A Simple Spreadsheet Model of Government Spending

There is no intention on my part to provide Steve Keen any competition for  his excellent Minsky program but I thought I would have a  try to explain some of the economic ideas of this blog in figures rather than just in the usual words, so I put together this spreadsheet. Which you can download  here. (Just make sure that it doesn’t get renamed when downloading. It needs to be called econ.xls for the macros to work). It is quite easy to use.

As spending has to come before taxation we first have to spend some money into the economy. I’ve chosen $500. Just consider the $ symbol to represent whatever currency you like of course.

The recipients of this money are three users of the currency (A, B and C) who receive the above amounts for services rendered. Just to keep it simple we only have these three users in the economy. The payments are decided in a quasi random way in the program so you won’t see the same figures but they should add up to the total spend by the government. Press the RESET button and you’ll see this.

Next, with the Tax level set at 0%, press the second macro button. You’ll see that user A uses his money to buy from user B. Then user B buys from user C and user C buys from user A.

As the tax level is set at 0% the goverment isn’t receiving any revenue so we now need to change this to 20%. Press the RESET.

Press the second macro and each time we’ll see the effect of a single transaction. ( meaning that all three users are buying and selling from each other). Notice that cash assets are equal to the government’s deficit and as the revenue rises the cash assets fall and the deficit falls too. Eventually the deficit falls to zero. We can raise tax rates to 30% or whatever and though the deficit falls faster it doesn’t go into surplus even with high tax rate. Press the RESET.

We’ll next allow our users to put some cash away in a savings account. We’ll allow them $5. As there are three users , pressing Macro button 3# should show $15. We repeat the exercise and surprise, surprise, no matter how many transactions we have, we end up with a deficit of $15.

Of course if I were George Osborne I’d shriek in horror at this $15 deficit
🙂 and call in the Office of Budget Responsibility. They would no doubt advise that the way to restore the spreadsheet to showing a surplus was to cut spending and raise taxes. So we cut spending to $450 and raise taxes to 25% and give the program another go. “That’s odd” George would be thinking “I’ve done what the OBR has advised but still my deficit is persistent!”

Next George could try Nigel Lawson. He knows a thing or two about producing a surplus. He managed it in the late 80’s by encouraging lots of borrowing. That’s what he’d suggest again. So George would type -$20 (minus $20) in the savings account for each user. Press macro #3 and try again. A few taps later on the second macro and Hey Presto! We have, or rather George now has his surplus. If we are one of those users, we are the ones in deficit!

If this wasn’t so serious and wasn’t ruining the lives of our young people this might be all rather amusing.  How is it possible that such a cretin can be paid over £130,000 pa for f***ing up the economy?
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Edit:
“Stuey” (below) asked an important question which might just bear repeating here with my answer.

Q: When I create a debt for the users, government runs a surplus. But isn’t that because the loan would have come from the government in the spreadsheet? Loans usually come from private banks. Doesn’t that make a difference?

A: It doesn’t make any real difference. We can easily put our three currency users into debt by clicking on the third macro.

Say we give them $100 worth of debt and the cash to match. That could be an overdraft at a private bank. So they’d have the debt but an extra $100 of cash ie spending money to start with. We click away on the second macro and the govt has a $100 surplus. Everything looks good – superficially.

If all the users banked at the same private bank the transactions would be recorded in the IOUs of that bank. Except, the tax bill on the transactions would have to be paid from the private bank’s reserves – in real central bank money.

So, at the end of the process, the users are collectively in debt to the tune of $100. The private bank has an asset of those debts but it has also lost assets of $100 from its reserve account. So the PB ends up all square. The debts in the economy remain, however, until they are repaid – unlike in the spreadsheet when they are extinguished by the reset button.

It is this accumulation of private debt in the economy which is the basis of Steve Keen’s debt deflation concept. The problem of increasing private debt levels can only be temporarily fixed by encouraging the creation of yet more private debt. But that’s a bit like a junkie needing a bigger and bigger fix. He needs at some point to choose a healthier lifestyle.
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PS I do this kind of database (usually Access) and spreadsheet programming in my day job too, usually in an engineering context. If you have any requirements send me an email:   peter_martin_2001@hotmail.com

 

 

 

 

Are Government Bonds Just Another Form of Money?

