When the goverment spends, that spending is someones income and that someone pays some tax so the government immediately gets some of their money back. And then that someone spends most of their money which becomes other peoples income. And these other people also pay tax, so the government gets another fraction back. And these other people also spend which becomes the income of even more people who also give a fraction back to the goverment. And so on. If everyone spends then the government gets all its money back. Whereas when you or I spend we do not get anything back. That is a big difference. The only way the goverment can be in deficit is if the people decide to save. The goverment debt is simply the peoples savings. If at any point the people go out and spend their savings, then the goverment debt will be cleared.
By Prof Charles Adams of Durham University
Richard Murphey - The UK government is not like a household – and does not have a household type budget. That’s because it, quite literally, makes the money the rest of us use. So let’s stop pretending it has a credit card
12 comments:
That’s because it, quite literally, makes the money the rest of us use. Richard Murphey
Not really; the economy runs largely* off private bank deposits and the banks create those too when they "lend."
To be sure, even 100% private banks with 100% voluntary depositors might safely create some deposits but vastly less than they may currently create via government privileges such as deposit guarantees.
*Except for mere physical fiat, coins and paper bills.
"the economy runs largely* off private bank deposits and the banks create those too when they "lend.""
Completely wrong... Govt spending in FY19 just ended Sept was $5T and Loans and Leases in Bank Credit only increased $500B
US Govt spending is the most powerful financial flow on planet earth it is literally moving markets every month...
And all the moron libertarians dont even want to know about it! They are going all around all the time saying "we're out of money!"... How stupid are they????
So Federal spending does not create private bank deposits, Franko?
Except for mere physical fiat, coins and paper notes, the economy MUST run off private bank deposits - there being no other option such as allowing the non-bank private sector, including individual citizens, to use the Nation's fiat in account form at the Central Bank (or Treasury) itself.
ICYMI
Exploding the household fallacy
https://axecorg.blogspot.com/2019/11/exploding-household-fallacy.html
The right and the wrong way to bring money into the economy
https://axecorg.blogspot.com/2019/07/the-right-and-wrong-way-to-bring-money.html
Criminals and the monetary order
https://axecorg.blogspot.com/2019/10/criminals-and-monetary-order.html
Egmont Kakarot-Handtke
no It doesn’t it creates deposits at the US central bank.... ie “Reserve Assets at Depositories” which is an asset at the Depositories but a Liability of the Central Bank...
Govt spending is the source flow for ALL financial activity in the nation....
Nothing “runs” off of a stock, systems “run” off of flows... Deposits are a stock measure...
Or this is all too complicated an abstraction to figure out for you and all the other idiots and you can make the typical reification error on public finance by thinking “govt is like a household!”
Take a f-ing Accounting course.... it’s not that hard....
Look at any day the govt spends without issuing Treasury Securities.. like usual Mondays, Weds and sometimes Fridays (Treasuries usually issue on Tues and Thurs)...
The Treasury Account is marked down an equal amount Reserve Assets at Depositories are marked up...
Govt spending increases deposit Liabilities at the CENTRAL BANK...
Here's Murphey's reply to my comment (first comment):
Richard Murphy says:
November 11 2019 at 1:18 pm
Banks issue government money under licence
See what would happen if they issued their own
And don’t quote Scotland, that is 100% note backed with BoE
Sorry, but the fact that some of the task is sub contracted does not change the reality of what is happening
Perhaps you should go over to his site, Franko, and try to straighten him out rather than pretend I don't know what I'm talking about?
lol youre never going to get anywhere trying to master this subject via platonistic bs using figurative language to try to understand systems that are properly understood and have been developed via the abstractions taught in Finance and Accounting Science...
The problem here is using the basic methodology of platonism which relies on figurative language in the first place.. "govt is like a household!" is using figurative language in the form of an analogy which is not Science in the first place...
You cant correct someone making this type of a reification error just using more platonistic figurative language... these matters dealing with our numismatic systems are to be understood SOLELY using the appropriate terminology of the Finance and Accounting Sciences...
Heres a Scripture for you (and it aint in the f-ing Old Testament):
"not for discrimination of reasonings" Rom 14:1
iow, when you come upon two platonist morons arguing with each other... the move is not to try to figure out which side to jump in on...
Stick with the proper Science methodology in the first place and youll never have morons saying "govt is like a household!" to begin with...
This is how this cognitive problem is going to have to be eventually solved...
“This is how this cognitive problem is going to have to be eventually solved...“
Ah...the holy grail of solutions. Give it a a year or two and Matt may come up with another holy grail in his mind after he’s gotten nowhere.
Matt Franko
Exploding the household fallacy
Comment on Charles Adams on ‘The household fallacy’*
Charles Adams, a physics professor at the University of Durham, explains the household fallacy: “When the goverment spends, that spending is someones income and that someone pays some tax so the government immediately gets some of their money back. And then that someone spends most of their money which becomes other peoples income. And these other people also pay tax, so the government gets another fraction back. And these other people also spend which becomes the income of even more people who also give a fraction back to the goverment. And so on. If everyone spends then the government gets all its money back. Whereas when you or I spend we do not get anything back. That is a big difference. The only way the goverment can be in deficit is if the people decide to save. The goverment debt is simply the peoples savings. If at any point the people go out and spend their savings, then the goverment debt will be cleared.”
