There has been much discussion here on myths needing busting.
Before I spend time working on them (and I have been asked to do so by some who have to face the media and try to do just that) what are the ones that you think need addressing?
Your top five would be good.
Suggested answers are very welcome as well.
Thanks.
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I’m sure everyone will suggest this, Richard, but given how frequently you’ve discussed it on this blog over the years it would have to be how money is created. Closely followed, of course, by another perennial (and very recently discussed myth), that when it comes to government borrowing the state is like a household: what it borrows has to be repaid, just like it would by everyone else who takes out a loan. Bollocks of course, as you’ve extensively debunked over the past few days (years), but a deeply entrenched view that almost everyone I know – even people who ought to know better – actually believes.
On the list
Thanks Ivan…
One that I’ve been thinking about more and more, what money actual is for. Most seem to think that governments need money to enact policy. Whereas it’s the other way round, policy dictates what money it required, where and when.
I think that is what people get wrong at a basic level, that money is the end goal,, whereas it’s actually the means for delivering democracy to the country.
“During seasons of great pestilence men have often believed the prophecies of crazed fanatics, that the end of the world was come. Credulity is always greatest in times of calamity. Prophecies of all sorts are rife on such occasions, and are readily believed, whether for good or evil.”
― Charles Mackay, Extraordinary Popular Delusions & the Madness of Crowds
Written in 1841 and just as true today.
I appreciate you’ve done these but they need updating/refreshing and perhaps better explained it simplified.
1. GERS. Still getting “Scotland is a basket case” type conversations. Soft No’s looking for proof we would do OK independent.
2. Deficit. Linked to above but also need solid arguments now that the “nudge machine” is gearing us up for austerity 2. Read your recent blogs about this but still think too many will shrug off the arguments
3. UBI. Lots of myths which are shrouded in people’s misconception of intrinsic human value/worth.
4. Income inequality. Also related to UBI but I
nasty, don’t think people grasp how bad it is for a country and how it warps our economy and our understanding of economics.
5. Nationalism. I mean the nasty xenophobic kind that thinks we can only be great by being completely independent without realising that no country can function as a completely independent entity.
If you can do all of that well, you will of course have saved us all.
Good luck Richard
Thanks
This is going to be a gargantuan task
Yes, and the one about future generations will have to pay for “our debt”.
What Ivan said, plus countering this twaddle by Andrew Walker https://www.bbc.co.uk/news/business-50504151
The myth that the state is like a household needs debunking, of course, but an associated problem is that local government is like a household and central government likes it that way in order to exert control while continuing the myth of local choice.
After nearly 40 years of the rollback of the state and the wholesale privatisation of essential utilities the myth that private provision is better than public provision needs to be addressed. I’ve lost count of the times I’ve read journalists writing that we don’t want to go back to the bad old days of the 70s. A lot of them weren’t born then.
I don’t recall it as that bad
I do recall some really qyite good things
Chirpy Chirpy Cheep Cheep apart….
It was quite good really. I worked for the CEGB. We built power stations to time and cost and didn’t pay over the odds with borrowed Chinese money. We had a research division with an aim to be an informed buyer. I struggle to find virtue in a system that has replaced technical expertise with armies of billing clerks that I have to go through uSwitch every year to buy fuel at exactly the same price I paid last year. Just a reminder, when Walter Marshall was in charge of the whole shebang before privatisation he received a salary of about £70k pa which was about twice what a principal engineer earned. The CEOs of the successor companies are paid 7 figure salaries plus bonuses : the engineers aren’t.
You’d have got on with my dad – a CEGB employee in his time and a big believer in spare capacity for resilience
Just a note, we haven’t privatised everything up here in Scotland. Scottish Water is still in public hands. CalMac Ferries is also still publicly owned and has been tasked by Scottish ministers to prepare a franchise bid for Scotrail to bring it back under public control.
Oh and there is NO privatisation in our NHS. We don’t even have an internal market. Different trusts cooperate. New ideas are trialled in one place, if good rolled out everywhere. Public satisfaction is high (don’t believe our MSM).
When Independent we plan to operate as an ongoing rebuke to everything which is wrong in England. Not that many will pay attention of course.
It’s a good model
Keep it
It might as well be. Going through the independent billing companies is a nightmare if you really need to speak to Scottish Water. These companies aren’t doing the billing for nothing. It should be Scottish Water you deal with.
The NHS is a financial burden on Society.
The NHS will always be there.
We can’t afford a Green economy.
Corporations need to offer large pay packages to chief executives and senior staff in order to attract the best talent.
Billionaires create the wealth in our country. They work “very hard”.
Wealth trickles down.
Benefit fraud is rampant.
Low paid workers are less deserving and not contributing as much as highly paid workers.
Thanks
Please bust the myth that George Osborne understands economics. He’s quoted (again) in the Scotsman today as saying –
“Recovery will be quicker than after the “banking crisis” where credit markets got clogged up, but the UK will be poorer and the government will have to make “hard choices” about what we can afford.” [Translation: the financial system didn’t cause this crash, so the recovery (of the financial system) will be quicker, but people still have to suffer – because I say so!]
As far as I am aware, most economists, even including some of the neoliberal numpties, don’t believe the recovery will be quicker than after 2008. It would be good to have a simple demonstration of why Osborne is wrong about this.
Hard choices will make the recovery slower, just as they did before when Osborne and his supporters made them. This is a different kind of recession/depression, and I’m guessing there are more/different reasons why “hard choices” will make it worse. So can we have a specific busting of the “hard choices” myth for the current situation?
Actually, the recovery could be quicker
It all comes down to the choices we make
But it’s a good one to tackle
Off-topic reminder: Will the recovery be aided by the changes to the furlough scheme Rishi Sunak has just announced?
See blog – done at your reminder
Never say I don’t listen!
I just wonder how much bankrupt business will be bought up on the cheap by foreign investors and those based in tax shelters.
Richard one you may wish to consider
The Economy Myth
The Economy is a Thermo-Dynamic not primarily a money system.
Imagine you were placed in an inhospitable desert a couple of hundred miles in every direction from civilisation; 50 degrees centigrade in the day and freezing at night. All you have to wear are the clothes you stand in. You are given a choice: £200m in any mixture of money assets you like. You can have any combination of dollars, Euros, gold, silver, diamonds, shares etc. Anything you can carry out of the desert is yours to keep. Or you can have an air-conditioned four-wheeled drive vehicle with enough food, water and fuel to see you to the nearest place of safety. You would be a very foolish person to plump for the monetary assets. Within 48hrs, you would be dead. Money assets are not real wealth. Money is only a proxy for wealth. It is only an active and functioning civilisation that gives money any value. A functioning society includes one where the rule of law, personal and collective security and well financed public services exist.If you were given the same choice but this time placed in London, Paris or New York, you would be forgiven for choosing the money assets. The classical economists (Adam Smith, David Ricardo, John Stuart Mill and Karl Marx) had a good understanding of this concept, as evidenced by their distinction between the “real economy” and the “fictitious economy”; also known as the FIRE sector — finance, insurance and real estate (Michael Hudson).
