The UK's right wing press has been 'over the moon' because the government has finally balanced its current budget this year, meaning that borrowing is only being used to finance investment.
There are two problems with this though. The first is it has only happened at cost to the millions of people in the UK who are now considerably worse off than they need be, some of whom have been pushed into serious poverty as a result, including many families with children.
The second fact is that this austerity has left us ill-equipped to deal with the future. We are a nation with low stocks of physical, intellectual and human capital because investment has been so low in both the state and private sectors; both being the result of a crushing of demand from the state sector.
Third, we are not making the transition that is needed to a low carbon economy that meets the needs of our ageing and changing population as a result.
Fourth, With further austerity planned, and a massive round of further cuts in benefits just about to be introduced, those in precarious situations are about to get more vulnerable still.
Fifth, all of this is before Brexit.
What we have seen, and are seeing is the madness of an economic philosophy that says that government expenditure (G) must equal tax income (T) when in practice we know that as borrower of last resort the government has to take any savings offered to it. These savings are often called government debt, but that's only because any deposit taker owes the funds they hold back to those who have placed them with them for safe custody. To eliminate these borrowings the government has than had to shrink the economy to ensure excess funds are not sent its way.
This is, and has always been, the economics of the mad house. Rather than accept that the short term consequence of any growth in an environment of uncertainty (as we have) is more saving, which the government has a duty to absorb and which it could do at present at no net cost at all because real interest rates are so low, the government has instead crushed growth and so any prospect of improved well-being for most people in this country out of the system.
And that's what it seems to want to continue to do, with the right wing press making that one of the centre pieces of its demands. As economic narratives go this one is crushing, quite literally.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
And the IFS are cheerleaders for this trotting out of neoliberal ideas. When is Corbyn going to go on the attack here? Maybe after the budget he will trot out his mantra – for the many not the few – without telling us that we are all being fed a lie and that an alternative is possible and how it must be done.
Apols for off topic but do you know if the taxes paid by The City have been compared to its subsidies to give a nett result? Regards
I am but surcof th3 question you are asking
More detail would be needed
People are bleating that if parts of the City move to Europe, the state will lose some of the supposed £80bn from it in tax receipts. I wonder how much it costs the rest of the economy to obtain the £80bn?
It’s all very distressing and depressing isn’t it? We’re living in a socio-economic dystopia. What kind of people knowingly inflict ever more unnecessary hardship on those least able to shoulder it? Quite simply they’re sociopaths. How much longer must we endure this regressive Tory rabble? Probably at least another another 4 years.
I’m suffering from the UK equivalent of Weltschmerz. To help fuel the flame of optimism, like many I turn to music in its many genres. This morning I enjoyed this recent release from one of my favourite charities that speads happiness world-wide via music. The lyrics seem appropriate. “You can lean on me brother, I can see you’ve carried too long…” https://playingforchange.com/everlasting-arms-song-around-the-world.
Well, it might not be everyone’s cup of coffee but it makes a change 🙂
“The UK’s right wing press has been ‘over the moon'”
And no one else is is the least bit impressed. The rest of us are either underwhelmed, appalled or couldn’t care less.
If it wasn’t so serious it would be funny.
Agreed. There is an issue of semantics here. Economists , even someone like Skidelsky who I think qualifies as a thinker and not just a propagandist uses technical language known only to economists on the one hand and then resorts to the inaccuracies of the common tongue, most especially ‘ printing money ‘ which only serves to reinforce misconceptions to the man/woman in the street. Such linguistic infelicities only serve to reinforce the status quo regarding how money works in our society in the twenty first century. My son who is the man in the street for this purpose, but also happens to be a professional writer in an entirely unrelated field, has been working with me to produce a short, succinct text to explain money creation with the following aims :
1. To describe the actual process without resort to technicalities in so far as this is possible.
2. To show that money is not a thing.
3. To show that money is not a commodity and not scarce.
So this is what we have produced to date and thanks go to all the thoughtful people who contribute to this blog and the blogger himself, Richard and, as is always said any faults are ours and ours alone. We are thinking about putting it on You Tube simply as text with the title ‘ Money Creation in the 21st Century ‘ .
