Monthly Archives: October 2013

Borrowings and Lendings

“….. but for each dollar of current account deficit you’ve got to borrow a dollar from a foreigner” I heard this one just a couple of days ago by from David Murray the former CEO of the Australian Commonwealth Bank.  Its even more stark than the usual misrepresentation of government and trade deficits. The statement is highly misleading , in the sense that people use the term borrowing, and it’s hard to think that David Murray wouldn’t know that. Borrowing in the normal use of the term means going out and asking someone for a loan.  As head of the Commonwealth Bank he wouldn’t have used the term borrowing to describe the process of the Bank’s customers depositing their money in his bank. In a narrow accounting sense that is what the bank is doing though and that’s all most government “borrowing” is. The central reserve banks of all developed countries have many overseas held accounts.  In an accounting sense they have borrowed money but it doesn’t cause anyone to lose any sleep in the way that an average person might if they had borrowings as a mortgage or a car loan. If we have money in the bank and that bank displeases us in ways  banks often do, we can’t repossess the CEO’s car! All we can do is move our money to another bank and the bank don’t usually care in the slightest!

Warren Moslers 7 Seven Deadly Frauds of Economic Policy #3

I am giving just short answers to each of the frauds which we hear perpetrated all the time.

Deadly Innocent Fraud #3:
Government budget deficits take away savings.
Government budget deficits ADD to savings.

This is just so basic that it barely needs any explanation. Every year I typically receive back about a $1000 in overpaid income tax.

When that happens my bank account increases by $1000 and the government debt also increases by the same amount.

How hard is that to understand? 🙂

The 7 Deadly Innocent Frauds of Economic Policy: by Warren Mosler is available on pdf for anyone who would like the full explanation to each one.

More on why fiat currencies have a value.

I received an email about my “Fairy Story”  making the point  that most currencies did start off as commodity currencies and later switched to being fiat currencies.

So here is another take on how that has come about:

Imagine a large prison camp with many prisoners. The authorities have  issued tokens to be used as a currency. One token is  equal to a packet of cigarettes. The authorities promise to redeem those tokens for a packet of cigarettes and so the prisoners are able to use those tokens as a currency. For every token they take in, and for every packet of cigarettes they pay out, they in turn pay out that token in the form of wages for jobs the prisoners may do in the kitchens or the prison gardens. That’s like the Gold Standard of course.

Then one day one of the people in the prison authority comes up with a bright idea to eliminate the need for them to pay out any cigarettes.

How is that done?

The answer is that they impose a poll tax of one token per week from each prisoner. Or just from some prisoners. They have to pay in one token. There are severe penalties for non-compliance. The authorities have to give the prisoners a way of earning those tokens so they offer them a job in the prison gardens or the kitchens, as previously,  so they can earn them. Even the prisoners who aren’t liable to pay can still work and trade their tokens if they want to.
That’s the way it works – I think.

So, the government pays out the tokens in the form of wages to its employees and contractors first and then receives them back in the form of taxes later.

The “conventional wisdom” is that it’s the other way around. Governments can only spend, unless they borrow the difference,  what they receive in taxation!  I don’t think so!

Warren Moslers 7 Seven Deadly Frauds of Economic Policy #2

Deadly Innocent Fraud #2:
With government deficits, we are leaving our debt burden to our children.

Collectively, in real terms, there is no such burden possible. Debt or no debt, our children, and us if we are still around,  will get to consume whatever they can produce.

There is no big mystery about this. For a start, it is not possible for any generation to send anything to a previous generation. That would mean travelling backwards in time! The next generation will consume whatever is available at the time just like every previous generation has done

For countries like the US and the UK it  could mean that the next generation will have a more balanced level of trade with countries like China and Japan. Say the Chinese  used some of their $ and £ to buy aircraft or power stations, or whatever they choose to spend their money on,  and place contracts in the UK and the US. That would be hailed as good news. Politicians would claim credit for the  number of jobs  they had created.

If we really are worried about the next generation we’d do whatever it took right now to keep them off the dole queues and give them genuine opportunities in real and meaningful jobs.  The older generation will be helping themselves too. That way the economy will be in better  shape in 10 or 20 years time and better able to cope with the demands of an ageing population.

Future Funds and a Biblical story.

There’s a Biblical story involving Joseph and the Pharoah that many  will be familiar with. Joseph had been sold into slavery in Egypt but  even though he was in prison he managed to acquire a reputation in fortune telling.

The Pharoah asked Joseph to interpret some dreams. Joseph was smart enough to come up  with the reasonable suggestion that they meant seven years of plenty followed by seven years of famine. Maybe Joseph had spotted something in the climate patterns or maybe he just got lucky.  Some will believe he really did have some special powers. Who knows?