Proxies are essential for the management of practical affairs, but they are essentially all abstractions and should only be treated as reality within their legitimate remit. For example we could be misled into the belief that all wealth is created solely by the ‘captains of industry’. The reality of the present pandemic reveals who are the real wealth creators.
I like it
The Economy Myth Redux:
We are slaves to this thing called the economy (for the avoidance of doubt, this is not my view).
John Adams
Daniel Defoe knew that in the 1600s.
In his book Robinson Crusoe, there is a second wreck. A Spanish ship with no crew is wrecked on the shore so he can loot it. In the Captain’s cabin he finds a bag of gold coins. He throws it down in anger. ‘I would have exchanged the whole lot for six pairs of English shoes and stockings”.
As you say it is not real wealth.
An explosion of the myth that ‘printing money’ will inevitably cause inflation a la Nazi Germany, Zimbabwe & Venezuela.
I’m tired of having to counter that one. A snappy refutation would be really helpful.
Definitely on my list….
MYTHS
national debt must be repaid
we must live within our means
there is no such thing as a magic money tree
the market always knows best
private ownership is always preferable to public ownership
private ownership is always more efficient (profitable) to public ownership
The tory party is always more careful with the public purse
etc etc etc
I second these: the market knows best, private enterprise is always more efficient/better than public enterprise, and whenever the public sector tries to engage in something in the market (which I think would allow the exclusion of “well just look at the NHS, dammit”) the result is horrible inefficiency and often corruption.
This is something that I’ve been trying to figure out how to argue with my sister about for years now – she firmly believes that the market is the only way to organise things. I tried to argue for governments having a say in the way the market is reorganised after the current crisis, but she refused to even consider that the democratically elected government should have a say in the way the nation reorganises its economy, and her argument seemed to be based on the notion that governments are simply incapable of doing anything like that without messing it up completely.
It may be outside the scope of the commentary you’re working on, Richard, but it’s definitely something that will need to be addressed, and I honestly have no idea how to address it convincingly (particularly if “of course governments should make that kind of decision – that’s the whole point of democracy, dammit” doesn’t work).
To muse on…
How are we going to pay for it?
The answer I heard from the commentator on TV ( I forget which) was we had 3 choices
– More tax
– More cuts
– More borrowing
Are these the only choices?
No, we work our way out if it is the real one
Cuts in public spending are necessary during recession
Cuts in public spending do not stifle growth
Privatising state run services saves money
Privatising state run services improves those services
Tax cuts for the very wealthy stimulates growth and wealth for all.
Trickle down economics works for all.
The first 4 are probably the first 2 but I couldn’t think of a way to combine them.
Arguments put in different ways are not the same thing
But it does suggest any myht buster must have a list of variations on the theme as part of it
Thanks
1) “Debt”
Why the term “debt”, which in many languages of the world is a synonym of “shame” and “guilt”, in the context of a government’s debt, can be viewed – on the other side of the balance sheet – as a private asset. Employing the layman’s parlance and using the example that coins and notes in circulation are literally the manifestation of that debt is a tangible thing that I’ve found can help people understand this dilemma.
2) “Printing money”
The prevalent myth is that a government utilises this policy as a one-off, emergency action, and that it ALWAYS leads to rampant inflation. People really need to embrace the reality that all public expenditure is new money.
The way I’ve been able to explain it to friends is breaking the money circuit down into two simple bank accounts. One is an account that society (households and businesses) has with the government, the other is an account the government has with the central bank. Starting from a zero balance in each, the government runs an overdraft on its account with the central bank in order to spend into society’s bank account. When expenditure leaves society’s account in the form of taxes, it enters the government’s account with the central bank, reducing the overdraft.
This is a visualisation of deficit spending. We have a government willing to run an overdraft so that society is able to save or buy the things it needs or desires. And that overdraft need not be paid back. The only issue one might have is with levels of interest. But the government can, and does, slap that interest on the overdraft as a matter of course. And even so, with interest rates effectively zero, as long as an economy continues to grow, there is practically no risk associated with that at all.
3) “Money is just an IOU”
Not a myth, but reality. People still outright refuse to believe this. It scares them. It’s too simplistic. It’s as if people have been participating in a game of ‘pass the parcel’ for their whole lives without ever having been aware of it.
I pass the debt on to you, and you accept it — no questions asked — because you know that you will be able to do the same in turn. This is monetized debt.
The only time this could ever be considered scary is if you handed the plasterer, who just completed your walls, £1,500 in BoE bank notes, and he/she looked at you a tad iffy and asked if they might be recompensed instead in US dollars or Bitcoin(!) That’s when you would know that the fiat currency is losing the underlying confidence in it that is absolutely integral to its purpose, and survival. But, it’s a scenario so improbable that it’s not worth worrying about.
4) “Taxpayers’ money”
This is a very personal bête noire. A myth perpetuated knowingly by Thatcher’s sophistic assertion that a government has no money of its own, and only spends your hard-earned cash.
We know this now to be provably false. And yet it gets rolled out by every news outlet and even prominent columnists/authors with an economics background.
It is typical of Tory divide-and-rule tactics. If you can be made to believe that taxes are just a kitty to be redistributed by a government, you can be manipulated into thinking that YOU are not getting ‘value’ for YOUR money, and hence you are being ‘cheated’. “Why should I pay for them?”
It also feeds into a sinister myth that those you don’t pay tax are somehow undeserving. For example: the “taxpayer” picks up the cheque for the disabled lady down the road. This is a repugnant fallacy. It’s public money spent for public good. And it’s a myth that needs to be smashed down with the simple logic and reality that renders it indisputably false.
5) “Balanced budget”
This is the fallacious handbag economics reasoning you will encounter with everyone from the bloke down the pub to senior politicians.
This ties in nicely to the first two. To really grasp this, first you must know that debt is not a catch-all phrase: it has differing permutations depending on context. And that money is “printed” continuously by the government in a circuit of creation and destruction.
If I say to someone, who truly understands these principles, that “we can just create more money to settle the interest on the debt”, they might nod and agree. But the lay person will be horrified. You will be told “it’s always a bad idea to take on new debts to pay old debts” and that we must “balance the budget”.
What I think helps people to understand is that an individual is deliberately profiled and prejudged of their supposed creditworthiness before being offered a loan. A huge factor of this prejudgement will be the individual’s ‘earning potential/window’. You want a mortgage of £750,000, at the age of 54, earning £27,000 p.a.? Not a chance! Your earning potential/window is too short and narrow.
So it’s clear that we, mere mortals, have a finite window in which to earn and settle debts, and we cannot print money to do so. Taking on more debt to settle previous debts could well be a disastrous decision for a individual.
But a government doesn’t have that problem. Its lifetime is presupposed as infinite. And it is sole supplier of the sovereign currency. It can roll it on indefinitely, and click its fingers to settle it with new money.
So far from a need to balance the budget, the real need is to spend into the economy to drive demand and raise living standards.
This is rpiving to be esily the most udeful question of the day I have asked
And I have not read all the reolies by some way as yet
Thanks
Great list! I’d add that the whole idea of “the budget”, and the way it’s constructed and approved, is flawed. Which leads me to the myth of the “independent OBR”. It might be tedious to do, but perhaps you could bust the myth that their pronouncements can be trusted.
