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[00:00:30] Kapitalanlagerisiko Marketinginformation
[00:00:32] Jetzt ist Herbst und bald stehen schon wieder die Feiertage vor der Tür. Das kann auch für Hunde ganz schön stressig sein.
[00:00:42] Viele Vierbeine reagieren unter anderem mit einer gestörten Verdauung. Und das ist wiederum Stress für ihre Besitzer.
[00:00:49] Aber es gibt schnelle und einfache Hilfe. Das Probiotikum Purina Proplan Forti Flora.
[00:00:54] Streu einfach einen Beutel über das tägliche Futter. Die außergewöhnliche Zusammensetzung mit lebenden guten Darmbakterien
[00:01:01] stellt das Gleichgewicht im Darm wieder her. Natürlich kannst du Proplan Forti Flora auch präventiv oder bei alltäglichen Verdauungsbeschwerden einsetzen.
[00:01:09] Es unterstützt auch bei Ernährungsumstellungen oder Antibiotika-Einnahme.
[00:01:14] Purina Proplan Forti Flora
[00:01:16] Jetzt auf shop.purina.de
[00:01:18] But as someone who's been trying to change the way we think about deficits and government spending, I saw this as an opportunity to show why government budgets don't work like household budgets.
[00:01:37] Why all of their red ink is really our black ink. And why our nation can afford to keep investing in the things we need, even after spending trillions to fight the pandemic.
[00:01:52] This is the Debunking Economics Podcast with Steve Keen and Phil Dobby.
[00:02:00] Well, that's Stephanie Kelton, author of The Deficit Myth on a TED Talk a few years ago, with the easily quotable line, their red ink is our black ink.
[00:02:10] That government deficits are good for the private sector. That government surplus should shrink the economy.
[00:02:17] But how is that? How does that actually work?
[00:02:19] Well, Steve Keen joins me and will explain it all step by step in an easy to understand way and a realistic way.
[00:02:27] This week on the Debunking Economics Podcast, this is the one you should tell your friends to listen to.
[00:02:39] The conventional thinking is if the government has a deficit, the spending is more than its tax it's getting from incomes.
[00:02:46] So it issues bonds and bonds get bought by banks and financial institutions, but often they they'll sell them on the people who buy those bonds, which are often retirement funds, use the money they have.
[00:02:59] So in effect, the government debt is being paid for by the retirement funds for the duration of that bond.
[00:03:06] So no new money, just money moving around. And that's the way a lot of people see it.
[00:03:12] But Steve, your point and the point of modern monetary theory and the likes of Stephanie Kelton in her book, The Deficit Myth, money is created by the government creating a deficit irrespective of the bonds.
[00:03:25] And we'll come into how bonds because they do muddy the water a little bit.
[00:03:28] But a government deficit is positive for the private sector. Her mantra is their red ink is our black ink.
[00:03:35] And key to this is the notion that equity is a zero sum game.
[00:03:41] So the private sector has positive equity. The public sector has to be in negative equity.
[00:03:46] So let's let's examine that, first of all.
[00:03:49] Well, actually, let's take it right back to basics as to what equity actually is.
[00:03:53] Now, for most people, they'll understand equity if they've got a house, they've got equity in the house.
[00:03:58] They've paid a certain amount for the house. The house is worth a certain amount.
[00:04:03] The difference between how much the house is worth and how much they owe is the equity they have in the house.
[00:04:08] So we all understand that. Why, though, does private sector and public sector equity have to even out?
[00:04:15] Why is it a zero sum situation?
[00:04:18] OK, now this is I'm going to start with the point that I only realized very late in the game in terms of, you know, I've built my Ravel software to enable people to understand monetary dynamics.
[00:04:28] And actually building it taught me monetary dynamics.
[00:04:32] So, you know, lots, lots of points have come through.
[00:04:34] But it's just putting together what is the only software package on the planet that lets you actually analyze how financial flows actually work.
[00:04:41] Fantastic. I'm so glad you got the plug in there, Ellie.
[00:04:44] And it's available for a bargain price.
[00:04:45] Yeah, yeah.
[00:04:45] It's available. It's a mere $7 a month.
[00:04:47] You can get it from Patreon.
[00:04:49] But if we come back to why I designed it in the first place and back when it was free, for that matter, too,
[00:04:54] was to get work out money creation using double entry bookkeeping.
[00:04:59] Because, you know, what banks do is create money by making loans.
[00:05:03] And that's one of the many strands in non-orthodox economics, not the mainstream.
[00:05:09] The mainstream ignore that.
[00:05:11] But you know what?
[00:05:11] I think quite a lot in the mainstream acknowledge that money is created by banks giving out loans.
[00:05:16] Yes.
[00:05:17] Yeah, they believe they use what they call the money multiplier model.
[00:05:20] So, they do have an explanation for how banks create money.
[00:05:23] So, you know, that's straight.
[00:05:25] You're right to say we should start with equity.
[00:05:26] Yeah.
[00:05:27] I dived in a bit too quickly there to begin with.
[00:05:29] So, let's go back to the beginning.
[00:05:30] Yes, please.
[00:05:31] When we talk equity, we tend to mix up things which are actually different.
[00:05:35] And one thing in building my Ravel software, one thing I've learned is that you have to distinguish between financial and non-financial assets.
[00:05:44] Now, a financial asset is something which is a claim on somebody else.
[00:05:49] A financial liability is the opposite.
[00:05:51] That's somebody else's claim on you.
[00:05:53] Now, when you add up all financial assets and all financial liabilities, you get zero.
[00:05:58] Because, you know, if you…
[00:06:00] Yeah, someone gives you some money, you owe them that money.
[00:06:03] Quite straightforward.
[00:06:04] So, that's financial assets.
[00:06:06] But there's also non-financial assets.
[00:06:08] And those include things like houses, et cetera.
[00:06:12] Well, that explains because that's my point.
[00:06:14] That was actually one of the questions I was going to ask.
[00:06:16] Because the money I owe on my house is the house has increased in value.
[00:06:22] Yeah.
[00:06:23] You've got to…
[00:06:24] We put a notional value on your house.
[00:06:27] I mean, you can't take a house and go down the road and buy a car.
[00:06:29] Okay?
[00:06:30] You've got to sell the thing before you can actually realize it.
