EVERYTHING YOU EVER WANTED TO KNOW ABOUT HOW OUR MONEY SYSTEM WORKS BUT WERE AFRAID TO ASK

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EVERYTHING YOU EVER WANTED TO KNOW ABOUT HOW OUR MONEY SYSTEM WORKS BUT WERE AFRAID TO ASK

by Prue Plumridge

At a time of great political and economic uncertainty you may be scratching your head and asking what on earth has this article to do with you as you’ve enough trouble just keeping your job and your finances in order let alone worrying about getting the government deficit down and paying the national debt back! What a temptation it is to shake our heads and defer to the experts who, we believe, must know better. The subject of economics might seem a little tricky but the basic concepts are simpler to understand than you might think at first glance and, rather than being a dull and arcane subject, it has everything to do with your life and your well-being.

So let’s start with a short economics quiz. No cheating now just answer the following questions with a yes or no without peaking further down for the solutions.

  • The state money system operates like our own household budgets
  • Government spending relies on taxation and borrowing
  • The government needs to reduce the deficit, balance the books and save for the future
  • The government must learn to live within its means
  • The government has to cut public services like the NHS, education or welfare because we can no longer afford to pay for them

If you answered YES to all of those questions you might be surprised to learn that you have fallen into the mainstream trap. This is what mainstream economists and politicians want YOU to believe. But what if everything you ever thought you knew about how the money system works wasn’t actually true but was being used to justify an ideology which includes austerity and cutting the public services we all rely on?

Well that’s exactly the case! YOU have been deceived.

WHAT YOU NEED TO KNOW:

  • The UK government issues the currency out of thin air via keystrokes on a computer – yes really! Banks create money out of thin air too when a customer takes out a loan but that debt must be repaid with interest.

 

 

  • The UK government is not like a household or a business where its finances are concerned
  • When the UK government spends it creates money by crediting the reserves of commercial banks held at the central bank – the Bank of England. A monetarily sovereign government like the UK can never run out of money and can always meet its liabilities as long as they are designated in the local currency, in this case our British pounds
  • The government as the currency issuer spends money into existence and doesn’t need to tax or borrow on the markets to fund its expenditure. Think about it:
    • What sense would it make for the government to borrow money it had issued in the first place?
    • How can the government spend tax before it has received it? Your tax obligations can only be paid once the government has issued the money and it is deducted at source by the taxman from your salary. (And just to shock you a little bit more do you know what happens to your tax? It gets extinguished from existence.

So, tax is not funding government expenditure. We have just been conditioned to believe it does.

  • Tax does, however, have a number of specific functions which include:
    • Ensuring that the economy does not exceed its productive capacity and lead to inflation – taxing more if the economy starts to overheat and taxing less if it is slowing down.
    • Enabling wealth to be distributed more equitably. So, yes, the rich SHOULD pay the tax they owe but not because it is funding healthcare, education or public services. It does not.
  • If our expenditure exceeds our income we will be in debt and it may cause us financial concern. However, a government deficit is far from being the bogeyman it is presented as by experts and politicians. (Just to be clear a government deficit is difference between tax received and the amount government spends and the national debt is the accumulation of those deficits). Deficits are, in fact, normal and necessary. They represent YOUR income. The politicians won’t tell you this (perhaps they don’t know) but in historical terms governments have run fiscal deficits for most of the time and have hardly ever run balanced budgets. Indeed, when it has happened they have occurred just before economic downturns. Think about that. What conclusions might you draw?
  • Budget surpluses are not the equivalent of saving to fund future government expenditure no matter what the politicians tell you. As the currency user you can save for that holiday you’ve always wanted but this does not apply to a sovereign government which is the currency issuer, cannot run out of money and can spend when it chooses. When a government chooses to pursue a public surplus what it actually means is removing wealth from the non-government sector -in other words you and me, the currency users. When that happens poverty and private debt increases instead. And that is exactly what has happened.
  • When you borrow money from the bank you have to repay the debt with interest. If you don’t the debt collector will be round pretty sharpish. This does not apply to a monetary sovereign government which cannot go bankrupt so the debt collectors won’t be knocking on the door of the treasury ready to haul off its assets any time soon.
  • Government funds public services like the NHS through creating money not by borrowing or taxing to pay for it.

