Without a radical reform of the monetary system, deficit spending and accumulation of public debts will continue to accelerate regardless of who is in power. The problem is systemic.
“More than 100 years ago, Lord Acton wrote: “The issue that has swept down the centuries, and which will have to be fought sooner or later, is the people versus the banks.””
This lays it all out in a way that’s hard to refute. The debt curve can’t be flattened, not because politicians are lazy or greedy (although sure, some are), but because the system itself demands it. Fiat currency plus fractional reserve banking is like a treadmill that only speeds up the longer you're on it. Whether it's red or blue in charge, they’re both strapped into the same machine.
That whole bit about the deflationary gap? Spot on. People instinctively know “saving is good,” but on a macro level, unless those savings get reinvested fast (and wisely), the whole economy starts starving for cash.
And yeah, we’ve been sold this illusion of choice between “capitalist” and “socialist,” but as you say, the system steamrolls everyone down the same path. You will get government expansion, you will get debt, and the only real variable is whether that money flows through Boeing and Raytheon or through food stamps and health care clinics.
At the end of the day, unless we overhaul the actual plumbing of the system (money creation, credit, and the whole fiat game) we're just arguing over the color of the curtains in a house with termites.
"People instinctively know “saving is good,” but on a macro level, unless those savings get reinvested fast (and wisely), the whole economy starts starving for cash."
Is this why Von der Leyen said that for the Commission’s re-armament program of Europe, the people’s "unused savings" will be utilised, and she was referring mainly to people’s deposits in bank accounts? She stated on X: "We'll turn private savings into much needed investment."
I guess we 'The People" can save voluntarily and allow that money to be invested, or the government will intercede and do it for us.
Problem is when government chooses how savings will be invested (wars/military armaments/biowarfare preventative (jabs) measures, etc.) that people say 'NO' and try to take back their savings for a different use.
Then government (doing whatever the hello they want) goes ahead and prints and devalues your savings whether you like it or not.
Either way, "The People" lose, either by savings being manipulated, or devalued.
I had to laugh at that Leyen comment. As if the peoples bank saving weren't mostly already being utilized by the banks for other loans. I dont live in the EU but I truly wonder how many people look at Von der Leyen and see a person of intelligence.
Alex: Please grab a copy of Dr. Stephanie Kelton’s book, “The Deficit Myth,” and acquaint yourself with MMT. Our entire concept of money is currently fraudulent.
I'm sure Alex doesn't or why would he keep suggesting that fractional reserve banking is relevant or indeed actually describes how money is created and how banks work?
All money creation in modern fiat economies is achieved by double entry bookkeeping. Either publicly owned Central Banks i.e. governments or privately owned commercial banks.
Step 1 This factual observation about how the real world of money creation works is the first step that MMT uses to construct the rest of it's "theory".
Step 2 is the suggestion that government taxes cause / force people to have to accumulate the money the government has authorised commercial banks and the central bank to create as legal tender to pay their taxes.
Step 3 is to then notice that according to the rules of double entry bookkeeping, when taxes are paid i.e. returned to government that tax money is destroyed along with the tax demand that was created to collect it. As such these assets and liabilities must cancel out to zero.
Step 4 is to finally realise that taxes can't fund government own spending.
What is then done with that shared foundational reality is of course up for debate!
Of course Alex knows about MMT, he was living and working right at the heart of the financial system. What he has is practical knowledge, which is often of more use than merely theoretical.
I like much of MMT myself, btw. And think its insights could be used for practical benefits - to some extent.
That 'to some extent' is the nub.
MMT also has its critics, and I'm not talking about neolib stuffed shirts who want to pocket all the benefits for themselves.
Currency once created becomes subject to the classical laws of economics - it has real world effects. How many times it circulates is important, as is the amount being created - one cannot print money willy-nilly to prosperity, or else Weimar Germans and Zimbabweans would be the wealthiest people in history.
Note that every serious person who talks on the MMT level also mentions using it to invest in productivity. Note also that the most successful global economies DO connect savings to investment: the German Landbanks (Local Credit Unions in english), are quite explicitly the reason for the formerly German economic success story.
Losing that grounding has pushed the Anglo/Western economies into dire straits.
Note also that Russia carefully balances its financial books to avoid this very problem: and the ruble is now one of the, if not the hardest currency on the planet.
I'm not saying MMT is WRONG, just that it is only part of the picture.
Agree, MMT simply describes double entry bookkeeping i.e. the creation and destruction mechanism, (assets + liabilities = zero) and thus challenges the incorrect assumption that gov spending is restricted by tax collections, which isn't correct: tax liabilities are destroyed by matching them to the demand assets when it's collected.
Alex; a complication of your model is that the US, and nearly all Western economies, are NOT "Saving". They are instead borrowing like mad.
Using your model (The map is not the territory; I know. :) ), in theory such a system COULD pay down the state debts, as therefore there is more economic activity that should strictly be generated in that closed system.
The obvious answer is that the state instead of funding the people, are instead funding the private corps and billionaire mega-wealthy, who are removing the 'investment from debts' from circulation, into their tax-evading bank offshored bank accounts.
I never knew Hayek was so hot! Perhaps her most ardent admirer, Thatcher, was a secret lesbian! ;)
In the 1970s when I did my Economics A-Level we were taught that the economy suffers from Stag flation - High inflation & low growth, and that therefore the Phillips curve trade off between unemployment and inflation wasn't working.
After 3 state funded years at University I was a Bond Trader on the London Stock Exchange. I cut my teeth arbitraging Big 98s against the Long Gilt future (Treasury 15 1/2 % coupon 1998 gilts).
But gradually the Economists got it right, Inflation fell, growth was maintained or grew and the coupon rate on bonds fell from 15 and a half to almost zero.
Hurrah - perhaps. Inflation and low growth has been replaced by low inflation and higher growth. Magic.
