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We need a government that dares to think big and be more ambitious in its strategy to set our economy on a more sustainable and equitable pathway.

Man begging with sign that says "homeless and broke, please help if you can"Photo by Vincent Albanese

“The difficulty lies not so much in developing new ideas as in escaping the old ones.”
John Maynard Keynes

When the world is facing one of the worst public health and economic crises since the Great Depression in the 1920s, Rishi Sunak excelled himself this week with his summer statement. Not in a good way one has to say. To put it bluntly, we have gone from Boris Johnson’s ‘New Deal’ pretensions to Rishi Sunak’s ‘meal deal’ as so neatly coined this week by the Labour party. At a time when unemployment has soared globally with projections that it will rise still higher, Sunak’s intervention could be said to be less than even a damp squib which fails to deal with the very real threats that the UK faces right now as domestic and worldwide demand plummets and people hunker down in uncertainty both for their jobs and their financial security.

That the Chancellor thought a ‘eat out to help’ scheme would help those 3.7 million key workers struggling to survive on less than £10 an hour shows where his head is firmly planted – in the sand. As Garry Lemon from the Trussell Trust noted ‘encouraging people to eat out is one thing but ensuring people can afford to eat at all must come first’. Ten years of austerity has left essential public services on the edge of collapse and people in insecure work on low incomes both in the private and public sector. Whilst giving a dining out discount to the already well-off it is quite simply a slap in the face for working people who have already borne the brunt of years of government cuts to public spending and yet who have proven their value to society in these last few months as key workers keeping the important services going as the nation locked down. The clear downside of his meal deal voucher is that you’ve still got to have the means to pay the other half of the bill when many are simply struggling to put food on the table!

And the bad news did not stop there, as government showed yet again who is to benefit from increased government spending. The proposed Job Retention scheme, which will replace the Furlough scheme ending in October, is just another mechanism for supporting businesses instead of working people and as the TUC commented it will do little to reduce unemployment. It will quite simply represent just more of the same corporate ‘welfare’ which has underpinned government policies for decades, whether bailouts for banks and businesses or employment legislation honed to serve private sector needs.

And then, to cap it all, a £1bn giveaway to second home-owners and landlords in the form of a reduction in stamp duty which once again favours the wealthier amongst us and does nothing for renters or indeed anyone purchasing a house in areas where prices are lower out of London.

Just how Sunak viewed these proposals as a mechanism to kickstart the economy is anyone’s guess, when there are already vast numbers of people struggling as a result of the combined consequences of government austerity and the economic consequences of Covid-19 with more hardship to come as the OECD projections make clear. The words of Marie Antoinette who was reputed to have said when there was no bread ‘Let them eat cake’ sums up the government’s response very simply as a complete denial of the extent of the poverty and inequality that exists which has been caused by a pernicious economic theory which has been used to justify greed and selfishness and put private over collective good.

Bread or cake, either way it’s just crumbs, when the strategy should be far bigger in terms of spending to alleviate the human cost to society and the economy and indeed dealing with the next big challenge bearing down over humanity – climate change. His plans do nothing to address the structural poverty which exists in the UK where food banks, homelessness and families living in temporary accommodation have become the norm and an accepted part of the way things are, as has blaming and shaming.

His plans do nothing either to reverse the cuts to public spending which have done so much damage to our essential public and social infrastructure, the consequences of which have been so much in evidence these last few months. After weeks of people clapping key workers on the doorsteps of their homes and politicians jumping on the goodwill bandwagon to give the false impression that we are all in it together, little has been said about the who is to blame for the worsening condition of our public services and what comes next. Johnson passing the buck for the care home crisis onto staff, along with his criticism of NHS England, Public Health England and SAGE’s responses to the pandemic should be a clue to where the government intend to shift the blame. Just more smoke and mirrors to distract from the consequences of government policies.

The fine words and expressions of solidarity with the working people of this country by Rishi Sunak are no replacement for real action to deal with the threats that face us. In the event that a second wave of Covid-19 can be avoided, unemployment is likely to rise to 11.7% by the end of the year but should we experience a second wave that could, according to the OECD, rocket up to almost 15% of the working population. The scourge of unemployment threatens young people in particular who stand to lose out as the labour market contracts.

So far, we have seen the government relying on the private sector to dig us out of this mess, whether it’s a Job Retention Bonus or the proposed apprenticeship scheme. It fails to acknowledge that continuing economic uncertainty will not bring about confidence, either for businesses to invest or consumers to spend. Furthermore, a £10 meal voucher or a reduction in VAT will do nothing to restore confidence when people are fearful for their jobs and their future income. It’s all sticking plasters and simply perpetuates the lie that it is only the private sector that can create the wealth in the end.

As Josh Ryan Collins wrote in a UCL IIPP blog on Medium ‘The pandemic has raised the level of uncertainty in the economy to an all-time high. As John Maynard Keynes emphasised, at such times it is natural for firms and households to retrench. Under such conditions – and with foreign demand also crippled – the domestic government is the only actor able to stimulate the economy and prevent unemployment and recession’.  

The action needed to avert an economic crisis and address climate change is on a scale far greater than the one on offer by the Conservatives, who are picking and choosing the recipients of their spending based on a flawed economic model which puts the private sector as the wealth creator and denies the power of the state and its money issuing powers to address the serious challenges to come.

Government needs to restore its role as employer of last resort and focus its efforts on full employment through job creation – not as a temporary measure but as a permanent feature of public policy. At the end of the day, whether you are on the right or the left of the political spectrum, a mechanism for providing paid work at a living wage which supports the health and well-being of local communities in difficult economic conditions and at the same time keeps money in people’s pockets which then, in turn, flows through the economy and keeps prices stable surely should be the goal of any government?

But how could this be achieved? In two ways:

Firstly, with the introduction of a public sector Job Guarantee to provide employment for those who have been made involuntarily unemployed either as a consequence of Covid-19 or as part of a Just Transition towards a green economy as old carbon-based jobs become redundant and new green ones take their place. With a living wage and training, it would offer a stepping-stone into private sector work as economic conditions improved, would set a wage floor below which private employers could not offer employment and would serve local communities by providing worthwhile and useful public service work.

And secondly, with an expansion of the public sector, which hitherto has been shrunk to a shadow of its former self and is also short of hundreds and thousands of staff particularly in social care and health. As GIMMS has said many times before, the public sector provides the foundations for a healthy economy and any government of any political shade would do well to recognise that public service which serves the economy should not be in the hands of profit-hungry companies which are more interested in cutting costs than improving lives.

Not only do we need to rebuild the public infrastructure that has been shattered by the austerity policies and neoliberal narratives of small government, but we also need to recognise the real and tangible value of public sector work to the economic and social infrastructure.

Of course, without doubt, the next question will be ‘how will it be paid for’? Over recent weeks the debt scaremongers have been much in evidence from various media outlets to public institutions and public finance experts who show scepticism that even the current round of additional spending can be funded without taxing or borrowing more. They put the fear of God into the public consciousness that at some unspecified time in the future someone will have to pay and that someone will be the taxpayer.

Even the Daily Mirror this week helped to spin the lie to its readers that the government has to borrow to fund its deficit, that it will take decades to pay off the debt that has been accumulated as a result of the additional spending, and that the Chancellor will have to impose higher taxes eventually to pay it back. None of this is true and it is shameful that such lies continue to create such fear and uncertainty in the minds of the public.

By all means carry on with this nonsense but such beliefs will, by their nature, constrain any government’s capacity to serve the best interests of its citizens and the economy as a whole if people lose confidence and fear the consequences of such spending on their own future income. Instead of listening to the likes of the Daily Mirror, Rishi Sunak, successive shadow chancellors and other economic pundits not to mention the IFS which regularly trots out analyses of the public accounts as if it were a household budget, we should be challenging these false notions wherever they come from.

And then, when the National Audit Office adds its concerns about the increasing cost of rolling out universal credit and the rising impact of Covid-19 on job losses and Rishi Sunak announces that the number of work coaches in jobcentres would double next year to cope with rising numbers of unemployed people signing on, if you have even the most limited knowledge of how governments spend then you have to scratch your head in puzzlement.

The first thing to note is that the monetary cost of any programme is an irrelevancy for a government like the UK’s that issues its own currency. Secondly, it is not the monetary cost of unemployment or underemployment that is important, it is the social and economic cost to individuals and the economy as a whole that matters. And thirdly it won’t matter how many job coaches you put in Jobcentres – as Warren Mosler so aptly pointed out using the analogy of dogs and bones – if you’ve only got 95 bones and 100 dogs it won’t solve the problem of unemployment. Suggesting that the onus lies with the individual to shape up and be responsible for his or her own fate is a neoliberal narrative to blame and shame.

We need the state to recognise its responsibility as the employer of last resort during the economic cycle and we need a Job Guarantee, not a system of individual censure and humiliation.

The government needs to think big and be more ambitious in its strategy to help reset our economy on a more sustainable and equitable pathway. Whether it will, is an entirely different matter.



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The post We need a government that dares to think big and be more ambitious in its strategy to set our economy on a more sustainable and equitable pathway. appeared first on The Gower Initiative for Modern Money Studies.

What went wrong at intu?

