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The solution to money woes was there all along

When we were little my siblings and I would accompany my mother as she went from greengrocer to butcher to grocer in those pre-supermarket days. Often the first place she visited in the daily round would be the local bank, National Westminster as I recall, where she would queue to write a cheque “to cash”. (For thus it was, my children, when cash machines and internet payments were as yet unknown.) Boring though it was listening to all those grown-up conversations, at least I was learning about how the world worked.

One day my parents were moaning about lack of money. I was tired of their obtuseness in the face of the obvious. I stamped my little foot and said, “If you haven’t got enough money, go to the bank and get some more.

What are you laughing at? I’ll have you know that my youthful economic ideas have been taken up by our government in waiting:

Labour will promise to increase spending on infrastructure and public services, the script says. Among the key pledges are a £10-an-hour living wage, a national investment bank to create £500bn to fund capital projects and infrastructure, and a guarantee on the triple lock for pensions.

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38 comments to The solution to money woes was there all along

  • That’s the wonderful thing about fiat money. You can just create it – or rather you can’t but the government can. There’s a rumour this affects the value of the pound in the voter’s pocket but Jeremy probably thinks that is lying capitalist propaganda, plus he regards his likely voters as expecting any pounds in their pocket to have come from the government rather than anywhere else, plus redistribution is his aim and inflation redistributes from the private sector to government like nobody’s business. So what’s not to like?

    (Quite a lot actually, but he’s not going to win the election, thank God!)

  • Bilwick

    And if the bank runs out of money . . . why, just print more! That always works out well.

  • Fred Z

    Sadly, the tendency of all governments to wreck their currencies for a quick voter popularity uptick widens the gap between the poor / middle classes and the rich.

    The rich don’t own much cash and don’t care that much what happens to its value. They own hard capital all over the world – stocks and real estate. The old folks with 50,000 pounds in the bank, or the young couple saving for a home, they get their cash value hammered and their lives suffer.

    I’m not rich, but comfortable, and I don’t care too much when the Canadian dollar dives because of oil price or government woes. My money is in real estate rentals and stocks. Much of it the hell out of Canada in the NYSE/NASDAQ and in your benighted country. Some nice FTSE P/Es you got there. Plus I’m old and don’t spend much.

  • Mr Ed

    But this has in effect, all been done. The Bank Of England has Quantitative Easing, ‘QE’, which is corporate welfare for the favoured failures; the ‘Living Wage’ has ratched up the minimum wage (btw is there not a case for a ‘Dying Wage’, the rate at which a minimum wage kills jobs?), and the capital projects have been stolen from Donald Trump, who wasn’t the first anyway.

    Douglas Adams (QEPD) satirised fiat money wth the Golgafrinchans and their ‘leaves as currency’ plan, hatched when they landed on Earth, followed by reverse ‘QE’, a massive defoliation programme.

  • Patrick Crozier

    I often read a Natalie Solent post and then want to comment. Unfortunately, this poses a problem. Natalie’s posts are so erudite and self-contained that I find that I have nothing to contribute.

    Other than: “I agree”.

    Which does not seem to do justice to her labours.

  • Laird

    The funny (or sad) thing is, we’ve all heard stories like that. Not too long ago one of my young great-nieces told her mother to just go to the ATM when she was low on funds. And we all laugh at the naivete of children. Yet somehow we think that the same rules don’t apply to government, and we laud over-educated fools like Paul Krugman (or that uber-idiot J M Keynes) and consider them to be economic geniuses for touting precisely the same idea at a macro scale.

  • Alisa

    Same here, Patrick. However, I do have something to add to Niall’s comment:

    That’s the wonderful thing about fiat money. You can just create it – or rather you can’t but the government can.

  • Paul Marks

    There is a massive deficit already (“Austerity” is a myth – there is very large scale deficit spending) – and the opposition (Labour and the Lib Dems) want to spend even more money.

  • Lee Moore

    When we were little my siblings and I would accompany my mother as she went from greengrocer to butcher to grocer in those pre-supermarket days.

