We have just published this short video on YouTube and many other channels.
This is the transcript:
It is said that the government needs to borrow from financial markets. That sounds responsible. It sounds like a household taking out a loan, but it's misleading. A government that issues its own currency doesn't need to borrow it.
Let's be clear what happens when the UK issues gilts. When that happens, the Bank of England swaps deposits held by our commercial banks and others with it for bonds issued by the Treasury.
The bonds offer savers a safe interest-bearing asset for those who need really long-term savings, like pension funds. By doing so, the government does something else. It supports its own long-term interest rate management policy.
It doesn't go out to get money in that case; it is managing money it has already created. That's the important point to understand about gilt issues. When gilts are issued, the Bank of England is controlling interest rates.
It is providing pension funds with safe assets.
It is stabilising financial markets.
Treating government borrowing like household borrowing when it isn't, then, is simply justification for unnecessary cuts, and we don't need them.
The phrase, ‘Borrowing from the markets,' frames the state as being financially constrained; it isn't.
The constraint is the availability of real resources in the economy and inflation.
We can't run out of pounds.
The government does not need to borrow its own currency. It does need to choose how to manage it. That is what ‘so-called' borrowing permits.
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Thanks for this. Could you explain what you mean by: “Let’s be clear what happens when the UK issues gilts. When that happens, the Bank of England swaps deposits held by our commercial banks and others with it for bonds issued by the Treasury”? What happens to the bonds and what happens to the deposits?
As I understand it, it’s the ‘usual’ double-entry book-keeping, of ‘money in an account’ and an ‘asset’ (in this case, the gilts).
If the the commercial bank itself is buying the gilts, they pay for them by the BoE reducing their reserves by the price of the bonds they bought. The bank’s balance sheet is reduced by the amount paid and increased by the value of the bonds. The BoE’s books are balanced in an equal and opposite way (except that before this transaction, they were ‘gifted’ the gilts by the government’s Debt Management Office creating them).
If a customer of the commercial bank is buying the gilts, the bank is the money intermediary: they reduce the customer’s account balance by the price of the bonds, simultaneously increase their reserve at the BoE; and then reduce that reserve once again, to pay the BoE (for the DMO). A ‘clearing’ operation. The bank’s customer’s account is reduced by the price of the bonds and they receive the gilts as an asset in exchange.
Thus, in either case, the net effect is the transfer of an asset to the commercial non-government sector; and the transfer of money into government balances. Hence (as per other comments from Clive Parry and others) money is taken out of the banking system and can no longer be used for consumption or other investments.
(Open to correction by others if there’s some errors here! I wrote this partly to try to clarify my own thinking: always think ‘double entry’: one person’s credit is another’s debit; one type of book entry (like money) can be exchanged for another (an asset). These are movements of capital, not flows due to consumption or production or interest.)
MMT does have a few critics from the further left. I had to use ChatGPT to find the problems within the article. I am hoping you would look into it as I love to expand the amount of counter arguments I can have. Be warned, it uses a Marxist framework of economics.
https://communist.red/zack-polanski-and-modern-monetary-theory-whats-the-real-alternative-to-austerity/
On a side note, why not discuss Marxism, Keynesian economics, and MMT. That would be an interesting topic to cover.
Again Christine Desan talks a lot about this in her history of English central banking in her book ‘Making Money’; Stephanie Kelton in ‘The Deficit Myth’ and Perry Mehrling’s ‘The New Lombard Street’.
Margaret Thatcher lied to this country about where money comes from. She has a lot to answer for.
At least she won’t be in line to appear on our banknotes.
We will have robins, badgers, eagles etc.
More ministry of truth, the dangerous belief being bred in the popular imagination is the government and all of us are subordinate and dependent on the market. The Market is the new medieval king.
They seem to achieve this through consistent pithy, key phrases, acting as learning reinforcement, to shape beliefs, to control the narrative. Government borrowed from markets.
Antidote is a similar memorable, consistent key phrase : eg the government created more safe assets for the market, or government created more safe deposits for pension funds- likely better ones than one these.
Today, the 14th, Rachel Reeves says she has “found” some money for those that burn oil of their heating. Its embarrassing.
The government no longer needs to issue gilts (borrow) to control the interest rate. Instead, the Bank of England pays interest on reserves (IOR). There’s a good explainer here:
https://open.substack.com/pub/frapacioli/p/to-borrow-and-to-borrow-and-to-borrow?r=7dnd50&utm_medium=ios
A bit off topic, but the comments on a more relevant post from March 6th are turned off now.
After explaining (attempting to at least, but reasonably coherent after studying your tutorials) what money, tax, and deficit is, especially in the light that tax doesn’t fund government, I started to wonder, “So what’s the point of income tax?”. It’ll withdraw excess cash from every person working and reduce general consumer inflation (which is less likely in a very unequal society), which doesn’t really seem a terribly compelling argument for it. Then I thought that it _could_ provide a means to limit inequality by tapering the benefit of excessive salaries. The purpose of income tax then, through Richard Murphy MMT-Goggles ™ (pat. pending) is to provide a “soft limit” on personal income from employment. But that makes national insurance contributions a bit irrelevant, except if we wish to draw attention to it. Including NI on a payslip is really just a reminder it’s there, (I suppose it also provides a means to reimburse taxation errors, if they ever get around to that – I’ve been waiting over 6 months for a repayment I was granted in August last year).
Unfortunately, if you don’t know MMT-Goggles™ exist, you’ll think these taxes pay for things and it’ll make you think money is scarce and encourage you to adopt a “household finance” view of macroeconomics.