Scotland should vote yes in 2014 but only if …

I am in Perth today speaking at a public service employees union congress. The talk is based on a major report we have just finished tracking the implications of public spending cutbacks in Australia on the volume and quality of public service delivery. We did several case studies – one of which was child protection – and the cutbacks will lead to increased child abuse in Australia without doubt. The story is pretty grim and I will write about it once the Report is made public by the commissioning party. But with travel (Perth is a long flight from anywhere and I have to get back to Newcastle tonight – 6 hours) and commitments I haven’t much time to wax lyrical on my blog. But I have been meaning to write about the upcoming Scottish referendum on independence from Britain and it fits a nice theme with yesterday’s blog – The demise of social democratic parties – they are all neo-liberals now – where I argued that good intentions come to naught if the economic policy paradigm used is erroneous. I would recommend the Scots vote yes at the 2014 referendum. But only if they introduce their own unpegged, floating currency and avoid any talk of joining the Eurozone. Further, the yes vote should be conditional on the government committing itself to achieving full employment on the back of their newly created currency sovereignty. Then the yes vote will improve welfare for the Scottish people. If they continue to use the British pound – then nothing will be gained.

Clearly I am not qualified to write about the cultural and political underpinnings of the desire by Scottish nationalists to become an independent nation again after losing that status in 1707.

I have read John Prebble on the fall of the clan system and the – Highland Clearances and the Glencoe massacre. My assessment is that Prebble’s interpretation was more accurate (that is, it was a deliberate strategy to remove the Highlanders and Islanders from Scotland) than those who claim that the population decline in rural Scotland was driven purely by economic and social factors.

But all these nationalist sentiments, though important in the debate, are beyond my remit. In general I wish nationalism would disappear but I am a realist.

The Scottish Government published its White Paper – Choosing Scotland’s Future: A National Conversation: Independence and Responsibility in the Modern World – in August 2007, where it canvasses the issue of independence.

In its most basic form, independence (moving from the current state of devolution) would:

… involve bringing to an end the United Kingdom Parliament’s powers to legislate for Scotland, and the competence of United Kingdom Ministers to exercise executive powers in respect of Scotland … and the Scottish Parliament and Scottish Government would acquire responsibility for all domestic and international policy, similar to that of independent states everywhere, subject to the provisions of the European Union Treaties and other inherited treaty obligations.

These are essential criteria for a nation to enjoy sovereignty.

The legal transition would be simplified because Scotland already has “its own legal system, borders, and other independent institutions” as a result of the various acts of union that have been enacted since England took control.

The institutional structure of governance, courts and judiciary are already established and the transition would be easy.

The White Paper also notes that:

With independence, the Scottish Government would assume from United Kingdom Government Ministers full Ministerial responsibility and functions for currently reserved areas, in addition to their existing powers in devolved areas, and would be accountable to the Scottish Parliament for their exercise of these responsibilities.

There would be a lot of cross-border demarcations to sort out in terms of existing departmental structures and purview. None of which would require any rocket scientists being called in.

There are a lot of issues relating to “such matters as: apportionment of the national debt; allocation of reserved assets, such as the United Kingdom official reserves, the BBC, and overseas missions of the Foreign Office; future liabilities on public sector pensions, and social security benefits; the split of the defence estate and the equipment of the armed forces.”

In the public debate, the question of North Sea oil has been central. The polarisation of views is clear.

In this article from the Economist Magazine (April 14, 2012) – The Scottish play – we confront the question “would an independent Scotland be an impoverished backwater or a land flowing with oil and money.”

The Article provides the following answer, which is not inconsistent with my analysis of the available data:

Scotland’s accounts of revenue and expenditure, based on Treasury data, show that it is not a ward of the state, grossly subsidised from Westminster. In fact it performs better than all regions outside the south-east of England … In 2010-11 Scotland’s GDP was £145 billion ($225 billion) including a geographical share of North Sea oil and gas, around 10% of Britain’s, with 8.4% of the population.

