First a quiz:
Q1. The UK economy is just like a household and the government has to finance spending out of its income or through borrowing. True or False?
Q2. The role of taxes is to provide finance for government spending? True or False?
Q3. The UK government needs to borrow money from the private sector to finance the budget deficit. True or False?
Q4. If the Tory/LDs were running a budget surplus instead of a budget deficit, pressure would be taken off interest rates because the private sector would have more funds available for investment projects. True or False?
Q5. If the budget deficit persists it will burden further generations with inflation and higher taxes. True or False?
Q6. We need to run budget surpluses now, to help build up the funds necessary to cope with an ageing population in the future. True or False?
The answer is that they are all are false …not true… misleading… erroneous… fictitious… incorrect… deceitful… dishonest… sham… bogus… unreal… and yet we are fed these lines, day after to day, to justify George Osborne ‘shrinking the state’. And worse still, Ed Balls and the LP are going along with an austerity-lite economic strategy.
Don’t believe me?
Listen to what the St Louis Federal Reserve, from the heart of Western capitalism in the US says:
‘As sole manufacturers of dollars whose debt is denominated in the dollar, the US government can never become insolvent ie. unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for US government debt at home because the US government has the only means of creating risk-free dollar-denominated assets.’
The same is true of Sterling. Economics Professor Randy Wray explains :
L. Randall Wray — MODERN MONEY: the way a sovereign currency “works”
Published on Sep 23, 2012 ModMonPubPurpose
The UK government can never ‘run out’ of money;
The UK government can never be forced to default;
The UK government can never be forced to miss a payment;
The UK government is never subject to the whim of ‘bond vigilantes’.
So why are we told that there is no money left; that it is imperative to reduce the deficit and debt; and that we have to keep the ‘bond markets’ happy?
The scale of the Coalition government’s intended austerity measures are on a scale never seen in modern Britain. What is planned here will dwarf anything that was undertaken by Thatcher in the 1980s. There is already massive unemployment in the public sector….Massive unemployment and lower wages mean lower tax receipts, and even bigger budget deficits and debt loads… It is now clear that the austerity policy in the UK is not a matter of economic necessity but of political choice… It is obvious that the cuts of this scale are about much more than just deficit reduction… The cuts are part of an agenda to transfer services from the public sector to the private sector. The pretence of ‘there is no alternative’ is a means for the Conservative project to radically transform the state.
If George Osborne was serious about reducing the deficit and balancing the budget, he wouldn’t be cutting jobs, benefits and reducing corporation tax.
‘So even if you are obsessed with reducing deficits, the best way is to engender growth. The dumbest thing a government can do if it wants a lower deficit is to impose fiscal austerity. There are a lot of dumb governments out there. The problem is they are aided and abetted by criminal types who know full well it is dumb to cut net public spending but pressure governments to do so as long as the space for spending on them expands.’
The 2011 Budget Control Act, initiated by the Republican controlled House, is one of the most foolish pieces of legislation ever passed into law by Congress, as it forces the government to attempt to “balance” its budget and reduce the budget deficit. National government budget deficits, which are the net contribution of government spending to economic growth, are actually integral to economic growth, contrary to the anti-scientific conventional budget lore upon which deficit hysteria has been built. Without government budget deficits, the economies of nations with trade deficits CANNOT accumulate net financial wealth due a matter of simple arithmetic; those few nations (China, Germany, not the US) with large trade surpluses MIGHT be able to accumulate net financial wealth without a budget deficit but always with the cooperation of other nations financing those surpluses through trade and, in most cases, government budget deficits on the side of the net-importing nation.
A fiat currency-issuing national government, unlike a local government, business or a household, does not depend upon tax or other income and therefore is not and should not pretend to be bound by conventional balance sheet accounting, which was perhaps a more applicable, though not particularly successful, means of national government accounting during the gold standard era. The reasons for transitioning away from the gold-standard, the rigidities which it imposed on aggregate demand and the money supply, have been suppressed from public discourse in an era in which deficit hysterics like those at “Fix the Debt” hold honored seats at the policymaking and policy advocacy tables. These deficit hysterics, funded by Wall Street tycoons freelancing as economic pundits, would like Washington insiders and the media to believe that the gold-standard never went away, specifically for the purpose of cutting social programs that stand in the way of Wall Street’s expansion into new markets.
I have recently proposed that we rename the so-called budget deficits specifically of currency-issuing governments, the government’s “net contribution to monetary/economic growth” so that the confusion no longer persists that these so-called deficits are by their nature “bad” and to be avoided. The fiat currency issuer can never run out of its own money, can never be in “deficit” in it; “net contribution” is a better formal description of the excess of spending over taxes for specifically a fiat currency-issuing government. The government spending over taxes collected becomes the incremental increase in the money supply for the real economy as it grows in real terms, underneath the pro-cyclical expansion and contraction of money available from bank credit (i.e. expands in a boom and collapses in a bust). Too much price inflation is a possibility with too much government spending over-and-above taxes collected but demand-led inflation in our current situation would be a “high quality problem” indicating that we have reached full capacity in our economy, which is not nearly the case. Right now we have a very large output gap as well as high demand for government-led expenditures on things like infrastructure, public services and education, making increased government expenditures very unlikely to cause inflation.
The deficit is the government’s ‘net contribution to monetary/economic growth’ .. so who in their right mind, would want to reduce it? We should be increasing it until the UK has jobs for all who are willing and able to take them. As Keynes said:
“Look after unemployment and the Budget will look after itself”
Keyes also said: ‘Capitalism is the extraordinary belief that the nastiest of men, for the nastiest of reasons, will somehow work for the benefit of us all.’
(My emphasis in bold)