In this morning's video I note that politicians, commentators and journalists all like to claim that the UK government could run out of money, but that is total nonsense. The UK government can always create the money it needs to pay its debts. It is the one and only organisation in the UK that can never, as a result, run out of money.
The audio version is here:
This is the transcript:
The government can never run out of money. That is a simple, straightforward statement of economic fact, which is not the easiest thing to say on video, as we've just discovered having recorded it about five times.
Why is that statement true though? Because, if you listened to commentators, politicians and most of our Chancellors of the Exchequer, you would believe what Liam Byrne wrote in a note when he was the outgoing Chief Secretary to the Treasury in 2010 to his successor, that there was no money left in the Treasury.
But that is technically impossible. The reason why is, of course, that the Treasury makes the stuff. Literally all of the money that we have.
The government creates money through its spending and it does so by going to the Bank of England and saying Parliament has approved that we spend money on whatever it might be: pensions, teachers' pay, a new power system, whatever, and as a consequence please will you make a payment for us to whoever it might be. And the Bank of England is required by law, so long as that payment has been approved by Parliament, to make payment of the sum in question.
It doesn't look into the bank account that the government holds with it to say, there's no money there today. Instead, it just settles up. And in the process, it extends a loan to the government, and like every loan made by every bank to every single customer, new money is created as a consequence.
But this new money is of a very particular type. It's government created money. This is the money that can eventually form part of the national debt.
And by forming part of the national debt, it forms part of the national money supply. But there is no limit on the amount of that money that the government can create, if Parliament has approved a budget. And Parliament has never not approved a budget for a majority UK government. So, any government that's in power has, by definition, always had its budgets passed and therefore there is no limit on the amount of cash, money, whatever you wish to call it, that it can create. And if there is no limit on the amount of money that a government can create, how can we say that a government can run out of money?
By definition it can't. So, somebody somewhere is not telling the truth. And the people who are not telling the truth are those Chancellors, MPs, other politicians, prime ministers, journalists, economic commentators and others who say that the government could run out of money.
No, it won't. It never can, and it never will in the case of the UK.
It could run out of money to make settlement of debts owing in a currency other than sterling. But let's be clear, the UK government doesn't incur debts in currency other than sterling. It always pays in sterling and therefore that's also not a problem.
So let's not pretend it is. It could see the value of the pound fall against the value of other currencies and that has happened most spectacularly after Brexit, of course.
But there wasn't a threat to the ability of the government to pay.
And, unless we have a total breakdown of good government and good governance in the UK, which nobody thinks very likely at present, we will not replicate the experience of those places where there has been a a complete breakdown in the ability of a government to create money of any value.
Therefore, the UK government will always be able to pay its debts. And anybody who says otherwise has a completely different agenda. What they're really saying is they don't want the government to spend money. Now they should be honest about that. Instead of pretending that there is no money left, they should be honest and say they don't want to spend.
Now that is something that may be appropriate. They might decide quite genuinely that they do not think a proposed plan for expenditure is in the interest of the people of this country. And that's what political choice is all about. And that's a fair thing to say. But to pretend they can't spend because there is no money to make the payment is wrong. The UK government can always pay for whatever it wants if it thinks it is the right thing to do. And it can always pay its debts because it can always create the money to make the settlement.
So, let's stop the nonsense that says the UK government could ever run out of money and has not got access to the money it needs to make payment for whatever it is that it wants. Because both those claims are completely untrue.
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It can’t run out of money, but printing more and more money makes that money worth less and less. Given a global market and the requirement to import essentials from abroad, there is a restriction on the amount of money the government can print and hence this is basically the same as saying that the government can run out of money.
So the point that the commentators are making is basically true, semantics aside.
No one ever suggsted money creation per se was a good idea
I was pointing out soemthing quite different.
Did you deliberately miss the point? I suspect so.
Colin Howell wrote: “but printing more and more money makes that money worth less and less”
No, that is the myth perpetuated by governments who want austerity. Spending (not printing) does not need to cause inflation.