Historically Scotland has received bigger grants per head from central government than Wales, for example-in part a tacit acknowledgment that it contributes handsomely to oil revenues, which in 2010-11 amounted to £8.8 billion. An independent Scotland would lose that subsidy, but gain the right to collect taxes on hydrocarbons locally. For the moment, Scotland’s day-to-day accounts would look little different to now.

Analysts, however, argue that in the longer-term, the North Sea oil will run dry and there are “hidden liabilities” involved in decommissioning the oil and gas installations, which the British government is currently liable for.

The other issue surrounding the British-Scottish relationship is if the Scots get the lion-share (excuse the pun) of the North Sea oil revenue (they are claiming 90 per cent although they would get nothing if the Shetland and Orkney Islands, in turn, achieved independence from Scotland) what share of the banking bailouts will they have to wear?

The Economist article notes that the “financial-services industry” in Scotland is in deep trouble. The 2008 bailout of the two largest Scottish banks – Royal Bank of Scotland (RBS) and HBOS – required the British government injecting significant funds. Would the Scots have to pay the British Government back?

However, I think this issue would become irrelevant if the Scottish government achieved true independence. They would have all the funds necessary to nationalise the banking sector and guarantee deposits in the new currency. They could offer the British government some settlement in the new Scottish pound.

But if they do not introduce their own sovereign currency then these matters become more important.

The Economist article provides some commentary on that issue:

… most testing for Scotland’s future would be the question of its currency. Mr Salmond’s hopes of joining the euro have soured-for now he plans to stick with the pound. Yet the euro zone has amply demonstrated the dangers of entering a monetary union without fiscal union. Soothing niceties from Cheshire-cat politicians no longer reassure bond markets-Scotland would pay a premium for being part of a monetary union that could break. It would have no central bank, no monetary freedom and limited fiscal autonomy.

The White paper says that “an independent Scotland would have responsibility for macro-economics, defence and foreign affairs in a way that would not be possible while Scotland remains within the United Kingdom”.

The most important point is that to be truly independent the Scottish Government would have to gain “full Ministerial responsibility”, including all central banking and treasury functions.

They could not realistically have responsibility for macro-economic policy if they joined the Euro or kept the British pound.

The White Paper says on currency:

However extensive internal devolution may be, it is necessarily the case that the United Kingdom as a single state would have a single currency, whether sterling as at present or, at some future date, the euro. To join the euro, Scotland would therefore remain dependent on a decision of the United Kingdom Government and a referendum across the whole of the United Kingdom, rather than being able to join at a time best suited to Scottish economic circumstances.

The desire to join the Eurozone, which has now given way to a claim that an independent Scotland would retain the British pound tells you that the independence movement has not been motivated or informed by any deep understanding of how modern monetary systems function.

The statements about fiscal autonomy and full fiscal responsibilities are fraught with misconceptions given that the Government does not propose full currency sovereignty.

The absence of their own central bank would completely compromise the new government’s capacity to advance public purpose independent of policy settings from Westminster.

To understand this point, I would advise readers to become acquainted with the following blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3

Then you should read these more specific blogs – Fiscal sustainability 101 – Part 1Fiscal sustainability 101 – Part 2Fiscal sustainability 101 – Part 3.

A sovereign government in a fiat monetary system has specific capacities relating to the conduct of the sovereign currency. It is the only body that can issue this currency. It is a monopoly issuer, which means that the government can never be revenue-constrained in a technical sense (voluntary constraints ignored). This means exactly this – it can spend whenever it wants to and has no imperative to seeks funds to facilitate the spending.

This is in sharp contradistinction with a household (generalising to any non-government entity) which uses the currency of issue. Households have to fund every dollar they spend either by earning income, running down saving, and/or borrowing.

Clearly, a household cannot spend more than its revenue indefinitely because it would imply total asset liquidation then continuously increasing debt. A household cannot sustain permanently increasing debt. So the budget choices facing a household are limited and prevent permanent deficits.

These household dynamics and constraints can never apply intrinsically to a sovereign government in a fiat monetary system.

There is also a sharp distinction between a state within a federal system (which uses the federal currency and has no central banking capacity) and a truly sovereign national government.

