I just posted this thread on Twitter:
The government gave some staff in the NHS a pay rise yesterday, and then said that the cost must come out of existing NHS budgets. It refused a pay rise to the police. It's as if they're saying there is a shortage of money. There isn't. A thread's needed to explain that…..
Once upon a time, before most people in the UK were alive, the value of money was linked to gold, either directly or indirectly via the fixed exchange rate we had with the US dollar. But that ended in 1971. In that year the dollar ceased to be linked to gold.
Since 1971 the result has been that all the money we have in the UK is what is called fiat money. That has nothing to do with an Italian car company. What it actually means is that all our money is just a promise to pay.
You should be pretty familiar with this idea. This fact is printed on all our bank notes. They are just what are called ‘promises to pay'. And it so happens that mostly of us think that the government's promise to pay is a really good one.
There's good reason for thinking the government's promise to pay is good. First, it's responsible for making all our money. No one else is allowed to without a banking licence - and they're heavily regulated. The rest of our money it makes itself.
And there is no magic about the way the government creates the money it - and we - need. Parliament decides it wants to spend on something. It passes a law to authorise the spend, and the government then tells the Bank of England to pay the resulting bills.
The Bank of England has to pay whatever the government tells it to. Partly that's because it is owned by the government. Partly that's because the law says it must. It is not required to check whether the government has any money in its account first: it must just pay.
There is nothing very odd about this. After all, a bank can make a payment for anyone without there being money in their bank account. It just means that the bank is giving a person an overdraft. The government can have an overdraft at the Bank of England.
There are three differences between an overdraft you can have and the one the government has at the Bank of England. First, the Bank of England can't turn the government down. Second, the overdraft has no limit. Third, there is no repayment required.
That is a pretty amazing facility that the government has. What it means - and a law of 1866, most recently updated in 2000 backs this up -is that the government can never run out of money. In an instant, whenever it desires it, the government can always have the money it wants.
The point I am making is that the government does not need tax to spend. Nor does it have to borrow to spend. Instead, all it has to do is tell the Bank of England to make a payment on its behalf and it will always do so, on overdraft.
This is not money printing of course: these payments are made electronically, so no printing press is involved. Instead, all that is required to create money is a computer keyboard in the Bank of England that is used to enter the data that increases the government's overdraft.
Understanding this is vital to appreciating what is going on in modern politics. It is also key to understanding the biggest lie (I use the word appropriately) told by politicians of almost all parties which is ‘there is no money to do what people want'.
In the case of government it's never true there's no money to do what people want. The opposite is always true. There is always money to do what people want. The reality is that politicians have to decide which things they want, and the fact is that they do not want to admit that.
I stress, this is true right now with regard to the pay rises for the NHS and the police. The government will be claiming that they cannot afford to provide new money for the NHS and cannot afford pay rises for the police. But those claims are straightforward lies.
The government could provide the money for the NHS and the police. They just have to tell the Bank of England to make payment and the money would be created for the purpose. It really is that simple. So, why do the government not want to do this? There are a number of reasons.
First, and most important, we have a government that does not want to pay these pay rises. They know they could pay them. After all, they've created well over £300 billion of new money in the last year to pay for Covid, so they know how to pay. But they don't want to.
We need politicians to tell the truth, to make honest decisions, and explain them to us. What we actually have are politicians who deny that there's money when there is, who say this prevents them making decisions when it does not, and who blame us for their own inability.
Lesson one from understanding money is that politicians don't want you to understand money because if you did then we could all hold them to account, and that's the last thing that they want.
Lesson two is to understand where tax fits into all this, which it does. It is true that making money without limit will result in inflation. Tax is the mechanism used to prevent inflation. It takes the money the government creates back out of the economy.
This is what the main purpose for tax is now. Tax does not exist to fund government spending. Money creation does that. Tax reclaims the money the government has spent into the economy. So when the government says it spends taxpayers money, that's simply not true. It doesn't.
To reiterate: the government spends its own money. It does not spend money that taxpayers have given to it.
The claim that the government had to tax to spend was true before 1971. When the value of the pound was linked to gold there was a real constraint on the amount of money a government could spend. If it could not get money from taxpayers or borrow it then it could not spend.
But this is now deepest, darkest history. There has been no such constraint for 50 years now. The government can and does create all the money it wants whenever it needs it and the role of tax is to limit inflation and to deliver social policy e.g. on income redistribution.
