Reeves off track on growth

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[00:00:35] Growing the economy and raising living standards is the UK government's number one mission. That growth must be secure and resilient. This is the Debunking Economics podcast with Steve Keen and Phil Dobbie. Well, it's been a bad start for Rachel Reeves. Growth has come to a halt and many are saying it's because she's imposed hefty taxes on business by upping their commitment to

[00:01:02] national insurance contributions. If businesses don't expand, the economy doesn't expand. It's as simple as that. Has she kneecapped the economy because of an ideology based on balancing the budget in double quick time? That's this week on the Debunking Economics podcast. Well, aside from the question about whether governments can be a lot more fluid – let's put it that way – when it

[00:01:30] comes to deficits, a la modern monetary theory, the UK is an interesting test case of how going too far to try and balance a budget too quickly can create rather bad results. So, Rachel Reeves, in her attempt to cut down government debt, which she sees as a bad thing, by lifting the tax on business – $40 billion of tax rises on business and the rich in her budget, including a rise on the national insurance contributions of employers – it seems that the impact of

[00:01:59] that has been slow growth or no growth for UK businesses and for the UK economy. So, Steve, I mean, if you're going to tax, actually – I mean, we can question whether you need to or not – but the idea of taxing business rather than taxing the consumer directly, out of thought is not a bad one because it means if someone's got to, you know, squeeze their way forward to try and make a profit,

[00:02:27] then it's better that business does that rather than squeezing at the consumer end, isn't it? Helen is a piece of strength. Yeah, I know. It's a difficult one to answer. But, I mean, the upshot seems to have been that businesses have just said, well, we're not going to employ people. But you wonder how much of that is rhetoric. Well, let's take a bit of a step back here. She sees balancing the budget as the most important thing she can do as a treasurer. And that's – I mean, I remember when before the election

[00:02:56] occurred, she's saying, look, I learned about balancing books from my mother over the kitchen table. And it is absolutely critical that a household avoids the situation of continually spending more than it takes in income. You can do that for a while. I mean, when you buy a house, you're committing to a large amount of debt. But you get an equal amount of cash, which you then hand over to the person you're buying the house from. And therefore, you have

[00:03:25] to have an income stream to be able to service the interest payments back to the bank so that you can hang on to the house. That's the absolutely critical. And in that, she has gone to the Margaret Thatcher way of thinking, who really described it all as like balancing a household budget. I mean, actually, she's almost – she's the latest Thatcherite, isn't she? Absolutely. I mean, this is one reason I'm frankly so horrified by the Stama, Labour government

[00:03:51] in general, in that they're basically being Tories on steroids. They claim they're not doing austerity, but their objective – they're so panicked by the level of government debt and the excess of government spending over government taxation that they're doing things the Tories could never have got away with. If the Tories had said, oh, we're going to shut the winter fuel payments to pensioners, there would have been absolute hell to pay from people protesting

[00:04:18] against the Tories. If the Tories had said that they were going to reduce disability payments, there would have been hell against the Tories. When the Labour Party does it, you've got people going, what? What is my party doing? I mean, Labour Party supporters, what is my party doing? Cutting back on welfare, cutting back on payments to people in disadvantaged situations. Oh, it's more

[00:04:44] important to get the books balanced. That's why I'm sort of rather flabbergasted by the – it is just a hell of a shock. Yeah. But, I mean, they have put up public sector wages a great deal. They've sort of, you know, fixed that issue. And you'd assume at some point, although we're not seeing it yet, that will create growth because there will be a whole load of people in the public sector now with more money in their pocket, more able to spend. Yeah, there have some, some

[00:05:12] contradicts, well, some elements which haven't been completely driven by an agenda to reduce the government deficit. I wonder what would have happened if they said they weren't going to increase public sector pay. That would have been real fun with the main trade union. So, they've still got support of that. But I've forgotten the name of the major trade union now in the UK. But they got to their support. But they're being attacked by the welfare groups

[00:05:34] and the Greens and so on. So, it's a strange situation. And to me, the problem is, and this is the same, all parties suffer from it, not understanding the finances, not of their own little bit of it, but the entire economy. So, Reeves thinks if she gets her books balanced, that's all that matters. You know, and therefore, what she thinks she's avoiding is a future catastrophe

[00:06:00] where the government continues spending more than it brings back in taxation, continues accumulating debt, has to pay more interest on the debt. And at some stage, the lenders will stop saying, we're going to lend you the money anymore. They'll shut down government finances that way, or the interest payments will exceed the GDP, all these sorts of worries. Has that ever happened?

