fiat currency

The question is not how we will pay for the pandemic, but how government can use its currency-issuing capacity to deal with the most pressing issues of our time.

Published by Anonymous (not verified) on Sat, 02/05/2020 - 9:38pm in

Rainbow window sign with the slogan "Miss you" during the COVID-19 pandemicImage by Sara Holland

‘Care homes have been top priority for the government’ so said the health secretary in a COVID-19 briefing earlier this week. Daily the evidence grows that this is yet more political rhetoric aiming to create a purposeful narrative of a government that has acted in the best interests of citizens. However, the growing dissonance between politicians’ words and day-to-day realities for NHS and social care workers and many others across the country continues to stand out in sharp relief.

Whether it’s health workers or social care workers, still lacking adequate PPE or working in unsafe conditions risking their own lives and the lives of their patients as a result of hitherto inadequate testing capacity, we are witnessing the dire consequences of 10 years of ideologically driven austerity, cuts to public sector services, the whittling down of Public Health and local government services, unforgivable planning failures and government inaction early on, despite the World Health Organisation’s advice.

COVID-19 has revealed the extent to which our social care system has been hollowed out as a result of ideological cuts to funding for public services dressed up as financial necessity. It has highlighted, in the most tragic way, what happens when governments fail to serve the public purpose. Whether we are talking about nursing and residential care or help in the home, social care is in a state of collapse.

At a local level, social care amounts to almost 40% of council budgets and as a result of local government funding cuts, authorities (having lost 60p out of every £1 in central government funding since 2010) are likely to face a £3.6bn funding gap in adult social care by 2025. The UKHomeCare Association estimated in its 2018 report that almost one third of councils in England had seen homecare providers closing or ceasing to trade during that year. In 2018 more than 100 private care home operators collapsed, bringing the total over five years to more than 400.

The government’s promised review of social care has been on the back burner for many months but the delays in addressing the issue go back years. Jeremy Hunt, the former Conservative Secretary of State for Health admitted in a speech in early 2018 ‘In the past 20 years there have been five Green or White papers, numerous policy papers and 4 Independent Reviews into Social Care’ And yet nothing happened.  

Although the government is promising additional funds to deal with the immediate impact of COVID-19, the damage already caused by cuts to public sector spending on social care will not be quickly remedied.  The fact is that just promising more money does not necessarily translate into the capacity to provide the necessary resources immediately whether that’s PPE, which is still in short supply, or indeed, trained care workers.

Figures show that currently in the care sector there are over 120,000 unfilled vacancies with a growing reliance on agency staff to fill in the gaps (with all the health risks that that entails) which is particularly the case now as staff fall sick to COVID-19 and cannot work. Unless the government deals with the systemic problems caused by austerity and its belief in market solutions for public service provision, where profits are the driver and the focus quantitative rather than qualitative, the long term the future looks bleak for anyone who needs support as a result of sickness, disability or growing older.

The Resolution Foundation’s report ‘What happens after the clapping finishes? The pay, terms and conditions we choose for our care workers’ highlights the plight of many frontline care workers whether in public or private care environments.  It noted that around half of care workers, some 1 million people, were being paid less than the real living wage. In private care settings where the majority of care workers are employed as many as two-in-three earn below the Living Wage threshold. According to the report, many experience significant job insecurity and are four times more likely than average to be employed on a zero-hours contract. The Foundation stated that ‘Insecurity has become a structural feature of working life in social care. Zero-hour contracts have not been used sparingly, but instead have become the new normal in many settings. Blunt in its analysis it said ‘’Clapping is welcome, but care workers will value better pay and conditions even more’ and that ‘better pay in care should have long been a priority given the vital role care workers play in protecting the vulnerable’

Those hitherto labelled by politicians as ‘low-skilled’ workers are suddenly being propelled into the limelight and being lauded, quite rightly, as vital. Not just to meeting the challenges that COVID-19 is presenting, but also to the good functioning of society. And yet for decades, their contribution to the economy and to the wellbeing of society has gone unrecognised. The nation is learning this lesson the hard way as it watches the tragedy being played out daily as their friends, neighbours and family succumb to COVID-19 – people, not statistics.

Boris Johnson standing outside No 10 clapping for care workers is a clever distraction being cynically appropriated by a government whose political decisions over a decade caused the decay of vital public infrastructure, the provision of which does not depend on the healthy economy they claimed was necessary. Quite the reverse. Over 26,000 deaths already from COVID-19 can be added to the likely death toll of those who will have died at home or found themselves unable to present for worrying symptoms during the lockdown and the 120,000 which occurred as a result of harsh austerity measures which cut health services and welfare for vulnerable people. So, when the government says that their strategy in dealing with COVID-19 has been to ‘put their arms around every single worker’ we should see it for what it is. An attempt to create a caring narrative and expunge their austerity record.

But what if the country’s appreciation for its vital workers were to be rewarded in better pay and conditions? How could this be achieved?

Firstly, the care sector should be restored to publicly funded and delivered provision, rather than the profit-driven model which has dominated for decades as part of the neoliberal notion that the market delivers better outcomes.

The CHPI’s (Centre for Health and Public Interest) 2016 report noted that around £14bn is spent on adult social care annually in England, both for residential and home care delivered through local authorities. Authorities whose budgets have been cut over the past decade, leading to a decline in the numbers of older people receiving state-funded care services and who have no alternative but to fund their own care from their own financial resources.

