I rarely comment on these things but I wanted to say Thankyou for using your channel to highlight the MMT analysis of government money. Sometimes I think I'm going mad when the UK is consumed with balancing the budget while the entire global financial sector knows it is all based on made up ideas that sound similar to how the average citizen thinks about their own finances. Not a government spending its own money. Much appreciated. Many of the MMT proponents are very bad at explaining themselves or are too often associated with left leaning politics so the conversation becomes political rather than simply a matter of objective fact.
very simplistic! There is no mention here of foreign exchange or trade & cross border bankng or competition with foreign economies, let alone the confidence needed to make this system function. Moreover, money is not a repository of wealth, but a measure of that confidence. No one trades or holds foreign currency, if they have no confidence in the government, especially if they create too much money [commensurate with confidence] & leave it in circulation. What do you think is happening in Russia right now? Inflation is a function of confidence & mercantlism is not dead in Russia either.
Some people claim well we need government debt for retirees to save their money in. That’s BS. We have something better. It’s called a MINT. Retirees or social security literally could buy and own actual gold or silver money coins. If you own the gold you own it and the government doesn’t have to pay you. But with social security buying tons of government bonds you gotta think that helped drive down rates to some extent and the government has to pay those bonds back. If it’s a matter of saving why isn’t the government having people save in MONEY FROM THEIR MINTS?
That would be true if the UK was the world. When the government creates money, it devalues the currency (inflation). A crisis can arise if no one outside the UK wants sterling. We then have to raise minimum lending rates which impacts UK businesses and consumers, reducing growth and potentially causing recession. Truss / Kwateng thought they could spend £40bn extra but this threat of creation of money or borrowing. Bond prices are sensitive to inflation causing a crisis in pension funds, several of which were within hours of going in administration. So the bank had to buy bonds to drive up the price while the government wanted the bank to sell bonds. Sure, the government and bank cannot run out of sterling, but sterling can become worthless.
Absolutely; A system designed to keep the majority on the employment treadmill till almost death! Government taking back 60% plus of your gross earnings!Just look at the state of UK towns and Cities and what a Pound is worth. Gold is not anymore expensive.. It’s just that the pound is on the skids
Govt can print all the money they want, but the exchange value of that money will be affected. You could repay the debt by printing all of it and paying it back nominally but it would have the same effect as calling bankruptcy. Less fortunate countries (like those in the EU) on one hand pay less interest on their debt as it’s denominated in a “foreign” currency but don’t have the ability to pull off this trick. This is why failing governments resort to emit bonds in foreign currencies as no one trusts their local currency anymore (including the citizens) making the local currency even more worthless. I’m not a fan of MMT because while true within the constraints it imagines it depends on the perceived value of the fiat currency, and that can vanish very quickly
A good explanation. There was a leader who saw the economy like balancing a budget as if they were running their Dad's corner shop and look where that person got us in the 80's. Austerity crushes spending which crushes industry, infrastructure and business which reduces taxes which feeds more austerity. Those who like the idea of not putting money into an economy need to come up with a way to grow and increase tax revenue but they don't their economic ability stops right there and we end up with the 80's. Selling borrowing at election time to the public who see it as they see money is an uphill task after all i still hear the daft phase magic money tree used. If ever there was an empty void of a phrase there you have it.
Also they spend with or through multi national corporations that does not help your local economy as much spending in your local high street shops, specifically the shops that are owned and operated by locals…
News Flash. Either way you will have a lifetime of "un-learning" what you've been taught to get to the truth. Please do not take Richard's overt confidence to equal knowledge of things money. Public Debt is a legal obligation on the part of the BORROWER for repayment of Principal and Interest, in the Coin of the realm to the LENDER. All of it. And those payments MUST BE MADE per the Amort. SCHEDULE. How is Public Debt anything else than that ?
Be assured that you would learn nothing useful on a modern economics course in most UK or US universities. Most of them are just regurgitations of neoliberal dogma.
Thanks, Richard. Love your videos. This one runs up against the logic of your other videos though. You previously pointed to the 2014 Bank of England paper that rightly says that 97% of money in the economy is created by banks through loans. Are you saying that the government ALSO spends money into the economy but that the selling of bonds simultaneously destroys an equal amount of money or that the government can, as we saw during Covid, spend more money into the economy than it takes out (by "monetising the debt")? If it's the latter, didn't the monetisation of £900 billion have massive inflationary effects and a shocking knock-on effect on wealth inequality as Gary Stevens argues? It's a particularly powerful argument because he predicted it would happen in mid-2020! The other critique I'd have is that we are not America. Stephanie Kelton's take that governments can spend all the money they want is oblivious to the reality of the American dollar empire. They can do that. We cannot. Truss's government demonstrated that unfunded spending can spook markets and tank the pound. Such a devaluing could spiral out of control if a government constantly monetised their budget deficit. They only got away with it during covid because every major economy was doing the same thing. Also, your take on currencies would be interesting. We run a trade deficit and have done so for years. Therefore, there's always downward pressure on the pound (ie, we need to buy dollars to buy things on international markets). Is the only reason that the pound has stayed relatively valuable when compared with other currencies that foreigners buy pounds to buy assets in the UK? And might that be why we don't own anything in this country any more? Presumably, there will come a time when the firesale of UK assets must end because there will be nothing left? What then?
Commercial banks create bank deposits by lending. They don't create bank reserves, they come from the government (and its central bank). It is the bank reserves that are drained when the government sells bonds.
@@Vroomfondle1066 If commercial banks are short of reserves they can borrow them from the central bank. Depends if you prefer a floor or ceiling system. I tend to hold the view that the risk is deflation over time and recent inflation is an anomaly, time will tell.
@@Vroomfondle1066 I suspect inequality is just a feature of the system (as its effectively the pareto phenomenon). Not sure it does destroy the buying power of the 99% as the government is free to distribute its money however it sees fit (we are not at ransom for money itself from the wealthy) and buying power increases in a deflationary environment.
@@downshift4503money is merely a medium of exchange and a sort of store of wealth real world asset and resource allocation is the determinate of wealth in society it is this that has tipped rapidly towards concentration in the hands of a smaller and smaller section of society the monetary denomination is merely the numerical representation of this asset and resource allocation.
Private banks have destroyed national sovereignty, perverted justice and bred degeneracy. It is to theses banks and bankers that the people and its institutions belong including their own governments. For this reason, the West is being taken apart and its policies are baneful to liberty, decency and human happiness.
Incomplete truths. Funding government expenditure in through printing money will simply lead to inflation, as more pounds are chasing the same goods and services. And inflation leads to the rich getting richer (as their non-cash assets go up in value) and the poor getting poorer (whose wage increases always lag inflation). If it spirals out of control it can lead to the impoverishment seen in Russia in the 90's, Zimbabwe, Venezuela, Argentina, Weimar Germany and more. Governments already do this far too much, benefiting the asset-owning classes. This can be seen in how wages have consistently lagged economic growth since the 70's when developed nations left the Bretton-Woods system and could print money in this way: the rich have consistently gotten richer. You are being told fairy stories.
@@rocketpig1914Exactly. It never fails to surprise me just how many people feel they "know" and can come online and make "explainer videos" like this just filled with the most basic nonsense propaganda about the economy that gets fed to young students and has no bearing on reality
Richard - I think you will need to address the global nature of the economy and some of the constraints that that places on governments other than in the US. MMT is just that - a theory. It may have more validity than current text book theories but in practice there are other factors that limit the creation of money for fiat currencies.
" MMT is just that - a theory". It's understandable that you say this, because the T in MMT = Theory. However, it's a misnomer, because MMT descrbes what actually happens in the economy. It is not a theory.
@@helenheenan3447I don’t disagree in terms of its relationship with reality and I am more interested in the practice but even a set of observations that is codified into a particular view of a system is a theory. It still relies on one or more assumptions about why what is observed is happening. I know this sounds a bit pedantic but any assumption can be challenged.
This is why MMT focuses on what is available to buy rather than the money instrument. MMT is just as valid in the global economy as the local economy and it doesn't suggest buying everything or 'printing' vast amounts of money. It says that the financial constraints that are spoken about in the orthodoxy are mostly arbitrary.
Fantastic video! I have incurred so much losses trading on my own....I trade well on demo but I think the real market is manipulated.... Can anyone help me out or at least tell me what I'm doing wrong??
Investing with an expert is the best strategy for beginners and busy investors, as most failures and losses in investment usually happen when you invest without proper guidance. I'm speaking from experience.
Taxes exist to give fiat value. If you or I decided to make up a new money, nobody would use it, it would be worthless. The government on the other hand, demands you must pay taxes in it's money and nothing else, if you do not pay you are punished, this gives the money value, it is essentially a violence backed currency, 'use our money to pay tax or go to jail!'. This is why, despite the government having unlimited capacity to print money, taxes must still exist.
I find Mosler’s fetish for violence and exploitation to reason about money and trade a bit noxious. Taxes existed before money and with commodity money; the explanation falls apart on these grounds and on several other points as evident in human history. Taxes do promote currency use, but a standard means of exchange is desirable to an entire market economy for multiple reasons chiefly as “legal tender for all debts public and private”. National taxes *cull money* from the system and *local* taxes actually fund local governments so again, the reasoning from MMT lacks rigor. The most valuable thing national taxes can do is prevent the public utility the means of exchange provides from puddling in the system. This keeps everyone able to gain and spend money for their daily needs. The most efficacious tax here is demurrage tax, a coin tax.
It would be worthless to discharge debt with it to anyone other than the issuer and would take adjudication, which is expensive and time consuming. It’s not tradable. The fixation on threat of violence is largely *obnoxious* and belies the ample examples of other dynamics that rigorous fields of study like anthropology have researched. Economists are immensely ignorant people about intensively relevant history.
@@GhostOnTheHalfShell agreed that taxes existed before fiat money was common place, even when commodity money was most common. However I still think that if governments did not require tax to be paid in their own currency, people would slowly move away from using state issued currency and shift to either commodity money or even something like bitcoin. State issued currency is guaranteed to lose purchaing power over time, if it were not required for payment of tax, people would prefer to trade with something that has a fixed or limited supply, something they know will not be debased over time.
@@syproductions456 I think friedgeld's are a necessary direction to take, but your statement about state currency being guaranteed to lose purchasing power is not true. They lose value because of interest and inflation. Interest injects inflation while not being the only source of it. And Interest and inflation are wealth transfers, while taxes are not. This history of commodity monies (gold etc) clearly demonstrate they suffer and inflict the same economic crises as fiat, and worse have unique problems because of the commodity they are struck from. Bitcoin is in no position to become a currency for a lot of reasons, but a fatal flaw is the cap on the number of coins, it suffers the same problem as commodity monies.
The general public thinks that the national economy is like your household budget, but it's not, and it's very hard to get this conception across to people, for want of better explanation, it's just to mind blowing for them , thats the problem!, and the MSM uses this as smoke & mirrors, frightening us with things like "ooh wheres the money gonna come from", " the national debt is higher than its ever been", "we max the credit card out, Britain's broke" etc, etc
The national economy is not like a household budget? Interesting So as a household I can create new assets or have a pitch for creating assets and get a bank to use them as collateral for a loan. If the government doesn't use assets to value their money, then where is the value of my asset coming from? What country would accept the Pound in return for trade if there is no value to get in return? Contrary to the MMT narrative, the Government does run like a household budget. If a country sends goods/services here, they want an equal amount of goods/services in return. If the citizens of this country creates assets, they want the value of those assets to be properly appraised to trade for an equal amount in return. If the government wants to create a deficit that isn't bound(bonded) to asset values increasing, or creating new assets, then the value of their money will now be spread to all existing assets. That would be devaluing the money...better known as inflation. If you continue to create deficits that are not accompanied by asset(wealth) creation, no one will trade with you, without demanding an increased amount in return to finance the trade. Basic risk management. Keep down that path and you will end in financial ruin as you'll reach a point that repayment is not possible. Households are no different. Governments can monetise assets, so can you through asset creation. The balance of payments system needs to be balanced. If your current account and capital account don't balance, the IMF will be taking actions in short order.
