The definitive guide to Britain's success in the twenty-first century
Debt can only be described as a promise of future work. If we describe it as a future ‘payment’ (money, services or goods) this is just a way of describing it - as future work, since work must be done to create goods and services or money, at least within our present economic theories.
CST has long argued that work in the future is destined to change radically, to the point, (within a likely timescale of 50-80 years), there will be no paid work as such. And therefore, at this future time debt has no meaning as it cannot be described and it will cease to exist. See: Economic Gaia Effect
Thus, our current economic theory is not going to work in future as debt is fundamental to every aspect of current economic theory.
Lets consider another basic assumption, that of a balanced economy. Most people, (and governments), generally consider that the amount of money spent via government spending is an overall cost to the society and it must be raised, (through taxes), to balance the economy. Borrowing to make up the difference is considered bad.
To create a 'balanced economy', tax reciepts must balance government spending. Borrowing is considered as a cost, and if it is 'externally' funded - this is true - as there is a money flow out of the country, it is equivalent to importing goods or services from abroad.
If however we create new money either by quantative easing or by an internal borrowing system, (eg UK bonds sold only to UK individuals), this new money has no little or no cost to the country.
If we consider where government spending actually goes we see that most of this money continues to circulate within the economic system of the country. In the UK, when the government spends additional amounts say on education, paying for more or better teachers, the resulting wages are spent mostly on goods and services within the closed economic system of the UK. Some is lost to imports, but this is relatively small. The amount lost externally, (imported goods or services), is the only real cost to the society of this government spending.
If the economy as a whole is balanced between imports and exports, then it makes no difference how much is spent by a government to the costs of overall society in the medium or longer term, provided this money does not create inflation. If the money can be used to create future efficiencies there must be a net benefit for the society as a whole.
Analogy - The Household Budget
The usual analogy given by the politicians is to consider government spending and income in the same way as we consider our household budgeting. At first sight this seems sensible, and it is a powerful analogy. But it is wrong.
The real analogy is that the household budget is equivalent to the imports/exports trade balance. And the accurate analogy for the government spending and income (tax) is the budget within the family.
Such an analogy for the internal family budget is more complex. Consider a family of seven, two adults, five children. The external income and spending budget is positive and the family saves money every week. There are four people earning – two parents and two children, all have external jobs. The other three children do not contribute to the household income.
It does not matter how the total external earned money is allocated across all these seven people, (from the total household budget), it cannot effect the overall balance of the household income and spending budget.
So, the family can create money flows within the family, say by paying some children to do jobs inside the home such as cleaning, babysitting and the children may spend this money on services from others within the family and perhaps spend some externaly. This money comes out of the total income allocation of the household.
So, this has no effect on the overall household budget which is still positive. Indeed the family could create an additional internal money supply that can be spent onlywithin the family. At the end of the year, if the family earns more from external inputs than it spends on external outputs, the family will increase in overall wealth.
Efficiency & Investment
Extra spending does not mean that the economy will be particularly efficient or effective, it might, but it might not. Government spending can easily be spent on the wrong things and the resulting output may be poor and get poorer over time. There are two distinct issues here, one is what useful output is created? And how do you measure its effectiveness? How do you measure the efficiency of the output achieved for the society short, medium and longer term?
These are difficult issues to resolve by governments in a top down provision of ‘useful' output. This is the main argument for having a competitive work and free market environment where the government allows the market place to make the best decisions.
If a government decides to spend additional money, (assuming balanced imports/exports), where does this money come from? The government can just create this money and it will not have any long term effect on the base value of the currency as the ‘value’ of the UK will not change, provided the imports equal exports over the longer term. Apart from inflation, the only way long term currency valuation can change is if the total valuation of the UK changes. This is the value definition of the currency.
Balancing the trade account does not prevent inflation. Inflation is caused by an increase in the money circulation that is not matched by an equivalent increasing output (in goods or services). This will happen if a government creates money when the ‘resources’ of the economy are not capable of handling that money and turning it into an equivalent new output. In this situation the money increases more quickly than the new resource created and the new (and existing resources) become devalued in terms of the money value. This will devalue the currency within and external to the economy. Simply, there is more physical money that represents the same amount of ‘stuff’.
In the family analogy above, this is equivalent to the family creating an internal 'monopoly' money supply that keeps increasing - clearly the 'value' of this money within the family will decrease and the exchange rate to real external money will also fall.
So the second process that a government needs to ensure is one of efficiency of output within the use of available resources (people, infrastructure, factories etc) thus not creating an inflationary spiral.
In the years after the 2007 recession, many economies simple ‘printed’ new money and pumped it into the economy via the banking systems. The UK ‘printed’ £435 Billion. The UK stated that this was not money creation but just a short term change to the amount of money within the circulation, ‘quantative easing’. CST wrote to the UK treasury and asked them when this money was to taken back out of the economy. The treasury did not know but ensured us that it was not ‘printing’ money. Nearly 13 years later we now know that it was untrue.
Unfortunately, this money was just dumped back into the banking system, to the people who not only caused the issue but who then needed to dump it somewhere to get a return. These bankers and financiers were risk adverse to lending (after the 2007 crash) to businesses, and most of this money found its way onto the equity markets (shares). So this £435Bn did nothing to help the UK’s economy in the short, medium or long term. It could have been allocated to useful infrastructure projects, education, health improvement, providing effective jobs that would have lifted the economy in the short, medium and longer term. This is what the US economy did, and they have lifted their economy significantly since the 2007 crash.
