Daily Archives: October 27, 2013

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.

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.