The FT is continuing to face reality as it considers what to do in the face of the coronavirus crisis. It has an editorial today that concludes:
The scale of today's downturn means even the most direct monetary financing, such as “helicopter money”, or handing cash to the public, should remain an option.
That's pretty radical, and I rather strongly suspect suggests that this editorial reflects the views of Martin Wolf, who has always had sympathy with helicopter money, when I have had my doubts, believing it for government to manage our social safety net.
Rather more importantly, they go out of their way to make clear that they support direct monetary funding (DMF) of the government by its central bank. As they say:
There is no clear distinction between quantitative easing and monetary financing.
They clarify this by suggesting that the only obvious difference is whether unwinding is possible, or not. But as they then note, the original national ‘debt' of 1694 was not unwound. Nor has any UK QE been unwound, and the idea that very much of that now in existence in the world might be unwound is now ludicrous: the capacity to do so simply does not exist. Most QE is DMF already.
So the risk in new DMF is not really messaging, which they think was Andrew Bailey's concern in his bizarre article that I noted yesterday. Rather, they think that the risk might be inflation. As they note:
Without limits, allowing a government to finance itself by creating money can lead to hyperinflation. But these risks can be manageable: the quantitative easing of the past decade, despite predictions, has not lifted inflation above the main central banks' 2 per cent targets. The money pumped into rich-world economies has been met by increased demand, perhaps permanently, for precautionary saving.
Private wealth has, in other words, been increased. That, of course , was not the aim, and needs countering now with weaklth taxes. But in any case, as they also note:
If trends restraining inflation go into reverse, central bankers have tools to combat rising prices, whether through raising interest rates or unwinding QE. The present crisis may even be deflationary and central banks' targets are, with the exception of the European Central Bank, symmetric in promising to tackle inflation that is both below and above their stated goal.
I think the note about deflation particularly apt: I really fear the likelihood of this right now.
So, is direct money funding (‘money printing' in common parlance) on the FT's agenda right now? It definitely is. As it should be on the Bank of England's agenda. Our economy is going to need all the help it can get for a long time to come. I am talking years here. The availability of money is the last thing that should constrain it.
I hate to say it, but my 2015 prediction that this would be required by 2020 has been proved to be right. Modern monetary theory and People's QE have won the day.
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It seems we have moved from “ridicule”, through “violent opposition” to the third stage that the truth of MMT is “self-evident”. I await an announcement from the IFS that they were always a supporter.
🙂
The sad thing is they still think that “money printing” only happens as a one-off at extreme times like this, but as Warren Mosler tweeted yesterday…
“Central banks are best thought of as ‘printing money’ every time they credit any account, and ‘unprinting money’ every time they debit any account.”
Agreed..
Stephen Ferguson.
Stephen.
Just wanted to say thanks for the explanation on government”debt” you sent me on a previous blog/thread. That thread is no longer taking comments.
(Answering the Question “How are we going to pay for it?” April 3rd)
Using IOUs and UOIs has really helped me get my head round it all.
Part of the confusion for me is how to match the theory to the actual reality of how it is done in practice. The role of tax in particular.
For example, what is the “paper trail” if I send a cheque for £1,000 to HMRC Shipley to pay my tax bill?
(This is how I think it works)
1. I write a cheque for £1,000 to HMRC Shipley.
2. HMRC then present the cheque to the BoE at the end of the days trading.
3. BoE then moves £1,000 of CBRs from my bank’s (NatWest) reserve account at the BoE to the Treasury’s reserve account at the BoE.
4. NatWest debit my account by £1,000.
5. HMRC marks my tax bill as “paid”.
If this is correct, then by me paying my tax bill, £1,000 of CBRs have not been “destroyed”. (As you suggested happens on return of the UOI to the government). Instead the CBRs (the original IOUs) have been returned to the Treasury “pot” in its reserve account at the BoE, to be used again.
Am I right in thinking, that actually destroying the CBRs is a bit pointless (but could happen in theory) because the BoE would just create more anyway? Transfering the CBRs back to the treasury account just saves the BoE from having to create extra CBRs unnecessarily?
Does my confusion make sense? Am I missing something?