Money is created in two ways. The first way is the government grants licenses to high street banks to create it. That money is created on a computer in the form of loans to customers. It literally comes into existence via a computer into your bank account as a loan which you repay over an agreed period of time. The second way is the Government’s bank, the Bank of England acts as the Government’s banker. It credits the Government’s bank accounts held with high street banks with as much money as the Government needs to run the country . This money comes into existence when the Government need it to. Until then it doesn’t exist, nor having been created is it backed by something else, like gold for example.
At the end of the year both the high street banks and the Bank of England produce a set of accounts called a balance sheet showing their overall financial position ; their plusses and minuses, which as with anything in balance, have to cancel each other out. To balance its balance sheet the Government demands taxes from companies and individuals . If the taxes it collects do not offset its liabilities ( aka the money it needs to run the country ) completely, it can create IOU’s. A government IOU comes in the form of a bond ( a promise to repay ) that the government sells to the public as a form of savings . So if you buy one you are lending the Government money. The Government can create as many IOU’s as it wants to make up the difference. These IOU’s are not backed by anything other than the Government’s promise to repay. But, because ( as described above ) the Government can never run out of money because it can always create more the public are right to trust that their savings are safe.
So by now you might be asking yourself the question : If the Government can never run out of money how is it meant to act responsibly in spending the money it creates ? The answer is both simple – it should act in the best interests of all the people in the country in so far as it is possible to do so – and complex – it has to arbitrate between competing interests for the money it creates . So take the NHS as a prime example of an institution which is supported by the majority of the people in the country ; the Government should manage its expenditure to ensure that it is not in a chronic state of crisis. The Government can always do this , but if it chooses not to do so because it would prefer to eliminate the ‘ deficit ‘ ( the difference between the taxes it collects and the money needed to run the country ) by refusing to create more IOU’s , a policy the Government calls ‘ austerity ‘ that is a matter of choice not necessity. In fact it is a policy designed to underutilise resources – labour and machinery – which already exist, but the Government chooses not to employ.
The masquerade used by the Government to fool the public into believing that there is insufficient money is to pretend that its debt ( aka the money we have lent it ) is just like yours or mine when in fact it is nothing of the sort because unlike you or I it can create all the money it needs.
I suspect there will be comments…
I think the project appropriate
Do others have suggestions?
A few quick comments:
1. I do not think you can say that money is not a thing. The best description is that money is information, but information is still a thing.
2. I am not a fan of the ‘banks create money’ meme. What they do is create credit-debt relationships. If you accept 1. that money is information, no more, no less, it is easier to understand how this is possible.
3. Government is different because it runs it own bank, so the credit and debit are in the same account (essentially). Also government is different because countries live forever (unlike us), so a debt from 1694 can be carried over for as long as the country continues to exist.
Good luck. It’s a worthwhile enterprise.
I agree with the argument re money being something
There is no physical substance to money but it has massive impact
It is the value of incomplete relationships in an economy
The most important of these may be unpaid tax
John Hope
My twopenn’orth
Money may not be a thing in the sense of something concrete but it is a promise – compare it with Tesco clubcard points. We accept them on the basis that they will be of value to us in the future. Just like when we are paid money.
“Until then it doesn’t exist, nor having been created is it backed by something else, like gold for example.”
Promises are made out of thin air. I do it all the time 🙂
Also may be worth saying that there are two sorts of money: specie and fiat. Specie is the old sort based on a commodity – that is a (concrete) thing usually coinage in a precious metal. (I’m pretty sure there’s no copper in ‘coppers’ any more or silver in ‘silver’ coins. Nobody melts them down as a result). We’ve now moved on to a new system which is fiat (Latin ‘let it be’) which is issued by governments and is their liability – that’s why it’s a promise to pay. Because government promises are trusted we all pass this round knowing eventually the government will pick up the liabity by accepting it in payment of tax.
“A government IOU comes in the form of a bond ( a promise to repay )” – as does all fiat money. It is an IOU that has not yet been collected as tax.