The process of government funding is that spend now always proceeds taxation. In a country like the UK, where the government creates its own currency, tax now never comes before spending. That is lesson three from this.
Lesson four is about borrowing. If the government creates all the money that we have (and ultimately, it does) then why does it need to borrow? The answer is that it does not. Actually, and as a matter of fact, the government does not borrow.
What the government does instead do is to offer people the chance to save with it. Government borrowing is another of these things that is now completely misnamed. What this supposed borrowing actually is might best be described as a giant savings bank.
When the government creates money and spends it into the economy not all of it is spent by those who receive it. Some of it is saved. And some of those savers want to save with the safest institution that they can find to hold their funds, which is the government itself.
The government is always the safest place to deposit money. After all, it can always repay. It can always create the money required to make that repayment so that it can never fail, unlike every other savings institution in a country.
So, people save with the government. It rations the number who can do so. If it didn't not no one might save with private banks. And it rations the value of savings it will accept by claiming that it still borrows to fund its spending. That's just another lie it tells.
Until 1971 it could have been argued that the government did borrow to fund spending because the amount of money it was allowed to create was limited. But now that is simply untrue. It can create all the money it needs. It need never borrow. It just offers savings accounts now.
Why do they lie about borrowing? Let's go back to the first lesson: because they want you to think that there is a limit on what they can do, and that as a result you cannot have what you want. The lie is there to make it seem as if that is true.
Lesson 5 is about the mysteriously named quantitative easing, or QE. QE is bizarre. Using QE, the government creates money on overdraft with the Bank of England (as it can) and then uses that money to buy back the savings bonds it has issued from the public.
To put it another way, given that these bonds are simply savings account balances, what the government does is force savers to take their money elsewhere. The savers in question then put it into housing or shares - and we get a boom in the price of both.
The government claims QE encourages risk taking in the economy. It hasn't. All it has done is avoid the pretence that the government needs borrowing to fund its activities during large scale financial crises, as we had in 2008/09 and 2020.
It so happens that QE also, rather conveniently for a government of the type that we now have, also creates asset price inflation that's made the rich richer.
But don't be fooled by claims that the government must reverse QE, or any other such nonsense, and must put money aside to do this. First, QE does not need reversing. Second, it never has been. But the third argument is the key one.
That third reason is that given that reversing QE would reduce the wealth of the wealthy and this government is dedicated to servicing the best interests of the wealthy and the City of London the simple fact is that QE is not going to be reversed.
Actually, the strongest likelihood is that we will get more QE the moment there is any threat of declining share or house prices: the government will keep the wealthy happy even if it claims it cannot fund a pay rise for the NHS and the police.
This last point is important: the government has used the power it has to create money - which is what really happens when QE is used - mainly to benefit the wealthy and not to help the majority in this country. They need to be called out for that.
So, in summary, money creation funds government spending. Tax controls inflation. No government needs to borrow; it does so only to provide a safe place for savings. And QE keeps the pretence that the government must borrow intact whilst boosting the wealth of the wealthiest.
Coming back to the NHS and police pay rises, what does this mean? That still needs a bit more explanation.
First, and vitally, there is no shortage of money to pay for these. Anyone who claims otherwise is lying and it's quite fair to say so: the government can always create all the money it needs to make any payment it chooses.
Second, there need not be any tax increases to pay for these pay rises unless there is a risk of inflation as a result of them. Best opinion is that there's no UK inflation risk now once short term supply chain issues are resolved - and they are not created by NHS pay rises.
Third, remember that these pay rises will in any case create additional tax payments, not just when paid but when the money received by nurses and the police is spent. So, critically, these pay rises have anti-inflation precautions built into them. No one says that, but it's true.
Fourth, there will be no need for borrowing to fund these pay rises, because borrowing does not fund the UK government. There will be no money market revolt and no pressure on interest rates either as a result. Any claim to the contrary is wrong.
Fifth, what's the reason why these pay rises can't be paid then? There is none at all. I mean, literally none. If the government really thought nurses and the police were of value then they would pay these awards without hesitation. The fact is that they don't want to pay.
Sixth, this is what needs to be understood. Once you know how the government funding cycle works and realise that the nonsense about balanced budgets is just a false claim by those who hate government and those who work for it because they despise the public interest, you're free.