    When I was little we used to do the same thing and I delighted in computing the change as soon as the greengrocer etc announced the price. “Three and ninepence” he would say as my mother handed over ten bob, and I would chime in with “That’s six shillings and threepence change.” Some shopkeepers were amused that I could do it a lot faster than they could. Some less so. Nevertheless it was jolly good for my mental arithmetic, which has been going downhill at some speed from its peak performance when I was eight or so.

    Anyway

    “That’s the wonderful thing about fiat money. You can just create it – or rather you can’t but the government can.”

    is interesting because of course anyone can create money – the difficulty is getting people to use it. The government gets away with creating money, except in extremes, because people are willing to use it. Even in the depths, or heights, of the German hyperinflation, local municipalities would create scrip money of various types and people would use it. And the rentenmark reform had next to no substance behind it. It worked on a wing and a prayer because the government did at last limit the issue (or at least said they were going to, though it took a while) and because people wanted to believe in it.

    So the fun mystery is – what is it that makes people trust government money for so long ?

    My theory – or at least one of them – is that even quite rapidly inflating currency is still very useful as a medium of exchange. Even at 300% inflation a year, you can get paid in a wad of notes and use them in the supermarket with little worry about depreciation in the four or five days that might have passed since you got the money. As a long term store of money, such currency is cxxp. But for most consumer purposes if it holds its value, more or less, for a week or two, it works.

  • NickM

    “inflation redistributes from the private sector to government like nobody’s business.”

    Niall. I am an economics dunce. Could you explain or point me somewhere. I’d appreciate.

  • Nicholas (Unlicenced Joker) Gray

    It’s all to do with blind faith, screw the objectivists! Once upon a time, notes represented real coins, or metals, locked in bank vaults. A pound note might have literally stood for a pound of copper coins in the bank. Banks discovered that they could lend other people’s money to get more money. They bribed the depositors with a bit of the income. Eventually governments created Central Banks to lend to Private banks. Isaac Newton believed in sound money, so the Bank of England started off on a solid footing, but politicians couldn’t help fiddling with the actual amount of gold, as opposed to the notes representing the gold. Fractional banking is now commonplace, but the system works because people keep their eyes shut to the central fraud involved, and society keeps working. The adulteration of the money has happened slowly enough that people could ignore it. In a sense, money now seems to be a share in the economy, not tied to any base.

  • nweismuller

    I’m reasonably sure that the ultimate ‘backing’ of fiat currencies comes from the fact that there is a demand to hold currency created by the fact that taxes are payable in government fiat currency. If it were mere faith and convention that allowed currencies to function, the rapid transformation of currencies of defunct nations into worthless scraps of paper and base metal that nobody accepts would seem unlikely. But no- everybody under the jurisdiction of a functional government has a need not to be forcibly imprisoned, and that government’s currency has value in allowing you to avoid imprisonment by the authorities, thus creating a universal demand.

    Needless to say, I’d far rather have our currency on a commodity rather than a fiat basis, given the implications about the underpinnings of modern currency systems.

  • Lee Moore

    “inflation redistributes from the private sector to government like nobody’s business.”

    This works in two ways :

    1. any issuer of money can acquire real goods and services from the private sector – that’s what issuing money means. This represents a “redistribution” from the private sector to the money issuer if one key condition is met – the sale price of the money created, ie value of goods and services acquirable for a unit of money, is greater than the money issuer’s cost of producing the money. Since the government is, these days, the monopoly money issuer, it gets the benefit. And since money these days is paper, or just rows of dots, the cost of production is small. So a government money monopoly will transfer resources to the government from the private sector. Money issuing is not however quite the same thing as inflation – government obviously gets to make, and benefit from, money issuing more in inflationary times, because it’s producing more money; but government can profit from money issuing even in non inflationary times.

    2. Inflation benefits debtors by reducing the real value of debts. Government is almost always a very large debtor (the largest debtor by a huge margin.) Hence it benefits from inflation at the expense of creditors, who are private sector folk. (Obviously there is a vast tangled web in which some government entities are creditors and some private entities are debtors, but net-net the government owes money to the private sector big time.)