There a few more possible ideas here:
http://www.progressivepulse.org/economics/welcome-to-the-money-factory
All the best with your project!
Charles,
Re. this: ” I am not a fan of the ‘banks create money’ meme. What they do is create credit-debt relationships.”
Its a bit much to try say that is just a “meme”. The “credit/debt relationships” they create also consist of a double entry system of loans and deposits. Those deposits can be, and often are, cashed-in ie. withdrawn, spent on goods and services. However one wishes to express it they can become money (are money) in a very real sense.
Peter May says:
“My twopenn’orth
(I’m pretty sure there’s no copper in ‘coppers’ any more or silver in ‘silver’ coins.”
Indeed silver content in ‘silver’ coins was reduced in stages then left out entirely decades ago.
I was relatively recently (a few years ago) surprised to discover that ‘copper’ coins are magnetically attractive. I also realised that the added value of putting a hole in piece of steel, to create a washer, made it more valuable than a similar sized ‘copper’ coin.
So your two penn’orth is worth less than a washer 🙂
Thanks Marco,
We probably do not disagree. I was crudely attacking the lazy ‘banks create money out of nothing and it’s terrible’. Banks can only ‘create’ money on the basis of a contract with someone that is offering to do something real.
There is a good discussion here.
http://www.coppolacomment.com/2017/10/money-creation-in-post-crisis-world.html
The quote from Pontus Rendahl that:
money creation “is not “out of nothing”. In fact, it’s very far from it; a more accurate description is that the bank converted an illiquid asset (the debtor’s future ability to repay) into a liquid one.”
works for me.
But that needs to be communicated more clearly….
The important point is that all money is like this
Why are high street banks allowed to create money? And how do you get one of those licences?
This process is widely documented
All banks do it
Worth watching this https://www.youtube.com/watch?v=bHQCjFebIf8
Which banks get a licence to create money, how is it decided and what do they in return for this licence?
All banks
But not building societies
They run banks with this licence
John and Richard,
This is definitely a worthwhile idea and a good effort.
I think what it is missing is a compelling reason to believe it.
You need some sort of irrefutable logical hook or a reference to something simple that people understand implicitly. This is why Thatcher’s household budget analogy stuck and won’t come unstuck.
Beware that sticking to common English words like “lend’ and “borrow” automatically causes people to start thinking in terms of traditional banking where deposits are required first before lending can occur.
I think you also need to explain why it is we’ve all missed something so obvious about something we all use everyday. It’s quite a big ask of people: abandon basically everything you thought you knew about money.
I’m hopefully going to finish my presentation for my local Labour party tomorrow. I’ll post the draft transcript here for comparison and feedback if I get it done in time.
But yes, I’m a firm believer that MMT is only going to gain traction if a significant proportion of the non-economist population get to grips with it. I think we lay people can help produce material to achieve this goal because we’re more able to remember what it was like to absolutely believe the mainstream view.
Please do share the transcript and any slides if you are doing them
Adam Sawyer says: to John and Richard,
“This is definitely a worthwhile idea and a good effort.” Agreed
“I think what it is missing is a compelling reason to believe it.”
My inclination to believe stems from seeing that a succession of chancellors of the exchequer have totally and abjectly failed to keep our national economy on an even keel throughout my lifetime. It was Nigel Lawson’s pitiful flailings and bullshit rationales, that first motivated me to try to understand what was actually going on.
Anyone who thinks the present political and economic situation in this country, and the wider world, isn’t a cause for concern isn’t going to be interested in any kind of explanation of the economy.
Like Flanders and Swan’s Ostrich, they’ve got enough troubles in everyday life they just bury their heads.
https://www.youtube.com/watch?v=-S4q41dQRyc
@ Adam: I think what it is missing is a compelling reason to believe it.
Ask people, why, if the private sector creates money, do notes and coins always have the head of state on them?
All money is public money, lent into the economy to help private individuals go about their business.
If they worry about electronic money, ask them if they would still be happy with those numbers on a computer if for some reason they were no longer convertible to the notes that local shop accepts.