But won’t ‘printing’ money create inflation I hear you gasp. After all you’ve heard about all about hyperinflation in Germany and Zimbabwe and politicians keep telling us all about the evils of ‘printing’ money and hyperinflation. As with everything there are caveats – nobody is suggesting for a moment that a government could carry on spending ad infinitum. Money may be infinite but resources are not.

The UK government may not be constrained financially but it is limited by availability of real resources – people, skills, technology, equipment, infrastructure, natural resources and ecological constraints. It is NEVER constrained by money.

We often hear journalists and politicians talk about a government’s financial credibility suggesting that an increase in the debt or deficit is an indicator that a government cannot be trusted to manage the economy effectively. However, this is the wrong measure of effectiveness. We should judge a government on the economic choices it made and whether it advanced public purpose. Did it create the necessary infrastructure to sustain a healthy economy? Did it invest in the health of the nation, in education, transport, food and farming security, renewable energy infrastructure or research and development? Did it ensure that citizens were protected in the event of illness, unemployment and disability or provide good pensions? Did it pursue full employment policies? Did it spend enough during economic downturns and offer a job guarantee for all those who wanted to work? And lastly did it use the available resources in the most effective way possible for the benefit of all?

If the answer to any of these questions is no then a government has failed to deliver in its primary purpose as a servant of the people. “The Government is us”.

Remember, a good government is one which:

  • deficit spends enough in relation to the prevailing economic conditions.
  • makes choices aimed at ensuring the well-being of the many and not just the few using the available resources as effectively and equitably as possible.

So, when people ask you as they invariably will ‘‘can we afford it’ the answer is yes.  The government creates the money and when it spends it benefits the private, non-government sector. In economic parlance, a government deficit equals a private sector surplus.

In short, spending equals income to someone – you, me, public service employees, pensioners, sick and disabled people receiving benefits all of whom will spend that money in the local or national economy not to mention businesses who will invest if they are confident in the government’s handling of the economy.

While we focus on the question of whether we can afford it in money terms we are ignoring the more important question of what the consequences are for the health and economic well-being of the nation if governments don’t spend adequately.  Austerity and cuts to public services have been presented as a financial necessity (however erroneous that argument is) and yet at the same time this government has had no problem at all with magicking up money from thin air to purchase weapons, fight wars, repair the Royal Estate, hand out tax breaks to the already wealthy or give public money to private corporations to run public services. It turns out the government is a real handy cash cow for the corporate sector.

Economic well-being depends not on money but governments making good choices which benefit us all and, given the record of the Conservatives over the last seven years, this is the question that should be on our lips not can we afford it.

 

Credits to:

https://era-blog.com/2016/12/05/paying-for-public-services-in-a-monetary-sovereign-state/

https://www.thepileus.com/economics/jeremy-corbyn-does-not-need-to-borrow-to-pay-for-his-policies/

https://www.thepileus.com/economics/labours-economic-alternative-to-neoliberalism/

http://bilbo.economicoutlook.net/blog/?p=25961

https://www.theguardian.com/commentisfree/video/2015/feb/04/another-economic-crash-is-coming-how-did-this-happen-video

https://www.theguardian.com/money/2017/apr/08/consumer-debt-loans-credit-cards-bank-of-england

 

 

 

 

 

 

Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.

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Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.

By Peter Martin Twitter: @petermartin52

An economic and political discussion usually and rather quickly gets around to a discussion on “the deficit”. Of course what everyone means is the Government’s deficit rather than the deficit neo-liberal politicians have created in our spending power in recent years. The other less mentioned deficit is the one the UK runs in its trade and financial dealings with the rest of the world. There are various terms used in connection with this such as current account deficit, balance of payments deficit. Then there is the capital account which includes the sale of gilts. To keep things simple I’ll just use the term external deficit for the net flow of ££ out of the economy. So we can think of this as the Surplus the Rest of the World has in its dealing with the UK in £ terms.

If we consider everything as a surplus we can say:

Government Surplus  + Private Domestic Sector Surplus(or PDS savings) + Rest of the World Surplus = 0

This is the well known sectoral balance equation. The Private Domestic Sector would essentially be the real economy and would include all publicly employed workers, local councils and their workers,  and even some Govt owned companies – though this might just depend on how the accounts are presented. This is just in £ terms. They don’t include any real assets like gold reserves or land holdings.

