The U.K. 2022

PS. You don't even need pebbles - all you need is bits of paper with "I promise to pay" written on them - somebody decided to call them bank notes.

Imagine a situation where a village uses chocolate money. Everything works fine until there's a heatwave and the money melts. Suddenly, people don't have the money to buy goods and services from others and trade grinds to a halt. The village elders can't tax anybody to pay for services because there isn't any money left.

Somebody comes up with the idea of creating money out of pebbles, which are readily available, and distributing them to all the villagers. People start trading again and can buy the services they need.

A few people are too young, old or disabled/ill to create enough to exchange with others for pebbles, so the village orders some people to help out those in need and to pay for some projects which will improve lives. They create a few more pebble coins to compensate those who have helped out. The village doesn't want too many pebbles in circulation because there isn't enough to buy with all the pebbles now available, so it recalls some of them. They get the people who have acquired most pebbles to pay back more on a sliding scale. They call this process "taxation".

I know that's a very simplistic explanation, but it shows how currency can be created out of thin air (or pebbles) and how services and goods aren't paid for with taxation.

A man in a suit was walking down the street when a man with a gun came up to him and demanded he gave him his money. The man replied and told him he shouldn’t do that because he was a Cabinet Minister in the government. So the gunman said, ‘ in that case give me MY money’.

Katie59

These long term War loans loans were redeemed with other borrowing at lower interest rates , that is explained in the Guardian article, there have only been 2 short periods in the last 50 yrs that the national debt has reduced.

The war loans were 'owed' to whoever we borrowed them from. Mostly the US. afaik. So they had to be paid back. They were real, historic, debt.

But what is now termed 'borrowing' is the money people invest/save into government bonds and NSI. Almost like 'shares' in the government. People and institutions like them because, unlike investing in shares, the government cannot go bust and their principle will always be repaid if they ask for it. In the meantime they have a steady return from the interest on them.

But, as Dinahmo pointed out, this has gone on for hundreds of years and is an accepted government facility. No-one panics about paying back this 'debt'.

The greater part of the so called 'debt' is money that the BoE has 'created through a purchase of fictitious government bonds. It isn't owing and it won't be paid back.

Coming off the gold standard and working with a fiat currency changed the traditional approach to government financing.

Did you read the BoE article about money and money creation? There is a nice section on what gives money its value. It concludes:

Money is a social institution that provides a solution to the problem of a lack of trust.(5) It is useful in exchange because it is a special kind of IOU: in particular, money in the modern economy is an IOU that everyone in the economy trusts. Because everyone trusts in money, they are happy to accept it in exchange for goods and services —it can become universally acceptable as the medium of exchange. Only certain types of IOU can obtain that status.
For example, if a type of IOU is not widely trusted to be repaid, it is less likely to be acceptable in exchange — and less like money. The next section of the article explains what types of IOU function as money in the modern economy, and how those particular IOUs became trusted enough to be universally acceptable in exchange.

The key word here is 'trust'. Money works at all levels because everyone trusts it. In theory the government could issue money ad infinitum and all would be fine so long as everyone who has to use it trusts it.

Hell, we don't even use physical money for most of our transactions now, but we trust that the numbers in our bank account have value. And the recipients of our card payments exercise the same degree of trust.

These long term War loans loans were redeemed with other borrowing at lower interest rates , that is explained in the Guardian article, there have only been 2 short periods in the last 50 yrs that the national debt has reduced.

Katie59

I accept the QE supplies money in the same way that borrowing does, it is done openly, financial markets take it into account and value sterling accordingly. Borrowing in theory should be paid back, but the national debt keeps rising so another loan is taken out to replace it, the only difference is interest.

Taxation must be used to provide services, the ONS analyses state finance, to a very high degree an although that can be manipulated short term the accounts do have to balance periodically. So unless there is a massive conspiracy that has not been exposed our services are funded by taxation in conjunction with borrowing or QE.

I've said it before and I'll say it again. The national debt goes back to the start of the 18thC with a group of merchants lending money to the then king in order to finance a war against the French. that group of merchants gradually became the B of E. The debt has increased to finance wars - Napoleonic, WW1 and WW2. After each war the debt (in the form of Treasury Stocks, War Loans etc) was repaid. If you look into it you will see the fluctuations.

