The Power of the Pound

Summary

The transcript discusses the misconceptions about the UK government's financial capabilities and introduces Modern Monetary Theory (MMT). It explains that, as the sole issuer of the pound, the UK can create currency as needed, making investments in health care, infrastructure, and education feasible without relying on taxes or borrowing. The script challenges traditional beliefs that equate government spending with household finances and emphasizes the importance of understanding the government's role in the economy to ensure the well-being of its citizens.

Takeaways

• 🌟 The UK is one of the wealthiest countries globally, possessing the resources to provide comprehensive services and infrastructure.
• 💰 The common belief in a shortage of funds overlooks the UK's capability to mobilize resources, particularly human resources, to meet national needs.
• 🏦 The concept of the government acting like a household with limited income from taxes is a flawed understanding of its financial capabilities.
• 💹 As the sole issuer of the sovereign currency (pound), the UK government can create as much currency as required, unlike individuals or businesses.
• 📈 Modern Monetary Theory (MMT) offers an alternative perspective on money and economics, suggesting that the state can generate the funds it needs.
• 🔄 The government creates a demand for its currency by requiring taxes, which can only be paid in pounds Sterling, reinforcing the currency's value and necessity.
• 🚀 Government spending is not limited by tax revenue but by the available resources, especially labor, to prevent inflation and economic imbalance.
• 🛠️ The government can spend on necessary services and infrastructure without the need for borrowing, as it can always create the required currency.
• 📊 Issuing bonds is not because the government needs to borrow but serves as a financial instrument for investors seeking risk-free returns.
• 📈 A government deficit, contrary to negative perceptions, indicates a surplus in the form of savings within the economy, showing the pounds in circulation beyond taxation.
• 🏢 Understanding the nature of money and fiscal policy empowers citizens to hold the government accountable for using its financial capabilities to serve the public interest.

Q & A

What are some of the desirable amenities and services mentioned for the United Kingdom?

The script mentions comprehensive healthcare through the National Health Service, well-made and up-to-date infrastructure such as roads, water, sewage, and communication, world-class science and medical research, high-quality education, and income and care for the elderly and infirm as some of the desirable amenities and services for the UK.

Why does the perception exist that these desirable amenities are unaffordable for the UK?

The perception exists because many people, including politicians, commentators, and economists, believe in a household model of government finance. They think the government has to act like a household with limited income from taxes and cannot spend money it doesn't have, leading to a belief in the unaffordability of these amenities.

What is the significance of the UK having its own currency?

Having its own currency, the pound, gives the UK government the power to create as much currency as it needs. This ability allows the government to mobilize resources, especially human resources, to achieve what is important to the country without being limited by a shortage of funds.

What is Modern Monetary Theory (MMT) and how does it change the understanding of money?

Modern Monetary Theory (MMT) is an economic theory that argues that in a country with a sovereign currency, like the UK, money is not a commodity with a limited supply. Instead, the state can create currency as needed. This view changes how we understand money and the government's role in issuing and managing it.

How is the UK government different from currency users when it comes to pounds?

The UK government is different because it is the sole issuer of the pound. Unlike individuals, businesses, or households that must acquire pounds before spending, the government creates pounds every time it spends, by electronically adding to the balances in people's accounts.

Why does the UK government need taxes if it can create money?

The UK government needs taxes to create a demand for its currency. Since the government's spending provides the pounds needed to pay taxes, taxing helps maintain the value of the currency and ensures that it is used as the medium of exchange within the country.

What is the role of government spending in the economy?

Government spending puts pounds into the economy, which can be used to pay for public services and amenities. However, it must be balanced with taxation to avoid inflation and ensure that the economy has the necessary resources for sustainable growth.

Why do governments issue bonds if they don't need to borrow?

Governments issue bonds not because they need to borrow, but for other reasons, such as managing the interest rate and providing a risk-free investment option for investors. Bonds are essentially savings accounts that offer a guaranteed return, known as gilt-edged return.

What is the relationship between government deficit and the cumulative savings of the population?

The government deficit represents the excess of government spending over taxation. This excess is effectively the cumulative savings of the population, as it is the pounds created by the government that have not yet been returned to it as tax.

What would be the impact on the economy if the government attempted to pay down its debt?

Paying down the government debt would involve taking pounds out of the economy, potentially leading to a reduction in savings, decreased investment, and possibly slower economic growth. It could also lead to increased unemployment and higher private debt.

How can understanding the nature of money influence government policy?

