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It’s all just numbers in a computer

Explaining modern money to friends is very challenging. I haven’t won many converts but I keep trying. I was in a café yesterday having a cappuccino with a friend and for once, I wasn’t the one who raised the subject. You can be the judge as to how I went.

The conversation went thus:

Friend: How can you say that Taxes don’t fund spending? Where else does the money come from?

Me: It comes from the Reserve Bank (RBA) or Treasury. All spending is newly created money.

Friend: What do you mean?

Me: When the government pays my aged pension, for example, Treasury simply executes an electronic transfer from the Reserve Bank (RBA) to my bank who then credit my account. It’s all just numbers in a computer.

Friend: Yes but they debit the government account.

Me: I’m sure they do. But that government account doesn’t need to have any money in it. The debit is just a number on one side of the ledger. Treasury keep score of debits and credits but that doesn’t stop them from paying their bills. They would never bounce their own cheques would they?

Friend: Then it must show up as being in the red.

Me: For accounting purposes it probably does, but they still pay the pension irrespective of the state of their account. The point is, the pension payment was just a number in a computer, money created out of thin air.

Friend: I don’t understand that. What I know is I pay taxes and the government spends those taxes on stuff. When those taxes are not enough, they borrow the money to make up the difference.

Me: And who do they borrow it from?

Friend: I don’t know. China, I suppose.

ladyMe: No, we don’t borrow money from China, or anywhere else for that matter. We are the currency issuer. We make our own money.

Friend: Well, that can’t be right. We are currently billions in debt.

Me: Well, not really. This is where it gets a bit complicated. You see, while we call it borrowing, what we really do is issue bonds, which is like offering shares to anyone who wants to buy them. Bonds are good business because they offer a guaranteed return. The government pays interest on them twice a year.

Friend: So who buys them?

Me: Anyone can buy them. They are always sold in Australian dollars so it doesn’t matter who buys them. Finance houses buy them, superannuation funds, even Chinese investors, but mostly they are bought by banks. Every night, banks need to make sure they have enough reserves to meet their obligations for the next day’s trading. If they don’t have enough, they borrow from another bank that might have more than they need and are looking for somewhere to put their money and get some interest on it.

Friend: What happens if no bank will lend them any?

Me: Then the RBA will lend it. The RBA will always provide reserves to the commercial banks. Otherwise the whole system would collapse.

Friend: What if a bank has excess reserves and no bank wants to borrow them?

Me: Then they can use that excess to buy bonds from the RBA who will pay interest on them. The RBA sets the interest rate and that controls what interest the banks lend to each other. If one bank wanted to charge more interest than they should, the borrower could simply go to the RBA and get a lower rate. That’s why the government issues bonds; to control interest rates, not to make up the difference between taxes and spending.

Friend: But, but, hang on, if that is true, why does everyone make such a fuss about how much the government borrows?

coryMe: Because they don’t understand how things really work and because the government wants you to think that running the finances of a country is the same as running the finances of your own household. It isn’t.

Friend: Why isn’t it?

Me: Because households can’t create their own money. Some have tried but they’re mostly in jail. We have to work for it.

Friend: But the government has to earn it by taxing us don’t they?

Me: No, that’s making it sound as if the government is the same as an ordinary citizen.

Friend: But if we are not, don’t our politicians know that?

Me: Sometimes I wonder; especially when you hear some of the stupid things they say.

Friend: So, if the government can create the money out of thin air, why do we pay taxes and what happens to all that money?

Me: We need to pay taxes for two very important reasons. One is that it gives our currency value, i.e. people must have it to pay their taxes. The other reason is that it takes money out of circulation, which is one way to help control inflation. Too much money in circulation can be inflationary. Also, issuing bonds helps control inflation by taking money out of circulation.

Friend: But with these bonds, you say the government is paying all this interest.

Me: Yes but by paying interest, the government is putting money back into circulation which helps drive demand.

Friend: But where does it get the money for that?

kathkimMe: The same place it gets money for everything it spends on. It creates it out of thin air.

Friend: But what happens to all the tax money we pay?

Me: The taxes we pay are recorded as revenue and then Treasury has no further use for it. It’s just more numbers in a computer. We keep records of course, to keep the accountants and bookkeepers happy, but it is of no further use. It’s not a tangible asset, it just disappears.

Friend: Isn’t it used for spending?

Me: No, it’s not needed. We make our own money. We have no further use for it.

Friend: But what about the deficit. Couldn’t we use it to offset the deficit?

Me: Again, we don’t need it. The deficit is just a number in a computer telling us how much more we have spent compared with what we took in taxes.

Friend: But deficit spending is bad, isn’t it?

Me: No, when we have high unemployment, deficit spending is good. High unemployment is the result of bad planning by government and industry. Governments need to halt rising unemployment by creating projects that employ people. That means pumping more money into the economy than they get back in revenue. When unemployment comes down they can spend less which might then create a surplus.

Friend: But that’s what we want isn’t it; Surpluses?

Me: Not when things are bad and people are looking for jobs. Surpluses aren’t money in the bank to be saved for a rainy day. Surpluses take money out of circulation and limit people’s buying power. That forces people to go into debt…real debt that they must pay back or suffer the consequences.

hockFriend: If you are right, then all our understanding of how money works, is back the front.

Me: Yes, it is.

Friend: That would mean that, if the government wanted to, it could make sure every person that wanted a job could have one?

Me: Yes.

Friend: It would mean that we can never run out of money?

Me: Yes.

Friend: That means all this hoohaha about not being able to afford stuff, health care, education, government services, how we are going to pay for it and so on, is all rubbish?

Me: Yes it is.

Friend: Then what’s to stop us from madly creating money, dropping it out of helicopters, enabling people to buy whatever they wanted, building super highways and high speed trains, that no one would use, just to keep people employed or just let people hang around doing nothing and expecting everything to be laid out for them?

Me: For every buyer, there has to be a seller. If we did what you suggest, it would have a devastating impact on our economy, our balance of trade, our foreign currency holdings, no one would work, nothing would get made, no food would be grown, no goods would be produced, and prices would go through the roof. That’s what happened in Zimbabwe. The strength of a nation’s wealth is its GDP, its gross domestic product, its ability to produce goods and services that people here and overseas want to buy. Throwing money out of helicopters would not achieve that. Eventually, there wouldn’t be anything to buy. We would all starve after everything that had been made up to that point was consumed. We would not be able to import anything for the cost of it and not export anything for the lack of raw material. Get the picture?