Going back to deficits this works out as:

Internal Deficit (Govt Budget Deficit) = PDS Savings + External Deficit (Trade)

It is common in discussions for someone to say something like ‘the trade deficit is not the fiscal Deficit.” Which is of course true, butthe two deficits are very closely related. If, as now, we are running a 5% of GDP trade deficit and the  Government is running a 4% deficit there is 1% more spending leaving the economy to pay our net import bill than is replenished by the Govt deficit. That money has to come out of everyone’s savings. So if the external deficit was zero the Government deficit would certainly be reduced substantially and may even be eliminated completely. Another way to look at it would be to say that money paid out for imports can’t be taxed but if it is paid out for local products it can be. Money generated from export sales, or import replacements can be taxed too. Redcar steelworkers pay UK tax. Chinese Steelworkers don’t.

Exporting more, to the value of 2.6% of GDP and importing 2.6% less will close the trade gap completely.  This may require a some initial discomfort to achieve but it will be nowhere near as bad as continually putting up with with tax rises and spending cuts, ignoring the external deficit and running the economy into ever deeper recession.This is a saleable message that our politicians (are you reading this John McDonnell? ) could well explain to a sceptical public.

There are those MMT supporters who will not be at all pleased with the thrust of this argument.They will be thinking that we should not be using MMT to explain how our deficits can be reduced but, rather, we should be explaining how they do not matter. They’ll argue that the deficits are just numbers on a spreadsheet, that ££ are just like runs on a scoreboard, that the government is monetarily sovereign and that it can never run out of pounds, it can never involuntarily default and it can never go broke in any debt denominated in ££. They will further argue that exports are a net real cost to the economy and that imports are a net real benefit. Therefore we should be exporting as little as possible and importing as much as possible. Of course, this is all absolutely true and intellectually incontrovertible. Except, I would just question the morality of deliberately taking more from the world than we are prepared to give in return.

It is also true is that we live in a democracy and we have to assess the chances of the voters ‘buying’ this argument in sufficient numbers for Labour to win in 2020. I am not a politician but I would say there is no chance at all. So, if this is a correct assessment, we have to look for the next best alternative. If we don’t offer that, which is an economy at relatively full employment with low internal and external deficits, stable but modest levels of growth, inflation and interest rates, we will end up with something very much worse.  An economy with high levels of unemployment and underemployment, high numbers of low paid and low productivity jobs, higher internal and external deficits, and with a government which is forever chasing its own tail with a succession of tax rises, spending cuts and the encouragement of excess private credit created asset bubbles.  In fact, just like the one we have now.

People are sick of all that. We just need sensible politicians to explain that there is a much better, if not a perfect, option

The Motives behind Corbynomics – Tax Research UK

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The Motives behind Corbynomics

As seen by Economist Richard J Murphy, of Tax Research UK,

Previously published here

I had this article in the Islington Tribune (Jeremy Corbyn’s local paper) whilst taking a couple of days off:

RATHER like Jeremy Corbyn the economics that has in the last week or so, been dubbed Corbynomics is not new.

What’s new is that for the first time in years a politician who is willing to speak out for policies that might really change the wellbeing of most people in this country has hit centre-stage.

There are three key ideas at the heart of Corbynomics.

• The first is that austerity is not necessary. 

This sounds really radical when, for example, at the last election all three major parties competed to argue who could cut the deficit the most.

In fact though very large numbers of economists, including Nobel laureates Paul Krugman and Joe Stiglitz, have pointed out how bizarre this is.

There is, they say, no chance of a recovery if we deliberately reduce our government spending by enforcing government cuts.

And as they add, balancing the budget is not necessary, especially when right now government borrowing is so cheap that it would be crazy not to invest in our future.

Corbynomics in that case is what makes sense, revealing austerity as just bad politics.

• The second theme is that reducing inequality increases wellbeing for everyone, including the best off. 

Again, this is not radical.

The International Monetary Fund agrees with this claim, which is based on the logic that if you want to grow an economy fast the people who need money most are those who spend their incomes.

That’s the least well off, because the best off save, by definition. So redistribution pays when you’re recovering from a recession.