Published by Anonymous (not verified) on Sat, 11/07/2020 - 9:35pm in


Debt, default, retail, UK

In June this year, a company called intu (no capitalisation) collapsed. Most people had never heard of it. But they knew what it did. It was the owner of many of the UK's biggest shopping centres. Lakeside in Thurrock, Metro Centre in Newcastle, and the Trafford Centre in Manchester - all of these were owned by intu. Indeed, they still are. At the time of writing, no disposals have been made. So intu is the landlord of a significant part of the UK's retail sector. And it is dead, killed by the pandemic. But like many of those killed by the pandemic, intu had underlying health issues that made it especially vulnerable. Long before the pandemic struck, the retail sector was in trouble. Over the last few years, a stream of household names have gone to the wall: Woolworths, Toys R Us, Mothercare, Maplin, BHS, Comet, and numerous fashion retailers. The department store House of Fraser was bought by Mike Ashley, owner of the lean and hungry Sports Direct. Numerous other retailers, such as the fashion chain Monsoon and the department store Debenhams, have entered into what is known as a "company voluntary arrangement" or CVA, under which the company's creditors agree to write down or reschedule its debts. One of the principal items that is typically reduced in a retail CVA is property rents. It's normal for landlords to suffer a percentage of bad debts, and a prudent landlord will allow for this in their cash management. But what has been happening in the retail sector is far from a "normal" level of bankruptcies, defaults and debt reprofiling. And intu has been far from prudent. It has borrowed far too much and its cash flow is far from free. So although it was convenient for intu's management to blame the pandemic for its collapse, in fact it has been living on borrowed time. Structural changes in the retail sector which began long before the pandemic, though they were accelerated by it, made its eventual collapse inevitable. Even before the lockdown wrecked its balance sheet and destroyed its cash flows, intu was a zombie. The statement from intu's administrators reveals that the proximate cause of intu's collapse was breach of a loan covenant on its revolving credit facility.  The company had been advanced a line of credit by a bank which was similar to an overdraft or credit card: there was a fixed limit to the amount the company could borrow, but it didn't have to borrow the whole amount and it only paid interest on the amount borrowed.  This facility was subject to certain conditions, known as "covenants": intu's covenants on its revolving credit facility included net worth and debt-to-net-worth limits. It is these covenants that were breached - with far-reaching consequences. In its 2018 full-year accounts, intu reported a loss of some £1.1bn, principally due to revaluation of its property assets. The (then) Chief Executive, David Fischel, ruefully remarked that "After two years of essentially unchanged valuations for our UK centres, 2018 saw investor sentiment turn against retail property. We reported a 6.2 per cent fall in property values in the six months to 30 June 2018 and a further 3.0 per cent in the quarter to 30 September 2018, with the full year reduction in our assets amounting to 13.3 per cent." But he then cheerfully observed that property values would have to fall by quite a bit more for the company to breach its covenants: 

These facilities have significant covenant headroom. For example, a further fall of 10 per cent in capital values would create a covenant shortfall of only £1 million.

And he helpfully provided this table showing potential covenant shortfalls arising from properrty revaluations: 
Fast forward to the 2019 full-year accounts, released in March 2019. The company reported a full-year loss of £2bn, of which £1.97bn was caused by a 22.3% downwards revaluation of its property portfolio. The company's asset base had shrunk by a third in two years. It's not difficult to see why the value of intu's property portfolio fell so much, and so quickly. Financial markets, watching the bodies pile up in the retail sector, realised that the rentals gravy train on which commercial property returns depended was about to hit the buffers, and ran for the hills. As CVAs and defaults rose, and vacancies increased, intu supported its income by extracting higher rents from its dwindling supply of solvent tenants. In 2019, it reported an uplift of 6% for existing rentals, well above inflation and of course wholly unsustainable. Despite this, income from rentals fell by 9%.If intu's cash position had been stronger, it might have been able to ride out the property market turbulence. But its cash reserves were entirely borrowed. And note 33 to the company's 2019 full-year accounts reveals that its cash flow was on a knife edge:Image

Cash generated from operations was barely covering intu's finance costs. It wouldn't have taken much of a cash flow disruption for this to become ponzi financing. Servicing its £4.5bn net external debt was draining the company of cash. The combination of rapid asset devaluation and declining income is fatal for a highly-indebted, cash-poor company like intu. Note 1 to the 2019 full-year accounts says that there was "material uncertainty" as to whether intu could continue as a going concern, and gives graphic details of the scale of the approaching disaster:

  • A further fall of 10% in property values would result in covenant breaches costing £174m to resolve, including repayment of the £161m drawn balance on the revolving credit facility. 
  • A further decline of 10% in rental income would cost an additional £34m in debt service covenant breaches.  
  • £331.5m of repayments would fall due on 31 March 2021 and £1,116.7m on 31 December 2021, including £573.2m outstanding under the revolving credit facility
  • Early termination of swaps could cost another £93m

This would not be remotely affordable. To have any hope of surviving, the company had to deleverage, and fast. The board identified a range of desperate measures: 

  • "alternative capital structures", probably involving some kind of debt/equity conversion, and possibly a rights issue
  • fire sales of assets 
  • persuading lenders to waive or amend the covenants (the note says this would have to be done before the next covenant test, due in July 2020)
  • "other self-help measures", including a lower level of capital expenditure "in the short term". This seems to be very much a last resort, probably because capital projects can be very costly to defer. 

The external auditors called in their restructuring specialists to evaluate the reasonableness of these measures. They seem to have been distinctly underwhelmed. Though they didn't explicitly say it, the tone of the auditors' statement in the 2019 full-year accounts (op.cit.) is much more "this company is bust" than "these measures might have legs". So even before the pandemic, intu was broken. All the pandemic did was accelerate its demise. The end came quickly. Collapsing property values due to the lockdown caused an overwhelming breach of the net worth covenants on the revolving credit facility. The company tried to negotiate a "standstill" with its bank - a grace period during which the bank would refrain from calling in the debt - in the hope that the disruption to its cash flow caused by the lockdown would pass. But the bank wasn't impressed: 

Discussions have been ongoing with financial stakeholders to achieving standstill-based agreements. However, insufficient alignment and agreement in relation to the terms of such standstill-based agreements has been achieved with financial stakeholders ahead of the above deadline. 

It's not generally in a bank's interests to pull the plug on a solvent business that is suffering short-term cash flow disruption due to an external shock, especially when the government has made it very clear that forbearance should be the name of the game. Intu wasn't actually insolvent before the pandemic, though it was teetering on the edge. And it did have a recovery plan, though admittedly a highly risky one. So why did the bank pull the plug?And here, I depart from the script. The company was in a horrible mess, but it was the effect of the pandemic that forced the bank to foreclose. The cash flow projections intu issued in June are disastrous:(click here for larger version)Not only does cash flow collapse in 2020 across all shopping centres, it doesn't fully recover in 2021. But intu was only just covering its debt service from existing cash flow, and it had £1.5bn of borrowing to refinance in 2021. No bank will lend to a company that is certain to default on its existing borrowing within a few months. Better to end it now than prolong the agony. So what happens now? Well, intu is being run by administrators, whose job it is to find buyers, ideally for the whole company - though that seems unlikely in the present circumstances - or for parts of it. The shopping centres are still open, along with their shops. But because of the lockdown, many retailers are now unable to pay their rents. There is no possibility that intu's income will recover, and the value of its property portfolio is likely to continue to slide. It seems likely that it will eventually be broken up and the assets sold well below their book value. There will probably be job losses, though at the moment it is hard to say how many. The demise of intu raises questions about the future of retail shopping. The pandemic, and associated lockdown, has accelerated migration not only to online shopping, but also to local shopping, since people have been actively discouraged from travelling. Will the footfall in shopping centres ever come back? Or are giant out-of-town shopping centres like big dinosaurs, slowly dying because the consumer climate is changing and they can't adapt? Is the pandemic their asteroid?Related reading:The key reasons why intu collapsed into administration - Nottingham Live
The sad story of Maplin Electronics Aerial image of the Trafford Centre from Wikipedia. .

Why Isn’t Modern Monetary Theory Common Knowledge?

Published by Anonymous (not verified) on Sun, 05/07/2020 - 9:56pm in

I’ve always been baffled why ‘modern monetary theory’ is called a theory. I don’t mean this in a disparaging way. As far as theories of money go, I think modern monetary theory (MMT for short) is the correct one. But having a correct theory of money is a bit like having a correct theory of traffic lights.

Traffic lights (like money) are a social convention. We agree that red means stop and green means go. Why we’ve chosen these particular colors is an interesting question, as is why we choose to put traffic lights where we do. But the fact that red means stop and green means go just is. It’s something we’ve defined to be true. The workings of money are similar. True, money is more complex than a traffic light — but only in application. In conceptual terms, money is equally simple. It’s a social convention that we’ve defined into existence.

To frame our discussion of money, let’s begin with what it isn’t. Money isn’t a thing. True, money can have concrete forms like dollar bills and metal coins. But it needn’t. It can be as abstract as digits in a bank account, or tallies on a stick. Money is an idea. It’s an agreement to tie our social relations to a unit of account. To understand money creation, we need only look at the principles of double-entry bookkeeping. Debt goes on one side, credit goes on the other. The two sides carry opposite signs and so cancel out. This allows us to create money while simultaneously balancing our accounts.