[00:06:33] So, when we talk about the value of a non-financial asset like a house, we're imputing what it could be sold for given the key conditions in that particular asset market.
[00:06:43] And there are some assets which can sell almost immediately like shares.
[00:06:46] And there are others like houses which take, you know, ages, months to sell.
[00:06:50] So, the reason when you think about your house, your house is an asset to you and a liability to nobody.
[00:06:56] But when I sell it, it becomes a financial asset, doesn't it?
[00:06:59] Because…
[00:06:59] Well, when you sell it, you then, you know, you realize the imputed monetary value of that non-financial asset.
[00:07:08] Right.
[00:07:08] You realize by selling it.
[00:07:09] And I'm taking that money away from somebody who had that money as cash.
[00:07:13] They had their…
[00:07:14] Yeah.
[00:07:15] Yeah.
[00:07:15] They are now paying that difference.
[00:07:17] So, again, it becomes a zero-sum game at that point.
[00:07:19] But only at that point.
[00:07:20] Before it, it's a non-zero-sum game.
[00:07:22] This is extremely important because people…
[00:07:24] You know, I didn't get this on flow.
[00:07:26] I started actually…
[00:07:28] Like, all my modeling was modeling financial assets.
[00:07:31] So, you have a debt which you owe to the bank.
[00:07:35] That debt is…
[00:07:36] You have that debt because the bank gave you money.
[00:07:38] Okay.
[00:07:38] So, you've got the asset of the loan.
[00:07:41] You get money.
[00:07:41] You have the liability which is the debt you owe to the bank.
[00:07:44] When they're first created, they're identical.
[00:07:46] You wouldn't…
[00:07:47] If you went to a bank for a loan and said, like, I want a million pounds to buy that place in Shropshire.
[00:07:52] And the bank said, okay, here's a million pounds.
[00:07:54] And you owe us a million pounds and one pound.
[00:07:56] You say, hang on a second.
[00:07:57] Why do I owe you one pound more than you lent me?
[00:08:00] Now, you pay interest on it, obviously.
[00:08:02] But the debt and the amount of money created are identical at the point of creation.
[00:08:06] So, in that case, assets…
[00:08:08] And so, your assets are the bank's liabilities.
[00:08:12] Your liability is the bank's assets.
[00:08:14] Add them together, you get zero.
[00:08:16] So, financial assets, you're not to zero.
[00:08:18] But then, if you think about a house, the house is obviously your…
[00:08:22] Regardless of whether you…
[00:08:23] If you're the owner of a house, regardless whether you've got a mortgage or not, you own it outright, own it with a mortgage.
[00:08:28] The mortgage side of things is the financial asset and financial liability.
[00:08:32] They still sum to zero.
[00:08:34] But the house itself, you'll put a notional value on the house based on market conditions and so on.
[00:08:38] And that…
[00:08:39] The house is an asset to you and a liability to no one.
[00:08:42] And then, you put a monetary value on that.
[00:08:44] So, financial assets and non-financial assets are very different.
[00:08:48] And what we do in capitalism fundamentally is we use the dynamics of money creation to enable us to, you know, hire resources.
[00:08:57] You know, like I'm building a house in Bangkok right now.
[00:09:00] Like starting building a house in Bangkok.
[00:09:02] So, I had to raise the money to do that.
[00:09:05] And once I've transferred the money across to the final installment to the builders, they'll start building the damn thing.
[00:09:12] Now, when it's finished, walking through the doors of that place, it's my asset and nobody else's liability.
[00:09:17] So, non-financial assets are greater than zero.
[00:09:20] Okay?
[00:09:20] And we tend to mix the two up.
[00:09:22] But when you look at what money creation involves, that just simply involves financial assets.
[00:09:28] And therefore, the sum of all financial assets is zero.
[00:09:31] And that's why Stephanie can say that their red ink is our blank ink because they'll be absolutely identical.
[00:09:39] The negative equity of one group is the positive equity of another.
[00:09:42] So, that's the starting point.
[00:09:44] And it applies not just to government money creation.
[00:09:46] It applies to private money creation as well.
[00:09:49] So, the government creates money or has a deficit.
[00:09:54] Let's not call it creates money at this stage.
[00:09:56] They've got a deficit.
[00:09:58] So, they've spent a certain amount of money.
[00:10:00] Let's call it a billion pounds.
[00:10:04] And that is over what it's also getting in tax.
[00:10:07] So, maybe it spends one and a half billion and it gets half a million in tax.
[00:10:10] It's got a deficit of a billion.
[00:10:13] So, that money didn't exist before because no one's paying for it.
[00:10:20] It's not anyone else's asset, is it?
[00:10:23] It's not.
[00:10:23] Yeah.
[00:10:23] It's been created by the act of going to negative equity.
[00:10:26] I like this.
[00:10:27] This is, you know, when I put together the whole system in my Ravel software, the initial
[00:10:34] starting point of understanding all this because I came from analyzing private debt.
[00:10:39] My work on Minsky is where I got into this idea of modeling, creating a program which could
[00:10:44] actually model the financial sector accurately.
[00:10:47] That began from my work on Hyman Minsky's financial instability hypothesis.
[00:10:51] And that was about what banks did.
[00:10:52] Okay.
[00:10:53] So, I got all that down pat.
[00:10:55] And then when you look at what banks do, when their bank creates a loan, it says, you know,
[00:11:01] you owe us a million pounds for that place you want to buy in Shropshire.
[00:11:04] And here's a million pounds with which you can buy that place in Shropshire.
[00:11:07] So, banks create loans and deposits at the same time, which are assets and liabilities
[00:11:15] for them at the same time.
[00:11:17] And there's no net change in the equity of either party.
[00:11:22] The bank's equity remains constant.
[00:11:25] The borrower's equity remains constant.
[00:11:27] Right.
[00:11:27] But in the case of the government, they have gone into negative equity.
[00:11:32] Yeah.
[00:11:33] And so that has created the positive equity in the private sector.
[00:11:38] Yeah.
[00:11:39] And this is where the two systems are different.
[00:11:40] Because they've given that money to everybody.
[00:11:42] Those people don't have any liabilities.
[00:11:44] It's sort of like free, somehow it's free money.
[00:11:47] They probably, they will have done some work for it.
