So, we all use Money …but what is Money?


So, What is Money? 

Money is Debt!

  • Personal debt is at its highest level in history – an average of £54,000 per family
  • We currently pay £192 million in interest to the banks every single day
  • Almost no-one under 40 can afford a house
  • Over 2 million people can’t find work in the UK
  • But the government’s ‘answer’ to this debt crisis is to get people to borrow even more… 

It doesn’t have to be this way!

Positive Money is Campaigning to change the Way Money is Created – and has Proposals for How to Fix the Banking System. Perhaps George Osborne should listen! He is ignoring all the expert advice so what is George Osborne playing at? It is probably a great mistake to think that George Osborne, or at least those advising him, do not know what they are doing.  What George Osborne might gain as a result of taking the flak for being the ‘worst Chancellor’ of all times is a matter for speculation.

Forgotten Wisdom


Forgotten (or ignored) wisdom

From Alittleecon

We seem to have forgotten (or ignore) so much of what we should already know. Here’s former Chairman of the US Federal Reserve Marriner Eccles talking about the false equivalence of household and government debt in 1938 (p5)*:

“Isn’t it about time that we learned this simple truth? Is it so hard to understand that when an individual owes money he generally owes it to another individual, but when a nation owes money it owes it to itself? When an individual pays a debt, he pays it to someone else. When a nation pays a debt, it pays it to its own people. Now, this doesn’t mean that a nation can go on and on piling up debt or that any amount of expenditure and taxation is justified. The point is that we get into wholly misleading con­ceptions if we make the old mistake of confusing the matter of in­dividual solvency with the solvency of the nation as a whole. The individual solvency depends upon continued income and living within that income. The nation’s solvency depends upon the productiveness of all of its people. The individual cannot create money. The gov­ernment can and must as one of its fundamental sovereign functions. Its primary responsibility is to create an adequate supply of that money for the purpose of aiding production. The individual cannot increase his income by taxation. The Government can. In fact, it seems superfluous to pursue further the point that there is no com­parability between the case of an individual and the case of a Gov­ernment.”

And about the way we are mislead about the dangers of government debt (p7):

“I think it is unfortunate to say the least to have public attention misled into becoming alarmed over the wrong things. I very much regret that responsible leaders, however conscientiously, nevertheless mistakenly create public alarm over the solvency of the nation or the soundness of its credit, This is just what they do
when they call attention to one set of facts or figures without show­ing their relationship to other facts and figures. Isn’t it up to us to keep our eyes on the important things? And what seems to me to be vitally important is that the Government shall do all it can both to create an adequate supply of funds and then to facilitate the flow of funds throughout our economy in the most productive way possible— that is, productive of real wealth.That is what, as I see it, the Govern­ment has been attempting to do, often clumsily, awkwardly and in­effectively. I do not suppose anyone has been more critical openly than I have about policies or expenditures that seemed to me to be unproductive or that seemed to me to interfere with production. The point I want to make here is that I do not think it is realistic, or that it helps us to solve the problems before us today, or that it contributes to saving our system or our democracy to work ourselves up into a frenzy over deficits or increases in the debt while at the same time failing to take account of the enormous gains that have been made [In terms of growth of national wealth].”

All the things we hear today about the dangers of debt and deficits have been thoroughly debated and debunked a long time ago, and yet politicians continue to return to these themes when it suits their political purpose. We should be able to see through them by now.

*Thanks to this blog by Bill Mitchell for drawing my attention to Eccles’ speech. Do read the whole thing.

Government Debt and Deficits Are Not the Problem – Private Debt Is

Government Debt and Deficits Are Not the Problem – Private Debt Is

Published on Mar 24, 2013

Michael Hudson: Why do they call for governments to balance the budget by pushing the economy at large deeper into debt, while trying to save the banks from taking a loss?

Why we can’t spend more than we bring in but Government can


Dr. Stephanie Kelton of UMKC explains that much of our current jobs crisis stems from a fundamental misunderstanding about the relationship between the US and its currency. She runs the blog New Economic Perspectives This lecture was given at Luther College in Decorah, IA on September 28th 2011.

Why You and I Can’t Spend More Than We Bring In, but the Government Can and Probably Should.

Uploaded on Oct 13, 2011 umkceconomists

Like the US, the UK is a sovereign government which issues its own currency.  In other words, what Stephanie Kelton says about the US economy also holds for the UK….. but it is not true of the eurozone countries because they use the Euro, which is effectively a ‘foreign’ currency.. and that is why the UK can never be like Greece!

