For a start, from last night’s Ken Craggs’ piece on today’s backbench debate in parliament, the nature of money creation is going to be covered.
The reasons you and I will do nothing on this are many:
1. The source is untrusted – it comes from someone you don’t know, Ken Craggs and is brought by someone you’re not over-enamoured of, James Higham. So it’s off to a bad start.
2. Even the fairminded see no corroboration anywhere they read, so it seems some invention, although invoking the name Carswell in this debate brings a familiar face into it. And it does seem to be actually happening if you follow the links, although it’s ‘just another backbench debate in a sideroom’.
3. You’re overwhelmed by what you yourself must do today – get into the commuter grind to get to work, do what they require all day or else you have a dozen jobs to do in your unemployment or retirement. You’ve no time for this blip on the radar in parliament, the MSM are not trumpeting it, therefore it is not real.
4. Time is ticking by, even as we read this – you must do your next job, mine is to go to town to do my … er … banking. I’m not feeling well, some medical issues of late. Anyway, there are too many bloody issues just now, they’re coming at us from everywhere and everyone thinks his or hers is the most important, plus there’s Kim Kardashian’s bum to look at and the book I’m currently reading and the kids to feed, Christmas shopping to get done.
5. Even if I do have the time to read Ken’s piece and maybe even click on one of the links, I get South Park and simply haven’t the day to day time. There are too many links to be bothered.
6. It’s boring:
In general UK government borrowing does not create new money.
Please see page 304 of Modernising Money.
Sorry Bob, but thats just objectively wrong. And here’s why:
The Tsy is the Govt securities monopolist
The Central Bank is the reserve (currency) monopolist
The only way to “buy” Govt securities is with Govt currency
These are facts, they are not my opinions. And your understanding and framework of the monetary system must incorporate these facts. So where does the currency that the Govt “borrows” come from? Well, it necessarily comes from the Govt.
Furthermore, Govt securities are digital pound accounts at the BofE, reserves (excluding the negligible amount of physical cash) are digital pound accounts at the BofE. Both account types are liabilities of the Govt (just different Govt agencies). Why anyone would count one type of account as “money” and not the other is confusing.
Using the scenario from page 304 of MM, we suppose that a
pension fund P, which has its bank account at Megabank, buys £1M of new gilt edged stock. Then:
(1) P’s bank balance (Megabank’s liability) decreases by £1M
of commercial bank money.
(2) £1M of central bank money (Megabank’s asset) is transferred from Megabank’s BoE reserve account to HMG’s BoE account.
(3) HMG transfers £1M of central bank money from its BoE
account to the BoE reserve account of Regalbank (a new asset for Regalbank) where the NHS has a regular bank account from which it can spend into the general economy.
(4) Regalbank credits the NHS account with £1M of spendable
commercial bank money (a new liability for Regalbank).
We deduce from (1) to (4) above that:
Megabank’s balance sheet shrinks by £1M and Regalbank’s
balance sheet expands by £1M. The integrity of each is maintained.
The aggregate amounts of central banks money and commercial
bank money in the system both remain unchanged.
No new money, of either sort, is created.
deficit spending adds pound deposits to the banking system, these pound deposits can either be in the form of reserves or gilts. Either way the Govt’s liabilities (Non-Govt assets) increase.
If you want to count pound deposits in reserve accounts as money and not pound deposits in gilt accounts, then you would have to apply the same logic to checking and savings accounts at private banks.
When you personally shift your bank deposits at RBS from on-demand checking accounts to a term deposit account (CD), do you consider that money as gone? Of course not, so why would consider the same operation at the public bank any differently?
Auburn Parks Bob Welham • 14 days ago
Sorry Bob, even though you have the accounting right you are getting the implication wrong:
Where did the MegaBank get the reserves? They got them from the only place they can come from, the central bank.
The Central bank provides the currency with which to “buy” the gilts.
This is why QE doesnt add anything to the economy and its not “printing” money in any meaningful sense. The Tsy only spends and taxes in Govt currency. So when the Tsy spends 1M and taxes 900K, there is 100K in Govt currency left in the banking system. This currency can only be used to either “buy” gilts or pay taxes, there is no third options in the aggregate (again, cash withdrawals are not really relevant to this process).
Page 304 of MM demonstrates convincingly that each individual event of UK government borrowing changes neither the amount of central bank money in the system, nor the amount of commercial bank money.
Extrapolating, the series of such borrowing events which constitutes government deficit spending also changes neither amount of money.
It follows that UK government deficit spending of itself does not create money. I doubt that this can be made any clearer and I leave the matter at that.
In contrast, since almost all QE gilt purchases were made from non-banks, the QE program did increase both the amount of central bank money and commercial bank money, each by £375bn.
Please see pages 90-100 of the following BoE publication, in particular figure 1, to confirm this:
As far as the accounting for QE:
Person A sells 1K gilt to B of E and uses private bank B:
Person A assets (private bank B checking account) +1K
Person A assets (gilt account at BofE) -1K
Bank B’s assets (reserves) +1K
Bank B’s liabilities (Person A’s account) +1K
Govt (Tsy) liability (gilts) -1K
Govt (BofE) liability (reserves) +1K
As you can see, nothing gets added.