@@cfalvl2380 The government may behave like a household but it is imposing that upon itself. If a country sends goods / services here it gets pounds sterling in return that sits in an account. Obviously the value of that money is related to the goods and services being produced here, or the expectation they will be produced later - hence the importance of growing GDP. MMT does account for the potential of inflation.
@@cfalvl2380a household needs to have an income and is constrained by that income. A household is time limited. A household cannot impose and enforce taxation in the same way a gov't can. But a gov't must facilitate productive activity and use the real resources available to it efficiently and for public good. So part of your story is valid but not all.
@@cfalvl2380but also, the MMT narrative has a lot more to it. 25yrs + of research, articles and papers that examine all aspects of global economics through an MMT lens. What Richard (and indeed Kelton) talks about just scratches the surface of the theory.
@@cfalvl2380 don't tell me, tell Richard the host of this channel. And i would say countries in the global North do behave in this manner, getting away with it, it's the global south that gets penalised by the financial institutions, look at the USA, the eye watering debt thier in, and they still call the shots, and thiers no reckoning yet for them, made you think though 😃
It is a Debt based system - money is created as debt. With now private banks creating the money out of thin air, and then loaning it to our government or us via mortgages, with added interest - is totally unjust and unsustainable longterm.
My state pension got credited to my bank account yesterday. I assume it was paid to me via a commercial bank ( ie not the BoE). What’s the debit entry for the bank? How does the government supply funds to the commercial bank to cancel down the debit entry that shows the government being a debtor to the bank? Hope that makes sense!
@@downshift4503 thanks. So for the commercial bank it’s credit my account and debit ‘central bank reserves’ (central bank is a debtor of the commercial bank). In the books of the central bank it’s credit commercial bank and debit HM Govt?
The money is cleared by the bank of England or the exchequer Each day all over the world the public and private banks total all the money they owe or are going to give out to customers the next day and total all they have received if there is a shortfall between what each bank collected and what it will pay out the next day then the bank of England will authorise the exchequer to issue more money the next day so each bank doesn't run out money and because this is now done electronically it is done overnight between midnight and 3am They don't send bank clerk's to the state treasury office anymore because it's done overnight electronically My mother worked as a ledger clerk for the ANZ and that was what she did all day - Write into the ledger each day each withdrawal and deposit made to the bank and then at the end of the day tally what was received and what was paid out That's why back in 1970's it took 7 days for your check to clear because it had to go to the state treasury who then sent it to the federal reserve which then authorised the actual payment in cash and then had to send that cash physically from the state treasury to the individual bank
It seems that some leading Economists are claiming that we do borrow from Pension funds and the BOE. If there is no pressure to pay loans back, why wont our government slow down re payment?
One huge thing you missed is inflation. Over the last 5 years it has been about 30%. That means that those "safe" deposits just rot. You mostly do not even cover inflation with interest. Indeed taxing interest in these circumstances is a wealth tax. Think about it.
Seems the government likes inflation as the vat receipts rise and income tax receipts rise as people get pay increases 😤 this inflation tax falls mainly on the poor who are hit the hardest
Long time since I did economics but couple of questions 1. What happens to money that leaves the country eg Oil purchases, all that stuff China makes for us? 2. Why does the IMF exist if no country can go bust? 3. What was going on with the Weimar Republic in 1936? There seems to be no world economy in your economic model.. If everybody else thinks something and you don't you are probably wrong.
The money markets buy government issued bonds. Those bonds have to be redeemed at maturity, with interest. How is that not borrowing from the money markets?
The behaviour of the markets are the only facts. You are advocating for educating ‘the markets’ to see things differently such as during the Greek debt crisis and the Truss Mini-budget. Fighting these crisis situations with an economics lecture is a brave strategy
Liz Truss might as a 'matter of fact' beg to differ here? Nothing she did as PM was passed into law but somehow external 'market forces' ended her government in just 45 days. If only it was so easy?
@@doubledigital_ But a question remains still, why does any of it need to be claimed back if we can just make as much money as we need? Why not simply make every Brit a billionaire?
@@OneAndOnlyMe Tax money is money destroyed. The accounts are balanced out and it no longer exists. The opposite process to when govt creates money, ie. adds numbers to an account it is paying to build a teleport or whatever. Taxes are required to create demand for the currency. You have to pay taxes in British pound sterling. So you need to work and get paid in British pound sterling. Like 33 million other people. By removing money from the economy, taxes also reduce inflation, ie. the reduction in what you can buy with £1, which would happen if everyone was a billionaire
@@OneAndOnlyMeas Ben bernake said, there is nothing to stop the US government marking up the accounts of every pensioner in the country, but there must be stuff available for them to buy. Essentially, it's the availability of labour and real resources are the constraint of money creation in a fiat money system. What, and how much the gov't buys with their money sets the price level which all other prices are based upon.
Why should the government pay interest at all when it is guaranteed and the government doesn't need the money? Where does this money to pay interest come from? It ends up amounting to a significant unnecessary expense.
Calling newly-created money part of the national debt is crazy for the reasons you have explained before: how can we borrow from ourselves? This is further exacerbated by allowing commercial banks to issue the money and charge interest on the balancing amount on their books. The Tories created new money to fill holes, and this ended up in banks for use by the wealthiest for asset ownership and rental. If we issued new money specifically for rebuilding our infrastructure, this would cut out the easy route to inequality where we are blackmailed by corporate interests and our politicians are subservient to them.
Commercial banks hold the governments currency as reserves in their exchange settlement accounts at the central bank and they cannot lend this money out to the public. It can only be used to make payments to each other.
@@martinsingfield Banks lend first and then look for the reserves later if they need them. They can increase their reserves by increasing the deposits that they borrow from the wholesale markets.
This is utterly daft nonsense. Government bonds are bought only because the buyers (eg the city and intl investors) have confidence that the bond will hold its value and that they will be repaid in a currency worth a similar value to the one they invested. If they lose that confidence, they dump the bonds, yields increase, and even more money has to be printed to pay it, creating a downward spiral. They might also dump the currency if they are holding it for trade. MMT leads to Zimbabwean Dollars and Venezuelan Bolivars. The government must always maintain the confidence of the markets because money is not wealth; it is merely a token to trade wealth with. Printing money cannot create prosperity any more than printing diplomas can teach economics!
Thank you. After watching this video, I did think to myself, "Am I going to have to comment to explain why this analysis is abject charlatanry? Am I going to have to point out that printing money is not analogous to creating value; that there are enormously compelling social reasons why institutional investors like pension funds need to expect a return of like value on the deposits they invest with the government, and that millions of people's income and financial security rely on that promise being upheld; and that any video which claims to explain this topic without even once mentioning inflation should set alarm bells ringing at max volume?" But I didn't have to, because you'd already said it much better & more concisely. Sadly I think you might get a bit of negative attention from motivated dogmatists who want to believe that currency inflation is the path to riches for all, and that because money and debt are fictions then the useful promises that underpin them are also fictitious and can just as easily be rewritten. But their shouting won't change the fact that you spoke out against a snake oil salesman, which is always the right thing to do.
@@thedukeofbreakfast I actually am centre left, so by no means am I defending Thatcherism, but this video is crazy even to me. I have zero issue with UK gov buying a stake in BP, or even creating a wealth fund ala Norway. There is a middle way. But these crackpot ideas about printing to oblivion are nuts. Nothing wrong with printing to invest where there's likely to be a return, eg in more efficient infrastructure, but money for moneys' sake has no value.
@gavinlucas22 100%. We are coming at this from the same position. Partly that's why this stuff is so frustrating - because we could achieve a progressive agenda, with far greater public investment and a more equitable redistribution of wealth, without resorting to wacky theories. It's just unnecessary, and it detracts credibility from the whole platform.
Another MMT rant. Yes, the govt can print or digitally conjure up all the money it wants in the short term, but for it to retain anything like it's value in the medium to long term the currency must be limited in supply, either by borrowing through the bond market or fixed in relation to a scarce asset.
Great videos. I've same question as phosferrax. Commercial banks don't sell bonds to cover credit they issue so why does the BOE? And why are governments worried about bond sales failing to find customers?
But surely when government expenditure exceeds revenue, it needs to borrow against bonds to bridge the gap. These bonds have to be repaid according to the terms they were issued for and if the country’s expenditure continues to exceed revenue income, the debt just escalates. It doesn’t go away. Businesses that spend more than they earn - continuously - eventually go bust.
Specifically because of how quickly and recklessly she operated. Yes, the pension funds are important. Yes they can affect the wider economy. But no the government doesn't owe them money in the way a normal person owes a bank money because of the specific differences outlined in the video. It's not that hard to understand. Two things can be true at once. His videos are all addressing the ways that these truths are twisted or extended further than is actually true. The point is that the system is interdependent. But the government is much more powerful than they pretend to be. In a normal situation, with reasonable time frames and logical adjustments in policy the government can do quite a lot of spending if it wants to. The Liz Truss situation is a complete outlier because they came in so hard and fast with their changes. That's not to say their changes were reasonable, but they certainly wouldn't have been as bad if they'd taken more time and briefed more people giving them time to make arrangements and see the weaknesses in the system and adjusted accordingly.
The truss affair had more to do with how pension funds hedge their interest income using LDIs (liability driven investments). The BoE threatened to raise rates quickly to 6.5% after the Truss announcement. This caused margin calls because the yields on existing gilts dropped or were predicted to drop. Pension companies needed liquidity fast to meet the margin calls or loose a lot of money. The dumping of gilts on the market caused a even bigger drop in yields which could have spiralled. The BoE stepped in as buyer of last resort to stabilise the prices. They stepped in too late to stop big pension devaluations. IMO the BoE failed on two counts. #1 telling the market that it would increase rates that quickly when it didn't need to do that at all #2 delaying stepping in as buyer of last resort causing price instability. Truss's budget was a 'bit-part' in that debacle.
she didn't cause a "disaster". It was easily fixed by the bank of England when they had had enough of watching and stepped in to intervene, which they could have done immediately. She announced her plans without effectively telling anyone, whilst at the same time the Bank of england were doing reverse QE. The markets 'panicked' and started selling bonds. This caused the price of bonds to drop. THe pension funds holding these bonds were using them as collateral to borrow more money to invest in higher yielding assets (which in itself should be discussed as whether thats right to do). When the bond price dropped, the collateral value fell below the loan conditions requirements. So bank of england stepped in to buy up bonds and raise the price to ensure the pension funds could meet their current liabilities and remain solvent. It had nothing to do with Truss trying to run 'unfunded' tax cuts, which she could have done if there had been more coordination with the Bank of england.
During covid all that printed money created far more innequality. The surplus of cash collected by the already wealthy are now buying up all the assets and inflating asset prices way beyond what ordinary folk can afford. How do we fix the misery this causes, if wealth taxes are not implemented?
Very interesting, thank you. I have a question, what is the effect of money created by fractional reserve banking being deposited in government bonds? Roughly 90% of this money wasn't created by the BOE but by private banks, yet presumably can be lent to the government by investing in bonds. As it wasn't originally money issued directly from a central bank, but loaned into existence, what complications does this bring? Does it mean that a proportion of the government's "deficit" is also loaned into existence? I can't get my head round it...
