It’s all a game of Monopoly really by Prue Plumridge
When Labour left office in 2010, Liam Byrne left a very unfortunate message saying there was no money left. The Tories have dined out on this lie ever since. We were compared to Greece and next in line to be affected by a sovereign debt crisis, and in 2010 Osborne claimed that the Tories had taken the country back from the brink of bankruptcy. The Tories have used the household budget narrative of deficit reduction, balanced books and surplus to justify the need for austerity when, in fact, it is not just the wrong recipe to return our economy to health but also a deliberate deception about how our state finances and economy actually work.
This deception has allowed the Tories to funnel more and more money into ever fewer hands and make the claim that we cannot afford public services or the NHS. The mantra of ‘there is no money’ has been used to justify the dismantlement of the safety net for when we are at our most vulnerable, and worse still the selling off of every aspect of our publicly provided services to the private sector. This government is making a political choice and people across the country are paying the price for it.
Most of us will identify with Dicken’s character Micawber in David Copperfield who wrote:
“Annual income twenty pounds, annual expenditure nineteen [pounds] nineteen [shillings] and six [pence], result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
So it is easy to understand how we buy into the idea that we have to pay our national debt down and balance our books. However, one cannot, in any way whatsoever, compare our own household budgets with the state money system.
And this is why:
A sovereign government:
- Issues fiat money which is not backed by gold or anything else. (The gold standard ended in 1971 with the oil crisis)
- Is not like a household. It doesn’t have to balance its budget (even though George Osborne says we do). In fact, reducing the deficit or going into surplus will remove money from the non-government/private sector.
- Doesn’t tax first then spend later which means it doesn’t have to rely on raising taxes to spend. It doesn’t save its tax revenue – it destroys it.
To explain this strange concept think of a game of monopoly. You appoint a banker but he doesn’t collect taxes to get the game going because no-one has any money yet. The banker has to issue the money before it can collect anything back or the game can’t even begin. The issuing of the currency comes first. The bank can never go broke. If it runs out of money it can issue as much as is needed to keep the game going. So, you move about the board and you draw a card from the Community Chest or Chance – so you pay £50 – there goes a leakage. You play another hand and tax is due. The game will end very quickly if there isn’t a replacement for the money that is leaking out. Which is why every time you pass GO you collect £200. This keeps the game going. The banker always has to spend out more than he collects otherwise the game will quickly come to an end. Which is to say that in this instance if the banker aka government is not deficit spending the game will end much sooner. (From Angry Birds by Dr Stephanie Kelton)
So to be clear taxes are not paying for anything not even your pensions!
However, they do have a function to:
control inflation or otherwise by raising or lowering taxes
redistribute wealth and income through progressive taxation
express public policy by subsidising or penalising certain industries or economic groups – for example railways for the first and polluting industries for the second.
To continue, a sovereign government:
- Doesn’t spend money like we do – it isn’t the user of the currency. It is an issuer of the currency and creates money as it needs it.
- Can’t ever run out of money and it definitely can’t go bankrupt. (Unless it is a European government and a member of the Eurozone. In that case a country becomes a user of the Euro and not the issuer. Then it is perfectly possible for it to go bankrupt as it is using what is, in effect, a foreign currency).
- Can’t borrow its own money through selling bonds or treasuries to fund deficits and doesn’t’ ever have to worry about selling bonds to do so. When such bonds or treasuries are issued it is not about financing government spending it is a mechanism for controlling the interbank lending rate and the money supply. These treasuries/bonds are a bit like our bank accounts where we have a current account and a deposit/savings account where we park spare money we don’t need to get some interest. This is what the private sector does – pension funds for example – stash their money in a risk free place to earn some interest. Some call this corporate welfare and it is completely unnecessary. To follow the logic to its natural conclusion. If a government can issue the money it needs, it doesn’t have to borrow a bean from anyone at all. Indeed, why would it borrow money it had issued in the first place?
- Can’t save up its own currency for a rainy day. Last year George Osborne announced that he would attempt to bind future governments to maintain a budget surplus when the economy is growing saying ‘we must act now to fix the roof while the sun is shining’. Budget surpluses do not represent ‘public saving’ which can be used to fund future public expenditure or a cache of money that can be spent later. A budget surplus only exists because private income or wealth is reduced so when there is a budget surplus private wealth is destroyed.
- Can’t live beyond its means. Wait I hear you say won’t the magic money tree lead to inflation like it did in Germany or Zimbawe? Whilst it is the issuer of the currency that doesn’t mean that it can carry on spending ad infinitum as this would be inflationary. The only thing that will restrict government spending is access to resources. So, assuming there are idle physical resources including labour a government can continue to spend without concern for inflationary pressures.
Just before I go a word about that scary national debt. The online debt clock is designed to have us shaking in our boots at our financial recklessness! The national debt, however, is not like a mortgage or a car loan that has to be repaid. Paul Segal in an article describes it thus:
‘It is the money the government owes to us – not money we owe to anyone else. That’s right 80% of our government debt is owed to the British people. What is called the national debt is our own savings looked at from the other side of the balance sheet.’