Friend: Yes, I think.

Me: Everything must be properly balanced. At the moment everything is out of balance because we have high unemployment. We can fix that if we want to, but it will take a major shift in government thinking. We can fix it by making sure that everyone who wants a job can have one. They can earn a liveable wage and live a normal life. That will restore demand, get the private sector producing and increase our national income. We can achieve that by recognising the power of a sovereign currency-issuing country, and exercising that power. Only government can do that.

confusedFriend: Should we be increasing taxes?

Me: Have you been listening to anything I said?

Friend: About what?

Many expletives have been omitted from this discussion to protect the sensitive. If you find this helpful, you are welcome to use this as a guide in your own café set.

 

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87 comments

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  1. Felicitas

    Wonderful work John, Just sent it on to my partner with whom I’ve been having this same argument for years. Not that I think he’ll understand. Not because of your writing, but because it falls too far outside the rhetoric he persistently believes and spouts. But I live in hope….

  2. $$$

    makes cents…

  3. Sue-Ellen Smith

    Great article. Definitely a keeper. I read that, when someone applies for a loan, the Bank of England simply creates the money electronically. Has this always been so?
    And they (whoever our puppet masters are) treat us all like mindless sheeples. They patronise us and manipulate us and treat us like fools. And to be honest I am including politicians in the sheeples category, because I am honestly starting to wonder if they have a clue either.

  4. Martin Bouma

    Brilliant. Thank you.

  5. Zolbex

    Sue-Ellen

    Not all monies are created equal. It is true that banks create money, but when they do they create a liability to the borrower, whereas when the government creates money, it creates a liability for itself.

    John, have you been approached by a theatre company yet? 😉

  6. Paul Richards

    One of the best articles I have read taking some of the mystery out of international reserve banking system run by the BIS. Thank you JK.

    The misleading language around Government surplus and deficit runs to major parties here in Australia. Sadly, any politician who understands the truth and speaks it, is accused of fiscal irresponsibility.

    Until awareness of Australia’s politcal centre is raised, it is doubtful this economic message will be heard.

    All any of us can do is pay this article forward and hope the message works it’s magic.

  7. Neil of Sydney

    Does it ever cross you peoples mind that you could be wrong? Take this point

    Friend: But deficit spending is bad, isn’t it?

    Me: No, when we have high unemployment, deficit spending is good.

    Hawke/keating and Rudd/Gillard did deficit spending and it had no effect on reducing unemployment. Howard/Costello ran surplus budgets and unemployment went from 8% to 4%. I am just reporting the facts


    Me: Everything must be properly balanced. At the moment everything is out of balance because we have high unemployment.

    High unemployment? It is currently at 5.8% so it is unchanged since the election. But 5.8% unemployment was a record low for the Hawke/Keating govt. And that was only for two months and occurred when Hawke/Keating ran one of their few surplus budgets. Unemployment was at 11% when Keating became PM.

  8. Rossleigh

    “In fact this is precisely the logic on which the Bank of England—the first successful modern central bank—was originally founded. In 1694, a consortium of English bankers made a loan of £1,200,000 to the king. In return they received a royal monopoly on the issuance of banknotes. What this meant in practice was they had the right to advance IOUs for a portion of the money the king now owed them to any inhabitant of the kingdom willing to borrow from them, or willing to deposit their own money in the bank—in effect, to circulate or “monetize” the newly created royal debt. This was a great deal for the bankers (they got to charge the king 8 percent annual interest for the original loan and simultaneously charge interest on the same money to the clients who borrowed it) , but it only worked as long as the original loan remained outstanding. To this day, this loan has never been paid back. It cannot be. If it ever were, the entire monetary system of Great Britain would cease to exist.”
    ― David Graeber, Debt: The First 5,000 Years

  9. Rossleigh

    “money has no essence. It’s not “really” anything; therefore, its nature has always been and presumably always will be a matter of political conten­tion.”
    ― David Graeber, Debt: The First 5,000 Years

    Or to put it as simply as possible:

    “If one does not believe in the king, the money vanishes with him.”
    ― David Graeber, Debt: The First 5,000 Years

  10. Sue-Ellen Smith

    Thanks Rossleigh for the explanation. It all helps in getting a deeper understanding of how it all works.

  11. Darren

    Neil of Sydney,

    Your comparisons look only at the modern “neo-liberal” macroeconomic period. If you look back beyond that time, to the 1950’s and 1960’s, anything above 3% unemployment was considered high. “Full employment” in neo-liberal speak is considered to be 4-5% unemployment, required to keep inflation under control it is said (utter rubbish), but more accurately full employment is around 2% unemployment (there must always be some, as there are always people “between” jobs for various reasons).

    As for your analysis of there being lower unemployment during the period of surplus budgets, you have the cause and effect reversed. Surpluses were possible BECAUSE of “low” unemployment and generally high private investment. When the private sector is spending, two things happen: there are plenty of jobs and the government doesn’t have to spend as much. Additionally, if you look at that period of surpluses, spending on national infrastructure was at an all time low – something we are paying for now – and private debt was rising at an incredible rate. Both of these are directly caused by the governments lack of spending.

  12. The AIM Network

    “Unemployment was at 11% when Keating became PM.”

    Yes Neil, we know, you’ve mentioned it 800 times already.

  13. Zathras

    There are a few additional concepts that should be considered.

    Once upon a time, money was physically backed up by gold (or silver) held by the Government (“The Government promises to pay the bearer… was printed on banknotes) but now money is all just debt. Without debt there would be no money and since the Gold Standard no longer exists we need debt.

    The secret of happiness is having manageable debt.

    Our reserve banking system is different from the fiat system used by the USA but basically it means that there is over 10 times as much money moving through the economy than actually exists at any time.

    Another item that has been refined is the concept of Employment.

    If you tell Centrelink you helped the little old lady next door weed her garden (for no pay) for at least one hour that week, you are flagged as “employed” but still get paid the dole.

    That 5-6% unemployment figure is vastly understated, especially when you consider the rising number of casualised and under-employed people being funded by the taxpayer.

    Hence the rising welfare bill in times of apparent low unemployment.

    It’s just a huge Ponzi scheme and nobody wants to be there when it all comes unstuck.

  14. John Hermann

    Thanks John, for going to the trouble to explain a subject which is very important to having an adequate understanding of how modern economies actually operate and at the same time is counter-intuitive. Scientists are well accustomed to handling counter-intuitive concepts, but most mainstream economists seem to lack the necessary intelligence and are unable to cope. And the average person in the street really does not have a clue, having been exposed for so long to the spin of business and bank economists which, as presented in our mass media, masquerades as intelligent analysis.

