as an organisation (effectively admitting that it was happy to consistently promote a lie and thus deceive its viewers and listeners)?
No, as with the Soviet Union and the construction of the myths concerning the economic effectiveness of their 5 year plans (ditto contemporary China), the lie is so deeply embedded and so fundamental to maintaining ‘order’ that it has to continue ad infinitum. And thus, so do the consequences – until a BBC version of Gorbachev emerges – if that’s at all possible. Perhaps May’s inevitable downfall will signal an opportunity to confess?
I think it is time for a television programme
I have just suggested one to an editor
The Magic Money Tree would actually be a good name for it.
And how about a co-presenter……………….I can see how it might work with someone like Dara O Briain.
That would be fun….
If The Magic Money Tree is produced, Brett Scott might be a good person to involve: http://suitpossum.blogspot.co.uk
I don’t know if you know his work, but his interests span financial education as well as art, activism, etc. I attended one of his workshops and was impressed by the thought he put into in making issues in finance and macroeconomics legible to non-specialists.
It certainly is and good for you. If I worked in social sciences at the OU I’d have suggested it for a BBC/OU co-production while such things still exist but it doesn’t fit so well under the technology/engineering discipline. If it goes ahead it’ll be interesting to see who you/they get to front it.
No replay as yet
Let’s not get excited…..
Excellent idea Richard I look forward to it!
Also, digressing slightly but related to educating the public, have you read Bill Mitchell’s MMT textbook? If so would you recommend it? I’m thinking if getting it myself.
Maybe the BBC need economics editirs and political editirs need a reading list…
I have not read it
I do have the Wray one
An Adam Curtis film on neoliberalism and the myth of the magic money tree would be good.
I have a whiff of interest tonight…..
It is older than that,Ivan. It started with Ms Thatcher and her “household budget” and “socialists run out of other people’s money” and “who is going to pay for it”. It is so well entrenched because it has been repeated for decades, not years.
Yep, Liam Byrne’s note was effectively a bit of last minute neoliberal propaganda before leaving office. That or he just didn’t understand, which is also bad!
I have met Liam Byrne this year
He still does not understand
I recently gave a talk to a group of nine middle aged middle class people the key element of which was this question of how banks create money out of thin air. The point at which the penny dropped ( no pun intended ) was when one of them said ‘ Oh I see when I sign the document agreeing to repay the ‘ loan ‘ money has been created and it was my signature that created it ‘ . The issue is one of cognition . A bit of re-engineering of the mental processes is called for .
Their promise to pay made the money
Which is why I disagree with the arguments that commercial banks make the money
Would that be true if banks were required to have reserves to cover all the money deposited with them?
And what would those reserves be made up of?
Bank notes and coins
I think you have a great deal to learn about money
Start with Ann Pettifor
Okay then, currency in the bank, or as balances in the bank’s accounts at the central bank.
So how then is there to be currency in use?
The fact is the tokens of currency are meaningless: all that matters is whether the promise to pay can be honoured. That is all money is
If you think it is tangible you are seriously mistaken
So without fractional reserve banks, we would use personally-signed IOUs as money
Try it
See how many people accept your IOU
We do accept the government’s because they will accept your tax payment with them and nothing else
That is how money gets its value
So a promise to pay makes money, but it can’t be done without a fractional reserve bank
To make a loan bank debits a loan account and credits a current account
Not a single deposit is required
No one else’s money is involved
Fractional reserve banking does not exist
I need to create some money or at least divert a good chunk towards myself. Any suggestions?
Make all you want
Then see if anyone will take it
That’s your problem
And it is tax that means people have to take government money
And you can’t tax
But some bitcoins, and hold onto the rollercoaster
A faux currency?
Why would you do that?
Hi Richar
Struggling to understand the creation of government debt and have some burning questions:
Why does the government get in to debt when in theory it could use Peoples QE and control inflation through taxation and monetary policy? Is it simply political will or am I missing something?
My understanding of debt is that people buy gilts issued by the government and expect a return. If this is the case, who intially created the money to buy the gilts? Private banks?
Aside from PFI and gilts, do governments get in to debt in other ways?
Let”s start with why there are savings. These are the stock of incomplete transactions – people have sold but not bought. So savings withdraw money from the active economy. They don’t promote economic activity. They indicate that it is not taking place. But they need a place to record these incomplete transactions – and savings media like gilts do that.
Why does hov’t do this?