[00:11:49] You know, they will have worked for a company that works for the government that is the beneficiary
[00:11:54] of whatever the government spent.
[00:11:56] But there's no, but that is a payout.
[00:11:58] There's no liabilities.
[00:11:59] They don't owe that money back.
[00:12:00] Unlike a loan.
[00:12:01] Yeah.
[00:12:01] When you get a loan from a bank, you get a matching asset and liability for yourself,
[00:12:05] no change in your net financial worth.
[00:12:07] When you get a government payment, whether that's a welfare payment or a payment for services
[00:12:12] or work as you were describing a moment ago, that is money comes with no attached liability.
[00:12:18] So the money comes into your deposit account, your net worth increases.
[00:12:22] Now for that to happen, and this is on the other side of the equation, the net financial
[00:12:28] equity of the government decreases by precisely as much as yours increases.
[00:12:32] And that's how government money creation works.
[00:12:36] So the government stays, it builds up a continual barrage of negative equity year on year
[00:12:42] on that basis.
[00:12:43] Yeah.
[00:12:43] But let's go back to that example you gave of, you know, you work for the government to
[00:12:47] do something.
[00:12:48] Let's say you build a school, okay?
[00:12:50] You're building an asset.
[00:12:52] Well, the school, you're building an asset and it's a non-financial asset, okay?
[00:12:55] So the process of going into negative equity, negative financial equity is done by the government
[00:13:02] in that instance.
[00:13:03] Because all the assets, everything the government owns and has built are all sitting on that balance
[00:13:08] sheet as a non-financial asset.
[00:13:09] And they're non-financial assets.
[00:13:10] Now they would be, you know, if you live in America, think about the assets of the government.
[00:13:16] Well, it starts with, you know, a few ICBMs scattered around the country, enormous, all
[00:13:22] the military paraphernalia, the police force, what's left of the education system, what's
[00:13:28] left of the legal system.
[00:13:30] You know, you can sum up the non-financial assets of the government.
[00:13:33] You're going to get a huge positive number.
[00:13:34] Do you know what?
[00:13:35] You can diss the UK chancellor all you like and she probably deserves it.
[00:13:41] But to her credit, I mean, in the last budget, what she was saying is, well, we have not
[00:13:46] allowed for in the past.
[00:13:48] It's exactly what you're saying.
[00:13:49] These non-financial assets.
[00:13:50] So we should be able to release extra funds to spend on investments because they are being
[00:13:56] counted by all these assets that the government owns.
[00:13:59] So she's sort of half onto this.
[00:14:00] Half onto it.
[00:14:02] Look, you know, as much as I'm being critical on what I write, it's just because she's swallowed
[00:14:06] what she's been taught in conventional economics textbooks.
[00:14:08] So it's not her fault that she believes this stuff.
[00:14:10] It's just what's taught and what's taken as being the real world by almost all financial
[00:14:16] journalists, certainly all mainstream economists, also most politicians.
[00:14:22] They simply think that the government should not go into debt.
[00:14:27] The government should be, you know, let's get positive equity for the government.
[00:14:30] And what they're thinking about is the financial assets, not the non-financial.
[00:14:34] And that's the big mistake.
[00:14:36] Yes, you want positive non-financial assets.
[00:14:39] And Reeves and Starmer both believe they're going to be doing something which helps create
[00:14:44] more non-financial assets.
[00:14:46] The trouble is to create the non-financial assets for the government, the government has
[00:14:51] to go into negative equity.
[00:14:53] It doesn't have to.
[00:14:54] It creates far more if it goes into negative equity than it tries to remain in positive
[00:14:58] equity, which it cannot be in.
[00:15:01] Okay.
[00:15:01] This is the other side of the dilemma because, well, it can, but what that then means is
[00:15:09] you live in an economy where the money is entirely created by the private sector.
[00:15:13] And that has all sorts of dilemmas, which again comes back to this issue that the sum
[00:15:18] of equity is zero.
[00:15:19] Well, the only way there would be bank loans.
[00:15:22] Sorry?
[00:15:22] The only way you'd increase the money supply without the government would be through bank
[00:15:26] loans, wouldn't it?
[00:15:26] That's right.
[00:15:27] That's right.
[00:15:27] And if you look at the history of the American economy, one fortunate thing about the Americans
[00:15:32] is they've maintained data records for private debt since 1834 and for government debt
[00:15:38] since 1790.
[00:15:39] So you can actually take a look at what happens on both the government debt, which is a financial
[00:15:47] liability for them.
[00:15:49] Okay.
[00:15:50] And you look at having a private debt, which is the liability of the non-bank private sector.
[00:15:56] And so the government has on several occasions in the 1800s in particular, tried to drive its
[00:16:03] debt down to zero.
[00:16:04] Now, shortly after it did that, there'd be a financial bubble.
[00:16:09] Some asset, non-financial asset would be focused upon.
[00:16:12] People would buy into it like crazy.
[00:16:14] Its price would rise, then it would crash and we have a bankruptcy and you have a Great
[00:16:18] Depression.
[00:16:18] And this happened regularly during the 1800s.
[00:16:21] So we have a historical record that says when the government tries to get itself into net,
[00:16:27] at least net zero, maybe even positive financial equity, the next thing is that the government
[00:16:34] occurs as a Great Depression.
[00:16:36] All right.
[00:16:36] And there's a causal link between the two.
[00:16:38] When we come back, we'll look at how all of this relates then to the money supply, but
[00:16:42] also let's throw bonds into the picture just to confuse things on the Debunking Economics
[00:16:48] podcast back in a second.
[00:16:49] Now it's winter and soon again the Feiertage are already in the door.
[00:16:57] That can also for Hunde very stressful.
[00:16:59] Many Vierbeiner react to other with a stortive Verdauung and that is a stress for their
[00:17:05] customers.
[00:17:06] But it's a quick and easy help.
[00:17:09] Probioticum Purina Proplan Forti Flora.
[00:17:12] Streu einfach einen Beutel über das tägliche Futter.
[00:17:15] Die außergewöhnliche Zusammensetzung mit lebenden guten Darmbakterien stellt das Gleichgewicht
[00:17:20] im Darm wieder her.
[00:17:21] Natürlich kannst du Proplan Forti Flora auch präventiv oder bei alltäglichen Verdauungsbeschwerden
[00:17:26] einsetzen.
