When it comes to organising society the fundamental question is really “what do we want members of society to do?” The answer to that question forms the basis of figuring out the nature of the systems we need to implement to direct behaviour (or not). Whether you believe in free-market capitalism, socialism, totalitarianism, feudalism or monarchy you have gone through this reasoning process (or your argument is incoherent.)

Do we want members of society to waste resources? Most would say no. Again, even free-market capitalist’s argue that a free-market is favourable because it allocates resources efficiently and therefor avoids waste.

Bitcoins are useless. You can’t eat them. They don’t cure any diseases. You can’t turn them into anything. No production process requires them. They can’t make people happy or better off or more ‘well’. They exist solely to be traded for something else. Accepted economic theory holds that they are demanded simply because they are in limited supply. I would argue that it’s more precise to say that they are demanded because people believe they can make a profit (or minimise loses) trading them. At least some Bitcoin users must want to make a profit else no Bitcoins would get produced. Bitcoins are just a speculative asset. They are the tokens you need to play the Bitcoin speculation game. Some people might just really want Bitcoins, however it’s more reasonable to assume that people  mostly produce Bitcoins because they can trade them for prizes at a profit. Note that profit is always someone else’s loss.

While Bitcoins themselves are useless, they require resources to ‘produce’. The production process is the execution of a mining algorithm. This process requires energy; if the energy costs are too high there’s no profit to be had producing them. As  a result Bitcoin production is going industrial. Production of Bitcoins has a (potentially huge) carbon footprint and requires allocation of physical resources that could be used for other things. For example the computers running the mining algorithm could be running a protein folding simulation, crunching astronomical data or whatever we can think up.

So, putting all of this together:

Bitcoin is a way to get people to tie up physical resources to produce entities that exist for no reason other than as a means to transfer physical resources into their possession. 

We have produced a system that encourages people to tie up resources in order to gain resources while doing literally nothing productive. You could argue something similar about gold coins; but at least an argument could be made (IMO an invalid one) that the upside is we get gold out of the ground. Not even this upside exists for Bitcoins. Bitcoins are literally useless whether we have them or not.

There is a general hysteria around the idea of jobs being stolen, usually by foreigners, leading to an obsession with immigration and immigration curbing policies.

It seems to me that the government’s efforts to reduce immigration is partly, of course, to pander to this hysteria but also a convenient way to off-load the unemployment that their policies are causing onto foreigners. Essentially someone is going to be made unemployed by austerity so they should try to make sure foreigners are made unemployed first [1]. They can’t complain. The received wisdom is that if you deny foreigners jobs then it frees up jobs for everyone else. People generally accept this wisdom. The trouble is that it makes no sense.

It makes no sense because jobs aren’t a resource and therefor can’t consumed and can’t be finite. We don’t have a finite number of jobs to share. Nor do we ‘produce’ jobs in any meaningful sense. Individual positions can be taken. Individual positions at any one time are finite. But jobs aren’t finite in number or restricted to resources.

It’s easy to see why jobs can’t be a resource by asking “what happens when we are out of resources?” The answer, of course, is we get resources. The task of getting resources is a set of jobs. So even in a situation where we have zero resources, we still ‘have’ jobs. So jobs can’t be said to be constrained to resources at all.

Jobs are just an organizational convention. Take an analogy: activities. Can we run out of activities? No. The idea doesn’t make sense. An activity is just a name we give to make it easier to think about and organise doing things. Can someone ‘take up’ activities? Again, not really. Sure, specific activities can require specific resources, and should those resources be restricted then the activities that depend on those resources are restricted. The word ‘job’ is like the word ‘activity’ except that jobs have the property that jobs create jobs: if jobs can be said to be consumed, then consuming them creates them. That’s an unusual property for a resource.

“We need to stop immigration because they are doing all of the things and leaving no things for us to do!”

When someone works in the UK, regardless of who they are or where they’re from, they get paid in pounds. Those pounds can only be spent in the UK. They can be transfered to an account belonging to a foreigner, but even then can only be spent in the UK. They could exchange their pounds for some other currency but that would just give the pounds to someone else that can, again, only spend them in the UK economy (or in some other country that has adopted pounds as official currency).

