I was asked to make this infographic. It will become part of a series I am planning on money, which appears to be the most difficult topic in all of economics, making it a priority for this work.
Please note, Box 8 has been updated to make clear that flows are multidirectional.
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This is great. Thank you.
Thanks
Thanks! The graphics really help to understand where and how money moves around.
Looking forward to others in the series.
Thanks
I really enjoy your infographics Richard, please keep ’em coming.
There are some (probably minor) points regarding money I can’t get my head around.
1. If I buy a share for £10, and it rises to £20 when I decide to sell, where does the money come from? Similarly if I buy a share at £20 and it falls to £10 when I decide to sell, where does the money go?
2. If I make a money transfer overseas – let’s say I sell my house for £500K and emigrate to a faraway country taking my money with me (now converted to another currency) how is this accounted for in the big scheme of things? £500K is small beer in the big scheme of things, what about A. N. Other Big International Company Ltd. which makes £500M profit in the UK then exports it to a tax haven converting it to USD. I can’t see how the accounting works out. Similarly if money is imported from afar to the UK.
You have probably answered these long ago in an archived blog. If you have I apologise for asking. I know you don’t like questions that a questioner can research him/her self … however I don’t seem to be able to get a simple straight answer to the above. I was an engineer, not an accountant!
Part 1
On shares, the extra money does not come into existence because the share price rises. The money already exists. It belongs to the buyer.
Suppose you buy a share for £10. A year later someone else is willing to pay you £20 for it. They transfer £20 of their existing bank balance to you, and you transfer the share to them. No new money has been created. What has changed is the distribution of wealth. You now have £20 instead of a share. They have a share instead of £20. The market now says that share is worth £20, not £10.
If the price falls from £20 to £10, no money has disappeared either. The next buyer is simply only willing to pay £10. The previous owner has suffered a loss of wealth because the market now values the asset less highly than before. Again, money has not been destroyed. The valuation of the asset has changed.
This is why it is important to distinguish between money and wealth. Money is the means of exchange. Shares are wealth. Their value can rise and fall dramatically without any money being created or destroyed.
I “get” that Richard, thanks.
Part 2
Your second question is about international payments.
If you transfer £500,000 abroad, your bank does not send a suitcase of cash overseas. It settles the transaction through the international banking system. Someone else must, in effect, be moving money the other way, or financial institutions adjust their positions by buying and selling financial assets and foreign exchange. The accounting always balances, even if the chain of transactions is immensely complex.
The same is true when a multinational transfers profits overseas. There is always an offsetting entry somewhere in the global financial system. That is why every country’s balance of payments must, in accounting terms, balance. If money leaves the UK on one account, there must be an offsetting transaction on another account, whether through trade, investment, borrowing or changes in financial asset ownership.
So the accounting always works. The real question is not whether it balances—it has to—but what the economic consequences are. If large sums continually leave the UK because profits are extracted and invested elsewhere, then the UK loses spending power, investment potential and, often, tax revenue. Those are the issues that matter.
I appreciate you taking the time to reply Richard. Answer 2 is tougher for me to get my head around … I will probably need to read multiple times! I think I need a bigger brain (insert exploding head emoji here).
Steven Keen says the speed or velocity of movement through the economy has declined in recent years.
More private spending is now to repay debt than was the case in the mid 20th century.
It has, dramatically.
Really useful and simple. Thank you
I wonder if you could do an infographic on the difference between GDP and the national debt balance? This confuses me but I may be on my own
I’d also like to understand the different definition of money – narrow, broad, central bank reserves. The infographic form has a way of making these concepts crystal clear
Thanks to you and the team for creating these.
I admit I am unclear how to do that. One is a flow. The other a stock. Let me muse on it.
Boxes 1-7 work well for me, though I think adding the flow of interest to bank profits into the diagram in box 5 and/or 6 would stress that point if there’s room for it.
