We Need to Understand This
How can our governments suddenly find the money to pay everyone’s wages, everyone’s bills, even their mortgages and rent?
We need to understand this clearly.
Not so that we can keep an eye on the Government, not so that we can ensure we don’t miss out, if there’s “free money” being doled out…
But so that we can ensure that we never go back to the way it was before our governments took these (apparently) extraordinary steps.
That’s the most important thing right now.
More important than not getting infected with the coronavirus.
Understanding how our governments are suddenly able to create all of this money to give to us.
Because if we can all understand it, we won’t ever need to go back to the way things have been for all of our lives until now.Money isn’t a Real Thing
We’ve most of us heard something along those lines, throughout our lives.
“Money isn’t worth the paper it’s printed on”, is an entirely accurate statement.
What does that actually mean though?
Until the first half of the 20th Century, bank notes were essentially pre-printed cheques. A bank note was never intended to have any intrinsic value. Quite the opposite.
It was intended to save you the trouble and risk of transporting something actually valuable, like gold for example, when you wanted to purchase something.
You left your gold in the bank vault, and the bank would give you a promissory note as a receipt for that gold. Later, when you wanted to get your gold back in your pockets, you would take the note to the bank and exchange it back for your gold.
Alternatively, you could give the bank’s promissory note to somebody else, and they could take it to the bank, who would give the note’s bearer, the sum of gold indicated on the note.
And that’s where promissory notes really came into their own.
If you wanted to purchase something that the seller would give you in exchange for say, an ounce of gold, instead of taking an ounce of gold with you on your shopping trip, you would:
• Deposit the ounce of gold at a bank
• Get the promissory note as a receipt from the bank
• Give the promissory note to the seller of the item you wanted
• And the seller would take the promissory note to the issuing bank, who would pay the bearer of the note, on demand, the equivalent sum in gold.
Importantly then, the promissory note was never supposed to have an intrinsic value. It was always supposed to be worthless. Representing only the value that it could be exchanged for at the bank that issued it.The Government Says So
During the 1914-45 European Civil War, it became increasingly impractical to keep using gold bullion as a means of payment.
In particular, the vast purchases of War Materiel from the United States would have required the shipping of gold bullion to America, just at a time when shipping things across the Atlantic became extremely hazardous.
By 1944, all of the major European powers had come off the “Gold Standard”, that tied a nation’s currency to gold reserves; and were instead using fiat currencies.
Government-issued currency that is only able to be used as a medium for exchanging value, because people trust the government that issued it.
So long as the Government doesn’t issue too much of it, the currency should remain stable and therefore usable as a means of both exchanging and storing value.
By 1971, every nation in the World was using its own fiat currency.
From that point onwards, currencies were worth whatever the people using the currency believed it was worth – something that fluctuates on a daily basis, depending on the performance of the government that issued it.
That is all that “Money” is, now.
No intrinsic value. Just units of account. Just a way of keeping score.
NOT a Real Thing.It’s Easy to Think Differently
Every day, we try to engage in activity for which we will be rewarded. And most of us accept our reward in the form of “Money”.
Something that we all know at some level, has no intrinsic value.
Our labour, our skills, some of the things we own, they all have Value. To someone.
The simple ability to lift a heavy box, move it somewhere, and put it down, will have value to someone who doesn’t have the ability or time to do that themselves, but needs it doing.
If you do that heavy-lifting for someone, you have given the value of your ability to someone who needed it. And in return, they may give you a worthless piece of paper, that has no utility value at all to you (or the person giving it to you) – although if the toilet-paper situation gets any worse, that may change…
But we don’t feel unhappy or short-changed by that transaction.
Because we know that there are other people who will accept the same worthless scrap of paper, in exchange for other goods and services of value.
So even though we know we are giving something of Real Value – our labour, skills, time – and are getting something of no value whatsoever in return; we are happy and confident that the worthless bits of paper and metal will be accepted by others, who will hopefully then give us things of Real Value in return.The Magic Money Tree
What this means then, is that a Government that controls (however formally or informally) its own Central Bank, can create as much money as it likes, whenever it wants to.