Here’s a simple example. Suppose that a friend does a favor for me. I want to return the favor, but don’t have the time to do so immediately. So I give my friend a note that says “Blair owes you one favor”. This note is money. It is created from nothing using the principles of bookkeeping. On one side is a debt: I owe my friend a favor. On the other side is a credit: my friend is due a favor. And that’s all there is to it. My friend can now exchange my IOU with other people. It becomes money in circulation.

Understanding this act of money creation is trivial — much like understanding the creation of a traffic light. Just like we define the rules of traffic, we define the rules of double-entry bookkeeping. We then use these rules to regulate our behavior, creating money as we please.

What’s interesting, though, is that few people misunderstand traffic lights. We all know that traffic lights can be put anywhere we want them, and that they’re based on an arbitrary social convention. Yet when it comes to money, the same is not true. Many people fundamentally misunderstand money. To them, it’s not an arbitrary social convention that can be created/destroyed at will. Instead, they perceive money as a scarce commodity — something that, like water in a desert, must be guarded and conserved.

What we really need, then, is not so much a theory of money, but a theory of why people misunderstand money.

The quantified obligation

To think about why people misunderstand money, let’s keep the definition of money in our heads. The anthropologist David Graeber defines it best. Money, he argues, is a quantified obligation. The holder of money is entitled to receive things from other people. (See his book Debt: The First 5000 Years for a detailed exposition.)

We can see from this definition that money is a powerful tool. In fact, it’s a tool for power. If I have a lot of money, I can get other people to do my bidding. This fact is hardly controversial. We all know the adage that ‘money is power’. But somehow we forget this adage when we think about money creation. Money is nothing but a quantified obligation, so in principle anyone can create it. But in practice, few people have this power. The problem is that for money to circulate, people must trust that they can use it to receive an obligation. I could try to circulate a note that says ‘Blair owes you one hug’. But other than my wife and daughter, few people want that IOU. So it will never circulate as money.

In practice, money creation is done almost exclusively by the powerful. Textbooks on money will use the word ‘trust’. They’ll say that money can circulate as long as we trust the issuer. This is true, but neglects the flip side of trust. When you trust someone, you endow them with power. When soldiers trust their commanding officer, they’re likely to obey orders. That gives the commander power. Trust, in many ways, is the basis of power. You can’t have stable power relations without it.

So while I could try to create money, few people would be interested. I lack the trust of the public, which is another way of saying that I have little power. But if government wants to create money, many people are interested. Many people trust the government, which is why governments have power.

Legitimate violence

The sociologist Max Weber famously defined the ‘state’ (i.e. government) as having a ‘monopoly on the legitimate use of violence’. I think we could equally define the ‘state’ as having a monopoly on the legitimate creation of money.1 There are interesting parallels, in fact, between violence and money.

Just like anyone can create money, anyone can do violence. You could walk onto the street right now and shoot someone. But most of us don’t. Why? First, because we think it’s wrong. Second, because the state punishes murderers. In other words, violence in modern societies is highly regulated. The same is true of money. Technically, anyone can create money. But few of us do. Your personal IOU will never circulate widely. And if you try to create state-backed money, the government will punish you. Like violence, the creation of money is tightly regulated. To see this fact, we need only look at language. We have a name for taboo violence (murder) and we have a name for taboo money creation (counterfeiting).

Those of us raised in stable societies take for granted both the regulation of violence and of money. This regulation begins to feel like a ‘natural order’. But if you were raised in a war-torn country, I suspect you’d feel differently. You’d understand that anyone can do violence — with devastating results. And if you lived through a period of hyper-inflation, you’d probably better understand that anyone can create money. (People tend to make their own money when government currency breaks down.)

Limits to government power

One of the main thrusts of modern monetary theory is to point out that government spending has no limits. If governments control their own currency, they can spend as much money as they want by creating money out of thin air. The interesting question is not whether this is true. It’s trivially true — much like it’s trivially true that a green traffic light means go. Any currency issuer (government or otherwise) can create as much money as they want. The interesting question is why governments don’t spend unlimited amounts of money.

Many economists will trumpet inflation as the boogeyman. Create too much money, they say, and you’ll have hyperinflation. Just look at what happened in the Weimar Republic. It’s true that money creation can lead to inflation. But MMT proponents point out that this has an easy solution. Government can destroy money just as easily as it can create it. Government spending creates money. Government taxation destroys it. Again, this is trivially true. And yet few (if any) governments accept this truism. In fact, most governments behave as if money, like water, is a scarce commodity. Why?

The answer, I believe, has to do with power. The creation of money is inseparable from the accumulation of power. Here’s an example. Suppose that I’m a king who claims the sole authority to create money. And suppose that everyone in my kingdom accepts this right. I create hordes of money and use it to buy all the land in my kingdom. I put the landed aristocracy out of business. And in so doing, I put all the citizens under my command. Everyone, in effect, becomes a state employee. It’s the totalitarian dream — an entire society unified under a single hierarchy.

This tale is, of course, a fantasy. The problem for a real king is that his subjects probably won’t accept his right to create unlimited amounts of money. There will be pushback, largely from other powerful people. The landed aristocracy, for instance, won’t want to give up their land. So they’ll oppose the king’s right to create money (and to tax it out of existence). History shows that rather than being sovereign money creators, feudal kings were in perpetual need of finance. This is just another way of saying that kings were relatively weak. They lacked the power to finance themselves.

What is true for the feudal king is true for modern governments. Like the king, governments can in principle create as much money as they want. But in practice they don’t, because there are limits to their power. When governments create money, they accumulate power, which implicitly means taking power away from other (powerful) people. The landed aristocracy didn’t want to cede control of their land to the king. And modern corporations don’t want to cede power to the government. And so these corporations act continuously to oppose government money creation.

The arbitrariness of power

I’m hardly the first to connect money creation with power. It’s been done countless times before. And yet many (most?) people still misunderstand money. Why? A good theory of money should explain this misunderstanding. Why — despite it being plainly true — do we recoil at the idea that anyone can create money, and as much of it as they want?

My suspicion is that accepting this fact is difficult because it means accepting that our existing social order is arbitrary. Those who create money do so not out of any natural right, but because of power that has been arbitrarily given to them. Nothing makes the human mind recoil like learning that the things we hold dear — the patterns and behaviors that dominate our lives — are arbitrary.

This points to a deep truth about human behavior. Our social conventions are, by definition, arbitrary. And yet the existence of these conventions is predicated on us believing that they are not arbitrary. One of the worst things you can say about a law is that it is ‘arbitrary’. Convince enough people of this fact and the law will soon change. Similarly, one of the worst things you can say about money creation is that it is ‘arbitrary’. Our social order depends on us forgetting (or refusing to see) this fact. The flip side is that changing the social order means remembering this arbitrariness.

[Cover image: Skitterphoto]


  1. I can hear your objections. Private banks create money — so how can government have a monopoly on the legitimate creation of money? I think of banks as the equivalent of military subcontractors. The latter are private-sector institutions that have been given the right to do violence. The same is true with banks, only with money. Banks are private-sector institutions that have been given the right to create money. Just as easily as it was given, government could take this right away.↩

Further reading

Galbraith, J. (1975). Money: Whence it came, where it went. London: Deutsch.

Graeber, D. (2010). Debt: The first 5,000 years. New York: Melville House Pub.

Robbins, R. H., & Di Muzio, T. (2016). Debt as power. Manchester University Press.

Rowbotham, M. (1998). The grip of death: A study of modern money, debt slavery and destructive economics. Jon Carpenter Publishing.

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We need to talk about Tommy…the NHS: charity, taxes and MMT

Published by Anonymous (not verified) on Mon, 29/06/2020 - 2:05am in

Thank You NHS flag with rainbowPhoto by Red Dot on Unsplash

In this post, originally published on Medium, Michael Berks discusses NHS funding.

I’m sure you’ve all seen the story of 100-year old Captain Tom Moore, who, by walking 100 laps of his garden has raised over £23 million for NHS charities. It is, on the face of it, a happy, feel-good story — something we all need in these difficult times. And I’m certainly not going to knock Captain Tom— bloomin’ legend that he is, or complain at anyone donating to his cause. However, if your social media feeds are anything like mine, you’ve probably seen lots of counter posts, pointing out the inescapably true fact that we have a government with a remit to properly fund the NHS — the importance of which has never been clearer — and portraying the NHS as charity, reliant on the goodwill of donations to perform its everyday duties, far from a good thing, is actually a very damaging viewpoint to take.

The majority of these counter posts also point out something else seemingly obvious –the way the government funds the NHS is by collecting taxes from all of us and using these to pay for services. And if some of the rich celebrities cheering on all this giving would instead pay a fair share of taxes we really could fund the NHS properly without relying on charity! Amirigghht?!!

At this point, of course, my MMT alarm bells start ringing. In fact, I’d argue that framing the funding of the NHS in this way is only marginally better than seeing it as a charity case. In this post, I’ll try and explain why. It’ll be quite (ok very) long, but I’ve kept it as economic jargon-free as possible, so I really hope you take the time to read through and hopefully come away with a clearer idea of how government provision of services actually work.