It also noted that a significant number of care home providers are large chains which are backed by private equity – leaving them reliant on risky financial structures and exposed to collapse (as discussed earlier). It observes that over the past two decades, as a direct result of privatisation both the quality of care and the terms and conditions of the workforce have declined. Yet private providers have still managed to achieve significant rates of return on their capital investment.

The FT reported in February this year that there are growing concerns about public accountability of some of the larger private equity-owned care homes, particularly as failures increase. It quoted Nick Hood from Opus Restructuring who said ‘what has happened is that care homes have become financialised. Their owners are playing with debt and expecting returns of 12-14% and that is simply unsuitable for businesses with huge social responsibilities.

In those final few words stands the crux of the problem and at the same time the solution. Bring back health and social care as a publicly owned, publicly funded, publicly delivered and managed service.

Of course, the next pressing question is how will it be paid for? As a former Chancellor and initiator of the first round of austerity in 2010 George Osborne, clapped on by others, has warned that further severe cutbacks may be needed in the future to ‘pay for’ pandemic relief. Not content with having overseen the dismantlement of public and social infrastructure on the basis of its supposed unaffordability, he is recommending yet more pain which no doubt will be ‘paid for’ by yet more cuts or tax rises (except for the rich). Bringing yet more suffering to the most vulnerable, as the last foundational posts of a functioning society are kicked away in the belief that the rich are the wealth creators and we have to give them free rein to create it.

Despite the huge sums of public money being created to address the pandemic, the narrative that there will be a price to pay in the future continues to be pushed by those with an agenda. This extraordinary event is an opportunity to challenge the predominant descriptions of how money works in the real world. If the public genuinely comes to value those services which lie at the heart of a functioning economy, which after all is us, then it has a responsibility to get informed. An economics degree is not necessary to understand in simple terms how money works, what really constrains government spending and how we can build a better society to serve all.

In the Resolution Foundation’s report referred to above, it said ‘…we have to recognise that we can’t just wish that social care workers were paid more and leave it at that. This is a large sector heavily reliant on public funding, that has been through an era of sustained austerity and operates on extremely tight margins. […] If pay is to go up, taxpayers or those receiving care will need to meet the cost’.

In short, we need to challenge the perception that there are financial limits to government spending and that if pay is increased for essential workers then there will be a price to pay in higher taxes. We need to get with the facts. The finances of a currency-issuing nation such as the UK are nothing like a household or business and there can never be any excuse for essential public services such as health and social care not to be properly funded. Quite simply, the UK is the monopoly issuer of its own fiat currency and neither needs to tax or borrow in order to spend. Social care does indeed operate on ‘tight margins’ but it does so as a centrally decided political choice. Local authorities as users of the currency have no alternative when their central funding is reduced – they either have to cut services or increase local taxes thus imposing even more economic difficulties for working people.

The real questions are about resources. In an article entitled ‘Can coronavirus bring Economics back down to reality’ in The Week, Jeff Spross wrote: ‘The coronavirus is going to teach – or, to be more precise, reteach – some hard economic lessons. One of them is probably going to be for policymakers to focus on money a bit less and real resources more. […] the coronavirus has forced us to grapple with the most concrete, flesh-and-blood questions: Do we have the equipment we need to protect the public and care for the sick? Do we have enough food to feed everyone? And if we do, how do we actually get the equipment and the food to the people who need it?

If a lesson is to be learned this is it, not how are we going to pay for it.

 

In February, we were delighted to have Professor Bill Mitchell and Professor Steve Hall speak at our events in London and Manchester. We recorded the events and decided that the quality of the Manchester recording was the better of the two.

Slides for Professor Michell’s talk are available here

 

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Norwood Hanson, Paul Krugman and MMT

Published by Anonymous (not verified) on Sun, 29/03/2020 - 10:00pm in

Phil Armstrong, University of Southampton Solent and York College

 2020

 

 1. Norwood Hanson: Is the sun going around the Earth or the Earth going around the sun?

 

Norwood Russell Hanson (1961) considers the conceptual foundations of science; he notes that the work of scientists involves observation. However, such observation is likely to be interpreted differently by different observers, as consistent with an acceptance of the view that all facts are theory-laden (but, importantly, not theory determined). Hanson focuses upon how we conceptualise what we see into general systems, ‘Let us examine not how observation, facts and data are built up into general systems of physical explanation, but how these systems are built into our observations, and our appreciation of facts and data’ (Hanson 1961: 3).

Hanson considers how different observers perceive things differently. He talks about Tycho Brahe[1] and Kepler looking up at the sky, and asks a question, ‘Kepler regarded the sun as fixed: it was the Earth that moved. But Tycho followed Ptolemy[2] and Aristotle in this much at least: the Earth was fixed and all other celestial bodies moved around it. Do Kepler and Tycho see the same thing in the east at dawn?’ (Hanson 1961: 5). Hanson argues that ‘people, not their eyes, see’ (Hanson 1961: 6) and develops his story by noting, ‘Tycho and Simplicius[3] see a mobile sun, Kepler and Galileo see a static sun’ (Hanson 1961: 17) and later notes, ‘Our sense observation shows only that in the morning the distance between the horizon and the sun is increasing, but it does not tell us whether the sun is ascending or the horizon is descending…For Galileo and Kepler the horizon drops; for Simplicius and Tycho and the sun rises’ (Hanson 1961:182). Hanson points out that ‘There is a sense, then, in which seeing is a ‘theory-laden’ undertaking (Hanson 1961: 19) and ‘The observer…aims only to get his observations to cohere against a background of established knowledge’ (Hanson 1961: 20).

