This tweet, and the video embedded in it, is quite extraordinary:
https://t.co/WqiaNchvPj pic.twitter.com/ghEu8oEAY1
— Rishi Sunak (@RishiSunak) October 29, 2020
Whether the tweet to which Sunbak responded was genuine or not (and who knows?) is not the issue. It is the errors in the reply that are staggering.
Sunak says first of all that the government has no money of its own.
Then he claims that government spending is funded only by taxpayers and borrowing.
After which he claims that borrowing has to be repaid.
All these claims are wrong.
The government makes all our money
The only currency we have in the UK is sterling. It is government created. No one else can make it. It is the only legal tender we have. It can only be put into circulation by the Royal Mint, which is government-owned, and the Bank of England, which is likewise government-owned. We literally only have government made money in this country. And we have to use it: nothing else is accepted for payment of taxes but g0vernment made money. That is why we use it for our everyday transactions.
The idea that there is no government made money is, in that case, wrong. Instead, we only have government money. Taxpayers simply use it. And the only reason they have it to use is because the government spends it into existence and then leaves it in the economy by running deficits i.e. by not claiming it back by way of taxation. The reality is that there is no such thing as taxpayer money.
That said, I acknowledge that it is true that banks can create money. The Bank of England does do that, day in and day out for the government by advancing it the funds it wants to spend whenever it wants to spend them. Historically that was done on overdraft. It was called the Ways and Means Account. Since 2009 that's been replaced by an alternative form of money creation, which is quantitative easing. The UK will do £300 billion of that this year.
Money is also created when banks lend. But they are only allowed to do this under government licence. And they lend using sterling - not their own currency. In other words, their money creation is wholly backed by the government. In a very real way we know that, because deposits with those same banks are government-guaranteed to £85,000. Again, that means all money we have is government money. There really is nothing else.
The government is funded in three ways
The government funding mechanism is not tax and borrowing dependent. It has three components. The pound owes its existence to the combined action of the Bank of England that creates it, HM Treasury that spends it into use and HM Revenue & Customs that demand that taxes be paid using that currency. The last is especially important: precisely because tax can only be settled in sterling we have to make use of it in our everyday transactions and so it has value. But note, the Revenue comes last, and not first, whilst money creation by the government or banks operating under licence from it comes first.
How then does borrowing come about? Only because government made money has come first. And so what is called government borrowing is, in fact, nothing of the sort. It is the redepositing of money with the government that the government has already spent into the economy but which it has not reclaimed through taxation. That's how the money that is available to deposit with the government came about.
Does borrowing have to be repaid?
In a word, no. There is no reason to repay the national debt. And as evidence, look at this chart:
Almost all our national debt has been created since the end of Wolrd War 2.
Every now and again very small amounts have been repaid, but I stress the emphasis on 'very small amounts'. What is more, most such occasions have been followed by some form of economic downturn. That is inevitable: repaying government that takes money out of the economy that it needs to function.
And that is the important point. We do not need to repay national debt because people want to own it. Those people are banks, building societies, pension funds, life assurance companies, individual savers, foreign governments and others all of whom value the opportunity provides for a safe place to save. Unless we are determined to take that safety away from them and force them to save elsewhere there is absolutely no reason at all to repay the national debt. What is baffling is that Rishi Sunak does not understand that.
Summary
It is exceptionally worrying to have a Chancellor of the Exchequer who has literally not a clue about how the economy that he is responsible for works, and how one of the basic functions within it, which is money creation, takes place. Without such essential understanding, which requires that he realise that he is responsible for money creation in our economy and that all the money that we use is government-created, then we can come to one of two conclusions. They are that either inadvertent economic mismanagement will take place or, alternatively, he actually knows the truth and deliberate economic mismanagement will take place. But, those are the only two options we've got so long as he persists with his entirely false claims.
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Thank you Richard. When do you think anybody will ask him where we’ve borrowed from this year? As you’ve pointed out, we’ve only borrowed from ourselves.
Not a clue? You’re much too nice.
I see this as out and out lying.
Why? Because saying these things cuts off hope or curiosity in people of any other route in the circumstances.
We have a bunch of people in Government that DO NOT believe in Government. They are here to destroy it and turn it once more into the handmaiden for the rich only.
Not telling the truth helps to keep people’s expectations low. It means that they will be less likely to see this Government for what it is – mean, cruel and biased towards the rich – Russian or English. It means that the people will be less likely to ask questions.
Cui bono? Who do these lies benefit? Why markets of course and the already rich and the money they will make as the Government becomes smaller and smaller.
That is why they lie. Deliberately. To maintain the illusion of powerlessness.
