In a fiat money system knowing how money is created. I addressed this issue yesterday. It is equally important to know how money is destroyed, because that's an essential part of the process. This video tackles that theme.
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Fascinating – and at the same time incredibly weird
So simple my 12 year old grandson gets It. He understands what grown up politicians can’t. Weird huh?
Th3 issue isn’t unlearning what we think we know, but don’t
It this equivalent to children knowing how to use the VCR when their parents can’t? (Er, perhaps showing my age there – what is the modern technological equivalent – TikTok?)
The bank invariably requires we pay more money back than we took out in the loan, as interest. Where does this extra money come from?
The same as any other spend – it is settled out of government created money or loan created money
It does restrict the use of that money for other purposes, effectively redistributing it
The legal aspect of Bank lending is an interesting one.
How can a bank “lend” something that it doesn’t have prior to making the loan?
In order to lend something in law, don’t you first have to own it?
A bank can “lend” you the money for a mortgage on a house without the bank having the money in the first place. If you default on the loan, the bank can then take the house from you and own it themselves.
The bank starts with nothing and then ends up with a house. Clever trick.
Indeed
No wonder their value has grown so enormously
I’ve started my new mantra
” Taxes paid are like loans repaid ”
But
How do we persuade / un-brainwash the populace that taxes don’t pay for Govt. spending !
Bit like the Early Christians ” we know we’re right. why don’t they believe us ”
At least they’re not stoning us ( yet ) !
Am I right in thinking that when I pay my £1,000 tax bill, my current account is marked down by £1,000.
My bank’s central bank reserve account at the BoE is also marked down by £1,000 and at this point my tax bill has been paid.
The £1,000 of central bank reserves is destroyed, it is not moved to a treasury reserve account to be spent again by the government.
By the way. The videos are great. Just the right length to not fry the brain but enough content to get the “cogs in gear” and turning.
You are right….
And thanks re the videos
I try to keep them to 7 minutes
And anyway, that’s usually as long as I can do in a take, and I like doing one take
@ Vinnie
@RichardMurphy
So isn’t this a pretty vital piece of the MMT armoury?
When you pay taxes using a private bank, the private bank’s central bank reserves are destroyed.
When you repay a loan from the same bank, the private bank’s reserves go up.
Yes…..
Peter.
“When you repay a loan from the same bank, the private bank’s reserves go up”.
I guess that yes they do. The money you use to repay the debt has first been deposited in your account from someone else. (Money you have earned).
If that person banks with another bank, then reserves are transferred between banks in order to credit your account.
If both parties bank with the same bank, then no reserves are needed, however, interbank transfers must happen somewhere down the line.
I think that’s how it works?
Yes
suggest rather tha “private bank” it might be clearer to say “commercial bank”
as i understand it private wealth, private bank is a special category
hope thats helpful
Ian Greenwood
Yes. I take your point.
By “private” I mean, privately owned opposed to publicly owned. Working for private rather than public interests.
Perhaps “High Street Bank” might be a clearer term.
”Tax repays the BoE” ”tax cancels the debt created between the government and the BoE”
Richard, I do get it – as you say it’s actually very simple to understand. But this is not the description of how it all works that we hear from the government, politicians in general, the OBR, pundits in the FT etc. They say (and many of them might actually believe) that taxes fund government spending.
But there must be some in officialdom – in HMRC or the Treasury, perhaps – who can verify that the accounting procedure for tax receipts is as you say. That is, that tax receipts really do get deleted, and that there is no transfer of electronic credit to some Treasury account that is then used for more government spending. Would a letter to the appropriate minister or even a FOI request to the Treasury clear this crucial matter up once and for all?
That will take some drafting….but I will think about it
The interest on the loan. Is that destroyed?
When repaid
David Rushent.
I guess that the money used to pay the interest on the loan has to be first earned by the person repaying the loan.
That earned income came into being by someone else, somewhere in the economy taking out a loan. When that initial loan (that later was earned and used to pay the interest on the loan) that the latter interest payment was originally part of, is repaid then yes the equivalent of the interest is repaid/cancelled. It doesn’t mean that the actual interest payment that the bank receives disappears.
Hope that makes sense!!!???
The reason that all the money in the economy doesn’t disappear when all the loans are repaid, is that new loans are constantly being created.