A sovereign government does not need to save to spend – in fact, the concept of the currency issuer saving in the currency that it issues is nonsensical.

A sovereign government can sustain deficits indefinitely without destabilising itself or the economy and without establishing conditions which will ultimately undermine the aspiration to achieve public purpose.

Further, the sovereign government is the sole source of net financial assets (created by deficit spending) for the non-government sector. All transactions between agents in the non-government sector net to zero. For every asset created in the non-government sector there is a corresponding liability created $-for-$. No net wealth can be created. It is only through transactions between the government and the non-government sector create (destroy) net financial assets in the non-government sector.

This accounting reality means that if the non-government sector wants to net save overall in the currency of issue then the government has to be in deficit $-for-$. The accumulated wealth in the currency of issue is also the accounting record of the accumulated deficits $-for-$.

So when the government runs a surplus, the non-government sector has to be in deficit. There are distributional possibilities between the foreign and domestic components of the non-government sector but overall that sector’s outcome is the mirror image of the government balance.

If Scotland wants to be truly independent it has to have its own currency.

Then all the issues about what ratings the public debt would get from the bond markets and the rating agencies and all the rest of the nonsense would fade away into irrelevance.

South Sudan

In 2011, South Sudan became the World’s latest sovereign country. When South Sudan create a new nation in 2011 they started in the right way from the perspective of the monetary system.

First, they introduced their own currency under the legal framework of the Bank of South Sudan Act 2011. On July 18, 2011, the new government introduced the – South Sudanese pound – which was floated at par to the Sudanese pound.

Second, they ensured that all legal monetary obligations between the government and non-government sectors, such as all tax liabilities, were only negotiable in that currency.

Third, they created the – Central Bank of South Sudan – which is an essential aspect of currency sovereignty. There was a bit of fun early on. The BBC news reported (August 17, 2011) – South Sudanese Pound as Legal Tender – which clarified the intent and legality of the Bank of South Sudan Act, 2011 “with regard to dealing in South Sudanese Pound as Legal Tender.”

The memo said that:

All public budgets, financial records and accounts, required by any law or established or maintained in South Sudan, shall be or be assessed in South Sudanese Pounds. Payments of money when required in any indictment or other legal proceedings other than for the enforcement of a foreign currency obligation shall be stated in South Sudanese Pounds.


Compulsory payments shall be assessed and required to be paid in South Sudanese Pounds … includes the payments of taxes (either direct or indirect), customs duties, excises, levies, fees, charges and penalties, as well as any payment to public utilities ….

From a Modern Monetary Theory (MMT) perspective this is impeccable.

The new government in South Sudan clearly understands that in a fiat monetary system the currency has no intrinsic worth. They have also clearly made the connection between the fact that their government spending is not revenue-constrained because they have their own currency but at the same time they have to provide an incentive for the citizens to demand that currency.

The starting point of this new understanding is that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities

In this way, it is clear that the imposition of taxes creates unemployment (people seeking paid work) in the non-government sector and allows a transfer of real goods and services from the non-government to the government sector, which in turn, facilitates the government’s economic and social program.

The crucial point is that the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending. Accordingly, government spending provides the paid work which eliminates the unemployment created by the taxes.

The purpose of State Money is for the government to move real resources from private to public domain. It does so by first levying a tax, which creates a notional demand for its currency of issue. To obtain funds needed to pay taxes and net save, non-government agents offer real goods and services for sale in exchange for the needed units of the currency. This includes, of-course, the offer of labour by the unemployed. The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.

This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets). From the previous paragraph it is also clear that if the Government doesn’t spend enough to cover taxes and desire to save the manifestation of this deficiency will be unemployment.

So it is now possible to see why mass unemployment arises. It is the introduction of State Money (government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment. As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period). Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).

Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account, but doesn’t desire to spend all it earns, other things equal. As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment. In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.

Keynesians have used the term demand-deficient unemployment. In a MMT conception, the basis of this deficiency is at all times inadequate net government spending, given the private spending decisions in force at any particular time.

