Only Fools and Liars say ‘Government Borrowing’

BorrowI propose the total removal of the term ‘government borrowing’ from our vocabulary.

Abstracting from the fact that it’s become entrenched in common usage, it’s a rinky dink term that you wouldn’t use if you knew what you were talking about, unless you intended to deceive others. The ignorant do not need a special vocabulary in which to convey their ignorance, and liars don’t deserve to have a weasely jargon to assist them in defrauding the public. Thus there is no legitimate purpose served by the term.

Do you use the term? Do you think it makes sense to use it, whatever your opinion on ‘government borrowing’ might be? Then try the following. Ask yourself whether there’s any difference between the government borrowing money and the government printing money. Forget what you’ve learned about economics, just think it through logically. If you can suffer through the next few paragraphs, I’ll explain why this is important.

Suppose the government deficit spends (as usual, I’m talking about countries with sovereign currencies – countries like those whose official language is the one in which this blog is written). It spends more than it taxes. It adds reserves to somebody’s bank account and doesn’t take the same amount away from somebody else’s bank account. Net reserves in the banking system have increased. Suppose the government does nothing to follow this. Orthodox theory will then say that the government has ‘printed money’.

What happens next? If the new reserves start to push the interest rate down, the central bank, whose job is to control the rate, will sell gilts out of its own stock until the rate returns to target. If it ran out of gilts it could ask the Treasury to issue more, or it could control the interest rate directly through paying interest on reserve balances. Not a big deal.

On the other hand, suppose the government follows up the addition of reserves by selling gilts. Now orthodox theory will say that it has ‘borrowed money’ rather than ‘printing’ it. The new supply of gilts can have the reverse effect, bidding the interest rate up by providing a higher-interest alternative to holding savings in reserve balances and thus an arbitrage opportunity. Again the central bank will intervene to maintain its policy, this time by buying gilts. Of course it can’t run out of reserves with which to buy the gilts, since it issues reserves.

Have you noticed what’s happened here? In either scenario you end up with exactly the same result: the central bank makes sure that the ratio of reserves to gilts is whatever is necessary to maintain its target rate.

Relative to any consistent central bank policy, there is no functional difference between printing money and borrowing money. Both have exactly the same result.

So, functionally speaking, ‘government borrowing’ is the same as ‘the government printing money’. The latter term is more accurate. After all, what the government does when it deficit spends is create reserves out of thin air and spend them into the economy. It may or may not sell gilts afterwards, but with a consistent central bank policy this makes no difference. So call it ‘printing money’, not ‘borrowing money’.*print

That may all sound technical. But it’s politically very important. The word by which we name an activity governs our intuitions about that activity, particularly about its risks. To speak of government ‘borrowing’ puts people in mind of silly, imaginary risks: the bailiffs banging on the government’s door, the ‘bond vigilantes’ clamouring for repayment and the government somehow not being able to cash up, despite the fact that it issues cash out of thin air. Most annoying is the ridiculous idea that future generations will be ‘burdened’ by our debts. Future generations will hold risk-free bonds, and nobody has to pay taxes to service a ‘debt’ owed by a government that issues the currency in which the ‘debt’ is denominated.

If you’re living in the UK, make no mistake: government borrowing is a big issue in voters’ minds. They’re convinced that there’s something wrong with it and want to vote for the party they think can ‘get it under control’. Convincing them that borrowing is unproblematic just feeds the delusion; it’s more effective as well as more truthful to argue that it doesn’t happen at all. What the government does when it deficit spends is print money. It doesn’t borrow anything.

There is another reason to change the conversation in this way. Speaking of government ‘printing’ instead of ‘borrowing’ puts people in mind of the real risk, namely inflation. Every pumped up pocket monetary theorist knows that printing money is linked to inflation; for many it’s all they know. But it doesn’t take much thought to realise that not all money printing can lead to out-of-control inflation. After all, all the money that exists must have been printed at some point, and inflation isn’t always out of control.