But... I stopped being a bond trader and took an ordinary job. I learnt about Wealth Inequality. In particular I discovered that Inequality had fallen and fallen constently from the extremes of the 1930s to the mid1980s and then completely reversed itself to 1930s levels since.
Indeed during the rapid growth of 1980s onwards, real GDP had doubled but median Income per head had gone up only 10%.
All this low inflation high growth had done nothing for Most of the population. Whereas decades of stagflation had done wonders for the many at the expense of the few. (No wonder the elites hated it ).
It isn't surprising and Alex's article has already laid out the differences.
In the 1970s deficits were to created pay benefits to the poor. And what do the poor do with more money - They Spend IT. How awful, and inflation results.
By the 1990s the Laffer curve was accepted by all. Use Deficits to cut taxes on the rich and we get growth! All the money goes to the already rich - so no one spends it (except on ever more expensive housing and investments). Zero inflation - Perfect. QE is even better - pure asset price pumping with no impact on the cost of eggs or farmers labourer wages at all.
Socialist Stagflation is vastly superior to capitalist growth and low inflation for most people.
In a sensible world we would adopt what I would call 75% GDP. The wealth created for the bottom 75% of the population. I think the top 25% can take care for themselves, it would be difficult to challenge this on any democratic grounds where the targeted minority is the top quartile in earnings. Only improvements on "75% GDP" per head should be targeted, and rewarded by re-elections.
In that period there were also two large macro effects: the rape of the former USSR and its resources and people; and the discovery of North Sea oil that supercharged the City of London (And the related Clintonite deregulation of banksters).
To agree with your main point, circulation of currency/wealth can be related to the flow of blood - anyone whose blood pools in one place, such as the 'head', will soon die.
Money pumped in at the lower extremes will circulate through the system, creating economic growth *Every time* the currency changes hands. If it circulates enough times before being stored as 'savings', it can actually pay for its own creation.
Pumping it to the already wealthy so that it *immediately* goes into savings, as you say "Reduces inflation" - but does bugger all for the economy or population.
So yes North Sea oil helped reduce inequality a little, but still only the tail end of a 50 year run. But from memory (and I was there) it was deregulation that supercharged the City of London not oil. City salaries were probably the first sector where premium salaries for a few went through the roof, and then every profession followed in the 1980s. Nowadays a School headmaster earns 6-8 times that of an ordinary teacher. then it would have been twice. (and that is the state sector).
Oil & Gas production actually peaked in 1999 not 1985 but revenues did peak in the late 80s in real terms per your link.
I joined BP in 1978 and was paid one of the highest graduate starting salaries around. The company couldn't recruit enough engineers. By the late 80s that had all changed though and the banks in the City were sucking in talent and paying huge salaries. I agreed it wasn't oil revenue that supercharged the City.
My ONLY disagreement with that is that N.S.O. "reduced inequality"; like you I was there too, and I can clearly recall the sudden massive increase in legal usury - you couldn't move past the letterbox without a new influx of letters begging you take on a new credit card, HP, 'catalogue goods', or overdraft. All at "Low low" deregulated usurious rates.
While you can spend debt, it doesn't reduce underlying inequalities. Only wages and benefits (With some help from reduced cost of goods and services) do that.
Everything else - abso-fucking yeah. The bastards.
Well North Sea oil gave the government the opportunity to spend more on something new. And up to the moment of peak production - 1985 - the UK was still getting less unequal. Quite how you allocate the good influences from the bad is up to you I guess.
I don't remember the money lending - my salary doubled twice in 4 years after which I still was barely being paid more than the new trainees - so I was hardly maxxing out my credit card.
I'll repeat we should only count and monitor the wealth of the bottom 75% of the pop. The rest doesn't matter in the least - they are all doing well. If trickle down works (it doesn't) then it would show up in the bottom 75%. So stop counting the bit that doesn't matter.
I think I agree… or is it too convoluted?…. No, I agree in part! Your experiences are a definite learning curve. And explains why people have different perspectives on economic matters, problems, and their solutions. I commend you from trying to get your head around it. I might have a different understanding that may get us to the answers we need . I hope you don’t mind me putting my reasoning to you?
Firstly, we must look at the very basics. Money is supposed to be a fair exchange of work, between you and me. The free market allows us to negotiate that fair exchange. However it has become unfair and in most extreme cases no exchange happens! It’s just taken!… so the basics are being undermined.
For example is David Beckham worth 1000 surgeons or is a politician worth 10 nurses and do on. These inequalities eventually play out. We hear ‘the rich are getting richer whilst the poor get poorer’. As money is finite, that’s true. One gets richer while the money to spread around the rest diminishes.
This is what we see play out now. It’s taken many, many years, but eventually it has become clear that the imbalance is visible. Mega rich cheek by jowl with mega poor. Everywhere. It’s breached the staff with the UK that we borrow off those mega rich holding must of our pounds, to pay our deficit. We have done for the past 25 years borrowed enormous sums as the rich pot grows and the working pot of the serfs, us, suffer a diminishing pot of money as we pay those debts back plus interest! Do the rich do get richer.
The Spending of money is key to any economy. If you font have money and spending you font have an economy for fair exchange. And if you constantly reduce the pot of money you automatically reduce the ability to spend. In turn it’s clear tax receipts will also fall to a level that can no longer pay enough in tax. So the government do three things. Cut expenditure. Raise taxes or borrow our own money back!!
Now in the past 25 years, but I’m sure it’s been this way for longer, the governments has reduced spending on services which is why the NHS can’t do its job, or we have no war ships or not enough Police. Wherever you look, services have been decimated. Look at crumbling schools roads and hospitals. So Cuts have already taken their toll. Yet economists now want drastic cuts like Argentina or Greece. Well I don’t see why we are the same basket cases but we will be if not stopped.