The big problem with the taxes pay for NHS (or other government services) frame is it promotes the idea that money grows on rich people — and as a result, that rich people are thus some special species we must protect. We must nurture them, the wealth-generators, to harvest them for their taxes, without which, we can’t have the things we need to make society work. In other words, while we might want to collect more taxes from the rich, if we upset them too much, they’ll all leave the country — so now we’re even worse off than before. Or at the very least, they’ll just use creative accounting to squirrel away more of their earnings into tax havens so we won’t see any extra income anyway. More generally, just reducing their earnings in any way actively harms us — they earn less, we get less in taxes, our services suffer. We’re fed this narrative time and again, and ultimately it leads to absurd stories like this… a pay-cut to Premiership footballers will harm the NHS!

Let’s be clear what this is claiming. There will be a frontline member of NHS staff somewhere — say Charlie the nurse — who as a result of footballers having to take a pay-cut while not playing football, will have to lose his job.

Take a step back. Forget what you think you understand about economics or how money works for a second, and just try and think this through.

In fact, stop and say these words out loud:

“Because some very rich men don’t get to go out and play ball with each other, we’ll have to stop Charlie doing his job as a nurse.”

Sounds ridiculous right? That’s because it IS ridiculous.

Why should anyone not doing their job, prevent Charlie from doing his? Obviously if said person’s job produced food for Charlie, or his transport, or something else he needs to live and breathe and get to work on time each day, that might be a problem. In other words, all they key-workers we’ve suddenly realised exist — we need them to keep working. But footballers..? Not so much.

As long as Charlie is willing and able to be a nurse, our government has an infinite supply of pounds it can pay him. It doesn’t need your taxes or charity to pay him. Indeed creating money out of nothing is how all government spending works.

Oh God! I mentioned government spending and infinite in the same sentence. You’ve just put your economics hat back on, haven’t you? Inflation. Hyperinflation. ZIMBABWE!! Don’t I know what happens when governments ‘print’ money without limits?!

OK, calm down. Let’s work this through properly…

First up, I’ll concede there is some conceptual difference between the notion of Charlie receiving pounds created out of nothing from the government, and paying him with pounds directly linked to a tax or your charity donations. The former are new financial assets entering the economy, whereas the latter are the same pounds recycled from somewhere else in the economy. So on the face of it, paying Charlie with ‘new’ government money is increasing the money supply.

And with your economics hat on again, you’ve heard that increasing the money supply equals inflation. As the supply of money goes up, its value must come down — the pound in your pocket is worth less, and thus all the goods you need to buy will cost you more. Simple supply and demand. QED.

Again, slow down. Take a step back. In fact ‘money supply increase equals inflation’ is one of those ‘common sense’ bits of orthodox economics that has no basis in reality, and is completely disproved by all the actual data we see in economies across the world (if you really want a description of what happened in eg Zimbabwe, ask me in the comments).

To see why, stop thinking in abstract economic terms, and think instead about some real supply and demand you actually experience in everyday life. Take petrol prices. The average pump price of a litre of petrol in the UK at the end of January was just over 127p. Today it’s 109p [ed. this was mid-April]. That’s a 15% drop in 2 months. The money supply in the UK hasn’t shifted by anything like that in this time — and more specifically, government spending is rising significantly to meet the demands of the current crisis, so surely prices should be going up?

Of course you know why petrol prices have dropped. No-one is driving their cars, so no-one is buying petrol, both here and abroad. More generally, the demand for oil across the world has plummeted, and in turn, so has its price (indeed there’s been a way larger percentage drop in the price of crude oil — the reason pump prices have ‘only’ dropped by 15% is because of all the other fixed costs in the retail price of petrol). When demand for oil increases, prices will go back up. The point is, it isn’t the total supply of money out there driving changes in the price of oil, but money that is actually being used to try and buy oil. The same principle, give or take, is what defines prices for most goods and services. In particular, money being saved — by you me, or anyone else in the economy — is not being used to buy anything. It just sits there in our accounts, as numbers on a spreadsheet somewhere. It is not inflationary.

So now let’s go back to Charlie and our Facebook posts. “If only the government would make rich people pay their share, and collect some of all that loot in tax havens, we could actually afford a fully funded NHS”. Polls show this sentiment is pretty popular across the political spectrum. Obviously if you read the Daily Mail you hate Lewis Hamilton, whereas if you read the Guardian you hate Richard Branson — but one way or another, everyone, apart from the super-rich, hates a tax dodger.

And you might disagree on how feasible it is to actually collect those taxes (and therefore not believe it when party X includes that income in their spending plans), but assuming the government does find a way, everyone thinks it’d be great if we could use that tax as income to better fund public services.

But hold on. Those pounds we’ve just clawed back from the Cayman Islands were previously sitting in the accounts of Richy McRich doing nothing. If we now use them to pay Charlie to keep being a nurse they are every bit as ‘new’ pounds to the real economy as the government creating pounds out of thin air.

Take the following three scenarios:

(1) Richy McRich in an uncharacteristic display of generosity pledges a portion of his off-shore account to pay Charlie’s wages forever as a charitable donation to the public.

(2) The UK government in an uncharacteristic display of a government doing what it promised to do, closes a tax loophole and is able to collect from Richy McRich’s off-shore account enough to pay Charlie forever.

(3) The UK government uses its power as the sovereign monopoly supplier of pounds to pay Charlie forever.

The functional impact on the real economy — that is, what money is used to buy goods and services across the country, is identical in each scenario. But (3) had your head screaming about hyperinflation a minute ago, whereas (1) or (2) seem like the perfect win for society.

So if that’s true, does that mean we don’t need taxes at all?

Well no, of course not.

Firstly, what makes Charlie, or anyone else, want to work for the government at all?

This is where taxes come in. By making all of us pay a tax, that can only be settled using pounds (of which the government is monopoly supplier) — and moreover, having the authority to put us in jail if we don’t pay — we all have the incentive to either earn pounds by directly working for the government, or by providing good and services for people that do. The government pays Charlie to be a nurse, receiving pounds some of which he uses to pay his tax. You sold Charlie his car, or walk his dog, or clean his windows — receiving pounds from Charlie, some of which you use to pay your taxes. You use your pounds to go to the supermarket… And so on. That’s how a modern monetary economy works.

You might not realise this fundamental role of taxes –after all, it’s obvious why you need pounds when everyone ELSE values them too. But have you ever thought, why does everyone else value them too?

Put another way, the government doesn’t need our money, it needs us to need their money. That is why in MMT we say taxes drive the value of money. It is the ability of the UK government to tax us in pounds, that gives what is otherwise just a piece of paper with the Queen’s face on it (or some numbers on a spreadsheet) value.

So #1 — taxes drive the value of money.

Next, remember the first rule of MMT is: THOU SHALL NOT TALK ABOUT MMT.

Wait, that’s not true either, we bang on about it all the time!

The first rule of MMT is: “Societies are always constrained by the real resource limits of their economy”.

What does that actually mean? In this case, Charlie is our real resource.

To keep Charlie employed as a nurse, we need him to be not employed doing something else. In that sense, the government is in competition with all of us in the private sector for all the goods and services we can produce between us. If everyone has a job, and there are no more people with sufficient skills to be trained as a nurse (or a doctor or a teacher etc) the government can’t magic one out of thin air, just because it has an unlimited supply of pounds. It could double the wages of all nurses, and then offer new posts — which might cause some people to think, ‘hey, I’m going to quit my job and retrain as a nurse’. But this scenario absolutely is inflationary. The government is using its infinite supply of money to bid up the cost of wages across the economy.

So as well as driving the value of money, another important role taxes play, is to take away some of our spending power. That leaves less money in our pockets to bid away the services of Charlie or anyone else. In other words, taxes stop us (the private sector) from using real resources we might otherwise want, making them available for the government to buy and use instead.

If that seems to contradict what we said above about tax havens, the point is Richy McRich didn’t want to use his pounds to buy any more goods and services — he just wants to hoard them. That’s why he stashed them in an off-shore account in the Cayman Islands. So trying to tax them doesn’t actually free up any real goods or services this government might need.

It’s at this point people with left-wing/progressive views (and largely the people making and liking the fund-the-NHS-with-taxes Facebook posts) get a bit uncomfortable with MMT. After all, taxing the rich is a pretty core tenet of our beliefs. And now we’re saying you don’t need to? Well, fear not my lefty friends. Think about the three scenarios above. The first two actually give power to Richy McRich — it’s the money grows on rich people framing I talked about at the start. Which means if we make our public services dependent on the ability of us to get his money, we also have to accept when he lobbies the government to get his way (to reduce corporation taxes or ease environmental restrictions on his airline or make his offshore fund legal in the first place etc, etc). This is exactly how politics work now. That’s why framing the NHS as dependent on tax income is almost as harmful as framing it as being dependent on charity donations.