  • Lee Moore

    I’m reasonably sure that the ultimate ‘backing’ of fiat currencies comes from the fact that there is a demand to hold currency created by the fact that taxes are payable in government fiat currency.

    I’ve never found this tax-backing of currency a plausible theory, mostly because it’s refuted by experience. People in Germany in 1922 and 1923 had to pay their taxes in Papiermarks, but that didn’t stop them trying to get rid of their Papiermarks as quickly as possible. Foreign currencies were used (illegally) though you couldn’t pay your taxes in them, other scrip issues arose and there was widespread barter. The demand for Papiermarks created by the need to have them to pay taxes proved to be very thin demand indeed. What people craved, and what caused them to resort to all these makeshifts, was the demand for actual money – ie a medium of exchange they could use for transactions in goods and services. Taxes were the last things on people’s minds – the best policy was simply not to pay, because by the time you did pay even with penalties, you were paying peanuts. Indeed you’d much rather part with your Papiermarks than with any peanuts you had lying around. Other hyperinflations have had similar stories What people want is money for living. Tax may be one of the expenses of living but it is not “special.”

    Moreover, a government could (and at times governments have tried things along these lines) insist that you pay your taxes in gold but require you to do your private transactions with paper money (so as to ensure that all the gold finishes up in the King’s hands for example.) Gold would not be “money” in such circumstances since it couldn’t be used as a means of exchange. It might still be hoarded as an investment, but that’s different.

    Obviously in a non hyperinflationary modern economy, what the government is willing to take for tax payments and what shopkeepers and landlords are willing to take is usually the same stuff. But the shopkeepers’ willingness to accept pounds is not created by the government’s willingness to take pounds, except to the extent that both contribute to pounds being generally acceptable to everybody. You might just as well say the government’s willingness to take pounds is created by shopkeepers being willing to take pounds.

  • nweismuller

    So, Lee Moore, what you have proven is that demand for the currencies of other countries, where the tax burden actually was a thing and thus had people demanding to hold them (in whatever country the currency originated from) outweighed the demand for a currency that was so badly devalued that there was essentially no demand to pay tax? I’m not sure you’ve disproven my point.

    What I know of historical currencies always shows a demand to hold the currency independent of the fact that it is accepted as currency- gold, cigarettes, valuable shells in the Americas. Where the taxing authority of a country issuing a fiat currency collapses, the value of that currency also collapses. Given that foreign currencies have a stable demand to hold by foreigners, this makes sure somebody will continue to accept that currency so long as there is any commerce with the foreign nation, and so it can still function as a currency.

  • Thanks to Lee Moore (April 27, 2017 at 2:46 am) for answering NickM’s question (April 26, 2017 at 11:54 pm). As Milton Friedman put it, after the state issues more fiat money, a proportion of the existing money in private hands can then be considered as mere receipts for taxes paid.

    Fred Z (April 26, 2017 at 6:58 pm) makes a useful additional point about how inflation alters the balance between the middle and upper classes. A side effect of that is to weaken a class that is a natural source of broad-based opposition to increasing state power, while simultaneously pressuring a class that is a natural source of leaders of such opposition into increasing crony capitalism or similar state-oriented activities. After the great Roman Empire inflation of the 3rd century, the silver and copper currency was never put right. However the gold currency – important to the state and to the upper class – was stabilised. AFAIK, this was the first really-well-documented case. It was not the last! 🙂

  • I’ll trivially and briefly (for me 🙂 ), add a related thought (which could doubtless do with much longer and clearer expression and/or correction): that the state can also give its new money an agio (in the sense used by Adam Smith rather than the more limited modern sense). A bank in Smith’s day, before fiat money, could apply a valid agio to withdrawal of its fresh-minted money (the gold coins were sure to be unclipped and unworn, for example), relative to privately-deposited money of the same currency. The EU today enforces a wildly fictitious agio for e.g. freshly-created state evidence-of-debt. EU law requires all banks to regard sovereign debt as risk-free – and to hold a risk-limited debt ratio.

    (This is of course a strange new meaning of ‘risk-limited’ that rational people were not previously aware of 🙂 – or, as one might say to some EU finance minister, “I don’t think that word means what you think it means.”)

