More on how money is created

[00:00:00] I'm being honest with you in terms of saying that we will put more money into the NHS, but there isn't a magic money tree that we can shake that suddenly provides for everything that people want. This is the Debunking Economics podcast with Steve Keen and Phil Dobbie. Yes, the old magic money tree argument. Well, maybe there is a little magic money tree, but that doesn't mean you should pick all the leaves off it. It's all a question of control.

[00:00:24] So again this week, where does money come from? We look at several ways and what are the caveats about how far you can go? And what happens if you ignore the existence of the magic money tree? Do you just starve the economy? That's this week on the Debunking Economics podcast.

[00:00:51] So Steve, we have been talking a lot, perhaps too much some people would say, about how money is created. And we have, but everyone is fascinated by it. And I think obviously it is very crucial to the way the economy operates. And the fact that a lot of people have got it wrong could be why the economy is malfunctioning in lots of ways. We talked last week about how banks create money and we'll come back and revisit that because today I want it to be like, let's look at a whole load of different ways that money is created.

[00:01:19] But including how banks created by giving out loans, because I've got a couple of extra questions on that. But the one thing I've always struggled with is how governments create money. So I want to go through this step by step, trying to keep it as simple as possible without having to open up a spreadsheet showing double entry bookkeeping. We can use it as the, you know, as the philosophy behind all of this. But let's give, let me give you a couple of scenarios. Right. And there will be steps involved in this.

[00:01:47] But scenario number one, the government spends a billion pounds and that billion pounds just, this never happens, but that billion pounds sits in the central bank, the treasuries account in the central bank as a billion pounds in the red. And the treasury says we're okay with that. That's a billion pounds of new money going into the economy. Well, this is the, I mean, I think we've dived in a bit too early into this situation.

[00:02:15] But if you think about what a government does when it taxes, it takes money out of deposit accounts. And that money actually, the balancing item for that is reserves fall by the same amount. And then what happens at the central bank is, the way the money taxation is transferred from the private sector to the treasury is that the reserves fall and the bank account of the treasury at the central bank rise by precisely the same amount. Already got me confused now. Yeah.

[00:02:45] So, so, so, so, so, so, look, I mean, the banks, so let's, let's, let's, because we've got to get this right, because we've struggled over it several times. Yeah. The, I mean, first of all, a government deficit is the difference between how much a government spends and how much it's getting back in tax. So, it's got a billion pounds deficit in one year. And it, and it just sits there in, as, as I say, it never happens. That is, that will all be new money, won't it? Because it's not, because it's just sitting as a, as a deficit within the bank account at the central bank.

[00:03:15] Yes. But the reason it's, to spend the money, you've got to put in people's bank accounts. So, if the government spends more than it takes back in taxation by a billion pounds, as in this example, then it puts, spends a billion pounds more than it takes back in taxation. So, therefore, deposit accounts rise by a billion. And so do bank reserves. They also rise by a billion. The matching item for the central banks is reserves rise by a billion.

[00:03:42] And the reason it rose by a billion is because the treasury went into overdraft for a billion dollars at the central bank. Right. So, it's central bank. It goes down by a billion. The reserves go up by a billion. And that is what causes deposits to also go up by a billion. Right. Okay. Think I'm getting there bit by bit. So, the, so let's take, let's look at the central bank part of that then. So, the central bank, because we're talking about a situation that doesn't happen, but, because it's always, bonds are always issued.

[00:04:10] But, anyway, aside from that, so the billion pounds that is sitting with the central bank is a, a lie. Negative billion pounds. Negative. Negative billion. Negative billion in the treasury account. Positive billion in the reserve account of the central, of the private banks of the central bank. So, overall, there's no change to the equity for the central bank out of that. Yeah. But they've not got, they've given, allowed the treasury to go a billion dollars or pounds into overdraft. Okay.

[00:04:39] And what the treasury does with that overdraft, it uses that to spend, put money in people's deposit accounts. And it does that by, first of all, putting them in the reserve accounts of the central private banks and saying, okay, I've got this bloke called Phil down in the south of England. We're going to give him a tax refund. So, he's going to get a, we want to put a thousand quid in his account. And that's a plus thousand quids in reserves, earmarked to go into your deposit account. And that thousand dollars comes out of an overdraft by the treasury at the central bank.

