“Out of intense complexities, intense simplicities emerge”. W. S. Churchill.
Imagine that you personally own, outright, Britain’s largest bank, and you are legally entitled to put any credit figure you choose in your own account. Would you really go out and actually borrow any money from anyone? Of course not. But, you are aware that if word gets out that you have unlimited money available, various fools and chancers, (and some deserving cases) will come knocking, asking for some.
So you hit on the idea of making an elaborate facade of your “borrowing” this money, rather than just typing it into your account. To make it convincing, you allow institutions with substantial funds to invest, (such as pension funds) to “lend” it to you, in return for some interest. You stipulate that all transactions must be in pounds sterling, because this is your currency. This “lending” gets called “Bonds”, and you know that when the Bond matures, you can give them their money back. No need to actually use it, as you have plenty of your own funds, and no need to worry about the interest, as you have an unlimited supply of £ Sterling to pay it to them from. You can then tell the fools and chancers that, sorry, you can’t afford to borrow any more to give them. To convince them, you occasionally add up all these Bonds, and call this scary-sounding total “the National Debt”. You can also, if you choose, tell deserving cases (such as public health care, or similar, that you don’t really care about), that you can only “afford” to give them so much. You can also pretend that the Bank is independent of you, and makes its own decisions.
(And, as we have seen, particularly since the pandemic, you can also choose to issue substantial funds to chancers, such as your friends and associates, claiming it to be “for the public good”.)
Get the idea? You’re thinking, this can’t be it, can it? But it’s a simplified version of what actually happens. The UK government, of any party, owns the Bank of England outright, and we all know that he who pays the piper calls the tune. And because of this, it can no more run out of £ sterling, than a football stadium can run out of goals, or a marathon sprinter run short of kilometres.
Still not sure? Have a look at these. C, from a politician, is a fib.
And, if you’re still not sure…..here’s Robert Peston, on ITV News at Ten, 14th May: “…..when you’ve got an independent central bank, as we do, in the shape of the Bank of England, the Government can, er, for a period at least, more or less borrow as much as it likes. The Bank of England buys the debt. That’s what’s going on at the moment. It’s creating new money now.”
(note: Robert is not quite correct, here. The Bank of England is “independent” in name only. It is wholly owned by HM Government and is controlled by HM Treasury. It has a few minor autonomous powers subject to Treasury approval. So, the Government doesn’t actually “borrow”, it issues.)
Also: If you’re still not convinced, and would like to read a much fuller explanation of the above, try this. It’s by a Professor of Accounting, no less, and although it’s more lengthy, it’s absolutely crystal-clear.
Why don’t the Government print money and give it to the people to spend if that is what makes the economy grow?
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Good question, thank you for asking. It’s because that would be damaging, and could get to a point where there is more money than resources to produce what people want, which could lead to excessive inflation. And, it could be spent on things which damage the environment, or do not stimulate the economy to the benefit of society. It is essential that Government spending is for investment, e.g. build hospitals or creation of decent, fairly paid, public service jobs, in such things as reduction of energy consumption or health/social care, or public works such as safer roads or new parks. This sort of spending then stimulates the rest of the economy as the wages are spent into other businesses, which can then grow and provide more jobs, and a fairer society. The only way money paid directly to citizens would benefit us is to provide a fairer safety net of social security, so that people unable to work- sick, disabled, jobs wiped out by Covid, etc- have enough money to eat properly, pay their rent, etc. They tend to spend it in our economy, not hoard it in tax havens!
ah ok, I get that, thanks. But this Tory lot don’t seem to want to spend anything on all those things you mention either. Quite the contrary?
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Would one of these ‘autonomous powers’ be granted to the BoE Remuneration Committee, of which one Dido Harding is a member?
I have no knowledge about that, but you may be right.
As an economist by education I was annoyed that you didn’t mention inflationary pressure. Then I read the top comment and now I’m just confused.
MMT is complicated. You are misleading people by suggesting money can be printed forever with no issue.
Thank you for commenting, but I don’t recognise the “would one of these autonomous…” comment. Did you perhaps read it somewhere else? As to your other comment, MMT has never claimed that money can be issued (not “printed”, that’s early 20th C), infinitely without causing other problems, which may include inflationary pressure. My post #3 “Let’s talk about tax” discusses how taxation may sometimes be used to reduce spending power in order to reduce excess demand, and other posts refer to how governments need to plan and prepare for an economy’s productive capacity to provision itself for what will be needed for the state to purchase, when it properly spends; to avoid inflationary pressure). My post #7 speaks about how this was done during the years of WW2, when the UK economy was re-purposed on a large scale to serve the war effort, for example. ( As could perhaps be done today, to meet the needs of climate change reduction). I would be interested to hear how you account for the total absence of inflation in Japan, despite 20 years of deficit spending and “national debt” far exceeding ours? I note that you are an economist by education, and wonder if that was in the conventiona Monetarist framework of the post-1980s? If so, I hope you will read my post #9, and Professor Kelton’s seminal book. When you have, I would be pleased to hear your impressions, please write again.
Brilliant explanation of the gbp internal mechanisms, thank you so much for that. My question is how is the government’s ability to print money affected by international trade with (a) countries with their own currency and request to exchange at a set forex rate (b) euro zone countries (C) countries around the world using a currency exchange that is not their own e.g those using US dollar, yen etc? Thank you once again. Regards, Steve.
I hope this is helpful, by distinguished econ professors. https://www.youtube.com/watch?v=1bypu9wnLuA
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