The first thing to notice is that in this story only the government sector and “people”, i.e. the household sector, appear but not the business sector. And, curiously, the word profit does not appear once. An economic story without profit is fishy, to begin with. However, having a bad smell in the nose and precisely locating its source are quite different things. So, one has to advance from storytelling to proper economic analysis.
For a start, one needs a description of the elementary production-consumption economy. This economy is constructed from scratch with the following set of macroeconomic axioms: (A0) The objectively given and most elementary configuration of the economy consists of the household sector and the business sector which in turn consists initially of one giant fully integrated firm. (A1) Yw=WL wage income Yw is equal to wage rate W times working hours L, (A2) O=RL output O is equal to productivity R times working hours L, (A3) C=PX consumption expenditure C is equal to price P times quantity bought/sold X.
Under the conditions of market-clearing X=O and budget-balancing C=Yw in each period, the price as the dependent variable is given by P=W/R. This is the macroeconomic Law of Supply and Demand. For the graphical representation of the analytical starting point see Wikimedia AXEC31.#1
In this elementary economy, the Central Bank finances the wage bill by creating fiat money out of nothing. The average stock of transaction money is given as M=κYw, with κ determined by the payment pattern.#2
So, the business sector spends money into the economy in the form of wage income Yw and gets it back in the form of consumption expenditures C. The stock of fiat money is zero at the beginning of the period under consideration and zero at the end. Money is created and destroyed by the autonomous transactions between the business and the household sector.
It is pretty obvious that this elementary production-consumption economy can run in all eternity at any level of employment. Problems arise if the households do not spend exactly their income, i.e. do not balance their budget.
Dropping the condition C=Yw yields two balances: Saving/dissaving of the household sector S≡Yw−C and profit/loss of the business sector Q≡C−Yw. It always holds Q+S=0 or Q=−S, in other words, the business sector’s surplus = profit equals the household sector’s deficit = dissaving and, vice versa, the business sector’s deficit = loss equals the household sector’s surplus = saving. This is the most elementary form of the macroeconomic Profit Law.
See part 2
Part 2
Now, if the households save the business sector makes a loss and if this continues for a while the economy breaks down. If the households dissave, i.e. run a deficit, the business sector makes a profit. The business sector’s deposits at the Central Bank (= money) grow in perfect lockstep with the household sector’s overdrafts (= debt). The deficit spending of the households is financed by the Central Bank and it ends when the Central Bank puts a brake on further debt growth. In this case, C falls back to Yw and profit falls back to zero.
Conclusion: Capitalism depends on profit and profit depends on deficit-spending, so Capitalism depends in the most elementary case on growing debt of the household sector. It is NOT enough that “people” always fully spend their wage income, they have to spend more. So ultimately, Capitalism depends on a credit creating banking system. However, here is the problem: either the households are not willing to go into debt or the banking system is not willing to give them much credit for an extended time span.
This is where the State comes to the rescue. With the State as an additional sector, the Profit Law reads Q=−S+(G−T). So, if the private households balance their budget, i.e. S=0, and the public households balance their budget, i.e. G−T=0, the balance of the business sector (= profit) is zero. If the government sector taxes only a part of its expenditures back, i.e. T less than G, then the business sector makes a profit, i.e. Q=G−T. The minimum condition for the survival of State-sponsored Capitalism is G−T>S.
Now, the crucial difference between private households and public households is that the growth of household sector debt is limited while the growth of public sector debt is virtually unlimited. Up to an ex-ante unknown amount, State debt is considered as riskless because of the taxing power of the State.
So, the household fallacy does NOT come down to the economic miracle that “If everyone spends then the government gets all its money back.” No, the government runs a deficit, i.e. G−T>0, while the households spend what they get as wage income, i.e. C=Yw. The government does NOT get its spending back and this is why the public debt permanently increases ($22 trillion and counting).#3
The household fallacy consists of the idea that the public sector is, in the same way, debt-restricted as the individual household. MMT is absolutely right in pointing out that this is NOT the case.
However, MMT is absolutely wrong in maintaining that government deficit-spending/money-creation is good economic policy. As a general rule, is NOT. MMT policy creates the distribution of income and wealth that is now generally regarded as a grave danger for social stability.
The physics professor again gets economics badly wrong.#4 There is something rotten in UK academia.
Egmont Kakarot-Handtke
* Progressive Pulse
http://www.progressivepulse.org/uncategorized/the-household-fallacy
#1 Wikimedia AXEC31
https://commons.wikimedia.org/wiki/File:AXEC31.png
#2 For more details see Criminals and the monetary order
https://axecorg.blogspot.com/2019/10/criminals-and-monetary-order.html
#3 Keynes, Lerner, MMT, Trump and exploding profit
https://axecorg.blogspot.com/2017/12/keynes-lerner-mmt-trump-and-exploding.html
#4 MMT and the single most stupid physicist
https://axecorg.blogspot.com/2018/09/mmt-and-single-most-stupid-physicist.html
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