[00:06:24] No, it never will. When the government is issuing debt or selling bonds in its own currency, absolutely not. And you've got to understand the accounting to get this right. I had a bit of a polite battle with James Meadway on Twitter in the last couple of days on the same point. James actually came out and said that it isn't a $22 billion black hole. He said, I think it was a 1.8 trillion pound black hole because that's the total level of government debt.

[00:06:53] And that particular tweet by James basically said the government has to get its debt to zero. And that's a couple of other, I finally thought, look, I've just, I can't put up with this anymore. I've got to come out and fight against some people who are actually... But he's not alone in that, is he? I mean, that belief that actually... He's not alone in it, no. It's a common belief, yeah. Yeah, we've got to get rid of the deficit because we've got to start winning a surplus so that we can start paying down that debt because that is our future generations that are going to owe money.

[00:07:20] But I mean, the easy counter to that is, well, hang on a second, what was that money used for? It was used to acquire assets which the government still owns. In fact, it's interesting, isn't it, how we'll say, well, okay, if the government sells off the publicly owned infrastructure to help balance the budget, that's fine because it looks better on the balance sheet. But actually, well, we're soft because we don't own that infrastructure anymore. Yeah, I mean, there's two things which matter to try to cut through the nonsense we're seeing

[00:07:49] from all political parties and most journalists and most economists. There's a distinction between financial and non-financial assets. So if you have a financial asset, it's a claim on somebody else. So if the government spends more than it takes back in taxation, it's creating a claim on itself by doing that. It's running up a financial liability. But at the same time, if it uses that to build a non-financial asset, like for example,

[00:08:18] a high-tech education system, roads that don't have potholes, trains that run on time, et cetera, et cetera, you're using your financial assets to generate non-financial assets. And a non-financial asset is something which is an asset to its owner and a liability to no one. So if you think about that, if you own the house you're in, even if you owe a mortgage on that house,

[00:08:44] the house itself is your asset and nobody else's liability. So the house is part of your net non-financial equity. Now, you can't go down the street and use your house to go shopping. It's a notional monetary value which you can only realize by selling it. But the actual physical asset that means you can live in, make veals, make children, maybe have a podcast duty on the backyard.

[00:09:12] I mean all this stuff is a physical capacity to produce goods and services which only exists because you took out financial liability, the debt, to buy the place in the first place. So there's an interplay between financial and non-financial assets. So if I was married to Rachel Reeves, well, first of all, that – Oh, lucky man. That's a certain children thing. I wouldn't be visiting anymore, but still. I mean she'd be saying because we want to do up the back of the house, you know,

[00:09:39] put – raise the roof, have an open-planned kitchen, all that sort of stuff. It's probably going to cost us £150,000. So Rachel Reeves would be going, well, yeah, you can't do that because that is adding to your debt, which it is, of course, but it's also adding to the value of our house, probably more than £1,500,000. £150,000, I should say. Let's get it right here. So, I mean, that's – yeah. I mean, that's the principle, isn't it? Yeah.

[00:10:06] You know, if you want to look at it in black and white from a household domestic budget type of approach, that's the way to look at it. Yeah, but I mean her classic statement, which was made in parliament, what, about eight months ago, is that if we can't afford it, we can't do it. Now, that's Rachel Reeves being your partner telling you that. We can't afford it, therefore we can't do it. And that is a direct reverse, and I'm sure it's deliberate now. I've thought about it a bit, and my guess is this is deliberate because Keynes at one stage said, anything we can do, we can afford.

[00:10:35] This is the opposite. Anything we can't afford, we can't do. And I'm sure that's a pushback that she's got with learning conventional economics, wherever she did her university economics degree. That is the conventional thinking, that money is a constraint. This is the way all the conventional economics arguments work. Money is a constraint on what can be done. Now, the perspective that I come from, and this is the – yes, modern monetary theory,

[00:11:04] but it goes back over a century with people who argued that banks create money when they lend, is that money is not a constraint. Money is accommodative. And this perspective applies to both private bank-created money and government-created money. If you believe that – if you think of money as like gold, okay, and you can only shop if you have gold, then the amount of gold you have is a constraint on what you can spend.