This is what makes it wrong to think in simple terms of a job being taken up while all other factors remain the same. The worker earns pounds in order to spend them, which they can only do in the UK. This is what economists call contributing to aggregate demand. The extra spending power is extra demand that can be met by some other firm in the UK. This demand has the potential to provide the need for new work to be done, which can give rise to new jobs. The factors that decide whether or not that demand will translate into new jobs are: is supply limited and is the money supply limited?

Theoretically speaking there are two factors: Supply and Money Supply. If supply is limited then a rise in demand causes a rise in prices. This is because there is no new stuff to buy. The thing is that ‘supply’ is an economics abstraction and doesn’t come close to mapping onto any real thing in the real world. How could ‘supply’ be limited in such a way as to stop any rise in demand causing a rise in supply? Maybe during a war? Perhaps. If we were extracting all resources at their maximum rate, then an increase in demand would definitely cause prices to rise because there definitely couldn’t be in increase in supply… well, maybe, if you ignore marketing. Are we extracting all resources at their maximum rate? Of course not. Some individual ones, maybe. I’m not sure what could manifest itself as restricted ‘supply’ in real life. Supply is rarely limited across the board, if ever. It seems that the idea of supply is so abstract that it can’t be limited, ever, without something systematically limiting it on purpose. But, there is one thing that we need to order to create jobs.  It is our chosen convention to only instantiate jobs that can be financed. No new money means no new finance, which means no new jobs, regardless of demand. So you might think “ah-ha! money is in limited supply and therefor jobs are too!” Well, money is not in limited supply. Money isn’t produced, it’s issued. We don’t dig it out of the ground. Austerity by definition the choice to restrict the money supply stopping the economy from instantiating new jobs.

The irony is that jobs are constrained to the money supply, which is restricted by austerity, so what appears to be a limited jobs supply is really a limited money supply caused by austerity.

[1] It’s interesting to realise that child birth is no different to immigration. Children being born is new people arriving in the economy. The difference being that immigrants tend to appear in the economy fully grown, and so require less investment. Why is the idea of restricting immigration so naturally accepted while the idea of restricting childbirth would be seen as hugely tyrannical?

It’s one of the deep ironies in economics that so many economists (to be fair, sometimes without realising) argue that the market works in mysterious ways beyond what any of us can comprehend and that trying to get ahead of it is impossible… then spend their entire careers trying to explain how to, or how not to, get ahead of the market. According to Peter Schiff’s blog he has an Austrian Economics view of the markets. Talking about gold he said:

People were buying internet stocks at crazy valuations just before the crash, people were buying condos in Vegas. They are doing the same thing in reverse when it comes to gold. It is the same lack of understanding of the fundamentals that is causing a mispricing of the asset.

So it seems that an understanding, or lack there-of, can cause the ‘mispricing’ of an asset. How is that possible? Is the market powerless to resist the effects of people’s ignorance? Or is he arguing that everyone has to be a devout and practicing Austrian Economist for Austrian economics to hold [1]?

Austrian economics argues that all agents obey what they call the Action Axiom, which seems roughly similar to the general mainstream proposition of rationality. It argues that economic agents do things that maximise utility, though they seem to dress things up with even more messy language than main-stream economists [3]. Austrian Economics also argues, again like mainstream economics (they aren’t as hip and anti-establishment as they’d like to imply) that the economy is just a sum of agents and by treating each agent as the same agent they can pretend that what is true for one agent is true for the economy [2]. So again, how the hell can any agent’s ignorance cause ‘mispricing’? In fact how can any agent be even said to be ignorant of anything relevant to prices? Every component of this statement contradicts some axiom of both Austrian Economics and mainstream economics in general.

[1] That would cause an interesting paradox in that, apparently, being an Austrian economist means not understanding Austrian economics.

[2] They hold it as axiomatic that there is no such thing as a group entity in economics.

[3] The difference is that the action axiom is, as far as I can tell, an unfalsifiable basis of a huge circular argument, while the idea of rationality is falsifiable and clearly nonsense.

I had a discussion with a friend the other day about the nature of finance and money. It was hard to get into details as there was a lot of ground to cover. I thought it would be useful to summarise my position in a list of atomic propositions. The following is true for the UK but equally true for any country that issues it’s own currency at a floating exchange rate. This is all based on work by people like L. Randall Wray, Michael Hudson, Steve Keen, David Graeber and Robert Shiller.