In any case,  the decision was made to store extra grain during the first good seven years. If the harvest was 20% above normal for seven years, then 20 % below normal  for the next seven they would of course need to store that 20% to smooth out the supply.
Even if there was no certainty there were lean times coming it would be quite sensible to store any surplus of course.    Of course we think we are smarter than the  ancient Egyptians. If we have a few good years we, here in Australia,  save our money in a future’s fund. Administered by highly paid executives , no doubt.

Australia has A$92 billion in the kitty presumably to be used when we have our seven lean years sometime in the future.

If the ancient Egyptians had done the same, saved money when their harvest was good   and spent money when their harvest was down, they wouldn’t have created any more grain when they needed it.  They would just have pushed the price up even higher.

The money has been sitting there for several years now and the Australian economy has managed reasonably well without it. Its pretty much forgotten as far as the economy is concerned.

If we didn’t have the money we might have to print extra if it was needed. The Australian government can print and spend  as many Australian dollars as it likes and it would have exactly the same inflationary effect as taking money out of the futures fund. So there seems to be no point in having the fund as far as I can see. Or am I missing something here?

Wasting Resources and Wasting Money. Which is worse?

In the “About” posting I write.

“Resources are being wasted in most developed economies because of insufficient purchasing power”

gbgasser makes the comment

“..Wasting is too often seen as spending needlessly. I think that is the primary idea people have when they hear the word waste. Focusing on saving needlessly as a form of waste, a missed opportunity to do something rather than waiting, might be a way to turn the prism just a little bit so people can start to see economics a little clearer.”

That’s right. It is important to appreciate the difference between money and a resource. We have all heard, and probably everyone would agree with, phrases like: “the most important resource of our company is the ingenuity of our employees” or “the true wealth of our nation can’t be measured in dollars and cents”

So we all do know what really matters even without going too deeply into questions of economics. Yet when it comes to questions of waste, the phrase “waste of money” is much more common than “waste of resources”.

MMT is particularly good,  IMO , at showing how economic problems, like high unemployment, which are usually associated with a lack of money can be effectively tackled. Economic problems which arise from a lack of resources are much harder to solve. No economy can be run perfectly and some waste is inevitable. It would seem to be  a ‘no brainer’ that we should err on the side of minimising waste of resources.

It is a pity the leaders of modern day Europe don’t seem to see it quite like that. In the previous posting  “A looming demographic time bomb”  I make the argument that the present generation of elderly potential retirees  will be dependent on the abilities of younger workers to maintain them in their latter years. Stored government IOUs aren’t going to make  any real difference.

And yet in parts of Europe youth unemployment is as high as 70%. What could be a worse waste of resources than this? The very people who will be relied on to keep the economic wheels turning in ten or twenty years time are presently languishing in the despair of austerity economics. Saving money is the only political imperative.

Even if we ignore the injustice of it all, and the loss to their communities of the results of the useful work they could perform,  it is hard to see how years of enforced idleness can be the best preparation.

The Mark Twain library in Detroit as it was photographed recently. What a waste. An entire library, full of books just allowed to rot.


I should perhaps just say that books are a commodity rather than a resource. Books contain their value, both in  use and  exchange value terms, as the sum of the stored labour involved in their production and the use value supplied by nature in the raw materials necessary for their production.

It may seem obvious but it is worth just noting that human labour power, the key resource involved any any type of production  can’t be stored. Its a case  of use it or lose it at the time. A commodity like a book can be stored, at least for a certain period of time. But what about money? We might  think that can be stored too. But can it really?  I’ll come back to that at a later time!

The Concept of Money Speed. Fast and Slow Money.

What does this mean?  Most people would have some of each. If you are a typical wage or salary earner with a gross income of £10k to £30k per year with the usual family responsibilities the chances are that money doesn’t stay around very long. It moves pretty fast. For a start, the Government will take its cut of, 35% or so,  tax and National Insurance contributions,  That has moved so fast that you’ve never  seen it! Then each week or month  there will be  grocery bills,  garage bills, bills for school trips and uniforms etc. You’ll probably be very familiar with all this. Much of what you buy will be subject to 20% VAT and that will quickly go back to the government.

As money is received by the Supermarkets, garages etc it will be used again to pay their staff and replenish their stocks. Their staff will also do with their wages and salaries exactly what you have done with yours, after the government has taken its cut,  and in turn those who receive what is left will do the same.

This kind of money, fast money, has an enormous effect on the economy.