Controlling inflation is the job of the central bank. We have seen that deficit spending does not get in the way of central bank policy, whether it occurs through a reserve-add or through a gilt-add (and, given consistent central bank policy, these end up with the same result). Since inflation is the only risk associated with printing money (other than currency depreciation, which comes through the same channels) the government may as well keep on printing until the central bank proves unable to control inflation/depreciation. Then it can stop. Until then, print away! Buy everything the public needs and taxpayers aren’t willing to pay for! End all the silly debates about what the nation can ‘afford’ (rescuing drowning refugees, for instance). Why not?

Since ‘government borrowing’ really means ‘government printing’, the government’s deficit is the amount it prints each year, not the amount it borrows each year. The public debt is just the sum total of money that has been printed, whether in gilt or cash form. There go all the pig-ignorant arguments about reducing the horrible, terrifying, burdensome, future generation-impoverishing debt. Cut away the misleading term and all that bullshit drops off with it.

If you’re a spin merchant manipulating people into voting against everybody’s interests, or if you get a kick out of advertising your own ignorance, then go ahead and keep using the term ‘government borrowing’. Otherwise just stop.

* – By the way, the central bank operations of swapping gilts for reserves and vice versa don’t amount to printing anything. Assets are swapped; no net assets are created. The swaps are undertaken for the purpose of adjusting interest rates or moving the yield curve – that’s all. So Quantitative Easing is not ‘printing money’. Now you know. Spread the word.

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34 thoughts on “Only Fools and Liars say ‘Government Borrowing’

  1. David Merrill (@DavidMerrill21)

    Yes, it is remarkable how the reality is do distant from common perception. Have made it my business to ask well known figures whom I meet their opinion on this matter and I am surprised how many acknowledge the lack of an affordability constraint but who won’t go public with their knowledge. The story about the target interest rate you give is in fact a strong piece of empirical evidence in support of MMT. Much of the MMT argument is a matter of logic so it is good to find something one can point to. I keep wondering what it would take to get the Guardian to print a piece setting out what you have just said. What stops them? As a clarification, is it really the case that the Bank of England cannot or does not create bonds only the Treasury? Thanks.

    Reply
    1. axdouglas Post author

      You’re right; the UK is disproportionately disinterested in MMT. The Guardian should be much more interested. Better commentators than I have tried to pitch things on the job guarantee, but so far no interest. It’s pitiful. Even Australia does better.

      There’s nothing to stop the BoE from issuing bonds, but what would be the point? When banks run overdrafts, they automatically borrow at the penalty rate. When they hold reserve balances, they earn the rate the BoE pays on those. Bond auctions would be superfluous. Treasury gilts are obviously issued by the Treasury, but that doesn’t stop the BoE from maintaining a buffer stock of them with which to adjust the rate as necessary.

      Reply
      1. Jimmy

        Another strange thing about the debate is that it isn’t even about intelligence. I work at university in an engineering field, even if I show academics (who are professors, scientists, physicists, not economists) MMT/PM/SM type ideas they dismiss them out of hand. With smart people it’s a form of “Theory Induced Blindness”, the type of reactions I get are “This can’t be right, you’re missing something” “How do we know x,y,z,..) they don’t want to believe the “higher ups or the clever people” have it all wrong. Academics are extremely closed minded, even in non-related fields their self worth is based on their ideas and world view being correct.

        The smart ones tell me “it goes against what Paul Krugman says” and Krugman is a nobel laurete, MMT is “something from the internet”.

        But, 99% of the time, I don’t bore people with details (not that I find it boring). I’m just asking them to step into the paradigm. Are we living in a “fixed rate/hard money” paradigm or a more MMT floating rate? and show them the evidence to support it, It’s very clear we are in an “MMT type” paradigm but many still won’t accept it.

        MMT/PM/SM etc should not be fighting amount each other until the public are aware of the fact that this gold standard old thinking is used for political games, whilst i’m very much in the center it does benefit neo-liberal corpratist types who have connections to government.

        I’m not a rude, know it all type of person either and I tend to keep my ideas to myself. I completely understand why you use strong language on your blog – it’s justified. Writing in a sober academic manner is not the solution. Even logical arguments fail to convince highly educated people, in fact they would rather vote to impoverish themselves and make banking executives wealthier than accept MMT. It’s like financial cuckoldry. Fixed money people deserve mockery for their lack of curiosity and believing in a delusions even when it hurts them.