Accordingly, the concept of fiscal sustainability does not entertain notions that the continuous deficits required to finance non-government net saving desires in the currency of issue will ultimately require high taxes. Taxes in the future might be higher or lower or unchanged. These
movements have nothing to do with “funding” government spending.

To understand how taxes are used to attenuate demand please read this blog – Functional finance and modern monetary theory.

The memo also noted that it was common practice among government and financial institutions, etc to “draft official or private contracts etc in “foreign currency” and:

This practice of dealing in a foreign currency rather than in our legal currency is not acceptable … The South Sudanese Pound is the legal tender and should not be refused or rejected by anyone, as provided in section 46 of the Bank of South Sudan Act, 2011.


I think Scotland would be well advised to ensure its referendum includes the fact that independence would involve a separate sovereign currency. Then the Scottish Government could achieve its goals to enhance the common good and it could avoid the nonsensical fiscal austerity that has captured the British government.

I don’t pretend that running a nation of 5 million odd people with limited resource diversification is easy. But I suspect the people would be better off overall with true independence.

However, if they keep the British pound, then independence will achieve little – other than soothe the nationalist desires.

Scotland should follow South Sudan’s example. If it did its future would be much brighter than it will be for that tiny African nation. But at least from a monetary perspective the South Sudanese government is on the right track.

Chickens in style

I am a vegetarian so I am all for treating animals with respect and style. So I should be happy that an English hedge fund manager has decided to treat his chickens to a state of sumptuous elegance.

The UK Daily Telegraph story (September 25, 2012) – Crispin Odey’s chickens come home to (a luxury) roost – reported that the hedge fund boss will spend £130,000 on stone alone to build a very nice “Palladian-style chicken house”.

Here is a snapshot of the architect’s plans showing the north elevation.

The description in the planning application goes:

The temple’s roof – adorned with an Anthemia statuette – will be fashioned in grey zinc; the pediments, cornice, architrave and frieze are in English oak; and the columns, pilasters and rusticated stone plinth are being hewn from finest grey Forest of Dean sandstone.

You can see more of the Drawings and other documents – HERE.

All I hope is that he doesn’t plan to eat any of the chickens!

Then there is the ethical issues of having that much cash when poverty is rising quickly in the UK on the back of the fiscal austerity program imposed by the British government. I will leave that for another day.

That is enough for today!

(c) Copyright 2012 Bill Mitchell. All Rights Reserved.

This Post Has 21 Comments

  1. If you are interested in Scots History with reference to economy, Prof. Tom Devine is the man to look for on youtube or in book stores if you haven’t already. It’s great to have some of our history that isn’t romantic myths

  2. I have to say all this talk about breakaway by Catalonia and others seems to be feeding into the hands of the euro market state.
    Their policey of regional funds over the last few decades seems to be paying dividends at last.
    Smaller Euro market states are more manageable then former nation state behemoths such as Spain and Italy I guess – which tend to have a critical mass of resistance if things start exploding.

    I must say the guys behind the euro curtain are good , very good.
    I would recommend you read the Shield of Achilles by Phil Bobbit to see their endgame.
    He gives a OK breakdown of his book in this interview although it takes a while to really get going.

    The SNP is not unlike FF of Ireland in many ways (at least in earlier times)…….good local politicians but not very good at the big stuff although to be fair the Hollyrood ding dong is far more entertaining then the chronic sensory deprivation of the Leinster house zoo.

    To be honest the current settlement pattern is far more logical for Scotland then Ireland with most people living in the central belt…..this is a consequence of the clearances but with the high oil prices its beneficial to people as long as we live a Industrial life and not return back to the land en masse.
    But Some Hebridean islands still have a more typical crofter scattered settlement pattern which made great sense when people were living semi subsistence lives with no cars and stuff… their input costs must be higher then typical west highland towns such as Mallaig which is at the terminus of the west highland rail line with almost zero population in the managed wilderness of the Knoydart which surrounds it.