The second thing they do is increase taxes or make up different taxes.the Laffer curve explains that there is a point when excessive tax becomes less productive. We have already reached that summit and we’re on the way over that hill!
And the third way is borrowing. We are now in debt to the tune of £3,000,000,000,000.00 trillion pounds. We are near to borrowing all our money back to the tune of 100% if monthly borrowing. So we borrow not to pay services and improvement or debt repayment but all to pay just the interest on that borrowing. It’s madness.
So here we are, looking down th ed toilet that Argentina has had to go through just for a handout from the IMF.
This is unsustainable. But, where is all our money? According to BoE there is s as optic £18 trillion pounds out there in the aether. So where is it? Who’s got it and why isn’t it in our pot that pays taxes. Well, that’s easy. As I have said it’s in Bank accounts abroad, not here. It’s in bank accounts here, but not being spent! And it’s hidden away from the view . But it’s dodo in people pockets and purses. But in the main most people including the poor and middle classes the money is being spent in full every month. People tend to spend all their income. Some don’t. They pay no tax in money not spent. Money unused, idle or hoarded. Or hidden abroad.
Because there is insufficient money swishing around and rotating in our working pot that pays tax to the exchequer is the reason why we can’t pay our way. The monthly money is devoid of the major part of our currency so no wonder we can’t pay our way!
We live in a democracy. How snd why do we allow our sovereign money to be held away and outside our grasp? And why do we have to borrow it back?? We don’t have to.
I think I should highlight that there has been plenty of growth. In 30 years or so GDP has doubled. But median income has grown maybe 10%.
The pay off between the economists measure, GDP, versus the democratic measure, median income, is not direct not particularly complex.
Prior to Margaret Thatcher and monetarism, all governments (all stripes) went to boost state spending as they though it was a particularly cost effective method of doing good (and NHS certainly is). They struggled with wage and consumer goods inflation because they were spending their budget deficits to boost demand for people and consumer goods).
Since then (and I voter for Thatcher and in many ways she was a good leader IMO) governments have targeted GDP and stock market indexes instead. Inflation is then much easier to control or rather the inflation in assets prices - stocks and houses is perceived to be good.
So the problem is that while some of the increased wealth is there and being syphoned off by the rich, much of it just isn't. If governments switched to balance budgets or even paid down debt would that hurt GDP - certainly. Would it hurt median incomes and the wealth of the bottom half? - only if governments cut spending rather than just increased taxes.
Would it hurt asset prices - housing and shares - yes absolutely. That small proportion of the population who has done incredibly well will have much of their lifetime gains reversed. Their houses will still have 6 bedroooms, they just won't be worth low 7 figures anymore.
The fundamental problem though is that economist have persuaded the world to use GDP as the main metric to target and consumer inflation. They should be using median wealth (or 75% wealth pp - ignore the top quartile completely - they can look after themselves) and properly weight assets that normal people should aspire to (housing, pension contributions) into inflation indexes.
Oh and just to say, inflation accounts for the higher GDP. Mechanics say earned £100 per week then in the seventies and maybe £1000 now. Snd wage rises means inflation is a result. As costs go up do too does wages snd inflation. As well as GDP. So it’s like a dog chasing its tail. The free market ensures it. Thatcher was imo useless. She sold off the family silver and decimated industry. She took away exchange control regulations in 1979 which allowed our money to hide abroad. It’s those actions that mean we are in debt now and rely on foreign interests to run our country. We had a sovereign currency that stayed in the uk. Now we don’t. And that’s where our money is. Hidden abroad out of our economy and not being spent. The same monetary system was then as now. The rich hold on to most our money and we try and pay sufficient tax on a less than efficient monetary pot. The same answer for then as now. Make all money rotate via spending it all every month creates the most tax revenue possible. Then and now we have an economy underfunded because most our money is not being spent and is in the hands of the rich who don’t have to spend it. Making us then and now devoid of it.
Again I think I agree. GDP is not accurate. It contains the borrowing they do! It’s like valuing your wealth by including the money owed!
I think you can use observation rather than intricacy. There is approx £19 trillion pounds out in the aether. But there is so much of that sitting outside the tax paying income, Reeves can’t get sufficient tax revenue to pay our way.
Government spending, is roughly 1.2 trillion per year. Yet with all that money that should be swishing around we only get £800 billion in taxes and have to borrow the rest. But spending is about 40% of GDP. And GDP is about 3.6 trillion. But with a possible 19 trillion put there then it must mean that not all of it is in play. We should be able to gain sufficient tax take to cover the 1.2 trillion the government spend if, the whole or main part of that 19 trillion is in play.
Thats my point. It’s like a diesel train leaving Birmingham for London with 20 cars. And it runs out of diesel at Northampton. Instead of putting sufficient diesel in to begin with the government decides to do the journey with 10 cars so it reaches London! You can make cuts to expenditure but why? Just do the rich can hang on to it?? And so we get in debt and can’t get a good pension or NHS!
We need all our money in the pot being spent do jobs can be for life and pensions can be £500 per week not £175. That’s my view. It’s got nothing to do with cuts to make it fit. It’s all about earning sufficient to pay for everything and more!
It seems to me that what you are talking about is an economic system which we once had in America, say circa 1875. There was no Federal Reserve or Income Tax, and yet... and yet even back then there were major financial disruptions, what were called back then, "Panics". But these were caused, AFAIK, by the banks. As Lord Acton pronounced, solemnly “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”
Although you do recognize that we have a fraudulent monetary system, and that's throughout almost the entire world, except for a few that still need to be bombed to bring them under control, you don't see that as the root cause, which it is. I can see why, if we take the way you make/made your money into consideration. Not trying to be cynical, just telling how it is. Sincerely hope you'll make much more, especially by educating people via substack etc.