• The third theme is that it’s just not true that markets do everything well and the state does everything badly: the reality is that great people can do great work in either sector and the job is to pick the right organisation for the job that needs doing.

So how does this pan out? In four ways.

• The first is in ensuring that the money to pay for essential government services is available.

This would be done by increasing some taxes on those best off, and for large companies.

It would also come from investing heavily in HM Revenue & Customs to crack down on tax dodgers.

• Second, it would come from investing new government money to kick-start the economy by building schools, hospitals, transport systems and in creating sustainable energy systems.

This is called People’s Quantitative Easing because it’s a variation on the £375billion programme used from 2009 to 2012 to keep the financial system afloat, but this time the money is used to benefit ordinary people. Funding investment activity in this way makes it much easier to balance the government’s books in the long term.

• Third, where it is essential that to get best public service that the state co-ordinate an activity Jeremy Corbyn is not afraid to say so.

Rail services are the obvious example.

• And last, Jeremy Corbyn is committed to beating inequality, whether from unemployment, low pay, disability, or discrimination or from lack of access to education, housing and other needs people have.

What he’s quite willing to say is that if this requires a bigger state sector than we have at present, so be it.

He is saying that may be vital to all our wellbeing and we can afford it.

The UK is, after all, the sixth richest country on Earth.

What is more, the well off would really benefit: there would be growth for them too, while the risk of inflation is virtually non-existent until such time as people in the UK are as well paid and productive as the French, who beat us by 20 per cent right now.

It’s different so it seems radical. But I will give the last word to the Financial Times. Last week they said Corbynomics “could actually be a decent idea”.

As one of its authors, I can live with that.

Reproduced under a Creative Commons Attribution-Non Commercial 3.0 Unported License. –

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Who says we can’t afford the NHS or Social Security?

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By Prue Plumridge

Yesterday in Parliament, we witnessed a shameful spectacle when only 48 Labour MPs voted against the Welfare Bill.  The extreme centre, as Tariq Ali referred to it in his book ‘The Extreme Centre: A Warning’, once again failed to vote for the well-being of the citizens of this country.   Not content with abstaining over Workfare in the last government, a majority of Labour MPs did so again.  Neoliberalism rules in the Labour party in all but those very principled individuals who chose to put their heads up against the flow and say no.

We are told time and time again, that we can no longer afford our NHS or our social security system.  We are told that we must reign in expenditure, reduce the deficit, balance the books and even achieve surplus.  Our politicians like to remind us regularly that we cannot not leave the debt to future generations.  Deficit has become the bogeyman of our times and austerity its friend.

We accept this because we have an incomplete understanding of how our economy and money systems work.  Our politicians (through ignorance and design) use the analogy of the household budget to explain why we can no longer afford public sector services and our social security system.  Notice I make a distinction between the terms social security and the oft used word ‘welfare’ which has become so tainted in recent times.  The connotation of welfare to mean skivers and scroungers has been cleverly used by politicians and the media alike to divide people who either don’t know or have forgotten its origins. Along with the mantra – there is no money – it is 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.

It seems to me that if we are to challenge the view being pedalled by our politicians and many mainstream economists that we can’t afford our public services, and create a decent society for all we need to go back to basics and gain an understanding of how our economy really works. Not the household budget model which serves as a useful means to deceive people who, quite understandably, identify with Micawber the Dickens character in David Copperfield, who said:

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.”

We are always told by politicians that tax funds our expenditure – meaning that our expenditure on things like infrastructure, the NHS, and Social Security is limited by that income.  We need to start dispelling these pernicious myths which are rooted in our ‘gold standard’ past which demanded that you had enough gold to back your national currency.  This arrangement was abandoned as far back as 1971 and yet we are still running our economy and money system as if it were still in place.

Last year, Dr Stephanie Kelton gave a presentation to students in Kansas City in which she challenged these ideas.  She used the Monopoly game analogy to explain where money comes from and how the system really works and pointed out that balancing budgets will only suppress growth because it removes money from the public sector’s balance sheet which in turn acts as a drain on the real economy.  By which she means the labour, equipment and other resources that produce the goods and services we all rely on.  Spending (as she says quite clearly) equals income to someone. She also explains that we are not going to leave a huge debt to future generations, as is being claimed by those politicians who either don’t understand or wilfully misunderstand the reality. The real issue is not affordability but how we ensure future economic prosperity through improving productivity.