        Even when shown proof of MMT type ideas people they still reject it. Most of the denial is irrational and political, it goes against what people like to believe.

        I think a good phrase is “useful idiots” or “useful educated idiots” (The educated idiots are the most rude, passive aggressive) The scientists are the MOST unscientific of all, I have showed them M McLeay paper from the Bank of England and they stubbornly refuse to even read it.

        The Conservatives ruthlessly beat Labour for 5 years with this nonsense. The fact that Labour couldn’t even argue for a higher deficits just shows how bankrupt they are intellectually. I remember Andrew Neil interviewing Ed balls and his solution was to essentially to “pay down the deficit later “. I have noted all the new Labour party candidates have bought into the Tory spin machine and are pushing this nonsense for the Conservatives, so politically nothing can change soon. In this case, Labour deserve what they get their duty is to be the opposition party not a megaphone for the party in power. I would also add that the public did not even make much play of the fact that the dreaded “debt” has risen significantly under the Conservatives. Labour could not adopt MMT even if they wanted to, their policy line/spin was always:-

        “Too far, too fast”

        Labour will probably continue with this line, perhaps they could undo the Tories by saying just get rid of social welfare altogether? I’m sure there’s a Malcolm Tucker type who could spin it.

        You would think The Guardian/Independent would love MMT after all it completes discredits Conservative Policies, think again. The Guardian above all wants to sell papers, that’s their business. MMT won’t sell papers to their audience, they don’t want solutions they just want a fertile demographic of misplaced rage to market their paper into. The usual drivel about the 1%, tycoons, £100 expedited offshore and the lack of women on the moon are easy to digest and reproduce ad nauseam, most of their editors are millionaires and are unaffected by any welfare/budget cuts.

        People like to believe delusions because they flatter their self image. The loud, and highly political don’t like their delusions collapsed.

        The small state Conservatives (whatever this means noways, it’s mainly a US libertarian idea) types love the deficit argument mainly because they have a strange fetish with Austrian Economics and this means fixed quantity of money, it’s like the resurrection of Mises – yet they mock the religious.

        Whilst the Greens mentioned “Positive Money” in their manifesto, it was filled with talk of building cycle paths to the moon and taxing x,y,z, (taking money OUT of the economy) which goes to show they probably don’t even understand the Positive Money viewpoint, even worse they have probably tarnished it and associated it with with being a kooky idea.

        The debt argument also appeals to older Conservatives, “paying down debts”, “being responsible” all odes back in their minds to a halcyon era which they claim existed (but didn’t) where people had strong values, believing this means we are going back to the good old days, when men were men. This is very much noted by their support for military spending, e.g. 30bn+ to US companies for Trident, but “we can’t afford” to spend an extra £1bn on welfare, it’s almost like an “original sin” type argument for these people.

        Younger people, (and I count myself as one at 29) almost always like the “paying down debts” nonsense argument shows “maturity” it’s a belief that differentiates them from hedonistic peers, “time to grow up now” (maybe Dad will love me now).

        The last group is larger than I thought and it’s growing. They occupy all classes and levels of education. They like these policies because it’s an opportunity to hurt others. They understand they may be affected, but they think another groups will be hurt more than them, (asylum seekers, vulnerable people on welfare,) so to their dysfunctional minds they win.

        Racists are love the concept of the debt, they now have some intellectual ground to hate people different to them after all, THEY cost money. THEY are destroying the NHS because there isn’t enough money. This debt rubbish has provided intellectual cover for racism, in fact we’re having a renaissance in racism. The climate is so so ripe it seems we can now say out loud that poor people fleeing a war torn country are “cockroaches” and Politicians are silent.

        These people will also claim benign intentions or to be “doing it for the good of the country* (we know this is crap)”, “patriotism” even “banter” These people all have all these loft motives but when you get to the bottom of it they are just vicious and inhumane.