  • Runcie Balspune

    I’m not sure where you get the idea that inevitably Labour’s plan involves printing more money.

    You are not thinking like Jez, you see, there are oodles of filthy rich people in this country with stacks of cash hidden away under the mattress, and brave old Sir Jeremy and his gang will come round and extrapolate it to pay for their five year plan.

    Mr McDonnell has stated that £70k a year makes you rich, meaning he and his boss are neatly in the super-rich category at the taxpayer expense. Ironically, this article supporting McDonnell’s claim also shows that there are not in fact squadrillions of “rich” people in the country and somehow those plans will have to be funded elsewhere.

  • Ironically, this article supporting McDonnell’s claim also shows that there are not in fact squadrillions of “rich” people in the country and somehow those plans will have to be funded elsewhere.

    Why are you looking at me when you say that?

    Oh. I’m the mark am I?

  • the other rob

    Yet somehow we think that the same rules don’t apply to government, and we laud over-educated fools like Paul Krugman (or that uber-idiot J M Keynes) and consider them to be economic geniuses for touting precisely the same idea at a macro scale.

    Exactly right, Laird.

    The corrupt bastards who govern our city are currently pushing a bond issue, in the tens of millions. This follows a previous bond of a similar size that is 20-something years from being paid off.

    Those of us who ask how this is any different from a guy maxing out his credit card and then taking out another are about as popular as a fart in a space suit.

  • PeterT

    There is only so far the tax burden can go while being progressive. It is quite progressive in the UK and very much so in the US where the poor pay almost no tax. Countries like those in the Nordics, which have very high tax rates as % of GDP, also have much higher tax rates on those with low and middle income. For example, VAT in Sweden is 25% and is applied even to food and necessities. There is only so much you can raise from those who have the option to work less or be clever about how they organise themselves (i.e. Laffer effect). I have put this to people from that region and the answer is always “well we get so much more in return than you do”. Even if that was true, which I don’t think it is; in practice I think there is a lot of redistribution from those of middling incomes but low outgoings (e.g. single and childless), this ignores the massive haircut civil servants take as intermediation fees.

  • PersonFromPorlock

    How about paying government employees – especially those in budget-setting positions – fixed salaries? If the job earns $1000/wk now, and it will still earn $1000/wk twenty years from now, then suddenly inflation will be a Very Bad Thing.

    To discourage government employees giving each other meaningless job-title changes that serve only to ‘justify’ higher pay, fix the total payroll amount and shift wages disbursed down (higher pay loses more) if the sum of salaries paid would otherwise exceed the fixed amount; and shift them up (higher pay gains more) if the sum of salaries is less than that amount, to encourage smaller government.

    Do I need to explain that I have a shrine to Dogbert in my bedroom?

  • Lee Moore

    How about paying government employees – especially those in budget-setting positions – fixed salaries? If the job earns $1000/wk now, and it will still earn $1000/wk twenty years from now, then suddenly inflation will be a Very Bad Thing.

    Again, we’ve been there, done that. In the German hyperinflation of the early 1920s. Despite the German government of the time being essentially socialist, the employees who suffered most from the inflation were – government employees. Certainly, other people on fixed incomes – pensioners (mostly former government employees) and private retirees living off interest on government bonds – suffered too. But amongst the workers, it was the government workers who did worst. Farmers obviously did OK, but after they’d got their act together, unions for industrial workers managed to get pay rises just big enough to keep their members’ heads mostly above water. But bureaucrats and penpushers, nah they were always running way behind. Aside from not being unionised, they weren’t actually useful to the government when it was in crisis. They didn’t make stuff. (I think government railway workers did OK, but they really fall into the unionised industrial workers box – and they were vital for the remains of the economy.) But for non essential workers – its own – the government was simply not up to changing its leviathan ways quickly enough. Making government employees hostage to inflation doesn’t prevent the government creating inflation.

    But if you want to clear the parasites out of government, a good quick dose of hyperinflation can be quite useful.

