How are you going to pay for it? – a politician’s guide

I thought it worth flagging up these two, short well-written pieces from Australia on how politicians should be answering the question “how are we going to pay for it?”

A Politician’s guide to the question, “How are you going to pay for it?”

The only improvement I’d suggest is that ‘the politician’ fails to point out that the private banks create new money whenever they lend – yet somehow this goes  unmentioned so the implication seems to be that this never creates any inflation. Hence, when the government creates new money we are always going to end up like Zimbabwe or Venezuela but never, ever when the private banks do it. Pehaps the thinking is that this would be too much for one interview session – but if your’e going to change thinking I’d argue you’ve got to do the job properly.

And then there is how the politician should be explaining taxation:

A Politician’s Guide to telling the truth about taxation

Here I think the politician should mention that when fiat money is created it is always created out of nothing. That’s what fiat money is. The alternative is specie money – which is, in effect, back to the gold standard. Surely the interviewer isn’t proposing that?

These small reservations aside, I think the articles are worth bookmarking. They are both simply put and thus widely enlightening.



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  2. Martin Kilgariff -

    We need to stop using the term “creating money out of thin air”, which simply sound implausible.

    This is of course only half the story, when the government instruct the Bank Of England (BoE) to credit a recipients bank account with money, it creates money “out of thin air”, but at the same time it create an equal (and opposite) amount of debt “out of thin air” which the BoE “adds” to the governments account with the BoE. This double entry accounting is rarely mentioned as part of the money creation process. Since the government owns the BoE there is no actual debt, just a double accounting entry.

    As it receives taxes, those taxes are paid into the governments account at the BoE, hence reducing the debt it owes to the BoE. The action of using tax revenue to pay back the the debt returns an equal amount of money and debt into “thin air” – i.e. destroying money (and debt).

    If people really understood this it would truly terrify them, because it means that money only exists as a double entry in the BoE balance sheet.

    Because we’ve signed the Maastricht treaty we can’t actually allow the governments account with tha BoE to stay in deficit, since this would constitute a loan to the government from the central bank which is not allowed, so we have to sell gilts to “fill the gap”, and the accumulated value of these gilts is what we call the National Debt.

    After the 2008 crash when it became apparent that we were going to need a shed load of money to stave off a recession, we did a wheeze, and created a BoE subsidiary to buy the governments gilts … but we didn’t buy the gilts from the governments (this would be seen as a loan to the government) , but bought them from institutions who had already bought the governments gilts. A bit of smoke and mirrors going on there, and they called it Quantitative Easing.

    On the “private banks create new money ” front. When a bank “issues a loan”, they are actually purchasing a “promissory note” from the customer. It becomes as asset for the bank and goes onto it’s balance sheet. At the same time it creates a balancing record of it’s debt to the customer equal to the value of the customer’s “promissory note”. This “record of it’s debt to the customer” is the credit/money which the customer can use. As the customer spends this “money”, it isn’t “money” which moves around, it’s this record of the “debt to the customer”, which moves around between banks.

    Bank created money in our modern economy is simply this record of an existing “debt to the customer”, which is secured on the “future revenue stream” based on these “promissory notes”.
    So this bank money also exists as a double accounting entry, this time on a banks balance sheet.

    Thinking this through to it’s logical conclusion, when you take a loan out from a bank you are in a very real sense lending money from your “future self”, and the bank is acting as an intermediary, indemnifying the loan (usually with the help of your collateral).

    1. Peter May -

      Agree with all that – except the first sentence! When De la Rue prints fivers on behalf of HMG where on earth does it come from? It may be implausable but it’s the truth that it is out of thin air – it’s fiat – ‘let them have faith’ ‘we decree it’, we’ll acccept it as tax money!

      1. Martin Kilgariff -

        I’m thinking about how you make something which isn’t intuitive (something out of nothing), more intuitive (money/debt pair).

        Money is created out of thin air, but it is only half the story. An equal an opposite amount of debt is created at the same time (in a double entry account). De la Rue prints fivers on behalf of HMG. A bank will use it’s central bank reserves to pay for that currency. Those central bank reserves will have been created at some point in the past by the BoE at the behest of the government, and when they were created an equal amount of debt would have been created in the BoE ledger in the government account. There is no money creation without debt creation.

        In the same way you can initially have no electricity, but when it gets generated, it’s generated in equal amounts of positive and negative charge.

        If you push against something you have an equal and opposite force pushing back against you.

        The general public understand equal and opposite pairs, I’m trying to build on that.

  3. Peter May -

    Agreed there is an accounting ‘identity’ I think it’s called.
    On the electricity analogy went there with ‘Positive Money’ and ‘Negative Tax’ but we couldn’t seem to get it to go much further….
    As everyone knows that the government prints money and are pretty happy with that I think probably we just have to build on that. What needs to be counteracted is all the guff on Weimar and Zimbabwe. That ‘s why I think it’s important to point out that the private banks create new money whenever they lend – yet nobody says the shouldn’t because of Weimar or Zimbabwe!

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