Yu cynic!!!!
Justifiably ….. 🙂
When you’ve finished exposing the OBR, Richard, why not do the same for the IFS?
I’m already it’s rare public critic….it’s Neoliberal and micro to its core
Just popping back to agree here the whole question of the chancellor announcing his annual ‘budget’ is wrong and feeds right into the idea of the nation’s finances being similar to a household. The case is rather that the chancellor has unlimited funds at his disposal. A more appropriate announcement then, would be how much of that limitless fund he proposes to spend into the economy, and his aims, and how he intends to achieve those aims without devaluing that currency.
You’ve already dealt extensively with things on my list, but here it is anyway:
1. Household economics 2. Tax and spend. 3. Deficit is the same as debt. 4. Government debt is bad 5. Economic imperatives are not political decisions.
Thanks
Agree on those two. I would also add busting the myth that the Conservative party borrows less and repays more. There have been several articles on this site about this and I think it would be worth it being part of the myth busters. Political, I know, but it’s something that gets routinely trotted at.
For another one, the myth that austerity was an economic necessity.
Craig
Thanks
How are we going to pay for it.
There’s only taxpayer,s money.
We’re all in this together.
It will require tax increases and spending cuts.
The rich are the wealth creators.
We need the rich to pay for public services.
It’s very difficult right now to find the money to pay for…..
If we tax the rich too heavily they’ll leave the country.
Wow….
I need to get busy…
You mentioned yesterday the deficit is 55% of GDP. Yesterday Chris Giles from the FT is showing a graph with it close to 100% and talking of this as a problem for the government. Is it? and why is he allowed to suggest it is when having read your content this does not seem to be the case.
He is suggesting that QE debt is still owing
I say that’s nonsense when the government owes it to itself
The top one has to be how do you get a nation that is moribund and self-destructing like the UK to cultivate an attitude of critical thinking, to challenge much of what they’re told. For example, it should be fairly obvious that money is a signalling system first and foremost, a relaying process for instructions and not a thing. Secondly, if you want well-being nationally and internationally access to this signalling system, this instructional flow, it has to be equitable or resentment builds up which if not assuaged naturally turns to violence. Keynes foresaw that in regard to the harsh reparations imposed by the Allies on Germany after the First World War.
Agree with most others here,to me there is naturally a lot of “worry” out there about the economy as well as our health. “A myth busting list” would be a positive thing to do,maybe you could pin a link it to the head of the blog for anyone do a quick rundown of the top 10 or so of common Myths, to avoid having to repeat the same points over and over.
Possibly addressing;
Worries about gov defecits being unsustainable
Worries about gov debt being unsustainable
Worries about where is the money going to come from
Worries about how the markets will react…(this one especially for politicians)
Worries about paying back all this debt
Worries about the size of the debt
Worries about the size of the debt vs GDP
Worries about falling GDP and growth at any cost
Worrries about tax increases
Worries about austerity.
Worries about leaving our grandchildren a pile of debt
When all we need worry about is equality,health and happiness.
Thanks
The things I struggle to counter are the effects of foreign trade and currency exchange.
I would have forgotten that
The existence of the phrase “taxpayers’ money”. Every time I hear it I want to scream.
If this phrase does exist then it means money that remains in the possession of taxpayers after they have paid their taxes. Money in a supermarket till is no longer shoppers’ money, it is the shopkeeper’s and money that has been paid in taxes is no longer taxpayers’ money. It belongs to the state.
Good one
I would like to see the truth about the revenue streams of the UK, particularly the fallacies surrounding GERS, GERW and whatever the equivalent for NI is.
I would also like to see the way that the financial sector sucks wealth from the rest of the UK highlighted.
If you have the time (and/or the inclination) the myth that the monarchy generates more than it receives would be a very interesting piece.
Those weren;t on the expected list
I like the addition of the finace curse…
The myth that London genetrates the income one….
Many thanks for these very excellent useful summaries Richard. If these talks are aimed at the general public, here’s a few suggestions where more clarification might be helpful for Dummies like me.
In talk No 2 you don’t mention the Treasury at all, and here you make a passing reference to it. I think many laypeople don’t understand the difference, or even why there is a Bank of England as well as a Treasury. Treasuries hold the treasure, right? MMT says the government creates money, so why cannot all these transactions , particularly DMF, be done by the Treasury itself?
Why do you call DMF monies an “overdraft” when MMT says this nomenclature is misleading and has value-laden connotations?
Why does the Bank of England have a separate company that buys bonds, what is its name?
In QE, when the BoE buys bonds from the private sector, suppose no one wants to sell at the price they offer? Does the Bank just keep offering a higher price till job done? Or is there legislation that requires the bond holders to sell?
From Nick, reposted by RM
OK. I asked for this so here goes, starting with my adopted selection criteria.
Firstly I start from the premiss that most people have very little understanding of what money is; where it comes from and where it ends up (I certainly did not until this year and I still consider myself to be in the foothills of understanding).
Secondly, I make the assumption that most people already accept that the government is obliged to accept massive additional debt at this time but believe it will have to be paid back at some stage (maybe that’s a big assumption on my part).
Thirdly, I assume that most people understand that the BoE controls the supply of money (which they see as notes and coin or its electronic equivalent) but they do not understand the role that the private sector banks and financial institutions play in money creation. So they worry that allowing the government/BoE to create money without later clawing it back through either increased taxation or decreased expenditure (i.e. more austerity) will inevitably lead to inflation.
But since I found it rather difficult to eliminate so many of the original points, I have resorted to cheating and in effect, combined number 10 and 14. I also slightly tweaked other bits to fit.
So here is my tentative shortlist:
1. Original number 11. It’s vital the Bank of England does do this money creation. Right now, government loans apart, there’s almost no new money going into the economy and given that all the money we use is created by borrowing, if the Bank of England was not creating new money no one else would be. So without the injection of new government-created money into the economy, as is happening right now, it would literally grind to a halt.
2. Original number 17. Because that new money simply replaces that which would normally be created by commercial bank lending, which isn’t happening right now, there is no chance it will deliver inflation. Instead it just keeps us going. So thank goodness for gov’t and its ability to create new money.
3. Original Number 10/14. Anyone who claims we cannot repay ignores the fact that the government can buy back its own debt any time it likes. For example, it has had the Bank of England create £575bn of new money via QE to do this over the last decade without causing inflation and none of that has to be repaid because the gov’t owns the BoE. If in doubt about this, just think how hard you’d find it to repay your borrowings if you owed them to yourself; which is what will happen with much of the new so-called government debt that’s going to be created during this recession, but which will be owned by the BoE.
Ideally, I would also like to weave-in Clive’s excellent points about Japan but that was not part of the original brief.