    However, once the government gets hyperinflation under control, the balance of advantage can flip very quickly. There was ferocious hyperinflation in Bolshevik Russia at the same time as in Weimar Germany. But once they’d done a currency reform, they maintained stability with rigid price and wage controls, which enabled them to rig the prices to favour their political favourites – the Party and the townsfolk, at the expense of the rural folk. Free marketers might say that that sort of rigging can’t work and must collapse. But it lasted seventy years or so, which is not bad going.

  • Jason

    This reminds me of when I was a kid. Our teacher was asking us what we would like to be when we grew up and me being a little smartass told the class I would open a “money store” where I would sell a dollar for 1.10. Wasn’t I just a hilarious little sh*t.

    Here I am many many years later working in foreign exchange essentially doing just that – who knew?

  • John K

    As I understand it, the Labour Party plans to borrow £500 billion, to fund some sort of industrial investment bank.

    The rationale is that interest rates are low, so it will not cost much to borrow the money, and I suppose if pushed, they will say that the money will be repaid with the proceeds of the loans which the government employees in their new bank issue.

    Of course, we know that government banks, run by government employees, do not have a very good record in making successful loans, but if you have a time horizon of five years, they probably think they can get away with it. Then again, they are not going to get elected, so we will never know.

  • Watchman

    Person from Porlock,

    We need inflation – it effectively reduces the value attached to non-productive rents (those that won’t be renegotiated) and allows rebalancing of relative value across the economy.

    And Lee Moore – aren’t government employees normally the victim of socialism, as they have no recourse to non-government systems, so suffer the effects worse. It might be government members aren’t, but there’s a lot of difference between an MP and the person who has to deal with the unpleasant bastards at the job centre…

  • there’s a lot of difference between an MP and the person who has to deal with the unpleasant bastards at the job centre

    …err…are we talking about the staff or the unemployed clients?

  • Runcie Balspune

    The great psychologist-philosopher Edward de Bono, he of “lateral thinking” fame, proposed a government official who found a way to make their own job redundant should be given a new job and a proportion of the salary of the job they’ve eliminated, this is assuming the old job wasn’t recently created that is.

    How about paying government employees a reduced salary and exemption from tax, quite a few busy bodies in HMRC could be dispensed with on that one alone.

    The rationale is that interest rates are low

    The same rationale that oil prices would remain high – that one worked out well for some socialist utopias.

  • Laird

    Watchman, that is the most interesting justification for systemic inflation that I’ve ever read. So let’s deconstruct it.

    How do you define “non-productive rents”? If someone is leasing a property he isn’t going to do so unless he expects to have a use for it (as a business site, a residence, etc.), so by definition that’s “productive”. If his judgment was wrong when entering into the lease (changed business conditions or whatever), and it turns out that he doesn’t have a use for it, as a rule he will sublease it to someone else (“productive” again), buy out the lease or abandon it. In either of the last two cases (and ignoring whatever legal remedies the lessor might have) the property owner will seek out some other tenant (“productive” again). Only if that fails, and there is no productive use to which the property can be put, is it reasonable to describe it as “non-productive”. But few owners are going to allow that situation to persist for long; they will raze the building and erect something more useful. In a free market, few assets will be allowed to remain “non-productive” for long. But assuming that we can actually find any of those elusive “non-productive rents” (and that you are arrogant enough to believe that this is something into which society should interpose itself), your solution to this alleged “problem” is to systematically extract value from all assets, including the “productive” ones? Really? You might want to rethink that.

    You then added the parenthetical “those that won’t be renegotiated”. Renegotiation of a lease is a private matter between the owner and his tenant; why do you presume to have any legitimate interest in forcing those parties to do so? That is arrogance writ large. And of course, as was noted above there is no way to confine the effects of inflation to just those rare instances; it affects everyone equally, even those who do renegotiate their leases in exactly the manner you desire.

    We then come to “rebalancing of relative value across the economy”, whatever that means. Are you saying that if the market value of one asset, in relation to another, somehow gets out of whack (by whose definition, or by what measure?), and market forces don’t swiftly correct the situation, a valid remedy is to reduce the value of all assets proportionately? Because that’s what inflation does. There is no “rebalancing” here; the falling tide lowers all boats. This is wholly irrational. As best I can discern, you are attempting to use monetary inflation as a means of indirectly achieving something approaching a land value tax. But that horse falls at the first gate.