  15. Jaquix

    Thank you John Kelly for explaining this so simply. I’ve saved it for sharing as you generously suggest – many thanks indeed. I wonder if some whizz could do a flow chart to show the system pictorially?

  16. David

    Thanks for that,something that needed to be explained.

  17. totaram

    Neil of Sydney’s remarks have been explained by Darren. The explanation would be even more convincing if we include the sectoral balances accounting identity. This states that the government’s surplus, the private sector’s surplus, and our trading partner’s surplus (our trade deficit) must all sum to zero in any accounting year. Since we usually have a trade deficit, the government can only have a surplus if the private sector has a deficit. Peter Costello’s “surplus” was the result of massive private sector debt increase as pointed out by Darren. If the private sector wasn’t prepared to take on more debt, the surpluses couldn’t have happened. And the private sector took on all that debt because the economy was booming (mining boom), and we had relaxed lending (and increased profitability by reducing capital gains) for investment properties. So that was the RESULT of low unemployment.

    As I keep pointing out, private sector debt here is now huge. Australian households are the most indebted in the world (using some measures). The same accounting identity tells us that this debt cannot be paid down unless the government runs deficits. Macro economics is slightly more complicated than (government surplus = good, deficit = bad).

    In fact the government surplus/deficit is endogenous, meaning it is a result of the actions of all the sectors taken together. The treasurer only has some control of government spending, and very little control over the desire of the private sector to take on debt. That is only partly controlled by the RBA setting interest rates. Our trade surplus/deficit depends on so many factors outside the treasurer’s control. A treasurer “trying” to achieve a surplus by cutting expenditure, when the private sector also wants to save (rather than take on debt) is a recipe for a recession or low growth. That is now playing out with Joe Hockey’s attempted surpluses. If all those cuts had gone through, we would very likely have had a recession.

  18. John Kelly

    Neil of Sydney, there is a) good deficit spending and b) bad deficit spending. Some is wasteful like the present and some is good like when it goes to reduce unemployment. Any unemployment (that is people who want to work but cannot find a job) is bad regardless of which government causes it.

  19. Möbius Ecko

    totaram. As we would have if we had followed Hockey’s proffered economic policy during the GFC. For only about $4b less than what Swan spent, Hockey wanted to immediately throw more than 200,000 jobs on the scrap heap, close a swath of SME’s whilst throwing billions at banks and big business. In other words undertake the same GFC policy framework that so dismally failed in other countries where they still haven’t recovered.

  20. Möbius Ecko

    Darren and totaram Neil has had this explained to him, with sources, many times before but it doesn’t matter as all he’s interested in is putting down Labor purely as a distraction in threads that rightly and veraciously highlight the considerable and long running failings of the L&NP.

    This has been a long running tactic of his as has repeating the same long running point over, sometime for years, no matter how many times a counterpoint and countervailing evidence is raised.

  21. Michael Taylor

    What’s it been now, Mobius, that Neil has been doing this. Ten years? I first came across him ten years ago on Tim Dunlop’s blog on news.com and he’s been saying nothing different since.

    Personally, I think he’s just playing with us. He can’t possibly be as stupid as he repeatedly demonstrates.

  22. kerri

    As the video you linked to the other day pointed out John, the Government should be looking at what things it’s people needs and providing them to encourage prosperity and fulfil their role as managers of the country.
    This Government is simply punitive! They see their role as being to force us all to pay for their mates because we are all lazy bludgers who didn’t inherit money and have no right to benefit from those mates stealing our consitiutionally declared goods in the form of minerals.
    Thanks again for the lesson John Kelly!

  23. eroerodroga

    yes government should taking care of his people

  24. Möbius Ecko

    That’s about it Migs, and the dual personality that sometimes comes to the fore as it did recently.

    Lot’s of speculation over the years about how he posts immature junior schoolboy stuff and childish retorts yet at other time comes up with a lucid, mature and well laid out argument, even if wrong. There’s been the brothers theory, the mate next door and the deliberate playing of an ignoramus idiot as a distraction. Guess well never know.

  25. Mercurial

    Thanks again. You can’t say enough about MMT, because the media – even some commentators on this site – are obsessed with ‘return to surplus’ as if it is some natural condition of balance to which we must strive.

    The MSM’s concept of debt should get a thorough shaking down if you consider that for all those countries in debt (yes, even China) there are very few countries in the opposite situation. Simple arithmetic – it’s not a see-saw, where one country’s debt is another’s gain. Most Western democracies are severely in debt. China has foreign debt, as does India. Which countries are owed all this money?

    Well it doesn’t quite work that way, does it? And when you understand what John has written above, you see that it can’t.

    John Howard started the myth that a budget surplus was the Holy Grail, because it suited him to do so. That has now become the albatross around the neck of politicians in Australia, who are enslaved to erroneous theories about household budgets.

  26. Mercurial

    The confrontationalism manifests itself in the repeat use of phrases such as ‘you people’.

    Neil’s got a tribe to protect, don’t you know.

  27. Pingback: It’s all just numbers in a computer | THE VIEW FROM MY GARDEN

  28. Royce Arriso

    John, as a layman’s guide, second to none. Cut n’ pasted it. Was about to write, “wonder how NeilOfSydney feels about this dose of simple reality’, when I saw his comment. No surprise! Have a theory about why conservatives and Neoliberal ideologues are so desperate to dispute fiat money creation. If Treasury Bonds can no longer be depicted as ‘govt debt’–“all debt is debt!” as one indoctrinated Neoliberal acolyte shrieked at me on another blog–then bang goes their demonisation of bad/ wasteful/ acne-ridden govt shackled by needless financial liabilities. A major weapon has been rendered impotent. So ‘govt. debt is just like household debt’ simply HAS to be true. EVERYTHING depends on it.
    Amazingly, one aspect of Neoliberalism is that it has no money creation component. The above disciple went into complete meltdown over mention of fiat money–abuse, accusations etc. So, Neoliberal economists, awash in academic quals, with the ear of govts in charge of huge economies, have no better than a kindergarten-level grasp of money creation. Imagine your brain surgeon telling you before you went under the knife, “no, I was never taught the circulation of blood. It didn’t seem important”. Un-be-firkin-lieveable……

  29. Royce Arriso

    Further to the above. And arguably, perhaps ad. hom. So, mea culpa. But very relevant.
    SCENE; Guardian Australia blog, 28.11.15. Poster–let’s call him, oh, I dunno, ‘Neil’— is crossing swords with, amongst others, the authoritative John Armour. JA recommends Neil reads a book extract he posts.
    J.A; “It seems I have wasted my time typing out that excerpt from Frank Newman’s book”
    Neil; “I read it. But YOU CANNOT FORCE ME TO BELIEVE SOMETHING THAT WELL, I DON”T BELIEVE OR UNDERSTAND” (Capitals mine)
    So there you have it. Has there ever been such a cri de couer? Does Neil’s failure to understand a topic upon which he continually offers opinions prevent, or even ameliorate, his commenting? Does it buggery!
    So a question, not merely rhetorical–why do conservative posters display so little awareness as to how they come across?

