THE ENDURING LIE

The Enduring Lie by regular correspondent Scott Egner.

I have basically tuned out of any election commentary and I’m sure I won’t be alone. One thing we can bank on after 4^th July, is that many people will continue to suffer. The economic ideology that continues to persist was encapsulated in the above quote by Margaret Thatcher during a speech in 1983.

I don’t remember this speech at the time – I had far better things to do like play football in the street, or ride my bike, blissfully ignorant at how profound an effect it would have on society. Some of course have profited, yet many have suffered. The saddest part, as we are seeing in the run up to the General Election, is that the entire political spectrum continues to buy into this pervasive lie.

To this day, most of us have simply taken her statement about money as read, but do we ever stop to really examine its veracity?

The U.K. has run fiscal deficits in most years, with a resultant year on year increase in national debt.  In 1983 the U.K. national debt was £128BN. By 1993, it was over $200BN, and £450BN in 2003. Today it stands at around £2.7 trillion. It seems that thanks to all these ‘investors’, more money keeps being made available. How come we never hear our media ask inconvenient questions like; how does this so-called ‘finite’ pot of money continue to expand? Where does it come from? Who created it? 

You might be surprised to hear that there isn’t any coherent explanation for this in mainstream economics. To quote celebrated British economist Frank Hahn, “The most serious challenge that the existence of money poses to the theorist is thus: the best developed model of the economy cannot find room for it”.

The creation of coins and notes is a function of a nation’s mint and central bank respectively. U.K. Commercial Banks were prohibited from issuing their own notes independently of the Bank of England, via the Bank Charter Act of 1844. Nowadays the quantity of notes and coins in circulation makes up less than 3% of the money supply and that percentage is falling.

So, given that mainstream models are not instructive on the matter, how DOES this ever present and ‘ever-increasing’ pot of electronic money that ‘funds’ governments come into existence in the first place?

Well, there are only two legitimate routes.

One route is via bank credit creation where money is literally borrowed into existence when we take out a bank loan. Conversely, repayment of the loan extinguishes that money. A considerable proportion of money in the economy today exists in the form of bank credit and U.K. Household debt currently stands at approximately £1.9 trillion

Banks are granted the privilege of creating money in this way under state license, but that’s not the end of the story. The state, via its central bank, accommodates and guarantees the integrity of the banking system every day by ensuring that there are adequate levels of ‘reserves’ in the system to fulfill millions of daily transfers. The term ‘reserve’ is an anachronism and more appropriate to a time when currencies were tied to quantities of gold and silver. They are simply a form of electronic state cash keystroked in and out of existence. Only one entity can issue and remove reserves from the economy, and that is the Government’s central bank. Payments settled using central bank reserves each day amount to around 15-20% of GDP! 

In the case of a currency issuing government like the U.K, the other form of money creation is through government spending. As the monopoly issuer of sterling, the government, via the Bank of England, spends by creating new money into the economy. If the government pays me £1000 in benefits, it creates a new £1000 into my bank’s reserve account at the Bank of England. My bank also marks up my personal current account by £1000. When we settle a tax bill, we will see a debit item on our deposit account, but our bank will also have its reserve account debited by the same amount and the reserves are extinguished. It is important to understand that tax is paid in state money which has ALREADY been issued into the economy. It makes no sense then to suggest that money returned in taxes is used to fund government spending. It would be a bit like saying that eggs are made from omellet! We talk about tax ‘revenue’. The word revenue is derived from ‘revenu’, which originally meant ‘return’. We are returning that previously issued.

But what about government bonds. We associate those with the purpose of borrowing, right? 

Interest bearing bonds were relevant and important in the age of fixed interest rates, where currency was convertible into gold or silver. They were a useful means of deferring claims on precious metal reserves held at the central bank. The treasury would far rather just pay you a rate of interest on your holdings of currency than run down its finite stock of gold and face potential default.

During national crises, there was a tendency to suspend gold or silver convertibility to give governments a greater degree of budget flexibility. During the Vietnam war, France’s President De-Gaulle was so concerned that U.S. war spending would impact the integrity of dollar-gold convertibility that he dispatched a destroyer to New York to exchange his dollar reserves for gold. Shortly after, President Nixon, ended the gold standard for good, and thereafter most currencies were issued by fiat – in other words, they weren’t backed by anything.

Today, bond issuance is still a necessary means of borrowing if you’re a country which doesn’t issue its own currency, but this is certainly not the case for a currency issuer like the U.K. Up until the financial crisis, bond sales were used to control the quantity of reserves in the banking system to maintain control of interest rates. Large infrastructure spending by the state for example, causes a large increase in reserves. Banks would then swap these newly created reserves for interest bearing government bonds to earn interest income, and the central bank would hit its interest rate target. So, bonds issuance takes place AFTER the government has spent the money. They have nothing to do with funding the government.