Banks, businesses, people or countries may choose to invest their money in bonds as they earn some interest – they are in effect non-risk places to park money. This is our ‘National Debt’. To explain: you have a current account receiving no interest at all. So you put some of the money you don’t need into a deposit account like a Bond for example. The bank debits your current account and credits your new savings account. When it matures the bank debits your bond account and credits your current account with a little bit of interest to boot. You are always in the same financial position plus you get a little bit of interest. Nobody ever says that the bank is ‘in debt’ because you moved money from your current account to your savings account. So saying that the UK government is ‘in debt’ because people, institutions or corporations have exchanged their pounds for government bonds is just as misleading. Government bonds are basically £ equivalents and the government creates them both from thin air.
The “National Debt” is not by any measure a debt, but a measure of saved pounds.
And since that pile of saved £ never gets any smaller, you can consider those £ to be “retired.” Government bonds, in a net sense, don’t ever get cashed in and spent (although they could). They just sit there, unused, and once in a while a small bit of interest is added to the pile. And that pile has no discernable effect on the economy.
So there you have it – we are not in debt up to our ears – George Osborne and the media just want you to think we are.
Finally, on the subject of the burden of debt on future generations. Only today, the Chancellor shamelessly used yet another scare tactic in response to his plans for more public spending cuts by saying “We need to act today now so we don’t pay later”.
To quote the economist Professor Bill Mitchell:
“The fact is that a government has as much ‘money’ now as it had yesterday and the same amount it will have tomorrow. That is, it has whatever it wants to spend. It has no more or less capacity to spend today because there were surpluses in the past than it would have if there have been deficits in the past. The idea that fiscal surpluses (as indicated above) provide more spending capacity in the future or lower tax rates is just plain false. Every generation will choose its own tax rates. That is, a mix of public and private sector involvement in the economy is a political choice. Currency issuing governments do not draw down on the savings provided by previous government’s surpluses. It is a nonsensical notion to think that a sovereign government would ‘save’ in its own currency.”
However, this is not to say that we shouldn’t be concerned about the direction in which the country is travelling in. Reducing the deficit and aiming for surplus simply removes money from the private sector which means that people have to take on debt. There has, over the last few decades, been a huge increase in private debt and the trade deficit (that is the difference between our exports and imports) is at worrying levels. But that’s another story.
Links and credits:
Note: These articles whilst written for largely for a US and Australian audience you just need to replace $ for £. It’s all the same!
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You need to stop this stuff for me. It is boring having to agree with you all the time!
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Excellent piece. Listening to George Osborne this morning on the Marr Show talking economics like the bloke in the pub is no less worrying because the majority of the population soak it up and vote accordingly.
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Here in America things are a bit different. Over 1/3 of our debt (as of 2014) is held overseas. The Fed predicts deficit spending needed to support changing demographics in 2020 and beyond will increase and debt service will carve out more from the budget. Moreover from a leftist perspective think you make a categorical oversight to call the debt what the government owes “us”. I for one don’t hold any bonds. The bond markets are the casinos of the upper crust. You are right that govt debt is not owed by the taxpayer but by the printing press, but confidence in the currency depends on predictable monetary policy. Anyway the whole thing is a ponzi scheme and what truly matters in America is that the Fed system is controlled by the private bankers’ cabal. Unless that point is addressed no other description of monetary mechanics is worthwhile.
Where the debt is held is irrelevant really. The overseas sector wants to hold USD denominated assets. If there were no treasuries, they would simply hold bank deposits. Treasuries are simply time deposits at the Fed, and are not significantly different from bank reserves held at the Fed. Interest payments to the rest of the world are the result of the rest of the world wanting US dollars, and the US not having permanently zero interest rates. The Fed is controlled by Congress. It is Congress which, at the moment, is controlled by private bankers, through your elected representatives, who are beholden to them. Elect different people to Congress, and you will resolve that issue. I know you will not be disposed to agree with the above, as your views are no doubt the result of long thought, but I would ask you to at least consider an alternative perspective. http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
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Good post. I might just add that different countries have different rules for counting the so-called National Debt. At one time the monetary base was backed by gold so wasn’t counted. Some countries changed their rules to count it when the gold standard was removed. Some didn’t. It really should be counted. The process of QE can make it appear that the ND is being reduced. It really makes no difference, or should make no difference if all liabilities were included. Its just a swap of one type of debt (money) for another (bonds).
In the USA one oversight was not to count the coinage. So in theory the US Government could eliminate its debt (as it defines it to be) simply by minting 18 x trillion dollar coins. Just Google the term for more info.
It has been suggested that it’s an easy fix for any President who has trouble with Congress not increasing the debt ceiling. He just needs to stamp out a few coins to fix that.
Of course this doesn’t really change anything. The US Government has to assume the debt so that everyone else who wishes to hold dollar assets can do so. It’s all quite natural once we know how it all works. In Prue’s monopoly game no-one ever worries that the banker (who’s really the Government) is in debt. He always is, and has to be for the players to have any money.
So the problem could be that the players in the game have too much money and want to spend it too quickly causing an inflationary problem. That would be the right time to raise taxes and maybe cut back spending to reduce the deficit or even turn a deficit into a surplus.