Thanks
Powerlessness is no illusion, as long as we are disallowed any part of governemnt decision making it will not matter to this or any other governemnt that follows the same system because we are all powerlessness since we do not get to vote on any decisions being made. Our MPs do this for us and they have their careers to think about. How many people would vote to raise the pension ages of others yet put their own down? We need to design a rival platform that advises ministers loudly of our thoughts and decisions designed and maintained by AI algorithms which constantly allow for “most votes” to rise to the top where knowledgeable others can contribute their wisdom for the issues. Perhaps in time this process could also provide a source of income for folks in bothering to answer and to vote. You need people to be able to provide their own questions with reasons for those questions set out which could also be voted up and down sop that we have fair representation. In any case this platform would need to be designed initially with freedom of speech and in the full knowledge of all of the points made above which are truths regarding our economy otherwise we are kept top eternity as slaves to a system currently designed only for the elite who would of course be included and could put their own reasons as to why they should get the lions share of our possible incomes before rendering our currency useless to us all. An algorithm would also be able to advise of currency value if correctly designed and how our decisions might affect such value id truthfully constructed. If anyone is interested in working on such a project please email me with subject line “advance”.
I confess I do nit get your last point. I am not sure how you advise the value of a currency
Hmmm………….in this case powerlessness IS an illusion because the Government has manifestly portrayed itself as weak and having its hands tied by concepts like (1) having to pay back the money it is spending to keep workers paid under furlough and (2) it only has limited means to deal with the crisis and (3) it’s tax payers money that needs to be spent and we are saving you from having to pay more tax (producing more fear in the process).
Your Government is sovereign yet it denies its own primacy in this pandemic: it portrays itself as something as much in hock to ‘the markets’ as the rest of us or even ‘in the hands of God’.
Well, at this moment believe it or not, God is the Government – it’s just that this bunch of Tories are in denial about it because they realise that the thin veneer of lies such as Thatcher’s ‘There is no Government money only tax payers money’ is now slipping away and people are beginning to ask questions about Thatcherite doctrine. Your Government is scared that people will realise that actually the Government can help and that the refusal to do so is a CHOICE and as soon as that is realised – and that people expect better – Boris is finished as would be any Timid Labour party would be.
And on the subject of God, he/she may have made the earth, the universe, the sea horse and even the biology that has given us Covid-19; but make no mistake, MAN made money – it is a corporeal concept not an ephemeral one as the Tories and Timid Labour like to portray it as. We made it and we can control it (like we used to).
As for helping to break the spell we are under – get people to read. Even if you bought Kelton’s book for one other person, that is a start.
There’s plenty of opportunity to break the spell on social media. Get out there and get commenting! There are any number of entirely plausible references available now to back up anti-TINA narrative assertions, not least our host’s video series of course.
“But they are only allowed to do this under government licence.”
This is categorically false.
Firstly, there is no such thing as a banking license in the UK. You only require Part 4A permissions to be a bank. When people say “banking license”, it usually means the ability to accept retail deposits.
This refers to the Financial Services Act 2000:
https://www.legislation.gov.uk/ukpga/2000/8/contents
If you read the relevant parts of the act, you will notice that most forms of lending do not fall within it. The only two forms of lending that are regulated are consumer credit and residential mortgage lending, and they are only regulated under FSMA.
All other forms of credit creation are unregulated in the UK. You don’t need a “banking license” or even to be based in the UK. Foreign banks and companies extend credit in GBP on a daily basis, in very significant sizes. Money markets, FX forwards and corporate credit markets – all unregulated I might add – provide far more credit to and within the UK than anything else.
On a more general note, you seem to be of the opinion that the sum of wealth in the UK is equal to the the sum of money the government has spent and created.
This is also demonstrably false. UK total assets far exceed the amount and value of total government borrowing and money creation – by a factor of about five.
Your logic seems to extend into the idea that there is no such thing as taxpayer money, which you then extend to saying that there is only government money. You are confused between the ability to issue note and coin, which government only can do, extend credit which is totally unregulated and most importantly don’t seem to distinguish between issuer and owner.
Just because the government issued a currency doesn’t mean it owns that currency. The notes in your wallet are tokens of value for the work you did to earn them, and you own those notes. You can decide what you want to do with them and exchange them for other products and services.
Your logic seems to suggest that you think that only thanks to the government’s largesse do we have any wealth, and that effectively all the value we create belongs ultimately to government. It is a deeply disturbing and incredibly illiberal idea. Fortunately it is also demonstrably false – one only needs to look at the private sector’s output and value added to see that it has always far outstripped that of government and that historically growth has been relatively independent of the size of government. For sure, government is part of and interacts with an economy, but you would still have an economy without government. Your argument pushes the idea that without government nothing would be possible and there would be no economy.
First, of course credit can be created by anyone. But it’s not banking.
