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. http://www.abc.net.au/lateline/content/2012/s3600412.htm 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!

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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.
Fact:
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.

http://www.futurefund.gov.au/

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.

Image

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.
http://bilbo.economicoutlook.net/blog/?p=23138

 

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