Issuing Money = Deficit Spending (Always)

The key to understanding how our economic systems work is really to realise that most of what is said about it is irrelevant bullshit. The more I learn about our money systems the more I realise that it is, as a high-level system, not very complicated and easy to understand. That isn’t the same as saying it isn’t complex or that it’s easy to predict. You shouldn’t confuse complicatedness with complexity. Take, as analogy, the weather. Weather systems are complex but despite that you can still take it for granted that it’s colder when it rains. There’s no hidden property of weather systems that messes up that simple rule, and you don’t need to model precise rainfall to come to that conclusion (except, perhaps, rain falling through a volcano eruption).

Which is why, to me, the title of this post isn’t controversial. It fact it’s about as insightful as saying “circles lack corners.” It’s really just a deductive statement about what the words in it mean:

The thing that issues money, whatever it is, is running a deficit.

This throws a spanner in the cogs of those who take the position in favor of what is called either monetarism or austerity, depending on your memory span. Everyone aggress that we need money. It seems a pretty effective means of resource management. No-one has had a better idea. But, many are ideologically apposed to state spending. At the extreme end there are those who want a metal standard implemented in order to make it impossible for the government to run deficits over the long term, requiring them to fund deficits with surpluses.

Imagine: The gold standard is in effect. You go into your garden, stick a shovel in the ground, and pull a pound’s worth of gold out of the earth. Let’s say you have a magic machine that turns it into a pound coin for free. Now, it’s not in circulation until you circulate it. You have two options: spend it or give it away. Pick one. You just ran a £1 deficit.

I think the first instinct, for most, would be to point out that you bought a pound’s worth of stuff. That is true, but that would be a real asset. Real assets aren’t part of a deficit, which makes sense given that they have no price until they flow. A deficit is negative cash flow. Money in minus money out. Of course the word ‘deficit’ can be used to mean anything, but it has a technical definition, and that is the definition used when people refer to the government’s deficit. If you don’t believe me go and check your government’s treasury FAQ.

The eagle eye might be drawn to the point that, although you lost £1, you gained £1 to start with, so your cash-flow is zero. This is shady given that the pound doesn’t sit anywhere on a cash-flow account, you didn’t gain it through a transaction, you just issued yourself it. Anyone can issue themselves money whenever they want, it doesn’t usually show up on a cash-flow account. But even if that argument holds then you’ve just proved that the government isn’t running a deficit, because it creates the pounds that fund it, else how could it spend them?

 

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