Anyway, we can go back centuries, but all (financial) crises, wars, plandemics and so on, have always benefitted "the happy few" or as we called them in ancient times, the money changers. That's not a coincidence, as it is initiated, instigated, staged and/or created by them. Over the centuries they became much more sophisticated in it, by delegating the dirty work to economic hitmen, the IMF, Worldbank, WTO, secret services, NGOs and/or US troops.
As a trendwatcher you know the money supply has exploded over the last decades and in particular post 2008 and 2019 - the plandemic was indeed yet another financial (repo) crises "sold" by yet such another globalist entity called the WHO. This in order to once again steal trillions of taxpayers' dollars to fill their pockets and cover up for that bankrupt system. An unsustainable speculative financial system based on derivatives backed by hot air, that is no collateral, "worth" at least 20 times the global GDP. Making money with computer entries, a parasitic system draining the energy and funds of the productive working class. Or in other words, there's, at least in most western countries, no value adding, that is productive economy. Again, that's no coincidence, because the renewal of the financial system is due, for them to stay in control. To gain total control by introducing digital currencies, connected to digital IDs.
I wrote "most western countries", because until recently there're some industrial power houses like Germany. The US's and most of Europe's citizenry have deliberately, already been transformed to consuming, bread and circus, popcorn eating Netflixers. In the US and apparently now in the EU as well through Nato's 5% GDP, compensated by "investing" in the military industrial complex. A complex, and I keep repeating myself, again, that fills the same deep pockets by handing over your wallet and/or giving up your live as canon fodder. That (Germany) must and is being destroyed to reign in their digital concentration camps, in order to create an impoverished public willingly accepting their digital "solutions", food stamps and UBIs.
Btw., in 2019 at Jackson Hole, Blackrock officially said goodbye to "fractional reserve banking" and took over from central banks, by, once again strategically bailing out and "going direct" (at your expense), for them and their institutional investment friends to gain trillions of dollars, now effectively controlling most of the western world.
That's why, out of the top of my head, 600 billionaires saw their net worth grow by $3,2 trillion, causing havoc to the mom and pop stores.
And yet, there's no single reason to put private bankers like the Fed, in control of money issuance, that is printing (digital) currency out of thin air, because Treasury can do it themselves against no interest. That that doesn't happen globally, tells you who's in control.
"And yet, there's no single reason to put private bankers like the Fed, in control of money issuance, that is printing (digital) currency out of thin air, because Treasury can do it themselves against no interest".
If one goes back in time to the years just before 1913, didn't we see that the primary reason given by Morgan, Warburg, et al. for creating a central bank was to prevent the regularly occurring financial panics. I have never understood how those panics occurred. Although I suspect once again it was the banks.
Everything you see "out there" has been created by printed money, i.e. by money created out of thin air. The total amount created = the total amount of debt does not equate to trillions but to quadrillions and can never be straightened out or repaid. A completely new reset is required on the basis of proper "householding" principles the extent of which is unimaginable.
Yes, the problem is systemic, but we might not want to hold our breath waiting for governments to initiate a radical reform of the monetary system.
The monetary system is designed to extract value and concentrate wealth by keeping us in a collective state of perpetual debt. There is a systemic shortage and artificial scarcity of state-sanctioned money because it is created/issued on the basis of interest-bearing debt. Total aggregate debt, including principal and interest, is more than the total amount of money in existence. And credit is often misallocated for unproductive or destructive purposes. which inflates the amount of money in circulation and can lead to price inflation, which erodes the value of savings and reduces the domestic purchasing power of the currency. State-sanctioned money is not a benign medium of exchange or reliable store of value.
We might not be able to completely do away with the monetary system (banks and governments will fight to keep it), but we can use alternative or complementary trading methods, create new units of account, and allocate short-term interest-free credit to each other for productive purposes to facilitate the exchange of goods and services.
Money’s primary function is to facilitate exchange; money nowadays is simply credit. Mutual credit clearing is essentially a bookkeeping system that keeps an ongoing record of members’ transactions (sales and purchases) and account balances (credits and debits). Membership within a network is entirely voluntary, and every member is both a producer and a consumer, a seller and a buyer. Members can receive short-term interest-free credit, which can reduce their expenses, and allows them to temporarily obtain more than they have provided if they are ready, willing and able to deliver an equal value of their own goods and services within a specified period of time. The allocation of credit for productive purposes preserves the value of the accounting unit within the network and can prevent inflation. Longer-term financing can be provided from actual savings and saved credits, using equity financing or debt financing. A market basket of commodities could even be used as a benchmark standard for defining an accounting unit to provide a more stable measure of value.
"Do away with the fraudulent monetary system" and replace it with what?
Also, a lot of this hinges on what you mean by the "imperative of economic growth" and how that growth is measured and manifested. Is the volume of money the measure of growth, or the changes in quality of life and their broader distribution?
An excellent analysis of the reasons behind ever increasing govt debt. However, I was looking for more after the analysis - a solution. The fact that modern economies are debt castles built on fiat money is well known for those who have an interest in such matters. Why can't anybody suggest a solution to this that is practical and possible? In the end this article is just another description of the issues with no answers.
Very clever depiction of Hayek! I suddenly want to study more of his work.
I didn't know he was so pretty. Oh, is that sexist?
He just looks better without his mustache and a little lipstick.
Look more closely....is that beauty? Or ...lipstick on a ....
The trans issue just wont stop raising its head....
“More than 100 years ago, Lord Acton wrote: “The issue that has swept down the centuries, and which will have to be fought sooner or later, is the people versus the banks.””
Brilliant minds Geo! (see comment)
This lays it all out in a way that’s hard to refute. The debt curve can’t be flattened, not because politicians are lazy or greedy (although sure, some are), but because the system itself demands it. Fiat currency plus fractional reserve banking is like a treadmill that only speeds up the longer you're on it. Whether it's red or blue in charge, they’re both strapped into the same machine.