[00:17:27] Es unterstützt auch bei Ernährungsumstellungen oder Antibiotika-Einnahme.
[00:17:31] Purina Proplan Forti Flora.
[00:17:33] Jetzt auf shop.purina.de
[00:17:37] Du träumst davon, dem Alltag zu entfliehen oder die Welt zu bereisen?
[00:17:44] Das bedeutet wahrscheinlich, dass du dir ein unabhängiges Leben wünschst.
[00:17:48] Investieren für deine Zukunft kann dir dabei helfen.
[00:17:50] Mit iShares ETFs kann jeder anfangen, kleine, regelmäßige Beträge zu investieren.
[00:17:55] Und das schon ab einem Euro.
[00:17:57] So kannst du deine Zukunftsziele erreichen, ohne einen Berg von Papierkram zu bewältigen.
[00:18:01] Mehr Zeit zum Träumen.
[00:18:03] Finde iShares bei deinem Broker oder deiner Bank und fange noch heute an mit ETFs zu sparen.
[00:18:07] Kapital und Lager Risiko. Marketing Information.
[00:18:13] This is the Debunking Economics Podcast with Steve Keen and Phil Dobby.
[00:18:22] So we've looked in the first part at how, you know, the comment that was made in Stephanie Kelton's book,
[00:18:27] The Deficit Myth, that if the government is running a positive deficit,
[00:18:31] then that is positive for the private sector here mantra that their red ink is our black ink.
[00:18:36] So by that reckoning then, Steve, if the UK government is in deficit this financial year,
[00:18:42] supposedly according to the budget, by 127.5 billion pounds,
[00:18:47] the money supply is about 3 trillion pounds, depending how you measure it, of course.
[00:18:52] So does that mean, you know, there will be things that confuse it, but, you know, by pure logic that we've discussed in the first half,
[00:19:01] does that mean the money supply will increase by the amount of that deficit by 127.5 billion pounds,
[00:19:06] which is about, until bonds get into, yeah, yeah.
[00:19:10] Yeah. But that's about 4%. That sort of seems about right, doesn't it?
[00:19:16] Exactly. Exactly. Yeah.
[00:19:18] If you want to, I mean, this is always in the context of a growing economy, okay?
[00:19:22] Yeah.
[00:19:23] You know, I've got to do my climate change comment there,
[00:19:26] but if you are going to have a continually growing economy,
[00:19:29] and that's, of course, what Reeves and Stalin will wish to achieve,
[00:19:31] then you need a growing money supply.
[00:19:33] Now, how do you create the money supply?
[00:19:35] There are two ways.
[00:19:36] Governments create money by going into negative financial equity,
[00:19:39] which creates identical positive financial equity for the non-government sectors,
[00:19:44] which are both banks and non-bank companies, individuals and companies.
[00:19:51] The private banks create money by creating assets and liabilities for themselves and the non-bank sectors as well.
[00:20:02] Therefore, there's no change in the level of the net equity.
[00:20:04] So, if you have only private bank money creation, and this, even though they're not aware of it,
[00:20:11] this is what they're actually trying to achieve.
[00:20:13] If you only have that, then fundamentally, the non-bank private sector has to be in negative financial equity.
[00:20:21] And this is the thing which has, you know, come aware to me as I was building Ravel.
[00:20:28] Because banks have to be in positive financial equity.
[00:20:31] It's a necessity.
[00:20:33] It's a requirement for becoming a bank.
[00:20:35] It's a requirement for maintaining operations as a bank.
[00:20:38] But the short-term financial assets exceed the short-term financial liabilities.
[00:20:43] Therefore, in the short-term, your assets are greater than your liabilities.
[00:20:47] Banks have to have positive financial equity.
[00:20:51] Now, when a bank gets to negative financial equity,
[00:20:55] that tends to happen because asset values collapse for various reasons.
[00:20:59] We'll talk about that in this podcast or another one.
[00:21:02] But when those assets fall in value and the liabilities remain constant,
[00:21:06] a bank can be negative equity.
[00:21:08] It is therefore bankrupt.
[00:21:10] One of my favorite examples of this comes out of the financial crisis when Hank Paulson,
[00:21:15] I think he was ex of Goldman Sachs, he was the US treasurer at the time.
[00:21:20] And he got a call from his successor and the successor said,
[00:21:23] look, you've got to do something and we're going to go bankrupt.
[00:21:25] And he said, well, how long have you got?
[00:21:26] And the answer was about three hours.
[00:21:29] So in other words, plunging value, this is actually a non-bank,
[00:21:32] because banks can't buy shares, but non-bank financial institutions can.
[00:21:36] So Goldman Sachs and co. have got share values.
[00:21:39] They're subject to the same rules as banks, that they have to have positive financial equity.
[00:21:43] He was watching his share price plunge during the 2008 downturn, the shock market crash.
[00:21:48] And if it kept up for another three hours, that was it.
[00:21:51] We'd bankrupt.
[00:21:52] So the take out from that then, just to keep us on track,
[00:21:57] is that if equity is just zero for the government,
[00:22:02] it's neither in positive territory or negative territory, it's just balanced.
[00:22:06] Then there has to be balance in the non-government sector, in the private sector.
[00:22:12] As well.
[00:22:12] Yeah.
[00:22:12] And you're saying, but of that, the banking sector to stay alive has to be in positive.
[00:22:17] Must be in positive.
[00:22:18] Therefore, it's in negative financial equity.
[00:22:21] So the only way you can get over that is for the government to be in negative equity.
[00:22:25] Exactly.
[00:22:26] To counterbalance the effect of the banks.
[00:22:28] Exactly.
[00:22:29] So, okay.
[00:22:30] So balancing the budget is very harmful to the broader economy,
[00:22:34] because the only people making money out of that situation are banks.
[00:22:37] And the reason we need extra money in the economy to grow is because if there's a set amount of money,
[00:22:46] let's assume that the velocity of money doesn't change, which it really does.
[00:22:50] It's just very slow these days.
[00:22:51] If there's a set amount of money at a set speed, it means if your business is making money,
[00:22:57] you are making that money at the expense of another business that is losing out.
[00:23:01] There's only so much money to go around.