Money is debt
The debt has been paid
How can the money still exist?
Ah. This is where I get stuck Richard.
The CBRs are moved back to the Treasury’s account at the BoE for reuse. To me, that looks like they have been “recycled” rather than “destroyed”.
I am struggling to make the mental leap.
I haven’t had it explained in a way that flicks the switch in my head.
If I use the (David Graeber) analogy to explain my problem.
A King has to feed his army. (He needs the army to be King)
Rather than having a “camel train” of cooks and livestock following the army around, the King gives his soldiers pieces of gold.
The soldiers then exchange the gold for food bought from local shop keepers, wherever they happen to be in the kingdom.
The shop keepers accept the gold as payment because the King says he wants his taxes paid in gold. (If they don’t pay tax, they get their heads chopped off)
By taxing the population, the King gets his gold back, which he can then “pay” his army again with.
This is a cyclical system, whereas the gold being destroyed would be a linear system.
If the CBRs return to the Treasury, to me , that appears to be cyclical, whereas, if the CBRs are “destroyed” then there is a beginning and end.
Hi Vinnie,
Thanks, I’m really glad to hear it helped you straighten some things out. By the way I’m aware it can sound condescending to boil it down to such simple terms, but its so very important to do so as otherwise people just get bogged down in the detail and will no longer be able to see the wood for the trees. To paraphrase Einstein; a ‘good’ model should be simple (in order that we can reason about it) but not so simple as to be inaccurate.
You said above that “Part of the confusion for me is how to match the theory to the actual reality of how it is done in practice. The role of tax in particular…If this is correct, then by me paying my tax bill, £1,000 of CBRs have not been “destroyed”…Does my confusion make sense? Am I missing something?”
Firstly your confusion makes perfect sense, because it IS confusing. And there are people a lot more knowledgeable and smarter than me that say that. If you want to know the gory details I recommend this post from Bill Mitchell on the very topic of why it looks like the treasury put the tax into a pot of money.
“Where do we get the funds from to pay our taxes and buy government debt?”
However if you don’t want to get bogged down in the gory details then, taking another leaf out of Einstein’s book, might I offer a thought experiment:
Say the UK government goes crazy and decides to pay off the entire national debt of £1.6 trillion. How does it do that? It taxes every single penny of that £1.6 trillion back from every individual and organisation in the UK. All £1.6 trillion. That’s ALL our savings and ALL our money – including your £1,000 tax payment. Not a penny left, but – to the great delight of of ‘sound money’ people – the national debt would be paid off! There would be riots in the streets, but this is a thought experiment, so lets continue on anyway :).
Now, following your understandable line of enquiry, the next thing that would happen is the UK Treasury would have £1.6 trillion in its ‘pot of money’ account at the BoE (NB: lets’ ignore the implication the ‘pot’ wasn’t empty to begin with and just say, for the sake of argument, that it now only has the former national debt in it).
The question then arises. Where did the £1.6 trillion come from in the first place? It can’t possibly have come from the private sector, because the private sector has no capacity whatsoever to create £ sterling. So, by pure logic, the £1.6 trillion must have ALL come from the UK government. Every single brown penny of it. Of course that makes total (and extremely obvious) sense as the UK government (through the BoE) is the sole issuer in the entire universe of £ sterling.
Then the question arises, but what about that ‘pot of money’ account thing? The answer is, as Bill Mitchell says, is “smoke and mirrors”. That’s not to say there’s some grand conspiracy going on: there may be good technical reasons for such accounts, left-over historical reasons etc. etc.; or maybe the people who designed the system simply didn’t fully understand how it all really works.
The answer is in the fact that a £10 note is an IOU from the state to pay you £10 of government services. Let’s say I borrowed £10 off you and write out IOU £10 on a bit of paper and sign it. You could use that as money by giving it to a friend and telling me to pay the £10 to your friend instead of you. Once I pay back the £10 to whoever has the bit of paper what happens to the IOU? I tear it up and put it in the bin. In the days of cash then once bank notes went back to the BoE, e.g. because they were used to pay tax then they were usually burnt and the BoE issued newly printed ones when the government bought something.
