Where has the money gone?

“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.

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.

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

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

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.

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

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.

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

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.

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.

“Sterling has been going up and down because the economy is not doing well, it dropped with the Brexit vote and has never really recovered. In fact, some £60 billion was created by the BoE to bolster the pound just after the vote to leave the EU. They'd hardly have done that if they thought it was going to devalue it further..”

They created £60bn to prevent sterling falling further , the currency had just lost 30% of its value they had bills to pay in dollars and Euros.

Banks make loans with new money, in theory yes, but it is regulated by the BoE base rate and the reserves banks have to hold

Modern Monetary Theory is just a theory it is subject to the confidence of investors and currency changes. From 2008 to 16 sterling halved in value which you conveniently ignore

I have opinions Maisie, like you. They are based on the thin knowledge of economics that I have gained over the years. I wouldn't dream of "critiquing" your views. However, some of what is said doesn't agree with what I already understand.

Much of what Murphy says is Keynesian. I'm happy with that; I don't have a problem with it.

You say Murphy is absolutely correct that the UK can always pay its bills because it cannot run out of money. But we know, from experience and what the majority of economists say, that we can devalue money by overprinting it. That way can destroy an economy. I disagree with this part of MMT. I am not arguing with you. However wrong I believe this to be, you are entitled to your views. My small learning and experience, does not lead me to the same conclusion that your learning and experience leads you to.

And you're getting sterling and gilts confused again.

In theory the BoE can create as much money as it wants to, in practice it can’t and won’t because the value of sterling will fall and inflation will increase.

That is absolute nonsense, Katie59. It does it all the time and commercial banks do it daily under licence from the BoE. Every single new bank loan, be it a mortgage or a business loan, is newly created money.

Inflation stayed stable over the period 2008 - 2021 when the BoE had created some £900 billion of new money via QE. I don't understand why people keep ignoring this inconvenient little fact and trot out the 'causes inflation' mantra.

Sterling has been going up and down because the economy is not doing well, it dropped with the Brexit vote and has never really recovered. In fact, some £60 billion was created by the BoE to bolster the pound just after the vote to leave the EU. They'd hardly have done that if they thought it was going to devalue it further..

“Murphy is absolutely correct that the UK can always pay its bills because it cannot run out of money. That is what he says, not that the UK is 'not short of money'. There is a difference.”

In theory the BoE can create as much money as it wants to, in practice it can’t and won’t because the value of sterling will fall and inflation will increase. The reality is that nobody is going to invest in Sterling at say 5% if they think the value is going to fall by 5% or any other interest pairings.

It’s not just Sunak’s problem it will be Starmers problem if he wins the next election.

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

P.S, Dar. do you have a critique of my explanation of the theory behind 'austerity'?

If I haven't got it wrong, do you have a critique of the theory itself?

This can be explained by the vastly increased wealth now in the hands of a few who can afford to offshore it and, in effect, take it out of the economy.

I agree with you that that is what has ultimately happened to the money that the state has spent into the economy. But how has it managed to bypass what the state was supposedly spending it on; infrastructure and public services?

I;m not sure by what measure we were supposed to be a 'rich' country.

Murphy is absolutely correct that the UK can always pay its bills because it cannot run out of money. That is what he says, not that the UK is 'not short of money'. There is a difference.

I agree with Farzanah that the problem is growth of inequality, but not with her nod to Murphy that the U.K. is not short of money.

Obviously, we are still a rich country. However, we are not as rich as we once were. This must mean that somehow wealth has actually "gone".

Taking money out of the economy means it is not traceable by that economy and that the original economy has no lien on it.

This can be explained by the vastly increased wealth now in the hands of a few who can afford to offshore it and, in effect, take it out of the economy.

MaizieD

DaisyAnneReturns

F.

Very cryptic, DAR

It's for follow! I use it all the time on Facebook when someone asks a good question. I was going out and it takes me back to were I had read up to.

Dinahmo

Thanks for the explanation Maizie

It didn't work though did it?

Of course it didn''t.

Can you see the flaw (s) in the theory?

Thanks for the explanation Maizie

It didn't work though did it?

DaisyAnneReturns

F.

Very cryptic, DAR

Dinahmo

What I don't understand is why the Conservative govts since 2010 have been so keen on austerity. I get that it's a major part of their ideology but why would they want to see most of the population getting poorer. How does it help them.

I understand divide and rule, as is happening now with the migrants/refugees. I think by now that most of us know that they could have continued to fund the asylum processes but that they've chosen to spend that money on projects designed to inflame numbers of the population.

What I don't understand is why?

It's very easy to understand because it is based on everyone accepting the premise that a country is like a household or a company and has only a finite amount of money, which has to spent 'wisely'. Not only that, but households should never get deeply into debt.

The theory behind austerity is that when a government spends some of this finite amount of money on public services it deprives (crowds out) the private sector of money to create new businesses, and thus new jobs, to 'grow' the economy.

The public sector also diminishes the pool of labour available to the private sector, and so cuts their opportunities to produce more goods and services to sell at a profit.

In addition, public sector spending distorts the workings of the markets because there is no competition in the provision of public sector goods and services. It also leads to inefficiency in the public sector because there is no incentive in the public sector to produce goods and services at the most cost effective rate.

So, by cutting public sector spending it will free up money for entrepreneurs to enter the market and create jobs.

If you combine this theory with privatisation of the public sector you achieve a market economy in which competition drives down costs and prices and the market will supply all that the consumer needs.

I think I've got that right. Willing to be corrected.

Needless to say I don't support this economic theory.

I should emphasise that it is only one theory among several. It just happens to be the one which the US and the UK governments subscribed to in the 1980s and has been dominant ever since.

Can anyone else see the big flaw in it?

(and, it's nothing to do with money creation/borrowing)

F.