  30. keerti

    Banking as it stands is basically a private taxation scheme…I want to borrow $ to invest in a business. The bank bets against me by taking my house as collateral. It then creates money which it lends at the highest rate it can get away with. This is called usuary which incidentally is considered immoral in Moslem countries.Once I have the money I work to pay it back interest included. Once the money is paid back the bank writes that money off. It never existed! The system keeps the majority of people enslaved and keeps the results of work actually done flowing to the top.This is best defined as a ponzi scheme.

  31. Alex

    “It comes from the Reserve Bank (RBA) or Treasury. All spending is newly created money.”

    The treasury doesn’t issue money. It can only spend money in the government’s RBA’s ESA.

    “When the government pays my aged pension, for example, Treasury simply executes an electronic transfer from the Reserve Bank (RBA) to my bank who then credit my account. It’s all just numbers in a computer”

    I’ve heard this numbers in a computer argument before. This may come as a shock to the pre-internet generation, but things inside computers can be real, too.

    “I’m sure they do. But that government account doesn’t need to have any money in it. ”

    It most certainly does. This is because the payment system, and the government account, is run by the RBA (not the treasury). An instruction to pay money from an account that has insufficient funds will be rejected in the payment system.

    “For accounting purposes it probably does, but they still pay the pension irrespective of the state of their account. ”

    Even if that was the case, there’s no way a line of credit could represent a real liability, right?

    “And who do they borrow it from?”

    It’s not really an issue. The fact is they can’t spend money without having first borrowed it in commercial terms (this contradicts the point you just tried to make).

    “No, we don’t borrow money from China, or anywhere else for that matter.”

    Good argument.

    “We are the currency issuer. We make our own money.”

    The RBA is the currency issuer. Please clarify for yourself the distinction. Who is “we”?

    “Well, not really. This is where it gets a bit complicated. You see, while we call it borrowing, what we really do is issue bonds, which is like offering shares to anyone who wants to buy them”

    Stop saying “we” and explain which party you’re actually referring to. Bonds are nothing like shares, they’re like a loan. The government must borrow money before it can spend it. This is because it is not the RBA.

    ” Bonds are good business because they offer a guaranteed return.”
    In stark contrast to shares.

    “Anyone can buy them. They are always sold in Australian dollars so it doesn’t matter who buys them. Finance houses buy them, superannuation funds, even Chinese investors, but mostly they are bought by banks.”

    You’ve contradicted yourself again. In order for a bond to be purchased an amount of public money is removed from circulation. This negates your earlier statement that all government spending is newly issued money.

    ” Every night, banks need to make sure they have enough reserves to meet their obligations for the next day’s trading”

    Bonds in the SECONDARY market are the medium of exchange used in open market operations. Please clarify yourself the difference between the primary and secondary markets.

    “Then they can use that excess to buy bonds from the RBA who will pay interest on them.”

    Wow. this is just off the charts wrong. The RBA doesn’t issue bonds.If you meant the RBA will sell them in the secondary market, then the RBA will not be paying the interest, the issuer will.

    “That’s why the government issues bonds; to control interest rates, not to make up the difference between taxes and spending”

    You didn’t demonstrate that in any of the preceding crackpottery.

    “Because households can’t create their own money. Some have tried but they’re mostly in jail. We have to work for it.”

    Central banks make money mate, not governments.

    “The other reason is that it takes money out of circulation, which is one way to help control inflation. ”

    Stupid. Taxes are the government’s revenue, inflation is the RBA’s job, and it has much more effective and precise ways of controlling the money supply than taxes. In fact every day it must conduct open market operations to adjust the money supply to account for tax receipts to keep the interest rate on target.

    “Also, issuing bonds helps control inflation by taking money out of circulation.”

    False logic. Issued bonds represent government borrowings so that it can spend the money right back into the economy.

    “Yes but by paying interest, the government is putting money back into circulation which helps drive demand.”

    Stick to marketing and communications mate, leave the economics to economists.

    “The same place it gets money for everything it spends on. It creates it out of thin air.”

    No.

    “when we have high unemployment, deficit spending is good.”

    Finally you’ve said something that makes sense, though it is not accepted among monetarists that Keynesian stimulus works empirically.

    “Surpluses take money out of circulation and limit people’s buying power.”

    Money out of circulation leads to lower inflation which, ceteris paribus, increases people’s buying power.

    “That would mean that, if the government wanted to, it could make sure every person that wanted a job could have one?”

    Why can’t the government do everything for everyone?

    ” Everything must be properly balanced. At the moment everything is out of balance because we have high unemployment. We can fix that if we want to, but it will take a major shift in government thinking. We can fix it by making sure that everyone who wants a job can have one. They can earn a liveable wage and live a normal life. That will restore demand, get the private sector producing and increase our national income. We can achieve that by recognising the power of a sovereign currency-issuing country, and exercising that power. Only government can do that.”

    Phew. Two sensible things in this whole article. Bang up job.

  32. Kaye Lee

    Alex,

    Would you agree that, as a sovereign currency, we could fund deficit spending by just crediting an account at the RBA rather than by issuing bonds? This could be recorded as quantitative easing.or e-seignorage or capital introduced or some such name. Provided we don’t exceed the productive capacity of the economy this does not have to be inflationary though I am not sure of what effect it might have on the exchange rate.

  33. Alex

    Quantitative easing isn’t just giving people money, the central bank gets a bond for the asset side of its balance sheet, only it’s a corporate bond not an AGS. Otherwise it would expend equity to issue money. I do not agree that the central bank can or should expend its own equity to issue money to the government and get nothing in return. The distinction between the central bank and the government is non trivial because politicians cannot be trusted to have direct control over money creation. As for direct issuance of currency: it’s a great idea and Iceland is doing it.

