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Dear God he still doesn’t get it, does he?

That is because all money is now, as a matter of fact, created out of thin air when banks lend money, inclduing when (as will be legal again after Brexit) the Bank of England lends directly to the Treasury.

The Bank of England creates base money. The banks, as banks, do not create money. The banking system as a whole creates wide money, or as we might call it, credit. These are vital distinctions that even a Senior Lecturer should manage to grasp.

There is then no technically reason why all government debt could not be cancelled (as this QE debt has, in effect, been) in this way.

QE hasn’t cancelled the debt. As with the Federal Reserve later this year they will stop rolling it over–although the BoE might vary the timescale– at some point.

But this this then leads me to state the other obvious fact: government debt is just another form of governmement created money. It’s convertible into cash, as QE proves.

Well, yes, obviously, I can take a Treasury and go and get cash for it. As I can with some gold, some euros and my used flip flops. So?

First, if we are to have some inflation (and we generally agree two to three per cent is good) then we need more money. And government debt is money. It is, in effect, the promise to pay that underpins the economy. So inflation says we need more of that debt each year. If we don’t get it then the economy is starved of cash and that causes economic stress, at the very least.

Jeebus, not even getting this right. It’s this distinction between base and broad money again. One way of describing that being the velocity of circulation of money.

You know, MV=PQ all over again?

Sure, we want to have expanding M0 as the economy expands, quite right that the restaurant serving 100 covers needs more crockery than the one serving 50. And we also want to have more M4, or credit, or wide money, as the economy expands too. But there’s a relationship between the two, M0 and M4, usefully called V.

Government debt is not, for example, M0. The cash created under QE is. See the difference? Desiring a larger money supply means not creating more government debt, it requires creating more M0. Or, of course, V can change which is why we did QE, to compensate for the manner in which V plummeted.

He’s just not getting even the basics, is he?

So inflation demands more government debt. It’s the best deal for a growing economy that there is. That’s why governments have to create it.

He’s making the leap between more M0 and more Treasuries. They’re just not the same thing.

Third, banks need this debt. When most people put money in the bank they assume it is safe. That is because the government guarantees the deposits most individuals make in banks so that if the bank fails the depositor will get their money back. That is the only reason most of us trust a bank. But this does not apply to businesses depositing millions of pounds in their bank accounts overnight, as happens every night in the UK. Those businesses have no such guarantee. If the bank fails on them, as Lehman did in 2008, then they might well go down with it. So they don’t deposit the cash. They enter into contracts with banks. The banks sell them government bonds in the evening, which the despoitor then own, and which cannot fail because the UK government (unlike banks) can’t fail, and which the bank agrees to buy back in the morning at a slightly higher price, with the increase representing the interest due. If there were no government bonds to fulfil this role then the banking market would grind to a halt.

He’s entirely forgotten about the overnight and interbank markets, hasn’t he?

Fifth, interest paid on government debt is a good thing. As already noted, it underpins private pensions for a start. And a lot of the most stable savings funds. I’m not saying this is a perfectly equitable redistribution of wealth, because it is not. But I am also saying it is not income lost to the economy.

No interest paid is money lost to the economy you idiot.

So we need debt, and because of inflation, growth and growing numbers of pensioners we need more of it. How much more? Notional national debt is now about £1.8 trillion and after QE it is around £1.4 trillion. Assume inflation of between 2% and 3% and how much extra debt do we need a year? Anything between £30 billion and something in excess of £50 billion would seem to be the answer. It’s not a precise science: there will be swings and roundabouts.

You see? He’s confusing M0 with Treasuries.

But the point is that this new dent is vital: it has to happen or the economy is harmed. And this sum excludes debt issued for specific purposes, like an infrastructure fund. Issue less than this and the economy will be in trouble. That’s a simple fact and explains why the Tory obsession with a balanced budget is so dangerous.

Dear God. And this man teaches economics in a British university? OK, well, Islington Tech perhaps but really….we need £30 to £50 billion more a year of Treasuries in order to finance the economy? Just to let you in on a little secret. In 2005 M0 for the UK was around £40 billion, £45 billion. Yes, we want that number to grow, gently, along with the size of the economy, the crockery argument. As long as, you know, V doesn’t change too much.