That whole bit about the deflationary gap? Spot on. People instinctively know “saving is good,” but on a macro level, unless those savings get reinvested fast (and wisely), the whole economy starts starving for cash.
And yeah, we’ve been sold this illusion of choice between “capitalist” and “socialist,” but as you say, the system steamrolls everyone down the same path. You will get government expansion, you will get debt, and the only real variable is whether that money flows through Boeing and Raytheon or through food stamps and health care clinics.
At the end of the day, unless we overhaul the actual plumbing of the system (money creation, credit, and the whole fiat game) we're just arguing over the color of the curtains in a house with termites.
"People instinctively know “saving is good,” but on a macro level, unless those savings get reinvested fast (and wisely), the whole economy starts starving for cash."
Is this why Von der Leyen said that for the Commission’s re-armament program of Europe, the people’s "unused savings" will be utilised, and she was referring mainly to people’s deposits in bank accounts? She stated on X: "We'll turn private savings into much needed investment."
I guess we 'The People" can save voluntarily and allow that money to be invested, or the government will intercede and do it for us.
Problem is when government chooses how savings will be invested (wars/military armaments/biowarfare preventative (jabs) measures, etc.) that people say 'NO' and try to take back their savings for a different use.
Then government (doing whatever the hello they want) goes ahead and prints and devalues your savings whether you like it or not.
Either way, "The People" lose, either by savings being manipulated, or devalued.
I had to laugh at that Leyen comment. As if the peoples bank saving weren't mostly already being utilized by the banks for other loans. I dont live in the EU but I truly wonder how many people look at Von der Leyen and see a person of intelligence.
But Paul, isn't savings how capital is created?
Fractional Reserve Banking is a bit of a myth as proven by Richard Werner.
Commercial banks have a licence to invent money at no cost to lend at interest.
I'd love to run my personal budget like a government, just raise the debt ceiling as I please! somebody will pay for it, not me!
Alex: Please grab a copy of Dr. Stephanie Kelton’s book, “The Deficit Myth,” and acquaint yourself with MMT. Our entire concept of money is currently fraudulent.
Magic Money Tree.
William, I'm pretty sure Alex knows all about MMT.
I'm sure Alex doesn't or why would he keep suggesting that fractional reserve banking is relevant or indeed actually describes how money is created and how banks work?
All money creation in modern fiat economies is achieved by double entry bookkeeping. Either publicly owned Central Banks i.e. governments or privately owned commercial banks.
Step 1 This factual observation about how the real world of money creation works is the first step that MMT uses to construct the rest of it's "theory".
Step 2 is the suggestion that government taxes cause / force people to have to accumulate the money the government has authorised commercial banks and the central bank to create as legal tender to pay their taxes.
Step 3 is to then notice that according to the rules of double entry bookkeeping, when taxes are paid i.e. returned to government that tax money is destroyed along with the tax demand that was created to collect it. As such these assets and liabilities must cancel out to zero.
Step 4 is to finally realise that taxes can't fund government own spending.
What is then done with that shared foundational reality is of course up for debate!
https://www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-creation-in-the-modern-economy
https://billmitchell.org/blog/?p=14620
Of course Alex knows about MMT, he was living and working right at the heart of the financial system. What he has is practical knowledge, which is often of more use than merely theoretical.
I like much of MMT myself, btw. And think its insights could be used for practical benefits - to some extent.
That 'to some extent' is the nub.
MMT also has its critics, and I'm not talking about neolib stuffed shirts who want to pocket all the benefits for themselves.
Currency once created becomes subject to the classical laws of economics - it has real world effects. How many times it circulates is important, as is the amount being created - one cannot print money willy-nilly to prosperity, or else Weimar Germans and Zimbabweans would be the wealthiest people in history.
Note that every serious person who talks on the MMT level also mentions using it to invest in productivity. Note also that the most successful global economies DO connect savings to investment: the German Landbanks (Local Credit Unions in english), are quite explicitly the reason for the formerly German economic success story.
Losing that grounding has pushed the Anglo/Western economies into dire straits.
Note also that Russia carefully balances its financial books to avoid this very problem: and the ruble is now one of the, if not the hardest currency on the planet.
I'm not saying MMT is WRONG, just that it is only part of the picture.
Agree, MMT simply describes double entry bookkeeping i.e. the creation and destruction mechanism, (assets + liabilities = zero) and thus challenges the incorrect assumption that gov spending is restricted by tax collections, which isn't correct: tax liabilities are destroyed by matching them to the demand assets when it's collected.
Alex; a complication of your model is that the US, and nearly all Western economies, are NOT "Saving". They are instead borrowing like mad.
Using your model (The map is not the territory; I know. :) ), in theory such a system COULD pay down the state debts, as therefore there is more economic activity that should strictly be generated in that closed system.
The obvious answer is that the state instead of funding the people, are instead funding the private corps and billionaire mega-wealthy, who are removing the 'investment from debts' from circulation, into their tax-evading bank offshored bank accounts.
I never knew Hayek was so hot! Perhaps her most ardent admirer, Thatcher, was a secret lesbian! ;)
Yes.
In the 1970s when I did my Economics A-Level we were taught that the economy suffers from Stag flation - High inflation & low growth, and that therefore the Phillips curve trade off between unemployment and inflation wasn't working.
After 3 state funded years at University I was a Bond Trader on the London Stock Exchange. I cut my teeth arbitraging Big 98s against the Long Gilt future (Treasury 15 1/2 % coupon 1998 gilts).
But gradually the Economists got it right, Inflation fell, growth was maintained or grew and the coupon rate on bonds fell from 15 and a half to almost zero.
Hurrah - perhaps. Inflation and low growth has been replaced by low inflation and higher growth. Magic.
But... I stopped being a bond trader and took an ordinary job. I learnt about Wealth Inequality. In particular I discovered that Inequality had fallen and fallen constently from the extremes of the 1930s to the mid1980s and then completely reversed itself to 1930s levels since.