Peter L. Jørgensenet al writes: “this paper presents empirical evidence that prices do not increase in response to a positive government spending shock. Instead, the response of prices is flat or even negative” (Jørgensenet, 2022)
Forbes magazine notes: “Does government spending cause inflation? [..] The answer, roughly, is yes – and in other cases, no. [..] Studies of the historical link between government spending and inflation find that the link is tenuous. [..] In particular, one study by the St. Louis Federal Reserve (see source below) found that government spending has little to no impact on inflation. In fact, a 10% increase in government spending may lead to a 0.08% decline in inflation. [..] Others have found that government spending around the world may have minimal impacts on inflation, often in the tenths of a percentage point.” (Forbes, 2022)
In their paper, Yash Moitra and Pooja Sharma conclude: “The overarching conclusion remains that Government Spending does not cause Inflation.” (Moitram 2021)
The Gower Initiative (Gimms) recognises that: “too much of any kind of spending can create inflation, [..] A little steady inflation is seen as ‘good’ and too much or little is seen as ‘bad’. When either the government or non-government sectors of the economy spend [..] it can cause inflation – but doesn’t necessarily. This can be illustrated by a brief look at the UK economy in the 20th century.” (Gimms
Sources
“The inflation response to government spending shocks: A fiscal price puzzle?“, Peter L. Jørgensen and Søren H. Ravn, European Economic Review, Volume 141, January 2022. https://doi.org/10.1016/j.euroecorev.2021.103982
“Does Government Spending Cause Inflation?“, Forbes, Aug 25, 2022. https://www.forbes.com/sites/qai/2022/08/25/does-government-spending-cause-inflation/
“Government spending does not cause inflation”, Yash Moitra and Pooja Sharma, International Journal of Economics and Research, Volume 12 Issue September – October 2021, p.30-42. https://web.archive.org/web/20220120083755/http://ijeronline.com/Vol12%20issue5.php
“Fact Sheet: Inflation“, 2019, The Gower Initiative for Modern Money Studies (Gimms). https://gimms.org.uk/fact-sheets/inflation/
Many thanks, Ian
The puzzles and uncertainty are a reminder that economics does not possess a satisfactory scientific methodology. Why economists are given the status of privileged critics and commentators, even in Government monetary and economic policy formation should be handled with a large dose of robust scepticism. They are hopelessly unreliable sources of knowledge and insight on the economy; and that is a fact.
“So the point that the commentators are making is basically true, semantics aside.”
What does that statement even mean? “It can’t run out of money”, but at the same time it can?
No, Mr Howell, as a matter of plain fact, not semantics your proposition is false. The fact that it may be unwise or irresponsible to resort to producing more money does not make it true that a Government can run out of its own money. The facts are different; you are trying to turn a semantic misrepresentation of the facts into a fact, and that is simply wrong.
Which makes it an entirely meaningless point, promoted by the left to suggest that we can spend as much as we like without consequence.
In the same way you cousin argue that the government doesn’t have to tax its citizens at all or the government could provide each citizen with a £1m annual income.
It could do all of these things in theory, but in practice, there are many constraints on a government and how it needs to order its finances. And, a practical and succinct way of summarising that, is that, once the government has exhausted all the levers it can reasonable pull, in terms of borrowing, taxation and money printing, then it can indeed run out of money.
Politely Colin, if your level of argument is to a) abuse and b) misrepresent and c) argue in absurdum and d) then draw a false conclusion that is unsupprted by evidence you are not welcome here.
Richard is lucky, I don’t even understand what Mr Howell’s reply was attempting to say.
While I am not quite sure what this actually means: “In the same way you cousin argue that the government doesn’t have to tax its citizens at all”, if it is claiming that I have argued that government doesn’t have to tax at all; that too is plain false. It has never been my position. I have argued ‘ad nauseam’ that taxation is essential; and further, that without the power to create money and demand tax no Government is sovereign, and therefore could not survive. Money authorisation and issue, and tax define Government. Government power and authority are essentially and necessarily a function first, of money and tax; necessary and sufficient conditions. They are the ‘sine qua non’ for the capacity to govern – at all.
If you are going to criticise here, and I am happy to engage in debate; it helps if you actually understand what is written here. It appears you simply don’t, or can’t. Your comment is either confused, or obtuse.
I have blocked him, not least because all the classic signs of a troll have been shown. He is also a waste of all our time.
I note your failure Colin to talk about private sector banks being allowed to blow an inflationary house price bubble for over fifty years. Why is that? Why are you not making the wider point that too much creation of money by either the private or government sector can create inflationary problems? Why can’t you think in a balanced way?
Thank you and well said, Schofield and others.