Permalink: https://www.taxresearch.org.uk/Blog/2020/05/22/thank-goodness-for-the-governments-ability-to-create-money/
Reposted by RM from Alan Fowler
What struck me about Mr Fowler’s comment (by Richard) is that it actually attempts to turn the debate on its head. I do not mean the numbering, but it presents the argument from a slightly different and I think more challenging perspective; it debates the issue on ground the status quo will find more difficult to defend; it challenges the status quo rather than defends MMT. The problem with all the items everyone has listed here, is that they present the argument from the perspective the neoliberal status quo prefers; MMT always seems to end explaining and justifying itself; yet we know the status quo has failed and can’t justify itself, and has had to throw its own rulebook on the scrap heap, because it doesn’t work; while pretending that somehow, although it doesn’t work, we need it more than ever; which is plain nonsense.
In other words we are still allowing MMT to react defensively to the problem our opponents set. We are being palyed. The problem with this is that because the narrative is set by the status quo, even if MMT seems more plausible, nobody is really listening – because the public think they already know the correct answer, even if they do not understand why. All we do is show how complicated it all seems; too complicated.
It is much better if we set the agenda; challange from an angle that makes people think first about the anomaly the status quo has become, because they haven’t seen it quite presented that way before (which I think Mr Fowler’s 1. and 2. at least approaches – ok, maybe not perfect yet, but at least something to work on), and make the status quo explain itself, which of course is much more difficult for it to do – because it can’t; as everyone knows the status quo isn’t working any more. Most ‘markets’ have disappeared. Government debt is going up, spectacularly. The Government is required to fix the economy, all on its own; because the private sector can’t. The private sector, and ‘markets’ have failed; spectacularly. For the second time in twelve years. Banks then almost everything else now; something is wrong with how we do things. There is no hiding from this. If the houshold budget metaphor is true, we really are finished, already. But we aren’t, and it has nothing to do with household budgets, and it can’t be.
I really appreciate this – we do need to think differently
You make the case very well
OK – this is a really interesting point that John S is making and it’s got me reflecting (hopefully to a sufficient level) ………………….maybe this might help…….I don’t know……..this maybe just a stream of thoughts……………..
………..most people believe that the money they have in their pocket or bank account is THEIR money – it belongs to them — they have earned it from working or some other transaction that allocates it to them.
As to the extent to how much they reflect on how that money is created I don’t know, to them it is just there. This factor of the origin of money is made even more abstract by the modern digitised mode of creating money. But also, they see themselves as getting their money from the private firms or the local authorities who might employ them. The money they get belongs to the employer first who passes it onto them in exchange for labour as far as they are concerned.
But as Richard has consistently pointed out — the money we get in wages/income is actually GOVERNMENT money: the sovereign Government actually owns the means of allocating wages, savings, money from your parents etc., and also credit as well as taxes (it says so on the bank notes). It has sole authority to print that money and can give others the permission to do so (private banks & credit issuance). But make no mistake ALL money is actually issued by the State as well as NOT issued by the State.
So the Government (or shall we say ‘The State’) is responsible for providing to the country a currency in one form or the other — it issues the means by which its citizens can get paid, go on holiday, pay taxes, trade, save, buy stuff, help their kids out. This sovereignty issue must be constantly brought into play — that the State CAN help people with its money.
The money is distributed through markets, private sector, local authorities, banks.
Therefore, markets just use Government money too. That’s all. Although it seems to me what markets are engaged in a form of warfare or power struggle with the State as to how money is produced/allocated. I think markets favour debt issuance over real base money and want to control it for themselves in the name of narrowly defined benefits and profit through speculation – betting. Markets are therefore also potentially undemocratic and unaccountable – something else that needs to be attacked — because they soak up money that could be used for better things.
This competition by the rich and vested interests for a greater share of the distribution of State money goes back centuries in human history and I if I recall properly, is even attributed to the eventual decline of debt jubilees by Michael Hudson in ancient societies.
To get MMT off the back foot as John S W rightly suggests, I think that we need to go back further than 2008 — and back to the U.S. New Deal in the 1930’s too.
In both cases the private sector had mis-managed the money that had been allowed to circulate by Governments to the point where Government as the owner and also operator of the currency had to interfere and redirect money into more socially useful areas of life (except of course after 2008, money was printed into the bank sector where the rest of us tragically got austerity instead).
But both The Depression and 2008 reify the fact that the State also has the power to print cash — that is what they have in common.
The problem with post 2008 austerity however is not just its real effects on the country and our economy but that it also reinforced the false view that Government can’t actually do anything for its people — that it too was constrained by how the market wants to manage its money in society. As I’ve long argued in my account of the ‘incompetence versus design’ argument for this Government and the previous one(s) there is nothing as effective at destroying hope or expectation by the Government doing the wrong thing (austerity as opposed to MMT/DMF) that it is supposed to do or CAN do. Faith in politics and democracy is constantly cunningly undermined by portraying Government as useless by those running it (Cameron, Osbourne and Johnson, Sunak as well as the Labour party at times too).
We are faced with a population who may no longer believe that the State cares about them at all or can even help if it wanted to.
These crises happened in 2008 and the 1920’s because the consensus was that if we leave markets alone to keep money circulating they will do a good job (also, lies such as ‘trickle down’ also do not help).
The big problem with markets is that that over-rely on using money to create debt to fuel growth and the servicing and recycling of that debt it creates all too often spirals out of control and creates instability (bubbles, boom and bust) and the inability of companies to deal with crises such 2008 and Covid-19 because they are too indebted (not helped by the low standards of corporate accounting regularly highlighted here).
The State must therefore re- regulate its money supply and financial sector with rules and standards to ensure the greatest amount of social welfare for the greatest amount of its people is derived from money being printed because there is a tendency for the rich to get hold of this money first via markets and spend it on things that just make them wealthier when others do not have enough to live off.
So, the State owns all the money in circulation; it is in charge of/the originator of the nation’s money supply. Markets are just part of the money distribution chain who have decided to try to take a larger chunk of this money for itself and essentially diverts it away from doing more useful things. The markets have proven themselves time and time again to be untrustworthy to be left to get on with it for the greater good. The wisdom of their allocation of money – a resource — has to be questioned. If we totalled up say the amount of money tied up in real estate in the U.S. and the UK and then actually spent that figure on (say) a cure for cancer, would cancer be cured by now? Or some other social ill vanquished — poverty — for example?
The State needs to assert itself — not just for this crisis — but use this crises to change things going forward because the crisis (like 2008) reveals where real power really lies but also, this sort of thing (Covid-19) could happen again.
We need also to differentiate between the ideas of ‘State’ and ‘Government’. I see the concept of ‘State’ as something that endures and is a permanent architecture of a sovereign country; ‘Governments’ come and go – a Government is just a collection of people with the same political beliefs who use (or choose NOT to use) the apparatus of ‘The State’ to rule as they see fit if they get elected. This is something that is key in the argument of pushing the ball back into the neo-lib court as JSW suggests, to force them to justify why they choose NOT to exercise sovereign State power for the greater good. Here are some questions perhaps for this Government and its Neo-lib bullshit…………….
1. Why does the Government want to issue loans to businesses during Covid-19 when it does not need any income back since it prints its own money? Why offer loans to those in trouble? For God’s sake !! You are a Government of a sovereign State — not a fucking high street bank!!