Most mainstream economists would argue they are not. They would say  cash and bonds are not economic equivalents.  They would argue that issued money wasn’t debt but issued bonds were. A common counter argument would run as follows:

“This idea  falls apart at the local gas station…  you can’t go shopping, bar-hopping, or on vacation to Miami with a bunch of T-bills and not notice the difference compared to cash…therefore, they are NOT ECONOMIC SUBSTITUTES. Let’s be very clear here: nominal financial *value* DOES NOT EQUAL purchasing power.”

I’ve quoted here from an on-line discussion I’ve just had on this same topic.

The argument on whether bonds are, or can be considered to be money, has perhaps to be considered on several levels. Of course if we need to pay a £9 grocery bill a (genuine) £10 note will be very acceptable  to the cashier. A £10 bond, were it to exist in paper form wouldn’t be. Neither of us would know exactly what it was worth at the time. If it was close to maturity it could well be worth something close to £10 but if not, it might not be enough to cover the £9 bill. That’s the only difficulty.

The acceptability argument, though, would also fail €500 notes in Europe. They aren’t easy to spend! No-one wants them.  Does that mean they aren’t cash or even money? The best way to get rid of them is to take them into a bank where you have an account and pay them in. The cashier will probably take a note of the serial number in case there is any problem. In that respect a €500 note is no more useful than a paper bond. We’d be able to pay that into our bank account too.

To answer the question we need to consider what money is and why it has a value. To fit in with the concept of financial sector balances, money has to be classed as a liability or a debt to the issuer and an asset to the holder.

So, if we have a closed system of say 100 currency users and their ‘government’ issues 10 currency units to each, the government then has a fiancial debt/liability of 1000 currency units and the users have total assets of 1000 currency units.

The users later switch half their assets to bonds. Say they each buy, at auction, 5 cu of bonds from their government (on the promise that they will be worth, say, 10 cu at some future time) their total assets are still 1000 cu as they can trade the bonds for exactly what they paid for them between each other or even sell them back to the government, if it should have a policy of QE!

The government still has total liabilities of 1000 cu. The fact that it created new IOUs (bonds) and swapped them for its previously issued IOUs (Cash) is of little signficance. If the effective interest rate on those bonds is zero, then zero significance.

The commonly held view that cash and bonds are somehow fundamentally different probably is a hangover from gold standard days. If the government had a policy of backing its cash IOUs but not its bond IOUs with gold,  it would make some significant difference. If gold held in bank reserves by government was counted as a financial asset, then issued money wouldn’t represent any net debt, providing it was always on a strict 1:1 basis.

Of course it is arguable that gold is just a commodity like all the other commodities owned by the government and shouldn’t be counted. But if the mindset is that MONEY=GOLD it’s possible to see the logic of the alternative argument.

Germans don’t understand how currency unions need to function.

The economic clash between Greece and Germany is invariably portrayed as a clash of cultures. The majority of Germans resent what they see, and are assured by those who should know better, as a bailing out, at their expense, of those in the southern peripheral European countries who appear to be unable to manage their economic affairs as well as they can.

      

That seems a perfectly commonsensical point of view but raw ‘common sense’, as always, in economics cannot be relied upon to be the best guide. Our common sense is invariably derived from our own micro-economic experience. The principle that it is better to be in surplus than deficit, for example, works fine for us as individuals in the micro world, but taking a wider view, that commonsensical notion is inconsistent with the basic accounting principle that for every asset there has to be a debt. For every surplus there has to be a deficit. Not everyone can be in surplus and not everyone can be in deficit.

So we need to correct our ‘commonsense’. Physicists, like Angela Merkel who therefore can have no excuse,  are used to doing exactly that. They know that their commonsense viewpoints of the world will only take them so far. It fails completely after that. Anyone who has studied Maxwell’s equations, Quantum Mechanics or Einstein’s Relativity knows that these subjects can make your brain hurt! After a while, we have to come to the conclusion that it is better to try to understand via the mathematics of it all rather than understand completely.

It is nowhere near as bad in economics,  but still just a little lateral thought is required. The easiest way to understand what needs to happen in the single currency eurozone, is to make a comparison with what already does happen in a successful currency union.