The economy, (in normal times!) Is constantly expanding as well (growth). So the volume of loan created money in the economy is ever expanding (quicker than debts are paid off)
But when that is nit the case, the government has to step in….
Richard.
Agreed.
The other place where money can enter the economy is through government spending. Public sector wages for example.
This doesn’t involve the creation of more private debt (or even public debt!)
As noted in a previous blog. It would be interesting to know how much new money creation is through bank lending (private debt) and how much is through government spending?
I’m guessing bank created debt money far exceeds government created money through spending.
A rebalance of this would have a massive positive effect on the economy.
Excellent! – Simple straighforward and factual. Your video presentations make such sense.
A request – May we have your thoughts on syatems which may be devised to ensure that the people who control the creation/annihilation of money do so only in the best interest of society in general rather than in those of a select minority?
How do we reframe monetary policy? It’s an interesting idea….and noted
I first “got this” point reading a Warren Mosler article ,who described the early colonialist powers in the USA annually burning pallets of money in the form of paper notes(scrip)they had issued the year before and had been used by the local population to repay taxes. I was perplexed as to why they would they do that.
The reason being of course was that this gave the colonial authority room to issue more notes for the following year,otherwise there would be rampant inflation. Some colonies balanced money creation/destruction well, while others were less disciplined and as a consequence suffered terrible infaltion, which ruined many a colony’s economy.The colonial powers used this local scrip to pay public employees and other government expenditures, like a standing army.Crucially ,this allowed the colonies to fund the war against the British and is a terrific example of the power of issuing your own currency. Previously the colonies were forced to use Sterling which was far too scarce as a good money supply and also cost interest to be paid to the Bank of England. The early American foundimg fathers like Jefferson understood the power of issuing your own money and used it to fund an army which eventually defeated the British. This was in fact the real reason behind the American civil war,the war was actually about who had the right to issue money in the colonies.
Aplologies that last line of course should say, “American War on Independence”!
Richard, I am finding your blogs on the economy both illuminating and challenging.
In the hypothetical situation where a government which has a deficit of, say £50 billion, wishes to borrow an additional £100 billion to pay for it’s public spend program, then that money is raised by encouraging private and corporate to save with the government via bond issue and national savings. Government borrowing is therefore achieved by public/corporate savings and not tax. So the national debt is now £150b.
At the end of the year private/corporate taxes are required by law. Money is paid into HMRC. Presumably the total of this money, say £30b, is then subtracted from the overall government debt, which will now be £120b.
In any year where tax receipts exceed government spending, the national debt is reduced. In theory, however unlikely, a government could reach a point via taxation where the national debt had been repaid and the account in surplus.
Is it not this offset principle that feeds the perception that government pays for spending by taxation? I’m not entirely sure how tax paid is money destroyed. Removed yes. I get that it cancels the overall government IOU by taking that £30b out of the economy. But at the same time it creates a + in the government account.
I’m sure that I have a mental block or two to overcome yet, but when we have been taught to think in a particular way about the economy, it’s tough to retrain.
You need to start at the beginning
All gov’t spending is paid for with borrowing from the BoE – it cannot come from tax as there would be no money to pay for it without spend first
The same is true of so called borrowing Which is actually – the spend has to come to create the money to be saved first
There is then no plus in the gov’t account from tax – it cancels what the gov’t owes the BoE and so is cancelled
Does that make sense?
Stephen P
Try this video. It really helped me to get my head round it.
Try thinking of tax and bonds as ways of removing money from the economy to create the “space” for more spending.
Hope the link works!
https://youtu.be/bHQCjFebIf8
The really obvious questions that most voters never ask is A) How do private banks really create money? (If they checked the Bank of England would tell them from thin air.) and B) If private banks can create money from thin air why can’t government?
As it stands money in British society is like a ghost it mysteriously turns up from a non-material world somewhere out there. This is like living in the Dark Ages! It’s been going on for several centuries and one of the main reasons for Britain’s steady decline.
Agreed
But the denial of the reality that private banks create money is widespread – I was told I was wrong to say so by someone I might call an MMT extremist on YouTube today
Such denial dies not help MMT
Actually, I go further that Stephanie Kelton on this issue – pointing out banks only do this under government licence
But apparently that is still unacceptable to some. And that does not help MMT at all
I think you need to do a piece on how the government licences private banks to issue money
Noted….
a ghost that has incredible power at manipulating an unsuspecting public
You seem to premise your arguments on the basis that all money is borrowed from either a bank or a central bank or another licensed lender.