        Despite what it seems, there are actually many disparate groups which benefit from the “austerity bullshit” not financially, but ideologically. It’s not simply about education and awareness as I had previously thought, they “paying down debts” is almost like a somber ode to post war rebuilding which appeals to some British people (don’t ask me why).

        Personally I think we should find simple ways to mock , yes mock, austerity economics. There is to much deference to these ideas, as if they are grand and have intellectual rigor. The good news is that that debt myth is really just a house of cards, once you can get them to concede that debts are illusory, the whole thing falls down, their true motivations will be exposed as will those of all their strange bedfellows, racists, well heeled corporate types, respectable academics as well as the useful idiots.

  2. Mark Yelland

    Hi,

    Re. your closing para:
    “* – By the way, the central bank operations of swapping gilts for reserves and vice versa don’t amount to printing anything. Assets are swapped; no net assets are created. The swaps are undertaken for the purpose of adjusting interest rates or moving the yield curve – that’s all. So Quantitative Easing is not ‘printing money’. Now you know. Spread the word.”

    I don’t disagree with you, but doesn’t the treasury’s receipt of the coupon payment on the gilts constitute ‘printing money’ in some respect?

    http://www.thisismoney.co.uk/money/news/article-2230579/Treasury-receives-35bn-money-Bank-England-QE-gilts-interest.html

    Reply
    1. axdouglas Post author

      Well, it’s largely semantics, but my unstated premise was that gilts and cash both count as ‘money’, in one case in an interest-earning savings account, in the other not. Returning gilt interest to the Treasury is more like a retrospective price adjustment than a quantity adjustment. And since the Treasury uses the ‘surplus cash’ to buy back its own gilts, there is no change in the quantity of money in the private sector – the money is merely moved from gilts into cash.

      Reply
  3. GrkStav

    Ann Pettifor (@AnnPettifor), with our without having actually read your blogpost, has taken to twitter, to ‘correct’ what she declared “nonsense” or “propaganda” in response to a fellow (@netbacker) quoting. in 2 installments, the following excerpt from it: “Since ‘government borrowing’ really means ‘government printing’, the government’s deficit is the amount it prints each year, not the amount it borrows each year. The public debt is just the sum total of money that has been printed, whether in gilt or cash form.” and linking to this URL.

    I have tried to establish whether she, in fact, is quibbling with terminology (in effect refusing to grant that two operations, with different names and thus connotations, that are the FUNCTIONAL equivalents of each other, can be thought of as, ‘basically’, the same operation) or, alternatively, clinging to the notion that sovereign nonconvertible, floating Fx, fiat currency issuers actually borrow their own currency, at rates set by ‘the market’, for ‘revenue-raising’ or fiscal purposes. No resolution has been achieved yet.

    (@GrkStav is the twitter handle I used)

    Reply
    1. Joe Leote

      In as much as the financial asset of one party is legally recognized as the debt of a counter-party it is not unreasonable to see an instrument as a “fuzzy object”. It is both money/savings and debt. It would be useful call government securities National Savings and get folks to focus on the real impact of fiscal policy.

      MMT arguments about govt spending coming before taxes may be correct in the esoteric realm of daylight settlement funds added by central banks but I think this argument is a distraction from the fact that government and central bank financial instruments are in most contexts just a superior economic substitute for financial instruments issued by banks and nonbanks.

      Reply
  4. Danny A

    I saw Ann Pettifor’s twitter response and it was my distinct impression that she hadn’t read this post and was assuming that the tweet was implying that government borrowing was ‘bad’ like money printing was ‘bad’ i.e. coming from a goldbug perspective.

    Would be nice if she could clarify here though…

    Reply
    1. axdouglas Post author

      I agree. Still, some clarification would be nice, as you say, since technically she did call this propaganda. But I mostly agree with her, so no hard feelings!

      Reply
  5. handf

    But thinking of it as debt is a useful fiction because it acts as a constraint on politicians and institutions misallocation of resources. There’s a long way – a lot of hidden wrong can occur – between the printing and the manifestation of inflation and balance of trade problems and that’s if you even accept inflation is properly measure. It’s not.

