This is well worth watching:
The video is by an architect, J . D. Alt, who asked why the world could not afford to build the vision he had for it, and realised that the only obstacle was lack of understanding of money.
There is more about him, here.
And about his book here. I have not read it, but if the video reflects it then I suspect it is useful.
Hat tip: Kelly Gerling.
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Dynamite.
“For a quarter of a century we’ve been hearing about trickle-down wealth and supply side economics”. Now call me a thicko, but I read the Labour Manifesto of 1997 and they aren’t in there. I’ve been in jail since and when I came out I read economics for dummies and those concepts aren’t in there either. Where should I have been for the last 25 years?
With respect, you really need to do a little more reading
Back in the 50’s some of my best friends were architects, albeit rugby playing ones. They had fine visions but little comprehension of costings and less of economics. After a pint or several they could build a new town just like that. What was interesting is how often they failed to buy their rounds being short on the readies.
I liked that. I thought he could have stressed the business that bond selling is actually doing more of a favour to the purchaser than the seller but overall it got the message across well. When will the leadership of the Labour Party in the UK take this message on board and start a propaganda exercise to neutralise some of the myths that the Tory Party have propagatec over the years? For the Labour Party i feel that Callaghan did so much damage with his speech in the late 70s when he said Keynesianism didn’t work and that it only ever worked by pumping inflation into the system. That was at a time when oil prices had quadrupled in a year or so and were due to be hiked again.
and Heath’s govt. adopted the Competition and Credit Control policy which increased the flow of credit and amount of money in the economy. I bought my first house for £5000 in 1970 and by mid 1973 it was worth £10, 000.The policy was cancelled in a few years but it also contributed to the inflation of the 1970s. The ‘popular press’ blamed the unions but, as even Enoch Powell conceded, they were responding to, . not causing the problem
Great! It makes it easy to understand basic MMT. I particularly liked his description (on his web site) of this all being a problem of ‘seeing’ (most obviously for those who believe in Tax & Spend), likening it to the famous figure-ground puzzles (he gives the girl/witch example, but I think that the 2 faces/vase one is best known). His web site has a free download PPT of the basics.
One for you, Richard,
Am I right in thinking that the ECB has no taxation authority as such and that taxation in the Eurozone is reliant on the separate countries to do it through their own national systems?
Yes, on all counts
“Yes, on all counts”
Hey, am I getting the hang of this stuff? 🙂
I’ve put the Alt Video out in a couple of directions and will be interested to see if I get any response. If I get any hard questions I’ll be right back.
I have a feeling you mean that….
This video serves a good exemplar in the art of communication – of how to explain this subject to those who are unfamiliar with it and do so in a considerate, uncomplicated way.
JD Alt’s approach should be noted by those that simply spout technical jargon at people. His coverage of the endogenous money (private lending money) aspect was scant but I suppose that he had to cut something to keep this initial explanation short enough.
Marco,
I agree it’s nicely presented.
“His coverage of the endogenous money (private lending money) aspect was scant ”
Well he probably didn’t want to confuse his audience with the finer nuances of endogeneity at this stage. Who would ? Especially after Gordon Brown wittering on about endogenousness ’til we were all blue in the face and our ears started bleeding.
I think ‘endogenous growth theory’ is now one of those phrases you would you choose only very selectively to employ, along with perhaps ‘rivers of blood’ which is also somewhat tainted in political discourse by its negative associations. 🙂
Great link! I’ll use this in my presentation on modern money to my local Labour Party next month.
My advice to Adam: Don’t.
I got as far as about 5 minutes in and concluded at that point that the video is nonsense, and right wing nonsense at that, and gave up.
He had just added in to his nice fiscal plumbing diagram the facts that the interest on lending goes back from the FG (Federal Government) pot to the PS (Private Sector) pot, AND the money spent by the FG does the same, it goes back into the PS pot.
Therefore when the FG removes money from the PS via taxation, it is simply a question of who gets to make the spending decisions – the PS or the FG. The “money” just goes on round and round.
So why would a Labour supporter think that the PS a priori makes better spending decisions than the FG?? The split is a political choice and it always has been and the video tries to obscure this fact. Therefore it is right-wing propaganda.
Am I right?
