Where has the money gone?

Maizie It should be made clear that your views are not those of mainstream economists. Not that some economist do share yoor view, but certainly not the majority and the recent experience of quantitive easing and inflation suggests that they are the triumph of hope over experience.

You state your views so confidently as if they are mainstream and are operational, but they are not, and economic affairs worldwide are still being run on the old systems. Taxes do pay for expenditure and increasing money supply devalues currencies and drives prices up, That is the reality we are living with, and no one should think anything has changed. It hasn't.

Modern Monetary Theory is like the belief of some pacifists that if only people would stop fighting each other we would have no more wars, but that assumes that everyone is reasonable and rational and that aggression, acquisitiveness, bullying and power seeking can just be squeezed out of human kind like toothpaste until the tube is empty.

Sadly human nature is not like that and the same applies to MMT. It assumes that only big fiscally strong countries will do it, but in recent years countries like Venezuela and Zimbabwe, and others have shown the downsides of this theory as their economies have collapsed and hyperinflation has taken hold.

Previous historical examples, like Germany after WW1, show clearly how these policies can lead to hyperinflation and unrest and worse in even sophisticated and mature economies.

Katie59

Where has the money gone?

Recently, paying for Covid protection for the population, some well spent, some wasted, plus Brexit deficit due to weak sterling.

Previous to that, for social improvements, QE after the 2008 crash, pay for income tax cuts

I don't think that the Tories made any social improvements so that's not a reason for money disappearing. In fact they cut many social policies introduced by the previous Labour got such as Sure Start, a 4 year benefit freeze, the two child cap on child tax credits and many more.

Dinahmo

Katie59

Where has the money gone?

Recently, paying for Covid protection for the population, some well spent, some wasted, plus Brexit deficit due to weak sterling.

Previous to that, for social improvements, QE after the 2008 crash, pay for income tax cuts

I don't think that the Tories made any social improvements so that's not a reason for money disappearing. In fact they cut many social policies introduced by the previous Labour got such as Sure Start, a 4 year benefit freeze, the two child cap on child tax credits and many more.

This is the point that I've been trying to get across, Dinahmo. I'm glad that at least one other person seems to understand it.

All that money 'borrowed' by the government and nothing to show for it

Blair increased social spending greatly which pleased the voters for sure and was affordable in the good times but then came the crash. Since then governments have struggled with health and social protection cost outstripping inflation and growth

They have had to borrow/create more money to fill the gap, with an economy that is not growing. Borrowing more for social protection is going to see sterling fall again.

Katie59

Blair increased social spending greatly which pleased the voters for sure and was affordable in the good times but then came the crash. Since then governments have struggled with health and social protection cost outstripping inflation and growth

They have had to borrow/create more money to fill the gap, with an economy that is not growing. Borrowing more for social protection is going to see sterling fall again.

As most people know the crash was caused, not by any of the then UK govt's actions but by the fall in America's house prices, combined with increasing numbers of people unable to afford their loans. Banks were selling mortgages to almost anyone who wanted one, without the necessary affordability checks. The sub-prime market collapsed sending shock waves through the American banking industry and affecting the global markets.

Sterling has fallen for a number of reasons and I don't think that borrowing for social protection s one of them. The main reasons are:

1. Loss of confidence in UK politics, the UK economy and the UK financial sector. The UK is no longer seen as a "safe haven"

2. Since Brexit there has been less inward investment.

3. Outside the EU and the single market, trading in the City of London is less attractive.

I suppose that yo could point to the number of foreign investors buying up certain UK properties but I doubt that it matters to many of them if the value of their property purchases goes up and down.

Finally, concerning spending as a means of boosting the economy - here's a link to Roosevelt and the New Deal which he introduced in 1932 because of the Great Depression which saw extremely high unemployment figures in some American cities.

www.history.com/topics/great-depression/new-deal

The crash happened because of deregulation, everyone was greedy and assumed the boom was sustainable, giving 120% mortgages sank Northern Rock. RBS invested heavily in commercial property, when the market crashed so did commercial property and still has not recovered. Thankfully residential property remained relatively stable, there were not widespread repossessions

The US problems triggered UK crash but there was plenty wrong with the system, immediately strict controls were put back on banks who had proved they could not be trusted.

