The Money Tree


This week on Facebook: Most of those who believe in the existence of ‘A Money Tree’ and particularly those who choose to write about it (either from the political left or right), are not so naive as to believe that the State uses its fiscal policy wisely. The term money tree is used for political effect, yet regardless of political leanings most remain mute regarding the money that grows on it and where it comes from.

The issue of affordability never arises when the proposed spending relates to activities like going to war or bailing out the banks. There Is A Magic Money Tree

Countries like the UK that have their own central bank with which to create and borrow its own currency, claiming that deficit financing is part of a fiscal policy and not a problem as it is only incurred as an investment that is part of government economic policy. Those committed to the political left or right claim that their fiscal policy will encourage economic growth and resolve any deficit financing problem. The State has consistently failed to cover the costs for the future in its management of fiscal policy such that deficit financing always increases the national debt and fails in its social responsibilities.

To paraphrase Peter F. Drucker, it could he said that: The first responsibility of government is to cover the costs for the future. If this social responsibility is not met, no other social responsibility can be met. Peter F. Drucker, The Practice of Management

There is a superficial belief in the existence of a magic money trees, in that State fiscal policy is expected to ensure an abundant and a never ending supply of money. Politicians seem to be imbued with this superficial belief when they determine fiscal policy and predict economic growth. Most electors share a common belief that chooses to ignore the State’s role every time it sets a fiscal policy and creates a magic money tree, particularly when it resorts to deficit financing.

The politically left or right always predict economic growth for their tenure of office and control of public administration, this wish for economic growth by the State never overrides their common interests. With deficit financing increasing or decreasing economic growth the State applies a common fiscal policy¹ that consistently increases the national debt and inflates the value of all State currency as a means of meeting the future debts incurred².

money tree

Shaking the Magic Money Tree: click image

Fiat money allows the State to introduce quantitative easing and while this clearly bears fruit on the magic money tree other methods of increasing the State’s income by its fiscal policy, such as taxation, the sale of government bonds (gilts) and ‘off the balance sheet‘ bookkeeping have always been available. All means by which State fiscal policy has caused past Systemic Banking Crises and with global debt levels well above those at the time of the last crash in 2008 another global financial crisis is predicted.

So what does the money tree mean to you? Well, that depends on your means of income: that is ‘how much gross income‘ you receive and from what sources. Many States have a social welfare programme, which is in a lot of cases the gross (or total) income of the indigent. The terms disposable income and discretionary income may become irrelevant to the indigent on a social welfare programme and yet are major considerations (even if indirectly) among the non-indigent when the topic of funding a social welfare programme arises.

It seems that little consideration is to those totally reliant on social welfare when increasing taxation in the form of value added tax (VAT). While increasing VAT taxation reduces the social welfare spending of the State it also reduces all other incomes. Increasing VAT has a significant impact on the disposable income taxpayer in that it reduces discretionary income and while the indigent may have no discretionary income, this particular taxation vexes them considerably more than those that do.

Income can be expressed as residual income minus disposable income equals discretionary income. Those on a relatively fixed disposable income often have a reducing residual income, this reduces their discretionary income and often drives them into debt. They have no magic money tree to invoke and may find debt leads to indigence at the point where there is zero residual income. Indigence certainly occurs when disposable income falls below a certain economic value.

For several months in 2005, the average personal savings rate dipped into negative territory for the first time since 1933. This means that in 2005, Americans were spending all of their disposable income each month and then tapping into debt for further spending.  Disposable Income

Having a large discretionary income is the situation of High Net-Worth Individuals (HNWI) and sets the global standard for the distribution of wealth and income for those with an ever rising discretionary income. According to the Capgemini’s World Wealth Report 2018³, when exploring the trends that affect HNWI, 71 countries with HNWI accounted for more than 98% of global gross national income and 99% of world stock market capitalisation.


1. The Economy Needs More Than A Magic Money Tree: At the push of a button, the Bank conjured up £435bn to buy up gilts – government bonds – and exchange them for bank deposits. On the national balance sheet this sum is listed as debt, but it is not in the strictest sense because it is not owed to anyone. Turns out there is a magic money tree.

2. The Magic Money Tree Does Exist, According To Modern Monetary Theory: Against this backdrop, the publication of Reclaiming the State: A Progressive Vision of Sovereignty for a Post-Neoliberal World could not be more timely. It is written by 65-year-old Australian heterodox economist William Mitchell and the journalist and author Thomas Fazi. The book’s introduction is topically titled “Make the Left Great Again”; a sentiment that will no doubt chime with many progressives.

3. There Is A ‘Magic Money Tree’ – And Five Other Facts About Money: Money is the bedrock of the modern economy. But beyond our everyday interactions with it, it can be hard to understand why money matters. These are the things you absolutely must know about money to understand its role in the UK.

4. How Bank Lending Really Creates Money, And Why The Magic Money Tree Is Not Cost Free: It is of course possible for banks to lend more than the population can realistically afford. But we should remember that prior to the financial crisis, political authorities actively encouraged and supported excessive bank lending, particularly real estate lending, in the mistaken belief that vibrant economic growth would continue indefinitely, enabling the population to cope with its enormous debts. “We will never return to the old boom and bust,” said the U.K.’s finance minister Gordon Brown in 2007. Such is the folly of politicians.

5. Why There Really Aren’t Any Magic Money Trees: To be fair, it is not just Labour-supporting economists who seem to believe in magic money trees. The Conservatives have confidently asserted that a stronger economy will deliver a substantial increase in funding for the NHS and other social priorities, with no further explanation.  Whereas the Labour manifesto arguably had too many numbers on both spending and tax, the Conservative version fell conspicuously short.


Referenced Articles & Books:

  • A text subscript above and preceding the title here, refers to a book, pdf, podcast, or simply a url that links to a (usually free) download.
  • Brackets containing a number e.g. (1) are used above to reference a particular article (1-5).
  • A long read has the url* followed by an asterisk.
  • Occasionally a link to Open University (OU) free courses is cited.
  • JSTOR lets you set up a free account allowing you to have 6 (interchangeable) books stored that you can read online.

¹Central Bank Quantitative Easing as an Emerging Political Liability (url*): These views can be seen in Jeremy Corbyn’s push toward “People’s QE”, as well as recent discussions over Universal Basic Income via debt monetisation, which is based on Milton Friedman’s “Helicopter Money” to bypass the financial sector in the transmission of ultra-accommodative monetary policies, i.e. “channel QE money directly to the people and communities!”

²Making Policy in Uncertain Times — Lessons from the Past for Future Policy Frameworks (url/pdf): The global economy is emerging from the long shadow cast by the global financial crisis. Global growth has strengthened — albeit unevenly — and prospects for future growth are probably brighter now than at any time in the past decade.

³Welcome to the World Wealth Report 2018 (url/pdf):  For the complete story on global wealth trends visit the site for dynamic graphs that explores HNWI data and trends across market sizing of the HNWI population and wealth, HNWI asset and geographic allocations and HNWI behaviour across six regions.

 

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The Real Economy

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