Whereas in scenario (3) we just ignore Richy. We don’t need him to keep Charlie as a nurse or all our other public services running. This means if you want to shut down his Cayman Islands account or whack him with a proper inheritance tax bill, or whatever, you can do so without being told ‘no, you can’t upset the wealth-generators or we’ll hurt the NHS’. Ironically, by understanding MMT and the role of taxes, you have far more freedom to insist on a more redistributive tax system (if you wish of course — others on the right may disagree, remember ultimately MMT is agnostic left vs right, by all means, fight it out, just get your economics right first).

So how about the NHS now? What are its real resource limits? The COVID crisis is showing us we’re hitting a lot of them. We can’t suddenly magic more nurse, doctors, ventilators, ICU beds or PPE in to existence. And even if people, in general, are available, they still need to be trained and moved to the required location. An unemployed ex-factory worker in Hartlepool can’t suddenly be redeployed as a nurse in London.

Some of those shortages (eg a lack of PPE orders) appear to be down to current government incompetence, but a lack of nurses and doctors (and ambulance drivers, lab technicians etc) is a long-standing problem due to the continuous underfunding of the last decade. As a proportion of the population, we had more frontline staff in nearly all our public services 10 years ago. The reason we don’t now, isn’t because we ran out of people, but because we were convinced we’d run out of money. But as you hopefully now understand, the idea we didn’t have any money is, and always was, nonsense! In other words, the real resources were always there, and thus the government always had the ability to keep buying them.

Where are all those people who could have been employed in the NHS working now? Well, Charlie’s mate Emily was training to be an ambulance driver but is now a self-employed courier delivering next-day Amazon prime parcels. Steve wanted to be a teaching assistant but works for Uber instead, and Vanessa was going to be physiotherapist for stroke victims but freelances as a PT in her local gym. Where do you think the record employment in the private sector and the gig economy has come from?

If you detect a note of sneering there, I promise you there’s none. I’m not knocking any of those jobs or the people that work in them. They clearly have value to the economy — both to Amazon, who benefit from a nice low wage driver for their sellers, but also to us, who get our gadgets delivered seemingly before we’ve even ordered them. And who doesn’t love an Uber eats?

The question for us all, then, is what we want from our economy. Or more importantly, what do we want from ourselves. Our taxes haven’t gone down to make those resources available to us as private individuals, and they won’t need to go up, if we wanted to instead shift them back to working in the public sector for society as a whole. Ultimately, it’s a political decision, far more than it is an economic one. And it’s not for me to persuade you what your what political views should be. But now you hopefully understand the economics a little better, then next time you’re clapping for all our NHS staff, have a think about what you value most.









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‘What if the Public (really) Understood How Money Works?’ Just think what we could achieve!

Published by Anonymous (not verified) on Sun, 28/06/2020 - 5:54am in

Line graph with downward trend, virus image and word COVID-19Image by iXimus from Pixabay

“There’s something invigorating about people freaking out about modern monetary theory (MMT). They treat MMT as akin to the Ark of the Covenant in the first Indiana Jones movie. They are petrified that knowledge of the financial equivalent of the “holy of holies” will be released to normal people because they project their greatest terrors onto the possibility that the public will be transformed and empowered by their knowledge of matters that much of the financial world has understood for at least a century.”

Dr William Black


After having previously been ignored and disparaged for decades by mainstream economists and politicians, MMT has been making the headlines and finding its way into a growing public conversation.

Two significant publications over the last few weeks are challenging the very basis upon which government policy is determined; ‘does it fit with our political agenda, is it affordable’ and ‘how can it be paid for?’

The Deficit Myth’ by Stephanie Kelton was described by Professor Hans G Despain in a review in the LSE blog as a ‘triumph’ challenging, as he explained, the false idea that ‘deficits are irresponsible and ruinous towards the productive political activity of deciding which spending programmes should be prioritised’.

Hot on its heels came Pavlina Tcherneva’s book ‘The case for A Job Guarantee’ described by James K Galbraith as the ‘next big, common-sense idea for economic reform’. And in the words of Paul Prescod in the Jacobin Mag, the Job Guarantee ‘offers an inspiring vision of what society would look like if we utilized the various talents and skills working people possess’

Both these publications have stirred an already growing interest in that hitherto boring subject of economics, showing that far from being irrelevant to people’s lives it is critical to them in terms of human and planetary well-being.

Hitherto sceptical economists are now saying things like ‘well we knew it all along really’ and sovereign currency-issuing governments across the world have suddenly discovered the fiscal levers they denied us previously, to keep their economies from foundering as a result of the deleterious effects of Covid-19. Until now, there has been a depressing failure to make the critical connection between government spending and economic and societal well-being which are fundamentally two sides of the same coin. Whilst people may not make the technical connection, they are now beginning to understand the impact that government policies and spending decisions have on their lives. They live them every day.

Whether on the right, where politicians defer to the market as the wealth-maker, claiming that public services depend on a healthy economy to generate sufficient tax revenue, or the left, who scrabble for a limited pot of tax revenue, preferably from the rich, or through borrowing at low interest to deliver their political agenda, the orthodoxy prevails on both sides of the political spectrum.

After decades of being in the wilderness, MMT is happily beginning to make headway and that is very encouraging. However, over recent weeks, the Empire seems to have been striking back! Sensing a challenge to its economic and political hegemony, recent newspaper headlines are reinforcing the orthodox narrative of the public finances being like a household budget. Fake news to keep the population compliant in the false understanding that there are real financial constraints to public spending and to prepare them for the possibility of more austerity to pay back the enormous, eye-boggling sums spent by the government during the Covid-19 crisis.

In an article last month, the FT asserted that the Chancellor would ‘face tough choices’, and that ‘at some point, taxes will have to rise’. While tax increases would be an unpopular move, it said this ‘would send a signal that ministers are getting the deficit under control.’

And just this week, headlines aimed at eliciting a negative public reaction have dominated the news.

‘Britain nearly went bust in March says the Bank of England’.


‘Borrowing cost set ‘set to rise’ as Bank sells off stock of gilts’

On the right, John Major waded in with a call on the government to ‘borrow heavily…to improve living standards’ and claimed that ‘taxes will eventually have to be increased to pay for an extremely expensive programme.’

And on the left, the Shadow Chancellor Annaliese Dodds said again this week that ‘it is only right that those with the broadest shoulders’, should make a bigger contribution as the UK recovers from the economic effects of Covid-19.

Whilst the IFS think tank couldn’t resist the following:

It is clear that the COVID-19 outbreak – and the public health response to it – will dramatically reduce economic activity in the second quarter of 2020. This in turn will depress tax receipts and add to government spending, increasing government borrowing and in turn adding to government debt […] A key issue is how quickly – and how fully – the economy, and with it the public finances, recover over subsequent years.

The economic pundits, institutions and politicians are reinforcing, as a deliberate tactic, that at some unspecified time in the future there will be a price to pay for all this spending. As Aldous Huxley, author of Brave New World said; ‘Sixty-two thousand four hundred repetitions make one truth’ the implication being that the more a statement is repeated, the more credible it is seen to be. And certainly, over the last decades in terms of discussion about the public finances, the household budget version rules in the public consciousness – even at the expense of its own well-being.

Just a quick look at recent headlines show the pernicious nature of such repetition on the health of the economy and its citizens, who compare the public accounts with their own finances.

It was reported this week that some of the UK’s largest councils may have to declare bankruptcy unless the government stumps up extra cash to cover the extra expenditure needed to deal with the impact of Covid-19. Nearly 150 authorities have predicted a combined budget shortfall of at least £3.2bn. Having already been struggling to deal with ten years of cuts to central government funding for local government, the chickens are now coming home to roost. Even the government’s proposed additional funding package will struggle with an already slimmed down local government infrastructure which includes people and services. However much money is allocated, local politicians and their officers will not be able to repair those losses to essential services quickly.

Also this week, the IFS reported that families who had become unemployed during the Covid-19 crisis would get £1600 less in benefits, on average, than they would have done without the damaging decade of Tory austerity. It warned that the UK, which had entered the crisis with an already less than generous welfare safety net combined with the worst decade for income gains since the 60s, would not ‘provide a good blueprint for a bounce-back’.

Pascale Bourquin, a research economist at the IFS, said that in the last decade the country had ‘witnessed the slowest growth in household incomes since records began as earnings and productivity stalled and working-age benefits were cut sharply’. And added that ‘we now have the dual challenge of trying to recover the ground people have lost in their careers and employment prospects and addressing the problems we already had’.

The narrative of household budgets is pernicious and yet it pervades the public discourse. On the one hand, the IFS recognises the damage austerity has caused and yet on the other still blathers on about the public finances and the national debt, hinting about the future cost we will all have to bear for this increased spending.

When Helen Barnard at the Joseph Rowntree Foundation, which funded the research, talks about ‘Finding a lasting solution’ she is demonstrating, just like the IFS, a woeful lack of knowledge about how governments actually spend. The solution is staring them right in the face.

The government has the power of the public purse to find solutions to unemployment, low productivity, poverty and inequality, not to mention the coming threat of climate change. It doesn’t matter which end of the political spectrum you sit on, whether you are on the right or the left, a healthy economy and societal and planetary well-being go hand in hand and should be a top priority for both.