@ Andy: My inclination to believe stems from seeing that a succession of chancellors of the exchequer have totally and abjectly failed to keep our national economy on an even keel throughout my lifetime.
Would an understanding of MMT have helped? My inclination is that Richard is more on the money when he says it is more about tax. The thing that matters is the distribution of wealth and income and in this regard, tax has a bigger influence than the system of money creation (even UBI does not solve anything if all the money flows immediately to the rentiers, only tax can ensure that the flows are balanced and fair).
We have to understand money
But we can’t unless we understand tax
The fact is the two are intimately related
MMT needs its partner – Modern taxation Theory
Only then does it make sense
And MTT has six reasons for tax – none of which fund gov’t activity
Adam, re, this one:
“Thatcher’s household budget analogy stuck and won’t come unstuck.”
Really? I don’t see it around much this analogy, not outside of this blog. As a point of argument there’s no official answer to this of course. It all depends on what we individually see being passed off in the media and public discourse. I am not saying that there aren’t any common misconceptions in this area. There certainly are. Personally, however I don’t generally come across this bonehead idea of a household analogy. Not much in the UK and not at all overseas.
My concern (and its not a great concern, just a conversational point) is that we might be creating a bit of a strawman here. As strawmen go I can see its attraction as it so easy to destroy and its easy enough to imagine the conversation:
‘Excuse me sir did you make that household analogy? ….Yes, really – does your household have its own central bank (no), does it set interest rates (no) does it issue its own currency (no, what a shame) and does it levy its own taxes?…No well, you’d better buzz off and finish your homework.’
Yep, all too easy. I look forward to having one of those conversations but I haven’t come across anyone that has actually said that government is like a household.
I suspect others might differ on this point .
I am not sure
Marco and others,
We and the people we speak to about economics don’t take the household budget analogy seriously because we are a self selecting group of people who know it’s a meaningless comparison having spent significant time thinking and learning about money and economics. People who haven’t had the time or inclination to give serious thought to the nature of money accept the household budget analogy implicitly.
I think we have to be very careful not to project our own perspectives and knowledge onto others. If we do we will fail to communicate effectively. I know I only slowly came to understand MMT’s logic and I know that’s because I had deeply seated, near unconscious, beliefs about what money was which clashed with what MMT was saying.
I’m very familiar with this idea because I play a lot of poker. Poker is a game with simple rules that’s easy for anyone to grasp and start playing. However, the strategy of the game is highly complex and beginners, intermediates, experts and world class players all understand that strategy differently. To succeed at poker it is imperative that you quickly establish what level of strategic understanding each opponent possesses so you know how to interpret their actions and how they’ll interpret your actions.
If we’re going to help spark a new public understanding of money and tax then we have to go to where the majority of people are on the subject right now and speak directly to them in a way that makes sense to them given their existing understanding. It has to be non-condescending but also start with the absolute basics to ensure everyone can be brought up to speed together. Those with more prior knowledge can skim through the “basics’ but in all honesty I for one have had a real “aha!” moment recently by realising that it is actually the structure of the most basic logic of IOUs on which all money related is based. In a way I’d dashed beyond this without ever reaching a thorough understanding or a satisfactory means of communicating it to others. I’m no expert by any stretch but I strongly suspect real bonafide experts will appreciate revisiting the basics for the improvement it’ll bring to their public education efforts.
I have a lot of sympathy with this….
John, this is the big project that we should be engaged with. Labour spokespersons cannot use MMT without being laughed out of court at the moment. I have no idea how to help except by speaking about it to colleagues. If this cannot be sorted before the next GE McDonnell will be forced to come up with some mumbo jumbo about how he will pay for everything or else be so constrained that the offer will not be attractive.
I shall be going to the LP conference in September and will be involved with the Labour Land Campaign. Also I am not competent to speak on MMT, but I think that a fringe meeting sponsored by a big organisation like Unite or CLASS could help. I am about to speak to them about other fringe meetings, but I’m only a little voice.
This is not hard – well at least not in that particular way.
