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Let's start with Debt:

Debt can only be described as a promise of future work.  If we describe it as a future ‘payment’ (money, services or goods) this is just a way of describing it - as future work, since work must be done to create goods and services or money, at least within our present economic theories.

CST has long argued that work in the future is destined to change radically, to the point, (within a likely timescale of 50-80 years), there will be no paid work as such.  And therefore, at this future time debt has no meaning as it cannot be described and it will cease to exist. See: Economic Gaia Effect

Thus, our current economic theory is not going to work in future as debt is fundamental to every aspect of current economic theory.

Money Supply and Investment

Lets consider another basic assumption, that of a balanced economy.  Most people, (and governments), generally consider that the amount of money spent through government spending is an overall cost to the society that either must be raised (eg through taxes) or borrowed. 

If we consider where this money actually goes we see that most of it continues to circulate within the economic system of pertinent to the country where the money is provided.  For instance, in the UK, when the government spends additional amounts say on education, paying for more or better teachers, the resulting wages are spent mostly on goods and services within the closed economic system of the UK.  Some is lost to imports, but this is relatively small.  This lost (imported goods or services) cost is the only real cost to the society of this government spending.

If the economy as a whole is balanced between imports and exports, then it would make no difference how much was spent by a government to the overall costs to the society in the medium or long term, provided this money did not create inflation. 

Extra spending does not mean that the economy will be particularly efficient or effective, it might, but it might not.  Government spending can easily be spent on the wrong things and the resulting output may be poor and get poorer over time.   There are two distinct issues here, one is what output is created and how do you measure its effectiveness?  And secondly there is the efficiency of the output achieved, (eg output per hour/cost).  These are both difficult issues to resolve by governments in a top down provision of ‘useful‘ output.  This is the main argument for having a competitive work / free market environment.

If a government decides to spend additional money, (assuming balanced imports/exports), where does this money come from?  The government can just create this money and it will not have any long term effect on the base value of the currency as the ‘value’ of the UK will not change if imports equal exports over the longer term.  Apart from inflation, the only way long term currency valuation can change is if the total valuation of the UK changes.  This is the value definition of the currency. 

Inflation

Balancing the trade account does not prevent inflation.  Inflation is caused by an increase in the money circulation that is not matched by an equivalent increasing output (in goods or services).  This will happen if a government creates money when the ‘resources’ of the economy are not capable of handling that money and turning it into an equivalent new output.  In this situation the money increases more quickly than the new resource created and the new (and existing resources) become devalued in terms of the money value.  This will devalue the currency within and external to the economy.  Simply, there is more physical money that represents the same amount of ‘stuff’.

So the second process that a government needs to ensure is one of efficiency of output within the use of available resources (people, infrastructure, factories etc).

Quantative easing – how to get it wrong

In the years after the 2007 recession, many economies simple ‘printed’ new money and pumped it into the economy via the banking systems.  The UK ‘printed’ £435 Billion.  The UK stated that this was not money creation but just a short term change to the amount of money within the circulation, ‘quantative easing’.  CST wrote to the UK treasury and asked them when this money was to taken back out of the economy.  The treasury did not know but ensured us that it was not ‘printing’ money.  Nearly 13 years later we now know that it was untrue.

Unfortunately, this money was just dumped back into the banking system, to the people who not only caused the issue but who then needed to dump it somewhere to get a return.  These bankers and financiers were risk adverse to lending (after the 2007 crash) to businesses, and most of this money found its way onto the equity markets (shares).  So this £435Bn did nothing to help the UK’s economy in the short, medium or long term.  It could have been allocated to useful infrastructure projects, education, health improvement, providing effective jobs that would have lifted the economy in the short, medium and longer term.  This is what the US did, and they have lifted their economy significantly since the 2007 crash.

Demagogy

So why are governments and chancellors so interested in balancing spending against tax income?  CST believes that there is a significant cultural misunderstanding here.  The society generally considers that the books must be balanced – just as they know that their own family or individual ‘books’ (income and spending) must balance. 