2. Why are the loans only 80%? What is wrong with 100%, when the State prints its own money? Why is this Government not using the apparatus of the State to print enough money to help its economy?
3. Why is a time constraint being set on the furloughing scheme, when Government can keep the scheme open for as long as it needs to as it can print its own money whenever it needs to?
4. Why can’t the Chancellor help everyone — the State can print money to keep people paid even if they can’t work? And helping everyone is really pulling out all the stops as was promised. And if you don’t know who ‘everyone’ is, why are you not going out and finding them and helping?
5. Why are people unemployed already? Why not find out who they are and find out why they were made redundant and help their employers out?
6. Tax is useful in society as it helps to contain inflation (amongst other things). Why do you insist on cutting taxes and saying that low wages, low benefits and unemployment should be used to control inflation instead when it is causing more in-work poverty and misery in the general population? It is well known that benefit payments (even if they were 100% of lost earnings) are non-inflationary, in fact this money – when printed — only replaces that which has been lost due to economic factors. And why do you think it OK if it is replaced with personal debt which destroys the value of earnings when people are already taxed? All that happens is more money goes to servicing debt and less is spent in the economy — surely shooting economic policy in the foot? When people pay off higher debt, they become more resentful of paying tax.
7. All sovereign State money used as wages or benefits for one individual is spent by that individual to become the wages of those who supply goods and services to that individual. What is the economic sense of removing buying power that keeps the economy turning over? (Everyone’s wages is someone else wages — Paul Krugman).
8. Why do you insist in privatising public services? Such privatisations create a lot of debt from the buyout (saddling the new private organisation with debt obligations to banks) but also investor value demands bear down on the quality of service and pay and conditions effectively transferring wealth to those rich enough to invest from those who no longer get a living wage. And then you think it OK to top up the low pay with a little money from the State but also portray these people as a burden to those who wrongly assume/are led to believe their taxes pay for the top up?
9. We are heading for an ecological meltdown. Why can you not print State money to kick start green technology when the private sector is so risk averse towards doing so? What is the sense in printing limited State money to deal with increasingly ecological disasters when enough money can be printed to start new green tech markets that may very well stave off such disasters? This makes no sense at all.
10. Why do you and the Labour still lie about pensions, making out that the State cannot afford to pay decent pensions for our elderly, making the public sector pensions for example an average earnings pension rather than a final salary one in 2003 (thus reducing it) and giving us a lump sum to invest in the private sector for example at our own risk when everyone knows money is safest with the State — even the very rich – when we know that the private sector cannot be trusted? Hmmm?
I’m all ears.
BTW — I have never believed that taxation pays for all Government investment. I have believed however that choices are executed and a Government can choose to spend tax receipts if it wants to as well as print the money — a mix of both. This is certainly what I was taught at University as late as the late 90’s to 2000. There will be lot of middle class professionals with progressive views who think along the same lines having been taught the same. A definitive account of what actually happens is sorely needed.
Thanks
One technical issue – the state does create the currency – I agree
But it does of course require a counter party to promise with
So it can’t be said to own all the money
Well argued, John. There’s two sides to the myths – the neoliberal myths (of which one of the most difficult to eradicate is the household economy myth), then there’s the myths (or insults) around MMT (recently described as a “wonderland” in the FT – makes a change from the magic one).
While tackling, say, the “household” myth it could be possible to show the evidence against the “household” – eg QE or whatever – also demolishes the “wonderland” myth against MMT and gives support to MMT as a descriptor of how the real economy works.
Hi Richard, great to see someone attempting to ‘lift the veil’ on money creation. I am an avid follower though still have large gaps in my understanding. The piece of the jigsaw I have trouble with is debt interest. I always assumed that the government paid interest on the gilts it issued and that this amounted to quite a significant slice of annual expenditure, approximately equivalent to spend on defence last time I looked, which admittedly was a long time ago. Is that debt interest going up as a proportion of national expenditure, or does it simply not matter because any shortfall can be made up through QE? I’m also wondering about the government’s Ways and Means account at the BoE. Is that funded by QE or debt on which interest is payable?
Reposted by RM from Nick
The myth that purchasing shares on the secondary market funds investment.
That as a nation we can’t afford social security.
I think the oldest myths are the most tenacious, and worth addressing again for newer reads.
1) ‘An Invisible Hand’ (Adam Smith) – the praising of selfishness.
2) ‘A rising tide lifts all the boats‘ (Sorensen/Kennedy) – praising (GDP) growth by implying benefit to the poorest (cf Ed Miliband, “they used to say a rising tide lifted all boats. Now the rising tide just seems to lift the yachts”.)
3) ‘Trickle down’ economics – or in other words, “what an older and less elegant generation called the horse-and-sparrow theory: ‘If you feed the horse enough oats, some will pass through to the road for the sparrows.’“ (J K Galbraith)
4) ‘Migrants take our jobs’ – (Groan!)
5) ‘The private sector is more efficient and invests more than the public sector’ – (though it was pointed out that all the research in an IPhone, including the internet it uses, was publicly funded!)
6) ‘Red Tape’ – If I were allowed a 6th it would be that regulation inhibits it’s otherwise beneficial sectors, such as banking and trade.
Thanks for considering these Golden Oldies again for a new readership. Mainstream Media reporters still fall back on them.
I’m reminded though that the term “myth” is misused if we merely mean falsehoods, whereas true myths convey community forming ideas in powerful imagery and story. Maybe we need a dismiss falsities In order to create a new economic mythology.
New ones – thanks….
Quick list:
1) People will happily pay more tax, even if provided with facts about taxation.
2) There will be a noticeable difference in society in the years following Coronavirus.
3) There will be a Green New Deal.
4) Politics will change after Coronavirus.
Can’t think of a fifth at the moment.
5) We will get definitive answers about COVID-19 and the will be a people’s enquiry.
Various ideas/possibilities:
If the government is like a household then how many households do you know that own a bank?
Households can save but why would a government save when it owns a bank?
The purpose of democratic government is a national wealth service
Government is literally a money creating machine which it uses to get things done
Possibly useful to remember that when in 1834 Parliament burnt down (perhaps interviewees could have in their pocket a postcard of Turner’s painting to show skeptical journalists!) they were burning the old wooden tally sticks, which were spent into the community in return for things the government wanted and which they accepted back in payment of taxes – and then destroyed. That’s still at base the current system.
National Savings & Investments should be merged with the Debt Management Office (conceptually at least)
We are not paying for it with debt but with credit creation.
The only debt worth bothering about is private debt
When people are financially insecure this makes their mental health worse – even the limited and poorly organised Finnish experimental UBI found people on it experienced less mental strain.
http://www.progressivepulse.org/economics/ubi-trial-finds-money-inhibits-our-resources
Belief that money is limited artificially limits our real resources.
Hyperinflation is extremely rare and indicative of incompetent government (only been 56 examples in the world 1795-2012)
http://www.progressivepulse.org/economics/debunking-hyperinflation-and-challenging-inflation
OK – I’m a bit late to the party (and I agree with the suggestions above) but here’s my two pennies worth:
Myth One:
All the money that has been created is all the money that there is and its just about dividing up what we have – the myth of treating real money (not credit) as a finite, scarce resource.