    As a Dork who appreciates the beauty of the highlands I greatly fear the Bigger Dorks in the SNP will destroy it for negative economic return much like how those FF people destroyed the Irish landscape under their pointless motorway programme which merely carried masses of credit hyperinfalted bank waste vehicles

    But Mallaig is in a bit of depression now me thinks – its herring and cod fishery is no more and its remaining rump Shrimp fishery destroys the seabed and juvenile fish so their more lucrative Fish Industry will never recover under such circumstance.
    Add to that the decline of tourism (although they got a bit of a shot in the arm in 2009 after devaluation with the locals complaining of a lack of places in hotels that summer I recall)
    This local schoolgirl catches the mood of the place perfectly.

  3. “For every asset created in the non-government sector there is a corresponding liability created $-for-$.” Bill Mitchell

    I don’t quite buy this. With inter-bank lending, a commercial bank can often borrow back its liabilities to other banks. With government deposit insurance, a commercial bank’s liabilities to its depositors are often a mute point – and if some depositors do withdraw physical cash that cash often ends up back in the banking system anyway. And behind the commercial banks is a Central Bank willing to lend them the reserves or physical cash necessary to cover their liabilities anyway. So something is wrong here, imo, regardless of the math. To any sort of believer in the free market the problem is obvious – government privileges for what should be a purely private business.

    “No net wealth can be created.” Bill Mitchell

    But real wealth is produced. Except like the balance sheet that real wealth too will net to zero unless we do something? Those McMansions do exist though I fear they will rot and be torn down for lack of owners for lack of income while people go homeless.

    It’s quite a shabby and dangerous system, imo. Why do we tolerate it? Because we can’t think of a better way?

  4. This 19th century famine wall was built at 3000 feet ~ in the heart of the now completly depopulated Knoydart peninsula……the islands of Eigg and Rhum (Norse names) can be seen in the distance..

    In western Scotland Norse names predominate on the coast , hybrid Gaelic / Norse names in the immediate interior and Gaelic names in the deeper interior.

  5. A separate currency on independence is almost certainly a step too far for most Scots voters, it would have to be the SNPs next campaign after independence (assuming they understand the need). its also worth noting the SNP have learned step by step pragmatism the painful way.
    Surprisingly to some, the independence referendum battle is likely to be about economics rather than history, Braveheart like or otherwise.
    Its worth noting that Salmond is probably the most senior anti-neo liberal politician in the UK & was a professional economist but his area of expertise is the economics of oil rather than currency.
    Its also worth noting the ONS, in some of its data, has started attributing a proportion of national debt to Scotland but under the acts of Union & Devolution, Scotland is not permitted a national debt though it would potentially be liable to this responsibilty on independence (subject to negotiation). In 1707 some individual Scottish nobles were given £398,085 10s as a payment to offset the liability of Scotland to incur a proportion of future GB national debt, I don’t think it was enough somehow

  6. I love to read your content,you do make an effort to keep it simple;
    BUT please try not to use DOUBLE NEGATIVES….it’s a bad British habit
    and does nothing to add to the narrative.
    Good luck with the new Textbook,I can’t wait to buy it!

  7. I suspect politics is the main reason the Scots want to keep the pound. They want to make all the decisions but want to be able to blame somebody else if it goes wrong.

    Keeping the pound means that Scotland can blame ‘English monetary policy’ for problems.

    The appropriate response for the remainder of the United Kingdom would be to remove access to the central bank and the rest of the Treasury infrastructure from Scotland. Then if Scotland wanted to keep using the British pound it would have to do it Ecuador style.

    The White Paper is a Scottish government White Paper. The UK chancellor has been quite clear that he does not support Scotland continuing to use the British Pound given the experiences of the Eurozone.

  8. F. Beard says:
    “something is wrong here, imo, regardless of the math.”
    I keep telling Bill that if we reconcile reality to classical economics, there would be less aggravation all around – but to no avail.
    You also assign to prof. Mitchell the quote “No net wealth can be produced” but he never argues that about real wealth, i.e. products or services. The context is strictly finance, i.e. net financial wealth.
    When “real wealth is produced”, financial statements of flows and wealth (are supposed to) show that.
    On your remarks regarding banking, perhaps you’d want to take a look at the blogs under the Category “Banking” (see right frame). There seems to be a bit of confusion, e.g. you say “With inter-bank lending, a commercial bank can often borrow back its liabilities to other banks”, but when a bank borrows, its liabilities increase; there’s no “buying back”.

