If we want to understand government finances, the last people we should ask are usually businesspeople and the City of London.
That might sound surprising. Businesspeople deal with money all day, whilst the City supposedly exists to understand finance. But neither seems to understand government finances.
The first problem is that businesspeople think in microeconomic terms. A business can spend its income, use existing cash or borrow. What it cannot do is create the money it needs to make a payment. The same is true of households.
That is not true of a government that issues its own currency. The UK government is not a household or a business. It is a macroeconomic entity, and it issues the currency that households and businesses use. That difference is fundamental.
When businesspeople say, “You cannot spend what you haven't got”, they are applying the wrong model. The government does not have to get pounds from taxpayers before it can spend pounds. Instead, money has to be created before anyone can use it to pay tax.
This should also be obvious from double-entry bookkeeping. Every financial asset has a corresponding liability. Every debit has a credit. Government finances cannot, therefore, be understood in isolation from the rest of the economy.
If the government runs a deficit, someone else must have a financial surplus. That is not an opinion. It follows from accounting.
The City has another problem. The existing system suits it well. The idea that governments depend upon financial markets gives the City enormous political power. Governments are told they must maintain “market confidence”, satisfy bond traders and design policy around the wishes of financiers. So, why would the City challenge a story that gives it so much influence?
There is a further problem. Both business and the City talk about money as though it were a thing that exists independently of the economy. It does not.
Money has to be created. Commercial banks create new money when they make loans. The Bank of England creates money when making payments on behalf of the government. Until money has been created, it cannot be spent, taxed, saved or used to buy government bonds.
And money is not a physical thing. It is a record. A bank balance is an entry in a ledger. If someone has a financial asset, someone else must have a corresponding liability. There are always two sides to the entry. Few in business or the City seem to understand that.
That is why relying on businesspeople and the City to explain government finance is so dangerous.
Business applies microeconomic thinking to a macroeconomic problem.
The City has a vested interest in maintaining its power.
And both too often misunderstand the nature of money itself.
That combination is a recipe for economic mismanagement.
We need to start somewhere else. We need to start by understanding how money actually works.
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“In a society governed passively with “free market” policies and “free” elections, organised greed always defeats disorganised real democracy.” (From Matt Taibbi)
Agreed
We know that it is a political choice to deny the truth of how the economy really works. The question then becomes why politicians prefer to explain the economy using the household analogy. It can only be that they do not understand it or they believe they cannot sell the truth to the voters. Either way, it is a sorry state of affairs when we cannot find one politician prepared to come forward and tell the truth or make the effort to find out what it is.
If something so obvious as this is not admitted, then everything else politicians propose and support becomes questionable in areas where we have no expertise. What other truths do they not understand or believe they cannot sell to the public?
In short it gives the power.
You are doing a great job on this. I am seeing the odd letter in the paper challenging the orthodoxies, and I have several times written to challenge my daily to provide some more accurate fare.
These articles about money are absolutely vital for everyone to understand.
They reveal the degree to which people are being totally mislead.
The propaganda sources that propagate these misconceptions bear a heavy responsibility for the UK’s cycle of decline, a decline that increasingly targets the most vulnerable in society.
And the job needing the best minds on the Left – currently apparently under-explored by them – is to work on how on earth to reach a duped public to allow them to see through these (I think deliberate) false narratives. The Left can get no purchase on the msm for reasons of its ownership. The alternative media giving the education needed to perceive the duping is read by the converted and reaches those most needing it the least. How do we help end this dilemma?
You hit the nail on the head about how the city looks at macro economic issues wearing micro economic glasses.
I see this too in the public sector in senior management. Their world is a world of constant shortage and false compromises. Not many of them extend their curiosity beyond that sphere of every day micro operation and existence to the point where micro is everything. There is no imagination, no willingness to fight. I suppose this is part of the capitalist system too – to pay these people (in finance too) enough so that they are comfortable in their own ignorance. They are paid off not to think.
Much to agree with
These paragraphs appear early in Stephanie Kelton’s book “The Deficit Myth” and point to exactly the kind of narrow-minded thinking ‘we’ are up against…
The top Republican on the committee was its chairman, Senator Mike Enzi from Wyoming. Enzi had a background in accounting and had run a shoe-sale business before getting involved in politics. He spent a decade as a state legislator, serving in Wyoming’s house of representatives as well as its state senate. In all of these jobs, he operated under a constrained budget. As a businessman, he had to control costs, meet payroll, and turn a profit to remain viable. As a member of the Wyoming legislature, he operated in an environment where the governor is constitutionally required to submit a balanced budget each year. Before coming to Washington, he had only seen the world through the lens of a currency user……………………………..
Senator Enzi’s comments never changed much. He looked at the federal budget as if it was an income statement for his shoe-sale business. To him, the problem was obvious. Uncle Sam was operating at a loss. Deficits and debt had become a way of life, and the whole thing was just plain irresponsible. You didn’t need an accounting degree (like Senator Enzi) to see the problem. Time and again he would simplify the situation by declaring, “Deficits are evidence of overspending!”
I’m assuming Ms Kelton will not object to my quoting her book in this context.
I am sure she will forgive you.
The wealthy elite have long since recognised that government spending is ‘the golden goose’, the only source of money that does not have to be paid back. That is why they have manufactured a hugely extractive economy so that what government spending does find its way to the masses is inevitably filtered back to them.
I totally agree with this opinion.
Having worked in the operations of brokers and investment bank, the City operates on the basis of overcharging for low risk financing situations, creating speculative bubbles and creating derivative products out of a scarce cash and real world products and commodities.
The City has relied on the privatisation of profit and the socialisation of its losses to the state and all the while it is subsidised by the incentives for where your tax free pension money can be invested.
Do not give them your money. It only encourages them to give themselves too much in bonuses and pay.
it is the vampire squid taking us for fools and sucking the life blood out of our economy.
If we ever did get a government committed to managing public finances properly, how would they prevent the traders, the City, the hedge fund oligarchs from attempting to torpedo its efforts to ‘right’ our systems. Would they not make a concerted effort to see interest rates skyrocket as the Tory ‘news’papers howled about financial mis-management?
I will answer this as a post this morning.
[…] comment was posted on the blog this morning by an occasional commenter called Dennis […]
A starting point, to be repeated ad nauseum until others begin to repeat it:
“ Until money has been created, it cannot be spent, taxed, saved or used to buy government bonds.”
Simple, understandable, leading to questions, to wh answers can be drip-fed, simply.
A kind of building block approach until more see the picture.
just a thought
Thank you
Another thought: a new nomenclature
“Murphy on Money”
???
catchy, short; memorable.
a good broadcasting handle.
i wld think LBC and Radio 2 wld like that.
I’ll take their call…
Or “Murphy on the Money”?
dble edged meaning of course!
🙂