    If you’re from the UK you’ll probably remember how politicians used to game interest rates just before and election. Times that by ten with their hands on the printing press unconstrained by the debt fiction. The “debt” constraint is a long way from ideal but I’ve not seen anything better suggested.

    Reply
    1. axdouglas Post author

      1. It is not a useful fiction, because it acts as a constraint on one side only. The worst thing a government can do, fiscally speaking, is fail to run a large enough deficit to match the saving propensity of the private sector. Doing so chokes off production and drives unemployment. The ‘borrowing’ analogy obscures this risk, since being in balance or in surplus sound like good positions to be in.

      2. If a large proportion of the government budget were discretionary, the risk of vote-buying would be significant. But it isn’t under the current system, and it wouldn’t be under my preferred system (see this post), under which fiscal adjustments are automatically made through the Employment Buffer Stock.

      Platonist though I am, I do not believe in governing by way of a Noble Lie, especially not with economists as the Guardian classes in on the deception and thus able to manipulate it to their own ends.

      Reply
      1. handf

        Hi,

        I think the savings propensity of the private sector is a complex issue, it depends on the management of the “horizontal” monetary system. Currently I’ll neither subscribe to or defer to your views on this, I’m still distilling my thoughts and understanding on the issue.

        I’m not sure what post you’re referring to re buffer stock but it sounds like mmt jobs guarantee. I’d like to see real world examples, I recently attended a Randy Wray lecture and found myself very underwhelmed. Particular his comments on trade, movement of people and currency value, which he seemed to just avoid or gloss over.

        Platonist? No I’m more of a pragmatist, I prefer many small incremental steps than grand schemes. Not least because I currently think our current problems were mainly caused by mismanagement and regulatory capture of the horizontal money creation system, I’d prefer focus was on fixing that than what was an already functioning pretty well vertical system.

        Thanks for reply

      2. axdouglas Post author

        Real world example of the Job Guarantee.

        MMT people have a lot to say about how the JG could affect exchange rates and balance of trade. For example, here is Warren Mosler.

        The vertical and horizontal monetary systems are linked. If the government runs a surplus, or runs too small a deficit to supply the surplus extracted by collectors of financial wealth, then somebody has to issue the liabilities to be held as assets by financial wealth-collectors. Generally this involves a lot of deposit-creation by banks. When you run out of opportunities for good lending you start to get bad lending. Thus fiscal ‘responsibility’ on the part of the government sets up the conditions for financial crises.

        Of course I think banks should be regulated; most of their current lending activities should be illegal. But I can’t agree that the problem is merely within the horizontal system and that the vertical system was ‘functioning pretty well’. A financial crisis doesn’t need to manifest as recession and job losses unless the government refuses to make a sufficient ‘vertical’ – fiscal – adjustment, to hold up the incomes of those who had nothing to do with causing the crisis.

        People confuse the financial crisis with the Great Recession. The crisis was due to structural failure in the banking system. The Recession was a policy choice taken by the leaders of the free world. It was, to appropriate Paul Keating’s turn of phrase, the Recession the world didn’t have to have.

      3. handf

        Hi thanks for your second reply, sorry on mobile and couldn’t find the reply button. I’ll check out your link.

    2. NeilW

      There are no such things as ‘balance of trade’ problems in a floating rate currency. It always balances as a matter of design. If the finance arm of x-currency zone deal doesn’t conclude then the real arm fails as well. Nobody is going to ship a container load of stuff without the letters of credit in place.

      It’s a complete misconception caused by taking the viewpoint of the borders of a political control area as a hard dividing line in the world, when in actual fact the modern world has dynamic currency areas that grow and shrink across lots of political control areas.

      People who take the hard line view struggle to analyse the Eurozone, where the mismatch between political control areas and currency areas is at its greatest. An MMT approach can easily analyse it and see what the problem is – not enough oil circulating around much of the engine and unsurprisingly it seizes up.

      Additionally politicians should be able to game the system as much as they like. They are in charge. If you believe in democracy then people will see through that, and if they don’t then they deserve everything they get. Responsibility has consequences. People should have the right to screw things up if they want. Let’s face it the banks under corporatism did, and they weren’t elected!