Strangely enough, Katie59, deregulation was the result of adherence to the prevailing economic theory about the ability of markets to self regulate.

When you go deeper into the build up to the GFC you wonder how 'the market' could have been so irresponsible as to encourage people to go deeper into debt and then to try to monetise that debt.

It had absolutely nothing to do with Labour expenditure in the preceding decade.

We don't have to go back as far as the New Deal to see the effect of state spending to avert a recession, it's happening in the US right now.

I've lifted this from a book review. It's an extract from the book being reviewed

In 2020, during the darkest hours of the global coronavirus pandemic, the US government spent $3 trillion to help rescue the country's – and, to some extent, the world's – economy. This infusion of cash increased US government debt and thus reduced US government wealth by almost the entirety of that frighteningly large amount – the largest drop in US government wealth since the nation's founding. Surely something this unfavorable to the government's 'balance sheet' would have broad, adverse financial consequences.

So what happened to household wealth during that same year? It rose. And it improved by not just the $3 trillion injected into the economy by the government but by a whopping $14.5 trillion, the largest recorded increase in household wealth in history. As a whole, the wealth of the country – its households, businesses, and the government added together – increased by $11 trillion, so this improvement in wealth was contained largely to households.

How and why did such an extraordinary increase occur?

To understand this paradox, we need to seek answers to some of the most fundamental questions in economics: What is money? What is debt? What brings about increases in wealth? Often the most basic questions can be the most challenging to answer. They appear deceptively simple but they are complex and vitally important." (Vague 2023, p. 1)

profstevekeen.substack.com/p/the-paradox-of-debt-by-the-tycho

I’ve never looked at US economics so can’t comment, but the US$ is the reserve currency that many commodities are traded in and other currencies are tied to.

So fluctuations in the US$ affects others in different ways

US economics are based on the same economic beliefs that the UK's economy is based on. The operation of their domestic economy is very similar to ours.

As we are talking about the 'national debt' and money 'creation', and Dinahmo cited the New Deal as an example of state spending based on 'created' money, I thought that a more recent example of the impetus that state money creation can give to growth I thought that a more recent example might be of interest.

For a start, it has stimulated growth. It must also make a country more attractive to importers as there is more spare cash in the potential market.

“US economics are based on the same economic beliefs that the UK's economy is based on. The operation of their domestic economy is very similar to ours. “

Most commodities are priced in dollars so if the dollar falls in relation to other currencies imports do not cost more, so the US is insulated from fluctuations.

Interesting blog from Prof. Simon Wren Lewis discussing neoliberalism (which is the economic system under which we have been living ever since the late 1970s and which DAR and MOnica think shouldn't be challenged.

...If you look at current academic economics, Friedman largely failed in his attempt to discredit Keynesian macroeconomic policy (see below). [2]. While public choice theory has been very successful in taking economic methods into political science, it has not stopped economists talking a great deal about market failure and how the state can intervene in the market to deal with that failure.

As a result, academic economics is very different from the economics neoliberal proponents like to talk about. I have sometimes joked that neoliberal interpretations of economics are what you might get from attending a first year course on economics and missing half the lectures. Yet because economic ideas are very powerful, a selective use of that theory can be pretty persuasive, and the individuals like Hayek or Friedman were very good at doing just that. But because they were selective in order to persuade, their ideas become very vulnerable to a more general use of economic theory and evidence.

Discussions of neoliberalism as an ideology or set of political ideas generally focus on the primacy of markets as a central idea. But it may be a mistake to take what neoliberals say about markets as true of actual markets. One of the most egregious examples of this is justifying CEO pay as being ‘determined by the market’, when in reality CEO pay is generally fixed by a committee of board members and external CEOs. What is the difference between this and having wages fixed by a commission set up by government? Yet few would describe public sector wages set by public sector review bodies as determined by the market.