Then, on the other hand,  you may have some money in an old National Savings account or Premium Bonds which you’ve half forgotten about. That’s very slow money. You may need it some day or maybe you’ll forget about it completely. There’s £ billions of unclaimed money in bank accounts everywhere which is so slow that its actually stopped.

This kind of money, slow money, has very little effect on the economy.

Is it important to know the difference? Well yes it certainly is when listening to politicians. Suppose they are advocating cutting the top rate of tax which may cost a certain amount. Say £10 billion. They might claim that they can balance this by making £10 billion of ‘savings’ elsewhere. In reality they will mean not employing, or cutting the wages of, teachers, nurses,  firemen. Exactly the kind of people who will go out and spend their money.

For a start the Government won’t get back their £3.5 billion in tax and national insurance contributions. So, the saving is now only £7.5 billion. Then they will lose all the 20% VAT payments they would otherwise have had. Similarly they will lose the tax and NI contributions of the next down the line and the ones after that. Cutting £10 billion in this way will probably cost much more than £10 billion in the final analysis as the economy spirals downwards and the government has to pay out  extra unemployment benefits.

And what about the £10 billion which goes to the top tax earners?  Well of course some of it will be spent, but a high proportion won’t. It is much more likely to end up saved in a superannuation scheme. It is much more likely to end up as slow money having little or no effect on the economy.

This means that some thought is needed when proposing an exchange of fast money for slow money in any economy. That could be  appropriate if inflation was a problem and the government wanted to cool down the economy. It certainly doesn’t look to be appropriate right now.

This isn’t hard to understand, in my opinion. Yet, you may well have a local MP, who won’t necessarily be a Tory, who doesn’t seem to be at all aware of this.  If so maybe you could have a try at explaining it to them?

Additional Reading.


(c) Copyright 2013  Peter Martin. All Rights Reserved.

Warren Moslers 7 Seven Deadly Frauds of Economic Policy #1

The term ‘innocent fraud’ was first coined by Professor John Kenneth Galbraith, in the last book he wrote before he died: ‘The Economics of Innocent Fraud’ The term was used to describe fraudulent concepts that were, and still are, claimed by many to be ‘conventional wisdom’.  There are many who may be innocent but equally there are many professional economists who really ought to know better and are probably guilty!

I propose to work through each one giving my take on the meaning of each. The 7 Deadly Innocent Frauds of Economic Policy: by Warren Mosler is available on line as a pdf.

Deadly Innocent Fraud #1:
The federal government must raise funds through taxation or borrowing in order to spend. In other words, government spending is limited by its ability to tax or borrow.

Mosler argues his case from an American perspective. So, the ‘federal government’ is the US Federal government based in Washington.  The funds in question are denominated in US $  Some would argue that the US$ , as the world’s reserve currency is a special case. However the same argument applies equally to any sovereign currency. Examples of sovereign currencies are the UK £, the Australian Dollar, and the Swiss Franc. It wouldn’t include the Euro which is something of a special case and which I’ll come back to in a later post.

Mosler states as an obvious fact that government spending is in no case
operationally constrained by revenues, meaning that there is no “solvency risk.” In other words,  government can always make any and all
payments in its own currency, providing it is sovereign  no matter how large the deficit is, or how few taxes it collects.

Note that he is NOT  saying that therefore governments should collect few taxes and he is NOT saying they can spend as much as they please.

He notes that taxing can be considered to be the equivalent of destroying money. Spending is the equivalent of creating new money.

IMO that is entirely consistent with the idea that money is a government IOU. If someone gives you one back you tear it up. If you need a new you just write it out on the spot.

He raises the issue of the often asked question of “How are you going to pay for it? ” This is the killer question.  The obvious answer is that if there are unused resources in the economy, if there are long dole queues then it is likely more things can be afforded. If there are unemployed teachers then smaller class sizes can be afforded. If there are unemployed builders then its better they should be working building houses than their time going to waste.

However if there is no spare capacity and there are signs of inflation maybe they can’t be afforded!  Does this sound like common sense?

The idea is that economics should be about a sensible allocation of available resources rather than a bean counting exercise.

Mosler  is NOT saying that everything can be afforded just because government cheques never bounce. It does NOT  mean that a small country like New Zealand, for example, can afford to put a man on the moon just because it has a sovereign currency.

A looming demographic time bomb?

Europe faces a “demographic time bomb” as its population ages and a record amount of young people remain out of work, the director general of the International Labor Organization (ILO) warned recently.

Guy Ryder has said that political leaders weren’t doing enough to tackle the problem.

“If we don’t get these young people into work it’s a demographic time bomb, so there’s a bit of schizophrenia around these issues and the only way out of that schizophrenia is to find ways to get young people into work,” Ryder said. “Youth unemployment is double, triple the overall levels and we need to find those jobs.