Myth Two:
Money is a private matter – it exists naturally in the world and the best allocators of it are markets (the negation of State money and the denial that it is an expression of national sovereignty (power) in the name of all its citizens – not just the rich). It has nothing to do with the State at all.
Myth Three:
The benefits system is funded by taxation – that tax payers support the low waged/unemployed (is this always the case all the time or can and do Governments choose to send taxes like this or is that just plain wrong?). In other words is redistribution via taxes/transfer payments or is it/can it be just by printing the money? Or can it be or as it ever been a bit of both?
Myth Four
The UK Government can only sell its bonds, gilts to the private sector which means that it is in debt to that sector which means that the private holders of those bonds can charge more interest to the Government and increase the debt/repayment owed if it feels the Government is spending too much of the cash the bonds/gilts that have raised and will have difficulty paying the markets back.
Myth Five
We have to have low wages for the many and a pool of unemployed people in order to combat inflation (when in fact it is a proper progressive taxation system that contributes to inflation control – so why this addiction to reducing the efficacy of best coolant for the economy – tax?).
Thanks for all your hard work
Thanks
Myth two definitely – the idea that money is a natural development that just magically happens at some point in economic development, and that it’s /not/ tied to the existence of a state (or a state-like power). The fact that coins always have the heads of important people or deities kind of hints at the problem with this idea – whenever money is created in concrete form (currency – coins, notes, etc) it’s explicitly tied to a significant power, it’s never something created by random Joe Bloggs.
Oh, and at the same time addressing some of the myths about the history of currency and its relationship to credit and taxation and so forth might be nice, though waaay outside the core scope of your plan.
I don’t think these have been mentioned :-
The myth of the independence of the central bank.
The myth of raising the interest rate reduces inflation.
I am going to spend tomorrow working on these
Aiming at the average person who thinks this is too complicated for him/her and so switches off from any economic discussion
1. Government debt is like household debt
2. Taxes pay for everything
3. We will run out of money if we’re not careful
4. GDP is the true measure of prosperity
5. Austerity was necessary
(6. The IFS… are worth listening to)
Figure out how to debunk that stuff succinctly and then stick it on the side of busses. That’s a crowdfunder I’d contribute to!
I think if we can get over to average people the simple idea that we can’t run out of money then they’ll start to think differently at election time.
Definitely good
Maybe nit the last, but only maybe…..
“Original number 11. …without the injection of new government-created money into the economy, as is happening right now, it would literally grind to a halt.”
But it should avoid the US mistake of injecting it into the FIRE economy (simply benefiting the wealthy through asset inflation) rather than into the production-and consumption economy.
Here’s mine:
We need to work forty hours a week in order to maintain a society that can provide everyone with what they need.
I suspect that a lot of what people call “work” is a waste of time and that if we would identify the useful stuff then people could do 20 hours of labour a week or even fewer and have a lot more time for learning, creative pursuits and enjoying time with children.
I’m not sure but I think the topic falls within the scope of your expertise.
Bonus myth – the sum of money a person is paid reflects their value to society.
The current situation has shown so clearly that this is false.
As you say – I will have think about how that fits in the remit
Hi Richard,
I learnt almost everything about modern money creation and the so called government debt here on you site but still feel knowledge is pretty fragile about these matters.
I would therefore be grateful if you could shed some light on how is it possible that governments can money as they please without damaging their economy? Does this mean everything government around the world could do the same thing without their currency losing value?
Many thanks
They can’t create money at will
They can create money to the extent that this creates full employment
Once there is full employment MMT makes it very clear that money creation is constrained by the capacity of the economy to use that money
Thereafter it us inflationary
MMT puts a massive emphasis on controlling inflation
Thank you. Crystal clear
The crowding out myth. Sclerotic govt. spending crowds out dynamic allocation of capital by the private sector.
Noted
That’s a really good one to note actually – well remembered Graham – it was used by Osbourne after 2010 and based on dodgy spreadsheets.
Others have done better than I could, and these are not myths exactly, but let me just throw in:
* The multiplier effect – government spending can “return” more than the original amount (hardly surprising when much private sector spending is based on returns on capital or investment).
* The inability of (neo)classical economics to explain a world that is not made perfectly rational economic units with perfect information, but rather living, breathing, emoting people with a range of irrational biases and limited (often wrong or misunderstood) information.
* The failure to recognise and take account of externalities. (Almost by definition.)
* The importance of health and happiness as important socioeconomic indicators of how well we are doing, not just GDP. (An example of price versus value.)
The multiplier is important
I seem to recall that the role of ‘The Multiplier’ was one of the central contributions that Keynes bequeathed to us by explaining the important role of ‘Positive Feedback’ in the context of flagging economic systems.
Its also a hugely important factor in other contexts such as engineering (my own area of interest) and the spread of infectious diseases when R>1 (currently everybody’s interest).
Hence we are reminded that we potentially ‘ride the tiger’ given that positive feedback systems are usually dynamic. Hence the same influence that provides a useful ‘amplifier’ when applied modestly, can lead to spiraling instability if ‘turned-up’ beyond a certain critical limit.
It just occurred to me that perhaps the Multiplier that Andrew had in mind was not the Keynsian multiplier (which I think we would assume is a useful concept) but the multiplier featured in the Fractional-Reserve theory of banking model (which I suspect most of us would consign to the myth bin).
Going further, as I understand it, there are actually three contending theories of banking, namely:
1. Fractional Reserve Banking (FRB).
2. Financial Intermediation (FI).
3. Credit Creation Theory of banking (CCT).
I assume MMT folk would subscribe to CCT and consider the first 2 to be myths, even though FI is probably the one that is currently most popularly believed.
So two more myths to add to the Busters list perhaps?
Incidentally Richard, processing all these suggestions is going to be a massive job for you. But we are starting to see them coalescing into variations on a discernible number of key themes. So I wonder if its worth contemplating a return on your investment in the form of a new book as a vehicle for wider dissemination? Something with a title such as ‘A Mythbusters Guide to the Economic Universe’ perhaps? I would buy one and encourage my mates to do likewise.
A book would be the eventual obvious conclusion
Werner’s already covered this in his ‘lost century’ paper https://www.sciencedirect.com/science/article/pii/S1057521915001477
Further, the BofE have got a couple of guys working to replicate his findings, one of whom is Michael Kumhof and the other is, ah… lost to me… anyhoo, here’s Kumhof discussing the idea of banks as intermediaries https://www.youtube.com/watch?v=CPcuIxDd4kQ
Thing is, a lot of what’s being asked of Richard has already been done so I’d suggest building a wiki first and then Richard, in all that free time he has 🙂 could consider writing to expand on points generally agreed to need clarification and fill in any gaps.
Where has it been done?
I just gave examples of some, I’m sure there are others where other subjects put forward here have been examined already. I’m suggesting searches be conducted before you start writing and then find you’re going over what turns out to be ground already covered.