He’s entirely and totally at sea here.

Which brings me to the final fallacy that needs tio be addressed, which is that one day the debt will have to be repaid. No it won’t. That’s because this debt is money. That makes it unlike all other debt which is denominated in money. They’re simply not the same thing. Debt denominated in money has to be repaid. Debt that is money is only repaid if we want to destroy money. And why would we want to do that? Is anyone seriously suggesting that we can live in a moneyless society in future? I seriously doubt it. And in that case national debt does not have to be repaid, ever, which is exactly what history tells us.

Government debt is a good thing. The danger is inherent in the myth that it isn’t.

What’s even better is that as we reverse QE by not rolling it over we will in fact not be reducing the amount of government debt at all but we will be destroying M0, money. That will be the very point of doing it.


Can I get a job teaching grievance studies somewhere? Sure, I know nothing at all about it but that doesn’t seem to be a current day barrier, does it?

18 thoughts on “Dear God he still doesn’t get it, does he?”

  1. Are his students examined by him or by external examiners? If external examiners, are they going to be demanding their money back?

  2. But he is simply going with the flow, no more no less than the major political parties etc. at the present. Yesterday, 2 May, I posted on the effective abolition of credit limits and rates of interest. Lie back and think of the Bank of England.

  3. jgh

    It’s International PE – a field overrun with Marxists and fellow travelers. By the standards of the field, Murphy is only moderately bad.

  4. Jeez, you really need to sort out your Quoting tagss, Mr W.

    I have enough trouble trying to understand this M0 M4 lark without struggling to understand who is saying what!

  5. This is the problem when reality is complicated – the charlatans, chancers and idiots get in first with their ‘simpler’ explanations.

    No economic fact which is counter-intuitive or complicated has ever penetrated the heads of more than a couple of percent of the population, even when they are directly affected.

  6. I sneeze in threes

    Money supply doesn’t need to expand with a growing economy, what’s wrong with falling prices?

  7. Tim (or someone)

    Is the Murf simply in MMT mode here?

    Ie, if you read through what he has said, in that context, does it make sense?

    We do know he’s a (partial) fan of the magic tree?

  8. No, even in MMT or magic money tree mode this still doesn’t make sense. Because he’s still confusing Treasuries, or Gilts, with base money. He’s argle bargle between M0 and M4.

  9. Tim

    Thanks, my memory is appalling.

    It was a while back, and in the back of my mind I had MMT as somewhat ambivalent wrt to M0 and M4. Ie, create/print, and then simply tax as necessary to control inflation. I had perhaps forgotten that the printing always needed a lender? Which makes sense because part of the rationale was that government debt was ‘good’ as it represented wealth (private savings)…

    But in which case, it’s not so much “printing and taxing”, as just “borrowing and taxing”, ie “more state”. OK, time to go back and re-read & refresh.

  10. Violet Elizabeth Reed will be along to point out the Wondrous Tuber is indeed correct in 3….2….1….

  11. Can I get a job teaching grievance studies somewhere? Sure, I know nothing at all about it but that doesn’t seem to be a current day barrier, does it?

    You may possess the required ignorance, but sadly for your employment prospects, you lack the inherent stupidity so necessary for acceptance into the fold… not to mention sustained career success.

    No job for you, Timmy.

  12. Gilts Guy gave Spud a good kicking in the comments. In his replies, Spud shows why he gives cunts a bad name – he is the quintessence of arrogant ignorance.

  13. As far as I can fathom the spudotollah advocates the magic money tree as the solution to all economic problems and all the government has to do is crank up the printing presses for instant nirvana- with no risk or ill effects. In a word free money.. Everyone who says this is a crap idea he labels as an idiot or worse. He never considers of course that he may be wrong or question why if it’s such an instant cure all, why no countries are proceeding with this wonderful idea. I think it’s what he’s advocating but who knows with him.

  14. And tomorrow on the TRUK blog…

    “The Tories are responsible for more debt than Labour ever was; disgrace!!!”

  15. This is the commentary equivalent of the Cullinan Diamond – in one of his posts this morning!

    ‘really think you should look at the history of government debt since 1694. It’s grown, a lot, and almost continuously. And very rarely has any been repaid.’

    Giltholders have been shafted for 300 plus years……

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