Free that is to call the government out. And free to tell them they are not telling the truth. And free to say that they're making false claims about affordability, inflation, borrowing and interest rates.
Free too to say that they're doing this simply to shrink the size of the state whilst using its power to create money not for the public good but instead, via the type of QE it's decided to use, to promote the wealth of the wealthiest whilst leaving the rest behind.
And free as a result to imagine what we could do when the answer to the question ‘how are we going to pay for it?' is ‘by using the power the government has to create money when there are useful things for it to do and the resources available to do them.'
You're free to say “And don't talk about inflation. That risk only exists if we overspend - and a pay rise for the NHS isn't that. That also only happens if we have a non-functioning tax system to claim the spend back - and we have one. So, inflation is not a risk from this.”
Really, what you're free to say is “Why do you hate the public services on which we depend so much that you are desperate to punish those who work in them?” That's the questions that understanding economics permits. And it needs an answer.
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“Tax is the mechanism used to prevent inflation”
Who gets taxed if inflation starts to rise?
And when? Interest rates have been used previously and can be raised every month if necessary. Are you suggesting we should move to a system under which income tax rates could be raised or lowered on a monthly basis? I’d have thought this unwieldy and politically difficult. Do you have an answer to those potential problems?
As the IMF now agrees, an interest rate rise will nikt deliver the desired change in the economy: multinational corporations are interest rate and price immune to change. So tax is all we have
VAT can be changed at will
But more importantly, we need a financial transaction tax charged on bank accounts for precisely this reason: that would fairly mute or stimulate the economy as required and could be progressive too
It could also include negative tax rates
You suggest that controlling inflation by taxation is a difficult thing to manage. No doubt you are correct – managing inflation IS very difficult…. but your statement implies that you believe that controlling inflation by interest rate policy is easy – and it is not. Policy makers think that rate changes act with, perhaps, a 2 year lag and in recent years policy makers have failed to meet their targets on a regular basis. Controlling inflation by interest rates is quite a convoluted – higher rates operate in two ways; first, they reduce investment, second, the reduce disposable income for debtors. Do we really want to control inflation at the expense of investment? Do we really want to squeeze disposable income among one sector of society (probably families with kids hold most mortgage)?
Using tax allows expenditure to be squeezed in a more targeted way.
Would we have perfect control of inflation if we use tax to control inflation? No – but using a combination of different taxes and still using interest rates where appropriate we can surely do a better job that just using one single tool.
Agreed
Fully agreed by me too and nicely put.
“Tax is the mechanism used to prevent inflation. It takes the money the government creates back out of the economy.”
I defer to your much greater knowledge of the tax mechanism and system, but would wish to identify another, and I suspect even more basic purpose of tax in the monetary system.
Tax is the unique method through which the sovereign (the prerogative of the ‘Crown in Parliament’) establishes and maintains its unchallengable authority over the currency it issues (or sanctions its issue); and through the absolute power to tax, guarantees the fundamental dependence of the citizen/subject on the currency the sovereign issues.
Accepted, but in the government funding cycle I was talking about I was not sure that necessary. I highlighted its role in that cycle
Thank you Richard. Now I understand.
Excellent! Your explanation of where money comes from and of spend and tax has got clearer over the past few years.
Thanks
this has really nailed it for me
would it suffice for Andrews shortish draft for his Labour colleagues ?
but, this article does need a wider audience
is Laura around for a BBC interview ?
or could John Mc Donnell be persuaded to respond
or even a current Labour shadow minister?
we live in hope
& end up pissed off
Yay prof this is almost there (it is not any criticism of facts just in the story telling). It really really is good.
The best Fairytales are labyrinthine but are scaleable to work in Ladybird books of yore, to dense religious gobbledygook of bibles and Law and adult fiction. That is how the non-thinking are kept ignorant and dumb all their lives whilst believing their ‘common sense’ They actually believe they have decided such issues all by their own clever human smartness born of the University of Life – the DelBoy Superiority Complex if you will.
Whilst abdicating the complicated stuff to these who had education to be surgeons and rocket scientists & born to be leaders.
Keep honing and let’s have children’s books about it! Maybe Michael Rosen could help?
I’ll keep spreading this to my sceptical thick best friends who are ‘smart’ and ‘clever’ and have lots of ‘common sense’ . Unfortunately 50 years, centuries, of brainwashing hardly ever gets overturned in a single generation, unless you have a Revolution such as South America,Cuba, Russia, France, Roundheads..!
