Reply To: State Funding and Modern Monetary Theory

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Mr Shigemitsu

The budget deficit is the difference between what the Govt has spent into existence, and what it has then recovered in taxes in one financial year. The shortfall *exactly* equals the amount of the currency that the private sector (i.e. us) has chosen to save.

Because all of this unspent money would be sloshing around as BoE reserves (where else would it go?), banks, in aggregate, would have reserves in excess of their liabilities. This would push down the interbank lending rate to zero, because the BoE doesn’t pay interest on excess reserves. So, in order to stick within the BoE’s interest rate target, and pull out these excess reserves, the Govt sells (usually at an interest rate – called the “yield”, which is usually higher than the base rate) a savings product called a Treasury Bond, or a Gilt.

Now this *looks* like Govt “borrowing”, because it is indeed a liability at the Treasury, but its only “borrowing” in the sense that NatWest or Barclays are “borrowing” your salary every month – and you certainly don’t lose sleep that they’re in massive debt to everyone at the beginning of the month as a result! The Govt could just as easily instruct the BoE to pay interest on excess reserves, and it wouldn’t need to issue Gilts at all. It’s partly as a favour to the financial institutions, providing them with an ultra-safe savings product that need never be defaulted on, and partly to maintain the pretence that the Govt has no money of it’s own – which is Thatcher’s”Govt as Household” myth.

The beauty though, is that even if the Govt *didn’t* issue Gilts (a liability at the Govt owned Treasury), there would instead billions of pounds of excess reserves sloshing around… which would be a liabilty at the Govt owned Bank of England!!! So either way – Gilts or no Gilts – for as long as the private sector net-saves, there will always be a Govt liability of one type or another, until the money is spent and consequently taxed out of existence. So all that the purchase of GIlts is, is just an asset swap for one type of govt liability for another – for as long as there are any kind of Sterling savings – even the tenner in your wallet – the govt is still “in debt”, even if it weren’t to sell any Bonds at all.

If the govt were to – god forbid – tax more than it has spent, there would be a budget surplus. At any time other than a boom, this would be dreadful for the economy – the private sector (ie us) would, in aggregate, have to raid our savings, or worse, borrow, in order to pay the tax that the govt was sucking out of the economy. In a nation like ours, with a persistent trade deficit, this would be a recipe for recession – which is why Ed Davey’s economic plans are illiterate.

There is no fundamental need to issue bonds – and the government can always spend without recourse to prior taxation.
For example, did you or anyone else in the UK get an extraordinary tax bill before the Govt bailed out the banks to the tune of £800bn? Before it then instructed the BoE to conjure up £435bn to buy up a third of all available Gilts under QE? When it decided to spaff away further billions on various foreign wars?

No of course you didn’t because that’s not modern money creation works.

The link you refer to tries desperately hard to separate the Treasury and the Central Bank (Fed Reserve in its case), but it’s a smokescreen, and solely a function of highly artificial, arbitrary, and functionally unnecessary, rules. The reality is that they *are* consolidated into one government function – which is to run the economy and provide the necessary currency in order for it to operate, and to tax in order to enforce currency use, and drain excess funds in order to combat inflation. The idea, as described in that blog, that MMT presents “moral hazard”, and that unelected committees, or independent central banks should decide fiscal and monetary policy is pure, undemocratic, neoliberalism.

Believing all this neoliberal economic propaganda is actually *imprisoning* otherwise progressive people into the Thatcherite narrative of scarce money: the sense that we have to keep public spending low because no-one will vote for higher taxation, or that the rich (who we absolutely *don’t* depend on for their taxes) will run away, and leave us without functioning services. That we cannot trust democratically elected governments to spend the money that a civilised society requires for a more equally distributed economy, so instead we need unelected managerialists and bureaucrats, to protect us from ourselves.

MMT itself is politically completely agnostic – it merely offers a lens to see how the modern monetary system functions, but unless you happen to be a Tory, a billionaire, or a banker, why wouldn’t you want to end this “Govt as Household” charade? But MMT *is* your “Get out of Jail Free” card, and yes, in a developed economy such as ours, we actually *can* all have nice things – up to the real capacity of all of us to provide them, and not by how much we pay in advance in tax, or borrow from rich people.