1) Money is a representation of debt. If you buy a car off someone you could pay them with an IOU to the value of the car. The buyer could then at some time give you back the IOU and get something worth a car (from you.) The debt would be cancelled out and the IOU would disappear. Money is what happens when you implement some sort of system that allows some otherwise normal IOUs to be transferable. I-owe-yous become anyone-owes-yous. This means that the IOU given in payment can be given, in return for goods, to someone else.

2) There is more than one way to make IOUs transferable. Broadly speaking there are only two that I know of. The first is social money. This is based on optional trust. In this system the IOUs are transferable within a set of people who trust each other to honour the idea that those IOUs are transferable. These money systems tend to be small because they can only be as big as human personal social groups allow. The other system is central authority. In this system a central authority issues the IOUs, which are all claims on that authority rather than individuals.

3) If the debt that money represents is repaid then that money ceases to exist.

4) The thing that the government ‘owes’ currency holders is a reduction in their tax bill. The promise the government makes when it issues currency is that that currency can be used to pay any tax bill they issue.

5) The purpose of the tax system is to create demand for sovereign currency. By issuing a tax burden payable in some thing the government creates demand for that thing. From a macro-economic perspective it doesn’t matter how the tax bill is issued. Technically it doesn’t even need to be tax, it could be fines. It doesn’t matter if the tax bill is uniformly divided or levied on one individual, or anything in between. The fact that someone has to pay a tax bill with Xs means that demand for Xs is increased. If X has value even without the tax system, the X will be worth more with the tax system in place [1].

6) The government does not need to ‘raise’ pounds to spend pounds. The government issues pounds. All tax pounds it receives were issued by it in the first place. The government must issue pounds in order to tax them back.

7) The government cannot ‘save’ pounds. The government cannot save pounds for the same reason you cannot ‘save’ your own IOUs. You can’t have I-owe-myselfs.

8) Money creation is a process that ends with government issuing currency. It isn’t accurate to say that the government creates money. Most money creation happens without the government’s direct consent. The government can pursue policies that aim to issue new currency but only to the extent that the rest of the non-government sector is willing to participate. The only way the government can create money independently is by directly depositing currency simultaneously into a person’s bank accounts and into that person’s bank’s reserves (assuming people are happy to receive it). This, however, is not how most of the money in circulation comes to be. The other two processes are lending and spending. The first process is that people ask banks for loans, the bank choses to oblige or not (without the government having any real say), then the bank tries to get whatever reserves it feels it needs (historically the UK has had no reserve requirements). If the bank can’t get the reserves it needs from other banks it goes to the Bank of England and asks for, effectively, an overdraft. The BoE always obliges because to refuse would cause a credit crunch. At this point the ‘money’ is already in existence and the person receiving the loan could have already started spending it. The government then issues the currency making the money official. The other way the government can issue currency is through spending, buying goods and services, but note that the government can only buy what can be bought and generally can’t force anyone to sell, so it’s spending is limited by reality. It also can only buy things in it’s own currency that are for sale in it’s own currency. It can spend other countries currencies if it wants (and has some), but by doing so can’t issue pounds.

9) The economy is split into three sectors: the government, the domestic private sector and the world. This is a financially closed system by definition. The accounts of these three entities add up to zero (again by definition). From the perspective of the UK a foreign country is a bank that has an account in the BoE. Foreign firms have accounts in those banks. From this the rest of the world can be seen as just a sector of the UK economy. This sector is very similar to the domestic private sector. The main differences is that it internally isn’t subject to the rules of our government but conversely has no say in how our country is run. Our country is also part of the ‘rest of the world’ sectors in other economies (that is the BoE has accounts in other countries central banks).

10) For the non-government sector to run a surplus, the UK government must run a deficit. This is true by definition.

11) If the non-government sector is free to run a surplus then the government is not free to eliminate it’s deficit. This is true by deduction alone.