I would just add shares and bonds to the property bubble you rightly highlight. That made many banksters / financiers look like masters of the universe. Deregulation, low interest rates (that also sparked commodity bubbles, including necessities), political influence / state capture (central bank independence, forcing investment in capital markets and preventing government banks from offering better terms for loans and deposits and even basic banking services), bribery, dirty tricks (versus Eliot Spitzer in NY) and tax evasion made for the super profits.
It’s often said that the most dangerous weapon of mass financial destruction is a mortgage, not a derivative.
And mortgages are easily turned into derivatives – MBS/CDOs (2007/8). American politics has in my opinion, never recovered from the US Treasury allowing Wall Street to unleash a wholesale policy of foreclosure over the broken mortgages littering small town, Main Street America. Potteresque Armageddon was brought to iconic exemplar, if mythic Bedford Falls. It led us down the rocky road to Trump.
That betrayal of Main Street, I submit has never been forgotten – or forgiven. Oh, and that was Obama’s Treasury, incidentally.
Perhaps Colin Howell would like to read this short summary piece:
“6 Main Types of Inflation” [1]
To remind himself that Government spending is not the only recognised factor in price inflation. It is not even the main one.
It seems highly likely that the recent bout of price inflation is largely attributable to commodity price hiking by speculators and excess profit taking by sellers.
See for example the work of Isabella Weber [2]
[1] https://www.economicsdiscussion.net/inflation/6-main-types-of-inflation-economics/26074
[2] https://en.wikipedia.org/wiki/Isabella_Weber
It was William Beveridge (1879 – 1963) whose 1942 report “Social Insurance and Allied Services” (also called the Beveridge Report), laid the foundations of the National Health Service and welfare state. He recognised that:
“There is no financial limit to spending by the State within its own borders, as there is a financial limit, set by their resources and their credit, to spending by private citizens.” — Lord Beveridge, Full Employment In A Free Society, Publ. 1944 Bradford and Dickens, https://archive.org/details/in.ernet.dli.2015.228995/page/n127/mode/2up?q=%22financial+limit%22
Clement Atlee’s government created the NHS and welfare state, also nationalised the railways, and started building 4.5 million homes (80% were affordable housing), despite Britain being effectively broke after the war.
If they could do it in then, a more prosperous Britain could do it now, ending the need for foodbanks, ensuring people had affordable housing, shorter waiting lists ,free dental health, and so on. The government chooses not to, not because it can’t, but because it wants austerity.
Beveridge was right
When Attlee won the election in 1945, Britain’s Debt/GDP ratio was 250%. And the NHS was still founded.
Britain’s economic predicament was difficult, but that was far more a function of the damage, destruction and exhaustion of a six year World War on Britain’s economy and infrastructure, or of the lack of investment in anything but fighting the war, and the decay of infrastructure, poorly addressed since before WWI; and compounded by the critical external problem of Britain’s eternal need for imported commodities and goods (and therefore, foreign currency); i.e., a balance of payments problem (which was the main focus of attention by Government for decades). These factors were more telling of Britain’s difficulties, than the plain internal debt problem; which is always manageable.
Absolutely and 100% correct. I find the phrase “£[x]bn black hole” – as used by almost all economics journalists when talking about fiscal deficits – just ridiculous. If I were running (e.g.) the BBC economics department I’d bar journalists from commentating on economics until they’d watched a complete set of your videos Richard, if they used phrases like that.
Thanks Howard
Appreciated
A good analysis of the issue. A major effect of the ‘running out of money’ myth is that quite a lot of people fall for it. I have had discussions with people pointing out that the £22 billion black hole is not quite what it seems and that the fiscal rules etc are a work of fiction. But get the response ‘Well we can’t spend any more so cuts are needed’. Very frustrating!
I don’t know if you know, but some of your videos can be found quite high on this newsfeed.
https://www.newsnow.co.uk/h/Business+&+Finance/Economy/International/UK
I was unaware
What I do know is traffic is growing
500,000 in the last month
Lot’s of good posts here today.
Advocating that your state can run out of money (if it is a sovereign currency producing nation) should be judged as seditious, unpatriotic, treasonable and traitorous because what you are doing is undermining the power of your country at home and abroad. It is also undemocratic.
Currency is sovereignty.
End of.
I can’t agree with this level of intolerance. It isn’t going to happen, and it should not. If that is the way to go, Richard is wasting his time, especially with the videos. If we do not believe in explanation, education and debate we have already lost.
Your answer doesn’t solve anything. It demands silence and passivity, not understanding or acceptance. They tried oaths of allegiance in the seventeenth century. It didn’t end well for the drafters of oaths. And their replacements in power began drafting the opposite oaths in turn, proving only they had learned nothing. Vindictiveness is not a wise instrument of policy.