 

2. Paul Krugman like Tycho and Simplicius

 

Moving on from the solar system to the financial system we move from asking whether the sun revolves around the Earth (or vice versa) to asking if taxes fund spending (or vice versa); specifically, when we consider the dynamic nature of the efflux and reflux of credit and debits in relation to government’s account we might conceptualise what we observe in two ways:  first we may ‘see’ the taxation (or borrowing) as funding the spending or (lending) [view A]  or second, as the spending (or lending) funding the taxation (or borrowing) [view B].[4]

In this context, we might reasonably compare Paul Krugman to Tycho and Simplicius. By way of example, I might consider a recent series of Twitter posts from Krugman (I have collected them into one passage below).

“I’ve been getting some questions from readers wondering about the cost of the not-a-stimulus (it’s actually disaster relief) package. “Where’s the $2 trillion coming from? Thin air?” Basically, yes. We went through this argument back in 2008-2009, when many people (including some who should have known better) worried that government borrowing was going to “crowd out” private investment. There are times when that happens, but this isn’t one of them. In the most immediate sense, the govt. is going to borrow the money — and its borrowing costs are near record lows, despite the surging deficit…But where does the borrowed money come from? Basically, right now we have trillions in private savings with no place to go, because private investment demand isn’t sufficient to use them; who’s going to invest in the face of a plague of unknown duration? So government borrowing just draws on this pool of excess savings. Furthermore, in so doing it helps prevent an even steeper economic contraction” (Paul Krugman, combined 5 tweets 27/03/20, emphasis added).

It is clear from the text that Krugman implicitly accepts view A. The italicised sections show this most clearly. By acknowledging the possibility of ‘crowding out’[5], arguing that ‘the govt. is going to borrow the money’ and that ‘government borrowing just draws on this pool of excess savings’, it is clear that Krugman conceptualises the government as a currency-user; a position that, as I will show below – in common with Ptolemaic astronomy -is not consistent with the evidence.

 

3. Modern Monetary Theorists like Copernicus, Galileo and Kepler

 

Returning to our discussion of the solar system we might note that the eventual triumph of heliocentrism did not come quickly or easily. Much hard work from astronomers was required but eventually, the battle was won and, ‘By the eighteenth century, after the successes of Galileo, Kepler and Newton, the universe was construed as an intricate geometric-arithmetic puzzle’ (Hanson 1961: 66). I might argue that shifts in worldview are prompted by the observation of some deeply significant anomaly (or anomalies) (Kuhn 1962). In this context,  Hanson (1961: 68-9)  notes, “We ask, ‘What is its cause?’ selectively: we ask only when we are confronted with some breach of routine, an event that stands out and leads us to ask after its nature and genesis.” Hanson refers to retroduction[6] and argues “A theory is not pieced together from observed phenomena; it is rather what makes it possible to observe phenomena as being of a certain sort, and as related to other phenomena. Theories put phenomena into systems. They are built up ‘in reverse’ – retroductively” (Hanson 1961:90).

In the same way that Tycho and Kepler ‘see’ the same things, those who conceptualise the government as a currency-user – such as all mainstream economists and many so-called ‘progressives’ such as Krugman – and those who conceptualise it as a currency-issuer – notably the advocates of MMT – ‘see’ the same things. The issue is how to decide which view is consistent with the development of a theory with the most explanatory power? Returning to the issue of anomalies – or unforeseen observations – we have a clue to the answer. The economics profession has long argued that heightened public deficits would lead to higher long term interest rates and, in turn, that these higher interest rates would lead to lower private investment or ‘crowding out’. This hypothesis follows from their view of the government as a currency-user which borrows from a ‘fixed pot’ of saving in competition with private borrowers.  This prediction was decisively falsified during, and immediately after, the global financial crisis when all the world’s major nations with their own currencies, operating under floating exchange rates, saw declines, not increases, in long term interest rates on government debt[7]. It is true that some, although by no means all – Eurozone nations did see a rise in long term interest rates. However, since MMT explicitly recognises the distinction between Eurozone nations (which have ceded currency-issuing power to another entity – the ECB) and currency-issuing nations, it recognises that Eurozone nations should be conceptualised as currency-users meaning that this outcome is exactly in line with the expectations of MMT[8].

An understanding of MMT removes the supposed element of ‘surprise’ from what is a highly significant anomaly from the perspective of mainstream economics, The advocates of MMT are able – retroductively – to posit the structures and mechanisms which explain this contrast between currency-issuing and currency-using states and I would, therefore, argue that MMT provides the basis for the provision of a satisfying explanation of observed phenomena – absent from mainstream thinking based upon ‘seeing’ the state as a currency-user.

In contrast to perspective which underpins the comments made by Krugman, above, Modern Monetary Theorists contend that when a nation has its own sovereign currency and operates under floating exchange rates, ‘borrowing’ by the state is not operationally required. The government should be thought of as a currency-issuer; it spends first and creates reserves, ex nihilo. It is never revenue-constrained as a currency-user might be. The so-called ‘borrowing’ operation which removes the reserves is voluntary (Mosler 2012). It could allow any untaxed spending to remain in the system. However, such a policy would result in the overnight rate falling to zero (if no other action was taken, such as the central bank agreeing to pay interest on excess reserves).

