We have published a short video on YouTube and many other channels last night, which refuses to embed here, so please click the link to watch it.
This was the message:
I did, of course, challege that narrative in the video
This is the transcript:
You've heard it being said time and time again. Politicians say there is no magic money tree. They repeat that whenever spending is questioned. But here's the truth: there is a money tree, you are just being told it doesn't exist.
In simple terms, the UK government creates money every time that it spends. It instructs the Bank of England to make a payment, and the Bank of England increases its overdraft, and doing so, it creates money because that's what happens every time any bank anywhere creates an overdraft.
The government always spends first and then taxes later. Taxes, as a consequence, don't fund spending in the way that households fund bills. Government money isn't found, it's issued.
Money creation happens whenever the government spends, but it's most apparent during financial crises, during pandemics, and when stabilising banks or markets. In those situations, the government always spends, and nobody asks “Where does the money come from?” Why? That's because they understand implicitly that the Bank of England has this capacity to provide money to the government whenever the government wants it. Get this wrong, and you cut support when it's most needed.
The phrase “No magic money tree” isn't about economics in that case; it's about political framing. It's meant to make public spending sound reckless when the state can and does create money every single day.
The real question is not can it do so, but who it's created for, and why?
Those are the questions we need to ask. We don't need to deny the truth that the government can create money in the process of doing so.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
“[The government] instructs the Bank of England to make a payment, and the Bank of England increases its overdraft, and doing so, it creates money”.
The issue that is almost never stated is that, when the government has an overdraft with the Bank of England, and unlike everyone else, it pays no net interest on that overdraft. That’s because it owns the Bank. Perhaps the Bank may charge the government interest, but this is pointless sophistry because any such interest is then returned to the Bank’s owners the government.
Given that the government can have an unlimited, interest free, overdraft, one is forced to ask why the government would “borrow” money by selling bonds?
It seems there is a Magic Money Tree and we are being lied to when politicians say it doesn’t exist.
Thanks
However, the increase in aggregate balances in Commercial Banks’ Reserve Accounts (which is always the direct result of Government spending) attract interest at the Base Rate.
Now, this does not have to be the case but while it is, interest is paid whether on gilts at whatever rates gilt auctions happen at or at the Base Rate.
A very fair point. 🙂
As you say the Bank (a.k.a. the government) does not have to pay interest on reserves. I suggest it is time it stopped.
Why does the bank borrow money by selling bonds? I have heard that Japan has a huge proportion of its debt owned nationally (I think I am right in this). Is the reason to sell bonds with interest to invite foreign investment? Is there a national benefit to these bonds?
Governments do not sell bonds because they “need the money” in the way households or businesses do. Spending already happens when the government instructs its central bank to make payments into the banking system.
Bonds serve other purposes.
First, they help manage interest rates. When government spending creates reserves in the banking system, selling bonds swaps those reserves for interest-bearing assets. That helps the central bank maintain its target rate.
Second, bonds provide the financial system with safe savings assets. Pension funds, insurers and banks want low-risk instruments in which to store wealth.
Japan is a good example: most of its government debt is held domestically by Japanese institutions. That shows bonds are primarily a savings vehicle for investors rather than a funding necessity.
Foreign investors can buy bonds, but attracting them is not the main reason they exist.
Correct.
I would also add inflation control. Yes, draining money via taxation is the principal means of controlling inflation as is the level of interest rates in restraining the real economy…. but bond sales are a quick and flexible way of draining cash when tax changes are slow – you can’t be changing tax rates every few months. Of course the volume of bond sales and the level of interest rates are intertwined…. but there is a subtle distinction.
Another excellent post.
I think I have a good basic understanding of bond issuance but fail to understand why the government doesn’t just set a target rate (a big topic in itself of course) and then offer bonds at that rate: if the primary market does not bid the offered price or higher at auction then don’t sell. In the end the market will buy what they need but interest rate is not affected by volatility in the secondary market. I know the government has a daily full funding rule but that is unnecessary as we well know.
In principle, what you suggest is possible. The government could simply set the rate it is willing to pay and decline to sell if bidders do not accept that price. After all, it is the issuer of the currency and does not need to “raise the money” in advance.
In practice, however, the UK operates a full-funding rule, meaning the Debt Management Office sells the amount of gilts required to match the deficit. That convention reflects the orthodox view that government borrowing must appear market-determined. This of course is the essence. This rule is utterly unnecessary.