  34. Matters Not

    Alex puts down a challenge at any number of levels. Who will respond to the many points of ‘fact’ (or otherwise) that he makes?

    Certainly above my pay grade.

  35. Mark

    And central banks can be trusted to have control over money creation Alex? Are you a banker

  36. Alex

    “And central banks can be trusted to have control over money creation Alex?”

    Strawman. Central banks DO have control over the money creation process, whether or not they can be trusted. The reason for that is to eliminate political procylical inflation and other monetary policy corrpution.

    “Are you a banker”

    No, I’m a pharmacy attendant. And even if I was a banker, unless I worked for the RBA, why would I care about weighing in on this discussion? Plus the ad hominem means you’re aware you have no quality argument to make.

  37. John Kelly

    Nice speech, Alex. Leaving economics to economists is what brought us to the unsustainable position we are experiencing today. What do you call 1000 economists chained to the bottom of the ocean? A good start.
    The purpose of the article was, and is, simplicity. I doubt anyone trying to get their head around modern fiat money would understand one word or point you have made.
    Certainly, no one these days, has much confidence in economists for fear of being more confused after listening to them than they were before they started. You fit that category very well. I doubt also that those trying to get their head around modern fiat money care about the distinction between treasury and the RBA. For the purposes of this exercise, it is irrelevant.
    Nor are they interested in the intricacies of the payments system within the RBA. That’s for eggheads like you to worry about. Any distinction between bonds and shares in the mechanics of bond issuance is being a bit precious as is the distinction between government or the RBA making money.
    I’ll continue to say “we” wherever I feel the intimacy of the moment calls for it. You seem to think I’m addressing a seminar of economists and bean counters. I’m not. I’m talking to the average man and woman in the street who don’t want to be baffled by existential in-house jargon.
    Keep that for your mates who think they know everything. Finally, What are you doing to help educate the average person in the street see through the utter rubbish politicians tell them?

    One final point. Your answer to Kaye Lee’s question told her nothing. Your were baffling on about a load of in-house jargon that not only failed to answer her question but was of no help whatsoever.

  38. Matters Not

    John Kelly, (or anyone else) could you please address the points Alex makes at 6:34 pm one by one? If not, then why not?

    Or is ‘understanding’ confined only to the ‘believers’?

    Surely, demolishing his assertions should be a piece of cake.

  39. Royce Arriso

    Alex, “the government must borrow money before it can spend it”. And it ‘borrows’ from……

  40. Alex

    “Alex puts down a challenge at any number of levels. Who will respond to the many points of ‘fact’ (or otherwise) that he makes?

    Certainly above my pay grade.”

    Apparently it’s above the author’s pay grade too since all he can muster is to shake his fist at how complex all this economics bizzo is. Question: how can he write anything convincingly about the topic if he thinks my (first year economics) criticisms of his article are just too strenuous to deal with?

    ” I’m talking to the average man and woman in the street who don’t want to be baffled by existential in-house jargon.”

    Any by propagating your factually, procedurally and theoretically inaccurate handwringing drivel are ensuring that anyone who reads it, and doesn’t know better, is more ignorant of the topic than when they started. But it’s cool to see your name on the interweb picture box hey, like you’re a proper journalist?

    “Alex, “the government must borrow money before it can spend it”. And it ‘borrows’ from……”

    Someone who has money and wants to earn interest. Mega ellipsis for effect generally foreshadows what do you think?

  41. Matters Not

    Alex, your post at 8:56 pm doesn’t advance your argument one bit. Ad hominem attacks add nothing.

  42. Alex

    I don’t need to advance it, since the author’s rebuttal doesn’t engage any point of discussion I raised (as you rightly pointed out in your post of 8:46).

  43. Royce Arriso

    John, Alex ‘ being a bit precious’. Agreed. Also, felt uneasy reading it, less from having one’s understanding challenged as witnessing a crusading zeal determined to root out heresy. Exactly the flavour of comments by Neoliberal acolytes I’ve crossed swords with. Inconceiveable that such purists could be wrong, apparently. But when pressed for details of their understanding of money creation, they dissolve in spitless fury and you cop a load of juvenile abuse.

  44. Royce Arriso

    Alex;
    1. “Mega ellipsis for effect generally foreshadows what do you think?”. Sorry, but is this a ‘clever’ comment inserted to enhance your own ‘thinker’ status, while revealing an opponents apparent ignorance? It is abstruse.
    2. The govt. ‘borrows’ from “someone who has money and wants to earn interest”. So what is your understanding of fiat money creation? Why does a govt which creates currency need to ‘borrow’ from anybody? And why are ‘fiat’ currencies so termed if, as you suggest, so-called fiat currency govts.are continually going cap in hand to ‘borrow’?

  45. John Kelly

    Matters Not, in response to your request, here is a point by point response to Alex’s assertions. I have ignored some simply because they are silly remarks.

    “The treasury doesn’t issue money. It can only spend money in the government’s RBA’s ESA.”

    This is a text book response reflecting standard commercial banking practice. In a fiat currency world, the central bank of a sovereign currency nation can credit any commercial bank account it wishes, any amount of money it needs to, with or without the funds being present in the account of the payer (Treasury).

    “An instruction to pay money from an account that has insufficient funds will be rejected in the payment system.”

    Rubbish. Again, this is standard commercial bank practice. A central bank will override any computerised payments system it wishes to effect a payment it considers appropriate.

    “It’s not really an issue. The fact is they can’t spend money without having first borrowed it in commercial terms (this contradicts the point you just tried to make).”

    More rubbish! For the same reasons as in the previous answer. The RBA doesn’t borrow anything. It creates the money; why would it borrow anything?

    “The government must borrow money before it can spend it. This is because it is not the RBA.”

    Semantics. The RBA operates as a guardian of the economy on behalf of the Australian government. The RBA creates the money and distributes it as directed by Treasury.

    “In order for a bond to be purchased an amount of public money is removed from circulation. This negates your earlier statement that all government spending is newly issued money.”

    Public money? I think you mean private money, which is not spent but deposited in an account on behalf of the purchaser of the bond.

    “Bonds in the SECONDARY market are the medium of exchange used in open market operations. Please clarify yourself the difference between the primary and secondary markets.”

    I’m not the slightest bit interested in the bond market. It is irrelevant to this discussion.

    “The RBA doesn’t issue bonds.If you meant the RBA will sell them in the secondary market, then the RBA will not be paying the interest, the issuer will.”