Partly historical: when money was asset backed it made sense. Now in principle it doesn’t except that the financial system – pensions and banking have made gem.integral to their processes
Why pay interest? Habit. But real rates are usually very low and negative right now
How else do banks get into debt? Pension promises
No expert, but I presume there are limits to this philosophy. For instance if the money was given, say £1m to every adult in the land, would this not simply devalue the value of the currency?
Of course
You do it to the limit full employment dictates
And you do of course spread the benefit
Tax is used to cancel cash issued to reduce inflation: the higher the tax rate the quicker this happens
Isn’t full employment an unrealistic goal now considering the rising tide of automation? (40%ish of jobs to be lost to machines in the next 20 years)
What would be the solution in that case? UBI and taxing the robo-productivty very highly?
Why is full employment an inappropriate goal?
Doesn’t automation let us do so much more that is really useful?
Such is the ego of those in power – be it politics, media, commerce etc. – that they are quite prepared to bring down the entire social edifice rather than admit they’re wrong. Crash & burn. Human lives are of no concern to them. It’s a recurring theme in human history, exposed in each civilsation’s mythology. And still they take no notice. It will take some cataclysmic failure of the status quo and its protagonists before the doors will be opened for radical change. Revolution? WW3? I wouldn’t dismiss any possibility. Why would the 21st century be any exception to the preceding ones? In the meantime they will continue to create the chaos and offer order to a frightened population, while providing bread & circuses to appease them. It’s a tried and tested formula. Plus ça change …. What this adds up to is yet another long and protracted struggle for social justice against the formidable foe of a desperate élite. Just thought I’d cheer you up!
It’s always been like this at the BBC.
Here’s Nick Robinson in 2009 when the debate over deficits and austerity was just getting going.
‘This is just one example of what can happen when the money runs out, a project half complete, the builders soon to be sent home. It is a glimpse of the future in the new age of austerity’ (BBC News at 10, 23 April 2009)
I have a question.
I understand what Richard is talking about, and I have a basic understanding of MMT.
What I’m wondering is: how ought the BBC to talk about austerity, the DUP deal, etc.? Instead of asking, “Where will the money come from?” what should they be asking? “Why aren’t you worried about inflation?”? Should they be talking about the proportion of the national debt that is owned by UK as opposed to foreign creditors? Or what?
Good question! I like it and it has not been asked before.
The answer is that the BBC should be asking at least five questions. The first is can Northern Ireland really spend the money in the time that has been made available? Does it have the people with the right skills to do so, and if not why is the promise being made? In other words, they should be checking the economic fundamentals of the deal, not the cash that pays for it.
Second, they should be asking if this is the best spend for Northermn Ireland.
Third, instead of throwing their hands up in horror at the cost for the rest of the economy they should be asking why if this money could be usefully spent in Northern Ireland it could not also be spent elsewhere.
Fourth, if it could also be spent elsewhere because the resources to do so exist there as well they should be asking why it is not being done.
And, fifth, if there is doubt as to whether the resources really exist because full employment is being reached they should ask if taxes are high enough to stop inflation being the alternative.
Those are real economic questions about right use of resources, whether the decision is appropriate within the capacity of the economy and what risks it creates. But to say ‘where does the cash come from?’ Is absurd, because the answer to that is always the same: the Bank of England creates it.
Jo, you can maybe condense Richard’s 5 questions down to 1. The Beeb (and we) should be asking ‘what are you buying?’.
As it’s an obvious fact that the UK government can create money whenever it wants, it can never run out either.
‘What are you spending?’ is what households ask themselves, because their finances are finite. The government is not constrained in this manner, so while they can spend whatever they like, whenever they like (although as has already been said, the real limit is when full employment and full deployment of available resources has been reached), they can spend wastefully.
So as a society we should be asking ‘what are you buying?’ with this money. Nobody objects to buying things if they are beneficial. Is the government buying things in pursuit of these two aims, and if not, why not? Are they buying resources to give the public a state-of-the-art health service free at the point of use? Are they buying enough teachers to educate our children? Are they buying cladding for tower blocks that is ACTUALLY fireproof so the residents can sleep soundly in their beds?
In the case of the DUP, ‘what are you buying?’ suddenly makes the reality of why the Tories have done what they’ve done very clear indeed – they’ve bought themselves a lifeline.
I’m on board with the government side of this, makes absolute sense.
But one gap I need filling.
If a commercial bank creates money out of thin air when it creates a loan, why would a commercial bank ever go bust when loans go bad?
So, Northern Rock went bust when it couldn’t get access to funds from the international money market after it seized up as the sub prime contagion spread. But why would it need to access that market if it could create another loan to replace that one?
