Weekender
pfm Member
It's money we owe to China.
The Fight for the NHS/MMT economics
- Thread starter ks.234
- Start date
Sue Pertwee-Tyr
Accuphase all the way down
AIUI we could, if we chose, create Sterling sufficient to pay off any bonds due to be repaid in our sovereign currency.
laughingboy
pfm Member
Perhaps you're right, perhaps you're not. But I'd expect you to be able to back that statement up with reasoning.
Right, and the government has to respond to three things: leakages to the external sector (foreign savings), leakages represented by private sector saving, and changes in demand for loans.
In other words, some of the factors that drive the size of the deficit (govt spending minus taxation, where taxation is the final 'leakage' of money in the active economy) are outside of the government's control. MMT is quite clear on this. See here.
ks.234
Half way to Infinity
Have we borrowed money from China?
ks.234
Half way to Infinity
The amount of money in the economy ultimately depends on the size of government deficit. Yes high street banks issues loans, which enable them to produce more loans, which puts money into the economy, but ultimately that money has to be in the private sector before it can be used to service loans. So it is the government deficit that creates money in the first place.
matthewr
spɹɐʍʞɔɐq spɹoɔǝɹ ɹnoʎ sʎɐld
Historically about 70% of UK debt is owned domestically mostly by institutional investors (banks, pensions, insurance companies, etc). What has changed since 2008 is that a lot of this ownership has shifted from private institutions to the Bank of England because of QE.
All the raw data on UK debt is available here : https://www.dmo.gov.uk/
laughingboy
pfm Member
That doesn't sound right to me. Heckyman is more right than wrong on this. He is supported by the Bank of England's paper on the money creation in the modern economy (here). Banks definitely create money when they make loans. And governments can create money too.
Banks don't need the government to be in deficit to create a loan. Look at what happens when someone buys a house from someone who has paid off their mortgage. A loan is created .The bank has a loan asset (debit); the borrower has a current account credit (credit) which is money/credit that didn't exist before. What has happened is the real asset (the house, which previously had no loans against it) has been monetised. The bank doesn't care about anything except the ability of the borrower to pay back the loan with interest.
ks.234
Half way to Infinity
Yes, agree with that and I’m not saying Heckyman is wrong, just that the order of things might be different.
I might also be plain wrong.
However, yes the high street bank only cares about my ability to repay my loan, but my ability to repay my loan is dependant on government spending putting the money in my pocket, or bank account, in the first place.
The economy works by you and I buying things, which creates a demand for things, there are various leakages, but ultimately government is the tap out of which money flows. Everything else are the various (leaky?) bath tubs (reservoirs?) in the system?
russel
./_dazed_and_confused
AIUI money creation is fine so long as the investment produces a return, if it doesn’t I.e a road to nowhere, sub prime loans, pyramids etc, then that will end up being inflationary. Infrastructure that produces a return, say high speed broadband to low income areas, increased training and education, R&D etc will more than likely be non inflationary as output will increase. The situation prior to the 2008 crisis was there was asset price inflation but because China expanded manufacturing so rapidly supply kept up with demand, plus shifting production to China depressed wages. A simplistic view is that the left build roads to nowhere and the right produce asset price inflation, each of which is equally bad in its own way.
laughingboy
pfm Member
In broad strokes, you're right: income permits spending. But not all money comes from government.
I may be wrong here, but it's possible to conceive of an economy that doesn't need government spending. It would be unsustainable, but it can be described - as long as banks are able to make loans. Let's start with all the country's assets unencumbered. And let's start with no money in the economy. In your account nothing can happen, because the government has to spend before anyone can have an income. But let's say I need to feed my family. I go to the bank to borrow money to buy land to grow food. At the same time, lots of other people go to the bank to buy land. Suddenly, there is plenty of money in the economy, as the people who have sold their land have money. And they buy the surplus food that I grow, and so the economy gets going.