    Don’t be so pedantic. The AOFM issues the bonds. Anything beyond that is irrelevant to this discussion.

    “Central banks make money mate, not governments.”

    Churlish!

    “Taxes are the government’s revenue, inflation is the RBA’s job, and it has much more effective and precise ways of controlling the money supply than taxes.”

    More semantics. Taxes are one measure of controlling inflation.

    “Issued bonds represent government borrowings so that it can spend the money right back into the economy.”

    Simply not true. It may appear that way to someone who cannot see past commercial practices, but in reality, receipts from bond sales are not spent.

    “Money out of circulation leads to lower inflation which, ceteris paribus, increases people’s buying power.”

    Leave your fancy Latin for the Catholic Church. Again, wrong and failed logic. How does less money increase buying power?

    If there are any further matters needing clarification, please let me know.

  46. Matters Not

    Royce Arriso, I’ll reserve my criticisms of Alex’s assertions until the resident ‘experts’ of MMT advance theirs.

    Are you stepping up?

    After all, his assertions are grounded in Economics 101. Or so he says.

    Have a go?

  47. Backyard Bob

    Wow, here’s a discussion going precisely nowhere……

  48. John Kelly

    Alex, whoever with, or wherever, you are studying economics, get out now while you have the chance and sign up with Professor Bill Mitchell at the University of Newcastle.

  49. Matters Not

    Backyard Bob:

    Wow, here’s a discussion going precisely nowhere

    Why? Just askin …

  50. Backyard Bob

    MN,

    Seems to me there’s too much defensiveness and ego involved for it to go anywhere useful. But perhaps I’m being premature.

  51. Roger

    Alex. I have a better suggestion than John’s (Don’t listen to Bill Mitchell – he’ll confuse you). Get on to Warren Mosler. He’s evidently offering a shitload of money to anyone who can disprove more or less what John’s saying. Here’s your chance to make some ‘real’ money. Let us know how you get on.

  52. Angus MacGowan

    Right at the heart of Alex’s argument is that for the most part, money is not simply magically brought into existence. Bonds are issued, interest is paid. It’s a loan. People, companies, investors, and even other governments are all lending money to governments all the time in the form of bonds. It’s not complicated. Governments get to do an awful lot of borrowing because they can always tax people more to repay the loans.

    Okay, then there is QE. This equates to printing money. But it doesn’t come out of no-where. If there was previously $100 in the economy, and the government prints $100 more, then there is $200 in the economy. But what this means is that $1 buys half as much as it did prior to the additional money being spent.

    It gets more complicated than this, but essentially, this is what happens. There’s not some mystical system that will inherently collapse. Sometimes governments borrow so much money that they become a credit risk, and people stop lending to them. The country is then effectively broke. Just like you or I would be. Argentina likes to do this quite regularly.

    Conspiracy theorists hate facts.

  53. John Kelly

    Angus, there is no conspiracy attached to modern money. But the reality is that money is “magically brought into existence” if saying it that way helps. Yes, bonds are issued, but they don’t have to be. That is a political decision, not an economics one.
    QE money works the same way except that bonds are issued in the reverse. The problem with QE is that for every lender there has to be a borrower. QE would be much better distributed straight to the people as in a helicopter drop.
    The only way a sovereign currency issuing government can become a credit risk is if they borrowed in foreign currency as Argentina did.

  54. Royce Arriso

    Testing. Around 8.10am, 9/2, submitted detailed post. Error panel ‘AIMN page not found’. 8.22am, still missing.

  55. Royce Arriso

    Something amiss. Submitted another comment around 8.32 am, 9/2. System seems to have accepted it. Where is it?

  56. John Kelly

    Royce, I can’t see anything stuck in the comments. Suggest you have another crack at it.

  57. Economic Reform

    There is definitely a problem with the posting system. I had the same problem as Royce.

  58. Economic Reform

    Alex and Angus, You do not seem to have grasped that the government (via its Treasury) is the only player within the broader economy which can create net financial assets (meaning financial assets unconnected with financial liabilities). Those financial assets are denominated in Australian dollars, and may be readily converted into actual dollars if there is ever perceived to be a need to do so. And it can inject those assets directly into the broader economy in order to achieve a particular economic outcome.

  59. Economic Reform

    Alex and Angus, In regard to the credits which Treasury holds in its operating account with the RBA, there is never a risk or danger that Treasury will run out of those credits, and in any case Treasury has a long-standing line of credit with the RBA. But even in the unlikely and hypothetical situation where those credits were running low, you can be certain that Treasury would simply resolve the matter by issuing more securities to the private sector.

  60. Economic Reform

    And irrespective of the accountancy convention, in a situation of economic crisis (in extremis) can it be doubted that the central government would do whatever it takes to stabilise the economy, and in particular would borrow directly from its own central bank the state fiat money required for that purpose. In a crisis situation what needs to be done will be done.

  61. Kaye Lee

    I am still having real problems with this. According to the RBA the government can only spend the money that is in their official public account (OPA).

    “As part of the Australian Government’s banking arrangements with the RBA, the RBA provides an overdraft facility to the government. The terms of this facility provide that it may only be accessed to cover unexpected temporary shortfalls of cash (for example, to cover a sudden previously unplanned outlay). This means it is used very infrequently.”

    As far as I am concerned, at the moment we do use taxes and bonds to fund spending. I do not think it has to be this way, but, according to all accounts, it is currently. Saying that bonds are issued to influence the overnight cash rate just isn’t right. Interest rates are not changing and the government is still issuing new bonds. Trading in bonds is one tool that can be used to do this but I am assuming that is what Alex means by the difference between the primary and secondary markets (I may be wrong).

    Alex,

    “Quantitative easing isn’t just giving people money, the central bank gets a bond for the asset side of its balance sheet, only it’s a corporate bond not an AGS. Otherwise it would expend equity to issue money.”

    Why does this have to be so? Why couldn’t the government just direct the RBA to credit an account with a given amount, recorded as ‘capital introduced’ on government balance sheets and a deposit at the RBA, that has nothing to do with corporate bonds? The idea is that a government would use the technique of quantitative easing (QE) to fund infrastructure projects and other long-term investments, rather than buying up its own debt.

  62. Kaye Lee

    I find it really difficult when you say taxes are destroyed. Yes, they are all just numbers in a computer, but those numbers are tallied up to compare revenue with expenditure to arrive at a figure which tells us by how much one exceeded the other. I would be much happier if you talked about how we then fund deficit spending. In my opinion, we currently do this by issuing treasury notes but could just credit an account instead. This money creation does not have to be inflationary provided it utilises the unused productive capacity in our economy and is invested wisely in productivity enhancers.