This week the IMF warned of a deep global recession. This will, without doubt, lead to further poverty and inequality which will be worsened by the prospect of a world ravaged by human-induced climate change if we fail to act now. It is time for the public, politicians and institutions to put away childish analogies about how governments spend – that is if we really want to secure a stable future for those that will come after us.

In the words of Dr William Black ‘What if the public understood how money works?

Well, there might just be a revolution!








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Fiscal Deficit and Public Debt too Large?

Published by Anonymous (not verified) on Thu, 25/06/2020 - 4:20am in

Funding Expenditures

As Britain enters a severe recession that will lead to large fiscal deficits and growing public debt, a question presents itself – when are deficits and debt too large?  The question has an apparently simple answer.  The fiscal deficit is too large when it results in the government finding it cannot sustain its servicing (interest charges plus repayment of principle).  That answer opens a further question, when is debt service unsustainable?

This question begins with the recent arguments that if governments have control of national currencies — sometimes called sovereign currencies — they can fund their expenditures through money creation.  This view derives from the argument that taxes do not directly fund spending.  This approach to public expenditure has limited applicability.  While possession of a national currency provides the necessary condition for governments to auto-finance their expenditures, it is not a sufficient condition as a moment’s reflection shows.

The International Monetary Fund has 189 members, 145 of which have national currencies.  Of those 145 no more than a dozen governments could safely and effectively fund their expenditures by money creation.  The ability to do so requires that the currency be safe from speculation against the exchange rate.  That requires either that the national currency serve as an international medium of exchange (reserve currency) or that the government possesses substantial foreign exchange reserves.  Both serve as protection against exchange rate speculation. 

Inspecting the Special Case

Among large countries only the United States and to a much less extent the United Kingdom have reserve currencies.  The Chinese and Japanese governments represent hybrid cases of partial reserve currencies, due to their large trade volumes and substantial foreign exchange reserves.  The Chinese government holds the world’s largest stock of reserves with Japan second, $3.1 and 1.4 trillion, respectively.  No other government holds as much as a trillion. 

A few governments of medium-sized and small countries possess reserves sufficient to protect against speculation, Norway, Saudi Arabia and Switzerland are among the few.  As I pointed out in my recent book, The Debt Delusion, the principle that governments with national currencies can borrow from themselves has such limited applicability that it does not involve theory.  Rather, it involves an empirical relationship of considerable importance but a special case. 

The vast majority of governments would invite fiscal disaster by borrowing from themselves.  Because of the structural characteristics of developing economies monetization of borrowing via selling bonds to the central bank or creation of credit lines in the central bank would provoke excess demand and inflation leading to exchange rate depreciation.  For that reason the vast majority of governments with national currencies borrow in financial markets, nationally and internationally.

Even for the handful of special cases a caveat applies, the sustainability of the debt service.  Further analytical discussion requires that we abandon generality and go directly to specific cases.  The British government can and has engaged in considerable deficit monetization because of two specific characteristics of the economy.  First, the large financial sector encourages capital inflow that weakens the destabilizing effect of exchange rate speculation.  Second, the lingering function of the pound as a currency of international exchange fosters holding of sterling as a reserve by many governments.

Even in the case of Britain, the sustainability of debt service requires the continuation of low interest rates on public bonds, now 0.5% for two year gilts, and a long maturity structure of UK bonds.  The latter at 15.4 years is the longest among OECD countries, all of which have an average of less than ten except for Britain.  The Debt Management Office in the Treasury maintains the stability provided by long maturity borrowing. 

However, interest rates at the present low level are not sustainable.  The British government can avoid speculation that would elevate interest rates because the Bank of England sets rates.  Public bonds serve as a major element in private pension funds, for wealthy and also for the middle class.  If interest rates remained permanently low, that would require a substantial restructuring of pension funds and private portfolios in general.

As a policy rule, the Bank of England should aim to sustain gilt rates in the long term near the economy’s sustainable expansion rate, about 2.5%.  Public debt service is manageable if it declines or maintains a steady share of public spending.  Calculating whether debt service is sustainable involves several key numbers: 1) the level of debt, 2) average interest rate on the debt, 3) fiscal deficit (which adds to the debt), 4) the size and growth of public expenditure, and 5) expansion rate of the economy.

As guidelines we set the economy’s expansion equal to the target gilt rate (2.5%) and set a guideline for public expenditure at 40% of GDP, the share for much of the post-WWII years.  Sustainability of public debt service then depends on two numbers, the fiscal deficit and the initial size of the public debt.  Should the covid-19 depression result in a debt to GDP ratio well over 100% and fiscal deficits to GDP in double figures, debt service sustainability could become a concern.


In principle governments with national currencies can fund expenditures through money creation.  In practice very few should do so, one of which is the United Kingdom.  We have an empirical possibility to consider, not a theoretical generalization.  At the beginning of 2020 the possibility of the British government incurring an unsustainable debt or deficit remained remote.  The covid-19 economic depression changes that.

Economic recovery will occur from an initial condition with a quite large public debt to GDP and double digit deficits.  When that recovery brings interest rates back to their historically typical level debt sustainability could become a concern.  This does not imply restraining expenditure but quite the contrary.  As shown when George Osborne was Chancellor, budget cuts reduce the Treasury’s tax take by slowing the growth of the economy.  Sustained recovery will require continued management of the maturity the debt and achieving a steady recovery, unlike the near stagnation during 2010-2020 abortive recovery.

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Coronavirus Borrowing and What Causes Inflation

Published by Anonymous (not verified) on Tue, 02/06/2020 - 1:52am in

In a previous blog I explained the policy advantages of funding public spending by borrowing from the Bank of England (“monetisation” of deficits).  Many economists and the public consider that policy inflationary, “printing money”.  In order to dispel that misconception, it was first necessary to explain inflation itself.  With that done, I can go to the heart of the matter, the causes of inflation.

The prevailing image people have of inflation is frequently that of toy boats in a bathtub.  Water is money and the boats are prices.  Turn on the money tap and the boats (prices) rise.  That metaphor is wrong.  Prices are not equally inflatable, do they not all float with the same buoyancy, and money cannot be strictly regulated.  Price increases do follow a general rule, that they result from excess demand for the good or service in question.

Almost all inflationary pressures, a general rise in excess demand, have one of four causes: 1) cycles in internationally traded commodities; 2) exchange rate depreciation; 3) external debt-related excess demand; and 3) sudden loss of tax revenue.  In the United States over the thirty years 1990-2020 almost all of the general increase in the consumer price index of 2-3% annually resulted from changes in international fuel prices (Economics of the 1%, page 148),   The same applies to other developed economies including the UK and major EU states.  While presented as “inflation” in the media, fluctuations in international prices are more correctly viewed as price adjustments responding to the economic cycle. 

Hyperinflation in developing countries frequently results from exchange rate depreciation, which itself follows from large trade deficits.  This type of inflation rarely occurs in advanced countries.  Infamous examples include the Indonesian inflation during the Asian Financial Crisis of the 1990s.  Large external debt payments are a closely related cause of high and hyper-inflation.  External debt service acts as an export for which there is no compensating import.  Exports generate foreign currency which is channelled abroad to pay interest and principle on public debt held by foreigners. 

With no import to absorb the domestic income generated by the export, the national economy suffers from chronic excess demand unless the government runs a budget surplus equal to the debt service.  The budget surplus eliminates the excess demand, but at high social cost.  This process generated high inflation in the deeply indebted Latin American countries in the 1980s and 1990s.  Governments were loath to generate the necessary budget surpluses because of their depressing effect on output and employment.  The German hyper-inflation of the 1920s was a rare case of this process in an advanced country, caused by the large war reparations specified in the Treaty of Versailles and the French military occupation of the Ruhr.

Sudden loss of public revenue is related to debt-related inflation.  Historically this has occurred as a result of looming or actual civil conflict.  Chile in the 1970s and Zimbabwe in the 2000s are obvious examples.  After the election of the progressive Salvador Allende president in 1970 the wealthy in Chile in effect went on strike, not paying their taxes and undermining the expansion of the economy.  The politics of the disintegration of Zimbabwe’s civil society developed in a less clear cut manner, but reflected a process of social disintegration.

In summary, over the last four decades mild inflation occurred in most countries developed and underdeveloped in response to international price cycles, most often prices of hydrocarbons.  In contrast rapid inflation invariably results from one of three causes or the interaction of the three — exchange rate collapse, high external debt burdens and civil strife. 

We should view the role of money in the inflationary process as passive, the policy or systemic response to the deeper causes.  Governments choose to cover strong inflationary pressures with monetary expansion in order to avoid what they consider a worse outcome of collapsing output and employment, even though the resultant hyperinflation may have the same effect.

For most advanced countries the low inflation rates of the last few decades should not fall into inflation terminology.  Price increases of 0-3% reflect international and domestic price adjustments inherent in dynamic economies.  Suppressing those price pressures results in economic stagnation and allocative inefficiency.  Treating any positive change in the consumer price index as inflation is practically and analytically wrong. 

If as some have suggested, the post-corona virus period brings a stronger role for trade unions and more vigorous expansion and innovation-driven productivity growth, we should expect higher rates of price increases, perhaps up to five percent per annum.  Should that happen it will reflect another general rule of market economies, that increased real wages occur during periods of moderate price increases.  That is because economic expansion itself creates upward pressure on prices while simultaneously reducing unemployment and strengthening bargaining power of employees.