Once upon a time … they lived happily ever after!
It’s the dots that matter and you are the only one filling them, thank you very much.
Michael Rosen has retweeted this today…..
Excellent.
I’d also add the multiplier, which is over one for expenditure on health care. That is, it returns more than you spend. Ask yourself who would choose not to do that, and why?
I thought about including it and decided it was one demand too many
There was a rather good study done on multipliers (health vs weapons as it happens).
“Does investment in the health sector promote or inhibit economic growth?”
Aaron Reeves1*, Sanjay Basu2,3, Martin McKee3, Christopher Meissner4 and David Stuckler1,3
Health had a multiplier of +2.5 to + 6, weapon spending had a multiplier of minus 9.
Of course spending on health does not cure political erectile dysfunction in the way that weapons spending does.
That may be worth an article – depending on my enthusiasm over the weekend
Thanks
Link: https://doi.org/10.1186/1744-8603-9-43
It has been mentioned a few times before, eg: https://www.taxresearch.org.uk/Blog/2020/03/29/is-world-leading-nhs-care-an-affordable-proposition/
The also lied when they said no-one else in the public sector was getting a rise – earlier this year HMRC awarded their staff 13% over 3 years backdated to June 2020
That rise was funded from existing budgets – the government didn’t give HMRC any more money than any other department. There were sweeping contract reforms which released the money to meet pay rises.
Of course, the government SHOULD have funded that payrise, like they should have done across the whole civil service and public services.
Hum, upsetting the Police at a time when there could be trouble.
What marvellous judgement
Richard, thank you for your persistence and patience in offering these explanations. Explanations of this – and other – all – economic and financial phenomena should be put into the public domain again and again, in different ways, tailored for different audiences, with any and all useful and accurate analogues, in simple and not so simple forms, so that the public can engage in asking relevant questions and understand what is happening, and what different governments are offering – and what they are unable to offer. This is the only way in which any authority can be held to account for any of their actions.
We face a dire absence of understanding in this new age, resulting in a crisis in governance itself. These endless repeats may be tedious but – THEY WORK! So carry on carrying on, giving us material that we can use in our everyday conversations. We are grateful to you and all other experts for your efforts.
Excellent. My first thought was “please, not another MMT explanation” but I was wrong. Wrong for two reasons.
First, it never hurts to keep restating the truth; someone will be reading and understanding for the first time. Others will be re-reading and gaining better understanding. This article is not aimed at me.
Second, the process of restating and rewriting improves its explanatory value….. and this is another step forward in creating a readable, understandable narrative.
So, Thank You.
Thanks Clive
Honing this is key
And so far this version has been seen 275,000 times and interacted with more than 13,000 times – and 4oo people have followed me on Twitter
That’s the message getting out there
It seems that people are hungry for explanation
Even when there were at least two pubics rather than publics in the Twitter thread – embarressingly
@Clive Parry,
I fully endorse your plaudits. The explanation is improving all the time.
But it needs to go a step further. Broadly speaking, people acquire the money created as described either via exchange or via transfers from the state. When they acquire it, they view it as “their” money. Any form of taxation or other extraction by the state is seen as taking from them something that is theirs. Even those who recognise that the state is nothing more nor less than those we elect, collectively and democratically, to do things (or to prevent the doing of things) that we, individually or in association, are unable or unwilling to do, (and sadly the number of these citizens is in decline) resent this extraction. The opposition to the extraction is vociferous from an increasing number.
Countering this requires the repair, maintenance and deepening of the common bond that binds us all as as citizens and residents of this polity. It has come to a pretty poor pass when neither the PM nor the Leader of the Opposition can speak to, and for, England – and it falls to the manager of the England men’s football team.
But the forces of darkness and resistance are formidable (FODAR). For example, the Free Exchange piece in the latest edition of The Economist is calling on the BoE to communicate it plans to unwind QE.
Yes, the cult of extreme individualism (selfishness?) lies at the root of most of our problems.
Thank you for the clear and simple explanation Richard.
I am new to MMT but have been following your blog for the last month or so which has been really helpful. You wrote above “Tax does not exist to fund government spending. Money creation does that. Tax reclaims the money the government has spent into the economy.”, the principle of which is nice and clear. I have a question which is do the two have to balance to prevent inflation? If not, to what extent can one exceed the other without this becoming a problem?