  9. Neil Wilson,
    Any texts describing in some detail how to do it “Ecuador style”?

  10. The article pretty much summarises my feelings about the referendum, without fiscal/financial autonomy its just going to be local government. Not really all that different from the ‘devo max’ option the UK conservative and unionist government so loudly oppose.
    Local Governemnt is not, of course, automatically a bad thing (eg we are going to miss the worst of the shitstorm that the NHS south of the border is engaging), but it does make true independence a lot more difficultm if not impossible.
    Salmond is no macroeconomist from anything I’ve seen (independence in europe seems a little silly now), and all the activists I’ve spoken to (admittedly the frontline door knockers, supporters etc) do not have any thoughts about macroeconomic issues at all.
    Ascribing aggregate motivation:
    Keeping the pound means that Scotland can blame ‘English monetary policy’ for problems.
    Is a bit of a stretch for me. The fear of the ‘step too far’ is probably closer to the mark in these artificially fearful fiscal times.
    On balance, I’ll vote yes.

  11. “For every asset created in the non-government sector there is a corresponding liability created $-for-$.” Bill Mitchell

    The math is clear. If an exception is mathematically impossible, one should accept the fact that it’s impossible and spend his time trying to understand why, rather than why not.

    “No net wealth can be created.” Bill Mitchell

    If one has trouble with this one doesn’t really understand balance sheets.

    A balance sheet has two distinct sides. One side has nominal units accounted for that have been introduced into the system by the monetary authority, either through direct fiscal transfers or through credit. No action or entity within the closed system whose boundary is the non-government can change these numbers in the aggregate.

    The other side of a balance sheet is an entirely different animal. These are listings of “real” assets, the value of which are measured in nominal dollars. The value attributed to these assets is not “real” even though the actual asset is real and has real use value (maybe) to the holder. What is the use value of a Mona Lisa? but it’s “value” is measured in nominal dollars. A house has utility value even if you can’t sell it. This value doesn’t show up in the sectoral balances.

    The “values” on these real assets may be real or they be imaginary (I may think my house is worth $250,000 even though I probably couldn’t sell it for more than half that). The important point is that the value of these real assets is entirely dependent upon the level of spending in the economy. Cut off the spending and the value of those assets in the aggregate will move in the direction of the level of nominal net assets in existence. The values are a leveraged multiple of net financial assets available for spending by spenders.

    Seems to me that MMT takes place in the universe of the right side of balance sheets.

    Not an economist…spent the night in a Holiday Inn Express.

  12. ‘e.g. you say “With inter-bank lending, a commercial bank can often borrow back its liabilities to other banks”, but when a bank borrows, its liabilities increase; there’s no “buying back” ‘. Vassilis Serafimakis

    OK, good point. Then I suppose the correct thing to say is: “With inter-bank lending, a commercial bank can often balance its liabilities to other banks by short-term borrowing from those banks the reserves it would otherwise have to transfer to them as the credit it creates moves from one bank to another.”

    But my overall point is this: the banking system as a whole creates some “liabilities” it need not EVER redeem so how can they truly be liabilities? And if they aren’t true liabilities then it can be said that the banking system as a whole DOES creates net financial assets. And that agrees with this:

    “Banking was conceived in iniquity and was born in sin. The bankers own the earth. Take it away from them, but leave them the power to create money, and with the flick of the pen they will create enough deposits to buy it back again. However, take it away from them, and all the great fortunes like mine will disappear and they ought to disappear, for this would be a happier and better world to live in. But, if you wish to remain the slaves of bankers and pay the cost of your own slavery, let them continue to create money.”

    – Sir Josiah Stamp, Director of the Bank of England (appointed 1928). Reputed to be the 2nd wealthiest man in England at that time.