Far from a problem, moderate rates of price increase signal a healthy, expanding economy.

Photo credit: Flickr/Alan O’Rourke

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We don’t have to accept a corporate blueprint for a future world. The alternative is to forge a collective vision based on solid values and publicly provided foundations to enable human and planetary flourishing.

Image by Alexas_Fotos from Pixabay

‘We hope this pandemic will teach us that in normal times we must build up our supplies, our infrastructure, and our institutions to be able to deal with crises. We should not wait for the next national crisis to live up to our means’.

Yeva Nersisyan and L Randall Wray

Austerity and cuts to public spending have taken a wrecking ball to our public infrastructure, not least local government. As central government funding was cut as a deliberate austerity policy, councils have spent the last 10 years trying to balance their books by cutting services and increasing local taxes and other charges to make ends meet. In 2019 council leaders said that government funding cuts would leave a £25bn black hole – leaving some councils having to consider bankruptcy as an option. The COVID-19 crisis is revealing the scale of the damage which has been done to the vital public infrastructure, particularly that which serves our local communities.

Despite the government’s COVID-19 crisis bailouts amounting to £3.2bn last month and additional money for social care, the writing is on the wall. Windsor and Maidenhead District Council said it was ready to file for bankruptcy as a result of its predicted £14m shortfall with only £6m in reserves. Many other councils face similar dilemmas. What options are left when they have already cut their spending to the bone to keep delivering their statutory duties which include social care? Already, there have been huge cuts to local services.

Hundreds of libraries closed, children’s and adult social services cut, a public health budget which has faced hundreds of millions of pounds in cuts since 2014/15, fewer waste collections, cuts to parks, sports, arts and leisure services not to mention increased outsourcing of public services including social care to private contractors to cut costs. While the focus has been rightly on how rundown the NHS has become as a result of a decade of austerity, council services which have also borne the brunt of cuts have left the UK totally unprepared with insufficient staffing and a degraded infrastructure to cope.

And now the situation has become so dire that even statutory duties are no longer sacred. Last month it was reported that a number of councils had taken advantage of the government’s COVID-19 emergency measures which allow them to suspend their duties to provide elements of adult social care so that resources can be redirected towards coronavirus support.

While government ministers claim, from their ivory towers, that they stand behind councils and that they are giving them the funding they need, the evidence is to the contrary. The horse has already bolted from the stable and did so the day George Osborne imposed austerity on the nation. Ten years of cuts cannot be remedied quickly and easily; you cannot rebuild overnight that infrastructure that has been lost. Without adequate central government funding now, local government will remain a shadow of its former self or indeed may not survive in its current form. With social care budgets making up over half of what councils spend then it is clear that something will have to give. It is likely that the axe will fall not just on remaining services but also on social care; the review of which has yet to take place having been kicked down the road endless times by successive governments.

We are facing the demise of local government and local democracy for more centralised decision making which can only be to the detriment of our local communities who are served best by those that know them best. Local government needs a massive injection of funds to allow it to implement both central and local initiatives, not just to manage this emergency but to ensure that the economy can rebuild itself and flourish in the future. It needs to rebuild the infrastructure that currently sits in tatters as a result of deliberate government policies to dismantle it. All it lacks is real political will.

Some deride local government, but without the services that it provides our lives have become poorer. We are beginning to recognise that, along with our NHS and other public services, they form the bedrock of our local communities. COVID-19 has revealed their vital nature in this time of national emergency. As the spotlight falls on our public infrastructure which has been so cruelly stripped down, it highlights the terrible cost of austerity. Not just in deaths from COVID-19, the scale of which was preventable had the government acted sooner, but also deaths caused by government policies and reforms to the social security system which have dehumanised people, left them impoverished, hungry, homeless and sometimes suicidal.

While we witness the very real consequences of the economic ideologies pursued by successive governments, which have denied the value of our public infrastructure except in profit terms for private corporations serviced with public money, we are now also witnessing another battle. The battle about the affordability of the current round of government spending and the perennial question about where the money will come from to pay for it.

This week, two articles appeared in the Telegraph which is not known for its progressive stance. The first suggested that according to a leaked Treasury document the country could face a ‘sovereign debt crisis’ and it set out a package of tax rises and spending cuts which would be aimed at ‘enhancing credibility and boosting investor confidence.’ It proposed an end to the triple lock on state pension increases and a two-year public sector pay freeze (so much for all that clapping on the steps of No.10). In effect, it suggested that higher debt now will have to be paid for in the future to stabilise the debt-to-GDP ratio and ‘prevent debt from growing on an unsustainable trajectory’.

Then, in the same week, another more surprising article entitled ‘The Treasury is wrong’: we don’t need hair-shirt austerity’ contradicted that proposition and said that ‘it was a sure-fire formula for structural damage and an economic depression.’ It also suggested that ‘we should be cutting taxes to support the economy’ and said that ‘the idea that we need significant spending cuts or tax rises is completely wrong.’ The author ended by commenting that it was ‘extraordinary that a sovereign country with all levers of economic policy under its own control should contemplate such self-harm’’. Whilst it is true that the article is still couched in the orthodox household budget narrative that austerity would lower future tax take and thus would be counterproductive for the public finances, it does nevertheless point out that such a course of action would be tantamount to a ‘scorched earth policy’.

However, confusion seems to reign in Tory-supporting circles as on Friday Boris Johnson, rejecting the Treasury floated proposal for more austerity to cover the cost of the coronavirus crisis, said that there was no question of freezing public sector workers’ pay and that the government were intending to spend heavily on infrastructure as the country exited lockdown. On the other hand, whether one can trust Johnson’s promises is another matter, given his track record on truth-telling both before the crisis and through it. Whilst he has a very short memory it is also possible that it will be a short career as Prime Minister. Clearly, it reveals potential tensions between No 10 and the current occupant of No 11, but it also demonstrates that the standard household budget orthodoxy still takes precedence even if it is purely a mechanism to deliver a political agenda rather than a recognition of how governments really spend.

We should remember whose pockets have benefited these last couple of months from public money. Only this week, it was revealed that the government had awarded £1bn worth of contracts to private companies bypassing the tendering process and thus any accountability. It had also failed to use NHS Laboratory capacity for testing, preferring to give the work to private companies. The lie of the land is easy to see. There is never a shortage of public money for corporations, but when it comes to public services the magic money tree goes into hibernation.

That we are seeing challenges to the economic orthodoxy of the past few decades is a positive step forward. Less positive is that it is still being seen in terms of productive economy meaning more taxes and less debt as if the national debt were the single most harmful issue that the nation faces. The suggestion that the government could face a sovereign debt crisis is the same as David Cameron deceitfully suggested in 2010; that we were like Greece and could go bankrupt if we didn’t get our public finances under control.

However, as many more people are beginning to realise, the UK government as the currency issuer can never run out of money and cannot become insolvent. When it issues bonds, which are portrayed erroneously as borrowing, it can always meet those liabilities upon maturity including any interest accrued. In fact, it doesn’t even have to issue debt to cover its deficit.

The bottom line is that the national debt represents our assets – our savings – not a burden on the nation, either now or for future generations. In 1945, when our debt to GDP ratio was around 240%, we built our NHS and put in place a social security system to protect people from cradle to grave. That spending represented a real investment in the future of the nation and the economy and in doing it we didn’t go bankrupt then, any more than we can now.

It is vital to turn this damaging narrative on its head. Deficits do matter, but not in the way we tend to think they do. They are normal and necessary, representing as they do our savings and the money circulating in the economy. Rather than focusing on the size of the national debt, it would be better to ask questions about what that debt represents. What was it spent on and why and who benefited or lost out? The answers to those questions will vary depending on the economic conditions of the day and the political agenda of the government in power.

The record of any government, which includes a range of factors from social to economic including full employment, is the real measure of success. Not whether it was fiscally disciplined and achieved a balanced budget. Damaging a nation’s health and prosperity cannot in any way be defined as success. The Conservatives spent ten years destroying it and regardless of how much money is promised now or in the future, it will take time to rebuild that lost public infrastructure if indeed they choose to do so.

In these difficult times, we are seeing the consequences of austerity on everything that we have hitherto valued but have maybe taken for granted. We have allowed successive governments to whittle away at those public structures upon which the foundations of a fairer society were built in the post-war period. We have accepted, not just the lie of unaffordability because we understandably compared the state finances to our own household budgets, but also that the market provided better outcomes for publicly paid-for services as if the government could be compared to a profit and loss business. This, in turn, has given corporations huge influence and power in Westminster and has lined their pockets, at the expense of good quality publicly funded and managed provision.

Those lies are now unravelling. Let’s make sure they unravel to a conclusion which invites a re-examination of our values and a commitment to creating a collective vision of the future which is both environmentally sustainable and fairer for all. Failure to challenge the rapid transformation of our society into a corporate free-for-all will leave us impoverished automatons in its service.



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The post We don’t have to accept a corporate blueprint for a future world. The alternative is to forge a collective vision based on solid values and publicly provided foundations to enable human and planetary flourishing. appeared first on The Gower Initiative for Modern Money Studies.