[00:23:03] Yeah.
[00:23:04] Yeah.
[00:23:05] And if you're going to-
[00:23:06] So there's no growth in it.
[00:23:08] Yeah.
[00:23:08] This is the thing which pisses me off so much when I get these little Austrian types turning up in Twitter and so on,
[00:23:15] that they say, as soon as you say money creation, they say Weimar Republic.
[00:23:20] I mean, the stimulus response, I might as well have Pavlov's dog.
[00:23:25] Rather than salivating, they say Venezuela or Weimar.
[00:23:29] So this has been going on for 250 years.
[00:23:32] Yeah.
[00:23:32] Well, the US has hardly ever balanced the budget.
[00:23:36] Yeah.
[00:23:36] I mean, it's always been deficit.
[00:23:37] Almost always.
[00:23:38] I mean, there have been a few occasions.
[00:23:39] I'll mention the equations.
[00:23:41] They haven't worked very well.
[00:23:42] 1921 to 1929.
[00:23:44] Right.
[00:23:45] Look what followed.
[00:23:46] And in 1998 to 2001, and if it hadn't been for the Iraq war, it would have continued through.
[00:23:53] So every time the government has tried to run a surplus, we've had a financial crisis.
[00:23:56] And this is particularly obvious in the 1800s data, but it also turns up particularly the Great Depression.
[00:24:02] I mean, and this is why I use it as such an important example.
[00:24:06] It's something which, if you can't explain the Great Depression, you're not an economist.
[00:24:09] And that means the most economists are not economists because they don't have an explanation for the Great Depression,
[00:24:15] or if they do, it's the government's fault.
[00:24:17] That's the sort of garbage.
[00:24:18] Pardon me.
[00:24:19] I'm sorry.
[00:24:19] You told me not to insult the classical economists in this one, didn't you?
[00:24:22] Damn.
[00:24:23] No, I just thought we'd be nice for once.
[00:24:24] That was all.
[00:24:26] But okay, let's throw bonds into the whole situation now then.
[00:24:30] So, the government's got a deficit.
[00:24:32] Say it's got a billion pounds that they spend over what it gets in tax.
[00:24:37] And it says, right, well, we're going to issue bonds because that's the way it's done.
[00:24:42] Those bonds are issued to banks initially, but those banks could pass them on.
[00:24:48] Actually, just on that, first of all, if there's a billion pound overspend, that's a billion pounds that has gone into the broader economy.
[00:24:57] So, that's a billion pounds that has gone into people's bank accounts.
[00:25:01] Exactly.
[00:25:01] Yep, yep, yep.
[00:25:02] So, is that what is counted as reserves or banks just have to hang on to…
[00:25:09] Well, the process, and this is extremely important to get the mechanics right, and conventional economists do not get the mechanics right.
[00:25:16] When the government runs a deficit and also has outstanding debt, which it has to pay interest on, and outstanding bonds, then governments are required by laws, not by the accounting of the situation, but they're required by laws to issue bonds equivalent to the deficit plus the interest payments on existing bonds.
[00:25:35] Just a second.
[00:25:36] Just, and we'll bring bonds in a second.
[00:25:38] Just that billion pounds that goes into bank accounts from the government's money, that sits in bank accounts.
[00:25:44] Is that added to the reserves of the bank as well?
[00:25:48] Yes.
[00:25:49] That's critical.
[00:25:50] And the government, so those banks then can't invest those reserves.
[00:25:55] That's right.
[00:25:56] So, they've got that billion pounds.
[00:25:59] Wouldn't they just be spending all of that on the one billion pounds extra bonds that have been issued by the government, if that was the case?
[00:26:07] Exactly.
[00:26:07] Because, I mean, there's two reasons for that, but the simplest one is to say that if you look before the global financial crisis, which, you know, stuffed up the monetary system as well as stuffing up the economy, before that happened, there was no interest paid on reserves.
[00:26:22] So, if you had a government running a deficit of a billion pounds, it puts a billion pounds into people's deposit accounts, and it puts a billion pounds into the reserves of the banks, which are no interest.
[00:26:35] So, then when the government does a prime, you know, what they call primary auctions or gilt auctions in the UK, I think they call them, what, the way they're paid for is that the billion pounds created by the, the billion pounds worth of reserves created by the deficit is then used to buy a billion pounds worth of bonds.
[00:26:56] Now, that means what's going on for the bank.
[00:26:58] It's an asset swap.
[00:26:59] You're selling, you're using an asset which you can't trade and which you can't, you get no return on.
[00:27:06] You're selling that for an asset which you can trade and for which you get a return.
[00:27:10] So, it'd be extremely dumb bank that didn't take that offer.
[00:27:14] Now, there can be curlies with that when there are rising interest rates, so that's another issue.
[00:27:18] It may be for another podcast.
[00:27:19] But, yeah, the basic reason that banks buy the bonds is because they're converting a non-tradable, non-income earning asset initially, lower income earning now, into a tradable, higher income earning asset.
[00:27:32] Of course, they buy the bonds.
[00:27:33] But if they didn't, or if they did and then they sold them, say they said, well, okay, for whatever reason.
[00:27:40] That's two different things.
[00:27:41] Okay.
[00:27:42] Well, but if that billion doesn't all go into banks, then let's put it that way, either directly or indirectly.
[00:27:47] It goes into pension funds, for example.
[00:27:50] Then you've got a situation.
[00:27:52] Say none of it went into banks.
[00:27:53] Say it all went into that one billion pounds, went into a pension fund.
[00:27:57] Let's get the went into correctly.
[00:27:59] What happens, first of all, with the primary auction?
[00:28:01] The only people that can buy in a primary auction are banks and approved by the bank.
[00:28:05] Okay.
[00:28:05] So, the bank for whatever reason.
[00:28:07] Banks buy them all.
[00:28:08] Yeah.
[00:28:08] And then they sell them all.
[00:28:09] Okay.
[00:28:09] It's two steps.
[00:28:10] They buy them off the treasury.
[00:28:12] But the net effect is the sale.
[00:28:13] They sell them to pension funds.
[00:28:15] Two steps.
[00:28:15] So, that one billion pounds now is money that the pension fund has paid for.
[00:28:21] And that one billion pounds, ultimately, the beneficiary for that is the government.
