Three Extremely Important Taboo Questions (And The Answers)

Please don't hit the back button when I say this, but you've just clicked on a post about macroeconomics. If you want to learn how to make central bankers squirm and understand why various problems exist in society, then keep reading.

There are three extremely important questions whose answers would make a seismic impact if they were known to most people. If politicians knew these, their countries would most likely enter a new era of prosperity which is unmatched in history.

Question 1

Can central banks ever run out of money?

You may or may not already know the answer to this one, but watch what happens when this question is asked to the head of the European Central Bank.

Squirmtastic! Central banks create money by typing numbers into a computer that they own. They can never run out of numbers, so they can never run out of money.

Despite what conspiracy theorists will try to force you to believe, central banks these days belong to governments. So, if the central bank creates money, that means that the government can never run out of money.

However, there are countries whose central banks don't create money, including countries in the Eurozone. That's right, the ECB can never run out of money, but the countries who use the Euro can. That's because there's no Eurozone Treasury to give instructions to the ECB to create money as and when it's needed. This is the opposite of a win button!

Not only that, but Article 123 of the Treaty of Lisbon prevents countries in the European Union from using their money systems to maximum effect. This is one of the reasons why they have austerity.

Question 2

Would the central bank ever bounce a government cheque?

An American economist named Warren Mosler was asked to give a talk to the Reserve Bank of Australia a few years ago and he asked that question to them. They didn't appreciate it. He describes the scene on page 23 of his highly entertaining and easy to read book, Seven Deadly Innocent Frauds of Economic Policy, which is available for free by clicking on the link.

I encourage you to at least read pages 23 and 24 to see how the central banker tried to deflect the question before finally saying that they would never bounce a government cheque.

I've also asked a similar question to the Reserve Bank of Australia and other central banks. When the question leaves room for ambiguity, they always, always try to make you believe that the answer is different. However, this one usually works for me, so feel free to test it out on your own central bank...

Would the [enter name of central bank here] ever refuse to make a payment that has been requested by [Federal Government/National Government/Treasury] if the request has been made in the appropriate format and does not contravene any laws or sanctions?

Some central banks just flat out choose to ignore the question, but the Reserve Bank of Australia confirmed that they would never, as Warren Mosler had already confirmed, bounce a cheque from the Government of Australia (which comes via Treasury).

As I mentioned, I've also asked that question to a few other central banks, including the Bank of England, who said...

the Bank of England would not refuse a request for payment from a Government account held at the Bank, provided the request was done through the appropriate channels and was in line with the relevant regulations.

It may appear that they're saying that they'd use 'money' from the Government's account to make the payments, but that's just them being tricky, as you'll see from the next question. Once you see it, you'll be able to put the pieces together and see that they'd actually just said that they'd never bounce a government cheque.

Question 3

This is a sneaky one on my part. I wanted to know if the government needs to collect money from taxes, etc., before it can spend, but I knew that no central bank would never answer a direct question like that. I had to ask in a way that they'd be happy to answer. Here it is in plain English...

Does the government ever have any money in their accounts at the central bank (or any domestic commercial bank)?

...and here's the same question in economist-speak...

Do the balances of any of the accounts held by Government (including all ministries, offices, etc.) which are denominated in [national currency] constitute any part of the monetary aggregates?

When I asked the Reserve Bank of Australia, the answer was no, the government never has any money in it's accounts. It may sound strange, but then if you look at the Department of Finance website, they are always careful not to use the word 'money', but instead mention account balances.

However, when I asked the Bank of England, they said that the Government of the United Kingdom actually does have a couple of accounts that have money in them. I looked into it and it turns out that these accounts are only used for bond transactions rather than government spending, so they have nothing to do with taxes.

Why are taxes collected if the money gets destroyed immediately? Well, taxation is a tool for controlling inflation. If the government didn't collect taxes, then one of two things would be likely to happen.

1. We could get hyperinflation.
   or
2. People would stop using the currency because they don't need it to pay taxes anymore. I'd just like to say that I'd be happy to see cinema tickets and snack bar coupons used as currency in such a situation (I love going to the cinema), but it's more likely that people would try using cryptocurrencies instead.

What Does All of This Tell Me?

The central bank receives instructions to create new money every time the government spends. That's one way that money comes into existence. That money then ceases to exist (as money) when taxes are paid (the money gets demonetised).

Accountants are able to understand this really well because they understand double entry bookkeeping, which makes them more qualified to run a central bank than anyone who currently runs a central bank.

Why Does Any Of This Matter?

Remember when the U.S. Government was talking about the 'fiscal cliff' a few years ago? It's complete nonsense - they can never fail to make a payment in US dollars, unless they choose failure.

In 2017, I lost count of how many newspaper headlines I saw about Australia's AAA credit rating being at risk of a downgrade. The whole thing is a con! Warren Buffet said that governments who have their own currency should have a AAAA rating. I'd say they should either have an infinite A rating or no rating at all, because they're totally meaningless!

• "Urrr mah Grrrd, we're gonna go broke paying interest on the National Debt!" No, you're not!
• "We need to tighten our belts, cut spending and increase taxes." That's the opposite to what you should do if your economy is sluggish.
• "We need to collect taxes to pay for things." Wrong again, buddy! See the answers to questions 1 and 2.
• "We need a balanced budget or budget surplus." If you think it'll help the economy to grow, you're wrong!
• "I have a PhD in economics from one of the World's most prestigious universities, so I know what I'm talking about." You have been mal-educated and should hand back your PhD because top universities teach macroeconomic myths and pass them off as facts. That's why things haven't been getting better.

Conclusion

The World doesn't need austerity. Countries who have their own currency don't need to borrow from the IMF or World Bank and sell off public assets. The size of government is not a monetary decision (what matters more is the amount of real resources that are available). Credit rating agencies are giving bad advice that will bring poverty rather than prosperity. This is all because they didn't ask three simple questions!