Everyone knows that money makes the world go round but few know that it spins in completely opposite directions to how our monetary system is usually described. The UK money system explained in 2 minutes (plus links for further reading) thread follows:
Money 1 - Your Bank Deposit is a record of how much YOU have loaned to your bank (to use as it wishes) - a positive balance in your bank account is just a record of what your bank owes you.
As a depositor, you are a low ranking creditor to the bank. Therefore the Government provides assurance that up to £85000 per individual is safe. fscs.org.uk/globalassets/d…
Money 2 - Banks do not lend out your granny’s savings. Banks create bank money (credit) when they agree a loan with you. They take the risk that you might not pay them back.
When we complete a loan agreement with a bank, the increase in the deposit you find in your bank account is simply an increase in the balance that the bank owes you. Loans create bank deposits. bankofengland.co.uk/quarterly-bull…
Money 3 - Just as bank money is created with the signing of a loan agreement, bank money disappears as loans are paid down.
Overall credit creation usually exceeds loan payments, so the bank money supply tends to increase over time. The global financial crisis led to a fall in bank money creation and the UK suffered a double-dip recession.
Money 4 - Private banks run the payment systems we us. Banks have to settle up between each other with money they can’t create themselves; They have to use central bank £ Sterling, instead. This reconciliation system is run by the Bank of England (BoE) using Electronic reserves.
Major banks have an electronic (reserves) account at the BoE. At the end of the day the sum of all of the transactions are netted out between the banks and reserves are moved between accounts to balance out any differences. positivemoney.org/how-money-work…
Money 5 - Cash is a paper form of central bank money. The publicly owned Bank of England can add and remove money (reserves) into and out of any of accounts held at the BoE. The BoE instructs the creation of as much cash as is required by the UK economy. bbc.co.uk/programmes/b09…
Money 6 - The UK Govt. Treasury instructs the BoE to create new money (reserves) when the UK Government spends on public goods & services. Therefore tax income is not required prior to Government spending. There is no need to increase taxes to ‘pay for’ any political decision.
As major private banks have electronic reserves accounts at the BoE, the private banks, in turn, increase the corresponding bank money account of the public service/goods provider where the spending is to be directed.
Money 7 - Just as paying off a loan destroys bank money, UK taxation destroys previously created electronic £ reserves. Taxation is simply accounted for.
Taxes do not fund UK Govt. spending. When you pay your taxes to HMRC, your bank account balance falls and the balance of the reserves account of your bank falls accordingly. Hint: Inland ‘Revenue’; the money comes back and is effectively destroyed.
Money 8- There is technically no limit to the amount of £ that the BoE can create. The UK cannot go bust as our debts are denominated in £s. In this respect we are not like Greece who do not have their own central bank. Or Venezuela who have debts in a foreign currency.
From 1973 onwards, $ had no formal link to any commodity; this is the so-called fiat money system. The value of the £ moves with other currencies according to the strength of the UK economy, the net amount of money creation over time, BoE actions and geopolitical stability
Money 9 - If, at the end of the day, the Government has spent more money than it has received in taxes, by convention, the UK Govt. chooses to convert reserves it has already spent into new interest-bearing Govt. bonds (Gilts) as a service to savers and the financial industry.
Money 10 - If we paid down the national debt we would have no safe private sector savings. The amount of new bonds issued per period is called the UK Govt. Deficit. The total outstanding amount issued by UK Govt. and held by the private sector is called the National (Public) Debt
Governments should not usually aim to be in surplus. A Govt. surplus isn't a lump of cash you can do something with in the future. A surplus simply destroys money. It occurs when the Government destroys more money than is created at the BoE. pileusmmt.libsyn.com/7-steven-hail-…
Money 10 - The National Debt is not a burden for our children & grandchildren to pay off. It is a political decision to priories current spending away from the asset poor to the asset rich.
We desperately need to use our democratically controlled money creation powers to shape our future prospects. We need long-term mission-oriented investment by Govts. to deliver sustainable future economic activity
Money 11- The global financial system remains broken and never left intensive care. The Central Bank induced ‘wealth effect’ through inflating all financial assets has created the ‘everything bubble’ which is showing increasing signs of popping peakprosperity.com/blog/114635/20…
Money 12 - A global reset of our economic goals is likely to be thrust upon us. Here’s hoping we heed the advice of Sir David Attenborough and adjust our priorities accordingly akin to @KateRaworth in her book #DoughnutEconomics
Economic activity is driven by the those who have the power to create and distribute our money. Private bank money creation is predominant, short-term and increasingly directed to and extracted by the super wealthy. We need to re-energise the power of public money creation. #MMT
*prioritise