What is happening is that real assets (land) are being monetised. Which is feeding a growth in money. No government spending required. Obviously, it's a weird economy, because when the loans are repaid, the money is destroyed and the assets are demonetised. So it's hard to see how the economy survives without an endless cycle of monetisation-demonetisation that somehow manages to stay in balance despite there being no restraints on the system and no stabilisers. It's going to spiral out of control somehow.
Sidenote: the thought experiment above also shows that when MMT says that 'taxes create demand for a currency', it's only part of the story. There's also the network effect: if enough people need to sell stuff to service the interest on their loans, then the money also gets accepted.
MMT's introductory models don't do a good job of explaining that banks create money under licence. It is not the same as the government creating money.
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ks.234
Half way to Infinity
Thank you, think I get it a bit better now.
“Banks create money under licence” seems to sum it up nicely. But am I right in thinking that Banks create money under a licence from Government?
laughingboy
pfm Member
Yes. In the UK, this is delegated by government to independent authorities - though there is some debate about the extent of their independence. The FCA controls banking regulation and the BoE controls interest rates/monetary policy.
ks.234
Half way to Infinity
And money goes backwards and forwards between banks to and other banks to stabilise and between banks and government to stabilise money supply, the overnight rate??? Something like that?
Heckyman
pfm Member
It's kind of the central tenet of MMT isn't it? Money should be created by the "government", considered a public utility and mobilised to meet society's needs.
But that's not the system we live under. Central bank money more or less stays within the banking system for the purpose of bank reserves and interbank transactions. This money isn't "used up" as the "source" of the loan when your bank extends credit to you. Money is literally created when you spend your loan and destroyed when you pay it back.
FWIW, I don't have an opinion on this stuff — our monetary system seems all very opaque, like most things to do with power and the law. I'm sure it could all work a lot better and also a lot worse!
MMT says nothing about “should”. It is a descriptive theory. Politicians can use it as a basis of policy that includes “should”, but the theory itself only offers a description of how things work.
There are many examples in history of descriptive theories being used as the excuse for what were in fact highly ideological policies.
There are many examples in history of descriptive theories being used as the excuse for what were in fact highly ideological policies.
Heckyman
pfm Member
Well, MMT-ers say money "is" created by the government. Except it isn't really. Presumably they are well aware of that, therefore I took the liberty of assuming that they think it "should" be. Makes sense when you consider MMT's alignment with Sanders and the left of the Democrat party.
laughingboy
pfm Member
I see what you mean. I think that MMT simplifies in the first instance to explain that the household model doesn't apply to government debt. That's the key takeaway. But I agree that it can't be a coincidence that the areas in which it simplifies coincide with giving the impression that government is in control. Nevertheless, the simplified models serve the purpose of grabbing people's attention.
The MMT academics know how things work in reality, including central bank reserves, but it's a bit like in physics class (see the 'electricity doesn't flow through wires' thread): we get taught a model of how things work, and later we have to ditch that to understand the finer details. I'd argue that MMT does something similar.
MMT theorists often talk about it being a neutral description of the economy, but I'm inclined to agree with you: it has a tendency to emphasise the power of government in the system. Maybe that's just a fact that governments haven't cottoned onto since the end of Bretton Woods; more probably it's a political bias.
ks.234
Half way to Infinity
No. Kelton is describing what happens in the current monetary system.
She is not proposing an alternative system, she is only describing an alternative way of looking at what we have. An alternative view that means tax is not the creator of spending, that the government deficit is a good thing, not a bad thing.
While things get more complex as we get deeper into the arguments, the absolute point of MMT is that there are currently no fiscal constraints on this government spend whatever is required on the NHS and Climate change and anything else. Which means that not spending on the NHS and Climate Change is not an economic necessity, it is a political choice.
I believe the most basic and fundamental point that the current economic reality that we can afford decent health care, and can afford to do everything we can to prevent further climate change, should be kept at the front of any discussion about minutiae
laughingboy
pfm Member
I think that you're asking about central bank reserves. Here's Positive Money's explanation (see the third link in the introductory article).
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