Thank you.
Thanks for the question
They do not need to balance
What has to balance is the real economy – and the aim is full employment with sustainability
Almost invariably that will require deficits to fund the process of change
[…] This first article appeared on Richard’s blog, Tax Research. […]
It seems quite ironic that the Bank of England was created to fund a massive bout of public spending (on the Royal Navy) which stimulated enormous economic and industrial growth. And yet all these years later state spending, on infrastructure or anything else, is seen to be a sin that is likely to cause ruin.
I think that it was very brave and clever of you to go on Twitter. I am not on it and only access it via the links you provide as a reader only.
I think the tactics are sound.
82,500 followers actually imposes quite a responsibility in some ways
Hi Richard,
When our founder spoke at the Economics for Ecology conference in 2009 he spoke of QE saying:
“At this point, the simple fact is that regarding economic theory, no one knows what to do next. Possibly this has escaped immediate attention in Ukraine, but, economists in the US as of the end of 2008 openly confessed that they do not know what to do. So, we invented three trillion dollars, lent it to ourselves, and are trying to salvage a broken system so far by reestablishing the broken system with imaginary money.”
He returned in 2010 with the core argument from his 1996 paper on the creation of money as debt:
http://wp.p-ced.org/projects/ukraine/sumy-economics-for-ecology/2010-presentation-paper/
Thanks Richard, it never hurts to hear the message in different words.
If I can hijack the thread to ask one question: if tax to stop inflation essentially means limiting the increase in money supply to the increase in the resulting total economy (am I right in that terse summary?) or in other words it doesn’t have to balance all the expenditure if the economy increases — what is the implication of money creation to support the status quo via Covid furlough?
As a non-economist I can’t see how furlough (and the associated grants) actually increase the economy, though they do stop what might otherwise be a calamitous decline. But does that mean they will create future inflation that requires taxation to control?
If there is excess capacity in an economy and no one has the economic power within the economy to demand excess prices (and external oil shocks and Brexit had that power, as do multinational corporations, but domestic labour has not, any longer) then supporting people to survive cannot create inflation because there was no excess of demand over supply
Where is the future shock coming from then if it has not done so now?
Richard, having read your blogs for 2 or 3 years , the material is quite familiar to me by now, but this is your best answer to life, the universe and MMT you have written. Its all there, put very lucidly. Any criticisms would be minor. Very well done.
Why oh why don’t we hear ANY MP saying this in the HofP ? Or any peer saying this in the HofL ?
Thanks Jeff
Practice, as they say, helps
I’ve heard sportsmen saying the more they train, the luckier they get. And musicians saying the more they practise, the more talented they become. As Edison said, “Genius is one percent inspiration, ninety-nine percent perspiration.”. Although in the case of his inventions, much of both came from other people.
I’d be interested to see someone attempting to pick your analysis apart seriously, without rhetorical appeals to Germany in the 1920s, or Venezuela or Zimbabwe, or indeed misunderstanding what happened in Britain in the 1970s.
I realise a thread response to Weimar etc is required
And the multiplier too…..
In the course of development
Listening to Ch4 news last night which is generally pretty good but still trots out the standard line on ‘paying back the debt’.
Is there a single commentator who appears regularly on the major media channels who is prepared to argue along these lines?
It seems not
This is your clearest and most accessible MMT-related argument yet.
Maybe that’s because it avoids using the word ‘debt’ – which for most people is unavoidably framed in such a way that it is understood as something that must be paid back, and from existing budgets, as in a household. As George Lakoff (the US linguist) said in his book ‘Don’t Think of an Elephant’, if opponents of the dominant narrative use the same key words and phrases that the dominant narrative contains in its framing of issues, most people will continue to think in the conventional way. A different framing is needed to get people to think differently, which is what your NHS blog begins to provide, though I know that it’s hard not to at least allude to the D word when it concerns a technical subject like this.
Here’s a short summary of Lakoff’s argument:
https://www.theguardian.com/science/head-quarters/2017/jul/20/the-power-of-framing-its-not-what-you-say-its-how-you-say-it
Regards,
Andrew Sayer
The avoidance of the D word was very deliberate
I spend a lot of time discussing this stuff….especially with Colin Hines, my Green New Deal colleague
What should be done about a government who tells lies daily including this, the biggest, most fundamental lie possible – about money creation – which is designed to create unnecessary unemployment, poverty, social unrest and crime? If there was any real morality the Head of State would ban the party from participating in future elections. In case it is thought there is no such power, recall the swift removal of Australian PM Gough Whitlam’s Labour government by the Governor General, acting on behalf of the Monarch. It can be done – but of course it won’t.