So why are governments and chancellors so interested in balancing spending against tax income? CST believes that there is a significant cultural misunderstanding here. The society generally considers that the books must be balanced – just as they know that their own family or household ‘books’ (income and spending) must balance.
This is just a confusion that few seem to understand or explain. This lack of understanding is hugely significant as it is one of the key drivers of how people vote for a new government. The public see this as perhaps the most fundamental issue for any government – how will this new government balance the books? This mantra, relentlessly repeated by all of the media prevents any sensible discussion from being presented. This is completely stupid, anti-democratic demagogy.
Most governments do not take an active role in this efficiency improvement. They leave it up to market forces and the business sector to ‘do the right things’ to ensure future efficiencies. In the UK we now see that as people’s work changes due to the gig / uba economy, this is producing less efficiency for the society as a whole. The increases of efficiency, (from increasing automation), are being exported to other economies (mainly the US) and the UK is not doing anything to counter this shift.
Education, for instance, is seen mainly as ‘the right thing to do’ for young people. The UK government does not see it as fundamental to its economic strategy and yet this is precisely what it is.
The government often argues innovation is a key issue, but the amount of money and resources actually applied here belies this fact. This is the other main strategy for increasing medium and longer term efficiency. It would counter directly the losses of the UK’s efficiency to the US companies (amazon, google, et al) and provides for future technical developments that underpin nearly all future business and societal efficiencies. The UK should be spending ten times what it currently does creating and promoting innovation.
CST has an innovative solution to managing the future money process that enables a government to spend in a timely manner while ensuring future debt ‘repayment’.
We have already described here and elsewhere why very long term debt will become irrelevant. In the meanwhile, to satisfy ‘market’ concerns we manage government spending by creating new investment structures. For instance, we create an innovation centre that provides resources to create long term business innovation. This is funded directly by the treasury and this adds to the overall debt, but this debt is held within the innovation centre. As the innovation progresses the treasury decides to create additional money (quantative easing) and purchases this debt from the innovation centre. This reduces the overall debt and maintains the money value as this new money is balanced by the outcomes from the efficiencies and output of the innovation centre via their funding of new business innovation.
We can apply the same processes for any area where we can legitimately show future efficiencies from spending.
Even if the debt ‘irrelevance’ takes longer than assumed (50 to 80 years), this does not distract from this process provided governments maintain efficiency improvement and useful outcomes through their spending.
Any government should be hugely concerned with balancing imports and exports (balance of trade). This gets very little direct influence from the UK government, it is left to the general working of the economy to provide a good result. This can be now understood to be complete nonsense.
So a government’s main economic objective should be to create a positive trade balance. While this is somewhat complex (services vs goods and external investments), the government should take a very active role in ensuring that the balance of trade will be positive. The UK government does not do this. It provides a few services to help, (such as export credit guarantees and the odd trade delegation), but clearly the UK governments of the past and their civil servants do not understand the importance a positive trade balance to the overall running of the economy.
By a government ensuring that the future balance of trade will be positive, it can then decide on what level of internal money creation and government spending will create the best overall economic performance in the longer term. This means using base resources as efficiently as possible in the short, medium and longer term.
So, back to our family analogy... Lets imagine the family of seven has additional unused resource within the home, say woodworking machinery & computer equipment. Some of the children have time on their hands. So the parents decide to create useful work for the children by using the under utilised equipment. The idea is to create new useful items such as kitchen cabinets & worktops and improving the kitchen storage, thus increasing the efficiency of the kitchen. The computer equipment is used to create a training video for the youngest children on how to use the woodworking equipment so they can help too.
Now, there is not enough 'real' money to spend on these new jobs as it is fully allocated, so the parents create some ‘monopoly money’ and tell the children that they can exchange this ‘money’ for lifts and extra treats. The children agree, (god bless them), and the family improves its longer term efficiency without changing the positive balance of the household budget. If the parents create too much new money, where it surpases the amount that can be spent on lifts and treats, the value of this ‘monopoly money’ will decrease, (equivalent to inflation).
So, by ensuring efficiency within the internal economy and by matching the creation of money to provide for future output and future increases in efficiency of output, this new money will not create inflation. In this way a government should actively seek areas to improve future efficiency irespective of the money supply.
It is now clear we can afford to take a longer term view. We know, almost certainly, that increasing (effective) spending in areas such as education and actions to improve future health outcomes will create a more efficient society in future. A government should then go further. If the economy has the slack, spending on infrastructure and research leading to future efficiencies will improve future outcomes. This is all commonsense, yet our UK government(s) do not do it.
The mechanism for ensuring accurate use of spending and provision for debt balancing should be new structures for investment based around the outcomes and efficiencies for the designated spending programmes.
How do we ensure that spending is maximised to create future efficiencies and improving the balance of trade? See CST’s ideas:-
Selling Britain
Education
Business Innovation
Thank You,
CST
Government Spending & Demagogy
October 2019
So why are governments and chancellors so interested in balancing spending against tax income? CST believes that there is a significant cultural misunderstanding here...
Debt, Household Budgets, Quantative Easing, Inflation, Demagogy...