  13. “The banking system as a whole creates some “liabilities” it need not EVER redeem so how can they truly be liabilities?”

    These are internal liabilities attached to Federal Reserve Banking System, which is external to the economy, which is a closed system. The liabilities are accounting abstractions with no real-world relevance.

    The liabilities do not exist on the non-government side of the ledger, therefore no net financial assets are created.

    Negative net financial assets are created because banks don’t create the interest balances when they create the principal, leading to a net increase of liabilities as interest accrues. We always pay back more than we borrowed. The question to ask yourself is where does the difference come from?

    “The process by which banks create money is so simple that the mind is repelled.” – John Kenneth Galbraith

    “In economics, the majority is always wrong.” – John Kenneth Galbraith

  14. @paul no.2,

    Great exposition! However I do have a passing knowledge of A = L + E. My objections are at least 3-fold:

    1) As you say, the two sides of the balance sheet measure different things. Can apples and oranges be compared?
    2) As you say, the value of the assets may vary depending on the economy.
    3) But additionally, the liabilities may only be virtual in practice.

    But let’s not argue. Let’s just remove all explicit and implicit government privileges for the banks and see if they can survive in the free market. History says they can’t – at least not for long.

  15. The liabilities do not exist on the non-government side of the ledger, therefore no net financial assets are created. paul no.2

    Yet bank assets are real debt obligations so Assets = Liabilities + Equity would reduce to Assets = Equity if bank liabilities do not exist. (I’m not talking about the Central Bank which most concede is a pure counterfeiter though a pet one of the central government almost always.)

  16. F.Beard,

    The problem here is you keep crossing the boundary between the two balance sheets, government and non-government. This can only lead to confusion.

    In engineering one must isolate systems in order to analyze them sometimes. Otherwise there is no unique solution.

    On a banks balance sheet the transactions between the bank and government are invisible to an observer in the non-government. As a member of the non-government domestic economy those transactions do not apply to your non-government analysis of balance sheets.

    If you wish to avoid confusion, ignore any transactions between the government and non-government except for net flows. Operations involved in money creation are irrelevant to us in the non-government, and nothing can be gained from examining them unless you are an academic or just plain enjoy navel- gazing.

    The sectoral balances identity does not recognize any of the transactions you seem to be so worried about.

    As with many things that are simple, you along with most I’m afraid insist on bogging your mind down with meaningless complexity.

  17. On a banks balance sheet the transactions between the bank and government are invisible to an observer in the non-government. As a member of the non-government domestic economy those transactions do not apply to your non-government analysis of balance sheets. paul

    And there’s the problem – the artificial distinction between “banks” and people by the government. There should be no such distinction. Banking should be an entirely private business (assuming it could survive as such).

  18. As with many things that are simple, you along with most I’m afraid insist on bogging your mind down with meaningless complexity. paul

    Well, when it comes down to destroying banking before it destroys us, we should know how the game works.

    I don’t consider banking sacred. It’s a cheap counterfeiter/embezzler’s game that should never have been allowed to hold the economy hostage.

  19. i’d agree with you about scotland other than the fact their demographics are akin to japans and so the country will probrably be stuck with deflation from day 1. its why the scottish uni’s are free, no kids of their own and the one’s that are about tend to run off somewhere younger instead of causing inflation in their own country.

    as oil goes, well you know what they say. the best cure for high prices are high prices.

    pensions on the other hand are about to seriously head north and so they would end up being taxed more and poorer than the people south of the borded which would only entice more kids away.

    on the plus side they should get low unemployment by default.

    i’d be very wary of jumping ship and if their destined to do so i’d wait till the baby boomers have passed through the system. it needs a lot more thinking about and an honest open debate about the pro’s and con’s and not just the usual drible spat out by the snp and westminster.

    times are changing in the west and the way i see it, the uk, us, france and oz through immagration will be fine going forward. the majority of the eu is now japanese and the germans (who have also commited demographic suicide) will be begging the ecb to print money at some point when internal demand collapses(2016?) as they won’t be exporting too much as the whole world turns into natural exporters with excess capacity just like the chinese.

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