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Tuesday, November 22, 2016

Modern Monetary Theory – is it achievable in practice?

At last night’s network meeting we were treated to a fabulous vision of how the UK economy could work to provide a Job Guarantee if only those in power understood Modern Monetary Theory (MMT).

Alan Hutchison has taken a keen interest in MMT for years, even though, he says, he is just an ordinary bloke in the street. So there is hope for all of us to gain understanding – particularly when Alan gave us a take home version of his talk at the end of the evening with references included (see download at the end of this post).

It seems, from what Alan said last night, that we are being hoodwinked by our government. How many years have they been telling us that they can’t increase government spending without a corresponding increase in taxes. And if they increase taxes this will increase prices and cause inflation.

“Complete and utter baloney”, says Alan.

He led us through the process of how government money works. Because we have a fiat currency and the government owns the Bank of England, the UK is in an extremely fortunate position. Essentially, whenever money is needed it can be created – out of thin air – just by using a few strokes on a keyboard.

Say, for example, the government wishes to pay a window cleaner £100 – actually it never creates an amount so small as £100, more like billions at a time, but this will do as a simple example. So we have created the £100 and paid the window cleaner. Of course, the government collects tax of 20% off the poor man, so he is left with £80. He spends this on a bargain TV at the supermarket and, for simplicities sake, the supermarket pays £16 in VAT to the government. The supermarket then buys some more TVs for the £64 it has left and the wholesaler pays £12.80 in VAT to the government.

So far we can see that by creating £100 people have been able to earn £244 and the government has received back £48.80 in taxes. The process will continue until someone, somewhere, decides to save the money they have received rather than spending it. On average this works out over the whole of the country to around 10% of the national expenditure. So for every 1 Million Pounds the government creates the amount of tax collected works out to about £900,000 with £100,000 being saved in either UK or overseas bank accounts.

This £100,000 is known as the deficit and ministers get extremely heated about how we need to reduce the deficit and introduce policies that reduce expenditure on all sorts of projects that are needed, in order to try and bring it down. Except it can’t be done that way. In order to bring down the deficit you need to encourage people to stop saving and the more the government encourages a recession the more people save to avoid having no money should they run short in the future!

We are so used to being told that the government’s coffers need to be filled with taxes before they can spend money that we believe it, yet it has not been this way for a long time. Household budgets work this way. We need to earn money before we can spend it. But government money comes into existence “by deciding to spend it!”, then taxes are the means to cancel that money out again.

To be able to go down the labour exchange, ask for a job and be guaranteed that they would find one for you, to suit your skills and that you were interested in doing, is what MMT promises is possible. This would not be at a ridiculously low hourly rate but would be a salaried job at, perhaps, £20,000 a year with holidays and other standard benefits. This would not be paid from a fixed budget but would be available for as many as want it.

Those that couldn’t work for health or age reasons could also be paid at this level to establish a decent standard of living, a base level for all living in the UK. All this extra cash going into the economy will flow through and create a healthy positive boost to the private sector resulting in more tax feeding back to cancel out the increase in public spending and prevent inflation from happening.

To find out more please download Alan Hutchison’s notes by clicking the link below.

we-pay-for-it-by-spending-the-money

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