Economics in no lessons

Let’s start at the very beginning. A person goes into a bank and asks for a £1,000 loan. The bank checks them out, and agrees. And that is all that it takes to create new money. Money is just a promise to pay. That simple exchange of promises is all it takes to create it.

No, that’s credit. OK, so, we can call that money if we like. But it’s broad money. M3 or M4 money. This is important. It’s not the same as central bank money, which is narrow, base or M0 money. The big difference is that wide money is the MV and narrow the M in the money equation – MV=PQ. This is important.

Tax is what gives the pound its value. If the government could just create money without limit it would soon be worthless. But it does not do that. Tax ensures that the government can control the amount of money in the economy.

Nope, we’ve just agreed that a bank can create that wide or M3 money. Therefore the government does not control it. Influence, sure, but not control. Further, it is not tax power that gives money its value. We have monies that are not taxed – bitcoin say. It’s not a very good money and all that but it has value. Further, we have monies that have no value despite taxing power existing. Z$ for example. So, again, we find ourselves in a world where taxation can influence the value of a money but cannot be the full and total determinant of said value.

We’re not in SnippaWorld, where influences are total reality.

And there is. We could have a government promise full employment. It could create the jobs we need. It could force up the minimum wage by guaranteeing local work for anyone who wanted it. And we could improve benefits too. All using government made money. Not tax.

But would there be inflation then? Not if we then taxed enough and cut spending a bit. But people at work in good jobs do pay more tax. And they claim fewer benefits. So that condition is easy to meet. And if we still needed more tax? Well, we could do that, if needed.

The difference between this and the old tax a lot first then spend the money is what? We still end up in a high tax, high government spending, world, don’t we?

Eleventh, inflation is not now controlled by interest rates – because we don’t want them to rise. It’s going to be controlled by tax. I admit, right now no one has an ideal tax to achieve this goal. I am working on it. It is possible. And it’s progressive, and so fair.

Snigger.

The underlying problem here is that Snippa is just sure that he’s found the Philosopher’s Stone of economics. Government can control interest rates, the quantity of money, the inflation rate and the FX rate all at the same time. With the one instrument.

Naaah, ain’t gonna happen.

11 thoughts on “Economics in no lessons”

  1. Bloke in North Dorset

    Government can control interest rates, the quantity of money, the inflation rate and the FX rate all at the same time. With the one instrument.

    Its all very easy in Kim Spud-il land.

  2. And there is. We could have a government promise full employment. It could create the jobs we need. It could force up the minimum wage by guaranteeing local work for anyone who wanted it. And we could improve benefits too. All using government made money. Not tax.

    This is brilliant. I bet previous governments wish they had thought of this. We’ll promise full employment and lo, full employment cometh. Doing what? I hear you cry. Who knows and who cares, but it’ll happen cos the government promised it. Who’ll buy the goods and services? Who knows and who cares, but it’ll happen cos the government promised it. He’s a fuckin genius.

  3. Japan has had near full employment for close to 70 years. They’ve been powering ahead with a growth rate of minus 5% and interest rates of minus 0.1%. Woo hoo!

  4. Therefore the government does not control it. Influence, sure, but not control.

    Well, governments and central banks setting reserve and capital adequacy requirements are what bankers would call control so Captain Potato’s theory adapted for a once proud and distant land would have to be modified:

    An Italian person goes into a branch of the Banca Monte dei Paschi di Siena and asks for a €1,000 loan. The bank doesn’t bother to check them out, and a hot salty tear runs down its venerable hollowed-out cheek because pretty soon Monte dei Paschi will be swimming with the pesci.

  5. Where is money created? The person who takes out the loan now has £1,000 but they also have an obligation to pay money regularly to the bank to repay them. This just isn’t the great ‘gotcha’ that Ritchie thinks it is.

  6. Eleventh, inflation is not now controlled by interest rates – because we don’t want them to rise. It’s going to be controlled by tax. I admit, right now no one has an ideal tax to achieve this goal. I am working on it.

    Comedy gold. My bet is that it will be the London Congestion Charge plus the Dart Charge

  7. Is it vanity that means he thinks only Government can create money?

    Anyone can, and do, create ‘money’. Anything that ends up as medium of exchange.
    All it takes is a reasonable spread of people who will exchange good & servicves of real value for some token, for later redemption.

    Traditionally cigarettes, I recall? (Prisons, Occupied Germany, and UK schools…)

  8. ” And there is. We could have a government promise full employment. It could create the jobs we need. It could force up the minimum wage by guaranteeing local work for anyone who wanted it. And we could improve benefits too. All using government made money. Not tax.

    But would there be inflation then? Not if we then taxed enough and cut spending a bit. But people at work in good jobs do pay more tax. And they claim fewer benefits. So that condition is easy to meet. And if we still needed more tax? Well, we could do that, if needed.”

    Thus spake Leonid Breznev. And behold it was so. And because Sakha (aka Yakutia) mined one-quarter of the world’s diamonds and many tons of gold he was able to buy one million tons of wheat a year from Australia to feed the inhabitants of what is now and was before 1917 one of the world’s two largest exporters of wheat.

    When I visited Yakutsk they loved Nicky Oppenheimer because he personally came to Yakutsk (where it’s -50C in winter) to do a deal with the diamond miners whereby they (who worked underground in sub-freezing temperatures) got more than the polishers in India and Amsterdam – a change from Soviet conditions – and locals were trained and equipped to polish the less valuable stones providing employment and income (especially valuable in the winter).

    I hadn’t previously rated Nicky Oppenheimer because the press described his as a playboy but since then I prefer Nicky Oppenheimer’s deal to Brezhnev’s. Clearly this is another point on which Murphy and I differ.

  9. aaa

    Where is money created? The person who takes out the loan now has £1,000 but they also have an obligation to pay money regularly to the bank to repay them.

    It’s the way “money” is defined. Of course, you are right. It mostly all nets off to nil, that’s the essence of it, a new asset is created by the new liability. But “money”, M4, when they talk about “creating money”, is defined purely as the asset side of that equation, not the net position.

    When you repay the loan (as a result of others paying you for what it is you are producing that gives you the cash to do that), no change to the net nil, obviously, but the amount of gross asset (and liability) does then reduce, “destroying” money.

    “Creating money”, it’s emotive, because it sounds like producing lots of twenties out of thin air…. Whereas actually, it’s a technical definition.

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