      So it’s a question of who you believe should be in control. The people via representative democracy or the new Robber Barons consisting of the banks, their economist priest class who justify their autocratic rule via the tyranny of ‘business confidence’.

      The vertical system is not working very well. That’s why there are millions of people unemployed, underemployed and mis-employed. That’s a dozen cities worth of people suffering for no good reason whatsoever.

      Reply
      1. handf

        Hi,

        I’ll take your views on trade under advisement, I’ve read much the opposite from others who I believe to be just as well versed on accounting.

        My view of politics, politicians and democracy isn’t as black and white as yours. Systems are about tensions and check and balances. If the uk was truly democratic we’d probably have had capital punishment for the previous two or three decades.

        As to the efficacy of the vertical system, again I suggest the current malaise is more a result of the past (and current) dysfunction of the horizontal system. But I am sympathetic to arguments that the vertical system be used to bail out the horizontal system, but that does introduce the problem of moral hazard.

        I like Steve Keens idea of a debt jubilee, particularly the requirement for private sector debt reduction which I think would aid financial stability. But again moral hazard is an issue.

        Ultimately I keep coming back to private sector money creation as more important than the vertical system. It’s here the big failings occurred.

        Thanks for reply.

      2. axdouglas Post author

        To clarify: it wouldn’t be necessary for the banking sector to leverage up so massively if the government ran deficits of the appropriate size, rather than being fooled by this ‘borrowing’ nonsense.

        ‘Moral hazard’ buys into the idea that, as Warren Mosler puts it, market discipline on the liabilities side is what should keep the banks under control. Time and time again that notion has been exploded. Banks take silly risks whether they get bailed out or not. There’s a reason J.K. Galbraith called it ‘irrational exuberance’. You have to regulate them on the assets side. That’s all there is to it, as far as I see.

        Thanks for your comments also.

      3. axdouglas Post author

        And don’t forget that as long as banks have a credit line to the central bank, the distinction between ‘horizontal’ and ‘vertical’ money is pretty blurred.

  6. Hugo Evans

    To paraphrase Marx, MMT rhetorical strategies to date have sought to describe the world. The point is to change it. Simple exposition of functional finance faces some severe communication problems in the media, which is in the business of telling moral fables about a world. In this world of hybrid chartal – credit money, the perceptual blurring of the horizontal and vertical components is key to the smooth functioning of the system. We can of course analyse financial claims into to a liquidity hierarchy, positing them as more or less equivalent or moneylike, but the effect of the CB is to totalise them into one homogenous fully negotiable system of claims, all ultimately created by you and me when we issue liabilities to banks in order to gain access to the distribution system of real goods. I suggest we start the story here, rather than with government borrowing, and show people that they are the gold in them hills. We need a debtor class consciousness.

    Reply
  7. Marvin _42

    Absolutely !
    Please send to all financial ‘journalists’ post-haste.
    On second thoughts. Replacing ‘government borrowing’ with ‘printing’ is going to confuse the idiots still further.

    Reply
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  9. Frances Coppola (@Frances_Coppola)

    I think it might be helpful to pay attention to the intertemporal nature of debt. I agree that government bonds are simply money in another form – indeed I’ve pointed this out myself in several posts. But it’s more correct to describe them as “future” money. “I promise to issue £10m on March 15, 2030”, for example. When a government sells bonds, it removes money from the private sector that it has already issued (note that for government, spending precedes funding just as it does for banks) and returns it after a specified period of time. So bonds are actually a temporary money drain (unlike taxes, which are a permanent drain).

    I regard government “debt” as private sector deposits – ie savings. I find it bizarre that we call government-issued safe assets “debt” and worry about their sustainability while at the same time encouraging banks to accept more and more deposits (which in their case really ARE debt) rather than building up equity. But that’s another story.

