This morning's thoughts on Twitter, in a short thread:
Sundays are for ideas. So, here are a few to muse on when out in the sun (a short thread, I promise).
Tax belongs to governments. There is no such thing as taxpayer's money. You pay tax because you owe it. Once you've paid it the money is no longer yours. It's the government's. Just like when you've paid a shop the money is theirs. Don't believe politicians who claim anything else.
Money is just a record of debts owed to and from other people, most often banks. The only real proof of its existence is the number printed on your bank statement that records that debt. There is no ‘money in the bank'. There's just a number on a bank statement.
Since ancient times people have known that what economists call rent is all about exploitation. Whether it's what we pay to use land or the interest we pay to use money, rent is about rewarding the already wealthy for their owning things we haven't got, however they obtained them.
Wealthy people are terrified of losing what they have. Because of that they're paranoid that everyone else is out to get them, and what's theirs. The consequence is their belief in the politics of envy, which only exists in their imaginations.
When it comes down to it most people want to live in peace and security, knowing they and those they love can meet their needs and have some fun. Almost all big political divides are based on whether that right should be available to everyone or just a select few in any society.
The idea that governments tax and then spend is wrong. All money is created by a government or the banks it regulates. And all money is spent into existence: no government or bank gives it away. So spend has to come before tax otherwise there'd be no money to pay tax with.
A government trying to balance its books in a time of inflation shows it just doesn't understand its economy. That economy needs more money to keep functioning because prices are going up. Balancing the books tries to reduce the money available. That can only end badly.
We don't need a politics that's based on privilege, meaning Eton and Oxford provide most of our prime ministers. We just have to stop believing rich people are especially clever, not least because the evidence proves they aren't.
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Still not getting a point you made earlier this week and would be grateful if you could explain what paid for deficit spending during the QE for the banks period.
It can’t have been QE because the direct beneficiaries of that programme were the banks as you said. Or could it.
Bank money creation paid for deficit spending during the crisis
It always does
If I may Durham Lad………………..
The Bank Richard refers to is the Bank of England OK?
So, we know that the 2008 crisis killed inter bank relations because the shitty products they were selling each other meant that some were left holding valueless assets as the market collapsed.
None of the banks knew how badly affected the banks they were trading with were in terms of losses or toxic assets. So trust just went out the window which also meant that our money in those banks also could not be moved around as much either – including the way in which businesses work and pay their bills to even current accounts. The whole thing just locked up like an engine without lubrication. Fear ruled.
Perhaps the best way to look at QE – and I’m open to being put right BTW – is to create a picture in one’s head and view the Bank of England in one bubble on the left and then private banking system in a bubble on the right.
We know – or we should know, that the sovereign owner of our currency (the pound) – it’s issuer and guarantor – is the Bank of England, which is also (since 1946), the Government. The pound is the State’s money denomination. Not private wealthy individuals or corporations. They are just users of the State’s currency like the rest of us mortals (they are also arguably abusers of it too – at scale).
To make the QE ‘tangible’ (as tangible as money can be these days), the BoE created and deposited the new QE money (it’s not tax income BTW Durham Lad , OK!) into another bubble that stands between the bubble of the Bank of England and the bubble that it is the private banking system.
This third and middle bubble in your picture is the central bank reserve account (CBRA). This reserve – like, if you will – a reserve parachute – which is a last ditch defence against the main ‘chute not opening resulting in death. So the CBRA can work like a reserve parachute and is designed to keep money moving when the private banks fuck up, as they often do. The CBRA stops the banking system from stopping during even self-induced crises. It stops the death of the movement of money.
The State has no choice of course because the State relies on the private banking system to distribute its currency into the economy (discuss?).
The private banks then draw on this money from the CBRA to cover their activities and loans to each other and the private banking system is unfrozen and keeps moving to the benefit of all of us really (although as usual, the bankers in the system will look after themselves first). Weirdly, although a lot of these wanking bankers hate the State and regulation and such like, they are willing to trust the State they say they don’t trust when it puts money into the CBRA for them to use.