What is the position regarding people who have implicit or inherited wealth?
They never need to borrow money on the basis that they have enough money to cater for their needs throughout their lifetime. all they do is spend.
How does their activity figure in the system that you predicate?
Wealth is not the same as money
And where is their wealth if money? They have lent it to a bank, because that is what saving with a bank means you have done
Brian.
Some of that inherited wealth is possibly held in property, shares, investments. Not money in the bank.
However, those of us who are lucky enough to have savings in the bank, do so because we have earn/receive more income than we need to meet our monthly outgoings.
But the money that we receive was either originally spent into the economy by the government or created by private banks when they make loans.
If I borrow £10,000 from the bank to buy a new car and then buy the car, the money is now with the car dealership and has entered the economy. (Used to pay wages, rents etc) THAT money is no longer “the debt” and is not cancelled by paying back the loan. An equivalent amount is payed back as the loan is paid back (as well as the interest) which cancels the original loan. The money to pay back the loan comes from my earnings i.e, money someone else borrowed down the line.
One thought that perhaps need addressing Richard, is the question of last resort that gets thrown at me from people who don’t (want to?) understand the MMT line of argument. ‘If it’s that good, why doesn’t every ‘expert’ agree with it?’ I can think of a couple of reasons – the people and organizations driving the neo con narrative are tax averse and when government admits it doesn’t HAVE to borrow money, it’s game over for them. Any more?
They do get it
They don’t like the fact that it empowers the government
It’s politics and not economics that gets in the way
Isn’t there a relationship between reserves and loans from private banks that needs to be covered?
Of course the minimum reserve requirement is tiny in proportion to loans, but necessary for banks to do business with each other?
Central reserves are the funds bank need to cover their liabilities to each other….so yes, us the answer
Where do the real pound notes/dollar bills come into this? I understand the idea of keystrokes going out and coming back they are destroyed but what if I pay my monthly mortgage for instance using real bills, stuffed into an envelope and put into the bank machine… do they literally burn them? Is there oversight? I would think it would be very tempting to keep and recycle them. In addition the Bank of Canada in the last couple of years made new banknotes out of a plasticky material that “would last longer”.. why would they want to do that if their life is actually quite short? I also notice that whenever I get notes from a bank machine they are new.. not grubby old used ones. And how do real pound notes/bills get into the economy if pretty well everything is electronic? Really enjoy your videos that seem quite straight forward and succinct .. until I start thinking more about them when I plunge once more into confusion!! Thanks.
Good question
What you have to realise though is that notes are Not really money. After all, they are not debt, and all money is debt. Instead they are a physical manifestation Of the promise to pay that is money.
If each promise was written individually of course we’d tear it up when fulfilled. We don’t tear up notes because we can reuse them to record new promises.
But that’s all they are: representations of money, and not money itself.
Liz Fox.
Imagine you pay your next tax bill with cash. £20 notes let’s say.
The Treasury now has your £20 notes.
It could pay someone to go through the pile of £20 notes and pick out all the ones that are in good condition to reuse and bin the rest. Replacing the binned ones with newly printed notes.
Or it could just bin the lot and print new ones.
Either way, The Treasury doesn’t “need” the £20 notes to fund future spending, but it does need to remove/tax the money out of the economy to create the “space” for future government spending.
Agree with that
Liz.
The notes probably can stay in circulation for quite some time before they are removed to pay tax.
Most people, I am guessing, pay their tax bills with “electronic” money from bank accounts rather than cash.
But even if they pay tax notes are recycled
They are not the debt
They are the record of it
Liz Fox.
I think cash enters the economy as the private banks are obliged to purchase them from the Treasury.
Banks would love to get rid of cash. It costs them to handle/move the stuff around (security vans) and they have to buy it from The Treasury.
Far better for them, that we only use their digital “loan”money.
Be wary, when there are announcements in the news about doing away with cash. Ultimately, it’s not for our benefit!!!!!
totally right.
real cash is the only early way kids can get a real grasp of maths (apart from building amd hands-on engineering) and solidify their grasp of numbers.
Humans, including myself are incredibly lazy in handling their virtual cash
it seems to me this may have some bearing on the jersey treasury ministerks tax reform proposals .Any comment ?
Not without doing more reading