[00:28:25] That billion pounds that the government had in debt has now been paid for by that pension fund.
[00:28:32] Yeah.
[00:28:33] Now, hang on.
[00:28:33] You're getting big language.
[00:28:34] You're getting a bit confusing here.
[00:28:35] If at first stage, banks convert non-incomeing assets, which are reserves, into income-ending assets, which are bonds.
[00:28:41] And they can trade them as well.
[00:28:42] Then what banks frequently do, for a large part of what bonds themselves, is they sell them on the bond market, which is the world's biggest financial market, far larger than share markets in terms of the volume of transaction.
[00:28:53] They sell them on.
[00:28:54] And then you made the point, a very important point earlier on.
[00:28:57] The deficit itself creates the money that's used to buy the bonds.
[00:29:01] And that's both when the bonds are bought by using reserves by banks, which has no effect on the money supply.
[00:29:08] But when the banks then sell those bonds to pension funds, what happens from the pension funds point of view is that their bank account at the banks goes down by a billion.
[00:29:18] So a billion pounds worth of money is destroyed that way, and they get an asset which is worth a billion dollars.
[00:29:25] So government bond sales to banks in the initial primary has no effect on the money supply.
[00:29:33] But banks selling bonds to the non-bank private sector reduces the money supply.
[00:29:38] Yeah.
[00:29:39] So if they bought – if the pension funds ultimately bought that whole billion that the government was in deficit by, then there would be no new money created.
[00:29:48] Because the money that's gone in retirement funds has basically gone to pay the government deficit.
[00:29:53] So it's a case of the private sector bailing out the public sector in that case.
[00:29:58] Not bailing out at all.
[00:29:59] Well, okay.
[00:30:00] Okay.
[00:30:00] Well, they –
[00:30:00] Okay.
[00:30:01] The government does not – the government – see, this is the thing.
[00:30:04] People – when bonds are sold to the non-bank private sector, they're not sold by the government.
[00:30:09] They've been purchased by the banks.
[00:30:10] So the fact that banks can – banks create money by lending more than they get back in repayments, they can destroy money by selling bonds.
[00:30:19] And that's one reason I don't think banks should be allowed to sell all their bonds.
[00:30:24] I think that's a mistake of the current structure of the system.
[00:30:27] But when they do it, the money that's used – in the gross sense, if the government has run a deficit of a billion pounds, then it's created a billion pounds of additional money.
[00:30:39] So the deposits of the banking sector go up by a billion pounds.
[00:30:43] Then you have the asset swap, which just occurs.
[00:30:46] The reserves go down.
[00:30:47] Bonds go up for the banks.
[00:30:48] Then when the banks sell those bonds to the public, the deposits go down and so do the value of the bonds held by the banks.
[00:30:57] So that's the act of banks selling bonds to non-bank banks, whether they're financial institutions or individuals or companies.
[00:31:07] That act actually destroys some of the money created by the deficit in the first place.
[00:31:11] I wonder why they'd have to do that.
[00:31:12] If it's a billion pounds that's been issued that's gone into bank accounts, that's a billion pounds in reserves.
[00:31:16] They'd want to cover that all with bonds, wouldn't they?
[00:31:18] But anyway –
[00:31:19] Well, they do.
[00:31:20] The government does cover all bonds.
[00:31:21] They're required to.
[00:31:22] So the government side of things, that's completely covered.
[00:31:24] The bond sales by the Treasury –
[00:31:25] Yeah, but I'm saying if the bank has got that money sitting in bank accounts, the banking sector as a whole would want one billion in bonds to cover that one billion that is sitting in reserves.
[00:31:35] That's what's achieved by the first act, the actual yield auction.
[00:31:38] That achieves that change.
[00:31:40] Then they've got an asset.
[00:31:41] And this is like back when I was a kid, a long time ago.
[00:31:44] But the asset increases in value and therefore they start selling it.
[00:31:47] Yeah, that's right.
[00:31:48] They're a sick of trading event.
[00:31:49] I mean, interest rates moving up and down, move bonds prices down and up.
[00:31:54] And then in that – and then, of course, pension funds want to have – the pension funds actually desire to have what they call safe assets.
[00:32:02] Now, by safe, they mean this one is never going to default on us.
[00:32:05] So that 4% that we're talking about is just – that incremental 4%, that difference between –
[00:32:10] It can fall down to 1 or 0.
[00:32:12] Yeah.
[00:32:12] Yeah, it's fallen down a bit because some of those bonds are getting sold.
[00:32:15] There's two other side effects to this as well.
[00:32:18] One is the potential from the government going into spending more and more, something which MMTers are well across and that they say is the one thing to watch is inflation.
[00:32:28] Because obviously it's resources, not money, that you're concerned about ultimately with the spending.
[00:32:33] No point in spending money building schools if there's not the demand for schools or there's not the bricks to build them with or there's not the people to build them.
[00:32:41] So it's resources rather than money that is the concern.
[00:32:44] The other is the impact of issuing a lot of bonds, isn't it?
[00:32:50] Because if you issue a lot, the value of those bonds is going to go down.
[00:32:55] Interest rates will go up because of that inverse relationship between the value of a bond and the yield on a bond.
[00:33:02] If the yield goes up, it's harder for the private sector to borrow and invest.
[00:33:08] No.
[00:33:09] Right.
[00:33:10] Because this is the crowding out argument, isn't it?
[00:33:12] This is the crowding out argument, which only works if the government is actually – like in the initial – the crowding out is not by the government.
[00:33:19] It's not by the banks.
[00:33:20] This is the other crazy thing.
[00:33:23] Because when the government actually runs a deficit, that's creating money that actually circulates in the private sector.
[00:33:29] It means you can finance operations out of cash flow rather than having to borrow money.
[00:33:33] Even if you do borrow money, you've got more cash flow because of what the government's done, so you're more solvent, more likely to get a loan, et cetera, et cetera.
[00:33:40] So it's not a crowding out effect at all.
[00:33:43] The government is crowding in because the government creates part of the money supply.
[00:33:48] And if you don't have the government doing that, then it's only the private sector, the private banks that create the money.
[00:33:53] You have less money creation.
[00:33:54] And because people find – because banks necessarily have to be in positive equity, and if you only have – you know, if you have the dominant money creation by far as private banks, then that means the non-bank private sector is a negative financial equity.