[00:05:08] And the reason why it's going into the reserves is because you're there saying, look, we want you to give a billion dollars to this Dobby guy. So, if we put it into your reserves, then you're covered so that you can take it out of your, you can issue that money to him. Yeah, there's an immense complexity. I mean, when I talk about reserves, I'm just lumping it together, you know, the accounts of numerous different banks. And then when I talk about putting money in reserves, what you're doing is saying, you know, in the case of England, there's, you know, what, 20, 40 million taxpayers.

[00:05:37] The USA is now 300 million taxpayers, something out of order. So, when the government is doing spending, and that can be like welfare payments to people who are on disability, unemployment benefits, buying nuclear, getting nuclear power stations built and paying the contractors, et cetera, et cetera.

[00:05:55] All that money is earmarked for specific accounts when it goes between the treasury's consolidated revenue fund, which is the name that's normally given to the accounts of the central bank at the treasury, the treasury at the central bank.

[00:06:09] But it's all, you know, massively, there's a huge bureaucracy and a huge necessary financial mechanism to specify that, you know, of that billion pounds in total, 1,000 quid is going to go to fill in the south of England. And so, it's, but it's, we do this at the level of macroeconomics because we're looking at the aggregate effect.

[00:06:38] So, we added the billions a year, millions a thousand to you and a thousand to somebody else. And pretty soon we're talking serious money. You've got a billion dollars worth of extra money circulating in the economy. Right. But so, because the equity in the, that the treasury holds has now gone down by this, this deficit has gone down by a billion, this deficit that they've got. And that billion is finding its way into other people's bank accounts.

[00:07:03] So, the non-government sector, the private sector, its equity has gone up by that billion. That's right, by the deficit. Yeah. So, the net worth of the private sector rises by the amount of the deficit. Now, there's no bonds or anything involved in this process. It's all there just sitting as a, as a, as a deficit or within the central bank or an overdraft. We had to like that. That is simply a legal requirement by most countries that the treasury is not allowed to be an overdraft.

[00:07:33] But like we go back to the COVID period, one thing, one specific measure done, I think in 2021, was just to speed up the whole process. The Bank of England agreed that they would got it. So, that's just the technical thing. Right. But if that was, if the world was that simple and they could go into an overdraft, then that would be new money because it was negative equity in the treasury. It was positive equity in the, in the private sector. We are a billion pounds of new money basically circulating in the economy. That's it. That's the thing. Yeah. Right.

[00:08:03] But we confuse it because we say, right, you're not allowed to do that. What we're going to do is issue bonds to, to the tune of a billion. So, you can get your bank balance back down to zero. So, and I know this is going to change hands a few times because it gets issued to banks. Banks could then sell them onto non-banks. So, let's forget about the steps. Let's just look at where it ends up. If the billion pounds was issued as bonds, all of those bonds are bought by the non-bank sector. Say, for example, a retirement fund.

[00:08:34] Let's get the steps right first of all. Because when, if you, we spoke first of all about the government just going into an overdraft of the central bank and no bonds are being created. The amount of money created is the deficit. So, the government, by running a deficit, which is negative financial equity for itself, creates equivalent positive financial equity for the non-government sector. Now, if the government then issues bonds and ultimately, leaving out the intermediate steps, all those bonds are bought by pension funds,

[00:09:04] then what that means is the deficit has created money by government going into negative financial equity. When all the bonds are bought by treasuries, that negative financial equity is used entirely to buy bonds. So, the net worth of the non-bank, non-government sector has gone up initially by the increase in deposits.

[00:09:32] Then those deposits have fallen, but the bonds have risen by precisely as much. So, you've still got the government having created net financial assets for the non-bank, non-government sector. But the form it takes is now, rather than increase in deposit accounts, it's increase in private non-bank holdings of bonds. So, this is the number of the issue here, isn't it?

[00:09:56] So, I've got – the government goes into – the government spends a billion pounds, goes into deficit by a billion, but then it tries to eradicate that deficit by issuing bonds. That – that they – the bonds are issued. They're still – their equity is still down by a billion, even though they've issued bonds. It's just finance – the bank account might be zero. Yeah. But they've issued the bonds. They still – oh, they've still got to pay for those bonds.

