Funding the Future

Around the world stock market values are falling as widespread selling of shares take place. Irrational investors are dumping shares they only recently drove to record high valuations. Is this a timely adjustment, or the sign of a recession to come? It’s hard to tell – but the signs aren’t good, especially for a new government that says it is dependent on growth.

Although Rachel Reeves seems to think otherwise, it’s a simple economic truth that no government can create growth by cutting its spending. That’s because without exception the government’s spending is someone else’s income, and so by cutting its own spending a government always reduces the income in its economy.

As a matter of fact, tax does not fund government spending because government money creation does that. So why do governments tax? There are six good reasons to do that. 

It’s widely claimed that our national debt threatens the well-being and stability of the UK, which is quite absurd when the national debt exactly equates to the value of private wealth that the government has injected into the UK’s economy. Why is it that those talking about the national debt do not seem to know this stuff?

It’s an economic truth that every action has a reaction, and yet economists and politicians often ignore that fact by pretending that some forms of government spending - and most especially benefits – deliver no useful outcomes at all. That’s not true, but what it says is that this process of thinking about reactions requires their serious attention.

The obsession with the national debt is absurd. The UK government has no need to ever borrow money. It can create all the money is wants, when it wants, from the Bank of England. The reality is that the City is desperate to save its excess funds – created by government spending more than the sums it reclaims in taxation – with the government because the government alone can always guarantee to repay funds saved with it. But that’s not borrowing. That’s the government offering savings facilities as a favour to the City.

The UK’s banks are amongst its least popular businesses in the country because they don’t give a damn about their customers and provide a perfunctory service. The UK government could provide an alternative in that case – and did at one time, called the GiroBank. I argue that Labour should get on and do this again.

It’s an economic truth that every time a government spends it creates new money to do so. It does not spend what is commonly called ‘taxpayers’ money. Nor does it spend funds borrowed from the City. It simply asks the Bank of England to make a payment – and that’s what that Bank does, extending an overdraft to the government to let it do so.

The Bank of England is signaling we’re going to have high interest rates for a long time because it thinks we are still at risk of suffering inflation. But that’s absurd. The Bank of England is now the biggest creator of inflationary pressure in our economy.

The Bank of England is signaling we’re going to have high interest rates for a long time because it thinks we are still at risk of suffering inflation. But that’s absurd. The Bank of England is now the biggest creator of inflationary pressure in our economy.