To begin with give up on the idea of schooling these people in “MMT” or any other entire school of economics or any grand analogy or any academic discourse. Roosevelt didn’t go around citing Keynesian jargon and Attlee didn’t spend much time quoting socialist philosophers. They took some advanced ideas, introduced them into the current discourse of the time and implemented them as if that were a perfectly normal and acceptable thing to do. Which it was, as it turned out.
Richard Murphy introduced his PQE into the public realm without any ideological dressing. Corbynomics picked it up. No one screamed in horror (no one much). It got quite a good run on its first pass and I’m sure we’ll see it again at some point. That’s a good example of how to get ideas across unadorned, uncomplicated, one at a time. I’ve said this before in this blog and as I recall the last time i did it Richard agreed adding: “Just tell them how it works. Don’t explain the maths.”
Quite succinct.
To which I would merely add, just get the ideas across and don’t try to convert people. A lot of them don’t like being converted.
Just one more thing for what its worth.
When the occassion arises to explain monetary financing, if need be, I just tell people that it already exists.
Every time the BoE lowers interest rates it buys gilts from the public (institutions mainly) in “Open Market Operations”. The money that it pays out stimulates the economy.
The point, more particularly, is that the money the central bank uses to buy those things doesn’t come from treasury or taxes. They simply issue it themselves – and they do this all the time.
“MMT needs its partner — Modern taxation Theory”
Indeed it does.
But theories imply proof is required before use – so why not call the MMT/Tax combination ‘Modern Monetary Practice’ ?
Accepted
Although I have little problem with theory
I think theory implies best available, nor proven
Richard Murphy says:
“Although I have little problem with theory
I think theory implies best available, nor proven”
Yes. That’s all very well in theory, but…. 🙂
Carol Wilcox says: “……but I’m only a little voice.”
Carol a little voice saying the right things is worth a lot of noise.
Marco Fante says:
“This is not hard — well at least not in that particular way……….etc….” Agree entirely with the tenor of the rest of this, Marco. And particularly:
“To which I would merely add, just get the ideas across and don’t try to convert people. A lot of them don’t like being converted.”
Very occasionally I have argued/discussed with people leaving them apparently quite unconvinced only to find them, some time later, ardently trying to persuade me of the veracity of what I have told them. By that time you really know you have won because they’ve joined the dots and having thought it through for themselves now ‘own’ the thoughts.
The corollary is the saying “Never argue with a pig, because you both get covered in mud (or shit if we’re being coarse) and the pig loves it.”
Hi John,
Really liked your summary. May I republish the text or should I wait until you’ve decided what to do with it? I think explaining to people how money really works in a sovereign state is crucial. Otherwise people hold on to theories that money is a straightforward development from barter and is in some way ‘theirs’ that ‘the government’ is taking away from them.
What I would like an explanation of is how come with such a massive increase in the national debt the economic growth has been so feeble. Other than RBS natwest GRG function seeking maximum extraction of fees like vampires on its estate of trusting customers that have rightly lost trust in their bank and probably banking itself.
By all means use any of it and disseminate anywhere you see fit. It is my opinion as someone who knows to a minor degree how to ‘ make money ‘ and struggled all his life
with the rights and wrongs of that process I have had to confront the truth of the money creation ( and destruction ) process . It hasn’t been easy . But after the Great Financial Crash I found myself compelled to do so.
John – a belated offering. I’ve just happened upon this Dec ’17 interview with Prof. Pavlina Tcherneva on the roots and basics of MMT, which may (or may not) add constructively to your accumulating knowledge base – https://www.youtube.com/watch?v=92KY7iTcNLY&t=1170s. Apologies if you’ve already seen it.
Recently I helped a pensioner friend deal with a revised housing benefit claim. He is in receipt of his state pension and a private pension which amounts to about £115 per week. His joint income is too high to be eligible for pension credit so he must pay council tax but has been awarded about £45 per week in housing benefit. Recently his private pension increased by 3% per annum covering inflation but this increase is then deducted from the housing benefit, so in effect his real income will steadily decline against inflation. Where is the incentive to save for retirement?
Do savings get taken into account when awarding benefits for pensioners? Mothers Day and both our mothers in their late 80’s have never claimed anything ever, but do not have the income you describe. But they do have assets i.e. the home they live in.