Let’s take a look at how it all works in the USA. The United States has, as we all know,  a common currency but also  a Federal Government to conduct macroeconomic policy, and transfer surpluses from the wealthy parts of the US to the poorer parts. It transfers surpluses. It does not arrange loans, except perhaps for special projects. If it did, the wealthier parts of the USA would end up as massive creditors. The poorer parts would end up as massive debtors. There would be clashes between New Jersey, the wealthiest state, and Mississippi the poorest.  I had to look this up , by the way. I suspected that Mississippi might be the poorest but I had no idea which was the wealthiest. I had thought maybe California. That’s as it should be. It should not be like it is in the Eurozone where the wealthy states never tire of letting everyone else know who is paying the bills.

So, imagine New Jersey  providing big loans to an impoverished Mississippi, dictating that it implement  privatisation of public assets at knock down prices and drastic cuts to state spending, pensions, its education service etc to be able to repay those loans.  The Mississipians and the New Jerseyites would be saying exactly the same things about each other as the Germans and Greeks are saying now!

So, just as any transfer of funds between New Jersey and Mississippi has to be just that, ie a transfer and not a loan,  so too it needs to be between Germany and Greece in the Eurozone.

The German taxpayers may well not like that idea. It certainly would not have been properly explained to them just what they were letting themselves in for when the Euro was created. No politician in any of the Eurozone countries would have dared make that explanation! It would have been career suicide. There were economists around who did their best to explain it all but they weren’t listened too.

It is too late for that now, but the reality of what has been created, in their name now needs to be recognised and understood by all. Some rethinking is in order. That has to start with the Germans,  then the Dutch and then everyone else too. The sooner the better.

Classical economists don’t understand real people or real economies.

There is at last some evidence that the political mainstream is coming around to the idea that  “places {in the same currency zone -PM}  in deficit have to be easily financed by places in surplus”. At least there is,  if we can consider John Redwood, a British Conservative MP,  to be representative of the mainstream. He, himself, may well question that assertion, but nevertheless this  recent quote  shows that it isn’t just Greece’s Syriza and the political left who are making the argument.

John Redwood is, of course, meaning Germany although the same argument would apply to Holland who run an even bigger surplus, as a percentage of GDP than Germany. The Germans were always happy to finance their customers when they used the DM. They’d buy up the treasury bonds of the deficit countries, like the UK and US, and that way their surpluses were recycled to their customers by the process of government deficit spending. So why the problem now? From their POV now, they should be even keener to do that. It would keep “their” trade zone healthy. They could impose conditions , of course, but there would be no reason to impose such stringent conditions as they do.

They seem wedded to the idea that internal devaluations are now needed in the peripheral countries of the Eurozone. General devaluations are no longer possible within the common currency zone. But can internal devaluations work? We know external, or general, devaluations can work. Recently the Canadian dollar has fallen by about 20% against the US dollar. This isn’t particularly noticeable to Canadians until they cross the border into the US. Then they realise that their wages and salaries are now worth 20% less, in terms of US$, than before. Canadian prices, at least the ones unaffected by import costs, such as rents, in are now 20% less too. Imports from the USA are now 100*(0.2)/(1-0.2) =25% more expensive.

This shift is necessary for the Canadian economy to adjust to changing world conditions. But what would have happened if Canadians used the US$? Theoretically,  if Canadians had reduced all prices and all wages by the same amount, and IF spending patterns were left unchanged,  the outcome would be the same. I’ve used the big IF because IF prices were falling fast then the real level of interest rates would be very high, even if they were nominally zero, and which would make it irrational for any individual to spend more than they had to.

But would that have really happened? If Canadian companies had faced falling demands for their products, they would do what all companies do. They’d cut back. But there wouldn’t be pay cuts and price cuts. Maybe just no pay rises and no price rises. They’d lay off some of their staff and stop recruiting others. They would adjust to being 20% (or close to it) smaller in this way. That would be repeated right through the Canadian economy which would end up 20% smaller too. Unemployment would skyrocket and the US media would no doubt be making negative comments about the Canadians, especially if they’d dared say it was even partially the USA’s fault.

That’s exactly what’s happened in Greece, Spain and elsewhere. Except of course it is the Euro not the US dollar which is causing the problem.  Economists, of the classical variety, will argue that this should not have happened.  Some will be in complete denial and will argue that it can’t have happened, or if it has, it must be due to some other factor. Lazy Greeks maybe? They can , of course, show nice mathematical models of how an ideal economy would be able to restore its competitiveness if only people would just behave rationally – according to their definition of rationality. But real people behave rationally as they themselves see it, not how anyone else might see it. That needs to be understood by real economists too. Including real German ordo-liberal economists!