Or maybe I missed some stuff that makes some sense later on?
DW
I have to disagree.
It is true that interest goes to the PS. But remember much fo the time right now the next rate is zero.
And of course the FG should allow decision making in the PS. Do you want state control of all aspects of your life? I do not.
But to suggest that allowing depiction making in the PS is the state abandoning its duty to make the decision that are its to make is just wrong, and even absurd.
The right relationship between the FG and PS is partnership. I struggle to see why suggesting each has a role is right wing. So long as each is given responsibility for the right roles isn’t that the goal?
Richard
DW –
Honestly I cannot believe that someone genuinely can’t be bothered to watch more than the first few minutes of something and yet can be bothered to read the comments and can be bothered to write a reply to one. Couldn’t you have skipped ahead in the video to allay your initial concerns?
So, while I find it difficult to believe you aren’t trolling I shall reply anyway out of politeness and for the sake of any actual progressives put off by the start of the video:
1) firstly the video illustrates the common perception most people have of our existing money system and economy,
2) secondly the video explains how that common conception of the economy is actually inaccurate and instead builds a more realistic model of how it all actually works.
The video does a nice job of clearly communicating the reality of our money system. It does not cover everything in full detail and it is specifically for the US system. However, for anyone, like me, who has been struggling to put together a 30min presentation for their own local group of activists (from whatever progressive group): the video provides a great outline on which to build a solid presentation.
Furthermore the author has licensed the power point presentation under Creative Commons and encourages others to repurpose it for their own specific needs as long as they likewise publish under CC.
I think it’s fantastic stuff and many thanks to Richard for bringing it to our attention.
I’d also like to reiterate Richard’s point about the public sector and private sector working together. Our money system is brilliant because it provides the means for both private and public projects to be agreed to and managed with a single, simple but infinitely flexible money system.
Where big national or regional level projects are the best way to deliver infrastructure/services the public sector can take the lead under democratic control and public ownership but individuals and local businesses can be hired to assist in delivery using their local expertise.
Where market based competition can deliver ever greater efficiency and quality the private banks can create the money required while the public sector provides regulation to ensure fair-play and a safety net to ensure entrepreneurs don’t fear failure so much that they never take any risks.
At its heart it is a wonderful system that could so easily deliver both fair and equitable social outcomes and an ecologically sustainable economy. The fact we so badly misuse such a great system is what we need to address and that’s precisely why fully understanding the true nature of the system in question is so important. All the progressive ideas in the world will be useless while ever the majority fail to grasp reality at the same time that a selfish minority understand it only too well. It us in fact their understanding combined with their selfishness that gives that minority their overwhelming wealth and power.
Thanks Adam
One question it raised for me was about the national debt. It is said to be funded from savings i.e. money not being spent by the owners but lent to the government to spend and for which the owners receive interest. After 2008 the national debt has doubled ?. I know pension funds often buy govt, bonds but were there really such sums available? In a recession people will look for a safe place and not invest but the sums are very large. My question is…was any of the money lent by banks using the power of fractional reserve banking to create money ‘out of thin air’?
a) There is no fractional reserve banking
b) The national debt has not doubled – QE cancelled half of the supposed increase – the government cannot owe itself money
c) Savings – especially from overseas, but also from growing inequality have grown considerably
The national debt simply is private savings
Ian Stevenson,
The point is the national debt isn’t money leant to the government so that it can then spend it. The government can always spend at will because it is the currency issuer. In what way does an entity that can create something at will benefit by collecting up the thing it can create at will? It can’t be that it needs to store it for later or needs to get some now because it can always create more at will. Warren Mosler likens the currency issuing government to the referee of a sports game. The referee neither has points nor doesn’t have points – he simply creates points when he deems that one or other team deserves to be awarded points. A football referee doesn’t need to borrow goals before the season starts nor does the FA have to tax goals from the players before they can award them in future games and there is not a growing debt of goals that will eventually have to be paid back – that’s obviously absurd! It is precisely the same with a fiat currency issuing government and yet our understanding is so muddled that we cannot see how absurd the idea of “the national debt” really is.