Hmmm……………….
In many ways, it does not sound fair does it? A bunch of wanking bankers get greedy and cause mayhem that destroys the lives of millions overnight. And then we give them some money. Ha!
But the thing QE has reified Durham Lad – made clear – is the power of the sovereign State and its money. The State’s power as the ONLY entity that can really meet the promise to pay printed on the pound notes it prints.
So, there is an argument that says that if more people know about this, maybe things would change. If the banking system can have the money they need when they fuck up, then surely the rest of us citizens when at work, or ill, or hard pressed and short of cash or when we fuck up can have the money we need too. Because the Government – the State – can use it’s money to pay. Always.
I’ve used Chapter 2 of Richard’s book ‘Money for Nothing and My Tweets for Free’ just to make sure I’ve understood the CBRA. It’s only £4.95 and worth every penny. Keep learning.
BTW – this talk of debt by the Tories and Labour is just a way of throwing people off the scent that QE – money creation – pretending it never happened. Because they don’t want you to know. Because that way, they won’t be able to justify privatising our NHS , our schools and anything left that the private sector wants to get its mitts on. And also, it reduces our expectations doesn’t it?
It is also meant to keep us in a state of constant hopelessness and confusion, fighting amongst ourselves.
I hope this helps.
Thanks
Appreciated
@Durham Lad
https://braveneweurope.com/steve-keen-money-matters
“…when government spending exceeds taxation then the amount of money in the private sector increases by the same amount: government spending increases the Deposits of the non-bank, non-government sector of the economy. This means that the Banking Sector’s liabilities to the Non-Bank Private Sector rise, and this is matched by an identical increase in the Banking Sector’s assets of Reserves. Since both the Assets and the Liabilities of the Banking Sector have risen, and money is the sum of the Liabilities and Equity of the Banking Sector, then the deficit has created money (Kelton 2020). The government doesn’t need to borrow what it has already created.
But what about the sale of Treasury Bonds to the Banking Sector? Is that borrowing? Technically yes, because Treasury Bonds are a debt of the government to the holder of those bonds. But where does the Banking Sector get the money it uses to buy these bonds? The real-world process is more complicated, but fundamentally, as well as creating additional money (when Spend is greater than Tax) the deficit creates an identical amount of Reserves. Reserves are an Asset of the Banking Sector that normally earns no interest. So, when the government then offers to sell Treasury Bonds equal to the size of the deficit, it is presenting the Banking Sector with an offer to convert non-income-earning Reserves into income-earning Treasury Bonds. This is why every sale of Treasury Bonds in history has been not merely successful, but oversubscribed: an auction of Treasury Bonds is an offer to convert a non-income-earning gift (the additional Reserves created by the deficit) into an income-earning one (Treasury Bonds). Of course, the Banking Sector takes advantage of that offer.”
The deficit spending creates the money in the first instance. Whether bonds are issued to ‘mop up’ those newly-created reserves is just a policy choice. It doesn’t have to be done: the Treasury could just admit it’s running an overdraft and we could all stop pretending that’s not exactly what it’s doing.
The Minsky modelling proves this.
Thanks
Thank you for this. Got a question Richard, if you might have a moment to consider.
Been thinking of how the wealth of countries is “measured”. Also hearing UK is 5th wealthiest country on planet, I guess that’s via gdp divided by no. Of citizens to give a number.
Where would we rank if it were calculated on the Mode of incomes?
Get a feeling it would give a truer representation of desperate state many are in. Cheers in anticipation of your thoughts.
Have a nice Sunday.
It is by GDP, not GDP per head
I am not sure how to answer your other question.
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(PPP)_per_capita
and see also
https://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
The UK has the sixth largest nominal GDP but the 36th per capita.
Note the Irish.