[00:10:26] They've still got to pay those bonds back at some point. So, they're still – they're still in negative equity. The – those bonds are issued. Those bonds are bought by the non-bank sector, ultimately. I spend – you've put a billion pounds into bank accounts. So, why is that – so, the billion pounds that is put into bank accounts is then used to buy – Bonds. Bonds.

[00:10:54] But people – so, they've spent the money on the bonds. But they've still got the bonds, haven't they? That's right. Okay. The deficit has created money. The private sector has used that money to buy bonds. And then the government is liable to pay interest on those bonds. And it does that exactly the same way by going into negative equity itself, negative financial equity, which creates identical positive financial equity for the non-government sector.

[00:11:20] And it issues bonds equivalent to that to – when it says – when a government first sells bonds, it sells bonds both to cover the deficit plus interest on existing bonds. And that's what people think is going to lead to an explosion in government debt. But in fact, when you take a look at the mechanics of this, the increase in government money creation – the government money creation is created by the deficit itself. The bonds actually end up having no impact on government money creation.

[00:11:49] And this is the thing which people have a very hard time getting their heads around. Unless you live in a double-entry bookkeeping world, which is where my head lives these days, you simply can't see it. And people think the government is borrowing money when they sell bonds. In fact, what it's doing is changing the nature of the asset that backs those bonds from, effectively, reserves, the bank accounts of private banks at the central bank, into bonds. That's all it's doing. It's still in negative equity. It's still in negative equity.

[00:12:18] Government creates money by going into negative equity. Yeah, because they issue the bonds. They've still got to – yeah. Okay. They've still spent the money. So there's the thing. So it's like the government saying, look, I'm going to give you a slug of money to buy the bonds I'm going to issue. It's like saying, well, okay. Yeah, so that's a great win for me because either I have the money or I have the bonds. I've still got something I didn't have before. That's right. Okay. The government's created something new in that sense.

[00:12:45] And this is one of the – and one of the reasons this gets so confusing is that people – you always see the money taken out of your account by tax. You never necessarily see the money coming into your bank account from government spending. But they both happen. They both have to happen. And if the government is running a deficit, by definition, it's putting more money into your private bank accounts than it's taking out. So the deficit is creating money for you. It's not a case of the government borrowing money from you. It's creating money for you.

[00:13:12] And then when the government sells bonds, what those bonds do is convert the form of the money creation by the government from money in your deposit account to bonds of the same monetary value, which then earn an interest stream for you over time. So, I mean, that's actually – now we look at it like that, that actually seems quite simple, doesn't it? It is simple. I mean, even without worrying about the – I mean, the idea – the government spends money. It issues bonds to cover that money.

[00:13:42] The money – the bonds are bought in the private sector with money that it's given to the private sector for which the bonds were issued. Which makes it very hard to call that borrowing. And this is why – I mean, we call it government debt. Savings. But when you look at it, it is the government selling something to you and you're buying it with money the government's created for you by running the deficit in the first place.

[00:14:08] So it's not the terrifying, you know, going to send the economy bankrupt really quickly type stuff that Musk is coming out with right now. Yeah. And more to the point as well, this idea that government debt is an impost on future generations. Yeah. I mean, if you want to get rid of it, this is the punchline. But it's really a worry. What's one of Musk's favourite sayings? The best part is no part. Okay. Let's apply that to government finances. The best debt is no debt. Central bank, buy all the debt. Now, the central bank can do that through open market operations.

[00:14:38] It's got – because the central bank functions as like a bank above the level of private banks. And banks create money in different mechanisms. Banks create money by marking up their assets and their liabilities simultaneously. So if you get a bank loan, the government – Yeah, yeah. Don't worry about that now because we'll talk about that after the break. Okay, okay. I mean, but the point is that – I mean, actually, the point beyond – you know, I mean, Musk

[00:15:06] is crazy talk because he just wants to stop the government spending as much as possible. Whereas we're saying, well, actually, do that and you don't get this money created by governments. You suddenly reduce money creation. Yeah. And also, you remove an instrument that the whole finance sector is using and investing in, which is bonds. And there's the other interesting thing. So this idea that it's, you know, that government debt is an impost on future generations. Well, actually, that debt is met by investment in bonds, which are savings.