So instead of imposing austerity on countries like Greece and Spain, to force internal devaluations, the Germans need to find some new economic advisers who can come up with some other way to equalise the money flows. Otherwise, their dream of a united Europe will become ever more nightmarish as time passes.

 

Greece hasn’t got a debt problem. It has a lack of growth problem!

At something like 175% of annual GDP it is easy to think that Greek public debt is out of control. But, let’s look at it another way. If Greek GDP had stayed the same as 2008 levels instead of falling by 30%, and also assuming current levels of debt, the ratio of debt to GDP would now be 175 x 0.7 = 122.5% Which might still be a little on the high side, for a non sovereign currency issuing country, but it would be looking a lot more manageable.

If Greece had instead grown its economy by the same amount, the ratio would be 122.5/1.3 or 94%. OK still a little high, maybe, but not the catastrophe the Eurozone has on its hands at the moment.

The key to managing Greek debts is help enable Greece to service  them. There’s no real need  to pay them off with interest rates as low as they are.  That can be best achieved by growing the Greek economy. So what’s the problem? Why isn’t the Troika (the IMF, ECB and EU commission) encouraging the kind of economic policies in the Eurozone peripheral countries which would encourage growth rather than economic austerity which, in both theory and practice, can only produce economic contraction?

The Troika shouldn’t be in any sort of conflict with the Greek  government. Both should be wanting exactly the same thing. Unless Greece comes out of the crisis ahead, no-one gets paid and so no-one else comes out ahead either!

PS If you agree with this post, please re-blog it, tweet the link, wp.me/p42SCg-Q7  ,  post up on your Facebook page, or whatever else you can think of to spread the message. No attribution is needed. We need to show solidarity with Greece right now. It may well be us next!

 

Boots, Economics and Politics

Stefano Pessina, UK tax dodger, and the acting chief executive of Boots, has recently created a stir in Britain by claiming the Labour Party’s economic policies are “not helpful” for business or the country. It is rarely a good idea for  chiefs of industry to enter the political arena in this fashion. Mr Pessina can speak for Mr Pessina but he cannot speak for Boots as a company. There are many people who have a share in, or work for Boots, each with their own personal view. He is entitled to a personal opinion, of course, but why would he single out the Labour Party? They are far from perfect but their current policies are more pro-business (just about) than the Tories!

All businesses, and presumably Boots is no exception,  want a healthy demand for their goods and services. They want paying customers, with money to spend in their pockets.

They aren’t going to get that if their customers don’t have a job, or are in some poorly paid job. Or even a non-job like a zero hour contract which gives them employment for zero hours! Just about every town in Britain has boarded up pubs, cafes and and shops, and also unemployed youngsters hanging around those closed down businesses . This should give common ground for the political parties which traditionally would be expected to represent business and those who may traditionally represent those working for, or hoping to work for, those businesses.

Of course, it is less like this in some areas than others. It’s not as bad in Maidenhead as it is in Middlesbrough. Is it that there’s nothing that needs doing in Middlesbrough? The phrase ‘full employment’ isn’t much used these days. There’s a general acceptance, among Labour and Tory politicians alike, that the term ‘full employment’ cannot apply any more. It’s even worse in Euroland. There the conventional wisdom, at least in pro-German governing class circles, is that Greece, Spain, Italy and France need even more bouts of austerity to cure the ravages of previous bouts of austerity. The remedy for any economic problem invariably involves cuts and more taxes. The Labour party, in Britain, are offering nice fluffy socially responsible cuts. Whereas the perception is that that Tory policy, if freed from any LibDem influence, would involve more severe and socially irresponsible cuts which, no doubt, would get a nod of approval from Angela Merkel.

No leading politican, in any of the major parties,  has the courage to question the conventional wisdom that budgets can be balanced by increasing taxes and reducing spending. It’s obvious they cannot. It should also be obvious that this is the economic equivalent of a dog chasing its own tail. There is no evidence in the slightest that this approach has ever worked or will ever work. There’s lots of evidence that it closes down businesses and deprives the former employees of work though.

It is in the interests of both business and labour to challenge this failed concept. It shouldn’t be a left/right issue. It should be one that unites everyone.