I rather thought PSR was being at least a bit tongue in cheek
He can confirm though
I was very happy to see PSR’s return to the comments, after his long absence, but some of the recent comments make me wonder if he isn’t being impersonated. At one point, Richard, you wisely asked for some toning down of the comments and I wonder if it isn’t time to repeat the exercise.
I do when I feel ur appropriate
And there is no one who is beyond being deleted every now and again
Blimey……………………
Look, I’m very militant about this issue but not dogmatic. But you deserve an answer.
I feel that I am pushing against something here that is……….I don’t know…………well, what do you want? How long is it going to take?
My militancy comes from the evil double standards and hypocrisy I see in the existing system and these people and what they do are to me exactly as I describe. Their hyper-individualism is inconsistent with democracy and a stable state and I will call them out. And also how those malpractices endure. Yet here I am basically being told that I’m being – what? – ‘intolerant’?
My view is that there are periods of egalitarianism and periods of authoritarianism – or if you like , periods of more equality and periods of less equality in human history. Those periods in human history will follow each other as night follows day John Warren no matter what a non-entity like me says. Or they should? Or will they, this time, hmm? Let’s hope so eh? Lets hope the long dark night ends by the sword of reason eh? Has the world ever been this unequal? Has it ever been underpinned by the magic of digital technology?
It just so happens that we now find ourselves in the latter, a period of rising inequality and increasing instability.
The welfarism and progressiveness we saw culminating in the post war period was one of the most peaceful transitions to a better world I can think of in the West (however, what went on elsewhere during that time was another matter). No one went about killing Earls and Dukes and factory owners. There was no violence. No guillotine. Dissent for sure. All I saw was fairness and sound thinking.
And yet, when you think about how that period was and STILL IS portrayed and distorted by our political and economic enemies and how it has been rolled back for NO GOOD REASON – would you call those responsible ‘tolerant’ John? Would you call them ‘reasonable’, would you? ‘Congenial’? How about ‘convivial’? As they create their own reality and negate the realities of others?
I don’t know…………this ‘thing’ I keep coming across here every now and then – I don’t know what to call it and I don’t want to be offensive.
All I know is that I can see the ghost of Carl Schmitt sitting there, smiling, chuckling and shaking his head as we ‘progressives’ have discussions like this. He’s seen it all before.
When someone is abused and turns around and says ‘No’ and calls time on their abuse – is that being intolerant? How are you supposed to say no?
Because I don’t know about you but I’m sick of being abused by government, sick of being abused by the financial sector, sick of ……………….well, we talk enough of what we are sick of here don’t we?
The people we are dealing with have everything and yet they always want more. They’ve become like machines and to stop a machine you have to turn off the power – you can’t ask it or talk to a machine doing what it does automatically. And what powers these ‘machines’? Money. So we have to take their money from them somehow and stop letting them twist things like the law and policy to make themselves unaccountable and do ridiculous and harmful things.
These neo-liberals, these fascists only exist John, because we let them exist. We do! We tolerate them. Yet they will not endure us. They will lie, steal – anything to deny us as their eyes fill with pound signs. What to do?!
One final matter.
I get the impression that this is a broad church of people – some intellectuals, some highly skilled, various degrees of angry, fed up or speechless. It can be difficult rubbing shoulders with those you are the opposite to. I believe that all are valid and even the most just collections of people needs its bad cops as well as its good ones – those prepared to get dirty with the pig so to speak.
So, have a chat with Richard John, and if you both feel that I’ve gone too far, or that I’m not the sort of person you want here, I’ll go. Honest! Or you can leave yourself maybe? Though – thug that I am – I always read and appreciate your learned posts and would miss them.
I’ll leave it with you.
PSR
I know you get heated
Maybe I should have edited or not posted you this morning
But we understand why you are heated
Keep coming, but I will moderate you when necessary – but you already know that
Richard
The last thing I would want to see is a R. Murphy thread with PSR no longer making comments. He is one of the reasons I feel it worthwhile to comment at all (very rarely) and was the person who convinced me to read Christine Desan’s “Making Money” (although very slowly). My own background is one of total ignorance of economics and monetary theory, in which only this blog has served to educate me. And it is through people like PSR (and John Warren, and Clive Parr and Mike Parr and Ian Tresman and, and, and …) that my education continues. I state quite unreservedly that this blog is one of the few sources of information that I absolutely trust and value. I simply make a plea that we avoid the extremes of discourse and avoid painting anyone with alternative opinions as any kind of enemy or subversive.