[00:34:10] You look at it, you buy it, and you think, oh, God, I owe 200,000.
[00:34:15] I've only got, you know, 50,000 in my bank account.
[00:34:18] It's pretty bad.
[00:34:19] How do I get a deposit?
[00:34:20] I know.
[00:34:20] I'll buy a house.
[00:34:21] So I'll go to the bank, borrow more money off the bank, and then that goes into the housing market.
[00:34:26] And the dynamics of money creation for houses – you know, I've done the mathematics on this.
[00:34:33] The main factor that causes house prices to rise is acceleration in the level of mortgage debt, not the change in mortgage debt, but the rate of change.
[00:34:43] And that's what drives asset prices.
[00:34:45] So the actual act of borrowing and then buying a non-financial asset with money you borrowed from the bank causes that non-financial assets value to rise, and then that happens.
[00:34:54] You think, oh, look, I know 1 million now, and I've only got 50,000 in the bank still, but I've got this house which has gone from 1 million to 2 million.
[00:35:03] Yeah, I'm ahead.
[00:35:04] I'm in positive total equity, but, you know, financial equity is still negative.
[00:35:08] Still not totally getting this, though.
[00:35:09] So let's take this step by step then.
[00:35:11] So the government, rather than spending a billion, spends 10 billion, for example.
[00:35:18] They go a bit crazy.
[00:35:20] Well, no, that's not necessarily crazy.
[00:35:22] They go for their life.
[00:35:26] And so they have to issue 10 – in a market that is used to getting drip feeds of a billion pounds worth of bonds a year, all of a sudden gets –
[00:35:35] Let's get – we're closer to trillions than billions.
[00:35:38] Okay, I know.
[00:35:39] All right.
[00:35:40] But anyway, we started with billions.
[00:35:42] The American economy, yeah.
[00:35:43] It's a very small economy we're talking about.
[00:35:46] It's Tasmania.
[00:35:48] Or maybe if it became a country.
[00:35:50] You better apologize to some of our listeners.
[00:35:52] So the 1 billion, all of a sudden, one year becomes 10 billion.
[00:35:56] That's a tenfold increase in government spending.
[00:35:58] What would that do to bond prices?
[00:36:01] Probably nothing.
[00:36:02] You don't think?
[00:36:03] No, because the reason is the bond – this is where the mechanisms of the central bank and the treasury come into play.
[00:36:09] Because this is in terms of rates on bonds.
[00:36:11] And there's actually a very nice little video explaining this by the Reserve Bank of Australia.
[00:36:15] So for once, I'm going to compliment the RBA.
[00:36:17] Okay.
[00:36:18] But when the central bank sets the target rate for interest rates, that's setting the rate which has to be issued for bonds at that point.
[00:36:28] And then what will happen in the market, that huge market, the secondary market that's created by banks on selling bonds to non-bank financial institutions and individuals and companies,
[00:36:38] is that secondary market is huge and people are buying and selling all the time and there will be market dynamics on the prices there.
[00:36:45] But the Federal Reserve or the Bank of England or the RBA has a limitless capacity to buy those bonds because they're also a bank.
[00:36:54] And if the central bank – we call it QE, but the main way that the central banks interact with bond prices is what they call open market operations.
[00:37:04] And in open market operations, if they buy bonds off the banks, that makes no change to the money supply, but it increases the reserves bank have.
[00:37:15] If they buy bonds off the non-bank financial institutions, that converts bonds which are held by non-banks into cash.
[00:37:24] That also increases reserves at the same time.
[00:37:27] So they've got to – let's say one way to solve Elon Musk's dilemma, the government owes $40 trillion, $40 trillion, and that's huge interest rates.
[00:37:39] It's going to compound.
[00:37:40] Simple solution for Elon, get the central bank to buy them all, $40 trillion worth.
[00:37:44] What the bank would do is put $40 trillion into the reserve accounts of the banks and into the deposit accounts of – either directly by buying off banks or indirectly by buying off non-banks.
[00:37:55] Reserves are about $40 trillion.
[00:37:57] The debt goes to zero.
[00:37:58] The debt's owned by the central bank, and the central bank pays no interest to the Treasury.
[00:38:03] Boom, problem solved.
[00:38:04] Don't think Elon's thinking that far, though, is he?
[00:38:06] I mean, he hasn't got it right.
[00:38:08] He's miles from being right at the moment.
[00:38:11] The government is spending too much, as far as he's concerned, and that could all be done by the private sector without this question about where the equity sits.
[00:38:19] So let's look at what the impact – just very quickly, because we've run out of time.
[00:38:22] It's been great today.
[00:38:23] But the impact of cutting back.
[00:38:27] So what happens if Donald Trump does want to cut his deficit?
[00:38:30] So the U.S. deficit is about $1.7 trillion, by the way.
[00:38:33] That's about 8% of their $21 trillion money supply.
[00:38:37] So 8% compared to 4% in the U.K.
[00:38:40] I guess they can – well, is that too much, or is that sort of like the range 4% to 8%?
[00:38:45] Depends how much growth you want, I guess.
[00:38:47] It's quite a bit of stimulus, actually, yeah.
[00:38:49] I mean, my rule of thumb is that the money creation should be equal to the rate of economic growth divided by the velocity of money.
[00:38:57] And that means like 8% is actually going to be about 8% nominal growth.
[00:39:02] And if you're going to split that up into what's feasible for real versus inflationary, then you're lucky to get 2% real growth these days.
[00:39:10] That's talking about a 6% rate of inflation.
[00:39:12] So in that particular case, you would want to have lower money creation, but you don't want to have it going down to zero.
[00:39:18] Right.
[00:39:19] Or negative, and that's what he's after.
[00:39:20] Yeah, okay.
[00:39:21] But unless he completely obliterates the deficit, which I'm sure he won't be able to do, they are still generating new money.
[00:39:30] They're not shrinking the money supply, but they are really slowing down the rate of growth.
[00:39:35] So less red ink, less blanking.
[00:39:39] So the economy is going to slow because they haven't got the same growth.
[00:39:43] So it's not actually shrinking the money supply.
[00:39:45] It's just slowing down the speed at which it grows.
[00:39:47] Yeah, but I think there's – and you look at Reeves' budget, for example.