However, it must be conceded that the difficulties involved in replacing deeply-embedded theories (or paradigms in Kuhn’s [1962] terminology) should not be underestimated and I would argue that this is particularly the case in economics. The economics academy has been highly successful in reducing the ability of alternative perspectives to gain traction. Contrary to their professed acceptance of the principle of falsification, mainstream economists have introduced numerous ad hoc modifications to their apparently failed theories (Armstrong 2018) to avoid falsification. However, despite this disappointing situation, the position of mainstream economics is far from impregnable and the advocates of MMT must continue to challenge its hegemonic status. We can only hope that mainstream economics and its conceptualisation of the state as a currency-user is eventually destined to be consigned to the status of an episode in the history of economic thought, following in the footsteps geocentric thinking in astronomy.

 

References

 

Armstrong, P. (2018), ‘MMT and an Alternative Heterodox Paradigm’, Gower Initiative for Modern Money Studies, https://gimms.org.uk/2018/12/26/mmt-heterodox-alternative-paradigm/.

Bhaskar, R., (2017), The Order of Natural Necessity, Gary Hawke (ed.), Luxemburg: CreateSpace Independent Publishing Platform.

Galilei, G. (1632/1953), Dialogue Concerning the Two Chief World Systems (Dialogo sopra i due massimi sistemi del mondo), Berkley: University of California Press.

Hanson. N (1961), Patterns of Discovery, Cambridge: Cambridge University Press.

Kuhn, T. (1962), The Structure of Scientific Revolutions, Chicago: University of Chicago Press.

Mosler, W (2012), Soft Currency Economics II, US Virgin Islands: Valance.

 

 

[1] Tycho Brahe (1546 – 1601) was a Danish astronomer who developed a view of the solar system which recognised that the moon orbits the Earth and the planets orbit the sun, but retained the position that the sun orbits the Earth.

[2] Claudius Ptolemy (c. AD 100 – c. 170) was a Greek mathematicianastronomer and astrologer whose Ptolemaic approach suggests that the Earth is at the centre of the universe.

[3] Galileo compares the Copernican with the Ptolemaic systems in Dialogue Concerning the Two Chief World Systems (1632). In the text, Simplicio presents the case for the Ptolemaic system and argues against the Copernican alternative. The character’s name is generally supposed to be derived from that of a sixth-century follower of Aristotle, Simplicius of Cilicia.

[4] A third view might be summed up by the question, ‘Is the distinction important?’ I would argue that the distinction is important since the government can spend without prior tax revenue whereas prior spending (or lending) is logically and historically required for taxes to be paid. Thus only view B above is valid.

[5] The crowding-ou hypothesis suggests that heightened government deficits lead to higher long term interest rates and that,  in turn, these higher rates, reduce – or ‘crowd out’ – private investment. Little or no evidence to support this hypothesis exists (Armstrong 2018).

[6] In the retroductive moment, a scientist imagines a mechanism or structure which, if it were true, would explain the event or regularity in question. It is the use of the imagination to posit explanatory mechanisms and structures’ (Bhaskar 2017: 28).

[7] Armstrong (2018).

[8] Armstrong (2018)

 

 

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A Short Comment on the UK Government’s Fiscal Policy in the Current Crisis

By Phil Armstrong, University of Southampton Solent and York College.

Man putting on protective mask and wearing latex glovesImage by Terri Sharp from Pixabay

The UK government’s significant fiscal expansion – in line with its ‘do whatever is required’[1] mantra – is, of course, welcome. However, I would argue that it is still far too small to deal with the massive demand shock associated with the coronavirus pandemic (Mitchell 2020a, 2020b) and also that it is incorrectly targeted. It pays insufficient attention to the poorest groups in society; the government has failed to take the necessary steps required to ensure the income of those most in need is adequately supported during the crisis. Clearly, the situation is evolving on a daily basis and, looking forward, it is highly likely that there will be continual calls for the government to increase its fiscal intervention from many sectors in society – not least business leaders who fear the effects of rapidly declining demand.

However, I would stress that the intervention is being enacted against an inapplicable theoretical and ideological backdrop, specifically the mistaken neoliberal framing of the so-called ‘government budget constraint’ (GBC). The logic of the GBC conceptualises the government as a currency-user, which might finance its spending by taxation, by borrowing (debt issuance) or ‘printing money’ (Mitchell 2011). According to mainstream thinking, each of these methods carries problems; increased taxation reduces non-government sector spending power and allegedly generates disincentive effects, ‘excessive’ borrowing leads to higher long term interest rates, in turn, causing ‘crowding out’[2] and ‘money printing’ inevitably results in inflation.   There is also an underlying ideology implicit in neoliberalism; that state expansion soaks up real resources which would be better (or ‘more efficiently’) used by the private sector.

In extremis, it appears that the Conservatives (who have shown a marked distaste for expansionist state intervention in the recent past) and even business leaders who would normally be opposed to increased government spending and enlarged deficits are now prepared to put their weight behind the fiscal expansion[3]. However, the underlying framing based upon the GBC is likely to come back to bite us all – hard – in the future. In line with the erroneous conceptualisation of the state as a currency-user, the government is presenting its current additional spending as being ‘financed’ by borrowing. The story is founded upon the idea that the government needs to spend significant extra sums now – owing to the severity of the crisis – and heavy borrowing is, therefore, essential (reinforced with the contention that it is cheaper for the state to borrow now than in the past as long term interest rates are very low) in the manner of household who accepts a very large credit card bill because there is no other way it can survive[4].