Indeed during the rapid growth of 1980s onwards, real GDP had doubled but median Income per head had gone up only 10%.
All this low inflation high growth had done nothing for Most of the population. Whereas decades of stagflation had done wonders for the many at the expense of the few. (No wonder the elites hated it ).
It isn't surprising and Alex's article has already laid out the differences.
In the 1970s deficits were to created pay benefits to the poor. And what do the poor do with more money - They Spend IT. How awful, and inflation results.
By the 1990s the Laffer curve was accepted by all. Use Deficits to cut taxes on the rich and we get growth! All the money goes to the already rich - so no one spends it (except on ever more expensive housing and investments). Zero inflation - Perfect. QE is even better - pure asset price pumping with no impact on the cost of eggs or farmers labourer wages at all.
Socialist Stagflation is vastly superior to capitalist growth and low inflation for most people.
In a sensible world we would adopt what I would call 75% GDP. The wealth created for the bottom 75% of the population. I think the top 25% can take care for themselves, it would be difficult to challenge this on any democratic grounds where the targeted minority is the top quartile in earnings. Only improvements on "75% GDP" per head should be targeted, and rewarded by re-elections.
In that period there were also two large macro effects: the rape of the former USSR and its resources and people; and the discovery of North Sea oil that supercharged the City of London (And the related Clintonite deregulation of banksters).
To agree with your main point, circulation of currency/wealth can be related to the flow of blood - anyone whose blood pools in one place, such as the 'head', will soon die.
Money pumped in at the lower extremes will circulate through the system, creating economic growth *Every time* the currency changes hands. If it circulates enough times before being stored as 'savings', it can actually pay for its own creation.
Pumping it to the already wealthy so that it *immediately* goes into savings, as you say "Reduces inflation" - but does bugger all for the economy or population.
Well quite, and tax cuts for the rich guarantees the money is going somewhere it won't be spent - which of course is perfect.
The rape of the USSR was mid-late 1990s by which time the world had already pro-rich.
We were told in school in 1970s that North Sea oil and gas would peak in 1985, and amazingly I look back and see we were not lied to for once.
https://obr.uk/docs/C4_C.jpg
https://obr.uk/box/the-evolution-of-north-sea-oil-and-gas-receipts/
So yes North Sea oil helped reduce inequality a little, but still only the tail end of a 50 year run. But from memory (and I was there) it was deregulation that supercharged the City of London not oil. City salaries were probably the first sector where premium salaries for a few went through the roof, and then every profession followed in the 1980s. Nowadays a School headmaster earns 6-8 times that of an ordinary teacher. then it would have been twice. (and that is the state sector).
Oil & Gas production actually peaked in 1999 not 1985 but revenues did peak in the late 80s in real terms per your link.
I joined BP in 1978 and was paid one of the highest graduate starting salaries around. The company couldn't recruit enough engineers. By the late 80s that had all changed though and the banks in the City were sucking in talent and paying huge salaries. I agreed it wasn't oil revenue that supercharged the City.
My ONLY disagreement with that is that N.S.O. "reduced inequality"; like you I was there too, and I can clearly recall the sudden massive increase in legal usury - you couldn't move past the letterbox without a new influx of letters begging you take on a new credit card, HP, 'catalogue goods', or overdraft. All at "Low low" deregulated usurious rates.
While you can spend debt, it doesn't reduce underlying inequalities. Only wages and benefits (With some help from reduced cost of goods and services) do that.
Everything else - abso-fucking yeah. The bastards.
Well North Sea oil gave the government the opportunity to spend more on something new. And up to the moment of peak production - 1985 - the UK was still getting less unequal. Quite how you allocate the good influences from the bad is up to you I guess.
I don't remember the money lending - my salary doubled twice in 4 years after which I still was barely being paid more than the new trainees - so I was hardly maxxing out my credit card.
I'll repeat we should only count and monitor the wealth of the bottom 75% of the pop. The rest doesn't matter in the least - they are all doing well. If trickle down works (it doesn't) then it would show up in the bottom 75%. So stop counting the bit that doesn't matter.
I think I agree… or is it too convoluted?…. No, I agree in part! Your experiences are a definite learning curve. And explains why people have different perspectives on economic matters, problems, and their solutions. I commend you from trying to get your head around it. I might have a different understanding that may get us to the answers we need . I hope you don’t mind me putting my reasoning to you?
Firstly, we must look at the very basics. Money is supposed to be a fair exchange of work, between you and me. The free market allows us to negotiate that fair exchange. However it has become unfair and in most extreme cases no exchange happens! It’s just taken!… so the basics are being undermined.
For example is David Beckham worth 1000 surgeons or is a politician worth 10 nurses and do on. These inequalities eventually play out. We hear ‘the rich are getting richer whilst the poor get poorer’. As money is finite, that’s true. One gets richer while the money to spread around the rest diminishes.
This is what we see play out now. It’s taken many, many years, but eventually it has become clear that the imbalance is visible. Mega rich cheek by jowl with mega poor. Everywhere. It’s breached the staff with the UK that we borrow off those mega rich holding must of our pounds, to pay our deficit. We have done for the past 25 years borrowed enormous sums as the rich pot grows and the working pot of the serfs, us, suffer a diminishing pot of money as we pay those debts back plus interest! Do the rich do get richer.
The Spending of money is key to any economy. If you font have money and spending you font have an economy for fair exchange. And if you constantly reduce the pot of money you automatically reduce the ability to spend. In turn it’s clear tax receipts will also fall to a level that can no longer pay enough in tax. So the government do three things. Cut expenditure. Raise taxes or borrow our own money back!!