This is just a confusion that few seem to understand or explain.  This lack of understanding is hugely significant as it is one of the key drivers of how people vote for a new government.  The public see this as perhaps the most fundamental issue for any government – how are they to balance the books?  This mantra, relentlessly repeated by all of the media prevents any sensible discussion from being presented.  This is completely stupid, anti-democratic demagogy.

The UBA / GIG economy

Most governments do not take an active role in this efficiency improvement.  They leave it up to market forces and the business sector to ‘do the right things’ to ensure future efficiencies.  In the UK we now see that as people’s work changes due to the gig / uba economy, this is producing less efficiency for the society as a whole.  The increases of efficiency, (from increasing automation), are being exported to other economies (mainly the US) and the UK is not doing anything to counter this shift.

Education, for instance, is seen mainly as ‘the right thing to do’ for young people.  The UK government does not see it as fundamental to its economic strategy and yet this is precisely what it is.  

The government often argues innovation is a key issue, but the amount of money and resources actually applied here belies this fact.  This is the other main strategy for increasing medium and longer term efficiency.  It would counter directly the losses of the UK’s efficiency to the US companies (amazon, google, et al) and provides for future technical developments that underpin nearly all future business and societal efficiencies.  The UK should be spending ten times what is currently does creating and promoting innovation.

Debt & Quantative Easing

CST has an innovative solution to managing the future money process that enables a government to spend in a timely manner while ensuring future debt ‘repayment’.

We have already described here and elsewhere why very long term debt will become irrelevant.  In the meanwhile, to satisfy ‘market’ concerns we manage government spending by creating new investment structures.  For instance, we create an innovation centre that provides resources to create long term business innovation.  This is funded directly by the treasury and this adds to the overall debt, but this debt is held within the innovation centre.  As the innovation progresses the treasury decides to create additional money (quantative easing) and purchases this debt from the innovation centre.  This reduces the overall debt and maintains the money value as this new money is balanced by the outcomes from the efficiencies and output of the innovation centre via their funding of new business innovation. 

We can apply the same processes for any area where we can legitimately show future efficiencies from spending.

Even if the debt ‘irrelevance’ takes longer than assumed (50 to 80 years), this does not distract from this process provided governments maintain efficiency improvement and useful outcomes through their spending.

The Key Points:

Any government should be hugely concerned with balancing imports and exports (balance of trade).  This gets very little direct influence from the UK government, it is left to the general working of the economy to provide a good result.  This can be now understood to be complete nonsense.

So a government’s main economic objective should be to create a positive trade balance.  While this is somewhat complex (services vs goods and external investments), the government should take a very active role in ensuring that the balance of trade will be positive.  The UK government does not do this.  It provides a few services to help, (such as export credit guarantees and the odd trade delegation), but clearly the UK governments of the past and their civil servants do not understand the importance a positive trade balance to the overall running of the economy.

By a government ensuring that the future balance of trade will be positive, it can then decide on what level of internal money creation and government spending will create the best overall economic performance in the longer term.  This means using base resources as efficiently as possible in the short, medium and longer term.

By ensuring efficiency within the economy and by matching the creation of money to provide for future output and future increases in efficiency of output, this new money will not create inflation.  So a government should actively seek areas to improve future efficiency. 

For instance, since we can afford to take a longer term view, we know, absolutely, that increasing (effective) spending in areas such as education and actions to improve future health outcomes will create a more efficient society.  This is commonsense.  A government could then go further.  If the economy has the slack, spending on infrastructure and research leading to future efficiencies will improve future outcomes.  This is all commonsense, yet our UK government(s) do not do it.

The mechanism for ensuring accurate use of spending and provision for debt balancing should be new structures for investment based around the outcomes and efficiencies for the designated spending programmes.

Conclusion for governments

 

How do we ensure that spending is maximised to create future efficiencies and improving the balance of trade?  See CST’s ideas:

Selling Britain
Education
Business Innovation

 

Thank You,
CST

 

Government Spending & Demagogy

October 2019

So why are governments and chancellors so interested in balancing spending against tax income?  CST believes that there is a significant cultural misunderstanding here...