I have argued that a better way to describe neoliberalism in practice (policies pursued in the US and UK by Reagan and Thatcher and subsequent governments) is that neoliberalism uses concepts from economics to promote the interests of capital (corporations and companies).^

As I have already mentioned, Friedman’s arguments against Keynesian fine tuning never had widespread academic support, and have very little now. Across the globe central banks move interest rates month by month in an attempt to regulate the business cycle. [6] As I have also noted, many academics study market failure. Another example was austerity, which was opposed by the majority of academics, a majority that came close to a consensus as the evidence came in. On the left, many economists in the 60s and 70s argued maintaining very low unemployment was essential, and prices and incomes policies should be used to contain inflation. Once again, evidence was not on their side, and that approach lost favour among economists.^

A response I often get when I make these arguments is why do we hear so much from economists that support right wing policies. The answer to that is straightforward: just look at who controls the means of information. Few people would argue that medicine was ideologically biased because we heard so many medics in the media arguing against lockdowns. Equally the media chooses among academic economists based on the ideas they want to see promoted, and not on whether they represent the academic consensus, as Brexit clearly showed.

mainlymacro.blogspot.com/

Wren Lewis is a Keynesian. He does not support MMT.

Formatting fail. All the extracts are from the blog, not my words.

Interesting blog from Prof. Simon Wren Lewis discussing neoliberalism (which is the economic system under which we have been living ever since the late 1970s and which DAR and MOnica think shouldn't be challenged.

I never made any such claim. Wishful thinking Maizie

Deregulation was the result of adherence to the prevailing economic theory about the ability of markets to self regulate.

When you go deeper into the build up to the GFC you wonder how 'the market' could have been so irresponsible as to encourage people to go deeper into debt and then to try to monetise that debt.

It had absolutely nothing to do with Labour expenditure in the preceding decade.

Maizie surely para 1 answers the question you pose in para 2. Markets self-regulate by swinging between boom and bust. They are amoral not immoral and have no interest in what effect their operations have on individuals.

There were warnings from the late 1990s that markets were overheating, particularly that the property market, especially that the domestic was being dangerously overlent, but while Labour expenditure contributed little to the 2008 collapse then government, and we could never have completely avoided the 2008 meltdown, but action by the (Labour) government under its 'prudent' chancellor could have done much to mitigate its effects.

The catalyst of the collapse in the UK was the collapse of Northern Rock, which had been offering mortgage loans of 125% and the reckless explosion in 'self-certified mortgages' beyond the narrow bounds of their previous limited use.

The government had the power to dampen down the property market and was, indeed urged to do so, but chose not to. The party cannot wriggle out of the accusation that it was instrumental in making the 2008 crisis far worse than it needed to be.

The government had the power to dampen down the property market and was, indeed urged to do so, but chose not to. The party cannot wriggle out of the accusation that it was instrumental in making the 2008 crisis far worse than it needed to be.

I don't know why you are insisting on reading what I am posting as though I am trying to make partisan points. I am alive to the differences in policy making that different economic 'schools' could enable but the 'theories' they promulgate are available to any party to use. I'm just describing what their theoretical base is and trying to point out that there is no one school of economic thought that is 'correct' while all the others are wrong.

I do find it difficult, though, to look at the effects on the UK of last 40+ years of following the dogma of the neo classical 'free market, small state' school of economics and to find that no-one is intellectually interested in looking at alternatives.

For example, the belief in market 'self regulation' is a neo classical theory. It's not even borne out by empirical evidence. Do we have to live by the operation of fossilised, unevidenced, theories when there may be better evidenced understandings of how economies work available?

