It was painful to watch the budget speech, but even more painful to watch Ed Ball's response to it. George Osborne had to paint a picture of a stagnating economy which will not grow significantly for the foreseeable future. This was widely predicted by those relatively few commentators who understand how our monetary system works. As they also predicted, the stagnation has been accompanied by continued deficits and ever rising debts. So what was his solution? Continue with the austerity. There is no alternative. Why? Because if the government shows any signs of reducing its commitment to fiscal 'responsibility', and cutting the deficit, the markets will punish it by refusing to lend the money the government needs to finance this deficit. The credit rating agencies will downgrade the UK's credit rating and the interest rate that the government has to pay for for its 'borrowing' will rise, increasing the 'burden' on taxpayers. the government may even find itself unable to borrow and have to go grovelling to the IMF for loans, which will impose even tougher conditions than his austerity measures.
This is, of course, complete nonsense. Government with a sovereign fiat currency and floating exchange rates have no need to 'borrow' in order to spend. They create money when they spend. Borrowing is a self-imposed requirement that simply provides the private sector with somewhere very secure to earn interest on their savings. The government and its central bank can set these interest rates at any level they want to. [This does not apply to countries that do not issue their own currency such as those in the Eurozone.]
What was most painful about watching this was that the opposition, because they have the same mistaken understanding of the monetary system as the government, were unable to offer any coherent criticism. Ed Balls was reduced to accusing the government of failing to cut the deficit, which actually supported the Chancellor's previously mistaken austerity policy and his continuation of that policy. No wonder he looked flustered and confused. His head was grappling with a contradiction so large that it induced intellectual paralysis.
The tragedy of the current economic crisis is that across the world all policymakers are operating under the same mistaken understanding of how modern monetary systems operate. Most importantly, they operate under the same view that governments must not run deficits and should try to run surpluses, believing this to be prudent. In fact this is a very dangerous. In modern fiat currency systems the governments are the only source of debt-free money. When they spend they are adding this money into the economy. When they tax they are removing it. They need to spend more than they tax (i.e. run a deficit) in order to add debt-free money into the economy. This additional money is needed to satisfy the private-sector's desire to save. Without it the economy would shrink every year by an amount exactly equal to net private sector savings, as this 'hoarding' of money removes it from circulation, reducing demand. Running a budget surplus reduces private sectors savings. Government ’debt' represents net savings of the private sector. Reducing this debt will reduce their savings. At a time when private sector debt levels are still at very high levels this seems bizarre.
There are compelling historical demonstrations of the dangers of government surpluses. For example, there is the fact that every depression in the USA in the past 230 years, and there have been six of them, was preceded by many years of government budget surpluses. Conversely, on every single occasion that the US federal government has tried to reduce its 'debt' substantially by running multi-year surpluses this has been followed by a financial collapse and a depression. When you appreciate that by running budget surpluses the government is effectively confiscating private sector savings it is not surprising that surpluses are so damaging. Logic and experience are clear. When the government is the supplier the currency deficits are necessary and surpluses are reckless.
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