I think they have all been covered
But the answers may not be readily accessible
I think Richard is correct that it probably has all been said before in myriad scattered outlets but the challenge here is surely not so much saying something new; its about getting it collated and disseminated at the right level in the right channels and then getting it repeated over and over again in varied formats that will connect with different people. Myths, almost by definition, are usually very heavily dug-in. Persistence and attractive narratives are likely to be required in order to counter them.
Agreed
Nothing much to add to all the comments above.
I think the following myths need busting and then a bit of an explanation of how it all really works.
1. Household budget=Government finance.
2. Tax and bonds are used to RAISE the money government uses in order to spend.
3. “Debt” and “borrowing”.
It then needs to be explained that the purpose of tax and bonds is to remove money from the economy to create the space for more government spending.
Its already been said in different ways through the many excellent comments already offered above, but there is the impact arising from the oversimplistic ‘Quantitative Theory of Money’ equation (PT = MV).
This alleged equation (I would argue its actually a tautology) appears to demonstrate conclusively that more government money (M) will inevitably produces more P (higher prices), everything else being equal.
This is a flawed and dangerous model as amongst its adherents (many of whom are fair minded and intelligent people) it induces a false sense of security backed by an ostensibly infallible mathematical logic. Unless its underpinning assumptions and limitations are properly explained and understood, it needs to be shredded.
Agreed
I am not going to add any more. But, what I want to do is suggest keeping the initial list to ten myths, or maybe even five, as a maximum. Use those as the starting point to change the narrative.
Just a thought.
Regards,
Craig
These will take time anyway!
Hi Richard
I submitted this comment this morning but not sure if it has been eaten by WordPress! Apologies for the duplication if you have seen it but would be great to have this included in your thoughts about how private banking fits into MMT.
My question was…
If a bank lends £12k, with which I buy a new car, the dealership sends £2k of this to the government as VAT. The dealership makes a 10% net profit margin, on which they pay 19% corporation tax. So immediately in the first transaction, £2190 is sent to the government in tax, for it to be destroyed. The balance then circulates further through the economy, presumably accruing further profit margins on the way, thus more tax, more to the Treasury and more destroyed currency.
If this is what banks do day to day then presumably we can multiply this out many times and assume therefore that banks put an awful lot of bank created money into the macroeconomy. How is this controlled? Presumably it doesn’t cause inflation, but why is that? And, as far as the government is concerned, why do all of these bank created money transactions not create huge amounts of tax which mean the government would end up in surplus? Instinctively when you add all this tax to the tax from government created money, it feels like it would close and overtake the budget deficit?
So basically I’m looking to understand how bank created money fits into the wider MMT model, as this “horizontally created money” doesn’t seem to fit with all of the stuff I read (and usually understand!) here about vertically created money.
Thanks for your time and consideration; you’re doing a fantastic service.
I hoped to find time to reply in detail, but simply have not and now need to cook supper
I am told being a father caring for their children is now a reasonable excuse for anything
I will still try…..
Thank you. I totally understand family comes first and you owe nothing to us. In fact I’m sure I speak for us all in that it is us who are in your debt (appropriate!). I am always impressed at the amount you manage to write whilst still engaging fully with the comments, all the while having to earn a living and look after family. Thanks again, no rush on my part, i just saw your question and jumped at the opportunity to seek help furthering my knowledge.
Don’t work too hard, we all deserve a day off and tomorrow looks to be a cracker.
I certainly won’t be working all day…..
And did nit yesterday either
Thanks for the understanding
Bit late to the party and only read half the comments, so apologies if already posted:
– Capitalism has lifted millions out of poverty…
…by moving well paying, unionised manufacturing or service jobs to developing countries to exploit workers with fewer rights, for less renumeration, impoverishing the working classes in the developed countries. Oftentimes even exploiting child labour. And the IMF or World Bank fiddles the figures by increasing the poverty line at a slower rate than inflation. And anyway I think it’s farcical to say “Look, these people were surviving on less than $2 a day before globalisation, now they work 12 hour days for $3 (or whatever, they aren’t getting a living wage)! Great success!”)
“Government borrowing” .
If only we could stop people using the word “borrowing” in this context. Most people think it means the government has to go cap in hand to the banks because it is short of money.
Isn’t it really about reducing the money supply or something? I don’t know. Like most people, I’m not an economist.
And isn’t the money destroyed anyway when the government gets it? If I borrowed money I wouldn’t put it in a pile and burn it.
Lots in hear about this – see the modern monetary theory category
There is one myth that transcends all others, the myth that there is no alternative to fractional-reserve banking; the means the already wealthy engineered for themselves over three centuries ago to extract disproportionate surpluses from national economies The right to create money was gifted to the newly-formed BoE in 1694, its paper debt competed with treasury bills and the debt-free coin and notes of the realm eventually displacing them as the main financial power, assisted by the rise of the commercial banks (until of course it and they got into real difficulties at which time the government found the means to bail them out), as the main source of money (97% in the UK) except when they’ve crashed because they abuse their ability (they are licensed by the government) to create money as loans and when buying securities. Reginald McKenna (a C20th director of the BoE and CEO of the Midland bank – taken over by HSBC) “I am afraid the ordinary citizen will not like to be told that the banks can and do create money and they who control the credit of the nation direct the policy of Governments and hold in the hollow of their hand the destiny of the people”.
The London Rothchilds observed in a letter to business colleagues in 1863, “The few who understand the system will either be so interested in its profits or be so dependent upon its favours that there will be no opposition from that class, while on the other hand, the great body of people, mentally incapable of comprehending the tremendous advantage that capital derives from the system, will bear its burdens without complaint, and perhaps without even suspecting that the system is inimical to their interests.” The tremendous advantage capital derives from the fractional reserve system is the fact that asset or cash rich entities do not have to use their own money to acquire fresh multi-million pound assets, their bankers create it in their accounts (the bank doesn’t have the money it just promises to get it when required by the capitalist’s creditor – and guess where the bank gets it from -the general publics pension contributions and insurance premiums!), they pay the interest on it and bribe company officers and shareholders with the promise of substantial rewards for their compliance in order to either acquire a profit centre or strip the target company’s pension fund.
The most egregious use of fractional reserve banking is in currency manipulation. The really wealthy funds borrow on margin (that is they borrow short-term to speculate, paying interest for a few days use of money, money the banks create out of nothing as promises which appear in the speculators account as millions of pounds. George Soros made spectacular use of this facility when over a period of several days he undermined the pound and in the process cost the BoE £3.3 billion. A full-reserve bank operation would not chance transferring huge sums for such purposes, the speculator would have to find something less lucrative, and less damaging to the economy, to employ their talents.
The present system discourages the emergence of a national competitive (except in speculation) capitalist society in favour of entrenching a national and international polyarchic one. Entrepreneurial individuals and SME businesses’ access to bank loans are circumscribed in comparison to incumbent corporates with whom they may wish to compete, sole traders and SME’s are also disproportionately vulnerable to bank asset seizures. The taxation system is rigged against the individual and SME and in favour of finance — William Paterson’s system was consciously constructed to accommodate and disproportionately favour incumbent capital its evolved successor does likewise. We need banks, they are vital to civilisation, it is fractional-reserve banking that needs consigning to the dustbin of history in order that all the commonly held myths about money that your correspondents have alluded to can be exposed as aberrations of the collective psyche. We need a divorce from TINA.