The national debt is just money temporarily taken out of circulation for a number of reasons including providing a safe store of value and a steady income for certain groups of people (some deserving and some less so). It is never to enable the government to spend but it might sometimes seem that way…
If and only if the economy is running at full capacity and the government has a democratically mandated policy that requires it to commandeer more real resources then the removal of money from circulation via the sale of gilts could be said to enable the government to spend without causing inflation. MMTers call it “creating fiscal space” – spending power is removed from one part of the economy to allow the reallocation of real resources to another part of the economy. However issuing bonds is not the only way in which inflation can be avoided and inflation doesn’t necessarily have to be avoided.
The point made by MMT, this video and Richard Murphy, is that if we understand the reality of how our money system actually works then we can all join in a rational debate about how we spend our time and real resources on collective projects and how much time and real resources we allow individuals and businesses to do with as they individually see fit. Then truly democratic decisions could be made.
The problem we currently have is that deliberately obscurantist ideas like “the national debt”, “loanable funds” and “fractional reserve banking” prevent the whole population understanding enough to meaningfully engage in the debate they should be having about real priorities for real resources. Therefore the “democratic decisions” we make are not based on the reality of our situation and thus the public give consent to policies without understanding the range of options available nor the likely outcomes of different policies. If informed consent to enact policies isn’t ever really given then can a government truly be said to be acting democratically?
The question you pose in your last paragraph is a case in point of this type of confusion. The answer to what I assume is your question is that, as Richard Murphy says, fractional reserve banking isn’t real. There are no loanable funds. Our deposits are not leant out. That’s why you never get told that you cannot spend right now because someone else has been leant the money in your account and you’ll have to wait till they pay it back, slowly over the next 25 years!
What actually happens is all private bank lending creates money ex nihilo in a similar fashion (keystrokes producing entries in a spreadsheet) as the Bank of England creates money out of thin air to enable the government to spend. Don’t take my word for it though, try this from the Bank of England back in 2014:
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
As another commentator has mentioned earlier, the video leaves the detail of private bank money creation out to avoid undue confusion to newbies. However, it is really pretty simple since it follows similar principles to the process of government money creation by the Bank of England or the Fed in USA. The big difference is that instead of a government tax-redemption-IOU being created and then a changeable amount of tax being imposed at some later date where tax may be greater, equal-to or less-than the number of tax-redemption-IOUs created by the initial government spending private-IOUs are created alongside an exactly equal entry on the other side of the bank’s balance sheet at the moment the loan is created along with a contract stipulating the time period within which the loan must be repaid (and thus the IOU destroyed). In that sense money created privately has a built in self-destruct timer ticking from the moment the loan agreement is signed.
That is why MMTers say “only the government’s central bank can create net savings in the private sector” – because only money created by government spending is free of this self destruct mechanism and so can lead to aggregate savings once all private debts are taken into account. In reality private loans sometimes do go bad and never get repaid so some privately created money escapes its designed destruction date but most gets paid back and thus destroyed as scheduled. Taxes will get the rest in the end anyway.
Another source of confusion is that private banks creating money out of thin air seems to deny the stated fact that “the government is the currency issuer”. In reality private banks are not as private as their “owners” would like us to believe. They all operate with a government charter, are tied into the government’s central banking system and their deposits are guaranteed by the government. Private banks are actually just small local extensions of the government controlled money system which provide local on-the-ground knowledge to competently (2008 aside!) create the many small sums of money required by individuals and businesses for their own private plans while government spending enables larger public projects to be put into actions. One simple and flexible money system allowing the seamless integration of private and public projects using the same finite time and resources – absolutely brilliant and probably the most elegant, robust and useful social construct our species has yet developed.
I don’t know if that’ll make sense (or indeed if I actually got it all right!) but basically all the money at all stages is created out of thin air! That is the nature of fiat currencies – they are counterintuitive and quite different to the mythical money system we grow up believing in. That is of course very convenient for the lucky few who do understand the reality and also have access to the levers of control over public or private money creation 😉
Many thanks
You completely get it
Dear Adam
A huge thank you for taking the time and trouble to write this. I shall print this off for a couple of friends who are interested but not convinced-such is the power of established ideas.