[00:39:51] Her intention is by 2026 and 2027, I think, that you're going to run a surplus.
[00:39:56] Now, she thinks that's saving money.
[00:39:58] And if you read the textbooks, that's what they teach.
[00:40:00] Mancuse textbook actually says that if the government runs a deficit, it's reducing savings.
[00:40:07] And if it runs a surplus, it's increasing savings.
[00:40:09] That is the exact opposite of what happens when you do the accounting properly.
[00:40:12] But if Reeves runs that surplus, which she's trying to do, she'll reduce the money supply by the scale of the surplus.
[00:40:20] Right.
[00:40:20] But they'd also be factoring in bond prices in all of this, wouldn't they?
[00:40:25] So interested in what you're saying that you don't think that the yield on bonds is influenced by the amount of yields.
[00:40:30] Because I'm sure in the Trump camp, they'd say less bonds, bond prices go up, interest rates come down.
[00:40:34] That drives more investment in the private sector.
[00:40:36] The Federal Reserve's got this enormous – any central bank has got this enormous power.
[00:40:40] When they set a target interest rate –
[00:40:42] They're part of the same school.
[00:40:43] They're thinking, well, we don't want to – we bought up bonds in an emergency.
[00:40:48] We don't want to do it anymore.
[00:40:49] But we have economists –
[00:40:50] In the United States, they've got this situation, actually.
[00:40:52] That makes the whole thing worse, isn't it, when we're talking about the supply of money.
[00:40:55] They are wanting to push out the bonds that they're holding back into the open market.
[00:41:00] They're wanting to – the money they're holding, which shrinks the money supply because people have got to buy those bonds that they're holding.
[00:41:07] And therefore, the money supply goes down.
[00:41:09] That's right.
[00:41:10] But like in terms of the price, when the central bank sets a target interest rate, it also sets a band around that, that it wants to manipulate the market to make sure it doesn't go above or beyond that range.
[00:41:20] So if you set a 5% target rate, for example, then the Federal Reserve will have a target of, say, 5.5% to 4.5%.
[00:41:27] That would be a large range that they'd allow.
[00:41:30] Now, if they see the price on the market as going to breach the 5.5% mark, they undertake open market operations where they go in and buy the bonds off the banks, non-banks, which drives down the yield.
[00:41:41] And because the central bank has got limitless capacity, because it's the banks of the financial sector, limitless capacity to buy those bonds is one of the sayings in the bond market.
[00:41:51] And this is one which I hope Elon learns.
[00:41:53] Don't fight the Fed because the amount of money that an individual company can use to buy bonds is limited by their own reserves and their capacity to lever those reserves.
[00:42:04] And that can be big.
[00:42:05] The Federal Reserve can buy – literally tomorrow, the Federal Reserve could say, we're going to buy all $40 trillion worth of bonds outstanding.
[00:42:13] We're going to buy them tomorrow.
[00:42:14] And that could do it.
[00:42:15] And that would expand the money supply as well?
[00:42:17] It would expand the money supply to the extent that those bonds are bought off non-banks.
[00:42:21] That's right.
[00:42:21] Okay.
[00:42:22] So it would do it.
[00:42:23] And that's one reason they don't.
[00:42:24] Okay.
[00:42:25] Because that would be a huge increase in money creation.
[00:42:27] It seems like – I mean, we've run out of time today.
[00:42:29] But I think what we've highlighted – I mean, there's many moving parts to this, aren't there?
[00:42:33] There's many players as well.
[00:42:34] There's the government.
[00:42:35] There's the central bank.
[00:42:36] There's the private sector.
[00:42:37] There's private sector banks.
[00:42:38] There's a balancing act between all of this to try and get what that injection of cash is that you want, or that injection of money, I should say, that you want into the economy.
[00:42:49] What that is, at a reasonable rate, that it's not going to cause alarm, that it's not going to cause inflation, that it's going to help –
[00:42:56] Or cause a collapse.
[00:42:57] Yeah.
[00:42:58] And it's going to help – yeah, exactly.
[00:42:59] It's going to keep the economy stable, the monetary system stable, and see growth at the same time.
[00:43:04] All those players have to work in tandem to try and create that situation.
[00:43:08] The problem we've got right now – and it's an interesting balance.
[00:43:12] The problem we've got right now is that some of the people managing that balance, perhaps all of them, aren't actually really understanding what it is that they're trying to balance.
[00:43:20] That's the trouble.
[00:43:21] Yeah.
[00:43:22] And we're about to get that on steroids when Musk and co. dive in there because at the moment what Musk is talking about shows he doesn't understand the system.
[00:43:30] And it all gets down to where we started, this understanding that equity has to even out – financial equity has to balance out.
[00:43:41] Yep.
[00:43:42] That's right.
[00:43:42] Which is a very – anyone in your business would understand.
[00:43:45] Yeah, hopefully.
[00:43:46] And that's the one that will – chink in the armour that I can see to get through to them that, look, you don't want to have the government achieving positive equity because that pushes everybody else in negative equity, including Elon Musk.
[00:44:01] And that goes.
[00:44:03] And collectively, you have less money in circulation, less economic activity, and quite probably a financial crisis.
[00:44:09] Now, you'd be thinking that Elon Musk having run some very big businesses would understand the way businesses work.
[00:44:15] But I actually do remember –
[00:44:16] No, it's understand business is not understand government.
[00:44:19] And this is the mistake.
[00:44:19] But it's also just understanding a balance sheet, isn't it?
[00:44:22] And I seem to remember – yeah.
[00:44:35] Yeah, yeah.
[00:44:36] Yeah.
[00:44:37] If you don't understand balance sheets, you're going to stuff up this system.
[00:44:40] And that's why – back to one final plug for my Ravel software.
[00:44:43] It's the only software package on the planet that lets you see this at an integrated level.
[00:44:47] I thought you were very nice to neoclassic economists today, Steve.
[00:44:51] We'll catch you again next week.
[00:44:52] Thank you.
[00:44:53] And I'll swear off camera.
[00:44:54] Okay.
[00:44:55] See you next time.
[00:44:56] Bye.
[00:44:57] The Debunking Economics Podcast.
[00:44:59] Bye.
[00:45:41] Do you know what I'm saying?
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