I quite often think that we have got to the stage where we are all blinded by money and can’t get beyond the money to see how the real economy works. For example pensions. The only way you could genuinely save for a pension would be to fill the garage with baked beans and bog roll. Anything else (i.e. financial assets) is just window dressing that hides the reality that the pension is always paid out of what is produced by those in employment at the time. What you can do, as the Prof has pointed out before, is to increase the productive capacity of the economy by genuine investment in factories, transport, education, etc so that more is produced in future which means there is enough to support those who are retired and not producing without stripping too much off those who are not retired.
In the present virus situation wrecking the private sector by mass bankruptcies and unemployment because we are worried we might run out of numbers in the accounting system does not seem very sensible. I am busy arguing with someone important in the Scottish context just now about inflation. But that is just not going to happen in a 25% of GDP slump. Whatever money the government eventually is forced to create will get used to pay off debt or be saved. It is what people always do in a crisis and the shops are all shut and you can’t buy most things even if you wanted to.
Thanks Tim
Your description of both money and pensions is very good…
Thanks Stephen & Timothy.
Stephen.
I like simple and no it nots condescending. I need the basics before I can go complicated.
I’ll check out the Bill Mitchell link tomorrow.
For what it’s worth, I figured it out extrapolating my King, gold, soldier, shopkeeper scenario above.
What if the King decides to write IOUs on little pieces of paper instead of using gold? (Perhaps, because the population was expanding and there wasn’t enough gold to go round?)
The soldiers would be happy as long as they can still exchange the IOUs for food.
The shopkeepers will accept the IOUs because the King wants IOUs in payment of Tax. (And the shop keepers still don’t want their heads chopped off)
But the King doesn’t need the IOUs so that he can recirculate them, like he did , the gold. He can just write some more. He could burn the returned IOUs, or if they are not too tatty, he could use them again. But what he does with them is not really important. They are no longer of use (redundant) until/if they are used to pay the soldiers again. Then they are IOUs once more.
The TAX is just a way of making sure that the IOUs are accepted by all the King’s “Subjects”. Tax does NOT function as a way of funding the King’s expenditure.
Fast forward a few hundred years.
The King now decides to replace the paper IOUs with digital ones.
Again, the soldier is happy as long as the digital IOU is exchangeable for food.
The shop keepers will accept the digital IOUs because the King insists that tax is in them.
What then happens to the digital IOUs is not really relevant. Once returned, they are no longer IOUs. The King may delete them and create some fresh them or stick them in a reserve account for the treasury at his central bank
Doh!!!!
Pressed send by mistake before finishing it.
Anyway. You get the gist!!!
Forgive me if I remain a little sceptical of the Damascene conversion. Why? In what other ‘serious’ intellectual discipline would such a ‘conversion’ even be required? For this requires a fundamental change in economics itself, by the economists; that is way, way beyond a mere Kuhn-esque ‘paradigm shift’ we may find in other sciences. I claim no special knowledge or insight, but I do not see it within the discipline; as far as I can see they are trying to incorporate MMT, take it over as established knowledge and then rationalise it’s significance (and the anomalies in neo-liberal theory) into dust. There are very few behavioural or experimental economists; the nearest we seem to have reached is ‘quasi-rational’ economics; think about that.
After all, it is not so long ago they were happily teaching fractional reserve banking (read Samuelson, whose ‘Economics’ has run to 16 editions, and taught generations of economists; and his perfunctory ‘T’ accounts).
I agree, there is a risk
Keynes soon gave rise to neo-Keynesian thinking, much of which looked remarkably neolclassical
Actually this does happen in science. Economics isn’t really a science, I think, but rather more an art. Anyway take Alex du Toit who was a South African geographer / geologist who proposed the theory of Continental Drift in the 1920s. He was universally ridiculed and practically driven out of academia. Too late for Alex, but renamed as the theory of Plate Tectonics this was suddenly obvious to everyone in the 1960s. Then there is the unhealthy fat theory in medicine / health. That turned out to be a load of nonsense that was all down to one heavily biased researcher and study in the 1960s. The real issue was sugar and not fat. Anyway there is the old saying that science advances one funeral at a time. Professors almost inevitably get heavily emotionally attached to their life’s work and defend it against all comers. For example by not funding any research that might not agree with it.