[00:11:31] And that says, therefore, in that situation, money is a constraint on physical activity. Without the gold, you can't build the castle. But the perspective that the non-orthodox economists have had for over a century is money is accommodative. So that reverses all the causation which turns up in conventional thinking. So, for example, in terms of inflation, conventional thinking, this is Milton Friedman, inflation is always in every area a monetary phenomenon.

[00:12:00] So if the government creates more money, that will cause inflation. The government – money creation causes inflation. But the perspective that the non-orthodox economists came up with, which they called endogenous money, reverses that causation. And it says money accommodates what people want to do in the physical economy. And to give the first major character to make that point was Basil Moore. And Basil wrote a paper called the endogenous money stock back in 1979.

[00:12:30] And he argued that if you look at the situation of private corporations borrowing from banks, back in those days – it is a long time ago – back in those days, companies would organize what they call lines of credit. So you'd have a major company like General Motors or – what's a major English company? I can't think of one that's not a financial corporation these days. But, you know, say Philips. I'm over in Amsterdam. So let's say Philips.

[00:13:00] They would negotiate a line of credit with a large number of banks. And that would be like a credit card. You get a set of accounts. You don't – you haven't accessed them, but you've got the right to access them whenever you want. Now, what that means is if you get an increased demand in – if the prices you're being asked to pay by workers or for wages or the price for oil by OPEC, if that price goes up,

[00:13:27] you simply access your credit card, your corporate credit card. So what happens is the price pressure causes a rise in the level of money. It's not the other way around. And when you do the empirical work on this – and I've actually done it for a new video, which should be going up shortly on my YouTube channel, I looked at the past data about money changes and price changes, but I included the private money system. And this is what the mainstream ignores because they try to pretend that banks don't create money.

[00:13:58] Well, they have a toy model they call fractional reserve banking, but fundamentally they ignore banks in their macroeconomic models. And I looked at it, and yes, there was a correlation between money creation and price rises. But it wasn't government money. It was private money creation. So if you go back to the 70s inflation, the stage the 70s inflation occurred,

[00:14:21] the level of government money creation, which I define as the fundamental cause of government money creation is the government spending more than it takes back in taxation. That's actually creating money. But if you look back on the 70s when the high inflation occurred, government deficits were falling. What was rising was private borrowing. And the reason it was rising is twofold. There was a real estate bubble around the world in the early 70s,

[00:14:50] mainly as much in commercial property as household, but definitely a commercial property bubble. And firms were borrowing money to create the skyscrapers. So that was increasing private money creation. And you had OPEC demanding wage, increasing the price of oil from $2.50 a barrel in 1973 to $10 in 1974,

[00:15:15] and then again from $10 in 1979 to $40 in 1980. Those price rises caused an increase in the money supply. Well, the oil one, of course, is just a supply factor. And if you look at, and I think you've got to assume that consumers and maybe the government, if there was more fluidity on how much you could borrow, you'd borrow at the right time for the right thing. So you look at us, for example.

[00:15:44] I want to build the back of the house this year now. I've decided. It's very much a focus, even if I have to borrow money with interest rates higher than they will be in a couple of years, because I'll realise the benefit from it in terms of my lifestyle over the next couple of years. But also, I feel like builders aren't particularly flush with work at the moment. So I'll probably be able to negotiate a better job if I do it now than if I do it at a boom time.

[00:16:10] Plus, I'm going to the bank in a year's time to renegotiate my mortgage. If I've added value to the property, then I've hopefully got a bit more, even though I'll be borrowing a bit more, I've got a bit more equity so I can negotiate a better interest rate. So it's all to do with timing. So I'm borrowing because the time is right rather than having Rachel Reeves saying you can't afford it. I can't afford it. I just need to get a loan for it.

[00:16:33] Yeah, but there's a fluidity in both directions between the real economy and the monetary system. And what you're talking there is if you want to borrow the money, you can then hire the workers to get – and then pay the building firm to get the extensions done. So in that sense, that's where you need the money before you can do the work. That's if you can't afford it, you can't do it.