@@andielines ... and then I get more confused... if some of the government's "deficit" is the result of re-deposits from private banks, i.e. from money loaned into existence, and the government turns round and uses this deposited money for more spending into, and to grow, the economy, wouldn't this the allow private banks to further issue yet more fractional reserve loans, the results of which may then eventually end up being lent back to the government as bond purchases which again increases the size of the available "deficit"for spending and so on...? I'd like to know how big an effect this is? What proportion of the so called "deficit" actually comes from fractional reserve banking deposits (in the form of bond purchases) as the result of money creation by from private banks? And is that a problem? Or is this kind of deposit a way of "cancelling" money created by private banks? If so, then why pay interest on the bond? Can anyone explain? To be clear, I don't have a problem with the idea of issuing government bonds for public spending, that seems a good idea...
@@BernardMcCarty tbh, it seems to me that most current mainstream explanations of economic theory are just post hoc rationalisation of a deeply flawed and perverse system, created to bring obscene profits to a relatively small number of people. Whoever you believe, an underlying truth remains. That the public has been told they have to pick up the bill for any costs involved.
Government spending creates new reserves in the banking system. Bond sales drain existing reserves out of the banking system. When a commercial bank lends it creates deposits (the banks liability) and an asset (the banks loan). If you use the deposit to purchase a government bond your bank will transfer existing bank reserves not the bank loan. The bank loan stays with the bank. The point is, commercial banks are creating bank loans, not bank reserves.
@@downshift4503 that just sounds like semantics and post hoc rationalisation to me. A financial system that moves around money created from nothing to benefit the tiny minority of people that controls that system. Cui bono?
This video does not explain why the Government cannot print to infinity. Otherwise they would as its their own money. Is it not true (and I am just punter off the street with no economics background) that there are constraints as to how big the "debt" can grow. At a certain point other countries start to believe that your currency is becoming worthless because you have printed too much of it?
All good with one exception... if your money get to outside players like US or China they can play against the system and even force turmoil. Basically... everything works just like that in a closed system. We don't have one so there are external risks.
Well we all know the Government could just print money..whats new there? Venezuela have been doing it for years, Zimbabwe too..what could possibly go wrong?
That's right. The government doesnt take taxpayer's money to fund their own borrowing, they simply tax them to level out the borrowings. Simple, innit!?😄
Hoe does VAT sit with the theory that taxation does not fund government expenditure? £200B a year approx. raked in on business and consumer spending. If taxation is designed to reclaim money it put into circulation, why would you use a method of economic activity to do so? Why not just tax savings and investments, company profits, PAYE, NI etc? Why do we need VAT?
Why not just tax land, or tax smoking or drinking? Tax is used for a variety of reasons, principally as a form of coercion so that people are forced to become productive in some sense or change their behaviour or dampen demand. Most people given the option try avoid tax so I guess VAT is instrumental in that regard.... you need more of the governments money to buy stuff and hence need to be more productive.
Vat is a regressive tax. It is meant to influence the spending decisions of the population. It should be better targeted. A blanket vat rate does not achieve what it is meant to achieve.
VAT is also conveniently not progressive in any way every purchaser pays the same rate whether a billionaire or a pensioner their total may differ but the rate remains the same so it isn't a redistributive mechanism.
I would add and argue that a government bond is sold at a bond auction and 'bought' by primary banks and actually monetised through the commercial banking system when the primary bank has the bond as an asset on it's balance sheet/account at the BoE. The owner of that bond takes the interest through tax revenue. Great work if you can get it.
@@ef7480 It's just an analogy to help understand the difference between bonds and bank reserves. If you want it to be clearer then bank reserves are first created by the BoE, spent by the government and become assets of commercial banks. The commercial bank can exchange their existing bank reserve assets into government bonds. Both bank reserves and government bonds represent prior government spending. The interest for government bonds is paid from - new bank reserves created by the central bank and spent by the government. The ratio of bonds to bank reserves is decided through monetary policy. The source for both though is the BoE and the government. All tax achieves in this process is to extinguish previous government spending from the system.
Spending does not come first. Demanding the tax comes first. On 1st of January you already know how much taxes you must pay. If we would have the simplest form of tax, the head tax, you would precisely know to the penny, how much tax you must pay until the end of the year. So from the beginning of the year all citizens are in debt and owe to the state the money, the state intends to spend. The second step is creating the money the state will spend. The third step is spending. The fourth step is recollecting the money. The fifth step is the destruction of money. Money is a bookkeeping system of debt.
Why offer bonds at all anymore? The first bond was offered around 330 years ago, but the monetary system is different now, so what purpose do they fulfill?
Monetary policy before interest on reserves. Excess liquidity drives down the rate at which banks lend reserves, bond sales drain excess liquidity to meet the banks targeted short term int rate. Now that the boe /state pays int on reserves effectively creating a floor system there is now no longer any need to issue debt
In part potentially a hangover from gold standard. Reserves were convertible to gold (a risk for the bank), but bonds were not - but you were paid interest by holding bonds rather than reserves. Today it's a fiat system so its not convertible to gold.
@@downshift4503 thats true , it was but it was still monetary policy up until just around the GFC before excess reserve balances. Bond sales were a requirement to prevent the states spending impacting short term int rates , but since IOR is now in place its now rendered obsolete
In Italy Is not as such. the Treasury auctions short (Bot) or long term (BTP) bonds monthly , if there Is a larger amount of governament bonds demanded than the monthly issuing, the ones Who request the lower interest( E.g. o.98 to the unitary face value instead of 0,975) are satisfied instead if bonds offer surpasses demand, the BOT are issued at the average requested "price"
Richard, could you do a follow up video please to answer the obvious question this begs: So, then why doesn't the government just print £1,000,000,000,000,000,000,000,000,000 and give it to everyone?
he actually explains this in the video. The government injects money into the economy and can do as much as it wants. It then uses taxes to destroy money. There are many forms of taxes and a few ways in which money can be circulated. For the reasons you allude the government can't sensibly dump money into the economy in such a manner, like it did during COVID.. However, it could use money in a targeted way such as infrastructure or other projects to develop the nation. In my view money is just a tool to mobilise the resources of a country I think? We need to stop seeing money in the context of a household budget. It's not the same for a government like in the UK.
Although the UK gov't faces no purely financial constraint, it faces a real resource constraint. There has to be stuff available to buy in the currency it issues.
It's been reported that most money from Quantitative Easing has gone to institutional investors. It's time Quantitative Easing was used to stop austerity, end poverty, end economic equality and improve living standards for the people and debts cancellation for those on low incomes, means tested benefits, student loans and public services.
QE swaps bonds for bank reserves within the banking system. It is functionally similar to moving existing money from a savings account to a current account. However it doesn't create bank deposits (the "money" that you and I can use) that you can just hand out to people.
@@Phil_D_Waller The investor in your example had the bond to start with and the resulting deposit is matched with a corresponding reserve. My point is, the QE didn't result in cash handouts as such.
Sounds like you are talking about People's QE. "Professor Steve Keen, a prominent economist formerly at Kingston University, London, has been a vocal advocate for "People's QE" (Quantitative Easing for the People) as a solution to economic crises. Keen's proposal differs significantly from traditional QE, which primarily involves the central bank purchasing financial assets to inject liquidity into the banking system. Instead, People's QE would direct money creation towards the real economy, either through public spending or direct cash transfers to citizens. Keen argues that traditional QE is ineffective because it does not increase the money supply in a way that stimulates demand. Banks do not lend out reserves as commonly believed; instead, they create money through lending, which means that QE aimed at banks often fails to translate into increased lending and spending in the broader economy. People's QE, on the other hand, would bypass banks and directly boost consumer spending and public investment, thereby stimulating economic activity more effectively." ~ chatbot search
@@downshift4503no it resulted in an increase of cash on the balance sheets of banks who then lent it out to customers at increasingly reduced rates in order to obtain a return on it as supply and demand dictates increased the supply of funds to loan the returns to that asset reduce.
If the government creates money, who is it that creates the markets? Money without a market is nothing at all. And more to the point, where are these markets?
What we call the government "debt" is just a combination of cash, bank reserves and government bonds. It is all the liability of the government and an asset of whoever holds them. The UK government (and its central bank which is in effect part of the government) is the source of its own currency.
Premium Bonds are counted in the national debt. Billions of £££ owned by you and me, and in effect., saved with the government. It is only debt in the sense that it will be paid back to you and me at some point. So not debt in the sense of a liability that is problematic. Also government bonds, as Richard has explained.
You didn't debunk that the government borrows money from private institutions, you literally explained that they do. Accepting savings and promising to pay back with interest later is precisely what borrowing is, regardless of whether it can be repaid by creating new money supply. Also, clearly the government prefers to take on debt rather than simply creating money because they don't want to drastically debase the money. Tax, debt, and debasement are all slightly different forms of revenue collection, which the government largely chooses between for political expediency.
The constraint to print more and more money are the resources in the economy. Too much of it would lead to inflation...Also the bond holders have the possibility to invest in other productive activities but don't do so due to risk/ reward trade off...
truth it may be in some sense that transcending all noise and even crises this is ‘right’, but now you must explain Why, even if this is ‘right’, Things take place (ie the financial crisis in Greece)
Why does the government pay interest on the bond? Surely the money the BOE is paying to the service the interest has either been magically created or taken from taxation?
With this model, can you explain how inflation works? My understanding is that inflation indicates that there is a fixed, real level of value in the economy. If supply of money exceeds that value the prices will rise. The goal of the government is to match the supply of currency with that real value, and this is achieved by keeping inflation in the goldilocks zone. Is this wrong?
Dumb question from me. If the government can create the money it needs, then why tax us. Couldn't the government ask the BofE to create all the money it need to run the country?
Don't private banks account for the vast majority of money creation through lending? When quantitative easing is carried out to create money to purchase assets on the open market it still effectively devalues currency reative to assets untill it is taxed back out of the system. The government or us the tax payer are still paying interest on this debt currently £115 billion per annum to the private debt holders.
OK Im no economist and Im not in the UK and I personally believe a lot of the financing we are presented are smoke and mirrors However if what you say is true then one has to assume this applies to all countries with reserve banks and if that is so the the US is the same as the UK. If the US is the same then they don't need to borrow either they can just print what they need and if this has no implications how come the US interest payments are nearing the Tax income of the US, who are they paying this interest too? What I am told is if countries just print more money then the value of their currency drops in relation to other countries and hence unless the UK is totally self sufficient and doesn't have any international trading then imports will increase in cost and it is the threat of inflation that restricts reserve banks from simply printing what ever they want. As far as I can see what you are saying is gobbledygook with no basis in reality.
The people of Argentina, Sri Lanka, Egypt, Zimbabwe, Ghana, Pakistan et al might not agree with you. When the financial markets don't want your over inflated currency there is always the IMF. They usually want your first born as collateral. Reinhart and Rogoff where right in that when debt to GDP hits 100% the servicing of that debt crowds out investment. The UK spent £89 billion last year on debt interest. Hence the crap roads and frozen pensioners.