The point about problematic ideas in science is not new. Perhaps the most critical problem was the ‘imponderable ether’ (see the Michelson-Morley experiment that failed to find it). It was superseded by Eienstein’s theories. Darwinian ‘pangenesis’ is another. This is quite different, I submit and perhaps exposes more fundamental problems of the general approach in economics; not least the lack of a secure experimental foundation.
Economics has always claimed to be a science, and lives uncomfortably even with the qualification that it is a ‘social science’; and it has strained to project econometrics aspirationally as almost turning it into ‘hard’ science. It isn’t. It has a poor record in prediction compared with other social sciences, and its use of statistics has suffered sustained and persuasive criticism.
I think you actually concede the point I was making right at the beginning of your comment: “Economics isn’t really a science, I think, but rather more an art” . I can now safely rest my case; you just made it.
Economics as widely experienced is neither art nor science — it is religion.
A friend of mine – a CoE Canon (now retired) did a PhD related to economic issues and reckoned the leaps of faith required by Christianity were a lot easier to make than those of neoclassical economics.
Believe you me, the IFS are waiting to rain on the MMT parade.
The Marxists also believe in some sort of cataclysmic event befalling capitalism and although they saw it as ending in an armed struggle, it seems that Covid-19 provides the tipping point and MMT is the revolution? In a way, the Marxists are right even about Covid-19 – the de-minimis, modern short termist, capitalist society (where Goldman Sachs can buy two airliners for its staff, but where having a store of face masks and ventilators for a pandemic outbreak for the hoi polloi is deemed a waste of money) effectively slits its own throat by living for the now and not considering that it could happen (indeed, it has happened before hasn’t it?).
The next struggle will be if the Left (or the ‘Laughed’ as I call them because one cannot take them seriously) or any progressives out there can make the most of this opportunity to going back to sound basics about funding robust societies that deliver the greatest amount of social welfare to the most amount of people.
I have often enjoyed listening to scientists, particularly on the radio, who are very good at explaining difficult concepts to the ordinary person. Just today, someone was explaining that the moon does not orbit in a circle around the earth, but does so in an elipse, oval like the shape of an egg. This came across without condescension, but put any listener who might be unsure at total ease. The best speakers do this as a matter of course. The exact opposite of those whose lives depend on things being seemingly complex.
My point as ever, is for those who want to continue to move the narrative into to ordinary acceptance, is to explain these concepts in a very rounded and careful way.
Hopefully some analogies will emerge that can be both easy to comprehend and at the same time being technically correct.
That aside, I think most people may easily accept that government can spend money directly on infrastructure and that the capital value of the assets can be brought into account, rather than simply focusing on the debt. The PFI debacle is perhaps a good place to start, even people with little understanding of economics know it is a bad way to do public capital spending.
She did explain it well. The only problem was that she was explaining the so-called “rare” so-called “supermoon”, which is a vague concept created in the 1970s by an astrologer (not an astronomer), and occurs about three or four times a year (that is, about a quarter of full moons are “supermoons”, so not so rare). At its closest, the moon looks about 14% wider than at its furthest, and so it is about 30% brighter. Still only 0.3 lux, about 100,000 to a million times less bright than the sun.
The full moon is a spectacular sight every month, super or not, and I hope the hype it gets people outside looking at the sky, but for my money the crescent moon passing Venus a coupe of weeks ago, and then Venus passing near the Pleiades the other day, was better. Anyone expecting a “pink supermoon” tonight is going to be disappointed. But if we are lucky, there might just be a naked eye comet in a few weeks, if Atlas brightens up a bit more.
I agree with your central point, but here are many publications which explain how money works in straightforward terms; unfortunately they get little publicity, and the media and most politicians would rather rely on the IFS performing arithmetic.
In your example we could move on from PFI being a bad way to buy infrastructure, and point out that only a minority of the cost was used to build the infrastructure. If the government had arranged for its central bank to mark up the accounts of the infrastructure builders for the capital costs, it could do the same to provide the relevant local authority or health board with the funds to pay for the staffing of buildings and maintenance of infrastructure – and the sum of capital & revenue cost would have remained well below the total PFI cost.