I did know most of this but I am not confident in my overall understanding, having come across elegant theories, capitalist and socialist in politics, in my own field of counselling and psychotherapy and in the area of religion, I have found there are always gaps, inconsistencies or simply alternative ways of understanding the same thing. The ability to live with doubt and regard all ideas of capable of revision is not a bad thing. Questioning is how we advance our knowledge; sometimes by seeing the information re-ordered or re-defined rather than new. So I am grateful to you.
One of my speculations was if the National Debt as we conventionally speak of it, was at all funded by bank fiat money; given that the banks played the major part in the events of 2007/8. It would immoral if having caused the problem, they could create money and earn interest from from the taxpayer. Your reply cleared that up.
I had worked out that probably QE was money owed to the issuer of the currency but, given my tentative hold on the theory needed it confirmed by someone who really understood the process.
Fractional reserve banking is a concept which drew me into alternative economics (and the politics associated with it). I had bookmarked the original B of E link you kindly posted, when Richard put it on his blog in 2014. otherwise I might never had heard it other than the occasional reference on the Guardian’s CiF. The point about bank created money being destroyed (which several of my friends find incredible) clarifies the issue for me. Terminology is key here.
From an MMT point of view, the suffering forced on the Daniel Blake’s (the film I, Daniel Blake) of this country, is needless. Necessary suffering is one thing, unnecessary suffering is tragedy.
I hope other readers will have found your reply useful as well.
All we have to do now is convince the political parties!!
I second both those last sentiments
And your own on unnecessary suffering
Particularly like the idea in the video that the currrent system is ‘the ideology of money scarcity’.
Also think it is helpful to think what would happen if you didn’t tax. That means either that a doctor or fireman would be paid only once because the government had spent all its money . Or the government would just go on printing – and nobody seriously contests that governments have the right to print money.
So if printing more money continues, everyone knows it results in inflation. But importantly nobody suggests the government doesn’t have the right to do it.
Logically it then follows that government also has the right to destroy that money they print.
Everyone knows that governments have the right to tax – it’s even supposed to be one of the certainties, along with death.
The missing link is that nobody seems to know that tax is the method a government uses to destroy money.
It’s dangerous territory but I’m fairly sure tax receipts were always low in the Weimar Republic and I doubt Zimbabwe collected much so it would change the narrative if, when the inflation question came up, the reply could be: of course they had rampant inflation – they didn’t collect enough tax…
Peter May –
I believe you are correct when you say it is problematic when people don’t understand that taxes destroy money. People find it difficult partly because it means that taxes don’t pay for anything and partly because it negates their belief that there is a continuous circulation of money. The perceived cyclical nature of our economy is strongly believed because we are used to the cyclical nature of the seasons and thus life itself. Also for most of us in employment our work is repetitive and frequently cyclical in nature, at least for years at a time. However I don’t think our economy in aggregate over decades is anything like the truly cyclical natural systems we are used to.
The reality is confusing because money does circulate for a bit before it gets destroyed by bank-loan-repayments or tax-payments. However I think that it is truer over the long term to say that there is no cycle at all. What there actually is are a series of decisions to invest in various activities. After the completion of each activity the economic system has been partially transformed and then the next activity starts from that newly transformed economic base. It is essential to have a money system that allows for this linear project based approach and that’s why we have money created at one moment and destroyed at another before new money is created to do something else later.
You see linear progression of natural systems only over extremely long periods of time so it is difficult to notice. For example evolution wasn’t an immediately obvious phenomena because it takes tens of thousands of years to even start to make noticeable changes to a species’ morphology. Nevertheless the difference between the life on Earth 1 billion years ago and the life now is obviously the result of a long-term linear process rather than just a cyclical pattern repeating ad-infinitum, though such cycles certainly have been occuring simultaneously with the long-term linear process of evolution.
The same could be said of galactic evolution and the process of element generation in repeated cycles of star formation and destruction. A linear process arises from a cyclical process. It is a common theme in our universe.
Perhaps highlighting the dramatic economic/infrastructure changes that have occurred over the last 250 years would draw people’s attention to this additional non-cyclical nature?