Now in the past 25 years, but I’m sure it’s been this way for longer, the governments has reduced spending on services which is why the NHS can’t do its job, or we have no war ships or not enough Police. Wherever you look, services have been decimated. Look at crumbling schools roads and hospitals. So Cuts have already taken their toll. Yet economists now want drastic cuts like Argentina or Greece. Well I don’t see why we are the same basket cases but we will be if not stopped.
The second thing they do is increase taxes or make up different taxes.the Laffer curve explains that there is a point when excessive tax becomes less productive. We have already reached that summit and we’re on the way over that hill!
And the third way is borrowing. We are now in debt to the tune of £3,000,000,000,000.00 trillion pounds. We are near to borrowing all our money back to the tune of 100% if monthly borrowing. So we borrow not to pay services and improvement or debt repayment but all to pay just the interest on that borrowing. It’s madness.
So here we are, looking down th ed toilet that Argentina has had to go through just for a handout from the IMF.
This is unsustainable. But, where is all our money? According to BoE there is s as optic £18 trillion pounds out there in the aether. So where is it? Who’s got it and why isn’t it in our pot that pays taxes. Well, that’s easy. As I have said it’s in Bank accounts abroad, not here. It’s in bank accounts here, but not being spent! And it’s hidden away from the view . But it’s dodo in people pockets and purses. But in the main most people including the poor and middle classes the money is being spent in full every month. People tend to spend all their income. Some don’t. They pay no tax in money not spent. Money unused, idle or hoarded. Or hidden abroad.
Because there is insufficient money swishing around and rotating in our working pot that pays tax to the exchequer is the reason why we can’t pay our way. The monthly money is devoid of the major part of our currency so no wonder we can’t pay our way!
We live in a democracy. How snd why do we allow our sovereign money to be held away and outside our grasp? And why do we have to borrow it back?? We don’t have to.
I could explain more? Brian
Nice commentary.
I think I should highlight that there has been plenty of growth. In 30 years or so GDP has doubled. But median income has grown maybe 10%.
The pay off between the economists measure, GDP, versus the democratic measure, median income, is not direct not particularly complex.
Prior to Margaret Thatcher and monetarism, all governments (all stripes) went to boost state spending as they though it was a particularly cost effective method of doing good (and NHS certainly is). They struggled with wage and consumer goods inflation because they were spending their budget deficits to boost demand for people and consumer goods).
Since then (and I voter for Thatcher and in many ways she was a good leader IMO) governments have targeted GDP and stock market indexes instead. Inflation is then much easier to control or rather the inflation in assets prices - stocks and houses is perceived to be good.
So the problem is that while some of the increased wealth is there and being syphoned off by the rich, much of it just isn't. If governments switched to balance budgets or even paid down debt would that hurt GDP - certainly. Would it hurt median incomes and the wealth of the bottom half? - only if governments cut spending rather than just increased taxes.
Would it hurt asset prices - housing and shares - yes absolutely. That small proportion of the population who has done incredibly well will have much of their lifetime gains reversed. Their houses will still have 6 bedroooms, they just won't be worth low 7 figures anymore.
The fundamental problem though is that economist have persuaded the world to use GDP as the main metric to target and consumer inflation. They should be using median wealth (or 75% wealth pp - ignore the top quartile completely - they can look after themselves) and properly weight assets that normal people should aspire to (housing, pension contributions) into inflation indexes.
Democracy
Oh and just to say, inflation accounts for the higher GDP. Mechanics say earned £100 per week then in the seventies and maybe £1000 now. Snd wage rises means inflation is a result. As costs go up do too does wages snd inflation. As well as GDP. So it’s like a dog chasing its tail. The free market ensures it. Thatcher was imo useless. She sold off the family silver and decimated industry. She took away exchange control regulations in 1979 which allowed our money to hide abroad. It’s those actions that mean we are in debt now and rely on foreign interests to run our country. We had a sovereign currency that stayed in the uk. Now we don’t. And that’s where our money is. Hidden abroad out of our economy and not being spent. The same monetary system was then as now. The rich hold on to most our money and we try and pay sufficient tax on a less than efficient monetary pot. The same answer for then as now. Make all money rotate via spending it all every month creates the most tax revenue possible. Then and now we have an economy underfunded because most our money is not being spent and is in the hands of the rich who don’t have to spend it. Making us then and now devoid of it.
Again I think I agree. GDP is not accurate. It contains the borrowing they do! It’s like valuing your wealth by including the money owed!
I think you can use observation rather than intricacy. There is approx £19 trillion pounds out in the aether. But there is so much of that sitting outside the tax paying income, Reeves can’t get sufficient tax revenue to pay our way.
Government spending, is roughly 1.2 trillion per year. Yet with all that money that should be swishing around we only get £800 billion in taxes and have to borrow the rest. But spending is about 40% of GDP. And GDP is about 3.6 trillion. But with a possible 19 trillion put there then it must mean that not all of it is in play. We should be able to gain sufficient tax take to cover the 1.2 trillion the government spend if, the whole or main part of that 19 trillion is in play.
Thats my point. It’s like a diesel train leaving Birmingham for London with 20 cars. And it runs out of diesel at Northampton. Instead of putting sufficient diesel in to begin with the government decides to do the journey with 10 cars so it reaches London! You can make cuts to expenditure but why? Just do the rich can hang on to it?? And so we get in debt and can’t get a good pension or NHS!
We need all our money in the pot being spent do jobs can be for life and pensions can be £500 per week not £175. That’s my view. It’s got nothing to do with cuts to make it fit. It’s all about earning sufficient to pay for everything and more!
I hope you can see it. Clearly. Brian
That is an amazing make-over of Freidrick Hayek!
It seems to me that what you are talking about is an economic system which we once had in America, say circa 1875. There was no Federal Reserve or Income Tax, and yet... and yet even back then there were major financial disruptions, what were called back then, "Panics". But these were caused, AFAIK, by the banks. As Lord Acton pronounced, solemnly “The issue which has swept down the centuries and which will have to be fought sooner or later is the people versus the banks.”
