I was asked yesterday to make a series of videos on how money is created. The good news is that I have already done that:
It would be good if Labour took a look.
The whole series is available via this link:
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One of the things I think the ordinary person in the street finds confusing is the use of the term “bank”. Most are familiar with the private sector ones where they hold their bank account/s but wonder why the government should need one since historically it’s always manufactured money as a thing. In today’s context when money is mostly an electronic promise it would be more accurate to describe a government owned central bank as a GEM – Government Electronic Mint. I know the Bank of England will never get to be called this since old habits die hard but it does come closer to describing what a central bank does for a government – create electronic promises as and when the government wants to spend.
But it is a bank….
What you say is completely understood by the Treasury, the BofE and every worthwhile economist on the planet. I am sure you accept this. Where you are an outlier is your believe there is no link to the creation of money and therefore increasing the money supply and inflation. Others do.
I have never ever said that
There is a link between money creation and inflation. Indeed, MMTers probably understand this more clearly than many – they think that if excess money that is causing inflation then it should be drained by taxation which far more direct a control than through the use of interest rates. Raising rates is a very blunt instrument in controlling money supply/demand in the economy that causes untold collateral damage to people and businesses.
There is room for monetary policy but it should be used in conjunction with fiscal policy which can be better targetted.
HMT and BoE understand this too – but also understand that tighter monetary policy helps the wealthy (as receivers of interest), fiscal policy hurts the wealthy (as the payers of tax).
The question is whether the BoE/HMT can be persuaded/directed to operate differently.
Well said
At PMQ Starmer accused Sunak of using the “magic money tree” to fund his NHS workforce plan.
Fair to say he doesn’t understand it or taken the time to examine it
@ CLIVE PARRY Good articulation of a basic divide in society. Would Keir Starmer ever deign to talk about this as a fundamental issue. You could almost bet your life he wouldn’t and that’s fundamentally why you shouldn’t vote for him. Closed mind!
Rachel Reeves on R4 Today this morning intoning ‘there is no money’ when challenged about not removing the benefit cap on more than 2 children – ‘we will create growth first’.
The interviewer challenged her with a whole list of things they wouldn’t do despite ‘child poverty relief being in their DNA’ – he still accepted her premise – by not noting some of your half dozen ways in which the benefit cap could be funded, nor challenged her on how she was ‘going to create growth’.
She needs to be asked how she will create growth – she needs to be challenged as whether public spending itself is part of creating growth. Both her and Starmer still getting off scot free with their ‘tough choices’ mantra.
Agreed
I have a question….
When you speak to politicians do they say
1) You are wrong
2) you are right but I dare not say so in public
3) I don’t understand
All three
It varies
I’m getting on a bit (will be 70 soon) but it seems to me that politicians over the last 20 something years have become less cable in the role/tasks they are supposed to oversee. I accept that a Minister will have a small army of advisors so doesn’t NEED to be an expert themselves, but who will sit down a new chancellor to explain the REAL world implications of different policy decisions and if someone does do this, why don’t they demonstrate that they actually understand?
We have politicians who consider this as a career path. The only career in which you do not need to possess any ability, knowledge, education or experience in the topic you will be formulating policy on. Madness on Stilts
One of the problems with the UK goverment is that there are no expert civil servents. This is because some time ago pay was frozen except when moving to a new position. This has forced the civil servents to move positions on a regular basis, I understand that the average time in one post is less than one year. This could have been one of the reasons that the new trade agreements are so poor.
What they actually say is: ‘I don’t care who you are or what you have to say’
There are a few technical points I would like your help clearing up. Maybe you could point out if and where I have gone wrong. There is also one query in the post that perhaps you could address. My thanks in advance.
1) I take it that base money consists in the sum of:
a) the value of the central bank reserve accounts of commercial banks
b) the cash held by commercial banks in their vaults
c) the cash in general circulation.
In other words base money is the money that represents a promise to pay by the BofE. If that is not the usual use of the term, take it as a definition in what follows.
2) When the government pays me money, it first increases the amount of my bank’s CBRA and instructs my bank to pay me.
a) The bank could pay me cash in which case it would either have to pay me with cash from its vaults or have to use money in its CBRA to buy the cash from the BofE. In either case the total amount of base money held by the bank would be unchanged, however since I would have cash valued at the amount spent the total base money in the economy would increase by this amount.
b) It is more likely that it will pay me by crediting the amount to my account at the commercial bank. Now this amount represents a promise to pay by the commercial bank, not the BofE, even if it is guaranteed up to £85,000. So it is not base money and one would not expect the CBRA to be debited by the same amount. However for double entry bookkeeping to work some account must be debited by this amount. What account is this? In this scenario the banks CBRA would increase by the amount spent, but, since I have no extra base money, the total base money in the economy would increase by this amount.
3) So the government spends the total base money in the economy increases by exactly the amount spent and that this is the only mechanism for increasing base money. When a government, sells (e.g. bonds it holds), borrows or taxes, presumably the opposite process occurs and base money decreases by the appropriate amount and these are the only mechanisms for decreasing base money.
Looked at like this, paying interest on CBRAs seems completely unjustified. One would not expect the government to pay interest on cash and yet this is just as much base money as CBRAs.
Sorry it has taken time to get to this. Life has been very busy. I am even further behind with emails.
To take your points:
No, base3 money is the CBRAs plus notes and coin. That is it.
You then say:
…Richard…useful compilation which I will send on to the hordes of my admirers who usually do their best to politely ignore me on the grounds that it is all above their “paygrade” – a misconception that is a problem in its own right.
On the Green Party (previous stuff) no reply to my e-mail, so I will phone them tomorrow when I’m back home. I also have a pal who is recently ex GP (& who took part on my mini-survey) who might be able to help.
I note that you’re reluctant to “burden” Caroline Lucas in view of her caseload – I can easily empathise, but you don’t need to if all you need is guidance and maybe an introduction?
I will write again asap.
Thanks
Plase note I am now in diiscussion with the Greens….
…good to hear that & happy to leave that with your German assistant i.e. Capable Hans! I will see what I can do to check out local Green views – promise not to tread on your toes….