However, following this line of thinking will lead to a damaging and erroneous conclusion. It is highly likely that in the future – when the crisis has passed – mainstream economists will argue that there is a financial ‘mess’ to fix; ‘unacceptably’ large public sector deficits may well persist beyond the crisis alongside an ‘excessive’ national debt as a proportion of GDP. The narrative will then, no doubt, suggest that they need to be ‘dealt with’– possibly with another, even harsher, round of austerity than last time – and it will those least able to cope who are most likely to be the ones asked to bear the greatest share of the burden (as was the case the last time austerity was imposed).

This conceptualisation of the government as a currency-user suggests that money printing and bond issuance are alternative ways of financing a deficit, however, advocates of MMT conceptualise the state as a currency-issuer. From this viewpoint, in reality, they are not alternatives.  The government always spends by the creation of new money – both taxes and borrowing logically and historically follow spending (or lending). Only money that has already been issued by the state can be collected in taxes or used to buy state debt. When the government spends, it does so by crediting the bank accounts of its target recipients, simultaneously increasing the target’s bank’s reserve account by the same amount. When taxes are paid by a private sector agent, her deposit balance falls and her bank’s reserve account balance at the central bank (CB) is correspondingly marked down[5].  The purchase of government debt is best conceptualised as a reserve drain (Mosler 2012) which changes the composition of non-government sector holding of risk-free state debt but not its size.

I would argue that having this correct conceptualisation is the key to avoiding the return of austerity. In reality, the government sets its aims, determines its budget and spends by the ex nihilo creation of new money. When the operational reality of the financial system is correctly understood, then the expectation of a post-crisis ‘mess’ to fix disappears. Once the economy has recovered, that does not necessarily mean a need for austerity or even fiscal retrenchment – only the post-crisis economic outcomes such as growth, employment and price stability matter. If unemployment persists after the crisis has passed, then government net spending should still be regarded as being too low, irrespective of the size of the government deficit both in absolute terms and as a proportion of national income. Only in an economy suffering from inflation from excess demand would fiscal contraction be required.

These are challenging times for us all, but in the current crisis we have the opportunity to push forward the insights of MMT and to challenge established thought – particularly with respect to the inapplicable government budget constraint. If our understanding of the operational reality of the monetary system can be characterised by the insights of MMT, the full scope of existing fiscal space can be understood and importantly, the likely post-crisis push for fiscal retrenchment can be effectively countered.

 

[1] See Islam (2020).

[2] The crowding hypothesis is based on the contention that higher interest rates will lead to lower private sector investment, meaning that large government deficits effectively ‘crowd out’ private investment. Little, if any, empirical support for this hypothesis exists (Armstrong 2015).

[3] For example, Richard Branson expressed his support for fiscal retrenchment in 2010 (Stratton 2010) but changed his mind in 2020 when arguing in favour of a £7.5 billion government support package for the airline industry (Hockaday 2020).

[4]  ‘We are in an entirely new world. A wartime effort, with wartime deficits to cover it’, Rishi Sunak, quoted in Islam, F., BBC News online, 17 March 2020.

[5] It is important to stress that private sector debt or bank money cannot provide the final means of settling a tax bill which occurs when a taxpayer’s bank’s reserve account at the central bank is debited in favour of the Treasury account (Armstrong 2019).

 

References

 

Armstrong, P. (2015), ‘Heterodox Views of Money and Modern Monetary Theory (MMT)’

https://moslereconomics.com/wp-content/uploads/2007/12/Money-and-MMT.pdf

 

Armstrong, P. (2019), ‘A simple MMT advocate’s response to the Gavyn Davies article ‘What you need to know about modern monetary theory’, Gower Initiative for Modern Money Studies,

https://gimms.org.uk/2019/05/27/phil-armstrong-gavyn-davies-response

 

Hockaday, J. (2020), ‘Airline bosses to ask for £7,500,000,000 bailout to survive coronavirus.

The Metro online, https://metro.co.uk/2020/03/14/airline-bosses-ask-7500000000-bailout-survive-coronavirus-12399300/

 

Islam, F (2020), ‘Coronavirus: Chancellor unveils £350bn lifeline for economy’, BBC News online, 17 March, https://www.bbc.co.uk/news/business-51935467

 

Mitchell, W. (2011), ‘Budget Deficit Basics’ 4 April

http://bilbo.economicoutlook.net/blog/?p=14044

 

Mitchell, W. (2020a), ‘The coronavirus crisis – a particular type of shock – Part 1’, March 10,

http://bilbo.economicoutlook.net/blog/?p=44484

 

Mitchell, W. (2020b), ‘The coronavirus crisis – a particular type of shock – Part 2’, March 11,

http://bilbo.economicoutlook.net/blog/?p=44488

 

Mosler, W. (2012), Soft Currency Economics II, US Virgin Islands: Valance

 

Stratton, A (2010), ‘Richard Branson backs Tory plans to cut spending sooner rather than later’, The Guardian, 16 February,

https://www.theguardian.com/politics/2010/feb/16/branson-back-tory-deficit-cuts

 

 

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#RethinkMoney – The Greatest Lie Ever Told (Probably)…#TaxAndSpend

GIMMS is delighted to have permission from blogger Duncan Poundcake to reblog his article which was originally posted here

 

So what have we learned from the General Election of 2019?