If the Bank of England just prints money for the government to spend, what happens to the value of GBP on the international money markets ?
In Germany in 1936 housewives were pushing wheelbarrowfuls of Deutschmarks to the bakers to buy one loaf of bread
In the UK we are now faced with paying back the money we created to furlough high street retailers. And the government is having to choose who not to pay next. NHS, police, teachers, army, pensioners, those on universal credit ?
I explained that in the thread
Because we tax we control inflation
Weimar collapsed because of a massive obligation in a foreign currency to make a payment that it could never earn by exports when the value of the currency was fixed to gold
There is literally no circumstance that is simialr
The notorious wheelbarrows were much earlier than 1936, during ‘Weimar’. In 1936 Hitler was already in power, and celebrating the Olympics in Berlin.
There is no comparison between the Weimar economic crisis and the Bank of England now.
Hyperinflation in Germany followed the loss of a world war (WWI), the Versailles Treaty and reparations, and then the failing of the international gold standard (Britain left the Gold Standard in 1931 and went through its own Great Depression). There were also very dangerous political tensions within Germany (as much a factor in the unfolding crisis as economics, for the decision making of politicians); the end of monarchy and the Germany built by Bismark; the introduction of popular democratic Government as a radical political departure for Germans; difficult issues with the Central Bank (Reichsbank) that were created by war, and muddied by an ambiguous approach to the Gold Standard; the complexity of Germany’s monetary position was further compounded by its relations with the War victors, and a switch from the softer regime of the Dawes Plan to the harder Young Plan, that made Germany’s situation more difficult by 1929. By around 1930-31 Bruning was introducing deflation, effectively austerity (familiar territory?) as a central economic policy; the result of that may be said to be to have helped hasten Hitler to power by 1933. Try to unpick the mere symptoms from the real causes out of that morass (I have not even mentioned labour markets, imports or exports).
In short, the complexity of the German hyperinflation is not easily parsed (the default position adopted by intellectually lazy neoliberals); try reading Holtfrerich or Ritzchl if you wish to understand the issues; but I suggest that you may find comfort from first applying a damp towel to your head.
Thank you
John, I always enjoy your carefully compiled responses to topics here and your detailed listing of factors influencing the German economy and politics of the 1930s was especially useful to my understanding of the period. My father’s work for a global, Scottish-based textile firm (no prizes for guessing) took my parents to Germany, Austria and all over central Europe between 1935 and 1939, so I recall from childhood fragments of their experiences. My father spoke of going for drinks with German work colleagues who talked about their experiences at the height/depths of hyper-inflation of going for an after-work beer: If there were 5 of them, they’d pool their money and buy 25 half-litres at the outset because, if they bought individual rounds, the price would go up between rounds. Their employer paid them in part in cash and in part in bobbins of thread, which enabled them to go into the countryside and sell a commodity which was inflation-free and was in demand in the farming community. It’s worth reflecting that weak government and poor economic control can usher in conditions that permit extreme governance to flourish.
You say that in using QE “what the government does is force savers to take their money elsewhere.”. I presume no one can literally be “forced” to sell their bonds back to the government. Do I take it that the BoE offers to buy them at higher than market price, and if that doesn’t produce sufficient transactions, they raise the price they offer until it does? Since the BoE is not financially constrained, can it can keep offering a higher price until it gets a result? Could this process run up against some other limiting factor?
You are right
This is a bidding process – and the BoE ups the price until it gets what it wants
Dear Richard,
I copied this absolutely superb article to a close friend who is progressive, liberal and open minded. She studied and lectured economics. Her response on exchange rates reflects this background. In asking you to advise on a reply, I am, of course, asking whether a dedicated response to this point might be generically desirable?
“Very interesting. I am left wondering where the exchange rate fits into all this. I am worried that the British economy may be supported at present by foreign speculators and a crash in the property market, for example, could lead to a large withdrawal of funds from Britain and a fall in the value of the £. This never seems to be mentioned now but if the exchange rate were to fall, as it did in the 1960s and 1970s, inflation would rise. And then interest rates would need to rise. And I start to get a headache trying to think it through.