This a similar graph to the one referred to by Stephanie Kelton in the video clip.  It shows that the different financial sectors of the economy always balance out… its a rule.

Picture 35

For further information, Alittleecon has written a very good explanation of “sectoral balances” on his blog There is an alternative.  He includes a similar chart, created by Neil Wilson, which shows exactly the same type of balance between the different sectors in the UK economy.

Picture 20

As Alittleecon writes:

The sectoral balances approach then allows us to consider how changes in government policy may impact upon the different sectors. Armed with this knowledge you would know that for the government deficit to go down, the private surplus and/or the trade deficit would need to shrink or disappear entirely. At a time of global recession, the prospects for a massively shrinking trade deficit don’t seem good, and the prospects for an already debt-saturated private sector to take on yet more debt also seem less than positive. Both of these things imply that any attempt to reduce the government’s deficit by cutting spending or raising taxes will ultimately be futile, and that’s exactly what we are seeing at the moment.

Myth Busting: The Coalition Cut the Deficit by a Quarter


Myth Busting: The Coalition Cut the Deficit by a Quarter

by MarxistNutter

First posted on Politics Worldwide January 28 2013


As the economic failures of the coalition government become more and more apparent they are driven to hide behind increasingly dodgy claims. The most common of these is that they have cut the deficit by a quarter. Having been disappointed  by others’ attempts to bust this myth, I have decided to have a go at explaining exactly why this is such a disingenuous claim.

The coalition are already being called out on one of their claims: That they are ‘paying down the nation’s debts’ – an absurd claim that they will no doubt be forced to retract; however this post will focus on the equally misleading claim that they have reduced the deficit by a quarter’. I sketched out the broad contours of this argument elsewhere:

 It is true the deficit is down by a quarter if you are very selective about how you present the data. In order to make this claim the government pick a point where tax receipts were at rock bottom and were already climbing. Tax receipts were climbing, in no small part, due to the stimulus package delivered towards the end of the last administration. So the government had spent money at a time when tax receipts were low (the exact opposite of what Osborne has done) which meant there was a large deficit; but this spending helped generate  five consecutive quarters of growth that the coalition cannot really take credit for.

Since writing this I came across an attempt by Jonathan Portes and also by Full Fact to deal with this issue. In addition an article also appeared in New Statesman (today) attempting to debunk the ‘deficit down by a quarter’ myth. These explanations are correct but also deficient as they only deal with one side of the equation.

Portes Argues

[M]ost deficit reduction – about two-thirds – has come from cutting investment. Given that even at the peak investment spending was only about a tenth of total government spending, this is astonishing. Moreover, it’s getting worse. Last year more than three-quarters of deficit reduction came from cutting investment. Indeed, the current deficit – excluding investment – fell hardly at all, from £102.5 billion to £99.5 billion.

Indeed. Full Fact, Portes and the New Statesman are obsessed with cuts to spending. It is as if they have been taken in by right wing rhetoric which equates the deficit to public spending. I think we need to remember what the deficit actually is. The deficit is the difference between government spending and government revenues (mainly tax). It is the revenue side which seems to be overlooked. This is strange considering (contrary to popular myth)  the budget deficit of 2008/9/10 was driven primarily by a fall in revenue than by too much spending, as the graph below shows:

What is most awkward for me here is that what I am about to argue is a defence of Labour’s economic policy – not being a huge fan of the Labour party this leaves a somewhat sour taste in the mouth – but still in the interests of getting to the bottom of this, I’m afraid the truth is, if anyone deserves credit for reducing the deficit (and I’m not sure anyone really does), it is Labour.

Full Fact point out that the government’s figures come from  public sector net borrowing which ‘stood at £159 billion in 2009/10 and fell to £121.5 billion by 2011/12 – a fall of 24 per cent (revised down from 25% as the figures stood a month ago).’ As I have already said, this involves picking a time when the deficit was at its peak and most likely to start coming down anyway and comparing it with a time when the government had only been in power for a short time. I have also pointed out that according to the ONS the deficit increased in 2012 under the coalition’s watch.

According to the government’s claim, they reduced the deficit by £37.5M between 2009/10 and 2011/12. The deficit did indeed fall in this time; but how much of it was down to the coalition is debatable. The coalition came to power in May 2010 and their spending review was in October. The majority of  their spending policies did not really come into effect until April 2011. Therefore any deficit reduction between April 2009 and April 2011 would be more attributable to Labour policies than coalition polices.

