I loved this twitter thread by Tony Weston, who sometimes commented here, and think it deserves a wider coverage, so I hope he will excuse me putting it up here:
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A good analogy.
I find it helps to have an argument as to why those with capital not only don’t ‘mind’ lower government spending, but actually rather see it as a lucrative opportunity.
This article by James K. Galbraith in The Nation ten years ago still rings true:
https://www.thenation.com/article/archive/defense-deficits/
“To put things crudely, there are two ways to get the increase in total spending that we call “economic growth.” One way is for government to spend. The other is for banks to lend. Leaving aside short-term adjustments like increased net exports or financial innovation, that’s basically all there is. Governments and banks are the two entities with the power to create something from nothing. If total spending power is to grow, one or the other of these two great financial motors—public deficits or private loans—has to be in action.
For ordinary people, public budget deficits, despite their bad reputation, are much better than private loans. Deficits put money in private pockets. Private households get more cash. They own that cash free and clear, and they can spend it as they like. If they wish, they can also convert it into interest-earning government bonds or they can repay their debts. This is called an increase in “net financial wealth.” Ordinary people benefit, but there is nothing in it for banks.
And this, in the simplest terms, explains the deficit phobia of Wall Street, the corporate media and the right-wing economists. Bankers don’t like budget deficits because they compete with bank loans as a source of growth. When a bank makes a loan, cash balances in private hands also go up. But now the cash is not owned free and clear. There is a contractual obligation to pay interest and to repay principal. If the enterprise defaults, there may be an asset left over—a house or factory or company—that will then become the property of the bank. It’s easy to see why bankers love private credit but hate public deficits.”
Steve.
Yes I agree.
Who gets to create the money in the economy is a crucial question.
Banks through loans or government through spending?
I have come to realise is.
There is only so much new money that an economy can absorb without an increase in inflation. By reducing government spending, there is more “space” for bank created money (that involves interest payments). This is why the political “right wing” advocate a small State. It allows the banking sector more room to make profits.
In this context, it is amazing that there is no official figures on the % split between government created money and bank created money.
Just to add.
I guess that there is more capacity for bank created money than government created money in the economy
Both can be removed from the economy by tax. But bank created money is also removed when a loan is repaid. This means that more bank created money can be created (without
increasing inflation) as it is being destroyed/repaid more than government created money.
Be interesting to know what percentage of tax is removing government created money and how much is removing bank created money.
Government created money can only be destroyed/removed from the economy through tax.
I admit I do not have that data
Vinnie here’s an argument to conjure with or agonise over:-
“Households ultimately pay for all principal and accrued interest from private debt in the system, either directly as a result of consumer debt or indirectly as a result of business debt costs having been rolled into the price of products they consume.
The purpose of this exercise was to demonstrate that no series of transactions within a closed system is capable of generating net nominal growth, even through ever-expanding debt. Nominal growth can only occur as a result of net government spending.”
https://neweconomicperspectives.org/2012/10/sectoral-balances-within-the-domestic-non-government.html
Just to add further to the Paul Meli argument I referenced it helps to understand the basis of his closed system viewpoint for the non-government sector and this is that a balance is a stock in that system. Unfortunately Paul Meli took down his blog which contained his historic currency creation data which shows that in fact government consistently shows a higher percentage amount of currency creation than private sector banks. He also took down his formula on which this was based. Central to his formula is that private sector bank loans are subject to double redemption, full bank loan repayment and taxation whereas government spending is subject to partial redemption. His argument can be followed through the comments section in the following:-
https://mikenormaneconomics.blogspot.com/2013/06/paul-meli-does-credit-drive-economy.html
Thanks Helen Schofield for the links.
Think I am going to read through a few times to get my head round what Paul Meli is saying.
The 60%/40% government/bank created money split is an interesting stat if true.
I’m still getting my head round the idea that more bank lending doesn’t increase money supply. Only government spending does.
I was always of the view that 97% of all money is created by Bank loans. The other 3% being cash printed by the government. But this is only logical if you think that the government doesn’t create money itself and has to tax in order to spend.
Now I get MMT, the above no longer makes any sense.
If the government created money when it spends, then the 97%/3% split can not be true. What the actual amount is is open to debate, I guess, but it must be big.
Helen. I would be interested in your thoughts on what happens if there is no exponential growth in the economy. I’m my mind, even MMT can no longer function.
With the global population predicted to plateau by 2060 and then decline and a need for us to consume so much less to tackle climate change, there are very serious pressures on achieving exponential growth.
What happens then?
The 97% etc is a Positive Money trope in reality
And they use to top try to prevent bank creation of money – which they oppose
Steve, thanks for that James. K. Galbraith link. I’m currently reading the latest edition of David Graeber’s book on “Debt: The First 5000 years” and in the first chapter, in connection with the debt the IMF imposed on behalf of private sector bankers on Third World countries, he makes essentially the same point as Galbraith’s. This point is why pride yourself in living in a democracy when you haven’t got a clue how your country’s monetary system works because knowing or not knowing this substantially determines how well the politicians deliver general well-being for you and “all” your fellow citizens!
Interesting question arises from the piece referenced by Helen via the link. I seem to recall Richard saying that the money created by a bank loan is destroyed when the loan is repaid but that the payment of the interest on the loan also destroys money. Is that really the case? Or is what actually happens a siphoning off of existing money in the economy by the banks through the charging of interest? So unless government spends more money into the economy what’s available to everyone else shrinks as the banks accumulate interest.
I have to say that Steve Keen thinks I am wrong in saying interest is destroyed on repayment and I am being persuaded
Can’t find any reference in Paul Meli’s work to what happens to private bank loan interest His formula in words is that “The total level of state money in the private economy should be equal to all public spending plus all private debt outstanding less federal taxes and net exports.”
It would seem rational to think that some bank loan interest gets taxed as bank wages, running costs, dividends, etc. whereas other amounts get temporarily stored as financial assets. Painstaking to assemble this information!
Writing in June 2013 after data mining US financial information he states the following:-
“Since 1970, credit has accounted for between 36% and 47.5% of the total number of dollars spent into the economy (and bad things happened at that peak), currently standing at just under 40% of the “money supply”. My seat-of-the-pants observation is that a healthy credit/public spending ratio is centered at no more than about 40%. At no time in the past 43 years has credit ever accounted for anywhere near 90% of the “money supply”. It’s an urban legend.”
If UK financial information can be mined for a similar length of time there’s no reason to suppose there’d be a different outcome from my experience of how American and British economies operate..
Thanks
I find it instructive to extrapolate to the limits which can be very instructive. If the banks are the only source of money and because they charge interest they will end up owning everything. The ancient civilisations knew this and periodically declared debt jubilees otherwise everyone would become slaves.
Some of the ancients recognised an unsustainable Ponzi scheme when they saw one and therefore why they knew there had to be an agency that also created currency from thin air and only partially redeemed it! (This is the Paul Meli argument. He says government 60% normal currency creation, private bank loans 40% currency creation. Anything that substantially moves the private bank creation percentage higher leads to an asset bubble inflation which then bursts causing a deflationary recession.)
In the same way they had bans or restrictions on Usury as they realized that a gold or silver based money supply was finite and they didnt want someone owning it all.
Perhaps the Christian Churches should revisit their ban on usury abolished many years ago
Hi Richard…. Thanks for the repost 🙂
I’ve only just seen this!
Tony.
I liked it!