And yes it can be shadow banking – but controlling the destabilising impact of that 8s another issue. And yes, I am decidedly familiar with it.
Moving on from there I have blogged in wealth in the U.K., which makes complete nonsense of your next claim. I make no such assumption.
And as for your claim that we could survive without government, with respect, that’s absurd and if you don’t know it I suggest you think, quite a lot more
I notice that you haven’t bothered to post my reply to you, so I’ll try again.
I have edited your comment, as is my right?
Why? Because people who deny there is a role for government don’t get to comment here.
Why? Because literally nothing they might say is worth noting.
I wouldn’t bother again
I suspect that like so many politicians, Sunak is being “economical with the actualite.”
The reality is that the government consolidated account at the Bank of England is run by the treasury and every time it spends money it creates it first. When the taxes come in they are cancelled bringing the money creation back to zero.
The fact is that the government spends first and collects the taxes later and Sunak knows that well.
Up until 1694 England had no central bank and yet the government had established a sovereign medium of exchange, a currency, a unit of account. It did this in three ways it used talley sticks, it established a Royal Mint to turn silver into coin of the realm and it encouraged private citizens to bring their silver to be turned into coin of the realm (as a fee for doing this the government kept some of the coins).
Why is this current plagued with so many people who are ignorant of this monetary aspect to the country’s history and then go and elect self-same politicians to govern them? It’s almost as though the country had a death wish and that’s before the coronavirus came along to assist accompanied by this incompetent government’s policies!
Helen.
Exactly so! I have mentioned this before. The last Tally Sticks to be destroyed – I suppose as taxes destroy the initial money created by government (?) – well after they were replaced by the currency of the privately created and owned BoE; resulted in burning down the House!
The creation of the Fairy Tales of Money to obfuscate its lever pullers behind the curtain with the giant puppet wizards of Capitalism and Anti Capitalism was the great conjuring trick of the C19th.
The Punch and Judy act that created the Right and Left which were designed to bash each other while picking the pockets -wealth creation – of the audience.
As RM has already noted in his interaction with Starmer and with this nonsense by Sunak – the same fairy tale of money is being told even as the reality of the Money Tree is finally being seen by the audience. Like some trained stage hypnotists and conjurers they divert and misdirect and expect us to believe in the grand wizardry – the all mighty Public DEBT, the great Tax Payers Money and the Public PURSE that is as liable to bankruptcy as a households!
Yep – the dance of death continues – I think I saw something in that wonderful film ‘ The Big Short’:
‘Everyone, deep in their hearts, is waiting for the end of the world to come.’
(On screen quotation from Haruki Murakami’s novel “IQ84”).
I have bought friends and relatives ‘The Deficit Myth’ by Stephanie Kelton for Christmas this year in the hope that it changes this ‘dead end’ mindset about money production and gets people curious.
Even if those on this blog bought a copy for one other person, we might start some sort of revolution – you never know!
Good idea
Succinct critique, Thank you. Typo penultimate para line 3 “individual sailors” !
Now corrected, thanks
Thanks for the breakdown and continued analysis Richard.
Great post thanks, but did you really mean ‘..individual sailors’? I guess savers but of course, sailors could be savers as well 😉 .
Oops…edited. Thanks
An uphill battle, I guess.
And, if ‘they’ admit that spending happens outside of taxation/borrowing the game is up.
I am still waiting to have a zoom meeting with our MP to discuss – not sure I will get one.
Sadly the media, including the BBC, reinforce this error.
Every day I hear these errors repeated.
Influential organisations, such as the Institute for Fiscal Studies, and particularly Paul Johnson, endlessly repeat these falsehoods, which are picked up and amplified by the media, particularly the BBC.
Effectively this is an institutional political bias in favour of the false neo liberal ideology.
As a result, the ignorance of people like the Chancellor are reinforced.
I’d love to know how we get out of this vicious circle.
The BBC have got form for this and they need to be reminded
https://positivemoney.org/2019/05/battle-with-the-bbc/
Whilst I agree with all that you said above, could the government not use created money to support the rebuilding our manufacturing sectors, thereby instead of trade deficits, we could generate trade surpluses and thus reduce the “debt” without affecting anyone?
The Japanese car plants show that in reality, British workers are more than capable of doing a good job at manufacturing?
A government with “vision” could look to do this over (admittedly) a longer-term horizon?
I would think the second option is the more likely, after all he is supposed to be intelligent isn’t he?
Ok, lets imagine that Government does borrow money (it doesn’t) and that it can’t create its own money (it can).
What happens if the UK NHS employs 100 more doctors and pays them £300 a day?
Debt goes up by £30,000 a day. GDP goes up by £30,000 a day.
Debt to GDP remains unchanged.
If we had no tax.
But we do.