[00:15:30] So actually, government debt is creating savings for future generations because those future generations have got that money sitting in their pension funds, which is money that has been created by the government and turned into savings ultimately and passed on from one family to the next. George, I think you've got it. You're likely to get the opposite of the usual abusive emails you get from being a devil's advocate to being a – what are you? You're not the devil's advocate. I suppose you're God.

[00:15:58] But yeah, you've got it right. This is the story. That is what they're calling a debt for the government is an asset for the private sector, but it's not a debt for the government. It is simply changing the form of the way in which government backs its money creation. That's what's going on. And that negative equity, I mean, we're calling that on paper and we've talked about in recent editions about how there's financial assets and then there's non-financial assets.

[00:16:26] So that negative equity is actually negative equity on paper, but of course that's paying for buildings and infrastructure and stuff. Yeah, if you wanted to build like – let's say there's something radical like a new nuclear power station in the UK, then if the government goes into deficit of $10 billion or maybe $100 billion for that construction process,

[00:16:50] it creates $100 billion of money in the private sector to build the thing. And then if it issues bonds to cover it and it's paying 10% on the bonds, it's giving 10% to the private sector for having created that asset. But the negative equity of the government enables it to create a non-financial asset, that nuclear power station, which then enables you to have energy, non-fossil fuel-based energy for the UK for the future.

[00:17:17] So by obsessing about reducing the level of financial liabilities, what you're getting is the government is not creating sufficient non-financial assets. And that's what's causing particularly the British economy to – well, it's going to be a walk like an Egyptian for the whole British economy the way things are going. So you definitely want to be building the non-financial assets, but you don't do that unless you create the financial liabilities in the first place. Right. Got it.

[00:17:46] Look, when we come back, we'll look at other ways that money are created. We talked about banks last week. We'll touch on that again and a few ways that perhaps are not, but also an off-the-wall idea from someone who wrote in about something, which might actually be another way that money is created. So we'll do all of that when we come back on the Debunking Economics podcast. Back in a second. This is the Debunking Economics podcast with Steve Keen and Phil Dobby.

[00:18:16] So the other way we talked about, Steve, that money is created is by banks giving out a loan. Of course, that is only money for the length of the loan, isn't it? So when the loan is paid back, then obviously that money is destroyed. So actually the amount of money that's created presumably then is the difference between how much is actually loaned and how much is paid back at any one time. You'd hope that the amount going out in loans is increasing.

[00:18:45] But when the economy is really bad, they might not be giving out loans quite so much, but they're still getting the money back on mortgages, etc. So that's when the money supply starts to slow or actually possibly even starts to decline a little bit. And that's what happened in 2008. So, yeah, the difference between how the government creates money and how the private banking sector creates money comes down to what happens on the... Now, again, it's always assets, liabilities, and equity.

[00:19:15] The private banks can mark up their loan, their assets by increasing loans if at the same time they increase their liability by increasing deposit accounts. So if you want to buy the next-door neighbor's house and it's a million quid and the bank thinks that's a good idea or think you can pay back the interest on it instead, then they put a million pounds in your bank account, which you then hand over to your neighbor, and they put a million pounds as a debt that you owe to them, which you have to service for the next 30 years.

[00:19:43] So they increase their assets and liabilities simultaneously, and money is fundamentally the liabilities of the private banking sector. So that's how they create money. That creates money for you. But you've got the money so you can buy the house next door, but you've also got the liability. Your net financial position has not changed. And the reason why banks just don't issue loans willy-nilly is because there's a chance that that million is going to go out of your bank account straight away because it's going to go into someone else's bank account.

[00:20:12] So then you get the question of which is what we spoke about last week, the imbalance between one bank and another in terms of assets and liabilities. So my million goes into another bank account. They gain that. So they've lost out on that as money sitting in their account. And if there's an imbalance between how much they've lent out and how much they're getting in,

[00:20:38] they will have to borrow reserves to cover the difference, and that's where interest rates start to become important. They can. I mean, there's so much interbank trade going on all the time because we all bank at different banks. You debark at Barclays. Somebody else banks at Lloyd's and so on. A transaction between you and your personal spend account and their personal account has to involve a transaction. But that's where for the banks, that's where the costs come in. One of them. That's why they can't. It's not a major cost, but it is one of the costs.

