Let's Talk About Money and Government Spending

[pErvinalia]

I want to put an idea to you. It's not a novel idea, but it's certainly counter-intuitive (or at the very least, strange on the face of it).

Virtually all new money is created out of thin air as debt. I wrote a long blog post about it and discussed aspects of it in some thread around here somewhere.

A corollary that flows out of this is that the vast majority of economic growth is created out of debt. And the corollary that flows out of this is that it is literally impossible to pay off world debt. Country 'A' might be able to pay off its national debt, but it will have to be at the expense of other countries borrowings, and/or its own citizens private borrowings . Another corollary that flows out of it is that if all debt (private and public) was to be paid off, the world economy would fall over in a screaming heap, as the action of repaying debt removes that money (and therefore spending power) from the system.

So, for our economy to function, we need debt. Therefore it is illogical to see debt in itself as a bad thing. The interest paid on that debt, however, is traditionally viewed as a problem, as it grows exponentially. And from the corollaries above - even if country "A's" debt was being repaid, world debt would still be growing exponentially. But when we consider the last corollary from above, we see that debt must not be repaid if we want the world economy to keep ticking over. The interest applied on that debt when the money is created is essentially propping up the world economy.

If the only real purpose interest is serving is to stop total world debt being repaid, then we can just do away with it and simply legislate that debt not be repaid. This leads to the idea I want to present. That is, governments take the power to create the vast proportion of money away from private banks and handle much of it themselves. And given that debt isn't a bad thing, governments can simply create money when it is needed for productive purposes in the economy. Need to build a bridge? The government simply creates the money to pay the contractors, and the money never needs to be repaid. This is the counter-intuitive bit. This goes against everything you've ever been taught. Free money doesn't just grow on trees! Actually, it can. When you consider how money is actually created out of thin air, and that debt itself isn't a problem, and that interest doesn't actually need to be charged, you can view it from a different perspective.

As far as I can work out, inflation is the only variable in play here. There's actually a couple of competing theories on what drives inflation. I'm far from an expert on it, but it seems to me that both of them ultimately relate to the ease at which money can be spent. So essentially, demand for products and services. As demand goes up (via whichever theoretical mechanism) so do prices and therefore so does inflation. As demand falls, inflation goes down.

So while the primary argument against just handing out free money would be an inflation risk, it seems to me that if the government is controlling the bulk of new money injection in society, it controls much of the demand. Traditionally, at least for the last 50 years or so, monetary policy used levers on interest rates to control much inflation (again, essentially controlling demand). At least, that's the currently prevailing monetarist view of inflation. Given interest as a lever would be much reduced under such a system as I am describing, its critical that the idea of government controlling inflation through demand manipulation is sound. I think it is, but as I said, I'm far from an expert.

To preach the controversy a bit, it could be helpful to take a purist monetary view of inflation and regard money supply as the top-level factor in inflationary states. In this case, inflation can be expected when money supply outstrips productive economic growth. And the inverse, deflation can be expected when the money supply falls short of productive economic growth. But this model of inflation is actually even more amenable to the idea I am proposing, as money supply will literally match economic growth by definition as long as the government is only issuing new money for productive growth (as opposed to growth that is more akin to gambling, like financial markets). In reality economic growth will slightly outstrip the government money supply, due to the concept of the "fiscal multiplier". But this is irrelevant to the inflation question as long as the multiplier remains reasonably stable over time.

The biggest danger in a system like this is that inflation will occur not because of structural reasons, but because there is technically no upper limit on prices that the government can pay for services. So lack of a proper competitive tender process and/or price collusion will hammer a system like this. So in this case it is important that a market be allowed to set appropriate prices. We can't have the government paying out $10 billion for a bridge that should cost $10 million. But even if they did, such a country would find its currency devalued massively to the point that it wouldn't be able to afford imports. In fact the government could use this type of price manipulation as a lever to help set appropriate exchange rates that better match the country's import:export balance.

Hmm, seems I've written another blog post. Any thoughts? It would be good to find holes in my argument before I put it up as an actual blog post.