  63. Angus MacGowan

    The holes in the author’s argument are fairly large. “All spending is newly created money.” So, no taxes are ever utilised to build roads? Dear me. Given that basic logic has left the room, could someone please give it a call and see if it could come back in for a while?

    And consider this. In the country of Doobie, there was $1000 of money circulation. One day, the central banker of Doobie woke up and decided to issue 500 trillion dollars. Does anyone think that this would not have an impact? The value of each dollar would fall, because of the disproportionate buying power of each dollar. There is an economic base that is inherent in each economy.

  64. John Kelly

    Angus, that basic logic has left the room and hopefully will not return. But don’t take my word for it. Take a moment to read Professor Bill Mitchell’s blog on the subject at:

    Taxpayers do not fund anything

    Should you wish to take Bill to task, I would love to be there for the fallout.

    Question: if Doobie had a thriving economy on $1000 of base money, why did the central bank issue $500 trillion? Was the central bank governor on LSD?

  65. Angus MacGowan

    John Kelly

    Obviously, the central bank governor in Doobie would have been silly to issue $500trn. I had a read of Bill Mitchell’s blog. He says that you don’t need taxes as you can just create money.

    “Final freedom from the domestic money market exists for every sovereign national state where there exists an institution which functions in the manner of a modern central bank, and whose currency is not convertible into gold or into some other commodity”

    In terms of absolute theory, he’s right. A central bank could issue money all day and night, handing it out to whoever needs to be paid. Costs $400m to build a road? Sure thing, I’ll just create $400m.

    But the Professor’s suggestion that there are no consequences from such behaviour is very misguided, hence my extreme example of the Central Bank of Doobie. If there were $1000 in circulation, and the next day there were an additional $500trn, then the value of each dollar would be very significantly reduced. There would be massive inflation, extraordinary currency devaluation and very real economic consequences.

    The reality is that governments do tax. They do spend that tax on public services. And they don’t create money willy nilly, for very obvious reasons. Any government in the world would prefer, for political reasons, to tax less. If they could tax less, they would.

  66. Matters Not

    Sure thing, I’ll just create $400m. But the Professor’s suggestion that there are no consequences from such behaviour is very misguided …

    no consequences? I don’t think you will find that MMT theorists argue that. Indeed they are very conscious of the dangers of ‘inflation’. Seems to me that you present a ‘parody’, or ‘caricature’ of their view, without any links to support same.

    Accordingly, it also seems to me that you are being intellectually dishonest.

  67. Angus MacGowan

    I might not be intellectual, but I’m honest. I’m reading the link that someone offered, and commenting on its contents. There is no parody involved in that.

    What exactly are MMT theorists arguing then? The argument I can see them making is that taxes are unnecessary as money can simply be created. Well, that’s true, in theory. But it doesn’t work that way in practice, for simple reasons that I have illustrated.

  68. John Kelly

    Angus, if you read my article you might have come across this: “We need to pay taxes for two very important reasons. One is that it gives our currency value, i.e. people must have it to pay their taxes. The other reason is that it takes money out of circulation, which is one way to help control inflation. Too much money in circulation can be inflationary. Also, issuing bonds helps control inflation by taking money out of circulation.”

    Bill Mitchell would never say there are no consequences from creating money.

    It’s a great pity that you have added nothing to this discussion.

  69. Tarantula of Forli

    Angus,

    In fairness to Professor Mitchell, he has, at length over the years, NOT said or suggested that there are no consequences for stimulatory spending in the manner you describe. He has been at (verbose!) pains to set out the need to have regard to the level of spare capacity in the real economy to justify such spending. To wit, the absurd levels of unemployment and underemployment currently facing Australia represents a clear and solid basis to justify greater Commonwealth government spending, to take up that spare capacity and stimulate demand in the economy.

    To represent Professor Mitchell’s work otherwise, in the way your comment has, is misleading at best.

  70. Angus MacGowan

    Tarantula of Forli – Increased government spending may assist improved employment levels. I have not argued against that proposition at any stage. It’s quite a different issue to a declaration that taxes are unnecessary as money can simply be created to facilitate government spending. My point is, that I don’t see quite what Mitchell’s point is. I agree with him on the first point re greater spending. I do not however see what practical value is gained by pointing out that taxation could be replaced by creating more money for the government to spend when it is accepted reality that the consequences of simply creating more money are so negative. I am open to being enlightened as to what his point is.

    John Kelly – Can you explain how paying taxes “gives our currency value”? Does not the market determine the value of a given currency? Taxes are determined as a % of a revenue/profit/income level per entity. Also, taxes are not money taken out of circulation – the government spends taxes, thus putting it back into the economy for a number of reasons, including the stimulation of demand as referenced by Tarantula of Forli. I do not think it can be argued that governments put taxes in a box and keep them. They clearly get spent. How could one intellectually argue the need for creation of money otherwise?

  71. Matters Not

    might not be intellectual

    Angus, to cite Gramsci (with approval): everyone is an intellectual, since everyone has thoughts and ideas.

    So don’t undersell yourself. That applies to ‘honesty’ as well. No one is suggesting that you are being ‘dishonest’.

    At the most basic level, (some) people understand that what actually ‘happens’ is ‘theory laden’. For example, some people will argue that what happens in the world is down to a ‘God’. And they find all sorts of ‘evidence’ to support that ‘theory’.

    Modern Monetary Theory is also a ‘theory’ (albeit minus a ‘deity’) of how the current monetary system works. The proponents are honest in their views as well. (I think they have much to offer).

    Entertain the idea that there are different ‘theories’ of how things ‘work’.

    Once upon a time people thought that the sun rotated round the earth and provided ‘evidence’ to support that theory. Once upon a time people thought the earth was flat … and so on.

  72. Backyard Bob

    It’s a great pity that you have added nothing to this discussion.

    No, John, the great pity lies in the fact that your inherent religious sensibilities, warped and destroyed, but not entirely vanquished by your nemesis The Catholic Church, are now channeled into your new found psychological depository – MMT

    You argue like a neophyte zealot. You are not an economist, just a convert who’s clearly infatuated with his newfound ideological toy.

    Whilst your enthusiasm is understandable, I suggest as an independent observer of all debates “economic”, that you play the role of the acolyte and not the Bishop.