Here is an article (7 years old) details the loan repayments.

www.theguardian.com/money/2014/dec/03/treasury-repay-war-debts-bonds-uk

I agree with you GrannyGravy. I don't know whether MPs understand themselves, but they are certainly very wary of being seen as irresponsible by voters who don't understand.

I think that the root of taxation funds government spending can be laid at the foot of nearly every MP in the U.K..
Whenever they are interviewed regarding government spending it is automatically linked to taxation, a prime example being we have to claw back furlough money or we are increasing NI to fund social care and the NHS.

I am yet to see a MP from any party discuss the true facts of government funding.

Katie59

I accept the QE supplies money in the same way that borrowing does, it is done openly, financial markets take it into account and value sterling accordingly. Borrowing in theory should be paid back, but the national debt keeps rising so another loan is taken out to replace it, the only difference is interest.

Taxation must be used to provide services, the ONS analyses state finance, to a very high degree an although that can be manipulated short term the accounts do have to balance periodically. So unless there is a massive conspiracy that has not been exposed our services are funded by taxation in conjunction with borrowing or QE.

No, Katie59, QE does not supply money the same way as other borrowing does - that's the whole point of QE! The money does not need to be paid back to lenders.

And no, taxation is not used to provide services. The government can provide whatever services it wants without any taxation. It has been demonstrated time and time again that paying for services precedes taxation, which has other purposes. This really is basic A level economics stuff.

Katie59

I accept the QE supplies money in the same way that borrowing does, it is done openly, financial markets take it into account and value sterling accordingly. Borrowing in theory should be paid back, but the national debt keeps rising so another loan is taken out to replace it, the only difference is interest.

Taxation must be used to provide services, the ONS analyses state finance, to a very high degree an although that can be manipulated short term the accounts do have to balance periodically. So unless there is a massive conspiracy that has not been exposed our services are funded by taxation in conjunction with borrowing or QE.

Did you even bother to read what the Bank of England says about money creation, Katie59?

I accept the QE supplies money in the same way that borrowing does, it is done openly, financial markets take it into account and value sterling accordingly. Borrowing in theory should be paid back, but the national debt keeps rising so another loan is taken out to replace it, the only difference is interest.

Taxation must be used to provide services, the ONS analyses state finance, to a very high degree an although that can be manipulated short term the accounts do have to balance periodically. So unless there is a massive conspiracy that has not been exposed our services are funded by taxation in conjunction with borrowing or QE.

What is cynical about what Maizie quoted Katie.

I found the explanation in Modern Monetary Theory: Real Economics very easy to understand. They say Money coming into the Private Domestic Sector, which is essentially what we all think of as “the economy” can only be from two sources. Government spending directly into it (GSP), and payments from overseas for exported goods and services.

I understand we have all been brainwashed to believe our taxes pay for services. But how can that be true? Where do our taxes come from? If it is our income, where does that income come from? Money originates in the amounts our Government allows.

I feel there is some truth in this. If I was going to be cynical, it would be about the fact that since this Government came to power, we have been told that we cannot afford the services we have had since the war. If this were a far-left Government, we might have to believe them. However, this one is far-right, those whose politics would never agree with state run services. Now I see that as cynical.

growstuff

Katie59

MaizieD

Katie59

Taxation certainly isn’t needed to fund capital spending, it is usually borrowed to do that, however it certainly is needed for operating costs. Hospitals do not provide treatment without cash from taxation, nor do roads get maintained.
As for taxation being used to redistribute wealth, it hasn’t yet, all it does is enable the poor buy the basics

Where are you getting this idea that taxation funds spending from, Katie59?
Economists have shown that it isn't true.

OK , so where does the cash to run the NHS mend the roads and pay benefits come from.

It's created by the government.

I sometimes think some people have the idea that the Chancellor sits in his counting house counting out pots of money. He doesn't.

It's created by the government (via the BoE) in exactly the way that the BoE bulletin describes. If people wont believe us, growstuff, do you think they'll believe the BoE?

