The Money Myth

As the party election policy machinations gather pace the media headlines become more and more hyperbolic. One party blames the other that their respective spending plans will bankrupt the country. What do these pontifications mean to us ordinary individuals who know little about the economy? Today’s Daily Mail (10 November) will strike fear into many households, as its headline claims that Labours plans will amount to a spend of £1.2 trillion, costing every UK household 43,000 pounds. Who’s right?

The New Economics Foundation (NEF) offers some sanity and wiser commentary.  They claim that our economic model is failing us. From flat lining wages, precarious work and the threat of environmental and climate breakdown, it’s clear that the way the economy is being run is serving only a few people at the top and leaving the rest of us and the places where we live in its wake. It seems undeniably true that for the last 40 years, the economy has been run according to a misplaced faith in free markets and competition. It’s the myth of neoliberalism, which makes us all believe that the market is king. NEF argue persuasively that after 4 decades it’s time for a change. The big difference between the economics of the last 40 years and current thinking is that there is a mistaken belief that the size of the government’s budget is the same as a householder’s budget. But the government’s job is not to balance its budget but to balance the economy. Herein lies the big mistake as we listen to the politicians make their electoral spending pledges.

Modern monetary theory describes how money works in a modern economy. It starts with the simple recognition that in most countries the currency itself is a public monopoly, which means the currency is only issued by the state. That’s what is meant by a “sovereign currency”. Because the state issues the currency it doesn’t face the same constraints as households and businesses. Countries that operate their own sovereign currency like the UK, US, Japan and Canada spend tax and provide savings with a currency it and only it can create. This means that a sovereign currency issuing government is free to determine its own key economic decisions. It’s interesting that all governments (whatever their political persuasions) have maintained the so-called national debt, which is the accumulation of annual deficits, without default, for more than 3 centuries. So why do politicians currently beat us to death with their dire warnings about how the other political party’s spend money? And why have they persuaded us that austerity is a good thing? The fact is a currency issuing sovereign government like ours which does not borrow in foreign currencies can never be forced to default. Hence its spending decision’s in terms of output and employment, social inclusion, ecological repair and prevention of excessive household debt, which are crucial to the health of the economy and well-being of citizens are not dependent on a balanced budget. It is the role of government to manage its financial flows by monitoring and matching the demand for money with the productive capacity of the nation. Herein lies the answer to the myths that pervade both our media and our political class based on a 40-year-old ill-informed and mythological concept of the economy.