[pErvinalia]

Here's an article (fairly poorly written, IMO) that touches on some of the same issues. As far as I can tell, there's a growing understanding out there of how money is actually created and how we've got the functioning of an economy and monetary system arse-backwards.

The only way for millennials to save, for households to pay down their debts, for all of us to have good job prospects and more security and to avoid that credit crunch, is for the Government to go back on everything they have been saying for years, and to increase its spending.

An increasing number of experts are now going against the mainstream, and making the point that for the rest of us to save, the Government has to borrow.

"Voters have been force-fed this neoliberal line that is without foundation in theory, history, experience or practice," said Professor Mitchell.

"If the non-government sector wants to save dollars overall, then the Government has to be in deficit a dollar. It's not an opinion. It's national accounting."

When the Government tells you that a social safety net for our most disadvantaged is a drain on the economy, it wants you to believe it can run out of the currency it creates.

It implies that the Government is just like a household, which can only spend what it earns, while in practice it is closer to the truth to say that households can only earn if the Government spends.

http://www.abc.net.au/news/2016-12-08/t ... 45426460=1

[Tero]

Your blog is hard to read in that the font is gray on white.

Leftist economics is always Keynsian
https://en.wikipedia.org/wiki/Keynesian_economics

[pErvinalia]

Your blog is hard to read in that the font is gray on white.

Yeah, I might make the text a bit darker. I've noticed that as well.

Leftist economics is always Keynsian
https://en.wikipedia.org/wiki/Keynesian_economics

This is more than Keynesian, though, as it's the interaction of the monetary system with the economy. Keynesian economics doesn't have anything to say about money creation and the interest charged on that, AFAIAA.

[Tero]

Shh! You can't talk about money creation! It's existence is built on belief.

[pErvinalia]

A thought just occurred to me, and that is perhaps it is necessary for the money created and distributed by the government to be paid back. If it wasn't, that money would stay in the economy and next year's GDP would be higher by about that amount again as well (depending on reductions via savings, tax (which would be mostly abolished under this system), and imports). This would lead to the economy outstripping money supply. Although, this could be a good counter to the situation of the money supply outstripping the GDP due to investment loans from private banks for rentier type activities.

[JimC]

Just as a general comment; if governments increase their debt via investing in new infrastructure which simultaneously employs people while helping to drive other parts of the economy, then the debt is not the problem that economic dries assume it to be; this without buying into your whole economic package, rEv...

[pErvinalia]

Yeah, that's generally true. The problem is that debt is compounding due to the interest charges. It's impossible to pay off total world debt. A single country could do it via either an increase in debt in the rest of the world, and/or an increase in their own citizens private debt. And how this has historically worked is that most of the money servicing public debt repayment is funded from private debt.

[rainbow]

A thought just occurred to me, and that is perhaps it is necessary for the money created and distributed by the government to be paid back. If it wasn't, that money would stay in the economy and next year's GDP would be higher by about that amount again as well (depending on reductions via savings, tax (which would be mostly abolished under this system), and imports). This would lead to the economy outstripping money supply. Although, this could be a good counter to the situation of the money supply outstripping the GDP due to investment loans from private banks for rentier type activities.

What could go wrong, if governments just printed money as they wished?

[pErvinalia]

You ripped that of from my blog post!

Two points, 1 - when interest is applied borrowing money endlessly is a no-win game; and 2, it depends on how much money is created and where it is spent.

[rainbow]

You ripped that of from my blog post!

Two points, 1 - when interest is applied borrowing money endlessly is a no-win game; and 2, it depends on how much money is created and where it is spent.

You do not give the government the right to print endless money, or it becomes worthless. That is why reserve banks in many countries are independent.

[pErvinalia]

In my blog post I talk about the need for an independent body.

Also, in the OP, I'm suggesting that spending on productive ventures won't be overly inflationary. But as I said, I'm not an expert on inflation. If you can explain why it would be, then I'd welcome that.

[NineBerry]

This will only work with a world government and a world currency. We are sadly very far away from that..

[pErvinalia]

Why would a world government be needed?

[NineBerry]

Because of the effect described earlier. When one country can decide to increase its amount of money, the currency of that country is devalued compared to other currencies.