The term schizophrenia may be somewhat questionable but, nevertheless, Guy Ryder’s meaning is clear enough. Has he got it right? What is likely to happen as Europe’s population ages and increasing numbers of retired and elderly people depend on a shrinking workforce.

Let us conduct a simple thought experiment. Suppose we  consider  a large number of  25 year olds living in a closed community, such as on a large island. It is easy to imagine they could have quite a good life. They could all work, they could set up a social security scheme to cover healthcare and any unemployment problems that arise. They could also set up a fund for their retirement. They may well have an ideological disagreement over whether to have a collective saving scheme through their government or encourage/compel everyone to pay a proportion of their income into superannuation. That won’t turn out to be the biggest issue.

Either way, everything works well for the next 40 years until they reach retirement age. Then they  all receive their pensions and even a large lump sum payout.  So in currency terms they all initially consider themselves to be very wealthy . Except of course when they go out it spend it they will find that what they have to spend it on will depend on how many children they have had and how well they  have been trained and integrated into the economy. If they’ve had no children, there will of course be absolutely nothing at all to spend their money on. If they have had many children, and they are all working productively in the economy,  then they’ll have a good retirement, in an  economy  big and healthy enough to support them.

And what if its somewhere in between? The older generation will want their spending power preserved. The younger generation will want it minimised  so it is their wages and salaries which are buying the produce of their labours and not someone’s pension. As they’ll be in demand economically  these wages  could be quite high. In effect there will be high inflation to re-establish some sort of status quo. The first reaction of many Governments  especially a future German one, will be to try to prevent inflation by fiscal measures. As income tax rates are high already in Germany any increase will likely see a mass exodus of their remaining skilled workers. A future German government could well find itself in the same position as the old DDR. It won’t be able to afford to pay its skilled workers  the market rate but neither will it be able to afford to let them go!

Europeans in previous generations would have, almost instinctively, known that their retirement prospects would depend on the level of support they could expect from their own younger family members. The present generation consider themselves to be more sophisticated and have relied much less on traditional arrangements. Birthrates have plummeted as whole populations have transferred their trust to their stored  funds to see them through their old age.

They could well be in for a very unpleasant shock in the none too distant future as  the realisation sets in that pensions aren’t just about money.  As is often said in MMT circles, any money shortfall  is easily fixed. Ultimately what matters is what those pensions will buy. They are very likely to soon realise that social security won’t be enough, and that having stored Euros and Pounds is not the same thing as stored wealth.  They will be just as dependent on the abilities of their children, to support them in their twilight years  as any previous generation.

Yes indeed Guy Ryder has it absolutely right.  He’s probably understating his case if anything. Levels of youth unemployment in Europe could justifiably be described as a crime against humanity. It is imperative for everyone,  that their skills of the young are fully developed in the way that they can only be when they  actually have  meaningful jobs.

Further reading:

(c) Copyright 2013  Peter Martin. All Rights Reserved.

A Fairy Story

Once upon a time, a King called Bill ruled a large island called Isla. Isla was rich in all kinds of resources: fisheries, forestry, mines, agriculture and could provide for all the islanders needs.  They bartered their produce, a fish for a coconut for example, between themselves, but gave a percentage of what they made or grew to  King Bill. King Bill was a good king who had the support and loyalty of most of his subjects.

One day King Bill had an idea. He decided to introduce a currency to bring his kingdom into the modern era. He didn’t have very much gold or silver so decided on what we now call the fiat system. He printed many banknotes, and he called the currency the Bill after himself. Kings are like that, even good ones. He issued many coins, and gave samples to all his subjects and told them that the price of a big fish should be 2 Bills a small fish would be one Bill, A loaf should be half a Bill etc. They weren’t impressed. They said they would rather keep their big fish than sell them for 2 of these so-called Bills. Some islanders drilled holes in their coins to use them as washers. They couldn’t think of anything to do with the banknotes  except mount them in picture frames to hang on their walls as they  had a nice picture of King Bill on them.

King Bill was very unhappy. He sat moping in his palace all day long. Then he remembered his fairy Godmother had always promised to grant him one wish and he had never used it. She was quickly summoned to the palace. ” Please Fairy Godmother,” he said:  “Can you cast a spell to make  my subjects  use these  Bills properly?” ” Oh,  that’s an easy one”,  she said.  “There’s no need for any spells. All you need do is demand that your taxes are paid in Bills. When I heard that you wanted a wish  I thought I was going to be up all night working on really hard spells like turning pumpkins into carriages, or frogs into beautiful princesses!”