Interesting conversation - of course the economic theories of the founding fathers are continually developing and changing, if they hadn’t done so, we wouldn’t have had Keynesian or Marxist economics - and off-shoots.
MMT is a theory being promulgated by initially economists in the USA and finding acceptance amongst some economists in Europe. I have been reading the theory with interest, but have yet to be absolutely convinced as to its credentials, particularly relating to the capitalist market economy.

monica I agree that Brown should have foreseen the danger relating to the overheating of the housing market, however, no government did, and in particular the US sub-prime market was the biggest factor in the eventual collapse, largely because of illegal banking activities relating to debt and housing.

All governments ignored economists warning, as they are want to do if it doesn’t suit them politically, and as a result of a period of inhibited growth it is easy to see why governments were too optimistic about future prospects.

Never-the-less Browns quick action in saving Northern Rock and other banks undoubtedly proved invaluable and was copied by other governments throughout the world , including USA.

Un-inhibited growth

M0nica

^Deregulation was the result of adherence to the prevailing economic theory about the ability of markets to self regulate.^

When you go deeper into the build up to the GFC you wonder how 'the market' could have been so irresponsible as to encourage people to go deeper into debt and then to try to monetise that debt.

It had absolutely nothing to do with Labour expenditure in the preceding decade.

Maizie surely para 1 answers the question you pose in para 2. Markets self-regulate by swinging between boom and bust. They are amoral not immoral and have no interest in what effect their operations have on individuals.

There were warnings from the late 1990s that markets were overheating, particularly that the property market, especially that the domestic was being dangerously overlent, but while Labour expenditure contributed little to the 2008 collapse then government, and we could never have completely avoided the 2008 meltdown, but action by the (Labour) government under its 'prudent' chancellor could have done much to mitigate its effects.

The catalyst of the collapse in the UK was the collapse of Northern Rock, which had been offering mortgage loans of 125% and the reckless explosion in 'self-certified mortgages' beyond the narrow bounds of their previous limited use.

The government had the power to dampen down the property market and was, indeed urged to do so, but chose not to. The party cannot wriggle out of the accusation that it was instrumental in making the 2008 crisis far worse than it needed to be.

Because the bankers were greedy - as were some of the people who took out sub prime loans. They took loans in order to buy property to let. A similar thing is happening in the UK now. Many people who took out several buy to let mortgages are having to sell the properties because they can no longer afford the repayments.

Markets self regulate between boom and bust unless there are safeguards to prevent massive swings. Any responsible government controls the interest rate and quantity of money available, before the crash there were no effective safeguards, if any existed at all. Moreover Retail and high risk Wholesale banking was not separated, which has now been done.

RBS in particular invested heavily in commercial property, when that crashed it would have affected thousands of personal and mortgage customers, which is why they had to be rescued.

When you owe £1000 you have a problem
When you owe £1m the bank has a problem
When the bank owes £100billion the Government has a problem

The banks allowed the situation to develop though, and were far too highly leveraged. They knew the risks that they were taking, where the financial products they had developed were offered to lower-income people with little understanding of the risk.

Whitewavemark2

The banks allowed the situation to develop though, and were far too highly leveraged. They knew the risks that they were taking, where the financial products they had developed were offered to lower-income people with little understanding of the risk.

The banks allowed the situation to develop but there were very few economists who signalled any warnings on the consequences. Those few who did were not 'mainstream', in that they didn't subscribe to the mainstream 'ruling theory' (i.e a theory which is dominant over other theories) of neo classical economics.

In fact, according to Steve Keen, a non mainstream economists, the Dutch economist Dirk Bezemer looked through economic literature to identify people who could legitimately claim to have predicted the GFC . He identified only 12 out of the thousands of economists who were happy with the developing situation. The 12 are listed on Keen's blog if anyone wants to check (you may have to register as a 'free' subscriber before you can read the blog)

profstevekeen.substack.com/p/my-blessed-and-cursed-life

A longer extract from a very long blog post about non 'orthodox economists and economic theory.