Mainly the familiar cry of:

”How will you pay for it?”

”Labour ‘broke the bank”…

”Labour left a note saying  – We have spent all the money”…

Nothing very new in that. We have heard it on a loop for nearly 10 years from many Politicians. Policy Makers, Think Tanks, Economists, The Press and RW influencers, that:

  • For Her Majesty’s Government (HMG) to spend is a very bad thing to do.
  • HMG is at the largesse of the Tax Payer and is unable to spend for public purpose. HMG must either – a: Tax and/or b: Borrow before it spends.

Why?

  • There is an undefined and finite amount of Sterling that can ever be available in the economy.
  • Once this Sterling threshold has been reached, HMG must borrow back this Sterling from the private sector, to fund its spending.

Even Labour, with its £400bn spending bill, tells us; Tax, Borrow and Spend is the order of the day.

Unfortunately, yet again, Labour miss an opportunity and tell us the polar opposite of the reality…

1. The UK has ALWAYS been a Sovereign Fiat Currency Issuer

HMG has ALWAYS been able to create £s at will but there have been numerous times where, by circumstance, or design, it has been limited as to how many Fiat £s it can create.

Since 1971, the UK has been a Sovereign Fiat Currency Issuer, without restriction – In laymans language, HMG:

  • Has the legal monopoly on the creation (Issue) of its OWN currency.
  • Can create (Issue) Sterling at will, from thin air, with zero impedance.
  • Everyone else is a Currency User.

So why does everyone tell you otherwise?

Time to travel in the Monetary TARDIS…

2. A little bit of History repeating – The Gold Standard (Again):

Image by PublicDomainPictures from Pixabay

 

Over much of the 20th Century, the UK, US and other developed nations have been on and off variations of the ‘Gold Standard’.
In stark comparison to the economics of the last 40 years, when the Americans and British created ‘The Gold Exchange Standard in 1944’, their focus was:

  • To avoid trade deals which impoverished lesser trade partners.
  • An attempt to control flows of speculative financial capital.

The latter, in particular, had wrecked the global economy prior to the Great Depression, the outcome of which was seared into their collective memories:

  • A global depression,
  • Mass unemployment.
  • The rise of Fascism in Europe and Communism as a response.
  • Global War.
  • Millions Dead.

Post-War planners aimed to prevent the repetition of previous competitive currency devaluations but engineered not to force debtor nations to reduce their industrial bases to attract financial speculators and keep interest rates high.

British economic sage, John Maynard Keynes…

John Maynard Keynes portrait© National Portrait Gallery, London
Image cropped from John Maynard Keynes, 1st Baron Keynes of Tilton; Lydia Lopokova by Walter Benington, for Elliott & Fry bromide print, 1920s Given by Bassano & Vandyk Studios, 1974 Photographs Collection NPG x90117

again fearful of repeating the mistakes that led to Great Depression and carnage that followed, was the primary mover behind Britain’s proposal that Trade Surplus nations should be forced to use their trade surplus for good, or lose it for good:

  • Either import from debtor nations
  • Build factories in debtor nations
  • Donate to debtor nations.

The U.S. opposed Keynes’ plan and proposed creating the International Monetary Fund (IMF) with enough financial clout to counteract destabilising flows of speculative finance. However, in contrast to the modern IMF, the fund would counteract these speculative flows automatically, no political strings or agendas. An honest broker.

History demonstrates that on almost every point where the USA objected, Keynes was to be proved right.

3. Bretton Woods… 

The U.S. Secretary of the Treasury, Henry Morgenthau, Jr., addresses the delegates to the Bretton Woods Monetary Conference, July 8, 1944The U.S. Secretary of the Treasury, Henry Morgenthau, Jr., addresses the delegates to the Bretton Woods Monetary Conference, July 8, 1944 (Credit: U.S. Office of War Information in the National Archives).

 

In 1944, at Bretton Woods, the Allies met to plan a Post-War world and as a result of the collective conventional wisdom of the time, the Allied nations preferred to do this by regulating a system of fixed exchange rates, indirectly disciplined, by binding the USD to Gold at a fixed price per ounce.
This  system relied on a regulated market economy with:

  • Strict controls on the values of currencies.
  • Flows of speculative international finance would be stopped by channelling them through Central Banks. #Capital Controls
  • The intention being to direct international flows of investment.
  • The focus on using capital to building useful things that created jobs or benefited the public purpose, rather than financial speculation on the markets.

Interestingly, it was US planners who coined the phrase ‘Economic Security’, surmising that a liberal international economic system would enhance post-war peace and keep Communism at bay. This came from a belief, that causes of both World Wars, was ‘Economic Discrimination’ and trade wars. The main culprits being trade and exchange controls of Nazi Germany and the ‘Imperial Preference System’, where members, or former, of the British Empire were given special trade status, resulting in a German, French, and American protectionist policies.

*US Planners were shrewd enough to recognise that to keep Capitalism popular, taxpayers and workers, needed to see a benefit from it and to feel their lives being improved, rather than risk the alternative, Communism. To ensure this, regulated Capitalism was the solution and the irony is, we have the Cold War to thank for this Golden Age.*

In stark contrast to today, Bretton Woods participants agreed that a liberal international economic system ALSO required governmental intervention.