If we accept there is a long-term need to pay for these essential pay awards, apart from through the money supply, there is the old option of raising direct taxation on the highest paid and wealthiest, and I think there is still a case for this. But unlikely with this government. They seem to be more likely to raise national insurance on the poorest so that wealthier home-owners (including us) will not have to sell or mortgage homes to pay for social care.
Just hoping for a change of government so that the underlying priorities can be reconsidered.”
So many fale assumptions in there including that we are still on the gold standard, that money flows as you assume and that even exchange rates matter ( have you seen how much they vary?)
But yes, I will add that to the list
There is still more thinking to do on Foreign Exchange rates. A good old-fashioned “Sterling Crisis” is always put up as the bogeyman that will squash any innovative progressive economic policy and it does need to be addressed…. but it is a complex topic. Here are a few random thoughts……
(1) Predicting how FX markets will behave is notoriously difficult and they often behave in an unexpected way. Why would a shift to MMT lead to a currency run? In my experience, markets like to buy currencies of countries that are well run politically and economically.
(2) Currency crises tend to occur when Authorities try and “draw a line in the sand”. In a fiat currency world, why draw a line?
(3) GBPUSD fell from 2.07 to 1.16 between Oct 2007 and March 2020 – and we have not suffered substantially above target inflation. (Sure, I have cherry-picked the range, but the point is still true – FX rates in even an open economy like ours are not such a huge influence in inflation).
(4) Japan has been QEing for over 20 years without inflation.
(5) Interest rates are definitely part of the solution….. but also credit and FX controls, too. More tools mean that a larger range of variables can be targeted…. including FX if so wished. Even Singapore, the supposed bastion of free markets still has FX controls. MMT needs to incorporate the idea that there are more tools than taxation to control inflation.
You have saved me the effort
Thanks
As I understand it Singapore operates a “managed float” (which seems to me an esoteric oxymoron, but I claim no privileged insight).
China (PRC), an extremely large beast (that supplies the whole world with product in what Globalist Neoliberals choose to call ‘free markets’; but I digress), pegs the Renmenbi to the US$; setting a daily fixed-point and allowing it to oscillate within a +/-2% range (at least as I understand the system).
There seems to be lots of different ways to skin this carcase, depending on circumstances (and the understanding of the authorities making the decisions).
Having read Stephanie Kelton “The Deficit Myth” which I thoroughly recommend, I understand that the Government has the ability to produce all the money it wants. The only danger is continuing to do it once full employment is reached as this then is likely to cause inflation. The labour force having the upper hand and moving to higher paid jobs forcing employers to continue increasing wages to retain staff and increasing the price of goods to the consumer to meet higher costs.
The problem with “full employment “ is that maybe the economy has reached that level but individual industries and sectors may well be over staffed in some parts and understaffed in others.
I have a feeling that deep in their hearts all politicians know that admitting there was money available would cause massive uproar from sectors, whether viable or not that they should be given their fair share regardless of the appropriateness of that funding for the economy.
The skills required to make those judgements are lacking in our current politicians and I think they know it.
Making the wrong judgements could harm their political careers, much better for them to promulgate the Thatcher myth that Governments are run like households, an idea, however incorrect, that most of the Electorate can relate to.
The evidence is very strong that there is significant underemployment and unemployment in the UK and that labour does quite emphatically not have the upper hand.
I think your assumptions need not be worried about for a long time to come
Look at this shite in today’s Observer:
https://www.theguardian.com/world/2021/jul/25/britain-faces-decades-of-financial-risk-as-370bn-pandemic-bill-mounts
Financial risk from WHO exactly?
Thanks Katherine.
Thanks Toby.
Please – don’t ask WHY for goodness sake eh? Just record and press ‘play back’ huh? And you actually get paid for this!!! A total abdication of journalistic ethos.
Pathetic – the Guardian is as bad as the Labour party in my view on matters like this.
Richard, Clive’s comments are incisive and helpful, but I don’t think he thinks they are a substitute for a lengthy, reasoned analysis by you, so please keep the matter on your to do list. Remember this friend of mine is a benchmark for a sector of progressive intellectuals whose academic background makes it very difficult to see outside the neoliberal straight jacket. They have simply not been exposed to the MMT alternative.