Given quite a few articles we have been reading over the last few weeks, we have decided it is time for another little visit to CentralBankopia and get another perspective on things.
If you are not already aware of CentralBankopia we recommend you firstly read this and this and this
Most traditionally educated economists and economic journalists tend to believe government deficits are totally wrong, are always a sign of a weak economy and should be avoided at all times. We are not exactly sure why, but what it does show is that they don’t seem to understand how money works in a modern economy with a FIAT currency where the government is the sovereign owner of fiscal and monetary policy. Australia is one of these countries, as is the UK, Japan and the US. Most members of the EU are not, however the way Germany controls the ECB it almost is.
It seems that most economists and the media are hell bent on talking about fiscal and monetary policy in the context domestic private budgeting. This is completely incorrect as the two have nothing to do with each other. We are not sure why this myth has been allowed to continue for so long; but it seems it is up to a few bloggers and a couple of “Crazy” economists to attempt to get the truth out there.
CentralBankopia is a concept we use on this blog to help explain what “money” actually means in a modern economy from a unique perspective, that of the monopolistic issuer. You need to be clear, this is not from the perspective of the people who work for the Central Bank, Treasury and/or other government institutions that set fiscal and monetary policy. It is from the functional perspective of the institutions themselves. From this perspective money is seen completely differently and has a very different use than it does to people, households, companies and other government entities that work outside this area.
So remember when we talk about “CentralBankopia” we mean these institutions. When we say “CentralBankopians” we mean the community of people who set fiscal, monetary and other economic policy that steers the macro-economy in the context of setting that policy.
CentralBankopian finance has a couple of concepts that are completely foreign to most people, but once you understand them you appreciate a very different perspective on economic topics.
- Money has no real value; it can be created or destroyed at any time.
- The real currency is GPEC , which is made up of sustainable Growth, Productivity, Employment and social Calm.
- GPEC is gained by using policy to manipulate the supply of money to and from the private sector ( via the banks ) to ensure that resources are mobilised in such a way to create sustainable growth , full employment and social well-being.
If you had this perspective on “money” then you would have a very different view of deficits, national debts and the supply of money. As a CentralBankopian can issue their own currency at anytime they can obviously spend money at will. Likewise, they can do the opposite, that is, raise taxes and simply destroy the money knowing full well they can create more next time it is required.
Now the first question you will be asking yourself is “how can they just create money out of thin air”. Well actually they do it everyday for a number of reasons. Here is one example; there are many.
In Australia at the moment the inflation rate is 2.8%. If the money supply needs to remain constant in real terms, (see point a. on this page) this means that the government will have to add an additional 2.8% to the money supply (or monetary base). That is several billion dollars added every year “out of thin air”.
However for everyone else in the economy, spending, savings and expenditure must be balanced otherwise they will get poorer and in extremes go bankrupt. CentralBankopians however have no reason at all to balance the books, there is in fact no book. The sole reason money is created and destroyed is to ensure the increase of GPEC, that is the sustainable productive growth of an economy while trying to ensure the maximum employment and social calm.
So what types of things would give greater GPEC? Well, in fact it is quite broad, but here are some good examples, maybe you can think of some others.
- Management of inflation.
- Ensuring investments provide productive improvements.
- Lowering dependencies on foreign sourced inputs that are outside of the sovereign governments’ control ( Think oil in Australia )
- Education of the workforce for higher productivity.
- Managing systemic risk ( Asset bubbles )
- Research and Development.
So if you look at the items in the list above you can see that there will be times when it is necessary to spend more than you take back (deficits), and at times it will be necessary to do the opposite (surplus).
But importantly what you will note is that the aim is to get GPEC not money. Money can be added to, or taken from the private entities as deemed appropriate. CentralBankopians do not tax the populace to get the money ( they can get as much as they want at anytime ) they do it to control the utilisation of resources, and to encourage investment that supports better economic and social outcomes for the country.
You will also importantly note that CentralBankopians do not need to borrow money to do something. They are the monopolist supplier; if they want money they create it. To borrow it from someone, they would first have to create it, give it to someone else and then ask for it back. This is obviously a pointless exercise that makes no sense. Yet on a daily basis people are told that the government must borrow money to fund programs. This is utter twaddle.
Now as soon as we mention Centralbankopia we are always asked 3 questions. So we will answer them here.
Q1 from People: How can you advocate this, Zimbabwe is proof if you just print money it creates hyper-inflation.
Answer from a CentralBankopian: Please think about GPEC, not money. Money is irrelevant. Zimbabwes’ government implemented policy that destroyed its productive capacity in farming and caused massive social unrest. They completely destroyed almost all of their GPEC in a very short amount of time and then attempted to compensate by increasing the money supply. Increasing the money supply can only give GPEC if it is used when the private sector desires it for productive and/or calming reasons or to balance inflation.
Q2 from People: If you can just create money from nowhere then why not just give everyone a million dollars so we can all be rich.
Answer from a CentralBankopian: Please again think about GPEC. Money is irrelevant. This would simply cause mass inflation, probably wouldn’t be implemented properly with some people missing out and causing social unrest and ultimately no one would be better off. I have no interest in everybody being instantly rich , how would I utilise resources if no one could be bothered working.
Q3 from People: If it was that easy why doesn’t every central bank just do this?
Answer from a CentralBankopian: Thank you for not mentioning money. Macro-economics is not very well understood, and highly politicised. Milton Friedman, someone who understood centralbankopia, once said that governments are so incompetent that even “moderately intelligent” behaviour is unlikely. He was correct. Have you seen that clown in the US pretending to be a CentralBankopian ?
So next time you are reviewing a piece of economic policy or are reading an article in the newspaper or on the net, please just have a think about it from a centralbankopians’ perspective. Forget about money and think GPEC. You might be surprised how much sense it makes.
Disclaimer: The content on this blog is the opinion of the author only and should not be taken as investment advice. All site content, including advertisements, shall not be construed as a recommendation, no matter how much it seems to make sense, to buy or sell any security or financial instrument, or to participate in any particular trading or investment strategy. The author has no position in any company or advertiser reference unless explicitly specified. Any action that you take as a result of information, analysis, or advertisement on this site is ultimately your responsibility. Consult someone who claims to have a qualification before making any investment decisions.