12) Activity funded with existing currency is repaying an old debt and issuing a new one. If I buy a car and issue an IOU, I owe you a thing worth a car. If that IOU is transferable then the person with my IOU can take it to someone else and exchange it for something, but in doing so they transfer the IOU to a third person. The second person is now settled., I now longer owe them anything, but the third person has a claim on me i.e. the IOU I issued. Spending money is the process of transferring a debt such the original issuer owes the final person in the chain, but the people in between are all left with a balance of zero (denominated in my IOUs). This is how our money works with the exception that my IOUs aren’t very transferable, but the government’s are. My IOUs are a bit transferable, so I can make these types of chains but only very short ones including people I know who trust me; however, I have little need to create such chains so never do. Instead I use the governments IOUs and become just another person in a chain, without having to worry about being the beginning or end.

13) Spontaneous activity requires issuing of new currency. From 12 it follows that the chain has to start somewhere. Someone has to simply issue the IOU from nothing. Linking to earlier points, this is usually how banks work. They start a debt chain then ask the government to insert themselves as the starting link, making the bank the second link in the chain.

14) Barter cannot explain expansion without charity. This is really an implication of 12 and 13. A business can be self-sufficient. It can pay for itself out of its income, but it has to have the income. It can’t generate an income before producing something. And it can’t produce something without capital. By deduction there has to be either a chain of debt that has to start somewhere (which disqualifies the economy as a barter economy) or someone must be simply gifting capital, which ultimately requires someone to be working for nothing. So a barter economy (lacking debt) that adheres to financial basics cannot expand.

15) There are good and bad ways to issue tax burdens and currency but the overall mechanics are the same. The government could choose to issue money by buying whatever it chooses. It could choose how it taxes and why. That will have varying social effects. The effects are an ethical matter not a macroeconomic matter. The choices will change the size of specific markets. For example if the government decided to always buy chocolate then chocolate markets would get a demand boost.

16) There is an optimum value for government surplus/deficit. There are pragmatic reasons to decide what a ‘good’ government deficit/surplus is, but those reasons do not include what the actual figure is. That figure is not always best when it is as low as possible and it is not always better when it is reduced. It is ‘best’ when it has the desired socioeconomic effects, which again are a matter of ethics not macroeconomics.

17) The UK government can not be forced to default on any debt denominated in pounds. It can never become insolvent. It can be forced to default on debts held in other currencies, but it can always issue the currency necessary to meet interest payments on debts in pounds.

18) The government set interest rates and therefor can always service public debt. If the UK interest rates were higher than growth, then the public debt would too quickly. But, again, the government sets interest rates so this could only happen if it chooses to let it happen.

19) Currency denominated in pounds can never leave the UK banking system. Often people talk about foreign held debt or dollars ‘in’ China or held by China. To be precise pounds cannot leave the UK banking system because they literally don’t exist outside of that system [4]. A foreign national bank can have an account at the BoE. In that account it can hold reserves or bonds. The currency can never be accurately described as being ‘in’ the foreign country. Pounds can only be spent in the UK financial system (or in a foreign country that uses pounds, which would be part of our banking system). Cash can be physically taken to foreign countries, but once there it becomes an asset in that country, not a currency. It can’t be paid into a bank account either, only bought in return for local currency if there is demand for pounds there. Virtual currency cannot be transfered to a foreign banking system either, the idea is meaningless. There is no meta-currency in which currency exchanges take place so currency exchange is either barter (floating exchange rates) or an arbitrary agreement to always issue a unit of currency in return for a unit of foreign currency. When a unit of currency is changed through a floating exchange rate it is really traded as an asset. When it is exchanged through a fixed exchange rate it is stockpiled by the foreign country and a new local currency unit is issued. The original unit of currency is still held in the currency issuer’s central bank (in an account controlled by the other country) and still entirely within that countries banking system.

20) A trade deficit does not export pounds. Following on from above, if the UK has a trade deficit (meaning it is at a net financial loss through trade, referred to as a current account deficit), this means that reserves are flowing into accounts in the BoE held by foreign central banks from other accounts in the BoE (usually mostly from domestic private accounts).

21) The UKs trade deficit is subject to interest rates that are set by the UK government just like domestically held public debt. Foreign central banks have accounts in the BoE, which pays interest just like any bank account. Higher interest can be earned by buying bonds (which are just like saving accounts). Those bonds, too, are just entries in an account at the BoE. Some think that this means foreign debt puts the UK government at some kind of default risk because of interest costs. The interest rates are, however, set by the BoE.