The Euro could work so why doesn’t it?

Arguably, it did work reasonably well for the first few years of its public existence from 2002 onwards, but now, unarguably, it does not. Recession and high levels of unemployment is the norm, not just in the peripheral countries of Spain, Greece, Portugal, Ireland, Poland, etc but increasingly in the original group of six too. Italy and France are both experiencing double digit levels of unemployment; and the problem is now spreading to Germany itself, as its export markets in the Eurozone start to dry up. The high levels of unemployment in the peripheral regions of the Eurozone naturally leads to increased levels of migration to other areas of the EU which are performing better. Whatever we feel should be the case, our observations tell us that this is causing social and political problems too, especially in the UK, which we would be foolish to ignore.

There are many theories offered to explain the origins of the problem. The stated opinion of German right wing politicians and their ordo-liberal economic supporters is that there is nothing wrong with the Euro. If they can manage perfectly well with the Euro then so should everyone else. If they, like Germany would only just get close to balancing their budgets then all would be well.

See for example:

http://www.theguardian.com/business/2014/aug/20/angela-merkel-scolds-italy-france-eurozone-faltering-growth

Furthermore, there tends to be a lot of finger pointing in the German circles directed particularly, but not exclusively, towards Greece. The criticisms generally include a past reliance on an oversized pubic sector, an inefficient system of tax collection, a past over-reliance on ‘money printing’ to fund government spending leading to higher than desirable levels of inflation and even systemic corruption. They probably do have a something of a point, no countries are ‘perfect’ not even Germany; but are the German right missing the point completely? From an understanding of just basic economics we can clearly see they are.

The fundamental problem is none of the above. There is also a widely accepted, but not necessarily correct, argument that countries need their own currency, which should be allowed to vary to allow countries to devalue or revalue their way out of economic trouble. That certainly would help but neither is it the core problem. Rather it is a problem of financial transfers, albeit an easily solved one, that is to be expected whenever two or more countries decide to share a common currency; one or more of which are large net exporters and one or more of which are large net importers. There is nothing wrong with wanting to be a net exporter, if that is what countries want to do. Of course, for every net exporter there has to be a net importer willing to buy those exports. So, we firstly have to disabuse ourselves of the idea that the net exporters, like Germany, the Netherlands, Austria, Switzerland (even though the Swiss are not in the EU) are somehow more virtuous than the USA and the UK (in the EU but not the EZ) who are net importers.

It makes sense, all round, to allow countries to choose whether to be net exporters or net importers. The alternative would mean clashes over trade, the imposition of high tariff barriers, and currency wars. It is no exaggeration to say that these clashes can lead, and have led in previous eras, to real wars too. No-one wants to see any re-occurrence of that.

How does it work when a net importer and a net exporter trade together using their own and, therefore, different currencies? Assuming that the two countries have the same trade pattern with each other as they do globally, there is an inevitable imbalance when it comes to the net importer being able to pay in its own currency. There is always going to be a ‘glut’ of that currency on the market, which if left alone would cause the currency to depreciate. That country would then be able to afford fewer imports, its exports would look more competitive, and so its trade would naturally move into balance. Neither country wants that, so the importer issues bonds which are obligingly bought by the exporter using the excess of the importer’s currency. The importer then re-issues the money obtained from the sale of those bonds into its economy by government deficit spending. In other words, the supplier lends money to its customer to be able to continue to be a good customer. The central bank of the exporter then stores the purchased bonds and just creates, or ‘prints’, extra amounts of its own currency to satisfy the need of its internal exporting companies to be paid in that currency.

So, despite  all German assertions to the contrary, the policy of the Bundesbank has never been solely the minimisation of inflation. The Bundesbank was quite willing to ‘print’ as many DMs as was considered necessary to hold down its value to maintain the sales of German exports. An artificially lower exchange rate also translates into higher prices in German shops and so contributes to a higher level of inflation than may be the case otherwise.
This kind of arrangement can continue indefinitely. Of course, as the currencies are separate, they can vary over time in value in relation to each other, but, providing that inflation rates in the two countries are approximately the same, they do not need to. In principle they could be fixed, providing the exporter and importer co-operate to equalise their monetary transfers by the necessary issuance and purchase of government securities.