[00:21:07] And there can be times when the reserves are low. I mean, people think they've got to have reserves to lend. That is a complete myth. And you do the double entry bookkeeping on it. The only way that it works is if the loans are in cash. And we know that hasn't happened for roughly a century. But when you look at the volume of money that people are transferring between private bank accounts at different private banks,

[00:21:32] that necessitates a transfer at the level of the bank accounts that those banks have at the central bank. Now, it's quite possible that in doing that, the bank that did the loan to you doesn't have enough to make the transfer. So what that happens, an interbank loan occurs, and then, you know, they'd say Barclays and Lloyds. So you bank at Barclays, and the person you're buying the house from banks at Lloyds. The Barclays account at the central bank goes down. The Lloyd account goes up.

[00:22:00] If the Barclays account's going to go into overdraft, they can make a deal with Lloyds to borrow that money back, to borrow the reserves back. So they're now paying interest to Barclays. So that's, you know, that's... And that's the ceiling, isn't it? That's why, because, you mean, you could say, well, if a bank can create a million pounds, why doesn't it create a billion? Because the answer is because there is a... The control on it, apart from the lack of interest in borrowing the money in the first place, which is the economy-related, is the fact that there is that cost.

[00:22:29] If they have to borrow the reserves, they have to pay money to another bank. So there's... That becomes... So it's not just... The idea that... Because that is the natural knee-jerk reaction, isn't it? Oh, if banks can create money with loans, why don't they just do it willy-nilly? The answer is because once you start looking at how the money gets passed between banks, there's a cost incurred in this. Oh, yeah, but they're relatively minor costs. And because, you know, you're somebody, a Lloyd's customer buying off a Barclays customer,

[00:22:57] somebody else is going to be a Barclays customer buying off a Lloyd's customer. These things net out quite dramatically. You know, they're one of the little families... You've also got the whole bad debt issue. So if I borrow a billion and then I default on a billion... Yeah, but you have already paid the money to... You know, the money's already been taken by another bank. Then you're left stranded. So what then happens in that case is if the bank finds you can't service your debt, then for a while they compound the money you owe them by putting the unpaid interest onto the debt you owe them.

[00:23:23] But at some point, if they see you're going for a non-performing loan to a loan in default, then they've got to write off the value of the loan to you and they're going to seize your assets. They're going to have a mortgage over your property or your business, whatever else. And then they're going to try to get hold of that and sell it and make a gain off that. And sometimes the banks can come out of it that way. If they still lose out, though, that's money that's gone out of them, which they have already paid other banks for. Yeah, and then they take a hit on their equity.

[00:23:53] Okay, so the banks have to maintain positive equity. They've got to make sure their short-term assets can cede their short-term liabilities. That's a vital calculation. The equity they're gaining all the time, obviously, is the interest that they're charging on those loans. Yeah, that's the net gain for the banking sector. And the larger the level of private debt is, the larger that gain is. And since we've allowed banks to go from having, like in the UK's case and America's roughly

[00:24:18] 50% of GDP level of private debt at the end of World War II to 200%, then we have an enormous increase in the amount of equity being coded for the financial sector. And frankly, to me, that's a waste. We want that money in the hands of industrial corporations, not in the hand of, as Marx called them, the roving cavaliers of credit. Right. So some points from listeners then. So we've covered the two biggies, banks and the government creating money.

[00:24:46] John, a listener, said, Trump has just launched a meme coin to the tune of a billion dollars. Presumably, people paid hard currency for these coins. And the Trump family can spend this cash on anything they want without affecting the value of the cryptocurrency. Does this mean that Trump has created billions of dollars in new money in the economy? Well, surely not, because they've spent their own money buying those coins. That's right. People that money, bank accounts of people who bought the bunch of coins off Trump, they've gone down.

[00:25:15] The bank account of Trump has gone up. There's no creation of money involved. There's a cryptocurrency which has been created, and then that can potentially be used for transactions. And a cryptocurrency is, in my analysis, a non-financial asset. If you hold a cryptocurrency, it's an asset for you and a liability for no one. Now, that means you're at the vagaries of how the market values that asset over time. But that's what attracts people to this.