As you can see in the Graph above the deficit went down by about £20M during the period where Labour spending policies dominated. Therefore about half of the government’s 25% deficit reduction claim can be attributed to more to Labour policy than the coalition. Now the coalition’s spending policies would have had an immediate effect on the deficit but their polices would have taken longer to impact on growth. Thus it is fair to say that economic growth between 2009/10 and 2010/11 would be driven more by Labour policy than by the coalition’s austerity  With the exception of a dip in growth at the end of 2010, this was a period of slow but steady growth and with this came rising tax revenues. In fact tax revenues increased by £38.7M between 2009/10 and 2010/11 (nearly double the increase between 2010/11 and 2011/12). This increase in revenues brought about by growth that is more attributable to Labour policy than coalition policy, would have had a huge impact on the deficit. It is at this point (after Labour policy had started to stimulate growth and increase tax revenue) that the coalition’s spending cuts would come into play. These cuts combined with the growth caused (at least in part) by Labour policy would have further reduced the deficit. It is this dynamic which accounts for the 24% reduction – a combination of Labour stimulus and coalition cuts. However Labour cannot receive all the credit. Part of it was simply natural economic bounce back from the dramatic loss of revenue (caused by the 2008/9 crash, noted above). As already stated the coalition chose to measure the reduction in the deficit from a period when it was at its peak, when tax receipts had taken a massive dip, and compare that with a period that had enjoyed a mild recovery caused, in part, by Labour’s stimulus measures. It is also true that (as others have noted) coalition cuts to infrastructure spending played a part in reducing the deficit too. These cuts combined with the knock on effects of Labour’s stimulus had a powerful impact on the deficit; but – crucially – this could only work in the short-term.  As the cuts started to impact on growth, the effect became less pronounced and has even gone into reverse.  Hence, as has been widely acknowledged, coalition policy has led to a double dip (maybe even triple dip) recession and stagnant growth. This explains why the deficit has increased recently under the coalition. This is why (as Full Fact point out) the coalition emphasise what is now a very dated measure, rather than admitting that recent data show that the deficit is rising again.

What is strange to me is that the deficit was caused by a drop in revenue, not by excessive spending, yet even the Left have bought into the myth that spending is all that matters. Thus even when the left wing commentators such as Jonathan Portes and George Eaton try to debunk the coalition’s deficit claims, they fail to convince, as only half the equation is considered. This is perhaps the most worrying aspect of all this for me. Not that the government manipulate the data to make themselves look good – this is to be expected – but that even left wing commentators seem to have bought into the dangerous logic that the budget deficit is all about government spending. This is the logic behind austerity and cuts….this is the path to the dark (supply) side; not a path that the Left should even consider walking down.

Also by Marxist Nutter:  Ideology and Discourse in ConDem Policy

Related posts:

Cameron and Osborne dwell on Bullshit Mountain, UK

Osborne and Cameron’s Big Deficit Myth

How to be a Deficit Owl

Labour’s deficit problem.

Why does the Structural Deficit remind me of LIBOR?


If Keynes is good for China – what about the UK?


The UK is not broke and doesn’t need to borrow to reverse the cuts.


The UK is not broke and doesn’t need to borrow to reverse the cuts. The video clip explains this simple truth about the US economy, but it is also true for the UK and all other countries that issue their own currency. The Eurozone is different because each EZ country uses a foreign currency, the euro… and (whatever David Cameron says) Ed Balls and Gordon Brown prevented Tony Blair from signing the UK up to that particular disaster.

George Osborne’s economic policies and cuts are ideological choices which hit the most vulnerable for the advantage of the super-rich and the multi-national corporations which will/are benefiting from the privatisation of our public services. The cuts are not fair:

Picture 37

A fair society: How the cuts target disabled people.

And the cuts are not necessary:

MMT Movie: Economics for Dummiez

Created by @HaikuCharlatan Published on Jan 15, 2013
MMT (Modern Monetary Theory) Basic Intro:

Hat-tip New Economic Perspectives

There is a link to an good interview with Prof. Stephanie Kelton about the Fiscal Cliff and inflation, courtesy of the ‘From Alpha To Omega’ podcast…..

Picture 39

Hat-tip @mark5000910

George Osborne says we’re running out of money ..


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)

Related posts:

The big lie – Governments cannot run out of money!

How to be a Deficit Owl

Cameron and Osborne dwell on Bullshit Mountain, UK

The fundamental deceit of ‘There’s No Money Left’

Why does the Structural Deficit remind me of LIBOR?

Osborne and Cameron’s Big Deficit Myth

What is George Osborne playing at?