Those pensioners owning a home outright would not be eligible for housing benefit – it normally helps towards rents payable, but I believe there may be help with mortgage interest if that applies. Otherwise capital under £16000 is disregarded for those in receipt of state pension.
Denis Swaine says:
“Do savings get taken into account when awarding benefits for pensioners? ”
Suggest you find out soonest.
” both our mothers in their late 80’s ….. do have assets i.e. the home they live in.”
In hard-nosed financial terms homes aren’t assets. Because your mothers are still living in their houses they are liabilities which require maintenance and have overhead costs. This is particularly the case if they are houses affording more accommodation than is desirable.
I accept they almost certainly have no desire to move, but possibly should have done so a decade ago. It may not be too late, but you need some sensible and imaginative advice, suggest. (Bearing in mind as ever, that more wisdom is required to profit from sensible advice than to give it.)
Look here – there is a calculator.
https://www.gov.uk/pension-credit
“The UK’s right wing press has been ‘over the moon’ because the government has finally balanced its current budget this year,….”
Yes, fine, but is it even meaningfully true, or just the result of shuffling some numbers around on ‘paper’ and pushing the ones they don’t like into another column ‘off the books’ ?
Irrespective of whether it was worth getting there (which it wasn’t) I’m deeply sceptical about the veracity of the claim.
Thank you Richard and thank you everyone for your encouragement and comments which Matt and I will read carefully together and tweak our text here and there and I’ll return with the finished version once we’ve put it up on You Tube .
This is such an important topic. You need to reach the ordinary public. Richard is so good at what he does but the message needs to be made much easier to understand. The average person has a low attention span. That is why we make short concise videos that are engaging to get vital messages across. I gab been saying this to you for years Richard. After our Stamp Out Poverty videos Msybe now is the time before it’s too late to save our country.
We need to talk Min….
Very happy to do so. Tell me when is a good time for you.
Have mailed you
Thanks
I am sure that getting the message across of where money comes from (& MMT in general) is a big problem because it goes against the common (mis)understanding that Govt accounts are like household accounts.
The best simple and perhaps convincing explanation I have found (apart from J.D.Alt’s USA themed YouTube video) is Neil Wilson’s article How The Government’s Super-Platinum Credit Card Works (https://medium.com/modern-money-matters/how-the-governments-super-platinum-credit-card-works-45894046ef1c).
I think it works particularly well thanks to his description of the ‘cashback’ element and because credit cards are almost as common as household accounts. About 32M UK adults have a credit card (uk.creditcards.com).
OOh! I like Modern Money matters site, Kevin.
Good link.
Adam , I am on your track with your poker analogy . You are sophisticated evidently at poker. I would be an ignoramus because I know nothing about poker and what’s more know that I would not be able to grasp even the rudimentary aspects of the game because my mind doesn’t work like that. For example I have a friend who I know loves geometry and I know this because he has done some work for me which involves complex geometry ( he builds track for model railways ) and the other day he utterly shocked me by saying he was a failure at arithmetic. I couldn’t believe it for a day or two and then as I have pondered his revelation and because I am somewhat obsessed by this question of what money is I think I see the issue. As far as I can tell it is something to do with this question of ‘ sophis ‘ which for the Greeks who invented it meant wise or knowledgeable to begin with . But not so long afterwards it became something of a dirty word because those people with the knowledge – the ‘ sophists ‘ – were the deceivers . So now the very word ‘ sophisticated ‘ has become almost a curse and certainly someone to be suspicious of. This I think is where we are with money and why I am trying as you say to get back to basics. It’s very difficult. Like you I’ve been trying to drill down into this question for a good number of years now and then just when you think you’ve worked it out something comes along that tells you you’re not exactly wrong, but neither have you got it quite right yet. All I know is this : somehow this question of money – what it is and how it is created and disposed of – is at the heart of the question of how we live in the world; it crops up in the New Testament , in Shakespeare , in Marx etc and in order to move forward as a race ( the human race ) we have to apprehend it or perish.
True