Most of us understand this to some degree or another. Just as we understand that if a government were to print too much money, it would debase the currency through inflation and hyper-inflation.
We may be aware of situations in Germany in the 1930’s or Zimbabwe at the turn of the Millennium, where hyper-inflation saw multi-trillion-unit bank-notes printed. Multi-trillion notes that could barely pay for a loaf of bread.
Simply: the more money created within an Economy, the less that money will be able to purchase.
A mechanism is therefore required to remove money that Government has printed/pumped into their Economies: and that mechanism is Taxation.
Governments need to spend the money they can print on goods and services they have promised or are obligated to make available to their Citizens.
And so long as the individuals and organisations providing those goods and services are willing to accept the money a government prints, in exchange for those valuable goods and services, a government can purchase as much as it feels like.
But if a government prints too much money, eventually, its goods and service providers will stop accepting that money; insisting instead on a “hard currency”. That is: a currency that has not been debased by political and economic mismanagement (but still nevertheless, a fiat currency).
But if a government can reliably remove the money it created and pumped into the Economy, without too much protest, it should be able to prevent hyper-inflation affecting its currency.
Taxation is the mechanism by which governments can legally and arbitrarily take money from individuals and organisations.
We are asked to believe and accept that taxation funds Public Spending.
Governments can fund as much Public Spending as it chooses, providing it can pay for that spending with the money it can print.
Once it has spent that money into the Economy; it can then remove any money it no longer wants to be in the Economy, using taxation.
The money came from nowhere, and it goes back to nowhere. Which makes sense, for something that is worth nothing.
A Magic Money Tree, if you like.Time to Sleep
As a result of the coronavirus, most Government-managed Economies have now been shut down.
Because human lives are more important than hard work (apparently).
But a Consumption-based Economy that suddenly finds itself without consumers, is going to struggle to remain intact during the period of the shutdown.
If this shutdown were run according to Capitalist, Free Market principles: then the Consumer Economy would have already died, more or less instantly. With no hope of any recovery.
So our governments have no alternative but to do what they are now doing.
Which is to turn on the printing presses and create the money that, up until now, we all thought we had to work hard to create and generate.Nothing New
The last time our Governments did anything like this?
About ten years ago, or so, and more or less ever since.
And plenty of other times before that too.
Difference this time is that instead of restricting the flow of free, printed money, to the Finance Sector and Super-Wealthy (and calling it something baffling, like “Quantitive Easing”): our governments must now give it to Everyone.
They have to give it to Everyone, because there simply isn’t enough time to allow the Finance Sector to let the free money it has been receiving since 2008 – and continues to receive – “trickle down” to where it is NOW needed.
The post-2008 “Recovery” accrued – by a significant margin – to those at the “Top” of the Economy, who were supposed to then “trickle” the money down to where it was most needed.
But it is just plain common sense to understand that if you give money to a wealthy person, they will just throw it on the pile with all the rest of their money. But, if you give money to a poor person, they will spend it immediately, because they have no choice but to spend it.Marginal Propensity to Consume
In Economics, the term that describes this is: “Marginal Propensity to Consume” (MPC).
Your current level of income and stored wealth determines how much you spend.
When you are rich, your MPC is low, because you don’t need to spend more, as you have likely already satisfied all of your wants (and very likely, all of your needs).
Let’s say that as a wealthy person, your MPC is 0.4. This means that if I give you a pound, you are going to spend 40p and save 60p. But if you’re poor, your MPC is going to be 0.8 or higher. So if I give you a pound, you will definitely spend 80p, and may save 20p.
Now the reason I am giving you the money (that I just printed), is because I NEED you to spend it: not save it. I need it circulating in the Economy, not sitting on a pile of the stuff, in a back-room of someone’s mansion.
So who am I better off giving it to? A rich person, or a poor one?Whatever You Do With It: Don’t Repay Your Debts!