Understanding the nature of money can lead to policies that leverage the government's currency-issuing power to serve the public interest. This includes spending as needed to ensure employment, provide public services, and maintain economic stability, without being constrained by concerns over borrowing or deficits.

Outlines

00:00

💷 UK's Economic Potential and Modern Monetary Theory

This paragraph outlines the aspirations for improved public services in the UK, such as comprehensive health care, infrastructure, and education, questioning their affordability. It challenges the common belief that the government's financial operations resemble those of a household, emphasizing the limitations of this analogy due to the UK's ability to issue its own currency. It introduces Modern Monetary Theory (MMT), which posits that a country with its own currency, like the UK, can create money as needed, fundamentally altering the understanding of fiscal policy and economic capabilities. The text critiques the conventional view on government spending and borrowing, highlighting the unique financial power of the UK government as a currency issuer, and the role of taxes in creating demand for the currency.

05:02

📊 Rethinking Government Deficit and Financial Management

The second paragraph delves into misconceptions around government borrowing, explaining that what is commonly perceived as borrowing is, in the case of a sovereign currency issuer like the UK, more akin to the creation of safe investment vehicles (government bonds). It questions the negative perception of deficits, illustrating that a government deficit leads to private sector surplus, representing savings. The narrative argues against the necessity of balancing government books in the traditional sense and advocates for a more informed understanding of fiscal policy, emphasizing that deficit spending is essential for economic stability and public welfare. It suggests that with a proper grasp of currency sovereignty, governments can more effectively achieve social goals and ensure economic stability through mechanisms like a Job Guarantee scheme.

Keywords

💡National Health Service

The National Health Service (NHS) is a publicly funded healthcare system that provides comprehensive health care to all UK residents free at the point of use. In the context of the video, it is presented as a desirable aspect of the UK's infrastructure, emphasizing the importance of accessible health care for the well-being of the population. The script suggests that the UK can afford such services due to its wealth and the power of its currency.

💡Infrastructure

Infrastructure refers to the basic physical and organizational structures, such as roads, water systems, sewage, and communication networks, that are essential to the operation of a society or economy. In the video, well-made and up-to-date infrastructure is highlighted as a critical component for the UK's development and quality of life. The script implies that investing in infrastructure is not only beneficial but also within the means of a wealthy country like the UK.

💡Science and Medical Research

To be completed

Highlights

The UK is one of the richest countries in the world, yet there is a common belief that the nice things desired by the country are unaffordable.

There is a widespread misconception that the UK faces a shortage of pounds and that the government is like a household with limited resources.

The UK's power stems from having its own currency, which allows it to mobilize resources, especially human resources, to achieve important goals.

Many politicians, commentators, and economists believe that the government must act like a household, raising income through taxation and being cautious about borrowing.

The UK government, as the sole issuer of the sovereign currency (pound), has the unique ability to create as much currency as needed.

The government creates demand for its currency by requiring taxes, which can only be paid in pounds Sterling.

The government's spending provides the necessary pounds for tax payment, and its taxing removes pounds from the economy.

The spending is limited by available resources, particularly labor, and not by the size of tax revenue.

Government bonds are not a form of borrowing in the traditional sense but are rather savings accounts with a guaranteed return.

Politicians often misunderstand the nature of the money system and create arbitrary fiscal rules that do not reflect the government's monetary sovereignty.

The government's deficit is not a negative but is actually the cumulative surplus of all the savings in the economy.

Understanding the true nature of money and the government's role can lead to holding the government accountable for using its power to serve the people.

A Job Guarantee scheme could ensure employment for all, serving as a powerful economic stabilizer.

Modern Monetary Theory (MMT) offers a different perspective on how money works and the government's fiscal capacity.

The government's spending and taxing create a balance in the economy, which needs to be maintained to avoid inflation or unemployment.

The misconception that there is a 'magic money tree' limits the understanding of the government's fiscal capacity.

By recognizing the government's unique financial capabilities, it can spend as necessary to provide security, defense, health, and social care.

Taxation serves to achieve specific social outcomes and maintain price stability, not just to fund government spending.

Transcripts

What are the nice things that we might want for the United Kingdom?

Comprehensive health care for all through a National Health Service?

Well-made and up-to-date infrastructure, like roads, water, sewage, communication?

World-class science and medical research?

High quality education across the board?

Income and care for the elderly and infirm?

Can we afford these?

Yes, we can.

The UK is one of the richest countries in the world.

But somehow, we've come to think that the nice things we want as a country are unaffordable.

We believe there is a shortage of pounds.

We don't realise the power that comes about from the UK having its own currency.