Some thoughts come to mind: The governments of the countries mentioned borrowed in foreign exchange. Different ball game. UK debt was higher than 100% at all points between 1916 & 1961. It was not unusual in that & it coincided with record growth. Japan is currently at ~250% & chugging along fine, its demographic issues notwithstanding. Thr current debt interest to revenue ratio is, at ~7%, not remarkably high by historical standards - it averaged 8-10% through 45-80 for instance & itself inflated by 'interest' paid to the BoE who simply remit it back to the treasury. That is currently around a third of total but the proportion held that way is effectively a policy choice. I understand its a distasteful thought to many but developed countries with their own currency really do have *alot* of leeway in spending decisions
I agree that Richard is missing the importance of one's currency on the international markets (see comment above). However, it's bad faith to reference such a highly disputed non-peer-reviewed article which was found to be based on flawed methodology. There is no magic number that debt to GDP gets to that then "crowds out investment". China's debt to GDP is now over 250% ... welcome to the real world
@@DavidByrne85 Several points. Japan is not chugging a long fine with the yen having to be propped up by the central bank. They have just raised interest rates marginally but too little too late. If the yen weakens further then much higher interest rates will test the solvency of the country. “At first you go bankrupt slowly, then all at once.” The "value" of a debt based currency needs to be measured against real money eg. gold.
@@homeeconomics4419 And people like Professor Steven Keen (who follows the same mantra as our host) have highlighted China as being particularly at risk of a Minsky Moment. Keen is right in that changes to the over leveraged private sector debt bring about recessions eg. 2008 but ignores government debt. Total debt matters and replacing declining levels of private sector credit with additional government debt only leads to a weakening of the currency, higher inflation and ultimately higher unemployment as interest rates are increased.
@@ianjackson8371 @ianjackson8371 people have been predicting the sky is about to fall on japan every year for nearly a quarter century. It isnt going to. If you want to make a case for the superiority of a gold standard, fine. But no major economy has operated a full gold standard since the 1930s so I cant see what you base your conviction that currencies must be backed by gold on These all sounds to me like austrian talking points. The school which has successfully predicted 15 of the last 0 hyperinflationary debt crises. But the next one might happen so please visit our sponsor, birch gold
There can be no crisis because we can always print more money? Isn't printing more and more money above the true level of creation of real wealth bound to lead to inflation? Isn't inflation effectively a tax on the public as our money is worth less and less?
It’s absurd because *debt* is entirely the wrong concept *for the manufacturer* of the balances in our bank accounts. Deleting debt or running a surplus *deletes* money out of the economy. This is a point Steve Keen underscores. Economists need to stop being so absurdly lazy and imprecise about nomenclature, especially regarding the overloaded term “money”. This lack of discipline only underscores the criminal incompetence found in most of the field.
But what about the international dimension? You talk about our government and the City and the Bank of England but how do I pay for something from overseas? What about overseas bond buyers? If we print money our currency is worth less so the government cannot print money with impunity.
I thought the majority of money in circulation is created via commercial bank loans with the money the goverment creates representing only a tiny fraction of the total
….and you know the second chapter of this story. It’s called Inflation. It has been going on since the late sixties….and there it sits in the national debt. Don’t worry about the national debt it’s just a number on paper. Like the Weimar Republic…or Zimbabwe.
It is a very “poor economy” and the government rakes an enormous quantity of that tax back. And the Vanity Project is the City of London, above all else. Compare the surpluses, the City far outperforms that of the miserable Economy. Liquidity, the balance of.
Governments DO borrow from financial markets. They don't HAVE TO borrow from financial markets. And if they compel the Bank of England to print money to buy their debt, then inflation will result. And inflation leads to the rich getting richer (as their non-cash assets go up in value) and the poor getting poorer (whose wage increases always lag inflation).
That's one of the functions of tax as he explains in the video, which is to return the money it borrowed from the boe. Otherwise there would be inflation , which he also clarifies.
Taxes could in theory fund what the government spends. But he’s 100% right that taxes today don’t fund what the governments spends because it’s impossible with debt to gdp over 120% or higher then some years of the ww2 war. Here’s the question. It’s true governments tell the privately owned central banks what to do because a private central bank monopoly only exists cause the government allows it. But it’s also true there’s a revolving door between big business and government. If you’re a Keynesian working for the central bank or Wall Street and then you magically work in a high government job you’ll probably retain the beliefs and work networks you had that helped you get your government job.
Some people claim well we need government debt for retirees to save their money in. That’s BS. We have something better. It’s called a MINT. Retirees or social security literally could buy and own actual gold or silver money coins. If you own the gold you own it and the government doesn’t have to pay you. But with social security buying tons of government bonds you gotta think that helped drive down rates to some extent and the government has to pay those bonds back. If it’s a matter of saving why isn’t the government having people save in MONEY FROM THEIR MINTS?
Some people claim well we need government debt for retirees to save their money in. That’s bullshiz. We have something better. It’s called a mint. Retirees or social security literally could buy and own actual gold or silver money coins. If you own the gold you own it and the government doesn’t have to pay you. But with social security buying tons of government bonds you gotta think that helped drive down rates to some extent and the government has to pay those bonds back. If it’s a matter of saving why isn’t the government having people save in money from their mints?
Euro dollar university says two banks without dollars can and did make dollars out of thin air. Two banks lend one million to each other denominated in U.S. dollars. Magically from an accounting perspective it balances out as each bank now has a liability and also an asset lending to each other. Then those new dollars are lent into the real world. Banks create new currency all the time which is why it’s said we have an elastic currency supply. It’s not fixed. If our currency supply was fixed and 100% relied on the government spending then this professor would be right. Abraham Lincoln did modern monetary theory and literally had the government spend and print new money and issued ZERO BONDS. If there’s no debt nothing has to be paid back. @koltoncrane3099 2 minutes ago He says if the government didn’t spend money into existence then there’d be no money to pay tax with. I don’t believe that’s entirely true. For instance, after ww2 Uk had capital controls and couldn’t let capital leave the Uk but they let their banks issue US dollars in the UK. After the U.S. told the Uk let Egypt keep the canal it just took from the Uk the Uk retained power over its former colonies by switching into U.S. dollar banking according to the video called spiders web on RUclips
Some people claim well we need government debt for retirees to save their money in. That’s misleading. We have something better. It’s called a mint. Retirees or social security literally could buy and own actual gold or silver money coins. If you own the gold you own it and the government doesn’t have to pay you. But with social security buying tons of government bonds you gotta think that helped drive down rates to some extent and the government has to pay those bonds back. If it’s a matter of saving why isn’t the government having people save in money from their mints.
Due to the global nature of the economy this analysis is a bit misleading if not entirely incorrect, not least as various factors beyond the government's control determine the value of money. Which is perhaps the most crucial point. So don't get it twisted
😂 Richard tries hard i will say. Tax paid in UK currency is essential because it enforces the use of sovereign currency. Say you didn't have UK taxes that needed to be paid in Pounds. If this was the case, then I wouldn't have to use Pounds to buy anything inside the UK. If there is no need for me to use Pounds, then the Pound's value is only the paper and ink used to create it. Tax imposes a demand for a sovereign currency. Without tax, people could use any form of money a counterparty is willing to accept. Notice tax encompasses nearly everything. The BOE is the primary custodian of government bonds. They auction the bonds to primary dealers/ counterparties, who create a market for them. Is it borrowing? Technically no it isn't. Banks that are GEMMs (Gilt - Edged Market Makers) are required to participate in government bond auctions and place meaningful bids. They are required to buy at least 2.5% of the volume of bonds on a rolling 3 month average, and place bids on 5% of total volume. This is where the borrowing terminology originates from. This isn't a voluntary event. Creating a budget is an incredibly complex endeavor. The forced participation of GEMMs shows that the government is not creating new money, they are repurposing existing money and bank credit that includes appreciation of assets, the creation of new assets, facilitating international trade settlements, etc. So while technically it isn't borrowing, it also technically isn't creating new money. People who are saying Liz Truss was solely responsible for the Gilt crash are using correlation equals causation. Correlation does not equal causation. The UK defined benefit pension funds were structured on an outsized reliance on leverage and derivatives. The market volatility from bond vigilantes brought margin calls on pension funds' mark to market losses by way of their synthetic positions. The margin call liquidity was attained by selling their assets which were concentrated in Gilts. The BOE came in and took the loss for them essentially to stop the downward spiral. Hey it's Friday at least. 😂
"The forced participation of GEMMs shows that the government is not creating new money" I don't see how your conclusion follows. The primary dealers are obliged to place bids sure. The government adds reserves by spending and the selling of the acquired bonds by the primary dealers into the market drains existing reserves. The spending come first otherwise there wouldn't be reserves to start with.
What you have conveniently forgotten to mention is inflation. If the government creates money and doesn’t tax it back, it creates inflation. I’d be very interested to know what happened to the Truss government if it’s all as simple as you are deluding people here.
This sounds like nonsense. You will have to explain next why the government has to pay interest on the debt if there is no debt because they can simply print all the money they need. Granted I’m sure they can print more money if they want but the last time that was practiced was in the 1930’s by some countries where their currency was devalued every time they did it and inflation was sky high. Not a practice which helps the economy.
THANK YOU, finally an answer to my question! Now all I have to do is digest it.
I rarely comment on these things but I wanted to say Thankyou for using your channel to highlight the MMT analysis of government money. Sometimes I think I'm going mad when the UK is consumed with balancing the budget while the entire global financial sector knows it is all based on made up ideas that sound similar to how the average citizen thinks about their own finances. Not a government spending its own money. Much appreciated. Many of the MMT proponents are very bad at explaining themselves or are too often associated with left leaning politics so the conversation becomes political rather than simply a matter of objective fact.
very simplistic! There is no mention here of foreign exchange or trade & cross border bankng or competition with foreign economies, let alone the confidence needed to make this system function. Moreover, money is not a repository of wealth, but a measure of that confidence. No one trades or holds foreign currency, if they have no confidence in the government, especially if they create too much money [commensurate with confidence] & leave it in circulation. What do you think is happening in Russia right now? Inflation is a function of confidence & mercantlism is not dead in Russia either.
*LITERALLY HAD THIS CONVERSATION* with my sister yesterday.
keep spreading the word
Did you mention inflation?
Some people claim well we need government debt for retirees to save their money in. That’s BS. We have something better. It’s called a MINT. Retirees or social security literally could buy and own actual gold or silver money coins. If you own the gold you own it and the government doesn’t have to pay you. But with social security buying tons of government bonds you gotta think that helped drive down rates to some extent and the government has to pay those bonds back. If it’s a matter of saving why isn’t the government having people save in MONEY FROM THEIR MINTS?
That would be true if the UK was the world. When the government creates money, it devalues the currency (inflation). A crisis can arise if no one outside the UK wants sterling. We then have to raise minimum lending rates which impacts UK businesses and consumers, reducing growth and potentially causing recession. Truss / Kwateng thought they could spend £40bn extra but this threat of creation of money or borrowing. Bond prices are sensitive to inflation causing a crisis in pension funds, several of which were within hours of going in administration. So the bank had to buy bonds to drive up the price while the government wanted the bank to sell bonds. Sure, the government and bank cannot run out of sterling, but sterling can become worthless.
Absolutely; A system designed to keep the majority on the employment treadmill till almost death! Government taking back 60% plus of your gross earnings!Just look at the state of UK towns and Cities and what a Pound is worth. Gold is not anymore expensive.. It’s just that the pound is on the skids
Govt can print all the money they want, but the exchange value of that money will be affected. You could repay the debt by printing all of it and paying it back nominally but it would have the same effect as calling bankruptcy. Less fortunate countries (like those in the EU) on one hand pay less interest on their debt as it’s denominated in a “foreign” currency but don’t have the ability to pull off this trick.