You can see why the UK has its work cut out stopping the unification…
The Irish GDP is massively inflated by corporate tax abuse
Use Irish Gross National Income, which is about 74% of GDP. That is what the Irish actually get when you strip out the likes of Adobe, Google, et al using Ireland as a finance bolt hole. For Scotland GNI is about 94% of GDP, which is not as bad as Ireland, but also shows we have a net outflow due to foreign ownership.
I wish to conduct a thought experiment, and ask a question. It deserves a warning – this is completely ‘off the wall’. Why not – we are living through interesting times, that are themselves ‘on the edge’? We need to “rethink”, recalibrate everything – now. The idea of a thought experiment is particularly useful in economics, because economists never do anything else. They do a thought experiment, then use a couple of simultaneous equations. That’s your lot. It isn’t science. They don’t observe, and they never do experiments. They have no experimental methodology (the more ambitious, younger economists not trapped in past error are currently trying to create one).
Back to the thought experiment. Imagine the UK National Debt: circa £2.4Trn at the beginning of 2022. We are told this is bad news. We do not have the money. What do we do? We are told to be anxious and worried about it. We also have a deficit in Government spend, so the debt is rising: this wrinkle makes it all worse, and worse; we are told. We are nearly broke, there is no money, but the UK is also very strong, leaders in the world. Confused? You should be. All we can do, we are told, to fix the problem is eliminate the deficit, which stops increasing the debt; then run a surplus in order to cut the debt, so we can afford to live. All we can do to achieve both aims, the only tool we have to do this? Yes, there is only one answer offered in Britain: Austerity. We were also told not very long ago that Austerity was now over, because we had fixed it. Remember? That was odd, because the Conservatives somehow fixed it without eliminating the deficit, and simultaneously by doubling the National Debt. Fixed it? You tell me how that worked. There is something very odd about this idea (somebody needs to check how that trick is done. Maybe Sue Gray could find out).
Back to the thought experiment. How could you solve the debt problem without Austerity, or running out of money? All you have to remember here is that all money is debt, and for every debtor, there is a creditor. The essence of the national debt is double-entry bookkeeping.
The conventional wisdom is, we can’t just print the required money to fix it, because – at least in the case where there are not matching unused resources in the economy – the circulation of new money will simply prove inflationary.
Now I ask you also to hold this thought. When we had a Gold Standard it was a monetary prop, but was almost never actually called on by anyone in the modern era. It was only ever likely to be called on in a national crisis, and in such a crisis the first thing any government did, was suspend the Gold Standard. The Gold Standard thus essentially was nothing more than a strange quasi-religious ritual, a contingent asset with magical properties nobody ever used or seriously tested. Gold was mined in places like South Africa according to a strange ritual in which it was dug out the ground, acquired by the rich, advanced states (US, UK etc), transported across the world, and then re-buried in vaults in Fort Knox, or Threadneedle Street; where it remained buried, until of course it was replaced by fiat currency; a very strange ritual, carried out with almost religious solemnity. Nobody laughed.
Here is the thought experiment. If it is thought the National Debt is too high (it was allegedly too high before the Crash in 2008, there was “no money left” in 2010, then the Conservatives doubled the National Debt, with the help of Austerity, that almost guaranteed its rise; then Bexit and Covid intervened, and by some miracle nobody bothered to explain, we went on to tackle the problems while the Debt grew and grew and is now almost three times the level at the time of the Crash; and on we go….). They told us in 2010 we couldn’t live this way. They said it in 2016, 2019, 2022 …. and so it goes … on and on. The National Debt just keeps rising, and the people who tell us we can’t afford it keep increasing it. nothing happens, except when the try and cut it by Austerity – which does virtually nothing to decrease the National Debt, and throttles economic growth. I suggest this is bizarre. The Emperor obviously has no clothes.
Here is the thought experiment, and the question. It is very simple. What would happen if the Government decided to print £1Trn of crisp new notes in all the denominations; but – crucially – didn’t circulate it: just placed it in the (empty and convenient) vaults in Threadneedle Street; the fiat equivalent of Gold. How would that appear in the accounts of government and BofE, and what happens to the recording of the National Debt. How does the balance sheet look now? We could vary the terms; print a single £1Trn bank-note, then we know it will never circulate (that variant was put to me by a young economist – who has broken free from the conventional wisdom).