Are the arrow heads in box 8 and the labeling of dashed and solid lines correct? If so then I’m a lot more confused than I was 5 minutes ago. The spending-income-spending bit in the middle of the box doesn’t inform me of much either. It isn’t clear to me who’s spending and who’s income is being depicted.
I was happy with it, but if it is not clear, I have changed it. A new, simplified, one is coming…
At last, a static diagram of the flow animations from Kelton’s video. Excellent!
Again Richard, these feel very ‘secure’ to me in what they are trying to get over – words and graphics that work really well. It is still worth considering what others have said about a publication of some sort – ‘the Collection’ as I would call it deserves a wider audience – maybe some mild sub-editing just to ensure nothing too personal from some of the ‘heads’ here and whom you have worked with elsewhere.
Of course, you have enough on but I still think that worth saying. It is the ability of your troop to re-invent itself that is most impressive BTW.
Thanks.
Noted
A book would be staggeringly expensive: it would be far too much colour.
Worth noting that the cancellation of Commercial bank money (via repayment) is mandatory, but the cancellation of Government money (via taxes) is not. Interest is also payable on the commercial bank money, meaning their is inevitably a greater liability than the amount of money created in the first place. Does that mean that without the creation (and non-cancellation) of sufficient government money to cover that interest, there will inevitably be a cumulative cycle of private sector debt to pay off the liability + interest created when the commercial money was created?
Equally, does it also follow that, in order to avoid a private sector debt crisis (which we are arguably in now), government needs to create enough money to match the economic growth of a country? Otherwise the only way that growth can be funded is by a temporary money source that needs to be repaid (normally by even further borrowing). So all we here about the government having spent too much money…the maths suggests the opposite, they have created roughly £3Tr too little which has directly led to a mountain of private debt to keep up with the growth of the country.
“Interest is also payable on the commercial bank money, meaning their is inevitably a greater liability than the amount of money created in the first place.”
This is not true. Paying interest changes the ownership of money already made. It does not create new money. None of your claims follow as a result.
I maybe didn’t phrase well, but I think that was the point I was trying to make. i.e a liability is created that is larger than the money that was created? For example, I take out a loan of £100, at 3%. A year later I owe £103, but that £3 was not created. There are 2 options to create that £3, government money or commercial bank money, but if it’s the latter, that in turn creates a liability higher than the money created. So to avoid a spiralling private debt crisis, does the government not have to ultimately create the money to cover the interest liabilities?
Or am I missing an element?
These infographics are brilliant. I’m printing all of them.
Great infographic. I’ll print it out.
Two points:
1. I gather from a reply from HMRC to one of your readers you published in a blog post ages ago that not all tax revenue is cancelled. Some of it is sent to the NHS.
2. Cancelling tax revenue helps redistribute resources to the wealthy or to the poor (I think). Could the graphic show that element or is that a pitch too far?
On your first point, I think HMRC is wrong. Tax paid to central government is cancelled on receipt. It is not stored up to pay for the NHS, pensions or anything else. Government spending and taxation are separate processes. Government creates new money when it spends. Tax then cancels money that has already been created. HMRC continues to describe this as if the government were a household, but that is not how a sovereign currency system works.
On your second point, I agree there is something that could perhaps be added, although I would need to do so without making the graphic too complicated. Tax does not redistribute because the money collected is then spent on someone else. It redistributes because a progressive tax system reduces the spending power of those with the greatest incomes and wealth, while government spending creates income and opportunities elsewhere in the economy. Redistribution is achieved by the combined effect of progressive taxation and public spending, not because one funds the other.
Your comment has cleared up a problem I’ve had (maybe I just don’t think hard enough). Tax is important in reducing the money supply, but MMT still supports HOW you tax.
This is great!! A one-stop-shop to send people who try to convince me has to stop printing money or it will go bankrupt.
(I think in the background, what those people really want is to eliminate taxes. As the diagram shows, taxes are not a problem, they are a necessity)
The infographics are brilliant and as a visual learner really help my understanding. Is it possible to download them individually?
We have not yet finished the download library, but just right click the image and you can download it.