This is why failing governments resort to emit bonds in foreign currencies as no one trusts their local currency anymore (including the citizens) making the local currency even more worthless. I’m not a fan of MMT because while true within the constraints it imagines it depends on the perceived value of the fiat currency, and that can vanish very quickly
What he's saying is theoretical. In practice, if the city stop buying government bonds the whole system collapses as it did with the Weimar republic.
A good explanation. There was a leader who saw the economy like balancing a budget as if they were running their Dad's corner shop and look where that person got us in the 80's. Austerity crushes spending which crushes industry, infrastructure and business which reduces taxes which feeds more austerity. Those who like the idea of not putting money into an economy need to come up with a way to grow and increase tax revenue but they don't their economic ability stops right there and we end up with the 80's. Selling borrowing at election time to the public who see it as they see money is an uphill task after all i still hear the daft phase magic money tree used. If ever there was an empty void of a phrase there you have it.
Also they spend with or through multi national corporations that does not help your local economy as much spending in your local high street shops, specifically the shops that are owned and operated by locals…
Ooh. Now would be a REALLY good time to discuss Liz Truss! 💚💚💚
Probably your best one yet, Richard!
I can’t thank you enough for making these videos so we can all learn without doing an economics degree😊
Accounting
@@subliminal_donkey your correct
News Flash. Either way you will have a lifetime of "un-learning" what you've been taught to get to the truth.
Please do not take Richard's overt confidence to equal knowledge of things money.
Public Debt is a legal obligation on the part of the BORROWER for repayment of Principal and Interest, in the Coin of the realm to the LENDER.
All of it.
And those payments MUST BE MADE per the Amort. SCHEDULE.
How is Public Debt anything else than that ?
Be assured that you would learn nothing useful on a modern economics course in most UK or US universities. Most of them are just regurgitations of neoliberal dogma.
If you did an economics degree you wouldn't have been taught any of this
Thanks, Richard. Love your videos. This one runs up against the logic of your other videos though. You previously pointed to the 2014 Bank of England paper that rightly says that 97% of money in the economy is created by banks through loans. Are you saying that the government ALSO spends money into the economy but that the selling of bonds simultaneously destroys an equal amount of money or that the government can, as we saw during Covid, spend more money into the economy than it takes out (by "monetising the debt")?
If it's the latter, didn't the monetisation of £900 billion have massive inflationary effects and a shocking knock-on effect on wealth inequality as Gary Stevens argues? It's a particularly powerful argument because he predicted it would happen in mid-2020!
The other critique I'd have is that we are not America. Stephanie Kelton's take that governments can spend all the money they want is oblivious to the reality of the American dollar empire. They can do that. We cannot.
Truss's government demonstrated that unfunded spending can spook markets and tank the pound. Such a devaluing could spiral out of control if a government constantly monetised their budget deficit. They only got away with it during covid because every major economy was doing the same thing.
Also, your take on currencies would be interesting. We run a trade deficit and have done so for years. Therefore, there's always downward pressure on the pound (ie, we need to buy dollars to buy things on international markets). Is the only reason that the pound has stayed relatively valuable when compared with other currencies that foreigners buy pounds to buy assets in the UK? And might that be why we don't own anything in this country any more? Presumably, there will come a time when the firesale of UK assets must end because there will be nothing left? What then?
Commercial banks create bank deposits by lending. They don't create bank reserves, they come from the government (and its central bank). It is the bank reserves that are drained when the government sells bonds.
@@Vroomfondle1066 If commercial banks are short of reserves they can borrow them from the central bank. Depends if you prefer a floor or ceiling system. I tend to hold the view that the risk is deflation over time and recent inflation is an anomaly, time will tell.
@@Vroomfondle1066 I suspect inequality is just a feature of the system (as its effectively the pareto phenomenon). Not sure it does destroy the buying power of the 99% as the government is free to distribute its money however it sees fit (we are not at ransom for money itself from the wealthy) and buying power increases in a deflationary environment.
@@downshift4503money is merely a medium of exchange and a sort of store of wealth real world asset and resource allocation is the determinate of wealth in society it is this that has tipped rapidly towards concentration in the hands of a smaller and smaller section of society the monetary denomination is merely the numerical representation of this asset and resource allocation.
Private banks have destroyed national sovereignty, perverted justice and bred degeneracy. It is to theses banks and bankers that the people and its institutions belong including their own governments. For this reason, the West is being taken apart and its policies are baneful to liberty, decency and human happiness.
This series is a refreshingly honest explanation of macroeconomic truths!
Incomplete truths. Funding government expenditure in through printing money will simply lead to inflation, as more pounds are chasing the same goods and services. And inflation leads to the rich getting richer (as their non-cash assets go up in value) and the poor getting poorer (whose wage increases always lag inflation). If it spirals out of control it can lead to the impoverishment seen in Russia in the 90's, Zimbabwe, Venezuela, Argentina, Weimar Germany and more.
Governments already do this far too much, benefiting the asset-owning classes. This can be seen in how wages have consistently lagged economic growth since the 70's when developed nations left the Bretton-Woods system and could print money in this way: the rich have consistently gotten richer.
You are being told fairy stories.
@@rocketpig1914 this guy subscribes to the magic money tree school of economics.
@@rocketpig1914Exactly. It never fails to surprise me just how many people feel they "know" and can come online and make "explainer videos" like this just filled with the most basic nonsense propaganda about the economy that gets fed to young students and has no bearing on reality
@@rocketpig1914
Correct. He avoided INFLATION.
Richard - I think you will need to address the global nature of the economy and some of the constraints that that places on governments other than in the US. MMT is just that - a theory. It may have more validity than current text book theories but in practice there are other factors that limit the creation of money for fiat currencies.
" MMT is just that - a theory". It's understandable that you say this, because the T in MMT = Theory. However, it's a misnomer, because MMT descrbes what actually happens in the economy. It is not a theory.
@@helenheenan3447I don’t disagree in terms of its relationship with reality and I am more interested in the practice but even a set of observations that is codified into a particular view of a system is a theory. It still relies on one or more assumptions about why what is observed is happening. I know this sounds a bit pedantic but any assumption can be challenged.
This is why MMT focuses on what is available to buy rather than the money instrument. MMT is just as valid in the global economy as the local economy and it doesn't suggest buying everything or 'printing' vast amounts of money. It says that the financial constraints that are spoken about in the orthodoxy are mostly arbitrary.
@@richyphillipsThanks - that’s something that doesn’t get a lot of airtime when MMT is talked about.
Fantastic video! I have incurred so much losses trading on my own....I trade well on demo but I think the real market is manipulated.... Can anyone help me out or at least tell me what I'm doing wrong??
Same here, My portfolio has been going down the drain while I try trading,l just don't know what I do wrong. .
Investing with an expert is the best strategy for beginners and busy investors, as most failures and losses in investment usually happen when you invest without proper guidance. I'm speaking from experience.
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Wow, I'm surprised to see Janet mentioned here as well. I didn't know she had been kind to so many people
I'm also a huge beneficiary of her..
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Taxes exist to give fiat value. If you or I decided to make up a new money, nobody would use it, it would be worthless. The government on the other hand, demands you must pay taxes in it's money and nothing else, if you do not pay you are punished, this gives the money value, it is essentially a violence backed currency, 'use our money to pay tax or go to jail!'.
This is why, despite the government having unlimited capacity to print money, taxes must still exist.
I find Mosler’s fetish for violence and exploitation to reason about money and trade a bit noxious. Taxes existed before money and with commodity money; the explanation falls apart on these grounds and on several other points as evident in human history.
Taxes do promote currency use, but a standard means of exchange is desirable to an entire market economy for multiple reasons chiefly as “legal tender for all debts public and private”.
National taxes *cull money* from the system and *local* taxes actually fund local governments so again, the reasoning from MMT lacks rigor. The most valuable thing national taxes can do is prevent the public utility the means of exchange provides from puddling in the system. This keeps everyone able to gain and spend money for their daily needs. The most efficacious tax here is demurrage tax, a coin tax.
It would be worthless to discharge debt with it to anyone other than the issuer and would take adjudication, which is expensive and time consuming. It’s not tradable. The fixation on threat of violence is largely *obnoxious* and belies the ample examples of other dynamics that rigorous fields of study like anthropology have researched. Economists are immensely ignorant people about intensively relevant history.
Good observation
@@GhostOnTheHalfShell agreed that taxes existed before fiat money was common place, even when commodity money was most common. However I still think that if governments did not require tax to be paid in their own currency, people would slowly move away from using state issued currency and shift to either commodity money or even something like bitcoin. State issued currency is guaranteed to lose purchaing power over time, if it were not required for payment of tax, people would prefer to trade with something that has a fixed or limited supply, something they know will not be debased over time.
@@syproductions456 I think friedgeld's are a necessary direction to take, but your statement about state currency being guaranteed to lose purchasing power is not true. They lose value because of interest and inflation. Interest injects inflation while not being the only source of it. And Interest and inflation are wealth transfers, while taxes are not.
This history of commodity monies (gold etc) clearly demonstrate they suffer and inflict the same economic crises as fiat, and worse have unique problems because of the commodity they are struck from. Bitcoin is in no position to become a currency for a lot of reasons, but a fatal flaw is the cap on the number of coins, it suffers the same problem as commodity monies.
The general public thinks that the national economy is like your household budget, but it's not, and it's very hard to get this conception across to people, for want of better explanation, it's just to mind blowing for them , thats the problem!, and the MSM uses this as smoke & mirrors, frightening us with things like
"ooh wheres the money gonna come from", " the national debt is higher than its ever been", "we max the credit card out, Britain's broke" etc, etc
The national economy is not like a household budget? Interesting
So as a household I can create new assets or have a pitch for creating assets and get a bank to use them as collateral for a loan. If the government doesn't use assets to value their money, then where is the value of my asset coming from? What country would accept the Pound in return for trade if there is no value to get in return?
Contrary to the MMT narrative, the Government does run like a household budget. If a country sends goods/services here, they want an equal amount of goods/services in return. If the citizens of this country creates assets, they want the value of those assets to be properly appraised to trade for an equal amount in return. If the government wants to create a deficit that isn't bound(bonded) to asset values increasing, or creating new assets, then the value of their money will now be spread to all existing assets. That would be devaluing the money...better known as inflation. If you continue to create deficits that are not accompanied by asset(wealth) creation, no one will trade with you, without demanding an increased amount in return to finance the trade. Basic risk management. Keep down that path and you will end in financial ruin as you'll reach a point that repayment is not possible. Households are no different.
Governments can monetise assets, so can you through asset creation.
The balance of payments system needs to be balanced. If your current account and capital account don't balance, the IMF will be taking actions in short order.
@@cfalvl2380 The government may behave like a household but it is imposing that upon itself. If a country sends goods / services here it gets pounds sterling in return that sits in an account. Obviously the value of that money is related to the goods and services being produced here, or the expectation they will be produced later - hence the importance of growing GDP.
MMT does account for the potential of inflation.
@@cfalvl2380a household needs to have an income and is constrained by that income. A household is time limited. A household cannot impose and enforce taxation in the same way a gov't can. But a gov't must facilitate productive activity and use the real resources available to it efficiently and for public good. So part of your story is valid but not all.
@@cfalvl2380but also, the MMT narrative has a lot more to it. 25yrs + of research, articles and papers that examine all aspects of global economics through an MMT lens. What Richard (and indeed Kelton) talks about just scratches the surface of the theory.