The Money Masters... https://www.youtube.com/watch?v=AOk3wBuQNcE&t=4s
There's not such a thing as a free market.
Although you do recognize that we have a fraudulent monetary system, and that's throughout almost the entire world, except for a few that still need to be bombed to bring them under control, you don't see that as the root cause, which it is. I can see why, if we take the way you make/made your money into consideration. Not trying to be cynical, just telling how it is. Sincerely hope you'll make much more, especially by educating people via substack etc.
Anyway, we can go back centuries, but all (financial) crises, wars, plandemics and so on, have always benefitted "the happy few" or as we called them in ancient times, the money changers. That's not a coincidence, as it is initiated, instigated, staged and/or created by them. Over the centuries they became much more sophisticated in it, by delegating the dirty work to economic hitmen, the IMF, Worldbank, WTO, secret services, NGOs and/or US troops.
As a trendwatcher you know the money supply has exploded over the last decades and in particular post 2008 and 2019 - the plandemic was indeed yet another financial (repo) crises "sold" by yet such another globalist entity called the WHO. This in order to once again steal trillions of taxpayers' dollars to fill their pockets and cover up for that bankrupt system. An unsustainable speculative financial system based on derivatives backed by hot air, that is no collateral, "worth" at least 20 times the global GDP. Making money with computer entries, a parasitic system draining the energy and funds of the productive working class. Or in other words, there's, at least in most western countries, no value adding, that is productive economy. Again, that's no coincidence, because the renewal of the financial system is due, for them to stay in control. To gain total control by introducing digital currencies, connected to digital IDs.
I wrote "most western countries", because until recently there're some industrial power houses like Germany. The US's and most of Europe's citizenry have deliberately, already been transformed to consuming, bread and circus, popcorn eating Netflixers. In the US and apparently now in the EU as well through Nato's 5% GDP, compensated by "investing" in the military industrial complex. A complex, and I keep repeating myself, again, that fills the same deep pockets by handing over your wallet and/or giving up your live as canon fodder. That (Germany) must and is being destroyed to reign in their digital concentration camps, in order to create an impoverished public willingly accepting their digital "solutions", food stamps and UBIs.
Btw., in 2019 at Jackson Hole, Blackrock officially said goodbye to "fractional reserve banking" and took over from central banks, by, once again strategically bailing out and "going direct" (at your expense), for them and their institutional investment friends to gain trillions of dollars, now effectively controlling most of the western world.
That's why, out of the top of my head, 600 billionaires saw their net worth grow by $3,2 trillion, causing havoc to the mom and pop stores.
And yet, there's no single reason to put private bankers like the Fed, in control of money issuance, that is printing (digital) currency out of thin air, because Treasury can do it themselves against no interest. That that doesn't happen globally, tells you who's in control.
"And yet, there's no single reason to put private bankers like the Fed, in control of money issuance, that is printing (digital) currency out of thin air, because Treasury can do it themselves against no interest".
If one goes back in time to the years just before 1913, didn't we see that the primary reason given by Morgan, Warburg, et al. for creating a central bank was to prevent the regularly occurring financial panics. I have never understood how those panics occurred. Although I suspect once again it was the banks.
Everything you see "out there" has been created by printed money, i.e. by money created out of thin air. The total amount created = the total amount of debt does not equate to trillions but to quadrillions and can never be straightened out or repaid. A completely new reset is required on the basis of proper "householding" principles the extent of which is unimaginable.
Yes, the problem is systemic, but we might not want to hold our breath waiting for governments to initiate a radical reform of the monetary system.
The monetary system is designed to extract value and concentrate wealth by keeping us in a collective state of perpetual debt. There is a systemic shortage and artificial scarcity of state-sanctioned money because it is created/issued on the basis of interest-bearing debt. Total aggregate debt, including principal and interest, is more than the total amount of money in existence. And credit is often misallocated for unproductive or destructive purposes. which inflates the amount of money in circulation and can lead to price inflation, which erodes the value of savings and reduces the domestic purchasing power of the currency. State-sanctioned money is not a benign medium of exchange or reliable store of value.
We might not be able to completely do away with the monetary system (banks and governments will fight to keep it), but we can use alternative or complementary trading methods, create new units of account, and allocate short-term interest-free credit to each other for productive purposes to facilitate the exchange of goods and services.
Money’s primary function is to facilitate exchange; money nowadays is simply credit. Mutual credit clearing is essentially a bookkeeping system that keeps an ongoing record of members’ transactions (sales and purchases) and account balances (credits and debits). Membership within a network is entirely voluntary, and every member is both a producer and a consumer, a seller and a buyer. Members can receive short-term interest-free credit, which can reduce their expenses, and allows them to temporarily obtain more than they have provided if they are ready, willing and able to deliver an equal value of their own goods and services within a specified period of time. The allocation of credit for productive purposes preserves the value of the accounting unit within the network and can prevent inflation. Longer-term financing can be provided from actual savings and saved credits, using equity financing or debt financing. A market basket of commodities could even be used as a benchmark standard for defining an accounting unit to provide a more stable measure of value.
"Do away with the fraudulent monetary system" and replace it with what?
Also, a lot of this hinges on what you mean by the "imperative of economic growth" and how that growth is measured and manifested. Is the volume of money the measure of growth, or the changes in quality of life and their broader distribution?
Alex, you end your article saying: "we’ll first have to do away with the fraudulent monetary system." My question is what do you replace it with.
An excellent analysis of the reasons behind ever increasing govt debt. However, I was looking for more after the analysis - a solution. The fact that modern economies are debt castles built on fiat money is well known for those who have an interest in such matters. Why can't anybody suggest a solution to this that is practical and possible? In the end this article is just another description of the issues with no answers.