John
I am musing on this and after return from a good walk have been reading accounts (HMT, consolidated fund, Royal Mint, BoE) and answering your question is an interesting exercise.
But I strongly suspect this has to be a coin, not a note. Notes are in the national debt. Conan’s are not, as far as I can work out.
Richard
Richard,
Many thanks for reflecting on my thought experiment. I wasn’t sure about notes, but happy if coins work. They will probably fill the vaults long before we reach £1Trn, so maybe need to extend the vaults or change the sum to £500Bn (!); we maybe also need new £10 or £20 coins for this experiment! In any case it would be in low value metal, so the cost can be managed!
I am interested in trying to focus attention on the centrality of the underyling accounting, especially at the very top of the money hierarchy, and for observing money (that is always money), establishing the existential nature of double-entry to (real, base or whatever we term it) money; and how it plays out in the accounting for the national debt (which is so heavily exploited by neoliberalism for political ends). I am not clear about the precise, the very specific, and particular nature of the accounting entries in the real keyboard transactions that move through the system into the Consolidated Fund and Loan Account; the nature of the exact entries, it seems to me, are absolutely crucial to both the meaning, and the consequences of the accounts (the ‘money facts’) that are presented as ‘real’.
I have been working in this now……there may be a blog in the morning. I have read far too many accounts for a Sunday afternoon
If bank notes are part of Government debt and the government prints them into existence and when these notes are worn out the government destroys them. This just proves that the government makes and destroys money. If this is true then the government can destroy part all all the debt.
The bronze age civilisation in the middle east invented money, lending money with interest and debt forgiveness, Debt Jubilees. This was introduced because of the high interest quickly turned the farmers into literal debt slaves. Some how debt jubilees have been forgotten and could have been one of the reasons that the Roman civilisations collapsed. We may be following them because we can not afford to stop global warming.
I share your concern about the environment
I think your money knowledge needs some development though
Your suggestion reminds me of something, wasn’t there recently a campaign to “Mint the Coin” in the US, i.e. create a $1Trn platinum coin to pay off the US debt? More here:
https://en.wikipedia.org/wiki/Trillion-dollar_coin
I believe this “Mint the Coin” campaign was done explicitely to bypass the debt ceiling in the US. The UK doesn’t have that limitation, so at first I thought it wouldn’t serve any purpose here. But seeing your post reminded me of a thought I had at the time which I think pretty much goes along the same line as yours.
If I remember correctly from previous discussions in this blog, at the moment the money created via QE is still considered a “debt” on the government accounts, even though as a debt it owes to itself via the Bank of England it should cancel out on the consolidated account. The given explanation it is still considered a debt is that, in theory, QE can be reversed and the debt be sold on. Despite the fact that, as Richard has pointed out several times throughout this blog, this won’t happen in practice without collapsing the entire financial markets, the accounts still report the full amount of debt, including QE, because of the above.
So when I heard about the Mint the Coin campaign, my thought was, if the UK government were to, say, mint a platinum coin to cover all the debt it owes to itself via QE, wouldn’t this “officially” cancel out the QE debt from the government accounts, it a way that the current arrangement mechanistically doesn’t (but does in practice)?
I may have gotten some details wrong along the way, and I’m happy to be corrected on that, but it does sound like your thought experiment is along the same lines as mine. And if this like of thinking is correct, then I’m wondering if running a “Mint the Coin” campaign here in the UK would have some beneficial effect as well, even if its only is to make official what is happening in practice with QE in the consolidated accounts…
See blog just published
I believe it was Paul Krugman. This is the $1 trillion platinum coin idea. You mint it and give it to the Fed in settlement of the corresponding value of Treasuries. It has to be a coin as coins are the only ‘real’ money. So there is no debt associated with a coin as the assumption is the metal equals the face value. In the UK case you could mint 9 £100 billion coins and give them to the BoE to buy back the QE bonds it owns. That would cancel the bonds without upsetting the BoE balance sheet. If you printed notes then these are a liability of the BoE so you would just be replacing one liability with another.