@@cfalvl2380 don't tell me, tell Richard the host of this channel. And i would say countries in the global North do behave in this manner, getting away with it, it's the global south that gets penalised by the financial institutions, look at the USA, the eye watering debt thier in, and they still call the shots, and thiers no reckoning yet for them, made you think though 😃
It is a Debt based system - money is created as debt. With now private banks creating the money out of thin air, and then loaning it to our government or us via mortgages, with added interest - is totally unjust and unsustainable longterm.
Correct
My state pension got credited to my bank account yesterday. I assume it was paid to me via a commercial bank ( ie not the BoE). What’s the debit entry for the bank? How does the government supply funds to the commercial bank to cancel down the debit entry that shows the government being a debtor to the bank? Hope that makes sense!
The government spends bank reserves into your commercial bank with an instruction to increase your deposit account by an equal number to the reserve.
@@downshift4503 thanks. So for the commercial bank it’s credit my account and debit ‘central bank reserves’ (central bank is a debtor of the commercial bank). In the books of the central bank it’s credit commercial bank and debit HM Govt?
@@davidstevan1 Your bank gets an increase in bank reserves on its BoE account. The Treasury gets a decrease in bank reserves on its BoE account.
The money is cleared by the bank of England or the exchequer
Each day all over the world the public and private banks total all the money they owe or are going to give out to customers the next day and total all they have received if there is a shortfall between what each bank collected and what it will pay out the next day then the bank of England will authorise the exchequer to issue more money the next day so each bank doesn't run out money and because this is now done electronically it is done overnight between midnight and 3am
They don't send bank clerk's to the state treasury office anymore because it's done overnight electronically
My mother worked as a ledger clerk for the ANZ and that was what she did all day - Write into the ledger each day each withdrawal and deposit made to the bank and then at the end of the day tally what was received and what was paid out
That's why back in 1970's it took 7 days for your check to clear because it had to go to the state treasury who then sent it to the federal reserve which then authorised the actual payment in cash and then had to send that cash physically from the state treasury to the individual bank
It seems that some leading Economists are claiming that we do borrow from Pension funds and the BOE. If there is no pressure to pay loans back, why wont our government slow down re payment?
One huge thing you missed is inflation. Over the last 5 years it has been about 30%. That means that those "safe" deposits just rot. You mostly do not even cover inflation with interest. Indeed taxing interest in these circumstances is a wealth tax. Think about it.
Seems the government likes inflation as the vat receipts rise and income tax receipts rise as people get pay increases 😤 this inflation tax falls mainly on the poor who are hit the hardest
Whats with central bank independence then if the BOE has no choice in extending overdraft.
It has operational independence, but that is purely a choice by the government.
Long time since I did economics but couple of questions 1. What happens to money that leaves the country eg Oil purchases, all that stuff China makes for us? 2. Why does the IMF exist if no country can go bust? 3. What was going on with the Weimar Republic in 1936? There seems to be no world economy in your economic model..
If everybody else thinks something and you don't you are probably wrong.
The money markets buy government issued bonds. Those bonds have to be redeemed at maturity, with interest. How is that not borrowing from the money markets?
The behaviour of the markets are the only facts. You are advocating for educating ‘the markets’ to see things differently such as during the Greek debt crisis and the Truss Mini-budget. Fighting these crisis situations with an economics lecture is a brave strategy
Liz Truss might as a 'matter of fact' beg to differ here? Nothing she did as PM was passed into law but somehow external 'market forces' ended her government in just 45 days. If only it was so easy?
thats because she wanted to use there money and not pay em back via tax lol ie.. they was never getting the money back! lol
@@doubledigital_ But a question remains still, why does any of it need to be claimed back if we can just make as much money as we need? Why not simply make every Brit a billionaire?
@@doubledigital_ But...Richard already claimed only yesterday on another vid that there's "no such thing as taxpayer's money". Confusing isn't it? 🤨🙄
@@OneAndOnlyMe Tax money is money destroyed. The accounts are balanced out and it no longer exists. The opposite process to when govt creates money, ie. adds numbers to an account it is paying to build a teleport or whatever.
Taxes are required to create demand for the currency. You have to pay taxes in British pound sterling. So you need to work and get paid in British pound sterling. Like 33 million other people.
By removing money from the economy, taxes also reduce inflation, ie. the reduction in what you can buy with £1, which would happen if everyone was a billionaire
@@OneAndOnlyMeas Ben bernake said, there is nothing to stop the US government marking up the accounts of every pensioner in the country, but there must be stuff available for them to buy.
Essentially, it's the availability of labour and real resources are the constraint of money creation in a fiat money system. What, and how much the gov't buys with their money sets the price level which all other prices are based upon.
Why should the government pay interest at all when it is guaranteed and the government doesn't need the money? Where does this money to pay interest come from? It ends up amounting to a significant unnecessary expense.
Calling newly-created money part of the national debt is crazy for the reasons you have explained before: how can we borrow from ourselves? This is further exacerbated by allowing commercial banks to issue the money and charge interest on the balancing amount on their books. The Tories created new money to fill holes, and this ended up in banks for use by the wealthiest for asset ownership and rental. If we issued new money specifically for rebuilding our infrastructure, this would cut out the easy route to inequality where we are blackmailed by corporate interests and our politicians are subservient to them.
Commercial banks hold the governments currency as reserves in their exchange settlement accounts at the central bank and they cannot lend this money out to the public. It can only be used to make payments to each other.
@@martinsingfield Banks lend first and then look for the reserves later if they need them. They can increase their reserves by increasing the deposits that they borrow from the wholesale markets.
This is utterly daft nonsense.
Government bonds are bought only because the buyers (eg the city and intl investors) have confidence that the bond will hold its value and that they will be repaid in a currency worth a similar value to the one they invested. If they lose that confidence, they dump the bonds, yields increase, and even more money has to be printed to pay it, creating a downward spiral. They might also dump the currency if they are holding it for trade.
MMT leads to Zimbabwean Dollars and Venezuelan Bolivars. The government must always maintain the confidence of the markets because money is not wealth; it is merely a token to trade wealth with.
Printing money cannot create prosperity any more than printing diplomas can teach economics!
Thank you. After watching this video, I did think to myself, "Am I going to have to comment to explain why this analysis is abject charlatanry? Am I going to have to point out that printing money is not analogous to creating value; that there are enormously compelling social reasons why institutional investors like pension funds need to expect a return of like value on the deposits they invest with the government, and that millions of people's income and financial security rely on that promise being upheld; and that any video which claims to explain this topic without even once mentioning inflation should set alarm bells ringing at max volume?"
But I didn't have to, because you'd already said it much better & more concisely.
Sadly I think you might get a bit of negative attention from motivated dogmatists who want to believe that currency inflation is the path to riches for all, and that because money and debt are fictions then the useful promises that underpin them are also fictitious and can just as easily be rewritten. But their shouting won't change the fact that you spoke out against a snake oil salesman, which is always the right thing to do.
@@thedukeofbreakfast I actually am centre left, so by no means am I defending Thatcherism, but this video is crazy even to me. I have zero issue with UK gov buying a stake in BP, or even creating a wealth fund ala Norway. There is a middle way.
But these crackpot ideas about printing to oblivion are nuts. Nothing wrong with printing to invest where there's likely to be a return, eg in more efficient infrastructure, but money for moneys' sake has no value.
@gavinlucas22 100%. We are coming at this from the same position. Partly that's why this stuff is so frustrating - because we could achieve a progressive agenda, with far greater public investment and a more equitable redistribution of wealth, without resorting to wacky theories. It's just unnecessary, and it detracts credibility from the whole platform.
Another MMT rant. Yes, the govt can print or digitally conjure up all the money it wants in the short term, but for it to retain anything like it's value in the medium to long term the currency must be limited in supply, either by borrowing through the bond market or fixed in relation to a scarce asset.
Great videos. I've same question as phosferrax. Commercial banks don't sell bonds to cover credit they issue so why does the BOE? And why are governments worried about bond sales failing to find customers?
But surely when government expenditure exceeds revenue, it needs to borrow against bonds to bridge the gap. These bonds have to be repaid according to the terms they were issued for and if the country’s expenditure continues to exceed revenue income, the debt just escalates. It doesn’t go away. Businesses that spend more than they earn - continuously - eventually go bust.
So how did Truss cause such a disaster with her mini budget? Millions of pensioners/households lost out, yet, the banks still got their bonuses.
Specifically because of how quickly and recklessly she operated. Yes, the pension funds are important. Yes they can affect the wider economy. But no the government doesn't owe them money in the way a normal person owes a bank money because of the specific differences outlined in the video. It's not that hard to understand. Two things can be true at once.
His videos are all addressing the ways that these truths are twisted or extended further than is actually true. The point is that the system is interdependent. But the government is much more powerful than they pretend to be. In a normal situation, with reasonable time frames and logical adjustments in policy the government can do quite a lot of spending if it wants to. The Liz Truss situation is a complete outlier because they came in so hard and fast with their changes. That's not to say their changes were reasonable, but they certainly wouldn't have been as bad if they'd taken more time and briefed more people giving them time to make arrangements and see the weaknesses in the system and adjusted accordingly.
The truss affair had more to do with how pension funds hedge their interest income using LDIs (liability driven investments). The BoE threatened to raise rates quickly to 6.5% after the Truss announcement. This caused margin calls because the yields on existing gilts dropped or were predicted to drop. Pension companies needed liquidity fast to meet the margin calls or loose a lot of money. The dumping of gilts on the market caused a even bigger drop in yields which could have spiralled. The BoE stepped in as buyer of last resort to stabilise the prices. They stepped in too late to stop big pension devaluations. IMO the BoE failed on two counts. #1 telling the market that it would increase rates that quickly when it didn't need to do that at all #2 delaying stepping in as buyer of last resort causing price instability. Truss's budget was a 'bit-part' in that debacle.
she didn't cause a "disaster". It was easily fixed by the bank of England when they had had enough of watching and stepped in to intervene, which they could have done immediately. She announced her plans without effectively telling anyone, whilst at the same time the Bank of england were doing reverse QE. The markets 'panicked' and started selling bonds. This caused the price of bonds to drop. THe pension funds holding these bonds were using them as collateral to borrow more money to invest in higher yielding assets (which in itself should be discussed as whether thats right to do). When the bond price dropped, the collateral value fell below the loan conditions requirements. So bank of england stepped in to buy up bonds and raise the price to ensure the pension funds could meet their current liabilities and remain solvent. It had nothing to do with Truss trying to run 'unfunded' tax cuts, which she could have done if there had been more coordination with the Bank of england.
Excellent analysis in these comments 👏👏 dare I say that the government will not borrow more but tax more instead ?
Isn't it just !@@Vroomfondle1066
During covid all that printed money created far more innequality. The surplus of cash collected by the already wealthy are now buying up all the assets and inflating asset prices way beyond what ordinary folk can afford. How do we fix the misery this causes, if wealth taxes are not implemented?
Very interesting, thank you. I have a question, what is the effect of money created by fractional reserve banking being deposited in government bonds? Roughly 90% of this money wasn't created by the BOE but by private banks, yet presumably can be lent to the government by investing in bonds. As it wasn't originally money issued directly from a central bank, but loaned into existence, what complications does this bring? Does it mean that a proportion of the government's "deficit" is also loaned into existence? I can't get my head round it...
YES!! THIS!! imho, this is why we are where we are.
@@andielines ... and then I get more confused... if some of the government's "deficit" is the result of re-deposits from private banks, i.e. from money loaned into existence, and the government turns round and uses this deposited money for more spending into, and to grow, the economy, wouldn't this the allow private banks to further issue yet more fractional reserve loans, the results of which may then eventually end up being lent back to the government as bond purchases which again increases the size of the available "deficit"for spending and so on...? I'd like to know how big an effect this is? What proportion of the so called "deficit" actually comes from fractional reserve banking deposits (in the form of bond purchases) as the result of money creation by from private banks? And is that a problem? Or is this kind of deposit a way of "cancelling" money created by private banks? If so, then why pay interest on the bond? Can anyone explain?