We aren’t just cycling existing money around as we do the same thing our grandparents did 50 years ago. Instead we’re creating vastly greater quantities of money to facilitate completely different projects using new technology to serve three times the number of people as our grandparents’ economy was capable of supporting. Imagine we had restricted ourselves to the supply of money available in 1945, what would that look like? Well we’d have had a massively deflationary currency and economic growth and technological innovation would have ground to a halt. There could have been people sitting around willing and capable of doing useful stuff, there would have been mountains of unexploited real resources. In the end 2018 would look exactly the same as 1945! We. Would not have had sustained economic growth and so would not have been able to support population growth. Many of us who now enjoy being alive would never have been born. That’s the power of fiat currency!
Once people are open to the idea of non-cyclical economic activity they may be more comfortable with the true nature of money: as a social construct that enables a variety of methods
of collective and individual decision making in extremely large groups.
Right now most people are blinded to the reality of how difficult it actually is to make decisions in such vast groups spread over such great distances. Ironically the reason we’re blind to that difficulty is because our money-system and associated political-system makes such a good job of it! As bad as things may seem they could easily be so much worse.
There’s a reason why the stone-age was so long: it took a very long time (in human terms if not in geological terms) to evolve the brain power, ideas and customs required to safely organise thousands of people rather than merely hundreds of people.
The ability to self-organise in groups of a hundred or so is an inherent human ability we’re all born with. We are instinctively capable of knowing the individuals and keeping track of all the interpersonal relationships in a group of a few hundred people we’ve known all our lives. That’s because our ancestors lived that way for hundreds of thousands of years and the species that came before them lived similar lifestyles for millions of years. Over those millions of years evolution selected for the fantastic cognitive abilities capable of performing such a feat of social networking as we now take for granted any ten year old at primary school can manage with zero effort.
So I think we’re blind to some aspects of our reality but only because we rarely look in the right places and frequently fail to approach what we look at in a receptive state of mind. Finding ways to open people’s eyes to these additional realities is key to opening their minds to reconsidering what they think they know for sure.
I may post part of this as a blog…..
Is that OK?
I still prefer a cyclic view even though the same money is not recycled. Like the electrons in an electrical circuit all money is equivalent and indistinguishable.
All money is created as a positive (credit) and negative (debt) – it is simply information stored somewhere – and is destroyed when the positives flows back to the source (completes the cycle) such that the double entry in the great book of accounts can be cancelled.
I tend to agree with you Charles
And I see no problem with that
But the public do – because notes and coin are not shredded when used to pay tax….
Charles Adams says:
January 22 2018 at 1:58 pm
“I still prefer a cyclic view even though the same money is not recycled. Like the electrons in an electrical circuit all money is equivalent and indistinguishable.”
I have a notion that that the electric current analogy has much merit. I haven’t quite got my head round it yet.
What may be very important in understanding the model (as electric current flow) is that we have it backwards. Because electrons are negatively charged. (cf Money is Debt)
An electrical generator does not produce electrons and fire them down the wires to us, it ‘sucks’ them from the earth and collects them by attraction when you plug in an appliance and make the connection. We perceive the flow as positive, but it isn’t really. The current we perceive is caused by negatively charged electrons flowing in the opposite direction.
If there is no consumer demand the generator produces nothing.
James Thurber’s mother (he alleges) was concerned about electricity ‘leaking’ from the sockets around the house. It doesn’t.
One interesting thing to consider also is that unlike water which ‘might’, (but doesn’t) trickle down) electricity is to all intents and purposes unaffected by gravity.
Richard –
Of course you can use my post in a blog!
I thought maybe I’d gone off on a rambling tangent there so I’m glad to see it made some sort of sense outside my own head 🙂
Thanks…not today….day job intruding
I’ve always thought that an electrical circuit was a better analogy than a plumbing one which is what we have in the video- where taxation is eventually shown as just a waste product down the drain. If it were an electrical system it would need to complete its circuit in order to function at all. And in completing its circuit you’ve made proper use of its power with beneficial economic activity on the way. And when it has completed its circuit it is in all senses ‘spent’.
The cycles are generated by the electrical power generation and need to be smoothed and regular for a coherent economy but Adam Sawyer’s linear progression is more a function of the management and control deciding when and where to generate rather than the actual generation itself. No generation equals lights out and back to candles but more and better generation equals electric cars, hydrogen buses and steelmaking on shiftwork – or something similar….
Peter
That’s OK so long as the circuit has a rechargeable battery in it – for debt….