22) Refusing to issue currency to meet the non-government sector’s demand for it always translates into unemployment. Unemployment can be caused by there not being enough things to do or by a lack of demand but it can happen when there is plenty of both, which is usually the case in the real world [3]. Should the economy be in a position to expand its operations it needs finance. It needs finance for purely abstract reasons. It doesn’t ‘use’ finance in production. it can’t turn finance into anything. Because financial systems need to be tractable, that is they need to make mathematical sense, balance sheets need to add up etc., finance must be made available to allow new activity. In this case debt must be issued from nothing. If there aren’t enough pounds in circulation then, regardless of intentions or business models or demand or ingenuity, no new ventures can be undertaken without making our financial accounts mathematically nonsensical. Employing the unemployed, without taking wages from existing workers, requires new economic activity to happen spontaneously. This requires issuing currency, which in turn is the same as increasing the deficit (or reducing the surplus). Refusal to do that, through government policy, creates a situation in which the economy can’t employ more people regardless of any other factors [2].

23) The government pays interest on BoE accounts and charges interest on reserves it lends out in order to control interest rates. Reserve accounts at a central bank can pay interest, if the government decides to. It will also charge interest if a bank wants to borrow reserves. It doesn’t do this for fiscal reasons. It doesn’t need to profit off lending nor is it required to pay interest payments (often central banks pay zero interest on reserves). And it can ‘afford’ to pay as much interest as it likes. It does these things purely to control interest rates.

[1] This is why gold coins almost always circulate at prices above gold’s bullion value. There is an exception, however, which is when the material the currency is issued in is mixed. If the government issues coins in gold and copper, that both have the same nominal value (meaning the both count equally against a tax bill or fine), then people will obviously pay their tax bills in copper coins before gold ones. This extends to virtual currency that is just spreadsheet entries and has no real value.

[2] There is actually a very weird but accurate analogy: money is a unit of measurement of debt. In that sense it’s no different to meters or kilograms. Imagine that, for some bizarre reason, creating a road would require you to ‘have’ enough meters in the bank. Roads could be built only when old ones are ‘liquidated’ back into meters, or when new meters are issued. It’s easy to see what would happen if the government tried to ‘balance’ their meter account. It’s also bizarre to imagine a government stressing about having a ‘meter deficit’.

[3] I would argue that in the real world there is always something to do. ‘Bad times’ are identified by the very fact that there is a lot to do. Everyone always needs to eat and people always need shelter and security. Further, if modern life shows us anything it is that we can condition ourselves to demand literally anything.

[4] This is exactly the same as saying “points can’t leave a football tournament.” The points scored in a football tournament are meaningless outside of the tournament. You can ‘transfer’ a football point to a rugby point if tournament operators arbitrarily decide to honour the idea. In this case what would really happen is that the football point would disappear and the rugby point would be created. Or the two tournaments could use some kind of floating exchange rate by allowing bartering of points from the other tournaments.

I was looking at recently published statistics on employment and inflation (for September to November 2013). As far as I can tell, even if you take a pretty generous estimate of CPI inflation, we have less than 1% more people working but we are paying people about 1.3% less. We’re hiring more people by paying them less. And not only are we paying people less individually… we are paying the whole workforce less*!

How can any rational concept of recovery fit this data?

*If we hired 1% more people but paid the whole group the same amount you would expect the average wage to drop to just over 99% (which would keep the overall wage bill the same but make the average wage lower) but we’re paying about ~98.7%.

When Osborne was appointed chancellor he immediately cemented his austerity programme by establishing the Office for Budget Responsibility. Uncomfortably Orwellian. His aim was to balance the Government’s books and counter what he calls “deficit denial.” At the moment he is trying to hoover up whatever reputation points he can from recently published economic performance data.

I have argued that austerity is hugely damaging a few times but mostly from a holistic perspective i.e. what effect it has on life in general. I thought it would be good to look at it from a more technical perspective. That is, try and figure out what austerity is as a mechanical process and how it can give rise to what we are seeing now.

The first most basic principal is what financial experts call financial identity. This is when two things are really inverse representations of the same thing. Any economy can be split, at the macroscopic level, into a government sector and a non-government sector. The net balance of these two sectors combined, as a matter of unavoidable financial maths, adds up to zero. This is a financially closed system [1]. This means that for the non-government sector to save (run a surplus) the government sector must run a deficit. If the government runs a surplus, the non-government sector, necessarily, runs a deficit.