Sorry for the dumb question.
You can’t lend to yourself…..
And the difference between commercial banks and the government is banks can’t tax
They’d like to (why else do they work so hard to capture tax revenue as PFI, etc?) but a government can always bail out of a crisis by creating more money because it knows it can tax it back in due course – and people accept that the guarantee that they can use the state money to pay that tax is good enough to make it have worth. But when a bank has a crisis it’s because it can’t secure its future income stream. So it goes bust because its promise to any has failed and the state has to take over responsibility for the money it created. A state’s promise to pay never fails for debt in its own currency. That’s the difference.
“You can’t lend to yourself…..”
Barclays can!
And I hope they pay for it
Thanks Richard. Makes sense now.
[…] Why? We know there is a magic money tree. […]
I think I understand that Greece cannot get itself out of its mess because it doesn’t have the right to create more euros – have I got that right? But what about Venezuela currently on the point of bankruptcy? Could it not create more money for itself?
Venezuela is a petrodollar currency and it is US dollar di named as a resukt
So the answer is no
Radio 4 has a theme on Austerity this morning. I caught a discussion of the increasing popularity of increased public spending and higher taxes to pay for it…
[…] person named Jo asked yesterday what the BBC should say in response to the DUP being offered £1 billion more for Northern Ireland […]
Hi Richard, great post and comments – just wanted to check one point: regarding tax, at one point you say it is money ‘recovered’ and elsewhere you say it is money ‘cancelled’. Sorry if being pedantic, but my understanding is that the latter is more accurate; that tax is money deleted from the system, whereas ‘recovered’ suggests money returned to the government to be used again in some way. Is this correct in your opinion? Is tax literally deleted or is it held in some account somewhere for any purpose at all?
Recovered means that it reclaims rhe money government spent
The consequence is, like loan repayment, that the money is effectively cancelled
I think the terms compatible but cancellation is the result
It seems to me that there is a need for an accessible source of information and debate on this specific issue. And with respect, surely the target for this information should be more than the BBC?
What about creating a website set up to debunk the myth that there is no Magic Money Tree, that there is, in fact, a thriving and fully functioning MMT. A possible structure:
Home page: set up the aims and objectives of the site, to debunk the myth – this would be the best place to display an easy-to-watch video
Contributors: A gallery of informed commentators who have made a contribution.
Library: A repository of papers/articles, films, archived TV programmes that support the objectives of the site, other publications books etc
Press information: “Simplified” press releases
Educational resources: resources for schools and colleges, and POLITICAL PARTIES!
The company name Magic Money Tree Limited is available, I would be happy to register this, I have registered the domain http://www.magicmoneytree.org.uk today.
My website developers have created a unique content management system that would provide me with all the necessary tools to create the website, or give access to anyone else that is interested in making this happen.
I would like to see the MMT debate on Channel 4, and someone should point Michael Moore to this topic, see https://michaelmoore.com/
Whilst I don’t have the economic street cred to contribute to the technical debate, I am inspired to contribute to the resource mentioned above.
Anyone for tennis?
Count me in Bob
tl;dr summary:
* Could somebody tap into some funding for Bob’s suggested activities?
* Is it worth collaborating on a pitch letter for Richard’s suggested TV programme?
Long version:
This all sounds fantastic, although I would be wary of replicating the online resources of Positive Money. If I remember rightly The Guardian and David Graeber have also done some good short videos. A pluralistic and resource-rich approach is a great idea (I like Geraint’s thought about a game as well). I’m also wondering whether some academic funding might be sought to support this kind of work, since it fits very neatly into the definition of Engagement (see e.g. http://www.britac.ac.uk/british-academy-rising-star-engagement-awards).
For actually shifting the public narrative, though, I don’t think there’s any substitute for having a new TV special at the heart of it. Something aimed at a very general audience. Essentially something like Dispatches. This material is intrinsically pretty dry, but it is so important, and I think it could be brought to life. The whole furore over the Magic Money Tree gives you the title and opening segment. It can develop an investigative journalism feel: I can picture eerie, dramatic music playing over montages of politicians from across the spectrum comparing fiscal policy with household budgets, or drawing false analogies between the UK and Greece. Animations, catchy slogans, etc., complemented by more nuanced analysis, to teach the principles. Footage taken from a workshop where members of the public (including committed deficit hawks) are taught the uncontroversial fundamentals of money creation. The same workshop discusses the impact austerity has had on all our lives personally.
