I had a great time presenting on the philosophy of money at Philosophy for All, and I learned a lot. Yes, I noticed the artwork. I’m not going to post the audio of the talk because it was my first time speaking on this; and, frankly, I made several mistakes that I’d be embarrassed to have out in public.
If you’d like me to send you the audio file for your PRIVATE use, drop me your contact details and I’ll consider it.
I found the audience generally receptive to the exercise of trying to think about money in a different way from what we’re usually taught. This bodes well. While I may have been speaking largely to a London elite, the generally sympathetic reception I got makes me wonder why some version of austerity is still the common ideological element uniting all the major UK parties. I didn’t watch the leader’s debate, but I saw enough on Twitter to get the ugly picture.
Some audience members, however, seemed to agree with my general conclusion – that capitalist production requires it to be the case that almost all the time at least one sector is running a deficit* – but for what I believe to be the wrong reason. Their reason is that in order for both the principal and the interest on a loan to be repaid, new debt must always be issued. The idea is that if the whole economy borrows £100 at 5% interest then it owes a total of £105 but only has £100. The ‘extra’ £5 has to come from somewhere, and this can only be from more borrowing. I’ll call this the Treadmill of Debt notion.
Steve Keen expressed some frustration at the prevalence of the Treadmill of Debt notion, and wrote a piece on Forbes explaining why it’s wrong. But his explanation is pretty hard going for the average non-accountant. He points out that it involves a confusion of stocks with flows. That is right, but a simpler way of pointing out the mistake is just to say that interest can also get spent. I think I can make the relevant point with an oversimplified model.
Suppose I borrow £100 from the bank at 5% interest. I use £5 of this borrowed money to pay off my interest, leaving me with £95. The banker takes this £5 profit and spends it buying stuff from me (a friend suggested I could also earn the £5 by working for the banker – mowing her lawn or something). I now have £100, and I pay off the principal. This is enough to show that it’s perfectly possible for both the principal and the interest to be repaid on a loan without anybody taking on more debt. All you need is for the interest to be spent.
Why is this important? After all, I also think that capitalism effectively depends on a continuous growth of debt. But it’s dangerous to think that this is needed just to repay the interest on existing loans. My point is that capitalists produce in order to accumulate money, not all of which they spend. The Treadmill of Debt notion, by contrast, makes it seem as though a permanent expansion of debt is necessary only because of the way the monetary system works. Thus the resulting policy recommendations differ.
One view (the one I think is correct) entails that the government should maintain a permanent deficit in order to sustain production at the highest possible level and increase the deficit during periods of recession.
The other – the Treadmill of Debt view – entails that the monetary system is ludicrous and should be overhauled. I blame Positive Money UK for the preponderance of that view. If you read their literature carefully, they don’t quite fall into the Treadmill of Debt fallacy. But they seem to target their promotional material at people who do fall into it.
There is a lot wrong with the way that banks are regulated. But the monetary system isn’t broken. It does not guarantee ever-expanding debt. On the contrary, it allows for periods of underproduction in which debt doesn’t expand enough for capitalists to realize a monetary surplus and therefore do not undertake production.
As I said, Positive Money don’t fall into the Treadmill of Debt fallacy, but there is one myth they propound that is in serious need of debunking. This is the myth that governments (with floating fx) currently have to borrow from private banks in order to spend. This is an illusion. When the government spends, the central bank credits bank reserves to the recipient of government spending. It looks like the government has to raise this revenue by selling bonds. But there is the illusion. Bond sales are a reserve drain, aimed at maintaining interest rates. Yes, most of the bonds are bought by private banks. The central bank then buys up some of those bonds or sells more out of its own stock, in order to maintain its target interest rate. This is all for the sake of maintaining the rate; it doesn’t finance government spending. If the central bank left the rates at zero there would be no point to the bonds at all, and the illusion that the government spends by borrowing from the private banks would be shattered.
Positive Money types say that we need to switch to a completely different Sovereign Money system, so that the government can create money ‘debt free’ instead of going into debt with the private banks. J. Huber even recommends a revolution in accounting, whereby money becomes a pure asset, with no corresponding liability, rather than a liability of the government. This is all wordplay and empty rhetoric. The results they want can be achieved within the current system with a permanent zero rate policy and the phasing out of bond issuance by the government.
Well, not quite. PM also want the elected government rather than the banks to decide where investment goes in the economy. That, also, is easy under the current system. It requires an active fiscal policy by a government not afraid to run deficits, combined with firm regulation of what banks are allowed to lend for (at least those banks with access to deposit insurance and lender of last resort).
The PM proposal to bring about this result is unnecessary and probably insufficient. Effectively they want to impose a 100% capital requirement on banks. That changes the way banks finance their lending; there’s no reason it should change what they lend for. If it does, this will be as an uncertain and indirect result. Why be indirect, when you can be direct? If you want banks to stop making massive profits out of asset bubbles, for example, forbid them to lend into asset bubbles. No more mortgages on the secondary market, etc., etc.
There are features of the monetary system that desperately need fixing. For that, we need to start recruiting the energetic thinkers and activists that Positive Money and other organizations currently have tilting at windmills. I should know; I used to be one of them.
* – that is, ∀ time(t): ∃ sector(x) & x is in deficit at t, not ∃ sector(x) & ∀ time(t) x is in deficit at t. Never mind the Inflation Monster; beware the Scope Ambiguity Monster.