Yesterday I spoke to a group of important economists about my book The Production of Money – but omitted to make one important point. So am making it here.
Savings are not needed for investment. Ever. There is absolutely no need for example, for the Chancellor to rattle the tax collection box, or cut government spending – to build up savings, before the government is able to invest. No need whatsoever.
To understand why, think of your own investments. When you (and I am assuming you are not a Saudi princess) set out to buy a new home that costs say £500,000 – you do not have that money in your bank account. You may have some savings for a deposit – a downpayment on your commitment to pay. But you do not have £450,000 in your bank. All you have is a contract. A Promise To Pay. That promise – its called money – may deliver a new roof over your head, somewhere secure to live, and perhaps a place to expand your family.
Its the same when you travel to a white goods store to buy a washing machine. All you have is your credit card. If you’re a regular gal (or guy) there is no money for the machine in your credit card account. All you have is a card which effectively says: the bank thinks that ……..(insert name here) will uphold a Promise To Pay. You hand over your card, the seller of the washing machine stamps and acknowledges it, and then – she hands it back to you. You have not engaged in barter. You have not handed over any money.
Instead you have handed over your Promise to Pay. And that is what we call ‘money’.
Its a wonderful thing. It gives you purchasing power (that is, if your bank trusts your Promise To Pay). And it gives the white goods store a sale. That helps the store make a profit, and probably helps the store or washing machine factory to employ a new member of staff.
Of course the important thing is that you, the buyer must have income. And for most of us, that means having a job – because employment generates income. Not just for you, but also for the Chancellor (in the form of tax revenues).
The Chancellor of course, has the biggest credit card of all. Not only is he backed by British employees – but he is virtually guaranteed income from 31 million taxpayers. And so his ‘credit card’ – gives him enormous powers of expenditure. Powers to purchase infrastructure, like flood defences against climate change, but infrastructure that is both social and capital investment. But investing the Chancellor is helping to create jobs (many in the private sector) which, hey presto – provides him with even more (tax) income from construction workers, nurses and teachers.
That is the magic of the Magic Money Tree.