I had a very long argument on Twitter with somebody about repaying the National Debt. If the Treasury repays a bond it puts the repayment into the Reserve Account of the relevant bank. But the Reserve Accounts are also a liability of the Treasury so although something has supposedly been ‘repaid’ the total liabilities (Reserve Accounts + Gilts) are exactly the same. Clearly nothing has been ‘repaid’. If you want to genuinely repay the National Debt you have to repay the Gilt AND destroy the additional Reserve Account balance, which you do via tax. So to reduce the debt by £100 billion you should repay the £100 billion of gilts AND raise tax by £100 billion. The tax does not need to come from the folk that had their Gilts repaid, but it could do. I think this would not be popular!
See blog just published
A clear, concise statement of some fundamental truths.
I know you have known/thought these things for a long time but stating and restating does two things. First, each will be a tiny improvement in language or small development in thinking; second, there are always new readers.
One day I will get it as I want it
But maybe not
The obvious question might be what happens if people dont get peace and security?
At the moment attention is being deflected onto refugees/left wing lawyers/unions etc but it cant go on for ever and when the penny drops those who are trying to guard their wealth and power might wish that they had been more willing to share it.
Which economic theories recommend increased spending / government borrowing during a time of high inflation?
All
As a matter of fact just to stand still that increase is inevitable
And when the inflation is not demand pull it is very necessary
Thanks PSR, that three-bubble idea is quite helpful. Though I am still a little uncertain what the middle bubble enlarged by the government really represents; it seems the banks don’t feel any sense of the government having bailed them out and producing an obligation for better behaviour in future, they still award themselves ludicrously high salaries and bonuses.
And to the Rev Green, while I know nothing of economic theories it seems to me that if the country is going into recession due to a fall in the private sector economy, the best way for the government to keep the economy afloat is by public sector spending. My preference is for them to do it by investing in things that will leave a beneficial legacy (like renewable energy infrastructure, or improving hospitals and schools) rather than meddling with tax.
The Rev Green is from Cluedo and I suspect a troll
Rather like bankers without a sense of obligation, and regulators from the BoE who fail to remind them of it, I suspect
Jonathan
The reason why the middle bubble – the CBRA – is now bigger is because of the simple volume of money being moved around by these banks today who simply don’t trust each other and (ah bless…….) need the State as guarantor for their transactions. Up to 2008/09, no one truly understood how much money had been generated by the banks in terms of losses, so the CBRA had to be extended to cover the reality of what they were up to.
In 2009 the CBRA was £42 billion according to Richard’s Amazon book I quote above.
At 2020 it was £479 billion. It might even be larger now.
Now before anyone gets carried away and starts prattling about on about benefits and the cost of looking after the elderly
and immigration etc., lets just remember that since 2010 we’ve effectively had austerity and are still putting up with declining standards in public services now.
So what has the extra £437 billion been spent on?
Well, this new CBRA enlarged to take on the huge amounts of funny money that stuff like the bank’s derivative trading had generated and or where side bets were allowed on business deals (credit default swaps) for example or where banks sold risky debt income to other banks but then insured themselves knowing full well the asset they were selling would fail. A lot of this money is just being used for speculation and to make huge amounts of money in very short time frames.
Or, if you like, the extra £437 billion in the CBRA has been spent on nothing useful. No cure for cancer; no increase in green fuel productivity (Green QE); no above inflation rate pay rises; – the list could go on.
This also explains why the richer got richer during austerity whereas the rest of us saw income drop.
But the answer to your question Jon is actually a political one.
Why is the Government content to offer an enlarged CBRA to wanking bankers and only offer the rest of us austerity?
Or pretend the CBRA is some form of record of debt against the country – as this Government and even Labour portray it?