[00:16:57] But equally, if the bank creates the money for the loan for you, that enables an expansion in economic activity, which more money does. And the government does the same thing when it spends more than it takes back on taxation. So Reeves – and this is the big failing of the conventional economic training, which she is a clear victim of –

[00:17:20] is that she doesn't understand money creation because the people who taught her, professors of economics at Oxford University and LSE and so on, also don't understand money creation. So when the government runs a deficit, what it is doing, it is actually going into negative financial equity. Its financial equity falls because by spending more money than it takes back in taxation,

[00:17:46] and putting that – therefore, the amount of money in private deposit accounts goes up. That is – it actually causes a rise in the net financial worth of the private sector, which is likely to encourage the private sector to spend more freely. And the expense of it, inverted commas, is that it puts the government in negative financial equity. But that's how fiat money is created. And the sheer lack of understanding of that is why she's doing the opposite.

[00:18:13] Rather than using negative financial equity for the government to create non-financial assets for the government that we all benefit from, roads that don't have potholes, schools that actually have buildings and teachers inside them, hospitals which have staff who can actually treat illnesses, we all benefit from those non-financial assets. And wards rather than corridors. Of course, yeah, all that stuff. She's destroying non-financial assets to avoid being in negative equity.

[00:18:43] The definition of a government over a region is an organisation whose liabilities are accepted in payment and commerce. So she's actually destroying the basis of a fiat system. Right. When we come back, because she's not the only one who thinks like that, obviously, and we're seeing two driving forces which are working against her, one of them is the market pushing bond yields higher. So I want to investigate that.

[00:19:12] And the other one is the central bank that would quite like the economy to tank really, because it wants to bring interest rates down. And it seems to think the only way that that can happen is if people are hurting a great deal. So we'll look at both of those when we come back on the Debunking Economics Podcast. Me and Steve, back in a second.

[00:19:29] We'll see you next time.

[00:20:02] This is the Debunking Economics Podcast with Steve Keen and Phil Dobby. So, Steve, Rachel Reeves has been criticised because she has, well, first of all, she's, you know, made the economy nosedive. So November's GDP, the economy grew 0.1%. It was down in September and October.

[00:20:31] The growth we were getting in services last year has now fallen away, presumably because, you know, we're now, we don't have quite so much money, so we can't go out and enjoy those services. So, I mean, that's the first thing. The other thing is the cost of borrowing has gone up. So the cost of bond yields, 10-year guilt yields, we're up over 4.41%. But bond yields are up the world over, it should be pointed out.

[00:20:57] But, you know, a lot of people very quick to point out that has pushed up the cost of borrowing for the government. And that is money that, you know, our children are going to have to pay at some point. So on both those counts, she's promised growth and she's not given it to us. And on the other side, you know, she's criticised the previous government for the, you know, for the micro-budget that caused bond prices to collapse.

[00:21:26] And she's sort of, not quite to the same extent, but she's doing, you know, she's gone a good way towards it. Yeah, it's, and again, it's because having a false understanding of the system, because when the government, and this is why you've got to understand the accounting. I went out to a little fight with James Meadway. He said, look, I understand the accounting, he said. And I said, well, frankly, James, given what you're saying, you don't understand the accounting. And this is something which people find, particularly if people haven't done an economics degree,

[00:21:53] find quite puzzling because they think, well, don't economists, isn't economics about money? You know, shouldn't they understand? The thing is, it's not about money. What an undergraduate student learns when they go to a standard economics department, like at Oxford or Cambridge, all the top-ranked universities. They get taught in the first year about what they call money illusion. Now, this is the belief that money actually matters. And they go through a little exercise which involves, you know,

[00:22:20] you see you have a consumer with a set budget and set preferences, and then you say, here we can work out a point of maximum utility for the consumer where they allocate their money between different commodities depending upon what gives them more personal satisfaction. And then they say, well, what if we double all prices and double incomes? What happens to your expenditure point? And the only correct answer is, oh, nothing, sir. Because we've doubled all prices and doubled incomes,

[00:22:47] you don't change the real point of the consumption of the two of the commodities that maximizes your utility. That's bullshit. Pardon me using a technical term here. Yeah, your debt's just halved, first off. Exactly. Your debt, if you've got debt and all prices and incomes double, your debt doesn't change, you're better off. Inflation makes debtors better off. It makes creditors worse off, which is why creditors are so obsessed about reducing the rate of inflation.