Fair comment
There is a video coming on this, soonish (I have production lists now)
I am not going to discuss this further, nor discuss it with Richard beyond these few words (it isn’t my blog, I simply offered my opinion, because I was a little shocked; that is all). You made a point, I think it was quite wrong, and I felt sufficiently moved to express it. I do not like to see the intolerant extremism of the kind I oppose, matched by the extremism of those whom I thought and hoped rejected extremism; and that is the beginning and end of my point. And yes, “[a]dvocating that your state can run out of money (if it is a sovereign currency producing nation) should be judged as seditious, unpatriotic, treasonable and traitorous”; seems to me blatantly excessive and inappropriate comment, but is not tongue-in-cheek; because if someone from the extreme right said that (the boot was on the other foot) – such an excuse wouldn’t wash. This whole discussion, howervr is now theatrically over-ripe.
“Blimey” suggests you are surprised by my reaction. I have no idea why. But I do not intend to turn this into a personal Jacobean drama, nor into an absurd hand-wringing exercise about people leaving. That hyperbolic approach is, to me. part of the problem.
I have made my point, and said all I wish to say on the matter.
Shall we move on
I think PSR’s tone was wrong
I made a mistake posting it
But he has explained his frustrations
Since first learning about MMT, I’ve often wondered what people who don’t accept the premise think money actually is, and how it’s created. Do they imagine that somehow, in the private sector, money is created by businesses doing business? Do they think that “wealth creators” make it, that economic activity in itself causes more money to come into existence? Or do they imagine that it’s still asset-backed like the old gold standard?
I’d love to see an attempt at an explanation from a politician or economist who rejects the explanations given by MMT (or indeed by the central bank itself).
So would I…I am not sure such descriptions really exist
But someone out there might….
What you’re basically saying is that the government can never run out of money, but the money that it does have could be worthless.
Which is a little different from saying that the government can (effectively) run out of money.
Think Zimbabwe in 2008 for an example – a sovereign country with its own currency.
It could never run out of money (by your definition) but that money was worthless when it mattered.
I said nothing of the sort
I said that could only happen if they’re was a collapse of good governance – and the chance of that in the UK is, I suggest precisely zero
So you are making a wholly false claim
Good governance should always include concern for, and action to protect, the wellbeing of everyone – especially those most in need of protection – within the jurisdiction of the governing entity. This has not existed at central government level in the UK for at least several decades.
Clearly then, the good governance to which you refer relates relatively narrowly to financial, monetary or economic matters.
Such is my ignorance of governance in this context that I (and perhaps others among your followers who share my ignorance) would benefit from understanding the elements of good governance whose collapse alone would permit a sovereign country with its own currency to run out of money.
The avoidance of borrowing in any other currency than the country’s own is understood but are there other essential rules?
I realise that I am coming to this rather late and I’m sorry to trouble you, particularly if you are still suffering from an ear infection; so please feel free to refer me to an appropriate other source or perhaps the key words to search for a previous post.
The essential rule is having a proper and transaprent bugeting and reporting system, and ditto re tax, so that weaknesses are clear
If there is accountability the risks are low
But that is a gross summary of a big peiece of work I am currently engaged on – which will be aired here eventually
I can sympathise with PSR. I am sick of hearing so-called sensible people parrot the money myths, and despite leading through the logic of money creation etc, at the end them still aver ‘well you can’t magic money out of thin air’. I am particularly tried by members of my former political party who not only parrot these myths but have also (bar one female) abrogated any moral responsibility for Gaza. What horrifies me is that LINO are leading towards being a partner in a Middle Eastern war, simultaneously as trying to give WMD to Ukraine.
I had a long conversation with my ex copper sister and her ex forces partner (not bleeding heart liberals), where they pinpointed the nature of modern politicians – school, university, SpaD or finance, parachute into power. No real life knowledge, and negative statesmanship, politics is a game of power, not governance.
They are right
The single transferable party in action
Richard your regulars sometimes outdo themselves with links and insightful observations – this post is a good example!!
As for your post. Perhaps I should have said 28.5/30 rather than 28. Developed countries had an economical miracle in ww2 because of what you said perhaps in part because there was no interest on reserves. That is a lot of evidence for your position!