Auburn Parks Bob Welham
Even though I’ve addressed all the points you’ve written, you’ve not engaged with my examples at all. The reason for this is that once you do so, you must acknowledge that you are wrong.
Again, I agree with you (the accounting is undeniable), issuing Govt securities does not add any money, as it exchanges one type of pound bank account type for another (reserves for gilts). its the deficit spending that adds the money. Which is what I’ve said all along.
We already did the accounting on Gilt issuance, now lets complete the cycle and do the spending shall we?
Govt spends 1K on retirement for person A (who banks at private bank B)
Person A’s checking account at bank B +1K
Bank B’s liabilities (person A’s account) +1K
Bank B’s assets (reserve account at BofE) +1K
BofE liabilities (Bank B’s assets) +1K
Tsy reserve account (asset) -1K
BofE liabilities (Tsy account) -1K
So the private Bank B’s net position is unchanged
The Govt’s net position is +1K liability (Bank B’s reserves)
Person A has +1K
The accounting couldn’t be clearer.
Taxation reverses this process, and to the extent that there is spending above taxes (deficits), the non-Govt gets this income.
Both taxation and government borrowing of themselves decrease
the aggregate amount of commercial bank money in the immediate term. Government spending of itself increases the aggregate amount of commercial bank money in the immediate term, whether that spending is funded by taxation or by borrowing, that is whether or not it is deficit spending.
These fluctuations of aggregate commercial bank money due to
government taxation/borrowing/spending are consequences of the government itself having an account at the BoE and thus holding its money there as central bank money. They exist because of the two-tier structure of the UK money system. Over time, allowing for a little fiscal lag, they balance out. Until it spends into the general economy, the government has no need to manifest its money as commercial bank money.
So the UK government tax/borrow/spend cycle has no net effect
on either aggregate central bank money or on aggregate commercial bank money. No enduring new money of either sort is created.
Government IOUs (gilts) are created by government borrowing
and, under certain circumstances, these are used as near-money, but that is a separate matter.
bob- commercial bank deposits are just one type of money, certainly not the only type.
The nice thing about accounting is that, like physics and math, there is no ambiguity. Accounting is not an opinion, its not politics. I’ve laid out the accounting for you, and the result is clear.
Deficit spending adds Govt IOUs (money) to the non-Govt.
Issuing Govt securities merely changes the type of Govt IOU, not the number.
If you’d like to argue against these facts, please use the accounting.
But you wont, because you cant. The only thing that needs to change is your cognitive bias. You have personally never thought of Govt spending as creating money, you obviously think of Govt finances in terms of your personal finances, so when presented with evidence counter to that, you are experiencing cognitive dissonance. Thats totally normal, but it doesnt change the fact that you are wrong
Bob Welham Auburn Parks
We seem to disagree over semantics. If gilts count as ‘money’ then of course deficit spending creates new money. If we stick to the three types of money outlined on page 3 of Where Does Money Come From, and regard gilts only as near-money, then it does not.
I would argue that the latter interpretation is the more conventional and certainly it is the one usually adopted in discussions on the PM website.
As far as I am aware, there is no cognitive dissonance on my part, and ad hominem attacks do not engage me. I simply recognize that we use the word ‘money’ differently.
What is the difference between a 12-month CD at the royal bank of scotland and a 12-month gilt at the bank of england?
I was certainly not attacking you Bob. Cognitive dissonance is something everyone is a victim of throughout their lives, its just human nature.
On the “are gilts money” front. If you dont think term deposit public bank accounts are NOT money thats fine, but then you must also exclude term deposit private bank accounts from the money supply count. You are free to do this, although it makes no sense.
7 Any the wiser? I understood some of that but as I’m in my blogrounds and have people to visit, I’ll put this aside, mentally, and determine to come back and try to understand it this evening although I’ll be dog-tired after my project and other things will get in the way today, e.g. having to sort out the goods which didn’t arrive yesterday, plus bills I have to pay and I dispute … and so it goes on.
8. And there goes possibly the only opportunity Carswell and others had to have a debate which involved the people of this land. If other people who read this reacted as I did, it fizzes out as an issue. The majority of the UK and abroad who don’t read OoL never find out about it anyway unless a blogger they visit mentions it.
Who knows – you might strike lucky and Guido might mention it – that means a few thousand more get to see it and the people in his comments thread with the funny names can make fun of it all.
9. And thus nothing is done. Nothing is ever done, no one understands and those creating money and debt and all that stuff we hear about in our austerity keep doing as they do and we keep doing as we do, oblivious but moaning about our lot all the same.
Here was a chance, a tiny chance, we thought for a moment and then said, ‘Nah, have to finish breakfast and get going for the day.’
10. And there is money creation, debt creation and power in ten easy steps.