The King was too worried about his failing currency to be thinking about beautiful princesses  at the time  and he wasn’t amused. ” Why would I want to do that said the King? I already have a warehouse full of Bills that no-one wants!”

Reluctantly,  King Bill did as his fairy Godmother had suggested and switched his tax system from one based on a percentage of  produce to one based on the new currency units. He sent out lots of tax demands. A big house would be taxed at 20 Bills. A small house 15 Bills. A big boat at 10 Bills etc He paid his tax collectors, his army, his police and all his servants in Bills too. They didn’t like that one bit and it caused a lot of resentment. They all went on strike! Everyone wanted to be paid in coconuts and bars of chocolate just like they always had been.  They all said his currency was worthless! They thought the King was going mad too. Why would he want his taxes paid in worthless pieces of paper currency when he already had a warehouse full of the stuff? He had thousands of notes and coins that no-one wanted. In any case, if he ever did run out of Bills it was easy enough to print off some more.

King Bill had to promise to pay everyone six months’ salary in advance and also promise that if it didn’t work out with his new Bills he would pay them again in bottles of the finest wines from his cellars. This convinced everyone to give the new system a try. His tax inspectors, his policemen, and all his other officials set out to the villages and towns in the four corners of the Kingdom.

Much to their surprise,  when they arrived to collect the King’s taxes they found their Bills much in demand. The islanders needed them for just those taxes. They found themselves offered much better lodgings than previously, they were offered much better food and clothing too but, of course, only if they paid in Bills!

So, thanks to the advice of his fairy Godmother everything went very well for the King. He happily spent and taxed his currency into existence. After a time everything settled down and prices become well established. He experimented with how it all worked. Sometimes he spent lots of Bills and taxed only a little. But then people would complain that the prices of fish and bread were becoming much too high. There seemed to be quite a lot of strikes too. Public opinion was divided between those who blamed the workers for being greedy and forcing up prices with excessive wage demands, and those who said the striking workers were just trying to maintain the purchasing power of their wages.

Then he went the other way and spent less and taxed more. He noticed this caused businesses to fail. They couldn’t sell everything they made. People lost their jobs and marched on his palace waving big red flags and carried placards that said things like, “power to the people”, “we demand the right to work!” They chanted slogans like ‘King Bill Out, King Bill Out King Bill OUT OUT OUT ! The king  noticed that when this happened his subjects became very intolerant of anyone who had come to live on Isla from other islands and they blamed them for taking their jobs.  If they didn’t have a job they called them ‘dole bludgers’ and said they were sponging on the hard working Islans and should go home.

Eventually the King got the hang of how to spend just enough, but not too much, and to tax just the right amount too, and became very good at what we would now call demand management. His kingdom prospered and his subjects became richer than they had ever dreamed possible.

Just as everything seemed be going marvellously well, with inflation well under control, and with nearly everyone, who wanted one, in jobs the King had an unexpected problem. His subjects suddenly got anxious when he decided to publish figures that showed he’d created 50 million Bills and all but about 1 million were out in circulation. Some of his subjects who claimed to be experts in economics,  said this meant the national debt from that alone was just about half of the annual GDP of the island.

Some people had become very wealthy. They’d saved their Bills in the King’s bank and which the King had supposedly “borrowed”. However, as he had created them all in the first place he didn’t see it as borrowing. He said he could make as many as he liked anyway so why would he need to borrow any more? He had actually chosen to pay out interest on these accounts, he said, so the holders should think themselves lucky.

Then there was a problem, or at least many people considered it to be a problem, with a neighbouring island. They weren’t so wealthy, their wage rates were low and so they could grow coconuts very cheaply. They sold lots and lots of coconuts to the people of Isla but hardly bought anything back in return. They seemed quite happy to keep all their money in King Bill’s bank. This added to the National Debt. That’s what the experts said.

That all added up to another 100 million Bills. So their National debt was now 150% of their total GDP. Then someone said that wasn’t counting the unfunded pensions that were due to be paid out soon.  That was much too high they said.  They said things like: “You need to be more fiscally responsible”. ” You cannot spend more than you earn”. “You need to balance your budgets”.  “Money doesn’t grow on trees, you know.” The King said that his orchard workers were paid very well and it probably would work out to be more expensive to pick the money from the trees if it did. No-one laughed at his joke.

“The end is nigh” cried the islanders. Or at least the ones who had listened to the claimed experts.  “We are bankrupt. How can we ever afford to repay such a large amount?”

“Well it’s like this, ” said the king. “Once upon a time……”

(c) Copyright 2013  Peter Martin. All Rights Reserved.