[00:23:17] But if you did have that high level of inflation, it would reduce your debt burden. So the correct answer is the wrong answer because they start, let's assume there's no debt. Okay? Let's assume there's no debt. Then let's ask the question. Now go back, is that a simplifying assumption? Yes, it's a simplifying assumption. We don't need to include it. It's not a simplifying bloody assumption. It's a fallacy. And I had a classic fight with a neoclassical, which I wish I'd used the line more broadly.

[00:23:45] A very straight believer and he'd done a PhD and he was talking about his paper at a conference. And he came to my session where I was explaining Minshew's financial instability hypothesis. And he finally couldn't contain himself. And he said, but you're assuming people are idiots. And I said, well, did you see the financial crisis coming? And he said, no. And I said, well, in that basis, in your own definition, you're an idiot. Why shouldn't I model the economy of consisting like people like you? And as I was walking out of the seminar,

[00:24:13] he followed me behind and was being very agitated. And finally he said, we have to make some simplifying assumptions. And I just said over my shoulder, walking away from him, mate, you've learned the difference between a simplifying assumption and a fantasy. The trouble is neoclassical economics starts from fantasies. Rachel Reeves has absorbed a lot and she's practicing those fantasies. And they don't work. When you try them in the real world, you get... Which is why a few weeks back we sort of had that example of coinucopia

[00:24:42] where economic theory does work because there was only coins, there was no growth, no debt. I mean, in that situation, maybe some of these things do operate. But that is such a simple world that it doesn't exist in reality. But the whole gilt yield question though. So gilt yield is getting pushed up to 4.41%. I mean, she doesn't have any control over the market. So if she says, well, tell you what, we're going to run even a bigger deficit.

[00:25:12] We're going to issue more bonds. The bond market is going to respond and go, well, we don't like that very much. The price of bonds is going to go down. That means the yields are going to go up. The cost of borrowing is going to go up. What can she do about that? She does a hell of a lot because since there's a debt of 100% of GDP, roughly outstanding, outstanding, there's bonds of 100% of GDP owned partially by the private sector, also a large section are owned by other government departments.

[00:25:39] But let's just make a simplifying assumption that 100% of bonds are owned by the non-government sector. If you have a deficit of 10% of GDP, that is one-tenth of the level of outstanding bonds. Now, if we had a Bank of England governor who knew what the hell he was doing and you had the situation where bond markets are saying, we're not going to buy those bonds because we expect the yield to continue rising, so the value is going to continue falling, so we won't do it,

[00:26:07] say, okay, I'm going to buy 100% of outstanding bonds now. The central bank could literally do that. We call it quantitative easing. But there's absolutely – And we did that, and we did that during the pandemic, of course. So the Bank of England balance sheet got over £1 trillion, about £1.1 trillion. So there's no – So they've been unwinding all of that, of course. You know, it's down about 25% now from where it was in 2022. So if you're selling bonds, you're driving down bond prices, and duh, the interest rate rises.

[00:26:35] So it's not the bond markets that are doing this. It's the central bank that's actually not the only factor. I'm sure private bond traders want to drive bond prices down. Has the central bank – have they all responded too quickly then? It's like we had this big pandemic. Governments had to bail out everybody for the economy to survive. We are still facing the consequences of all of that, and yet the Bank of England and other central banks are going, yeah, but, you know, this balance sheet, we've got to get it down because –

[00:27:05] well, let's not worry too much about the detail. We've just got to get it down. Not quite sure why, but we have to. If they didn't take that stance, then great salaries wouldn't have this. Exactly. If she said, well, okay, what we're doing is still dealing with the crisis that the pandemic created for us. Like I haven't been back to the Bank of England for something up to eight years now, I'd say, but there are a number of staff on the Bank of England who worked all this out and wrote a paper called Money Creation and the Modern Economy with respect to private money creation and got it right.

[00:27:34] And they quoted people from my side of the economic divide, the post-Keynesians who understand money rather than the neoclassicals that don't. But the vast majority of staff and certainly the people who are on the Monetary Policy Committee still think out of a neoclassical textbook, and they don't know what they could do with that amount of monetary firepower, even when they found out and they did it properly, in a sense, during the financial crisis and certainly during COVID.