... "Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” testified Federal Reserve Chairman Alan Greenspan before Congress. “The whole intellectual edifice, however, collapsed in the summer of last year". What’s worse, this massive humiliation of the economic orthodoxy was attached at the hip to an equally massive victory for the economic heterodoxy. For it was precisely economists of the dissident schools—employing completely different models from those of the mainstream, rooted in different principles derived from the historic analysis of financial markets—who did successfully predict the crash. And not just in the manner of those dogmatic Marxists who, as the old joke goes, “predict” 12 of the past 2 crises of capitalism. Rather, using tools like stock-flow consistent models and Minskyan crisis theory,33 heterodox economists such as Wynne Godley and Michael Hudson not only proclaimed in print (far in advance) that a financial crisis would happen but also identified its specific origin and causes in the real estate market. Here was as neat a natural experiment as anyone could ask for, and the winner was clear to anybody with eyes to see.

strangematters.coop/frederic-s-lee-profile-part-one/

The Greenspan quote is found all over the place in economic literature. He was Chair of the US Federal Reserve. He was in a position to evaluate the actions the financial institutions and to do something about them if he felt that they were threatening the financial stability of those institutions. His belief, as an economist, in the neoclassical economic theories made him confident that the institutions were doing nothing untoward.

TBH, if Greenspan couldn't see it coming and neither could any of the similarly influenced economists depended on by the UK government I don't see how we can blame the non economist PM of the time for going along with them.

To say the 'banks self regulate through boom and bust' is just repeating a neoclassical economic theory which has been proved to be untrue. It's based on a supposition that they are rational actors, and the neoclassical idea that markets shouldn't be interfered with in any way because they are self regulating. Calling for more regulation seems to me to be contradictory if one believes that the neoclassical theory is correct.

I have no informed ideas on the subject, but could suggest some likely reasons for the increase of the national debt.

The amounts originally appropriated for certain improvements in any public department, whether these are borrowed or not, frequently turn out to be grossly under the total price of the improvements they were scheduled for, so the NHS or whoever are faced with a half-finished project that has gone over budget and have to borrow (more) money to complete it.

Administrators and COs have for years now had the right to be paid quite enormous sums in serverence pay or upon retirement, whether or not they have done their job well, badly or been convicted of some criminal proceeding. Not only are these payments written into their contracts, they are paid out irrespective of "austerity" rules or any other consideration.

Borrowed money is lent at a certain rate of simple and compound interest and these rates have risen since the original loans were taken out, as like as not.

Taking out a new loan when you already owe a lot of money ought to make any competent banker wary, whether you are a private individual or a state, so when the government, irrespective of which party is forming it, needs money, a sensible banker will ask him- or herself how high the risk of the borrower defaulting is, and adjust the interest demanded accordingly, or simply say no to the proposed transaction.

A country that already has a large debt is bad business, so securing new loans becomes harder and dearer, thus enlarging the vicious circle.

MaizieD All the financial commentators could see it coming. It was written up and discussed on the financial pages of every newspaper.from the late 1990s onwards.

We may have had a non-economic PM but we also had a seemingly very astute and economically knowledgeable Chancellor (who became PM) and on such matters PMs generally listen and act on the advice of their chancellors.

The information was there - that the prophets of market economics were so convinced of their absolute command of economic wisdom that they chose to ignore them, is a separate issue. There are none so blind to the aapproaching train as those wedded to one simple solution to all our economic problems, whatever that solution may be. Words, MaizieD* that you too need to bear in ind.

It is the same as the way the Bank of England has acted over over interest rates rises in the immediate few years. Again the wider financial world was saying that interest rates needed to start rising the sooner the better and those with fixed period mortgages were encouraged to make the length of thei mortgage fix more important than the lowest interest rate.

When we took out a mortgage 2 years ago we sacrificed a few points of interest for a 5 year fix, as did our daughter not long before interest rates started to rise. Our mortgage rate will not move from its current low rate for another three years and we have plenty of time to prepare for a big hike in the interest rate when the 5 years expires.

Same all over the world,drives you crazy