The government wants stuff done. So it imposes a tax liability, payable in it’s own currency and issues that currency. It can issue the currency lots of ways. Mostly, currency is issued either as a response to the non-government sector creating money or by buying things off the non-government sector (spending). Actually, really, both of these things are spending. One is buying financial assets of banks (as a response to banks needing reserves) and the other is buying real assets of the non-government sector. Neither of these things can be done just because the government says so. For example they can’t buy what the non-government sector doesn’t produce. It’s also forced to buy some things. This is why the idea that the government ‘creates’ money is flawed.

If the total tax bill is equal to the currency issued by the government, then the deficit is zero. This is interpreted as the government ‘funding’ it’s spending through taxation. Actually this is backward because the government has to issue the currency in order to tax it back. It’s more accurate to think that the government is pushing currency into the non-government sector at the rate it is sucking it back out again.

In this situation the non-government sector cannot possibly be saving [2]. So, for the non-government sector to net save the government must run a deficit. Again, note that so far, this is all derived from that one unavoidable financial identity.

So what is the result of trying to reduce the deficit?

At first the non-government sector could absorb the deficit reduction by raiding it’s savings or saving less. This could give the impression of something miraculous, business as usual, giving the government some room for spin. Within the non-government sector different entities can play against each other. Some coming out better, others worse. But the net effect is that the sector as a whole will be subject to a lower rate of saving. If companies want to continue to save at the same rate then they will have to pay less in wages, so people will be forced to save less or cut spending. If they cut spending then some other non-government entity is going to lose an income, so they have moved the problem on to someone else in the sector [3].

The non-government sector has to meet it’s tax burden, but will do that by paying the lowest wage price it can. If we are lucky then everyone is employed. This would require the remarkable situation that the non-government sector needs to hire everyone in order to meet it’s tax burden. This situation can’t really continue for very long because firms are going to figure out ways to reduce costs. So it’s only a matter of time before they lay people off (assuming that full employment even happened in the first place). Unemployment will creep up or wages will creep down, or both.

How can the government react?

If the government is committed to a non-deficit there is pretty much nothing it can do. The situation will escalate. People without jobs need to eat. Fewer people working reduces tax receipts. The loop of currency begins to break down. Less and less currency circulates. The economy contracts financially, reducing wages and/or employment further. Sovereign currency becomes useless and inflation results.  The government might be forced to issue more currency (as a reaction to inflation, which many will then interpret in reverse as causing the inflation) or stick to it’s austerity guns. An austere government could engage in some ‘employability’ programs, but that can’t create jobs. And has to be funded. An austerity fixated administration would therefor feel it has to pay for those programs out of taxes. The tax burden would increase, giving the non-government sector stuff to do (the work to meet to higher tax burden)… but it also used those jobs to do the program.

The basic problem is that the economy needs to expand but can’t because the government has allowed no way for that to happen [4]. Note that this situation is created and perpetuated for purely abstract reasons: the need for a number to be zero. The economy needs to expand but because 1+1=2 there isn’t enough currency to represent the extra work. It’s like saying we can’t build more roads because we have run out of miles. Absurd.

Look at it another way. How did all that money get into the system in the first place? The government issued it. So how can it grow without doing the same? It can’t.

The logic is clear: Unemployment means there is more ‘stuff to do’ than is being done. More stuff to do requires an expansion of the economy. An expansion of the economy is issuing currency.

[1] You might have instantly wondered where the rest of the world is. Actually the non-government sector can be split into two: the private sector and the foreign sector.

[2] Within the non-government sector individual entities can save, but only if some other entity in the non-government sector is running a deficit.

[3] You might be thinking “surely the non-government sector” is digging things out of the ground and getting better off as a result. Sure, but who are they selling it to? If they can find a buyer in the non-government sector then someone else has paid them for it. If they sell it to the government, and the government’s books balance, then whatever money they make will be paid back as tax.

[4] They could also manipulate perception of the facts. This situation is fairly static from a macro-economic perspective (ignoring uncontrollable things) but is likely a mess at the economic scale. Within the non-government sector entities will be doing each other over routinely, with terrible social effects. Labour will be getting turned over repeated. People getting fired at the drop of a hat. A spin doctor can select successes from this and give the impression there is progress happening.


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