Another way of looking at this is to recognise that healthcare maintains human capital. Hence, so-called revenue spend is actually contributing to the sum of human capital.
George
Can you supply a list of those publications or the best links you have seen?
It would be appreciated
Richard
Caught by a typo – “here are many publications” should have been “there are many publications”!
Anyway, I like the following, in some sort of order (the first link is really, really good) –
https://ponderwall.com/index.php/2019/06/29/neoliberalism-fairytale-money-bank/
https://modernmoneybasics.com
https://www.youtube.com/watch?v=vryfJluFru4
https://theaimn.com/politicians-guide-question-going-pay/
https://vimeo.com/387886793
https://threadreaderapp.com/thread/1041042774278189056.html (very short)
https://gimms.org.uk/2019/02/10/uk-government-spending-taxation-bank-lending/ (longer but very clear)
http://moslereconomics.com/mandatory-readings/an-interview-with-the-chairman/
Thomas Edison and Henry Ford understood in 1921 –
http://prosperityuk.com/2000/09/thomas-edison-on-government-created-debt-free-money/
And who better to end with than James K Galbraith –
https://prospect.org/features/economists-got-wrong/
Thanks this will go on the blog as well
Richard
How could I forget this great compendium – https://www.youtube.com/watch?v=MB0bkytOdNQ
Good opener! 🙂
Good ending too!
🙂
You’re right. It’s all about the language, the imagery, the cliches that resonate with the general public, that make it seem like it’s part of their normal lives. That’s why the “household analogy”, and its many variations are so dangerous and so difficult to kill. These “self-evident truths” – there’s only taxpayers’ money, you can’t spend more than you earn…etc – are so deeply embedded in the public psyche it will take something equally “self-evident” and redolent of “every day life” to drown them.
This will only ever be fixed by politicians, because only they have the platform to fix it.
And it will take a very special breed of politician to do it, because they have to both be very brave and very smart. And also willing to repeat, repeat, repeat and never give an inch until the penny drops – if you excuse the pun :).
One outstanding politician who meets the mark is AOC, who is skilful enough to turn the ‘killer’ question “how are you going to pay for it?” back on the smug questioner. This video springs to mind…
https://twitter.com/AOC/status/1193273344138891264
When Margaret Thatcher declared the government has no money of its own I’m pretty sure her motive was to kill off the notion there could be no unaccountable beast lurking around that could simply create money at will because how could she possibly balance her housewife’s account with such a loose cannon on the prowl. Margaret Thatcher hated loose ends, everything had to have a place. I mean that’s how grocery shops were efficiently re-stocked after all. I think it was Napoleon who said England was a nation of shopkeepers and clearly many struggle to accept MMT because it requires a mentality comfortable with change, with fluidity, things in flux, etc.
Positive Money has seen the light too!
http://www.progressivepulse.org/economics/pomo-endorses-mmt
Blogged now Peter
Once again Andrew Bailey can provide no evidence that government supply of money through the convoluted hoops MMT says have operated at least since the abandonment of the Gold Standard causes abnormal inflation.
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
Most hyper-inflation hysterians miss the point that abnormal inflation is caused by supply side shortages of something that is much in demand or use. They even miss the point that a supply object can be plentiful in supply, like fraudulent mortgage bonds, but reek havoc in societies! They miss this despite a long human history of financial instrument (money) counterfeiting and societies’ attempts to eliminate such toxicity!
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
This is not MMT. By any means.
MMT describes:
1) Government spending by Bank of England crediting bank accounts.
2) Government taxation by Bank of England debiting bank accounts.
3) Government control of interest rates by being borrower of last resort (gilt sales).
4) The connection of the quantity of gilt sales, to the deficit, is a political choice.
What I see being discussed is:
1) Treasury offers gilts for sale.
2) Bank of England buys these gilts directly.
3) Treasury spends the proceeds.
4) At some point later, BoE unwinds the direct monetary financing, by selling the gilts.