Regards Geoff Toase
Thanks s- albeit that the last thing we need is full reserve banking!
‘albeit that the last thing we need is full reserve banking!‘ – The way in which full-reserve banking is presented to the public is as you say the last thing we need; money tied up in banks to meet any level of customer demand for their money. The system I alluded to in previous posts would require banks to keep their own running reserve as at present and a fixed amount in the domestic central bank (in order to obtain a license) any monies they cannot find takers for become excess reserves at the central bank which pays bank rate on all reserves held with it. Those reserves are a loan to the government (held on 72hrs notice) which it spends. As the economy contracts and the bank has a dearth of customers its level of reserves at the central bank will rise as individuals and businesses seek a safe haven for their money and the government will spend into the economy what the banks cannot, as the economy recovers the bank will need to recover its reserves from the central bank (which the government will have spent) a liability that will be met by the domestic central bank being authorised to re-create the amount of money the bank requires up to the level of excess reserves it held (as accounted for by the domestic central bank). Should the treasury and domestic bank MPC determine that the stock of money in the economy needs to be augmented to deal with a rise in demand for goods and/or services then the domestic central bank can be authorised to create new money and lend it to the banks creating a source of government income. The reserves the government spend represent a liability (debt) to the banks which a debt management office at the treasury will monitor and advise the government on the level of taxation required to remove inflationary/deflationary pressure from the economy. I would welcome constructive comment on this brief exposition of a proposed alternative to the present corrupt and corrupting money system we presently endure. A national institution should have the monopoly on the creation of national money, a common good, not private corporations whose track record from 1694 to date has been abysmal.
Your thesis works subject to one impossible proviso
All money is debt
It is only a promise to pay
What you are saying is that only the state can make that promise
And what you are saying is that the state should then create all credit and tale all credit risk
Personally I think that not only impossible – other banks would emerge
But I would also say that it’s utterly undesirable that the state take on this role
I see the state as borrower of last resort
I might see is equity provider of last resort in a crisis (and not lender)
But a routine provider of credit? Why?
All money is debt. It is only a promise to pay. What you are saying is that only the State can make that promise. – NOT SO – banks would keep their own running reserve as at present (composed of ‘bank’ money, a proportion of those monies loaned to it by individuals and businesses with ’deposit’ or ‘current’ accounts, bondholders, shareholders, earnings, etc). The banks will maintain the running reserve at a level consistent with their experience of demand for advances (loans). The banks determine who they do or do not lend to; when their customers borrow they become a debtor to the bank, they promise to pay back the ‘bank’ money that the bank transfers to the customer’s account, the bank debits their running reserve accordingly – there is no credit creation, bank money is transferred and the customer pays interest and eventually the capital to the bank for the use of it. The State has no part to play in this process.
A fixed nominal amount will be maintained at the domestic central bank – DCB – (in order to obtain a license) and any monies they cannot find takers for become excess reserves at the central bank (the banks will do this willingly if they cannot find remunerative employment in the economy) which pays bank rate on all reserves held with it. Those reserves are a loan (just like the loans the customer’s of the bank make when they ‘deposit’ money in the bank) to the government (held on 72hrs notice) which it spends.
And what you are saying is that the State should create all credit and take all credit risk – NOT AT ALL – from the foregoing it can be seen that the bank manages its own credit risk but cannot create money out of nothing in its customers account, it has to supply ‘bank’ money.
Personally I think this is not only impossible- other banks would emerge. – Other banks will already exist in the domestic economy with the same operating system supplying ‘bank’ money to their customers. No bank will be able to create national money out of nothing.
But I would also say that it’s utterly undesirable that the State take on this role. – So far apart from banning the invention of its money by private interests it hasn’t done anything.
I see the State as borrower of last resort. This is the language of the fractional – reserve banker, they need a lender of last resort to bail them out when the busts they induce by profligate national money creation, incurring liabilities many times any reserves they have, propel them and the financial system towards melt-down.
I might see (it) as equity provider of last resort in a crisis (and not a lender). But a routine provider of credit? Why? – At no stage in my brief exposition have I suggested that the State become a routine provider of credit. The final part of my exposition reads; As the economy contracts and the bank has a dearth of customers its level of reserves at the central bank will rise as individuals and businesses seek a safe haven for their money [ added – in domestic bank accounts ] and the government will spend into the economy what the banks cannot, as the economy recovers the bank will need to recover its reserves from the central bank (which the government will have spent) a liability [ added – like a bond] that will be met by the domestic central bank being authorised to re-create the amount of money the bank requires up to the level of excess reserves it held (as accounted for by the domestic central bank). Should the treasury and domestic bank MPC determine that the stock of money in the economy needs to be augmented to deal with a rise in demand for goods and/or services then the domestic central bank can be authorised to create new money and lend it to the banks creating a source of government income [ added – an occurrence dictated by circumstance, not routine] . The reserves the government spend represent a liability (debt) to the banks which a debt management office at the treasury will monitor and advise the government on the level of taxation required to remove inflationary/deflationary pressure from the economy. I hope this makes clear that the State will not in anyway operate in the manner which you allege, if adopted it will eliminate the curse of fractional – reserve banking and the sovereignty over national money creation exercised by private financial interests . TINA rules OK until people recognise it is a myth, a very expensive one for humanity.
I am sorry Geoff – bit this is nonsense
There is credit creation when lending takes place
The Bank of England have dismissed your version of events as wrong
So do I
Please do not waste time with it here again
‘One technical issue — the state does create the currency — I agree
But it does of course require a counter party to promise with
So it can’t be said to own all the money’
OK – fair enough – knickers in a twist and all that but if I have made that wrong assumption, how many others might? All I’m saying is that it is worth considering explaining what this means in practice to iron out the wrinkles given that I am someone who has made the effort to understand. I’m quite happy to display my ignorance if it somehow improves the delivery of the explanation of how the money system actually works.
My main thrust of view though is making sure that people know that their Government (State) can help them and that when this does not happen, it should be the basis of who they vote for or at least ask why if they are not helped. I worry that by design, anti-Statist, authoritarian politicians are destroying faith in the State and politics itself – and that is extremely dangerous.
Give me more time….
And for something seemingly so obvious it’s really not easy…
Richard
I’m not asking you to speed up. How could I? How dare I?!
I’m just acknowledging the shortcomings of my own ‘knowledge’, the superiority of yours and trying to add value to me being mistaken on a public forum that’s all, feeling that the embarrassment is worth it for a greater cause.
You do it when you are ready. I’m not the boss of you.
Respect.
MC
🙂
Richard,
You scored a goldmine with this question. So many myths expressed, with such diversity of expression, gives you plenty of material to work with. I am impressed with the depth of understanding of your readers. (I wish I saw more of that in the US.) You’ve obviously closed your mind to anything I could contribute, so I’ll give up trying. However, I am impressed with your effort and you remain on my regular reading list.
Why not answer the reasonable points I raised?