Yet such power can allow us to mobilise the huge resources that are available,

especially human resources, to achieve what is important to us.

Many people - including a lot of politicians, commentators, and economists -

believe that the government has to act like a household.

They believe that like a household, the government has an income that it raises from taxation.

It cannot spend money that it doesn’t have –

and if it borrows money to cover a pressing expense, that money must ultimately be repaid.

According to this household model, the government MUST think ahead before borrowing money to spend.

Do we raise enough money through tax to pay this debt off? And if the answer is no, the money can’t be spent.

‘There isn’t a magic money tree,’ as Theresa May famously told nurses seeking a pay rise in 2017.

But there is a flaw in this understanding of money.

It does not take into account the very important fact

that the UK government is the sole issuer of a sovereign currency, the pound.

There is another model that completely changes the way we understand how money works.

It’s called Modern Monetary Theory.

It’s been around for a generation and it has a solid background of academic work behind it.

It argues that in a country that has a sovereign currency, like the UK,

money is not a commodity – like gold – the supply of which is clearly limited.

Instead, the state can create as much currency as it needs.

Let’s see how this changes things.

As a currency issuer, our government in Westminster is different from the rest of us, who are currency users.

This matters!

None of us, whether the UK nations and regions like Scotland or Yorkshire,

nor businesses and corporations, nor individual households, can issue the pound.

Only the UK government and its agents can and do.

This ability to create pounds makes it unique, but somehow, our politicians don't seem to realise this.

As currency users, you and I have to acquire pounds before we can spend them.

If necessary, we can borrow.

The UK government, as a currency issuer, creates pounds every time they spend.

They do this by using a computer keyboard to make the numbers in someone's account larger.

This is the power we gave them when we voted them in.

If the government can create as much money as it needs, why do we need to pay taxes?

If the government can create as much money as it needs, why do we need to pay taxes?

By insisting that a fraction of the pounds it spends must be returned as tax,

the UK government creates a demand for their currency.

We are obliged to pay our taxes in the government's currency.

We can't use anything else.

Not US dollars, Bitcoin, or supermarket vouchers.

Only pounds Sterling.

If we don't, the government has the legal right to punish us,

either through fines or even loss of freedom.

The Government can spend as necessary to give us the things we want;

security and defence, health and social care, whatever.

When they spend, they give us the pounds we need to pay our taxes.

The spending puts pounds into the economy.

The taxes take them out.

That spending is only limited by the resources available, particularly labour, not by the size of the tax take.

These two flows need to be kept in balance.

The government has to buy resources on the open market and if it buys up too much,

it will force the private sector to try and outbid it.

Prices would rise, driving up inflation.

Too much tax and not enough spending will drain the economy of pounds.

Businesses contract and unemployment grows. So does private debt.

But doesn't the UK government have to borrow from the markets?

Aren't its finances subject to the whims of the bond investors?

No, they are not.

Monetarily sovereign governments issue bonds for other reasons.

These days, the UK government doesn't need to borrow because it can always create pounds.

And bond holders know this.

They know that the government can always pay.

That’s why government bonds are an important risk-free part of any investment strategy.

What gets called government 'borrowing'

is not borrowing in the sense that you or I (currency users) experience it.

Government bonds are really just saving accounts with a gilt-edged return.

But in a mistaken understanding of how our money system works,

politicians create arbitrary promises and 'fiscal rules' to link their spending plans to so-called 'borrowing'.

But what about the deficit?

Surely the government must balance its books?

When the government spends, it puts pounds into the economy.

When it taxes, it takes them out.

The amount the government spends in excess of what it taxes is called the deficit.

It's a word with very negative connotations.

But elementary bookkeeping tells us that where there is a deficit,

there must be a surplus.

That surplus exists as all our savings lumped together.

The trillions of pounds in savings accounts is the cumulative deficit that has built up over decades.

It is simply the pounds that the UK government created which haven't yet been returned to the government as tax.

When the government says it must pay down the debt,

it is essentially saying that it must drain away our savings.

Is that such a good idea?

If politicians on all sides understood how the government's currency really works,

they would appreciate their central role in a healthy economy.

They would spend as much as needed to give us what we require,

the reason the government exists in the first place.

They would tax to achieve specific social outcomes and keep prices stable.

A Job Guarantee scheme would ensure employment for anyone willing and able to work,

itself a powerful stabiliser of the economy.

When we understand the true nature of money we can hold government to account

and ensure it uses its power of currency sovereignty

to fulfil the responsibility to serve the people of the country.