Heroes Not Zombies

One of the things I’ve been thinking about since this pandemic began is money. Not my own personal finances, but money in society. Since the last big economic crash in 2008 a lot of governments brought in austerity measures because they said things like “there is no magic money tree”, and “we have to balance the budget”. But then once the pandemic took hold all of a sudden there were billions, literally billions more dollars, pounds, euros etc spent….and that huge increase in spending looks set to continue.

What’s happened?

Did somebody find the magic money tree after all?

It was thinking about things like this which led to me to explore a bit of economics and, no, I’m not about to deliver an economics lecture here, and reading a few books hasn’t made me an expert. But I thought I’d just share some of the more useful insights and ideas that I’ve discovered. Maybe I should also say that most of the economists I’ve read who have seriously impressed me are women. People like Kate Raworth, whose “Doughnut Economics” model makes it easy to see how there is a sweet zone between failing to deliver on the needs of human beings, and over-taxing the environment, and so threatening the existence of all life on Earth.

People like Mariana Mazzucato who describes how we can rethink the role of government in society and orientate our decisions around a sense of public purpose.

But I started with Stephanie Kelton, and read her “The Deficit Myth”. This single book turned my thinking about money upside down.

However, all I want to share with you today is to prompt you to ask yourself the question “Where does money come from?”

I took the photo I’ve posted here in Japan many years ago. It was in the grounds of a temple, and it shows lots and lots of coins which people have thrown into the water. We humans have a tendency to do this in many cultures – throwing coins into fountains, into wells, or into ponds, and making a wish. When I look at this photo I realise that I think of money as something physical – either coins, or notes.

However, the truth is that for me, and I suspect for most of you, most money isn’t physical at all any more. I’m retired so I my income is a government pension. The government don’t send me coins and notes each month. They use a keyboard to tell my bank to increase the size of my bank balance. Most of that balance is spent on things like rent, energy and telecoms, and food. Pretty much all of that spending doesn’t involve my handling any coins or notes at all. I set up a regular instruction to my bank, or I use a plastic card at a till, and the number in my bank balance goes down, while the number in the landlord’s bank balance goes up, or the number in the energy company’s bank balance goes up, or…..you get the picture.

Now I didn’t really think about that much till I read Stephanie Kelton’s book. But there has been a huge shift in the world, away from what was called “the gold standard” where the money created by the government was linked to the amount of gold they had their vaults, to what is now termed “Fiat currency”. The dollar and the pound, for example, are “fiat currencies”. Only the issuing government can create that money, and it does so by using a keyboard to change the size of various bank balances.

I used to think the government spent the money they raised – in other words they tax us and use those taxes to spend on Public services etc. But I hadn’t thought it through. Stephanie Kelton makes it clear that it’s the other way around. The government can’t take in tax any money other than the money it has already created. In other words, nobody creates new money apart from the government. Well, if you do, it’s called forgery or fraud!

So, when the government wants to spend some money on, say Covid tests, hospitals, supporting businesses, then it does that by creating money on the Central Bank computers. That’s the magic money tree that seems to have been discovered.

But wait, I thought, you can’t just keep creating more and more money, can you? Well, it seems you can’t. You can keep creating more and more money until society’s resources are fully engaged. Beyond that, inflation occurs. What then? Take some of the excess money out of the economy through taxation is the suggested answer.

Huh! Well, honestly, I had never thought of it that way.

Perhaps the most important thing I’ve learned is that government finances are NOT like family finances. And the big difference is….we can’t print money when we want it, but the government can.

OK, there is an awful lot more to learn and understand about all this, but Stephanie Kelton’s book is a great starter.

Does this interest you?

Maybe not, but it interests me because it seems as clear as clear can be that our current economic and political systems are not working. Covid has exposed our vulnerabilities, our weaknesses and our true deficits. If we don’t address those then this isn’t going to be the last pandemic to wreak havoc on us all.

Here’s a nice little summary of the key points in The Deficit Myth

And here’s my favourite podcast for learning more about these ideas.

Honestly, money isn’t something I’ve given much thought to in my life….well, apart from my own family finances that is……but the new ideas of Kate Raworth, Stephanie Kelton and Mariana Mazzucato are a total revelation to me, and they actually make me believe a lot more is possible than I had realised. They give me hope.