The problem that governments now face with this approach, is that so many consumers are so heavily in debt.
So actually, with the money that is now going to be given to consumers (sorry: Citizens), the bulk of it is likely to be used to pay debt obligations.
Which won’t help the Economy get through this “Snooze” moment.
For this reason, in addition to the Free Money now being offered by Governments, most debtors will also have received notifications from the financial organisations they owe money to, telling them not to worry about paying their credit-card, hire-purchase, loan and mortgage bills for at least the next 90 days.
Because people using the free money to repay their debts won’t stimulate the consumer spending needed to get the Economy going again.
But that is not something that governments or financial institutions can guarantee.
Once the money has been printed and handed over to individuals, they will do whatever they feel they need to do with it. And for most people, after they’ve made their rental payments on the property they live in, or on the money they have rented in order to buy a property they “own”, the next priority is servicing all of the other debts they have.
If they didn’t have all the debts they had, they wouldn’t need as much money as they do now. And for the most part, wouldn’t be doing a lot of the really shitty jobs many people have to do.Repay What?
So as people begin to get their heads around this sudden and unexpected change in their understanding of Money and Economics, the first and most suspicious question they are asking is:
When this is all over, how are we going to repay all this Money we are getting?
Is it going to require another century or more of “Austerity”?
To which the answer is: no, it won’t.
Why should it?
What is it that needs repaying exactly?
Government is just printing this money.
It isn’t borrowing it from anyone. Who would lend to any Government, the kind of money that Governments are spending, when nobody has any clarity at all, about who or what is still going to be alive in 6-12 months. Where’s the confidence that money loaned can or will be repaid?
Governments are printing money.
Or rather: now printing the money that they have been allowing banks to print since at least 2008; and redirecting the flow to the Bottom, rather than the Top of Society.
So what is it that would need repaying?
They’re not even actually printing anything. It’s just numbers on screens these days. “Keystroke Money” it’s called; following on from “Pen-Stroke Money”.
No ink or counterfeit-proofing technology required. Just a few keyboard presses to update some electronic ledgers.
So what’s to be repaid exactly?
Could be a Currency Inflation problem, if the taps are left open for too long.
But in the short-term, that’s a major benefit to debtors. Your debts won’t go up with currency inflation; but your wages will, along with the price of bread and other essentials.
Whilst it might sound shocking that you could soon be paying £200,000 for a loaf of bread; comfort yourself with the fact that you would also likely be earning more than a billion pounds a week for even a menial job…
…And could therefore pay off your mortgage, for the cost of 1, 2, 3 or 4 loaves of bread.
And once Everyone has settled-up, the Government can just turn off the taps.
And use the Taxation System to remove any surplus money it created, that is no longer required, and which may now be creating other problems.Money is Only a Lubricant
An internal combustion engine, of the type found in every fossil-fuelled automotive vehicle, is a collection of finely-engineered mechanical parts.
In order to produce power, those mechanical parts must work together in perfect alignment, with perfect timing, and in perfect order.
An engine that every minute, is trying to typically contain six-to-twelve thousand explosive events within its cylinders, and translate that energy release into mechanical movement, requires a lot of lubrication and cooling.
That is provided by the oil we put inside the engine.
If there is no oil, the engine will overheat, its metal parts will expand, and the mechanism will seize up.
If there is too much oil, the oil will interfere with the proper functioning of the engine, blow gaskets, cause leaks, and usually, create a lot of undesirable smoke.
Money is just what Human Society uses to lubricate its Economy, to keep it functioning. To stop it seizing up or blowing a gasket.
It isn’t an item that has any other use. It has no other utility value. And for the most part, in the 21st Century, money doesn’t even exist as a tangible, material item you can touch, grab, hoard or use to wipe your self with.
So after all of this is over…
What exactly is it that would need to be repaid?
Who, at the end of it all, is going to be missing something they had before all this began?
The money that is being printed for this crisis can be used for this crisis. And when the crisis is over, it can be unprinted.
Everything’s going to be Fine.
Now Enjoy Yourselves.