[00:25:44] People simply don't seem to think it's moral to have negative financial equity. They think everybody should be in positive financial equity. Well, that's a bit like thinking everybody on a seesaw should be up in the air. It doesn't work that way. It's a conservation war. The sum total of all financial equity is zero. Banks must have positive financial equity. That's a requirement to be a bank. So if the banking sector is in positive financial equity,

[00:26:14] the non-bank sector, and that includes the government this time around, is in identical negative financial equity with respect to the banks. So the only way we can have the private sector, meaning both banks and non-banks, in positive financial equity is if the government's in negative financial equity. Now, how could the government do that? That's one way the government determines that it is the government of a region. Where the government's liabilities are accepted is in transactions between private individuals. That is one of the ways you define the border of a country.

[00:26:44] So it's a natural thing for a government to be in negative financial equity. And if it is government is not in negative financial equity, then the private non-bank sector is in negative financial equity. And nobody likes being in negative. This is a common feeling. Because the equity has got a match between the two sectors. You know what? Nobody likes having liabilities greater than their assets. But everybody, again, people, they first of all try to get a rule that's just impossible. We should all be in positive financial equity.

[00:27:14] That's simply impossible. But they then ignore as well what's going on with this, with the negative financial equity that we create. That enables us to create non-financial assets. And they're things like houses and factories and roads and ships, et cetera, et cetera. And those are assets for their owners and a liability for no one. And what we should be doing is creating more of them and worrying less about the financial equity we're all in. Right. So meme coins or cryptocurrencies generally, or any assets like that, really,

[00:27:42] if you're paying for it with your own money, it's not creating new money, is it? Yeah, that's right. And if it goes up in value, it's only gone up in value because somebody has paid more for the last one. And they've paid for that with money that they've got. Yeah. Yeah. And it's one intriguing little side effect of Tyrone Cain's applying my approach to economics and the models he's doing for applied MMT, is that they're finding they can actually predict the movement, not just to the stock market, but also Bitcoin,

[00:28:11] from the positive financial equity of the private sector. So when Bitcoin's going up, it's because the government's been creating money. When Bitcoin's going down, it's because the government's not creating money. So an ironic little side effect of if the Bitcoin iftas get their way, then they could actually reduce the value of Bitcoin by preventing the government from creating fiat money in the first place. Which I love because all these Bitcoiners are there saying, oh, it is the creation of fiat money that is making that money worthless,

[00:28:41] and therefore we need to rein in government spending. They're actually arguing against themselves. That's beautiful. I love the irony of all of that. Look, Duke... I do too. Duke wrote in and said, perhaps you'd be interested in covering the economic theory creative currency octaves. Now, this sounds a bit like the Wurgel experiment. This is where a new currency is created. It's redeemable at a one-to-one ratio to the primary currency, and it's expendable on primary housing, food, utilities, non-luxury, transportation,

[00:29:11] all that sort of stuff. Basic units are distributed via basic income to all citizens who accept them, yet they expire. So in every way, really. Actually, it's the Wurgel experiment, isn't it? Just being applied. It is, yeah. So that would be new money, wouldn't it? Yeah, and a great amount of money at the local level. If you get people who accept that particular liability, which it is a liability, in settling other forms of commerce. So, you know, you get things like barter card

[00:29:40] and a whole range of different artificial currencies created at a local level, and they kind of function quite effectively as money as well. But are they new money? If you've got a barter card, is that new money? Well, yeah. If people accept that in transactions, then you've created a form of money. This is one thing. Minsky made this little side statement at one stage. Anybody can create money. The difficulty isn't getting it accepted.

[00:30:07] So if you started handing around, you know, fill cards, you know, pucks-a-20 fill being on the image of your note, you might be able to give it to one neighbor, and they'll accept it and see it as an IOU. If they try to pass it on to somebody else to buy something they want, if only the other person says, okay, I'll accept it because I know it'll be accepted by other people, then you've got a form of money. If you don't get that coming out, then you've just issued an IOU. So Wurgel is the example, isn't it?

[00:30:35] In Austria, in the 1930s, they created a new local currency, which the local government issued, and it could be spent within that local government area, and that allowed them to invest in infrastructure and all that sort of stuff, and then people paid local rates using this new currency. So that was new money, and it helped people to spend money in an area where money supply at the national level was restricted. So that makes a great deal of sense. All right, one last one.