This is what she had to say:

 ‘When you play the game monopoly, you open up the rules, set up the cards and ask who is going to be the banker. So how does the game start? Why doesn’t the banker collect taxes to get the game going? Because no-one has any money yet.  So what does the bank do first?  It has to issue the money before it can collect anything back or the game can’t even begin.  So the spending, the issuing of currency has to come first.  And then you read the instructions and it says the bank collects taxes, fines, loans and interest and the bank never goes broke. If the bank runs out of money the bank may issue as much as needed by writing on any ordinary paper.  It’s exactly what it means to be the monopolist. That’s why they call it Monopoly.  Money has to be spent before it can be collected back.

So you start playing the game and you move you pieces around the board and you land on Community Chest or Chance, you draw your card and oh oh pipes burst, pay $50 – there goes a leakage. You keep on playing, you land on another one and oh oh tax is due pay $100. This game will end very quickly if there isn’t a replacement for the money that is leaking out – so every time you pass GO you collect $200. Why does the monopoly game tell the banker to put in $200 each time you go around? To keep the game going. To let the game continue.  You can save in Monopoly in the form of real estate investment. Every time you buy a hotel or a house you pay the banker some money and it’s out of the game – it’s leaked out.  Every time you pay taxes it’s money that has leaked out of the system. The banker has to spend out more than it collects otherwise the game will quickly come to an end. Which is to say that if the banker is not deficit spending the game will end much sooner.”

Dr Kelton goes on to point out that even Alan Greenspan, former Chairman of the Federal Reserve knows perfectly well that a government cannot go bankrupt.  He made this quite clear when he said under oath as chairman of the Federal Reserve ‘a government cannot become insolvent with respect to obligations in its own currency.  A fiat money system like the ones we have today can produce claims without limit”.  When faced with a question posed by Congressman Paul Ryan on social security (although as Dr Kelton says it could refer to defence spending, education spending, infrastructure spending or student debt), as to whether personal retirement accounts would help to achieve State solvency  (whilst also disingenuously suggesting that social security was going broke and that it would be a good time to move towards personal savings account or in more plain language privatisation), Alan Greenspan replied that there was nothing unsustainable about social security because there is nothing to prevent the federal government from creating as much money as it wants and paying it to someone.  However, the real question, he said was, will the real assets be there in the future that those incomes can be employed to purchase? There are, we all know, demographic changes taking place – a shrinking work force and a growing population of retiring baby boomers which it is claimed is the reason why we need reform and privatisation.  It is, however, a red herring and the real issue is that with fewer working people producing the goods or services how will we ensure that there are enough for future generations to purchase.  If there are not, then competition for a smaller pool of output would then lead to inflation.

Therefore the questions we should be asking are not whether there is enough money but whether we are we making the necessary investments in education and technology or indeed will there be enough resources to ensure that we can continue to be productive particularly in respect to the finite nature of our planet’s resources and how should we manage it? To repeat, the debate can never be about affordability. These are perhaps the real questions for us as a society.  What sort of world do we want to live in? One where greed and inequality increases and poor people are dehumanised and impoverished?  Or one which is fair and just and treats citizens with respect and dignity whilst also recognising some of the really serious issues we face about the future viability of our planet home?

It is clear from recent announcements in the House of Lords and by government ministers that we are being prepared for the eventual complete privatisation of the NHS and our social security system, both to be replaced by insurance schemes.  Not because they have to but because of erroneous ideology which suits the politicians and their corporate friends.

The trouble is, as Mark Twain puts it ‘It is easier to fool people than to convince them that they have been fooled” and it is time to wake up to the deceit which is being practised upon us by those who should be leaders and not exploiters. We have an obligation to ensure that people understand what is happening and why it is happening.  We need to educate ourselves and pass it on.  Otherwise the lie will be perpetuated remorselessly until there are no options left.

References:

http://www.theguardian.com/politics/2015/feb/20/tariq-ali-interview-renationalise-the-railways

Tariq Ali: The Extreme Centre: A Warning

Dr Stephanie Kelton Angry Birds https://www.youtube.com/watch?v=d57M6ATPZ