And choose to be charged interest by the private banks for its provision of the CBRA (if only to manifestly lie and make the CBRA look like a debt) – as if its paying the banks to use the money the banks ‘need’ – not us!
Why? – Because the Tories are looking after the people who funded them into power, paid for their election expenses, BREXIT, – you name it. That’s why. And they also want to genuinely mislead us about it all too.
Now I don’t know about you but I’m livid Jon.
Over to you. What do you think about it all?
Over £800 bn in 2021
Today a friend, who is a Labour City Councillor, asked me to comment on this article in The Guardian. To some extent it may explain why BoE and the Treasury appear to be generously funding the UK private banks – although of course there could be other reasons, to which you and other contributors have referred.
https://www.theguardian.com/business/2022/jun/10/uks-largest-lenders-no-longer-too-big-to-fail-says-bank-of-england
I fully agree with your viewpoint re money creation by the private and central banks and I have discussed these matters in detail with Prof Richard Werner, who shares our view. He has demonstrated the process using a German bank by generating a loan transaction and later studying its effect on the bank’s accounts. The bank’s capital plays no part in the process.
Hi Richard,
Comments posted appear to be in moderation, then vanish, so I thought you trashed my comment yesterday.
I now owe you a (virtual) apology – we seem to agree on many things, and your thread on Twitter covers many of the bases as to what is going wrong without being too cynical; something I find it very hard not to do since I’m firmly of the belief that any exposure to modern politics and involvement therein immediately surrounds the, possibly naive, new politician with opportunities, shall we say, that dwarf the £82,500 or so that they get paid.
Robin McAlpine’s blog on Scottish politics is pretty good on this subject too.
The simple fact of the matter, IMHO, is that the people with access (party donors, rich people, we could go on…) have a disproportionate amount of influence on Goverment policy and the crap put out to the public by the likes of the Telegraph and the Daily Mail (and others) is essentially distraction that benefits the owners of these organs; rich people, in other words, who like things the way they are.
The amount of work you put in presenting things differently (and IMHO, more accurately) must be exhausting, but I’m glad that you do it. Looking forwards to that new essay, and wishing you the best.
Thanks
And apologies re moderation – but I have a life beyond here too
PSR, thanks, I hadn’t thought about it like that. I was aware that there are huge amounts of money washing around in hedging and similar bets I don’t understand – but it hadn’t occurred to me that banks need enormously inflated central reserve accounts to transact them as much as they do. Do those things actually bring any public benefit?
And I can see the necessary “float” gets lost in the vastly larger volume of transactions.
I share the cynicism about the rich pulling the strings, but how do you avoid it? It seems to have been a feature of UK politics (and many other countries) regardless of party in power since I first became aware of the news. Any solution needs to be reachable from here, under our democratic system.
(And don’t say Richard for Chancellor, when he isn’t an MP).
What an interesting – and enlightening – article and discussion; I’m most grateful. I’m tickled pink by the idea of converting debt into a single coin, so must ask if such a coin need have any intrinsic value at all? For some hundreds of years silver coins of a given weight and fineness were produced all over Europe and were used interchangeably throughout those countries and beyond. The quality of the silver and/or sheer weight of the declined from the mid14C onward in most countries and there was certainly inflation (though increased currency supply also aided economic development), however have we not progressed beyond a simple concept of mineral versus nominal value? If so, could we not simply use a different durable material instead of gold or platinum? A unit formed from Boriscronian brass neck might sound possible but since it is available in seemingly endless quantity would that bring about an inflationary cycle?
🙂
The coin would, of course, be intrinsically worthless
I also suggest it never leave the BoE – it is merely there to register claims against, changing day by day
£1 trillion or more should be created – and the claims will be less than this. The Treasury would have the balance
These are mere tokens as coins – nbit coinms do not have an interest charge paid on them – hence their value here
To make such a coin would be a delightful ‘Up yours’ to the private bankers as well as a reminder of who actually is in charge?
If only, if only.