[00:27:58] So the Bank of England could, if it wanted to, could convert all outstanding bonds, all bonds not owned by the government sector, they convert that to reserve cash in the bank accounts of the private banks at the Bank of England in a day. They could say, okay, we're going to buy everything on the market. When you do that and suddenly all these banks that want to have treasuries as part of their portfolios to be able to balance, you know,

[00:28:28] supposedly relatively constant returns with fluctuating returns of owning shares, they would suddenly find they've got no safe assets. Well, they'd better buy some bonds then. And so this is what happens in not as an exaggerated terms as I'm using here, but in a standard, the interplay of operations between the treasury issuing bonds and the private banks buying the bonds in primary auctions, if there aren't enough reserves available to buy the outstanding, the new bonds,

[00:28:58] then the central bank buys some of the outstanding bonds back, creates additional reserves, and they're then used by the dealers in the primary auction to buy the new bonds which are being issued. And, you know, as I said, literally, if you want to do the heavy firepower thing and be had any resistance in the bond market at all to paying for bonds at the price determined by the interest rate decisions of the central bank

[00:29:26] and set, therefore, on the value of the bonds, they could say, we're going to buy everything. If you want some bonds, you've got to buy them for this price. Do you want some bonds? Yes, please, would be the answer. So you don't even have to, you know, agree on the way money is created in this. It's just a simple argument, isn't it, about how many bonds are available and whether the amount of bonds available actually determines the price of those bonds. And actually, you know, increasingly I hear from people, well, it actually doesn't. There's not a lot of evidence.

[00:29:56] It's just another asset class. It just moves money from one asset into bonds. It's not necessarily influencing the price of the bond too much. But anyway, that aside, if the central bank can see the opportunity to just say, well, okay, there's a lot of bonds out there. If we buy a chunk of them, go back to quantitative easing, or at least, you know, stop issuing our bonds out into the open market for now while the economy has a chance to recover,

[00:30:25] Rachel Reeves wouldn't hit this problem. But of course, they don't want to do that, do they, for whatever reason. And the only reason they consume is because central banks want to, to bring inflation down, want the economy to tank. That's basically the truth. And if they can squeeze spending by consumers and the government, so they, you know, they keep interest rates up for that to happen, that means yields stay higher in bonds, because bond buyers are expecting those high rates. So they're the real enemy here, aren't they?

[00:30:55] The central bank, because they could do something about this. And again, it's because they're run by neoclassical economists. The last people you want controlling something are people who don't understand the thing they're controlling. And that's the case with conventional economists. They do not understand the monetary system. They had a set of mythical models. They teach to poor students, even little people like, you know, a little woman called Rachel with the last name of Reeves. She learns this stuff. They're misinformed, and they don't understand their own system. They understand.

[00:31:23] The people who do in the actual administration, they understand the technical aspects of it. But the economic theorists are running, building their dynamic, stochastic, general equilibrium models of the economy and trying to predict the future course of inflation. They're the ones who don't understand the system, but they're the ones who also end up sending the interest rate targets to the Monetary Policy Authority, and then the belief that the MPC also believing they've got to unwind their balance sheet. That all comes out of people who have been swallowed economics textbooks,

[00:31:52] and they're now throwing up over the rest of us with economic policy that is garbage. I could have used another word there, but it was getting a bit too explicit. No, that's all right. No, it was fresh year, Steve. Fresh year. Fresh language. Fresh vocabulary. I was like, I'm going to use the word vomit then, can I? You can use vomit as far as you can go. There you go. They're going to vomit bad policy. We're going to be nice to people this year. But the upshot is going to be, because she's squeezing money out of the economy, in effect, she's pulling money out of the economy. The economy grows more slowly. Yeah. Or goes negative.