Following the economic turmoil of the 1930s, the management of economies had become the main activity of governments, taking on increasing responsibility for the economic well-being of its citizens. This had proved to be largely successful and popular. Employment, stability, and growth were the order of the day. In turn, the role of government in the national economy would continue. The Welfare State, which grew out of the Great Depression, had created a popular appetite for governmental intervention in the economy, and it was Keynes who made it clear that Government intervention was required to counter market failures.

Enter the era of State Capitalism…

Members of the Gold Standard agreed to closely regulate the production of their currencies to maintain fixed exchange rates, with a bit of wiggle room either side. The express aim being to make international trade easier. This was the foundation of the U.S. vision of a post-war world, Free Trade:

  • Lowering tariffs
  • Maintaining a balance of trade via fixed exchange rates that assists Capitalism.
  • Reduce trade and capital flows.
  • Revive the Gold Standard (Again) using USD as the world’s reserve currency.
  • Prevent Governments messing around with their currency supply, as they had between the wars.
  • Governments would be required to monitor the production of their currency and would refrain from manipulating its price.

4. Tax & Spend & Borrowing…

It is important at this point, to remind ourselves, HMG was still a Fiat Currency issuer but, up until 1971, had voluntarily limited its ability to created its own currency.

So following Bretton Woods, from 1944 until 1971, Gold was ‘Convertible On Demand’ into Sterling. This required HMG to have lots of Gold stashed away at the Bank of England (BoE) just in case anyone wanted to convert their pot of Gold into Sterling. Indeed, once upon a time, you could walk into the Bank of England with Gold and they were obliged to accept it and pay you cash.

Like all liabilities, it was worked out on risk. HMG surmised that only a small percentage of the public would ever demand their gold to be converted into Sterling, at any given time, so it only had to have a limited amount of Gold in reserve, just-in-case. Fractional Gold Reserve Central Banking, if you will.

However, because of the rules of the Gold Standard, HMG Currency Issuing (Spending) would be constrained by the amount of gold in the BoE vault.

The other issue HMG was acutely aware of, was spending Sterling for Public Purpose was in reality, spending the Gold it had in the BoE. The Gold never left the BoE but with a promise of convertibility into £s:

  • Limited how many £s could be spent at any one time
  • How many £s cash could be spent at any one time was…dictated by how much Gold it had in reserve.

So if HMG wanted spend more, it had to:

  • Find more Gold to allow it to create more Fiat £s to
  • Or, recoup Fiat £s from the private sector i.e: TAXPAYERS – BEFORE it could spend more. Welcome to…‘Tax and to Spend’.

Now to protect all that Gold in the BoE from a profligate Government, just creating Fiat £s to spend, they had a few tricks up their sleeve…

How could a Sovereign Currency Issuing Government, such as HMG with a self-imposed brake (The Gold Standard) on how many £s it can create and issue, spend more £s than it was allowed to create?

The Solution?

BORROWING BACK Fiat £s from the taxpayers’ savings – to spend again – rather than creating and issuing additional new Fiat £s, which might exceed the back-up supply of Gold. The plan being:

  • Why not get taxpayers to exchange their £s savings, for Sovereign Gilts, Treasury Bonds OR similar, that pay interest.
  • Taxpayers still get to benefit from the HMGs spending MORE £s each year than it intends to collect back in tax. Thus allowing taxpayers to continue to build their wealth of £s.

ERNIE

*One ingenious demonstration of this, was the infamous ‘ERNIE’, invented by a Bletchley Park codebreaker in 1956 and Premium Bonds, offering taxpayers another way to save outside of banks or building societies. Which of course, was not its main purpose. Premium Bonds were just another way to recoup £ from taxpayers, without actually Taxing. Recycled Money.*

 

And this is exactly how HMG ran Government spending up until the point Richard Nixon suspended US involvement in the Gold Standard in 1971 – due to the spiraling cost of the Vietnam War. US Government spending was outstripping its Gold Supply – and became a Sovereign Fiat Currency Issuer, without restriction.

*As Keynes had predicted in 1944, eventually the USA found itself in the inherent paradox of the Gold Standard:

1. It was required to be the Worlds Reserve Currency and as per the Bretton Woods agreement, keep USD flowing outwards to keep global trade moving.

2. However, this put a restraint on its ability to spend inwards, domestically.

A large percentage of its Gold Reserves had to be set aside to cover outward flows of USDs, restricting  USDs available to be created for domestic Public Purpose – which at the time of Nixon was Johnson’s: ‘The Great Society’ project.

Between 1944 – 1971, the US saw its stash of total world Gold Reserves shrink from 65% to 22%. The market speculated that the US has so many USD out in circulation, it was unable to convert USD to Gold, due to these dwindling Gold Reserves. The dollar depreciated. Inflation went up, employment followed suite and due to the spending spiraling requirements of the Vietnam War, Nixon saw the solution as suspending convertibility to Gold and to go 100% Fiat. No restrictions to USD creation.*   

The Gold Standard was effectively dead. The US now no longer converted USD into Gold and other nations bailed out in 1973. The Gold Standard was officially buried in 1976. The UK followed suit. However, the system for creating and issuing HMG money, DID NOT CHANGE and as I write, in 2019 nearly 50 years later, the Government still operates its finances as if it were on the Gold Standard:

  • So the HMG continues to sell Gilts, Treasury Bonds, Premium Bonds
  • So it can ‘borrow back’ £s from taxpayers
  • To spend MORE than it collected in taxation.