The aftermath of the financial crisis saw the introduction of Quantitative Easing (QE) which saw central banks buy back bonds and flood the banking system with reserves. Since then, Central banks have simply paid interest on reserves held in banks’ settlement accounts. Today the banks are receiving a tidy 5.25% (the base rate) on their reserve holdings. So, bonds became redundant for reserve management, yet continue to be issued.

There is some very good educational content on how all of this works on the websites of Central Banks, yet economists continue to parrot an archaic narrative. So why then do currency issuers like the U.K. U.S. Australia etc. continue to issue debt? 

Well, interest paid on bonds benefits the asset holders – think of it as a basic income for the wealthy with every interest rate rise a welcome bonus. Government bonds are also a zero-risk asset and as such form the cornerstone of financial markets and are a pricing benchmark for other market assets. This is the reason that a nation like Norway which tends to run fiscal surpluses, continues to issue debt. The financial ‘free’ markets enjoy their corporate welfare.

The fallacy of ‘taxpayers’ money has had profound consequences for society, enabling the sale of public assets to the private sector under the pretense of ‘TINA’ (‘There is No Alternative’) and recently the libertarian dream of freeports and charter cities. It shifted the responsibility of economic growth onto the financial sector, resulting in rapidly expanding private debt bubbles and financial crises, stifling economic demand and destroying lives. Financial deregulation has resulted in the concentration of wealth into a small cabal who pump vast sums of money into well-resourced think tanks, media, and of course political parties.

I would wager that several politicians understand this truth perfectly well, yet a departure from the narrative is likely to be career ending, and a lie is easy to perpetuate when your mortgage depends on it. It also allows the political establishment to abdicate responsibility for poorer societal outcomes. It results in the division and conquest of society and has us fighting amongst ourselves – “it’s all these folk on benefits”; “it’s the pesky Europeans”; “it’s the immigrants” etc. This is reinforced by a diet of TV ‘documentaries’ sensationalizing the lives of those on benefits, whilst the real ‘benefits street’ exists within a square mile in the City of London. Understandably, people have become disillusioned by the so-called ‘progressives’ who have chosen to cushion their career and jump on the Thatcher bandwagon. This is how we end up with right wing populists who promise to make it all better.

Sovereign currency issuing governments are the cash cow for financial markets – it’s not the other way around. Commercial banks are vital to any economy, but we need to understand that they are not the heroic free-market entities they are made out to be. It is far more accurate to describe them as public/private partnerships entirely dependent on the state. As such they need to be regulated to benefit society, not to loot it.

We have now reached a point where, by policy choice, our children and grandchildren face worse outcomes than us.  Public institutions like health and education are being weakened and picked off one-by-one to the point where privatization becomes the ‘only option’. When considering what many would see as desired societal outcomes – first class health and education, cheap/free public transport, a zero-carbon future etc., the relevant question is not how do we pay for it, but how do we resource it? Sadly, that’s not a statement you’ll hear from any politician today. 

The fundamental truth is that ALL money is effectively state money, without which there is no payments system, no banks, no economy, yet a very powerful lobby wants you to believe otherwise. If we are to have any meaningful future, it is up to all of us to set the record straight.

MY COMMENTS

I have several regular correspondents who contribute articles on economic and monetary matters. I appreciate that some readers will have difficulty understanding some of the points they are raising but I think this blog and our public understanding benefits for airing them regularly. One thing that always strikes me about these topics, where I claim little expertise is just how difficult it is to change conventional thinking which is clearly wrong on many factors and create gradual acceptance of alternative theories. This is a subject of great interest to me as it is exactly the same task that Salvo/Liberation face when it comes to the Constitution. The accepted narrative about the Union of the Crowns and the Treaty of Union are clearly completely false and we have an abundance of documented proof to show this but the scale of these lies and the longitivtiy of this gaslighting is on a scale that would delight Joseph Goebbels whose view was that if you want a lie to be successful make sure it’s a big one. So my thanks to Scott for his efforts and I hope readers are more open minded about topics after reading this article.

I am, as always

Yours for Scotland.

BEAT THE CENSORS

Sadly there are still some sites, fewer in number these days, who are intent in censoring posts from bloggers who do not slavishly follow the policies of one political party. They are opponents of the basic human right of Free Speech. Fortunately my readers can confound the censors by liking and sharing my articles as widely as they can. My sincere thanks to all that do.

FREE SUBSCRIPTIONS

The most reliable way to receive future articles from this site is to take out a free subscription and join the thousands who have already done so. They are available on both the Home and Blog pages of this site. You will be very welcome.

SALVO AND LIBERATION

Both these organisations are doing very valuable work and are carrying out very worthwhile research and building the International case to win our freedom. They are also leading the fight to expose the Freeport’s ruse as the latest method to plunder our country’s resources. Please join at Salvo.Scot and Liberation.Scot and if you can afford a donation that would be very gratefully received.Details are as follows

Bank RBS

ACCOUNT SALVOSCOT.LTD

Ac number 00779437

Sort Code 83-22-26