To be clear, I don't have a problem with the idea of issuing government bonds for public spending, that seems a good idea...
@@BernardMcCarty tbh, it seems to me that most current mainstream explanations of economic theory are just post hoc rationalisation of a deeply flawed and perverse system, created to bring obscene profits to a relatively small number of people. Whoever you believe, an underlying truth remains. That the public has been told they have to pick up the bill for any costs involved.
Government spending creates new reserves in the banking system. Bond sales drain existing reserves out of the banking system.
When a commercial bank lends it creates deposits (the banks liability) and an asset (the banks loan). If you use the deposit to purchase a government bond your bank will transfer existing bank reserves not the bank loan. The bank loan stays with the bank. The point is, commercial banks are creating bank loans, not bank reserves.
@@downshift4503 that just sounds like semantics and post hoc rationalisation to me. A financial system that moves around money created from nothing to benefit the tiny minority of people that controls that system. Cui bono?
This video does not explain why the Government cannot print to infinity. Otherwise they would as its their own money. Is it not true (and I am just punter off the street with no economics background) that there are constraints as to how big the "debt" can grow. At a certain point other countries start to believe that your currency is becoming worthless because you have printed too much of it?
All good with one exception... if your money get to outside players like US or China they can play against the system and even force turmoil. Basically... everything works just like that in a closed system. We don't have one so there are external risks.
This is fascinating thanks. So where do the national debt figures actually come from then?
Brilliant ❤
Well we all know the Government could just print money..whats new there? Venezuela have been doing it for years, Zimbabwe too..what could possibly go wrong?
😄
Trolling again. Nobody buys this discredited nonsense about Venezuela and Zimbabwe any more.
It's almost like you didn't watch the video before commenting 🤔
I know you believe you're being clever, but you're only highlighting your gaps in knowledge and understanding.
In a fiat system all money is just "printed".
That's right. The government doesnt take taxpayer's money to fund their own borrowing, they simply tax them to level out the borrowings. Simple, innit!?😄
No, they don't actually. See the video
Hoe does VAT sit with the theory that taxation does not fund government expenditure? £200B a year approx. raked in on business and consumer spending. If taxation is designed to reclaim money it put into circulation, why would you use a method of economic activity to do so? Why not just tax savings and investments, company profits, PAYE, NI etc? Why do we need VAT?
Why not just tax land, or tax smoking or drinking? Tax is used for a variety of reasons, principally as a form of coercion so that people are forced to become productive in some sense or change their behaviour or dampen demand. Most people given the option try avoid tax so I guess VAT is instrumental in that regard.... you need more of the governments money to buy stuff and hence need to be more productive.
Vat is a regressive tax. It is meant to influence the spending decisions of the population. It should be better targeted. A blanket vat rate does not achieve what it is meant to achieve.
VAT is also conveniently not progressive in any way every purchaser pays the same rate whether a billionaire or a pensioner their total may differ but the rate remains the same so it isn't a redistributive mechanism.
I would add and argue that a government bond is sold at a bond auction and 'bought' by primary banks and actually monetised through the commercial banking system when the primary bank has the bond as an asset on it's balance sheet/account at the BoE. The owner of that bond takes the interest through tax revenue. Great work if you can get it.
it's nothing more than moving money from a current account to a savings account.
@@downshift4503 you shouldn't confuse the monetary system with your household system. look at where the funds come from and how they are created.
@@ef7480 It's just an analogy to help understand the difference between bonds and bank reserves. If you want it to be clearer then bank reserves are first created by the BoE, spent by the government and become assets of commercial banks. The commercial bank can exchange their existing bank reserve assets into government bonds. Both bank reserves and government bonds represent prior government spending. The interest for government bonds is paid from - new bank reserves created by the central bank and spent by the government. The ratio of bonds to bank reserves is decided through monetary policy. The source for both though is the BoE and the government. All tax achieves in this process is to extinguish previous government spending from the system.
Spending does not come first.
Demanding the tax comes first.
On 1st of January you already know how much taxes you must pay. If we would have the simplest form of tax, the head tax, you would precisely know to the penny, how much tax you must pay until the end of the year. So from the beginning of the year all citizens are in debt and owe to the state the money, the state intends to spend.
The second step is creating the money the state will spend.
The third step is spending.
The fourth step is recollecting the money.
The fifth step is the destruction of money.
Money is a bookkeeping system of debt.
Do the commerical banks not create around 95% of the money in circulation by giving loans, mortgages etc?
Banks create debt.
@@Ghengiskhansmum Yes, which is money to someone.
Yes but they do not create bank reserves. Government bonds function as a reserve drain.
All true, but did not discuss it can, and often does lead to inflation. That needs to discussed in the same videos.
Why offer bonds at all anymore? The first bond was offered around 330 years ago, but the monetary system is different now, so what purpose do they fulfill?
Monetary policy before interest on reserves.
Excess liquidity drives down the rate at which banks lend reserves, bond sales drain excess liquidity to meet the banks targeted short term int rate. Now that the boe /state pays int on reserves effectively creating a floor system there is now no longer any need to issue debt
In part potentially a hangover from gold standard. Reserves were convertible to gold (a risk for the bank), but bonds were not - but you were paid interest by holding bonds rather than reserves. Today it's a fiat system so its not convertible to gold.
@@downshift4503 thats true , it was but it was still monetary policy up until just around the GFC before excess reserve balances. Bond sales were a requirement to prevent the states spending impacting short term int rates , but since IOR is now in place its now rendered obsolete
@@Phil_D_Waller They also act as collateral in the wider system, so there is a demand for them. I can't hold reserves but I can hold bonds.
Question: Under what circumstances, then, does government borrow from the World Bank and other outside international sources of capital? Thanks.
In Italy Is not as such. the Treasury auctions short (Bot) or long term (BTP) bonds monthly , if there Is a larger amount of governament bonds demanded than the monthly issuing, the ones Who request the lower interest( E.g. o.98 to the unitary face value instead of 0,975) are satisfied instead if bonds offer surpasses demand, the BOT are issued at the average requested "price"
love the ending of the video "it's the truth" which is in short supply.
A unique view
Why charge interest on the money created out of thin air? Why not just give it directly after the creation
Could we include how this is related to foreign exchange rates and inflation? These are key.
Richard, could you do a follow up video please to answer the obvious question this begs: So, then why doesn't the government just print £1,000,000,000,000,000,000,000,000,000 and give it to everyone?
he actually explains this in the video.
The government injects money into the economy and can do as much as it wants. It then uses taxes to destroy money.
There are many forms of taxes and a few ways in which money can be circulated.
For the reasons you allude the government can't sensibly dump money into the economy in such a manner, like it did during COVID..
However, it could use money in a targeted way such as infrastructure or other projects to develop the nation.
In my view money is just a tool to mobilise the resources of a country I think? We need to stop seeing money in the context of a household budget. It's not the same for a government like in the UK.
Although the UK gov't faces no purely financial constraint, it faces a real resource constraint. There has to be stuff available to buy in the currency it issues.
And you get hyperinflation
It's been reported that most money from Quantitative Easing has gone to institutional investors.
It's time Quantitative Easing was used to stop austerity, end poverty, end economic equality and improve living standards for the people and debts cancellation for those on low incomes, means tested benefits, student loans and public services.
QE swaps bonds for bank reserves within the banking system. It is functionally similar to moving existing money from a savings account to a current account. However it doesn't create bank deposits (the "money" that you and I can use) that you can just hand out to people.
QE is effectivley an asset swap of bonds for reserves (GEMMS) or bonds for deposits (Non GEMMS / investors)
@@Phil_D_Waller The investor in your example had the bond to start with and the resulting deposit is matched with a corresponding reserve. My point is, the QE didn't result in cash handouts as such.
Sounds like you are talking about People's QE.
"Professor Steve Keen, a prominent economist formerly at Kingston University, London, has been a vocal advocate for "People's QE" (Quantitative Easing for the People) as a solution to economic crises. Keen's proposal differs significantly from traditional QE, which primarily involves the central bank purchasing financial assets to inject liquidity into the banking system. Instead, People's QE would direct money creation towards the real economy, either through public spending or direct cash transfers to citizens.
Keen argues that traditional QE is ineffective because it does not increase the money supply in a way that stimulates demand. Banks do not lend out reserves as commonly believed; instead, they create money through lending, which means that QE aimed at banks often fails to translate into increased lending and spending in the broader economy. People's QE, on the other hand, would bypass banks and directly boost consumer spending and public investment, thereby stimulating economic activity more effectively." ~ chatbot search
@@downshift4503no it resulted in an increase of cash on the balance sheets of banks who then lent it out to customers at increasingly reduced rates in order to obtain a return on it as supply and demand dictates increased the supply of funds to loan the returns to that asset reduce.
If the government creates money, who is it that creates the markets? Money without a market is nothing at all. And more to the point, where are these markets?
Sorry for being think, but can I ask, if government doesn’t borrow money from the market, who owns government’s debt?
What we call the government "debt" is just a combination of cash, bank reserves and government bonds. It is all the liability of the government and an asset of whoever holds them. The UK government (and its central bank which is in effect part of the government) is the source of its own currency.
Premium Bonds are counted in the national debt. Billions of £££ owned by you and me, and in effect., saved with the government. It is only debt in the sense that it will be paid back to you and me at some point. So not debt in the sense of a liability that is problematic. Also government bonds, as Richard has explained.
Quantitive easing causes inflation but borrowing from the bond markets doesn't. How on Earth can you say these are the same?
You didn't debunk that the government borrows money from private institutions, you literally explained that they do. Accepting savings and promising to pay back with interest later is precisely what borrowing is, regardless of whether it can be repaid by creating new money supply.
Also, clearly the government prefers to take on debt rather than simply creating money because they don't want to drastically debase the money. Tax, debt, and debasement are all slightly different forms of revenue collection, which the government largely chooses between for political expediency.
The constraint to print more and more money are the resources in the economy. Too much of it would lead to inflation...Also the bond holders have the possibility to invest in other productive activities but don't do so due to risk/ reward trade off...
truth it may be in some sense that transcending all noise and even crises this is ‘right’, but now you must explain Why, even if this is ‘right’, Things take place (ie the financial crisis in Greece)
If it is not a debt why does it cost so much to service it
The Govt does not have an entirely free hand. If Govt expenditure is far more that receipts the exchange rate suffers as per Liz Truss.
Why does the government pay interest on the bond? Surely the money the BOE is paying to the service the interest has either been magically created or taken from taxation?
With this model, can you explain how inflation works?
My understanding is that inflation indicates that there is a fixed, real level of value in the economy. If supply of money exceeds that value the prices will rise. The goal of the government is to match the supply of currency with that real value, and this is achieved by keeping inflation in the goldilocks zone.
Is this wrong?
So how come the debt interest is nearly as much as the entire education budget??
Anbsolute balls. Govts slways borrow. We only recently paid off the debt incurred by yhe Marshall plan
Dumb question from me. If the government can create the money it needs, then why tax us. Couldn't the government ask the BofE to create all the money it need to run the country?
Love your VTs, what does an accountant do?
So can someone tell me why Reeves has targeted pensioners and has foreshadowed worse to come in her budget?