Richard, you’ve suggested something to an editor. If there’s no luck there, might it be worth collaborating on a short pitch letter that we could send out to multiple editors, production companies, journalists, etc., to see if anybody bites?
BTW, isn’t it fantastic that Modern Monetary Theory and Magic Money Tree share an acronym?
One thing: Positove Money have got money entirely wrong
I have very little common ground with them
Love this idea. Perhaps a page could be included containing occasional blog posts that track when and where the Magic Money Tree (and such issues) has recently been mentioned/discussed in the mainstream press and then explains why these claims are wrong, and uses this as a starting point to re-educate/ debunk.
I’m thinking of something along the lines of the ‘Alerts’ page that http://www.medialens.org use – of course their aims are different but I think the format of ‘Alerts’ could be adapted to our aims with great effect. It would also keep the website up to date and relevant and less of a ‘repository of knowledge’. Just an idea 🙂
From a http://www.medialens.org page, on what is an alert:
“A media alert is our analysis of a news story, sent out via email and published on our website. The alert compares the corporate media’s view of the world with fact-based, referenced and credible alternatives…”
Ian/Jo,
I had come to a similar conclusion myself. Like the idea of a “Debunking fake news” type page.
What I need are uses of the phrase Magic Money Tree in recent quotes by economists, politicians et al, and reasoned arguments countering their suggestions. In other words converting fake news into real news – maybe that’s the handle for the page: “Fake news converter”
Again, send me your contributions bob@6110.co.uk.
Regarding Jo’s plea for funding. Costs are minimal I am happy to carry those. Rest is my time, and to be honest I am fortunate to have enough paid work to keep body and soul together so happy to pile in just for the thrill of feeling that I am doing something useful.
Thanks Bob
Can I encourage people to join in?
I suggest it is not enough to promote the good stuff. The conventional wisdom and those who spout needs to be mocked and pilloried.
So in addition a collaborative effort to capture all macroeconomic nonsense spouted by politicians, media, business leaders and groups like the IFS; Something along the lines of BS Bingo.
We could have prizes for: The stupidest interviewee/interviewer/question/answer of the day/week/month.
We could record stats on the number of times the phrase “we must live within our means” is stated.
If some of these are linked to video or audio we would have the material for an amusing montage.
How about a Khamal Ahmed page: All I know about economics. Or a Socratic dialogue between Hammond and Paddington Bear on the logic of paying off the UKs debt.
I love the idea of magicmoneytree.org
Brilliant!
The idea and the title ‘magicmoneytree.org’ allows a counter-intuitive concept, that prima facie appears recondite and far-fetched (largely because of the prevailing economic orthodoxy), to find wide, popular understanding and appeal; and to do it quickly. It is an excellent idea.
Are there any online fiat currency simulation games where you get to define monetary policy?
There is a game on Steam called Democracy 3 where you basically run a country and there’s a lot of economic decisions to be made in it that all impact on various elements in the game. The last time I played it was when I was still indoctrinated with neoliberal thinking so I’ve not tried playing it from an MMT viewpoint (I do remember implementing a very harsh austerity period in order to get a surplus (naughty me!) and was then running a very Bennite socialist government that won about 10 landslide elections in a row before I stopped… :p).
I’ll have to give it another go – it was good fun!
The link to bob@6110.co.uk doesn’t appear to work but here is one from Nadhim Zahawi MP for Stratford-on-Avon. I haven’t looked at the conservativehome website before for fear of picking up something nasty but I had a sneaky look after it was mentioned in a previous blog.
He wrote an article on 26 June which included this: “Everyone knows there is no magic money tree, and people are rightly suspicious of Labour’s policies. Everyone knows you need a strong economy to build strong public services. And everyone knows that increasing debt only leaves the next generation with greater bills to pay.”
You need to start with an easily understood analogy. If money doesn’t operate like a household budget then how does it operate? Preferably in two or three words.
I will sleep on it
Good. And I think if you nail it you will get peoples interest.
It’s not just the beeb. This morning there is an article in Grauniad entitled:
“Brexit could blow €20bn hole in EU budget, warns European commissioner
Günther Oettinger says” By one Daniel Boffey in Brussels. The opening paragraph is:
Britain’s withdrawal from the EU could leave the remaining 27 countries with a €20bn a year hole in their budget, requiring additional EU taxes to fill the gap, the European commission has said.
Here is the source for this Grauniad view of the world. I dont see any reference to increased tax so is this another example of dodgy reportage?
https://ec.europa.eu/commission/commissioners/2014-2019/oettinger/blog/what-your-europe-worth_en