The one upside of this was/is a form of Corporate Welfare exchanging £s for Government IOUs, with the interest received, adding to private savings and wealth.

So we have ended up where the reality of Money Creation since 1971, is that HMG is not revenue constrained when it comes to spending for Public Purpose but continues to use a Monetary system that claims to be still on the Gold Standard.

To reiterate, for clarity, Her Majesty’s Government:

1. Is No Longer on the Gold Standard.

2. Is Not required to convert £s into any commodity to spend.

3. Is Not required to use taxpayers £s to spend.

4. Does not need to borrow or recoup Taxpayers £s savings to spend.

Yet, NO Government since 1971, has changed the from Gold Standard System to reflect the powers of a Fiat Currency Issuer. So HMG continues to tell us that it needs to:

  • Sell Gilts, Treasury Bonds. Premium Bonds, The Lottery etc.
  • Use the proceeds – Taxpayers’ Private Savings & Wealth to allow it to spend more than it collects in Taxes.

Now the rub with this is the interest, or payouts HMG needs to make to holders of these, all of which is added to the National Debt. So to pay for this, the Government needs to issue even MORE Gilts & Treasury Bonds etc. to cover the interest payments. Ad Infinitum…

HOWEVER…

A quick reality check via Quantitative Easing (QE) has shown us, if you are lucky enough to have owned £454bn of Gilts and Corporate Bonds, HMG bought from you, then you have become very rich indeed…unlike HMG which is falling ever deeper into debt.

Which is a complete MYTH and has created 50 years of confusion and a convenient smokescreen for those who see Government as a problem.

Even the BoE concurs: “Read my lips. No new taxes”…Does the Bank of England print money? – YouTube

5. Enter, Stage Right…AUSTERITY:

Now if you believe all this unwittingly, or otherwise, there is a logic in thinking that an ever-increasing National Debt is unsustainable and the ONLY solution is to REDUCE, substantially Government spending and to pay down the debt.

However, knowing that Gold Standard limitations no longer apply, the HMG has created a solution, to a problem that does not exist and ironically, created a further problem to the original one, which never existed in the first place. Think IMF Crisis, 1976.

The National Debt and the convoluted machinations of issuing ‘debt’ and accounting for it, as a brake to stop HMG from issuing more Fiat £s than it could guarantee with Gold, is a relic of history. Some would consider this insistence on clinging onto an economic fossil, to be stupidity, or perhaps a sign of something far more deliberate…

It is of course a legal requirement and not unreasonable, to expect HMG to keep a track of its spending. The much-vaunted DEFICIT:

1. The gap between £s out and £s in.

2. A balance sheet of the Fiat £s HMG has decided to spend into the economy but not redeemed in taxation.

When the HMG spends, this allows taxpayers to keep £s. When the Government reduces spending, this forces taxpayers to use their savings to spend and REDUCES private wealth. The less the Government pays for, the more you have to use your savings and income.

Repeat after me…AUSTERITY REDUCES PRIVATE WEALTH…

Questions to be answered…

1. If HMG fell out of the Gold Standard in 1971…

2. Which resulted in the £ no longer being required to be convertible to Gold…

3. Why do we still account for fiat government spending for public purpose as if we were on the Gold Standard?

4. Is it just welfare for taxpayers to exchange their fiat £s into Government Savings Instruments, that pay interest?

As QE has shown us, HMG Debt Instruments are not distributed equally across all taxpayers but are bought by a wealthy private and corporate elite.

Perhaps the most mind-blowing for taxpayers to get their head around is the ability for HMG to PAY OFF – at ANY TIME – the National Debt by purchasing all Debt Instruments in exchange for Fiat £s. Hello Japan…

So far from being ‘Fiscally Prudent’ by reducing the Deficit and running Government Finances like a household, only spending what is received in Taxation – the real-world outcome is to impoverish taxpayers and their well-being.

6. The solution?

A fundamental shift and an education of all taxpayers and the political establishment, to understand that:

As long as labour and sustainable resources are available, Government Spending is not only a good and positive but absolutely essential for the economy and the democratisation of wealth.

The ONLY limitations HMG has to spending for Public Purpose are:

1. The physical resources available.

2. The labour available.

3. Its own aspirations.

4. The taxpayers’ willingness to learn, deconstruct and the 1% and their cheerleaders across politics, the media and society who have used the confusion around Government Money Creation spending and taxing for the purpose of wealth extraction and power.

History demonstrates that the Tax and Spend myth, has resulted in dire and far-reaching consequences.

Roberts

In 1976, when HMG went to the IMF claiming to have ‘run out of money’ and in return for $2bn, Healey was required to introduce Austerity measures – which were a precursor to the economics of Margaret Thatcher – latterly Neo-Liberalism.

There was an alternative proposed some 3 years before, yet thanks to Wilson, Healy & Callaghan’s refusal to listen to Tony Benn, history unfolded the way it did and Healy capitulated to Hayek and his Neo-Liberals, who have spent the following 42 years capturing the state, media and democracy in the UK – and beyond – for their own benefit.

Oh and by the way, Britain never did go ‘Bust’, no matter what Mr Roberts writes…

 

 

 

 

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The post #RethinkMoney – The Greatest Lie Ever Told (Probably)…#TaxAndSpend appeared first on The Gower Initiative for Modern Money Studies.