    Reply
    1. axdouglas Post author

      Yes, I think we agree. My point is only that the sense in which bonds ‘drain’ money is not at all the same as the sense in which my borrowing your lawnmower ‘drains’ your lawnmower. Holding a bond still allows me to spend (even if I have to use it as collateral and borrow), whereas holding a note saying ‘IOU one mower’ does not still allow me to mow my lawn.

      But I agree with your analysis: you can describe swaps of bonds and cash as various adjustments to the term structure on government ‘debt’, with the understanding that all money is government ‘debt’ in that sense. But for the purposes of pubic discourse, among people who don’t know any economics, I think terms like ‘borrow’ and ‘debt’ are too misleading to be of much use.

      Reply
    2. axdouglas Post author

      And as for the absurdity of worrying about government asset-creation and not worrying about private credit-creation, I couldn’t agree more.

      Reply
    3. NeilW

      “So bonds are actually a temporary money drain”

      They are not. They are new money-thing items issued. Nothing gets drained. It just gets moved somewhere else back around the loop and a different receipt issued. Balance sheets get expanded.

      There is no magical power in bonds, no reduction in wealth and no reduction in purchasing power.

      The obsession of economists with bonds and interest rates on bonds is mind blowing. The financial world has changed so much with so many liquidity options (including with government bonds pretty much guaranteed liquidity via the GEMMS backed by government) that there is simply no constraining function there at all.

      Similarly accepting deposits at banks is not a problem either, since they are essentially bailed against a state insurance policy. It’s a funny dynamic with deposits because individually the banks are at risk holding them, but systemically they are not – since the central bank would have to sacrifice the payment system in the case of a debt meltdown.

      Reply
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  15. Stephen Ferguson

    Great post. I’ve argued this point in the past with Richard Murphy on his blog who unfortunately described the view that government doesn’t borrow as “crass”.

    One quibble. I think its confusing to say that the government prints money when it ‘deficit spends’ as this too will ‘pump up’ your average Daily Telegraph armchair monetarist commenter into surmising that the deficit bit is ‘funny’ money, whilst the bit covered by tax is ‘sound’ money.

    I much prefer the more direct and correct MMT view that EVERY brown penny of government spending is freshly ‘printed’ money. There is no ‘non-printed’ spending since, as tax destroys money, there is no pile of cash somewhere marked “tax revenue”.

    PS Personally I prefer the term ‘government net injection’ (as proposed by Steven Hail) to ‘deficit’ because the latter is such a loaded term.

    Reply
  16. Chunch

    You are confusing things. Forget about the government printing for a minute – you need to first outline the process. The government also does not create reserves and it is my view that reserves actually dont exist.

    The treasury funds government spending. It does this by issuing bonds, ious, that banks purchase. Treasury gives a promise, banks give out cash. This is how it currently works, as per the government. I bet most will ask – so how is this the same as printing? I will explain.

    If you deposit a million at a bank, the bank is supposed to keep a fraction – 10% or so. The bank keeps the 10% and lends 900k. The next bank does the same, and on and on. Until 1 million deposit becomes millions. The money banks lend to the government comes out of the same process – it has multiplied in the system. So fractional reserve banking in and of itself “prints” money if you will. As individual entities neither the government nor banks can print money out of thin air. Its why not one person, when asked, can explain how money is printed.

    So it is fact that the government owes the banks the money – its a loan. But it is also fact that the banks themselves also owe that money times over.

    So wake up from that dream because the government does in fact owe the money. Your idea of reserves is also off. If you understand how money is lent and relent times over in a fractional reserve system – than you’d understand that there are no reserves.

    Calling deficit spending reserves is like calling theft a gift. When the government deficit spends, it is thereby taxing you without your consent. The additional money is not “a good thing” as it devalues existing money. It increases the money supply. So not only are you being taxed out of you income, you are being taxed via deficit spending.

    The idea that the fed can control inflation is pure nonsense – what happened in the 70s and 80s – when inflation was sky high. The fed increased rates to 20% without much success. If controlling inflation was so easy than why was inflation so high? Why is a dollar worth 15 cents of its value in the 70s?

    The above are facts that have been confirmed by our own government – this is not my idea of how it works. It is how it works. Sorry to burst your bubble but you need to wake up.

    Reply

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