Our objective here is to provide a simple framework for understanding the economic & financial news that filters through the media. Whereas most of the media discussion is superficial lacking context or implications, we hope our framework helps to make sense of important economic issues.
Inequality and the disparity between the 1/99% is a topical issue with important implications not just for the fabric of society but for overall economic prospects. So we'd like to clarify here why, from the Functional Finance perspective, income inequality is important utilizing as always the mechanics of money circulation in the economy.
The International Monetary Fund, IMF, put out a post on its blog titled Inequality's Toll on Growth with a podcast of the same issue. According to a new study by the IMF:
"It turns out that making the rich richer by one percentage point lowers GDP growth in a country over five years by 0.08 percentage points—whereas making the poor and the middle class one percentage point richer can raise GDP growth by as much as 0.38 percentage points."
Why? Basically, the more income you have the less likely you are to spend it all, saving the difference. Now saving is fine in itself, however, when income inequality reaches the extremes we are beginning to experience and those 1% fail to spend all their income the overall effect is to take money out of the economy thus reducing the overall amount that can be spent within the economy.
In the same way that taxes and bank debt repayments take money out of the economy so too the excess saving of the 1% serve to take money out of the economy lowering the overall level of economic activity.
Paul Krugman continues assault on the false narratives of "Very Serious People" relating to the source of the financial crisis, nature of national debt with the addition of media culpability in the UK.
So much about this issue and the way it is covered in the media provides insights and half truths without fully hashing out the consequences of the policy. The BBC article Osborne confirms Budget surplus law highlights the announcement with analysis that isn't incorrect but lacks context. The article says "The National Debt simply refers to the amount of money owed by the UK government" failing to say that this money was spent into the economy or as interest and is now the asset of the private sector. In order for the government to run a surplus it must lower this spending into the economy and increase taxes taking this money out of the economy-precisely the opposite of what central banks are attempting to do because they don't have to operate under this limited budgetary assumption.
From the Functional Finance perspective, the budget surplus or deficit fluctuates as a means of regulating the general level of economic activity. So Osborne's comment that "In normal times, governments of the left as well as the right should run a budget surplus to bear down on debt and prepare for an uncertain future," is patently false. The budget surplus to mitigate against rising inflation and manage incentives in the economy is the real reason to be concerned about the budget balance. For proof of this idea ask yourself how did central banks respond to the crisis and why should our democratic institutions differ in their ability as sovereign currency issuers.
But then Osborne also announced the Commissioners for the Reduction of the National Debt will meet again for the first time in 150 years so that says something about how outdated his ideas about the modern economic system are proving.
At Functional Finanace we're here to raise awareness about the reality and prospects for modern money. We believe as Abraham Lincoln did that "By the adoption of these principles.... Money will cease to be master and become the servant of humanity.
Help us spread the word about modern money to better support economics in the public interest.
Economics can sound complicated for those unfamiliar with the topic. With all the books he has authored Ha Joon Chang has done more than any other living economist to make this topic understandable and interesting.
This Talk at Google is a good introduction.
With reports of negative 1st quarter US economic growth the conversation about unconventional economic policy and failings of orthodox policy continues its inevitable move in our direction.
An excellent example of this is recent Bloomberg titled piece Monetary Policy for the Next Recession providing a great synopsis of the soon to come pit stops along the way aka "Unconventional" monetary policies.
While we're hopeful for the coming great mea culpa regarding the nature of modern state money( & trying to spread the word ourselves) and movement toward full employment policies the conventional wisdom train has left the station but not close to arriving with us. In part because the stakes are too high for banks as primary beneficiaries of all current policies to allow central bankers to speak too openly though some are making waves.
Till then we're pulling for interest free public/private investment in energy efficiency and education with a prayer for full employment policies.
Stay tuned in here and we'll keep you informed!
Just out Bank of England Working Paper No. 529 "Banks are not intermediaries of loanable funds — and why this matters"
We're wired with this understanding that banks operate as intermediators between savers and borrowers. This just isn't the way the financial system really works. Another paper from the Bank of England provides another valuable insight- "In the real world, banks provide financing through money creation. That is they create deposits of new money through lending, and in doing so are mainly constrained by profitability and solvency considerations."