Richard
Peter May says:
January 22 2018 at 6:07 pm
“…..No generation equals lights out ….”
Yes. But also, No.
The opposite also applies. No lights switched on (no demand) means no generation.
The generator does not pump out unwanted current into your appliances.
I think there must be some mechanism whereby unwanted current just leaks to earth, (wasted) but the challenge the power company has is to match consumption with production. Notoriously it has to cope with ‘everybody’ putting the kettle in at the same time when the commercial break occurs in Coronation Street or at half time of a world cup final.
There would is a similarly large problem when all the kettles switch off. I’m not clear which situation would do most damage to the generating machinery.
The rechargeable battery (or capacitor) that Richard mentions is vital to smooth the flow. This is the crucial element (in terms of electricity generation) in being able to store sustainably produced power generated at the wrong times of the demand cycle. (The Sun cannot be persuaded to shine just because there’s a commercial break in the TV transmission)
Is this equivalent to making savings for retirement? I’m not sure; but I think it might be. If ‘we’ are confused about what is credit/savings and what is debt, then the battery which Richard wants for debt is the sams battery which most of us would be likely to regard as a savings account.
Wouldn’t it. (?)
Electric circuits are a more confusing analogy than plumbing systems: While a DC circuit is not unlike the flow of a liquid, familiar household power is AC, which just shakes the electrons a short distance back and forth fifty times a second. Moreover, the matter of practical interest in an electrical system is the energy that drives the movement of the electrons, and can be extracted and put to practical use, not the electrons themselves. The time-honoured hydraulic theory models the journey of the money from issue to cancellation more closely, although the saying attributed to Pasteur, “The map is not the terrain”, is always a vital caveat to any analogical thinking
Agree with the last, a lot
I admit these diagrams do not really matter to me
I listened to rather than really watched this video
David Rotherham says:
“Electric circuits are a more confusing analogy than plumbing systems:….”
I take your point about the difference between AC and DC, but the fact remains that if you don’t plug in an appliance there’s no demand.
And if you disconnect the black (or blue) wires the circuit is incomplete and the appliance doesn’t work. (unless it’s a neon bulb)
It may well be that the power supply merely “shakes the electrons a short distance back and forth fifty times a second.” but try telling your electric meter that there is no flow.
“With respect “The time-honoured hydraulic theory … ” hasn’t served us very well because even now most people don’t understand how the financial system works. And as transactions are increasingly taking place in non-tangible currency in cyberspace I don’t think think a hydraulic theory is going to cut it.
The bit that the hydraulic diagram misses is that it is a closed loop which does no work. The point of money is that (like the Sundance Kid) it’s better when it moves. That perfectly expresses the present problem – we’ve got trillions of financial units changing hands doing no work on various money markets.
The hydraulic model needs water wheels or turbines to show what the money is actually doing. Vast amounts of it is doing bugger all in the modern economy but sitting in stagnant pools encouraging the breeding of harmful bacteria and blood sucking mosquitos…..Or something like that.
Richard says:
“I admit these diagrams do not really matter to me
I listened to rather than really watched this video”
I think an educational psychologist would say there is a significant difference between saying “I see what you mean” and “I hear what you say”.
Maybe
I’m sure this will be of interest to people on here – http://www.mmtuniversity.org/
I recall one of Richard’s blogs discussing what terminology should be used to describe the workings of a fiat money economy; I don’t recall many firm conclusions being reached? The slide show by JD Alt offers some answers, especially in the section on “The Right Words” where he offers Net Spending Achievement and National Savings Clock. Is it worth reviving that discussion?
For me, the most useful slides were about where your tax dollars go, i.e. nowhere at all!!
So Fiat Dollars = Tax IoU’s and when the government collects taxes, it just cancels the IoU’s.
Hence the government does not spend your tax dollars (deserves a Mic drop for JD Alt?).
I’d appreciate the experts on here confirming that this is unarguably true before I use it in conversation.
Spendable money is still being removed (cancelled) from the private sector, so the inflation control mechanism still works.
Your understanding looks Ok to me
Agreed absolutely re a rechargeable battery. But if we (importantly) presume that electricity generation is as green and ‘free’ as water then surely the rechargeable battery is the metaphor then that blows plumbing out of the – er, well – water, as it were?
🙂
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