[00:31:04] Randy writes and says, can you comment on what effect tax rates have? This is a bit left field compared to what we're talking about, but I think it's relevant. I'm in the US. Trump is lowering corporate and marginal tax to historic lows. So what effect? Given that we're talking about money supply, what effect is that going to have on the money supply? It's going to increase the amount of money in the corporate sector because they're not taking the money out again. If you're spending money, and a large part of it does go in the corporate sector, particularly in America, and you're not taxing it, then the value,

[00:31:32] the amount of money in corporate bank accounts goes up. So that's a good thing. Well, yeah. It depends how fast those corporations spend. You might get more money spent if you gave it to people who are unemployment benefits. So this is the other issue, how fast does the money turn over? And the wealthier the people are, the more slowly money tends to turn over. They've got more money. They can buy much more elaborate stuff with it, but the rate at which they spend is lower than people going out to buy their basic groceries. Right, but if he's lowering tax rates, and that's adding to the government.

[00:32:01] It's going to increase the deficit. Yeah. And that's a good... Yeah. Which will increase bond issues, and blah, blah, blah, blah. We'll get all the bond vigilante garbage coming out again. But we've just said that if the government goes into a deficit, and in effect, whether it's the growth is coming from people paying less tax or the government putting more money in, it's the same effect, isn't it? That they're issuing those bonds. So the money supply is being extended by that amount. Yeah, it is. Like one thing we forgot to mention, by the way, too,

[00:32:30] is interest payments on bonds also create money. Okay. Because in exactly... I thought about that, but I didn't want to confuse it for a minute. Yeah, exactly the same story, just as the... But you're saying that is new money. That's new money. Yeah, okay. That's new money creation. So the link for bonds in terms of money creation is not the sale price of the bond. It's the interest on the bond. Because the bond gets bought back, ultimately, doesn't it? Ultimately, yeah. I mean, the thing is, there's a huge turnover of bonds all the time. And the people who'd scream the most about abolishing bonds would be the banking sector, as you pointed out earlier,

[00:32:58] because government bonds are a critical part of the ecology of the financial sector. They want to have what they can treat as safe assets to combine with risky assets in forms of shares and property and so on. And government, when you're government issuing its own currency, the safest form of long-term asset is a government bond. So just finishing off where we were, when we sort of had that lightning bolt moment,

[00:33:28] I mean, we know that when a bank issues a loan, when that loan is paid back. So the bank issues the loan, the money is created. When the bank, the loan is paid back, ultimately, the money is destroyed. So right from the moment, you know, the money is steadily being destroyed. But then they issue more loans, and so life goes on. Surely the same applies with government bonds. The government issues the bond, that those bonds are bought, and they're bought with the money

[00:33:55] that people have been paid by the government, putting the money into their bank accounts. Those bonds have to be paid for and bought back by the government at some point. So what happens then? Create money. Again. Normally it rolls over. I mean, when the bonds expire, the new bonds are issued. And there's a, you know, again, there's an enormous infrastructure in enabling that to happen. But at the same time, if the government, if a particular bond,

[00:34:25] if you bought a bond for a thousand pounds, and 30 years later, you've still got it, and it expires, then when it expires, you get a thousand pounds in your bank account. So the thousand pounds... My equity's not changed. Equity doesn't change. Yeah, way, way back... I had the bonds before, now I just get the cash. Yeah, way, way back, you had a thousand pounds in the bank account. You use that thousand pounds to buy the bonds. No change in your net worth. Then 30 years later,

[00:34:54] you've still got the thousand pounds bond. The government, when it redeems it, you get a thousand pounds in your bank account, cancelling out the reduction in money supply from the sale of the bond in the first place. So the deficit of the government, the government's equity starts to increase at that point. It's not affected, okay, because it's still got the negative... Its equity is determined by the deficit and the interest on bonds. That's the main thing. Yeah, yeah. Okay, got it all. Makes perfect sense. Very good.

[00:35:24] All right, we'll talk about something different, I promise, next week. But thanks for taking us through it, hand-holding us through it all again, Steve. Thanks. You're welcome, mate. Bye-bye. The Debunking Economics Podcast. If you've enjoyed listening to Debunking Economics, even if you haven't, you might also enjoy The Y Curve. Each week, Roger Hearing and I talk to a guest about a topic that is very much in the news that week. It's lively, it's fun, it's informative. What more could you want?

[00:35:52] So search The Y Curve in your favourite podcast app or go to ycurve.com to listen. I'll see you next week.