Katie59

MaizieD

Katie59

Taxation certainly isn’t needed to fund capital spending, it is usually borrowed to do that, however it certainly is needed for operating costs. Hospitals do not provide treatment without cash from taxation, nor do roads get maintained.
As for taxation being used to redistribute wealth, it hasn’t yet, all it does is enable the poor buy the basics

Where are you getting this idea that taxation funds spending from, Katie59?
Economists have shown that it isn't true.

OK , so where does the cash to run the NHS mend the roads and pay benefits come from.

It's created by the government.

I sometimes think some people have the idea that the Chancellor sits in his counting house counting out pots of money. He doesn't.

Katie59

Nah, don’t buy it, even I am not that cynical.

I know you don't buy it, Katie59, you've been well indoctrinated.

I suggest that you read the first article in this Bank of England Quarterly Bulletin 2014. It explains exactly what 'money' is since the gold standard was abandoned. It also validates everything I've been trying to say... Perhaps other cynics would care to read it, too...

This is, I think pertinent to the assertion that tax revenue does not constrain (limit) government spending. It is an account of how commercial banks 'create' new money. They do it under licence from the BoE. The BoE can, of course, also create new money in exactly the same way. To finance government spending (and remember, it belongs to the government) it can create a new balance in the relevant government account.

When a bank makes a loan to one of its customers it simply credits the customer’s account with a higher deposit balance. At that instant, new money is created.

Banks can create new money because bank deposits are just IOUs of the bank; banks’ ability to create IOUs is no different to anyone else in the economy. When the bank makes a loan, the borrower has also created an IOU of their own to the bank. The only difference is that for the reasons discussed earlier, the bank’s IOU (the deposit) is widely accepted as a medium of exchange — it is money.

www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/quarterly-bulletin-2014-q1.pdf

Nah, don’t buy it, even I am not that cynical.

Katie59

WWM

Where does the cash to run NHS come from if it’s not taxation?

I'll repost this, Katie59

Taxation is no longer needed to 'earn' money for the state coffers, but it has a number of uses, a prime use being to also control the amount of money in the economy and prevent excessive inflation. But, while there are resources available to buy (and there are plenty of things the government could be spending on; investment in green technology and in state services being some examples) inflation caused by excess money driving competition for scarce resources isn't a problem.

I think this is the most difficult bit of MMT to grasp. That taxation in one respect means that , as with 'borrowing', the government doesn't have to issue so much money, but that the amount of money returned to it via taxation doesn't limit its capacity to spend. This contradicts the story that everyone is so familiar with, that everything the state provides is paid for out of our taxes. It isn't a true story, but it suits governments that are ideologically opposed to state spending to perpetrate it.

WWM

Where does the cash to run NHS come from if it’s not taxation?

Well it was sometime last year I think. On twitter they are posting photos of all the Tories who voted to dump sewerage into our rivers and sea.

Whitewavemark2

Don’t forget that the Tories voted for sewerage to be pumped into our waters.

I’ve only just realised this. Was that at the same time that they decided it would be ok to build on flood plains again? Do you know when the vote went through? I’d like to find out which MP’s voted for it.

Public sector workers have a 3.5% rise and there are various tax cuts, 30c a litre off fuel and the electricity cap of 4%.
I expect people will still be out on the street demonstrating.

Macron has given a "blood, sweat and tears" speech warning of how hard the coming winter will be with energy shortages and price rises of food and other commodities. He talked about cataclysmic climate change events (of which France has had a few recently) and the impact of the war in Ukraine, empasising the need to keep supporting the fight there.
It is the price of our liberties and values he said.

MaizieD

Katie59

Taxation certainly isn’t needed to fund capital spending, it is usually borrowed to do that, however it certainly is needed for operating costs. Hospitals do not provide treatment without cash from taxation, nor do roads get maintained.
As for taxation being used to redistribute wealth, it hasn’t yet, all it does is enable the poor buy the basics

Where are you getting this idea that taxation funds spending from, Katie59?
Economists have shown that it isn't true.

OK , so where does the cash to run the NHS mend the roads and pay benefits come from.

Don’t forget that the Tories voted for sewerage to be pumped into our waters.

Brexit bonus