The Bank of England could also stabilise yields through purchases if needed — as quantitative easing demonstrated. So the constraint is largely institutional and political, not financial. The current system preserves the appearance of market discipline rather than reflecting an operational necessity.
This is the way things used to “back in the day” (pre 1986). Depending on requirements the Government Broker, Mullens, would come onto the Stock Exchange Floor (wearing a top hat to indicate he was on official business rather than for its other clients) and “tap” the gilt market – an offer of bonds at a fixed price that the market could take or leave. (If the market declined to take it up then it would mean a bigger overdraft on the Ways and Means account… no big deal).
It it is only the relatively recent neoliberal worship of “The Market” that has led to the current system.
Thank you. I was unaware of that.
And was the offer always taken up or did some bonds offered remain unsold?
I’m writing a song about this called ‘You’ve Been Having Us On’ – I’m still working on the lyrics but MMT and Rock and Roll are strange bed fellows.
And there is another problem…………….I can’t bloody sing!!
Mind you, the chord progression is rather good – melodic etc.
🙂
The only magic about the magic money tree is how it always appears when there’s a war or banking crisis and then disappears when money is needed to help people,
Indeed – so now (today, Saturday 14th) the news is that Chancellor “Rachel from Accounts” says she has ‘found the money’ to help people with fuel bills that aren’t limited by the Price Cap mechanism (ie. those with oil- or kerosene-based heating).
She doesn’t seem to realise that she could ‘find’ (ie. create!) the money for lots of other things that are worthwhile: no, she says ‘we can’t afford it until we get growth’…
Why do people want the money/credit that the government issues in the first place? Especially historically, when did peasants decide that they wanted the king’s money? Why did they want it?
The short answer is: because the state required people to obtain the currency in order to pay taxes and other obligations.
Historically, most peasants did not initially “choose” the king’s money in a voluntary market sense. They needed it because the state demanded that certain payments, taxes, rents, fines, or legal penalties, be settled in the official currency issued by the ruler. That requirement created demand for the currency. 
Once taxes had to be paid in that money, people had to earn or acquire it. They might do that by selling crops at market, working for wages, or trading goods. In medieval Europe, for example, peasants often sold produce in order to obtain coins needed to pay rents or taxes. 
After that initial demand existed, the currency became useful for other reasons:
• it allowed trade with strangers without relying on trust
• it was accepted widely because everyone needed it for taxes
• it simplified accounting, rents, wages and market transactions
So historically the process was usually:
1. The state imposes obligations payable in its currency.
2. People need that currency to settle those obligations.
3. The currency then spreads through markets because it is widely accepted.
In other words, people used the king’s money not because they spontaneously preferred it, but because the political and legal system made it the thing everyone needed. Once that happened, it became the natural medium of exchange.
Prof. Christine Desan’s book Making Money is excellent on this topic
Thanks
So, in other words, it’s all about Money-Tree Policy.
….I’ll get my coat 🙂
🙂
Wouldn’t the World be a better place if bond traders deployed their talents on something more socially useful than faffing around with other people’s IoUs?
Do you think we can do without pension savings?
Maybe. How about moving towards a system where all workers can enrol in a decent public sector pension scheme, and for Government to provide support to the remaining, much smaller, private sector providers to invest in socially useful projects like the Green Transition?
We had a state earnings related pension scheme once upon a time. I would support it three introduction. I have outlined my ideas for private sector pension investment in the taxing wealth report
Funny that Magic Money Tree and Modern Monetary Theory have the same acronym
Thanks Prof, and really interesting posts, I can actually follow this stuff now, if by reading slowly.Yay!
And to help me get this I imagined the Government and BoE are like Mr and Mrs Jones – one household. Hence debt and interest rates can’t apply to Mr and Mrs J when money is owned and shared in common. It’s really just one pot.
i like link to YouTube and read comments in this community, lots of interesting comments, there was one not so nice, who conflated socialism and how money actually works.
(Maybe a short sentence or 2 to act as public education for key message reinforcement that this is how money actually works in the real world, and it’s apolitical, how government money is used can reflect political ideas on the right and left wing, and indeed anywhere in between. I remember you saying this and thought this was a powerful point, which countered MMT myth that it’s just a socialist blank cheque spending spree. Rather than a neutral mechanism like gravity. Apologies for longer post just wanted to share what helped me learn – as an unaware person)