    Inflation is nothing more (or less) than the systematic theft of value by the entity issuing the money (today, that would be government). It benefits debtors (especially government!) at the expense of savers and investors. Even the argument that “a little” inflation is necessary for price stability in a growing economy doesn’t withstand rational scrutiny. But then, facile justifications for theft (yours included) never do.

  • PersonFromPorlock

    Lee Moore, I think if government employees were told “this is what’s going to happen” before it was happening, they might be a bit more zealous in keeping it from happening. Mid-crisis, yeah, they’re screwed.

  • Thailover

    Turning lead into gold didn’t turn out so well. Turning paper into gold works much better…and long as people remember the moto. In This Paper We Trust. Just like bringing Tinkerbell back to life, one must clap one’s hands and believe, believe, believe. If everyone stopped believing, the paper would magickally turn back into paper.

  • Thailover

    John K wrote,

    “As I understand it, the Labour Party plans to borrow £500 billion, to fund some sort of industrial investment bank. The rationale is that interest rates are low”

    The price of money is low, thus the demand for money is low. There could be two reasons for this. 1) the economy is going like gangbusters, and everyone is self-financing, or 2), the economy sucks, and people aren’t so bullish on the prospects of a bright economic future. The second scenario is much more likely, which suggests that now is hardly the time to finace MORE debt. As loaner, on should prefer that the cost of the loaned item be high, not low, just as long as one REALLY expects to earn a profit, i.e. a return. What *I* expect the Labor Party to get in return though, is graft and fraud. (The American meaning for graft of course).

  • Thailover

    “EU law requires all banks to regard sovereign debt as risk-free – and to hold a risk-limited debt ratio.”

    Oh my fake god, that’s insane! That’s nothing short of begging for an economic collapse.

  • Thailover

    Watchman, the idea that we need inflation feels vaguely Keynesian…Keynes on a Meth bender perhaps.
    Arguably, the value of a currency is = to the market value of all the goods and services it “chases” in an economy. Magically creating more currency to represent the same degree of value is to devalue the currency…especially when there is a hysteresis, or ripple effect, identical to the effect of large amounts of counterfeit fakery circulating around pretending to be money. On a practical and effective level, inflation is government committed counterfeiting. The rich are harmed the least…the middle class and lower classes are harmed the most because they tend to feel the effects as the ripple “normalizes” the new economy. When the ripple has made it’s way all across the economy, private cash savings have been robbed of value.

  • Thailover

    “As I understand it, the Labour Party plans to borrow £500 billion, to fund some sort of industrial investment bank. The rationale is that interest rates are low”

    That’s sort of like saying let’s finance a new donut shop, which seems like a good idea because the demand for donuts is low.

  • Laird

    Thailover, it is insane, but it’s a little more complicated than Niall’s formulation would suggest. What EU law (technically, the Basel Accords) does is specify that government debt has a risk-weighting of zero for purposes of calculating certain bank capital ratios. In a roundabout manner, therefore, the EU is encouraging banks to hold a lot of that sovereign debt because there is no capital cost to doing so; it’s sort of a “regulatory subsidy”. But you’re right that it is “begging for an economic collapse”. Why else do you think that they couldn’t (and still can’t) permit a Greek default? Writing down those bonds to true market value would wipe out the capital of most European banks, sending them into receivership which the European Central Bank couldn’t possibly handle. They just keep digging the hole deeper.

    This will not end well.

  • John K

    What *I* expect the Labor Party to get in return though, is graft and fraud. (The American meaning for graft of course).

    I think that’s what we all expect. Luckily, the chances are we will never find out.

  • Nicholas (Unlicenced Joker) Gray

    Thailover, you don’t understand. If you plan for the markets to collapse, you can control it when it (inevitably) happens! Having a controllable currency cycle is better than random fluctuations. Also, when it happens, you can call for more powers to fix the planned emergency.
    Don’t you feel better knowing that someone, somewhere, is in charge?