Government money creation: Richard Murphy's insights

Sometimes you stumble on new views on everyday things that transform your thinking - like a bright light in a dark room. Such clarity comes from Richard Murphy's blog Funding for the Future.  As well a regular updates it has a glossary which provides clear references to financial matters that are sometimes puzzling to the non-expert.  

Professor Murphy explains the way the UK government pays for public services. It  instructs the Bank of England to create new money and spend it on what the public needs - contracts for anything parliament authorises through ministers.

Murphy says that it is important to understand the purpose of taxation. It is to withdraw most of the money spent earlier as above, in order to  damp down the inflationary effects of  having created the new money  now circulating in the economy. The Funding for the Future glossary entry for Bonds is particularly helpful. It cuts through the mumbo-jumbo very clearly.

A quote: 'The government does not need your money before it can spend. It spends first, taxes later, and offers bonds to absorb the difference. Those bonds are savings deposits by another name.' 

Another useful entry is Bond Markets which includes a piece on Bond Vigilantes which exposes the truth behind scare stories put about in the media concerning government finances.

For the sake of fairness, taxation must be aimed particularly  at reducing the money used by people and commercial concerns who have a lot of it to spare. Thus land value tax  would aim to reducing speculative spending on property, e.g. a person buying another spare house just to store spare wealth and not to live in personally. The land tax would not only steady house prices, helping housing needs, but also reduce new money circulating in a sector where it causes inflation. 

To abolish the current stamp duty on property transactions and replace it with a small annual levy on the land values of all property would bring beneficial fine-tuning to the exercise of  money reduction through taxation. It would also encourage new house building, as landowners and developers would build new houses to raise cash to pay the land tax.   

posted by The Free Lunch