[00:32:21] Yeah, she's not going to get that growth that she's looking for, which is what we're seeing. It's what we're seeing in Germany as well, of course. It's not what we're seeing in the United States, because they are growing the money supply, because they are. Until Elon Musk gets his doge running and starts cutting spending. So that's going to be real fun in America as well. Well, we'll have more evidence then, won't we, if that becomes the case. The picture will become clearer for all to see. The emperor's clothes will become much more evident, perhaps. So the upshot it will be, of course, though, that if, you know,

[00:32:51] and maybe this is the plan. I don't know. If you get no growth, it's very hard to get inflation. So, I mean, inflation will come down. At least one of those aims will be achieved. Well, this is the thing. The conventional economists who run monetary policy at the MPC level and who build the neoclassical MacRecom models at the research level, they all believe that inflationary expectations are what determines the rate of inflation. So if you can make people expect that prices are going to fall,

[00:33:21] or the rate of change of prices is going to reduce, hey, presto, it'll fall with no impact on the real economy. Now, that's bullshit. Again, another technical term. My apologies to people who aren't experts in mainstream economics. What actually happens is you reduce the bargaining capacity of workers by increasing unemployment. You reduce the bargaining capacity of fossil fuel companies by reducing the demand for their products, and that will potentially reduce the rate of inflation.

[00:33:50] But you do it by tanking the real economy. You don't do it by just changing people's expectations about the future. So can you grow to a position where you bring prices down? I guess the ideal in that scenario, let's think it through, is that, well, yes, if you can up your capacity, you can produce stuff cheaper ultimately. So that brings prices down. But, I mean, it's just a question, isn't it,

[00:34:15] of producing enough of a quantity of stuff so that it's meeting – I mean, I know you hate looking at these things in terms of supply and demand, but it is growing supply so that it's almost outstripping demand. So that brings prices down. That comes into you've got to have an investment taking place. And this is where even people who read the general theory don't get this point correctly because Keynes only worked it out himself

[00:34:44] in a paper called The General Theory of Employment in 1937 after he'd written The General Theory of Interest, Wages and Money. I've forgotten the full title of the book. But he said he had a – in the general theory book, he had a transactions demand for money, a precautionary demand for money, and a speculative demand for money. But he hadn't included what he realized in 1937. He called the finance demand for money.

[00:35:14] That says if you want to invest, you first of all have to raise the money to invest, and that's a finance demand. Now, if you've got an economy which is performing badly, then that finance demand for money is likely to decline because corporations invest to make a profit. If they see low returns, they're less likely to take out that debt. But if they do take out the debt, then that actually increases economic activity

[00:35:42] because that increase in credit money actually adds to aggregate demand. This is another point that mainstream economists don't understand. They don't want to understand it. They want to stick with a barter model of the economy. So they don't – as well as not understanding government money creation, they don't understand credit money creation either. So they end up doing policies which stuff up the physical economy because they don't understand the monetary economy. And you will not find – if you look in the economic data,

[00:36:10] you won't find that economy which has had growing real output by having a shrinking money supply. So in that sense, the money supply has to accommodate intentions to grow. When you have people pushing in the opposite direction, you'll have the real economy going down with a decline in money creation as well. So, yes, so the upshot is that we can have that Goldilocks scenario, as economists like to call it, where we do actually see that if we push growth

[00:36:38] and we see growth in production higher than growth in consumption, we can have that scenario where we see the economy growing and inflation coming down. But it seems like the easiest solution, the easier one for people to understand in central banks and in governments is, well, no, let's just crash the economy because that'll create a reduction in demand and that'll bring inflation down. That seems to be the world over, apart from perhaps the United States, the way the world is going. Yeah, and that means that we begin by being paranoid about the financial assets

[00:37:08] of the government. We're not creating sufficient money to enable the private sector to function properly. The private sector is also unwilling to take on debt because they only take on debt if they think there's a profit to be made from the products they produce with the money created by that debt. If they're getting negative signals everywhere, you're just going to have a tanking economy. And you just said you won't get a growing economy without a growing money supply at the same time.

[00:37:37] So they're actually inhibiting what they think they're encouraging. And that applies to both private banks and Rachel Reeves and the Monetary Policy Authority. Welcome to 2025. Good to talk, Steve. We'll catch you next time. Maybe we'll go back to Cornucopia next time. Let's do that. We don't need to brace for impact on Cornucopia, but we do need to brace for impact on the real world. All right. Catch you next week. Okay, bye. Well, maybe next week we should talk about Donald Trump and some of his early executive orders. Either way, back for that. I'm Phil Dobby. See you next week with Steve.

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