Therefore, if this arrangement can work with fixed exchange rates, it must be able to work with the same currency too. The process is simply same one, as before, of the exporting country lending back its surplus to the importing country so that it can continue to be a good customer. As the currencies are the same there does not have to be any bonds involved, it just needs money to be lent back, but there can be a transfer via bonds if that is mutually preferred. Money and bonds are just different forms of government IOUs in any case.

In the case of the Eurozone these would be the so-called Eurobonds which are widely being discussed, but adamantly opposed by German ordo-liberals. I fail to understand why. These are essentially the same people who were happy to lend their customers money when their currencies were different, so why do they have a problem now they are the same?

Ordo-liberals compound their mistake of not wanting to lend back the surpluses of the exporting countries in the EZ to the importing countries, by insisting that the importers should not borrow from anywhere else either. It may make sense for an exporter to have a balanced budget, but not an importer. The importer needs to sell securities and   deficit spend the money received back into its economy. That deficit could be 3% of GDP, the Euro limit, but equally it could be higher. It makes no sense to even try to impose arbitrary limits on government deficits, which are also affected by the desire of populations to save financially. The deficits can, and should be, varied, as need be, to ensure the consistency of levels of inflation in different EZ economies. So a possible strategy for the ECB would be to set an inflation target of something like 3% for every EZ economy and issue Euros either via the process of quantitative easing if the exporting countries were unwilling to recycle their surpluses, or the encouragement of bond issuance or even straight lending of euros if they were, or a mixture of both.

3% inflation may be too high, even if only for a limited time, for many in the more prosperous regions of the EZ to contemplate, and they have said so in no uncertain terms. See for example:
http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/11211973/Mario-Draghis-efforts-to-save-EMU-have-hit-the-Berlin-Wall.html
However, the alternative is to leave things as they are. It will only be a matter of time before France is ruled by their National Front. Greece ruled by Syriza, Spain by Podemos,   Ireland by Sinn Fein, the UK by UKIP. There will be an upsurge in support for new Eurosceptic movements emanating from both the extremes of left and right as the EZ economies, including the now prosperous ones,  go from bad to worse to disaster. It is hard to see how that could be any preferable than paying a small price by way of an acceptance of slightly higher inflation, and the issuance of as many Euros and Eurobonds as are required to fix the problem right now.

PS Another similar view
http://www.3spoken.co.uk/2014/02/its-exporters-stupid.html

Spending = Income! The Government needs to run a deficit to balance the books!

Spending = Income !

I don’t know why anyone has a problem seeing that. But, many of us are so caught up in the thought that saving must be a good thing that we sometimes miss it. Saving is what the virtuous do. Spending, on the other hand, must be a bad thing. That is what the reckless do. Except, of course, if the spending can be classed as “investment”. Then it might be classed as a good thing too! Income, naturally, is a good thing.  At least we all agree on that. Everyone needs some income to survive.

It should be a self-evident ‘truism’ that everyone, everywhere, who has earned any money has done so only because someone else has made a decision to spend some money. If people are not earning enough it must follow this is because other people are not spending enough. Spending may be “investing” in new infrastructure or, equally,  it may be simply you or I just going down to the pub and buying a pint or two!

Of course, if anyone wants to put aside some of their hard earned money then there is no reason why they should not. But, as a simple matter of accountancy, it needs to be recognised, by all,  that if someone is spending less than they earn someone else has to spend more, otherwise our economy will spiral downwards as it has in the Eurozone.  The foreign sector in the UK spend less than it earns. Overseas buyers spend less on buying products from the UK, our exports, than sellers earn from sales of products to the UK , our imports. That needs to be made up for.

Many baby boomers are nearing retirement. They are spending less than they earn, as they put aside money into their pension funds.  More generally, the private domestic sector needs to net save to clear past debts and avoid new ones. That needs to be compensated for too.

That has to be down to Government. There is no one else.  It needs to spend more than it earns, ie run a deficit, to “balance the books”. It is all so simple, and so obvious, but many of us are just so conditioned to be the way we are that we can be blind to what should be apparent to an intelligent 5 year old and mess up our economies as a consequence.

Loan repayments destroy credit money. Right? Wrong. They don’t.

I recently came across this comment by Steve Keen.