    I’ll spare you any Latin, as I know that annoys you. Just sayin’ as an independent observer. In short, you’re not debating, you’re lecturing, dare I say, sermonising.

  73. John Hermann

    Kaye, in answer to your query, when you write a cheque or make a creditary transfer to the tax office in order to make good your tax obligations, that money disappears from the money supply (the most useful measure of which is the monetary aggregate M1). And the money supply increases when the central government spends. Nothing difficult to understand about those processes. The associated banking reserves also disappear and reappear in the respective transactions just mentioned. Nothing conceptually difficult there either.
    The really interesting question for me is whether the credits in Treasury’s account with the central bank can be regarded as a form of money, in which case that account is a transaction account. Some economists would regard it as a form of state fiat money, however a good argument can be made for it not being a medium of exchange (which quality is generally taken to be one of the defining characteristics of money). And if it is not money then the account is an operating account, rather than a transaction account. There are many subtleties here; it is not a straightforward issue.

  74. Angus MacGowan

    “Entertain the idea that there are different “theories” of how things work”?

    Entertain it? I’ve taken that idea out to dinner, paid for its drinks, shown it round town and offered it a front row seat at a musical next week.

    Song and dance is one thing. Answering a reasonable question is another. What exactly is MMT’s point here?

    So far it seems to be common ground that state institutions can create money, but that their capacity to do so is fettered in practice by realities of inflation and currency devaluation. So far so good. And I think it is not a radical proposition from any POV that government spending can stimulate the economy and aid employment. Then there’s a suggestion that taxes are unnecessary, because the state can just create money (at this point, however, the constraints on money creation are ignored). Then there’s a proposition that taxes control inflation by reducing money in circulation, which ignores the fact that governments put taxes back into circulation via spending.

    I can’t see what the MMT theory is anymore. Is it that governments are bad because they utilise a fiat currency system (i.e., they create money, which is bad)? Or is it that governments are bad because they don’t create money to stimulate the economy and reduce unemployment?

    If anyone has a spare QED floating around, please bring it along next week.

  75. John Hermann

    Angus, you are so misinformed about what MMT is about, and your own ideas about the monetary system are so screwed up, that I would be hard pressed to know where to begin to put you straight. All I can suggest is that you read and try to understand a selection of MMT literature. A good place to start is New Economic Perspectives, and also Billy Blog.

  76. Angus MacGowan

    So, no explanation as to why Venezuela wasn’t able to just create more money to fix its problems then?

    I don’t do ad hominem attacks here (nor elsewhere). I’m not quite sure what the point of a website devoted to independent analysis is if it doesn’t permit a multiplicity of perspectives.

    I’ve been reading fairly widely about MMT (largely as a consequence of the debate here). Surely that’s a good thing? And I understand why states like Greece/Spain may be, according to MMT, unable to take advantage of a fiat system. But surely an MMT proponent could explain why Venezuela didn’t just create more money, obtain full employment, and manage inflation at the same time, especially under a socialist government?

  77. Kaye Lee

    Angus,

    Re Venezuela, my layperson answer would be that they did not use the new money to increase production or improve productivity. If we just print money and all buy a Porsche we will end up in trouble.

    Starting out in MMT, I would suggest it is easier to accept that our spending is not constrained by taxation or bond issuance.

    John,

    Another purpose of a progressive tax system is redistribution but that only makes sense if the taxes are spent?

  78. John Kelly

    Angus, just on the Venezuela thing, your sarcasm does you no justice. If you read the article you linked for us, you would have realised that it explains very clearly all the things that they (the government) did, and are doing, wrong. It isn’t about money creation, it is about trashing their own economy. An oil rich nation shooting itself in the foot and then trying to fix the blood flow by firing another round in the head. It is Zimbabwe Mark 2 with a vengeance. Don’t try to link MMT, or its principles, with their catastrophic incompetence.

  79. John Kelly

    Backyard Bob, sorry if I offended your delicate religious sensibilities. Yes, I am most definitely an acolyte when it comes to economics, newly discovered, thirsting for knowledge, loving it and can’t get enough of it. As for lecturing, well, I’ve been lectured savagely by religious zealots for most of my life. You should blame them for passing on what you perceive in me. But, I’ll take that criticism on board anyway and try to moderate my enthusiasm. Pax tibi.

  80. Tarantula of Forli

    Angus – part of the situation in Venezuela that distinguishes it from say Australia is (I believe, happy to be corrected) that it’s currency the bolivar was (until very recently I think) pegged to the US dollar, and was not fully and freely floating the way the AUD is. Pegging the currency impacts on the govt’s ability to make stimulatory spending. Can someone else with more insight take up this point (apart from linking to the Billy Blog, as I get the sense Angus would like an alternative authority to be cited, [though Angus, if you’re willing, I guarantee the answer will be there])?

  81. Tarantula of Forli

    Angus – I’d also highly recommend watching this 2014 presentation from Steven Hail, if you haven’t already.

  82. John Hermann

    Kaye said: “Another purpose of a progressive tax system is redistribution but that only makes sense if the taxes are spent?”

    Taxes do not need to be spent in order to have a progressive tax system Kaye. It’s all about relativity – in relation to the withdrawal of purchasing power from the economy. Remember that according to MMT the primary purpose of taxation is to withdraw a large part of the money spent into existence by the central government, in order to keep a lid on inflation. Those people on the far right who think that “all taxation is theft” simply do not understand that without taxation there would be hyperinflation. That is not to say that the opportunity afforded to redistribute wealth and income in a progressive manner is not an important secondary benefit (or potential benefit) of taxation.

  83. Kaye Lee

    Relativity does not redistribute – it just means the big end have less. The redistribution part comes when it is spent on things that benefit others (or all). I don’t see this as a secondary benefit. Why spend the money into existence just to withdraw it? What is the benefit? I understand the inflation point – I am talking specifically about redistribution

  84. John Hermann

    My point was not about spending per se, it was about the need to spend taxes. If there is a perceived need to increase the level of government spending (i.e. for redistributive reasons) then in most economic scenarios taxation will also need to increase if inflation is to be restrained. However that increase in taxation does not need to be in proportion to the spending increase — it all depends upon the level of unused capacity within the greater economy, including involuntary unemployment. I don’t think we are in basic disagreement.

  85. Tarantula of Forli

    Kaye – is it not the case that money is not necessarily taxed from the same places it is spent? To influence behaviour/activity on one end (taxation) and stimulate activity somewhere else (spending)?

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