So total deduction per day (income tax & NI) are £96.07 so GDP is still up by £30,000 a day but debt is up (£300 – £96.07) = £ 203.93 X 100 = £20,393
Debt to GDP falls! We’ve employed 100 doctors and we’ve reduced debt from 88% to 68%!!
And it gets better.
That debt reduction assumes that the doctor pays his tax and then burns the rest of the money.
Of course what actually happens is that he spends his money into the economy which is earned by shopkeepers and plumbers, etc and so on and is again taxed and earned and taxed, etc and so on.
Even if you don’t accept that the UK creates its own money, it *STILL* makes no sense not to expand government spending on the NHS, policing, social care, elderly care, education, prisons, housing, etc
IF DEBT TO GDP IS GREATER THAN 68%.
And I haven’t even factored in VAT or fuel duty or a whole raft of other taxes.
I think this is a lot more complex than you imply because of multiplier effects
But your broad thrust is appropriate
Such is the level of ignorance in Western societies the politicians know a great many people will believe any lie a servile media relays:-
https://www.cnn.com/2020/10/31/politics/donald-trump-doctors-midwest-2020-election/index.html
https://www.ncbi.nlm.nih.gov/pmc/articles/PMC4953321/
As you have said in previous posts, it’s the Tories that borrow big and don’t repay.
I feel that they are very well aware of how money creation works, and have been using it to enrich themselves and their cronies at every opportunity. The only difference today as opposed to say, 50 years ago, is that the Tories are much more blatant about it, knowing fine well that a) the public are stupid, and b) there will be no consequences (to themselves) for their actions.
When one owns the printing presses for pound notes, and the printing presses for reporting on the use of said notes, (and distraction therefrom) what can go wrong?
Apologies if this is daft, I’m early into my economics journey. With regard to not needing to pay off debt, surely you can just let it grow and grow? Is there a limit?
No
Deficits are limited by the actual resources on which they can gainfully spend
Either assumptions you’re left with when you’ve watched this video are troubling. If he believes what he’s saying, then his ignorance about the creation of money and macro-economics is vast.
If he knows that what he’s saying is nonsense, then he’s lending the prestige of the Chancellor of the Exchequer to a political propaganda exercise.
Any attack on this nonsense by Anneliese Dodds would have to explain which groups in society would be advantaged by Sunak’s approach and which disadvantaged.
“Any attack on this nonsense by Anneliese Dodds would have to explain which groups in society would be advantaged by Sunak’s approach and which disadvantaged.”
Exactly. If the electorate thoroughly understood the history of money development in the UK then this this would be a very obvious and natural line of attack by Anneliese Dodds on Sunak’s belief. Clearly it isn’t going to happen and the Labour Party will continue living a lie and being complicit in keeping the electorate in a state of zombiedom! So much for the Labour Party having a moral compass and therefore purporting to have respect for those who support the party. This is infantilising the electorate! Don’t know about you but I strongly dislike people who try to patronise me!
But doesn’t the Government issue bonds which are national debt owed to others? What about fractional reserve banking which is money created from thin air by banks who can raise sometimes a factor of 10 against the deposits that they have?
Please read The Deficit Myth by Stephanie Kelton
There is no such thing as fractional reserve banking
The Bank of England dismissed it as nonsense in 2014
It actually ceased to be relevant decades beforehand
For primers on this read modern monetary theory
I have shared this, with a suggestion that next time anyone who doesn’t believe buys something in cash, they offer the seller a choice of Government printed notes with the Queen’s face or self printed notes with their own face, and see which the seller takes
Richard, I hugely respect you & the work you do but this concept of all money being Government money is wrong. If it’s to be right it can only be so in theory over infinity. Therefore not in accounting.
Straight from the horses mouth comes The Bank of England Q1 2014 Bulletin which states 97% of the money supply is now created by private banks out of nothing. Only 3% is cash.
BoE Working Paper No 529 explains the role of the central bank in the current system. It is clearly stated the role is to buttress & support the private banking system including that money creation.
It states that banks can create as much new “money” as their books can handle and that reserves are created in the central bank as a result of that “lending.”
All of the “money” is designated as pounds and pence which makes it all seem the same (sorry, simplistic).
There’s no doubt from the BoE’s own publications that we have a privately created out of nothing money system with the public central bank not only propping it up but rescuing it periodically.
Now let’s presume the BoE was lying
They had to be
They have created – they say they have created £745 bn of QE and £107bn for the Term Funding Scheme
That is, however measured, vastly more than 3% of U.K. money supply and they say they created it.
So the 2014 claim is pure nonsense
And since the Bank also underwrites substantial parts of the nanking system, what part is oribate bank created?
And that’s before public spending is taken into account
I am afraid the BoE is not reliable on this issue