“This is a point on which I hap­pily dif­fer from most mod­ern Post-Keynesian econ­o­mists and instead con­cur with Keynes: credit money cir­cu­lates, it is not destroyed by loan repay­ment. The argu­ment that repay­ment destroys money made no log­i­cal sense to me when I first heard it, and was treated as absurd when I dis­cussed it with bank accoun­tants as well. I’ll elab­o­rate more fully on this in future lectures.”

http://www.debtdeflation.com/blogs/2011/09/15/behavioral-finance-lecture-07-endogenous-money-circuit-theory/

So is this correct?

Say, I borrow £10k to buy a car. The commercial bank creates £10k of new money simply by editing my account upwards. In other words, bank IOUs are issued.  The vendor has an account at the same bank. The IOUs are transferred from my account to his, so he now has £10k of new money in his account. Later, I walk into the bank with  £10k of real government  BoE printed notes . I hand that over to the bank. My loan is repaid. The bank puts the government money into its reserves. The vendor still has £10k of bank created money in his account.

So the bank created credit money hasn’t been destroyed. Is this what Steve means?
Say the vendor then wants to use the £10k to pay his tax bill or pay an overseas bill for £10k. The taxman or the overseas bank won’t want bank IOUs. They’ll want real government money. So the bank will use the £10k that it now has in reserves to settle either of those payments and the IOUs created, the credit money,  will then be destroyed. Alternatively he could just settle another payment with yet another customer at the same bank. In this case the newly created £10k continues to circulate.

It is important to distinguish between the IOU of the borrower held by the bank when the loan is issued, which is indeed destroyed on repayment of the loan and the credit money issued by the bank, which is not destroyed.

So Steve raises an interesting point and has to be correct. (IMO !)

MMT – Economics for the Political Right?

MMT is becoming to be generally well regarded on the political left. Part of that acceptance is due to MMT’s insistence that unemployment isn’t an insoluble problem and that deficits don’t matter, or at least not in the way  the neoliberals claim they do. There’s an obvious way for the left to find their spending money, once basic economic principles are grasped, to fund their social programs and at the same time fix the unemployment problem which plagues nearly all western economies.

That may not have quite the same appeal to the right, but nevertheless, there is something in MMT for them too. MMT in itself isn’t a prescription for what Governments should do, but rather an economic theory which explains how real economies function and therefore how they react to applied fiscal and monetary policies. So, if MMT is right, and the evidence is very much in its favour, it would make sense to look at how it could help all shades of the political spectrum.

One of the major questions to answer , from all political viewpoints, is ‘how big should the State be’? Hardly anyone is saying 0% of GDP. Hardly anyone is saying 100%. So there is really no correct answer. Everyone has their own opinion. I’d be happy with a State sector which was about 40% of GDP. Others, on the left, may prefer 50% or more. On the right they may prefer 25% or less.

So, using MMT how should anyone argue for a State sector of only 25%? Typically that would be only half the size of the State sector in present day European countries. For a start, considerations on the size of government should be decoupled from considerations of deficit reduction. It’s possible to have any combination of small or large government, and small or large government deficit or even surplus. If there’s an argument for smaller government then the political right just needs to make that argument.

This should run along the lines of ‘Yes, we are going to cut government spending by removing or reducing various services,  but we are also going to cut taxation too to help everyone to pay for those services which will no longer be provided by Government.’ A sort of Super- Reaganomics! The Government deficit shouldn’t be mentioned. A high deficit did not seem to unduly worry President Reagan, who was astute enough to realise that money to expand the economy had to come from government. He just favoured leaving it in the economy longer by taxing less rather than spending more.

Any attempt at a forced reduction in the deficit is likely to be counterproductive from a rightward perspective. It would lead to not only increased unemployment but also a failure of many businesses in the private sector. It would lead to increasing claims that capitalism was failing. There would be increased calls, as there are in the UK now, for more nationalisations to fix the problems of a failing system.

The Governement’s deficit,  which incidentally has to equal the non-government’s surplus, as shown in the previous posting, has also to equal the level of the net savings of the private sector plus the payment for net imports into the economy. These are largely outside the direct control of government in a free society and the equation is just as true for an economy with a smaller government sector as it is for a larger one.

PS If you have a political representative who is of a rightish persuasion, please, if you agree with it,  forward this article to them. These days that could include Labour MPs and Democratic Congress persons too!  I’ll retract any comments if they can prove any flaws in the argument.