Debt Monetization and Inflation Ideology

Published by Anonymous (not verified) on Mon, 11/05/2020 - 8:51pm in

Few common economic phenomena are as misunderstood and misrepresented as “inflation”.  Unemployment represents a concrete event that manifests itself in a straight-forward manner, loss of work, application for benefits and subsequent job search.  We can contrast this to inflation.  Economists struggle to define what inflation is. 

A “rise in the general price level” comes across as the preferred definition, but is ambiguous concept.  In actual economies with their many goods and services, the “general price level” exists as a measurement concept that no one directly perceives.  In addition, we have many statistical measures of inflation.  I focus on the commonly used consumer price index.

If we asked the proverbial person on the street, “are you unemployed”, we are likely to receive one of three replies — no, yes or “between jobs”.  Few if any adults would reply “I don’t know” or none of those”. 

We could ask the same person, “was your standard of living affected by inflation last month”?  There are many reasons why the person may find it difficult to answer.  If the Bank of England through intention or accident kept average price increase close to its 2% target, the rise might prove insufficient for the respondent to notice.  At least three characteristics of the “general price level” reinforce ambiguities of perception:  people have different consumption habits; all prices increases are not inflation; and in practice price determination falls into different processes.

To take obvious examples of the first, someone who rents accommodation will be unaffected by an increase in mortgage rates, changes in the fare for the London tube will go unnoticed by  a rural bus rider, and vegetarians will care little about meat prices. 

More important, consumer price indices use average consumption weights.  The substantial difference between average and median (mid-piont) income implies that the consumption pattern of the typical person differs substantially from the weights used by the Office of National Statistics.  ONS also calculates Indices by income deciles but these are rarely used in the media. Since 2006 when the indices began, average price increases for the population in the second decile (tenth) have differed each month from those of the ninth decile by an annual equivalent of 0.3 percentage points (ONS compares deciles 2 through 9 to avoid extreme values encountered at the ends of the distribution)). 

When people in the high ninth decile show no change, prices for those in the low second decile consistently show a small annual increase (calculated from ONS statistics for 2006-2019).  The distribution bias provides sufficient reason to make individual perception of inflation differ by income groups over several months’ periods of time.  And, of course, higher income groups may not notice small changes at all.

This ambiguity is substantially increased because (my second point), in time of low inflation quality change and new products have a calculated price impact well in excess of inflation itself.  The items people purchase continuously undergo quality change as well as being joined by new products.  Over twenty years ago the United States Congress commissioned a detailed investigation into the effect on inflation measurement of such changes. 

That study, the Boskin Report, concluded that new products and product improvement contribute about one percentage point to consumer prices each year.  While we have no equivalent UK study, the internationalisation of production and consumption suggests a similar impact.  If so, when the ONS reports an annual general price increase of two percent, what we normally mean by inflation — the same thing costs more — is actually one percent or less.

Perhaps the most important problem with measuring the general price level and inflation is a third complication.  The prices in our economy fall into three distinct categories: 1) goods and services who prices are determined in international markets, 2) those whose prices result from contact arrangements of varying time lengths (including public sector prices), and 3) prices determined in short term domestic markets processes (“spot market” prices).

With this complexity of price determination in mind, we can reconsider orthodox monetary policy.  For example if the ONS measured rate of price increases goes to 3.5%, the Bank of England is mandated, on advice of the Monetary Policy Committee, to act to reduce the rate down toward 2%.  An increase in the rate at which the Bank of England lends to private banks provides the conventional tool to archive this outcome.  Finding it more expensive to access funds, banks raise their lending rates.  Businesses then find their operating costs higher and reduce output.  Slower private expansion reduces pressure on wages and prices, bringing inflation down.

If this logic were sound, it would mean that the slow down in price increases would concentrate in domestic markets, leaving international prices such as petroleum unchanged, as well as having little impact on prices under contracts of various lengths.  The most flexible prices arise in markets with unregulated wages, such as retail and wholesale trade, where pay is also quite low. 

Thus, if the logic of conventional monetary policy holds, its distributional effect should prove quite unequal, its burden carried by the lowest pad.  The occasionally encountered argument that inflation disproportionately harms the poor is false; seeking to reduce inflation disproportionately harms the poor.

How did economic policy fall into this commitment to consistently inequitable monetary policy?  The alleged problem, excessive price increases, defies accurate measurement.  We have little evidence that the solution to this alleged problem, central bank manipulation of interest rates, would have any direct effect on it.  As I argued in my previous blog, underlying this mainstream monetary policy we find the belief in automatic adjustment to full employment — market economies naturally seek full employment, and government provoked inflation is the major source of instability.

A specific model of the economy provides the bridge from the belief in self-adjusting markets to mainstream monetary policy, the infamous Quantity Theory of Money.  In its simplest form that theory views the economy as generating one common output and money as created by governments.  In the simple neoliberal monetary world market economies automatically find full employment; only one output is produced; governments control the money supply; and inflation results from too much government created money chasing too little output.

But market economies tend to generate unemployment not full employment.  Real economies produce many goods and services with quite different process of price determination.  Governments and central banks at most influence not determine money in circulation.

Inflation is not the result of too much money.  That is its consequence.  In a third blog I focus on that issue — what causes a broad and persistent increases in prices, when that is a problem, and what policies to manage it.

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The Role of Tax after the Pandemic

Published by Anonymous (not verified) on Tue, 05/05/2020 - 2:54am in

Richard Murphy

Recovery from the coronavirus crisis will be a complex issue. In many ways it is impossible to predict precisely what will be required. And yet, when it comes to the role of tax in this recovery some quite straightforward things can be said.

What is indisputable is that tax does withdraw money from circulation that might otherwise be spent within the economy. It does as a result suppress demand for consumption and, by reducing the overall resources available within the private sector, for investment as well.

If that is the case then it is likely that the last thing that will be required after the massive slump in demand that the coronavirus shut down has created will be any overall tax increases. It is likely that they would be deeply counter-productive because they would suck demand out of they economy just when that economy will need to be re-established as the recovery proceeds.The fact that the government will be spending more does not alter this fact.

Governments can fund themselves in three ways. They can tax. They can borrow. And they can create the money that they spend by borrowing from their own central bank (a process called direct monetary funding). The precise nuances of these arrangements are not of concern here: what is important is that what this means is that tax increases need not be in any mix relating to increased government spending for the time being.

That being said, there is very strong reason to reform tax after this crisis. That is because, as I argued in my 2015 book, The Joy of Tax, the choice between the tax policies available to a government is in many ways the most important decision that any government has to make if it is intent, as most governments are, on shaping society in particular ways to suit some interests over others.

The UK tax system has, as a matter of fact, been used for this purpose over time. In recent decades the bias that has been displayed has been very apparent: it has been towards wealth. The fact that we have no tax on wealth as such does prove this: after all, one is possible. But as importantly, the taxes on income derived from wealth and the support that the tax system provides to saving are the clearest indications possible of this bias.  And in addition, the taxes that we do have on transactions relating to wealth, such as capital gains tax and inheritance tax, have been steadily reduced

As example, in the case of capital gains tax its original role as a back stop to prevent abuse within the income tax system has been forgotten, and a blatant differential between the two has been opened up so that there is now considerable incentive to re-categorise income as gains, and a whole tax abuse industry supports this process.

The same back stop role for corporation tax, which was originally intended to prevent leakages from the income tax system, has also been forgotten. As a result the rate of corporation tax is now below the basic rate of income tax. The consequence  is that those who need not live off their income can hold it in a company and see it accumulate in a low tax environment right here in the UK: the need to go offshore to achieve this goal has almost disappeared.

At the same time there is also a deep bias against work within the tax system. Whilst those who work on what they earn have to pay national insurance on their earnings those who live off investment income do not, effectively saving considerable sums as a result.

There are also massive incentives to save for those with the ability to do so. Pensions are heavily subsidised, whilst ISA accounts, special tax exemptions for savings income and other arrangements all result in low tax rates for those do not work for their income when compared to those who do.

This then results in two further biases. One is against the young, who tend not to have wealth. And it also creates a massive gender divide within the tax system as wealth ownership remains male dominated.

On top of all these injustices, the chance that tax is not paid by those with wealth or who run their own businesses is much higher than it is amongst those who are employed: another bias is apparent then as a result of the decision of successive governments to cut funding for the work of HM Revenue & Customs.

There is as a result a need for massive reform of tax after the coronavirus crisis, which is what has motivated me to address these issues in the Tax After Coronavirus Project, which is being published in stages on the Tax Research UK blog. But that motivation is not promote the raising of revenue. It does instead arise for three other reasons.

One is to reduce inequality.

Another is to ensure that all tax due is collected.

And third, the aim is to make sure that the income of those who need support in our society is increased by reducing the tax that they pay whilst keeping an overall balance in tax paid by increasing  the tax due by those with the capacity to do so. The result is vital support for those we now call essential workers, which can be provided by those who we now realise are not nearly so important, after all. This is a policy that is much more useful in the long term than clapping. But the clapping of those whose work is essential, many of whom are on very low pay, proves just why tax reform is required now.  

Images credit flickr/ images of money

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