Don't private banks account for the vast majority of money creation through lending? When quantitative easing is carried out to create money to purchase assets on the open market it still effectively devalues currency reative to assets untill it is taxed back out of the system. The government or us the tax payer are still paying interest on this debt currently £115 billion per annum to the private debt holders.
So are you saying that the government ( actually tax payers ) does not pay interest on the money the BOE puts into circulation ?
OK Im no economist and Im not in the UK and I personally believe a lot of the financing we are presented are smoke and mirrors However if what you say is true then one has to assume this applies to all countries with reserve banks and if that is so the the US is the same as the UK. If the US is the same then they don't need to borrow either they can just print what they need and if this has no implications how come the US interest payments are nearing the Tax income of the US, who are they paying this interest too? What I am told is if countries just print more money then the value of their currency drops in relation to other countries and hence unless the UK is totally self sufficient and doesn't have any international trading then imports will increase in cost and it is the threat of inflation that restricts reserve banks from simply printing what ever they want. As far as I can see what you are saying is gobbledygook with no basis in reality.
The people of Argentina, Sri Lanka, Egypt, Zimbabwe, Ghana, Pakistan et al might not agree with you. When the financial markets don't want your over inflated currency there is always the IMF. They usually want your first born as collateral. Reinhart and Rogoff where right in that when debt to GDP hits 100% the servicing of that debt crowds out investment. The UK spent £89 billion last year on debt interest. Hence the crap roads and frozen pensioners.
Some thoughts come to mind:
The governments of the countries mentioned borrowed in foreign exchange. Different ball game.
UK debt was higher than 100% at all points between 1916 & 1961. It was not unusual in that & it coincided with record growth. Japan is currently at ~250% & chugging along fine, its demographic issues notwithstanding.
Thr current debt interest to revenue ratio is, at ~7%, not remarkably high by historical standards - it averaged 8-10% through 45-80 for instance & itself inflated by 'interest' paid to the BoE who simply remit it back to the treasury. That is currently around a third of total but the proportion held that way is effectively a policy choice.
I understand its a distasteful thought to many but developed countries with their own currency really do have *alot* of leeway in spending decisions
I agree that Richard is missing the importance of one's currency on the international markets (see comment above). However, it's bad faith to reference such a highly disputed non-peer-reviewed article which was found to be based on flawed methodology. There is no magic number that debt to GDP gets to that then "crowds out investment". China's debt to GDP is now over 250% ... welcome to the real world
@@DavidByrne85 Several points. Japan is not chugging a long fine with the yen having to be propped up by the central bank. They have just raised interest rates marginally but too little too late. If the yen weakens further then much higher interest rates will test the solvency of the country. “At first you go bankrupt slowly, then all at once.” The "value" of a debt based currency needs to be measured against real money eg. gold.
@@homeeconomics4419 And people like Professor Steven Keen (who follows the same mantra as our host) have highlighted China as being particularly at risk of a Minsky Moment. Keen is right in that changes to the over leveraged private sector debt bring about recessions eg. 2008 but ignores government debt. Total debt matters and replacing declining levels of private sector credit with additional government debt only leads to a weakening of the currency, higher inflation and ultimately higher unemployment as interest rates are increased.
@@ianjackson8371 @ianjackson8371 people have been predicting the sky is about to fall on japan every year for nearly a quarter century. It isnt going to.
If you want to make a case for the superiority of a gold standard, fine. But no major economy has operated a full gold standard since the 1930s so I cant see what you base your conviction that currencies must be backed by gold on
These all sounds to me like austrian talking points. The school which has successfully predicted 15 of the last 0 hyperinflationary debt crises. But the next one might happen so please visit our sponsor, birch gold
There can be no crisis because we can always print more money? Isn't printing more and more money above the true level of creation of real wealth bound to lead to inflation? Isn't inflation effectively a tax on the public as our money is worth less and less?
Brilliant didn't realise 👏 😊
It’s absurd because *debt* is entirely the wrong concept *for the manufacturer* of the balances in our bank accounts. Deleting debt or running a surplus *deletes* money out of the economy. This is a point Steve Keen underscores.
Economists need to stop being so absurdly lazy and imprecise about nomenclature, especially regarding the overloaded term “money”. This lack of discipline only underscores the criminal incompetence found in most of the field.
But what about the international dimension? You talk about our government and the City and the Bank of England but how do I pay for something from overseas? What about overseas bond buyers? If we print money our currency is worth less so the government cannot print money with impunity.
Does this mean I've been lied to for the past 50 years ? Is most economics complete mumbo jumbo ?
No. They just “guarantee” pensions and suck them dry.
This man is very interesting!
I thought the majority of money in circulation is created via commercial bank loans with the money the goverment creates representing only a tiny fraction of the total
Superb.
….and you know the second chapter of this story. It’s called Inflation. It has been going on since the late sixties….and there it sits in the national debt. Don’t worry about the national debt it’s just a number on paper. Like the Weimar Republic…or Zimbabwe.
Truth!? That’ll destroy the government if it gets out !!
It is a very “poor economy” and the government rakes an enormous quantity of that tax back.
And the Vanity Project is the City of London, above all else. Compare the surpluses, the City far outperforms that of the miserable Economy. Liquidity, the balance of.
Governments DO borrow from financial markets. They don't HAVE TO borrow from financial markets. And if they compel the Bank of England to print money to buy their debt, then inflation will result. And inflation leads to the rich getting richer (as their non-cash assets go up in value) and the poor getting poorer (whose wage increases always lag inflation).
That's one of the functions of tax as he explains in the video, which is to return the money it borrowed from the boe. Otherwise there would be inflation , which he also clarifies.
I seriously think Prof. Richard Werner needs to have a look at this.
Taxes could in theory fund what the government spends. But he’s 100% right that taxes today don’t fund what the governments spends because it’s impossible with debt to gdp over 120% or higher then some years of the ww2 war.
Here’s the question. It’s true governments tell the privately owned central banks what to do because a private central bank monopoly only exists cause the government allows it. But it’s also true there’s a revolving door between big business and government. If you’re a Keynesian working for the central bank or Wall Street and then you magically work in a high government job you’ll probably retain the beliefs and work networks you had that helped you get your government job.
He says if the government didn’t spend money into existence then there’d be no money to pay tax with. I don’t believe that’s entirely true.
Some people claim well we need government debt for retirees to save their money in. That’s BS. We have something better. It’s called a MINT. Retirees or social security literally could buy and own actual gold or silver money coins. If you own the gold you own it and the government doesn’t have to pay you. But with social security buying tons of government bonds you gotta think that helped drive down rates to some extent and the government has to pay those bonds back. If it’s a matter of saving why isn’t the government having people save in MONEY FROM THEIR MINTS?
Some people claim well we need government debt for retirees to save their money in. That’s bullshiz. We have something better. It’s called a mint. Retirees or social security literally could buy and own actual gold or silver money coins. If you own the gold you own it and the government doesn’t have to pay you. But with social security buying tons of government bonds you gotta think that helped drive down rates to some extent and the government has to pay those bonds back. If it’s a matter of saving why isn’t the government having people save in money from their mints?
Euro dollar university says two banks without dollars can and did make dollars out of thin air. Two banks lend one million to each other denominated in U.S. dollars. Magically from an accounting perspective it balances out as each bank now has a liability and also an asset lending to each other. Then those new dollars are lent into the real world.
Banks create new currency all the time which is why it’s said we have an elastic currency supply. It’s not fixed. If our currency supply was fixed and 100% relied on the government spending then this professor would be right.
Abraham Lincoln did modern monetary theory and literally had the government spend and print new money and issued ZERO BONDS. If there’s no debt nothing has to be paid back.
@koltoncrane3099
2 minutes ago
He says if the government didn’t spend money into existence then there’d be no money to pay tax with. I don’t believe that’s entirely true.
For instance, after ww2 Uk had capital controls and couldn’t let capital leave the Uk but they let their banks issue US dollars in the UK. After the U.S. told the Uk let Egypt keep the canal it just took from the Uk the Uk retained power over its former colonies by switching into U.S. dollar banking according to the video called spiders web on RUclips
Some people claim well we need government debt for retirees to save their money in. That’s misleading. We have something better. It’s called a mint. Retirees or social security literally could buy and own actual gold or silver money coins. If you own the gold you own it and the government doesn’t have to pay you. But with social security buying tons of government bonds you gotta think that helped drive down rates to some extent and the government has to pay those bonds back. If it’s a matter of saving why isn’t the government having people save in money from their mints.
No they sell bonds
The magic money tree😂
What is the interest on the 3 TRILLION debt we're in😬. Mor than our education budget. Not in debt at all😂 What's thet your shovelling mate 💩
So why are so many economists and commentators so worried about a sovereign debt crisis?
Due to the global nature of the economy this analysis is a bit misleading if not entirely incorrect, not least as various factors beyond the government's control determine the value of money. Which is perhaps the most crucial point. So don't get it twisted
😂 Richard tries hard i will say.
Tax paid in UK currency is essential because it enforces the use of sovereign currency.
Say you didn't have UK taxes that needed to be paid in Pounds. If this was the case, then I wouldn't have to use Pounds to buy anything inside the UK. If there is no need for me to use Pounds, then the Pound's value is only the paper and ink used to create it. Tax imposes a demand for a sovereign currency. Without tax, people could use any form of money a counterparty is willing to accept. Notice tax encompasses nearly everything.
The BOE is the primary custodian of government bonds. They auction the bonds to primary dealers/ counterparties, who create a market for them.
Is it borrowing? Technically no it isn't. Banks that are GEMMs (Gilt - Edged Market Makers) are required to participate in government bond auctions and place meaningful bids. They are required to buy at least 2.5% of the volume of bonds on a rolling 3 month average, and place bids on 5% of total volume. This is where the borrowing terminology originates from. This isn't a voluntary event.
Creating a budget is an incredibly complex endeavor. The forced participation of GEMMs shows that the government is not creating new money, they are repurposing existing money and bank credit that includes appreciation of assets, the creation of new assets, facilitating international trade settlements, etc. So while technically it isn't borrowing, it also technically isn't creating new money.
People who are saying Liz Truss was solely responsible for the Gilt crash are using correlation equals causation. Correlation does not equal causation.
The UK defined benefit pension funds were structured on an outsized reliance on leverage and derivatives. The market volatility from bond vigilantes brought margin calls on pension funds' mark to market losses by way of their synthetic positions. The margin call liquidity was attained by selling their assets which were concentrated in Gilts. The BOE came in and took the loss for them essentially to stop the downward spiral.
Hey it's Friday at least. 😂
"The forced participation of GEMMs shows that the government is not creating new money" I don't see how your conclusion follows. The primary dealers are obliged to place bids sure. The government adds reserves by spending and the selling of the acquired bonds by the primary dealers into the market drains existing reserves. The spending come first otherwise there wouldn't be reserves to start with.
So as run away inflation
OK, so why not just print two trillion Pounds and pay off the national debt?
So why not print £1 million pounds for everyone to make us all a millionaire then?
Ah ! Yes. Those MMT years were not wasted. It must be 15 years since I realised the truth but the I quickly realised no one wants to believe this.
What you have conveniently forgotten to mention is inflation. If the government creates money and doesn’t tax it back, it creates inflation.
I’d be very interested to know what happened to the Truss government if it’s all as simple as you are deluding people here.
This sounds like nonsense. You will have to explain next why the government has to pay interest on the debt if there is no debt because they can simply print all the money they need. Granted I’m sure they can print more money if they want but the last time that was practiced was in the 1930’s by some countries where their currency was devalued every time they did it and inflation was sky high. Not a practice which helps the economy.