Yes, I know it leads to the same place. However, it’s the narrative – it’s what the public are told – they’ll say ‘direct money financing’ is something that can be done in emergencies, war, pandemics. BUT, when we’re back to normality, its back to balancing the budgets, austerity, etc.
We can’t let them get away with putting MMT in the ‘For emergencies only’ box.
But that unwinding is never going to happen
And once things change it’s clear the constraint has gone
The proverbial cat will be out of the bag.
“ We can’t let them get away with putting MMT in the ‘For emergencies only’ box”
Exactly.
And, another ‘share’ at the excellent Naked Capitalism site: https://www.nakedcapitalism.com/2020/04/the-ft-says-its-time-for-the-bank-of-england-to-start-direct-funding-of-the-government-modern-monetary-theory-has-won-the-day.html
Always fun…
In a ludicrous corollary to all this, the Guardian Australia today reports that Standard & Poors have put the AustralianFederal government’s on credit rating on “negative watch” – on the same day that their parliament is voting on that nation’s stimulus package.
I wonder if S&P know what a ludicrous anachronism they are in this situation. They should just go back to issuing bullshit ratings on dodgy corporate debt.
Oh damn. I forgot the links – here:
https://www.smh.com.au/business/the-economy/ratings-agency-puts-australia-on-negative-outlook-over-virus-spend-20200408-p54i5y.html
https://www.theguardian.com/world/live/2020/apr/08/australia-coronavirus-live-updates-nsw-victoria-qld-parliament-jobkeeper-latest-news-update?page=with%3Ablock-5e8d25028f08008f0919ee78
I presume that these ratings agencies will be doing this all round the world. They can get stuffed.
[…] of MMT resources on this blog and on Twitter yesterday, to which I did not have time to respond. George Gordon did though and offered these, many of which I know. As he put […]
The battle ahead is how to get the general public to understand MMT. There will be desperate attempts by vested interests to try and stop the public at large from understanding that the government can just create the money.
I’ve spent the last 3 weeks battling to try and make sense of it all myself.
The concept is simple but the translation to the actual economy is difficult to understand. Even the idea of CBRs and broad money and how they relate to eachother is beyond most people’s present understanding.
It must be near to impossible for you Richard, to get your points across in a 5 minute discussion on Radio 4? Where do you even start?
I have found just reading about it a part of the problem. I need diagrams (not just graphs). I need to see a visual representation of the abstract concepts, to try and understand them as well as words.
Some of the short videos on the Positive Money website have been good at explaining some aspects, such as privat bank created money. They combine animated graphics, audio and subtitles which go into different parts of the brain. Not all learners, learn the same.
Is there a similar video explaining MMT? If not, then this may be the way forward.
A clear, easy to follow step by step guide using animated graphics, audio and subtitles. It could then be “crowd funded” to pay for a slot on prime time TV like a Party Political Broadcast. It needs to be put in the public consciousness like UBI has over the last few weeks.
It’s what the Labour Party should be doing, but I’m not sure that they get MMT either???!!!
Vinnie
First I’d have to be asked…
No one is doing that
And videos like that are not cheap…
Richard
Richard.
It was just an out loud thought process. I wasn’t suggesting that you had to make it happen or pay for it. (Or even me for that matter!). Just wondering what such a video might look like?
Think you have enough on your plate at the moment!!!
Keep up the good work.
Oh come on Vinnie. If the Financial Times don’t represent “the vested interests” then who does?
Things are changing more rapidly now than ever. As difficult as it might seem one needs to adapt their mindset accordingly.
In the meantime its nice to have Richard monitor financial press for us. Thanks Richard.
Marco.
Indeed, but I’m not sure how many people read the FT?
I can see an attempt to revert back, post covid 19. (If there is ever s “post”?).
Direct funding cuts out the middle man/woman.
Vinnie,
Check this out…
https://www.youtube.com/watch?time_continue=1314&v=bHQCjFebIf8&feature=emb_logo
PS Is based on a great illustrated article called “DIAGRAMS & DOLLARS: modern money illustrated” written a few years back by an architect called JD Alt who likes to see it all graphically (google it – is on an MMT website started by Stephanie Kelton called New Economic Perspectives and then later turned into an animation)
Thanks Stephen.
I will check it out.