Errors In The MMT UCL Self Financing State Article

Friends, I read the UCL Self Financing State Article, which MMT points to as ‘proof’ the Bank of England creates new money for the Government to both spend and deficit spend.

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683

The research on the U.K. Government accounts is fantastic! However, their conclusions do not seem to match their research, it is like they wrote the conclusions before they wrote the paper! Chris Rimmer asked me to write out the mistakes I am seeing in their conclusions, so here it is. Please review, and let me know if you see any mistakes; if so, what do you think am I missing?

Or do you agree they made mistakes?

Please advise. Thx!

1. The U.K. Parliament Approved Deficit Spending Over The Last 4 Years.

· 120B pounds 21/22

· 127B POUNDS 22/23

· 134B POUNDS 23/24

· 146B POUNDS 24/25

P24 : https://researchbriefings.files.parliament.uk/documents/CBP-9040/CBP-9040.pdf

2. The BoE Has Reduced The Supply Of Reserves Almost 30% The Last Four Years From Around 1T Pounds To Roughly 700T Pounds Today.

https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/our-objectives

Q: How could reserves go down if the Bank of England was issuing new reserves to pay for Government spending or Deficit Spending?

3. The Treasury Debt Management Office (DMO) Sells Gilts Before Funds Are Needed, So Treasury Always Has Excess Reserves On Deposit To Meet All Spending Obligations, And Does Not Need To Borrow From The Bank Of England.

https://www.dmo.gov.uk/responsibilities/financing-remit/

4. The U.K Government And HM Treasury Credit Line With The Bank Of England Shows The Government Has Not Borrowed From The Bank Of England In The Last 15 Years.

The Bank of England temporary overdraft facility for the government, known as the Ways and Means facility, has not been used for 15 years, which you can find in the BoE database or the link below.

https://www.bankofengland.co.uk/boeapps/database/fromshowcolumns.asp?Travel=NIxAZxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=2000&TD=31&TM=Dec&TY=2040&FNY=Y&CSVF=TT&html.x=66&html.y=26&SeriesCodes=RPWB72A&UsingCodes=Y&Filter=N&title=RPWB72A&VPD=Y

5. If There Is No Spending By The BoE Or Lending By The BoE, Then The BoE Does Not Create New Reserves And New Money To Fund Government Spending.

If there is no borrowing through BoE balance sheet expansion, and no BoE spending, there is no creation of new net reserves and no increase in the supply of reserves, no new money to fund Government spending.

6. The Mistake The Paper Is Making Is Taking The First Step In A Two Step Liability Swap, And Forgetting The Second Step In Double Entry Accounting, Wrongfully Concluding It Show New Reserve Creation.

All payments to and from all accounts on the BoE ledger are completed via a BoE double entry Liability Swap, which is how value is transferred among all BoE accounts.

· +Liability (+reserves to banks of Gov Payees)

· -Liability (-reserves Treasury/Consolidated Revenue)

A Liability Swap results in no net new reserves, so no increase in supply of reserves and no new money. When the BoE credits the reserve account of the banks of Gov payees, those reserves are being debited from the Treasury DMO account or CR account.

7. The Paper Shows If The BoE Did Ever Create New Reserves To Credit The Accounts Of Government Payees, And The Treasury Did Not Have Enough Revenue On Deposit To Complete These Payments, These Amounts Would Always Be LOANED To The Treasury By The BoE, Which Normally Would Be Repaid By The Following Days Revenue.

If the BoE credited accounts of Gov payees and the Government did not have enough reserves on deposit to cover these payments, the sums the Government were short are put on a BoE credit line for the Treasury. These borrowed funds were normally repaid by the following days revenue.

8. If For Any reason The Credit Line Was Not Repaid, The Full Funding Rule Requires The Treasury To Pay All Government Debts Annually By Selling Gilts To The Public.

The Full funding rule means all outstanding Government debts are paid by Gilt sales, and only the public can buy new Gilts at auction, meaning deficit spending is financed by the Government borrowing existing money from the public.

9. Deficit Spending Is Ultimately Financed By Gilt Sales, Meaning 100% Of Deficit Spending Is Financed By Borrowing From the Public, And 0% By The BoE Creating New Money For The Treasury To Spend, and 0% By The BoE Creating New Money For The Treasury To BORROW To Spend.

If the Bank of England ever created new reserves for the Treasury to spend, this balance sheet expansion expands the supply of reserves. When the loan is repaid by borrowing from the public through gilt sales, repayment of the credit line de-issues these borrowed amounts and takes them out of circulation forever. And, the Treasury has not borrowed in over 15 years, so the BoE has not been creating new reserves for the Treasury to deficit spend during the last 15 years.

10. The Paper Shows Tax Revenue and Bond Sales Revenue Fund 100% of Government Spending And Government Deficit Spending.

Forensic accounting shows the reserves that cover deficit spending are borrowed from the public through Gilt sales. Even if the BoE temporarily creates new reserves to loan to the Treasury, the credit line is repaid by borrowed funds from the public, which reduces the supply of reserves, as the borrowed reserves are destroyed and taken out of circulation forever upon repayment of the credit line. Borrowing existing funds from the public currently provides the only long run method to finance deficit spending.

11. Deficit Spending Does Not Increase The Net Supply Of Reserves.

The BoE creates new reserves through Balance Sheet expansion, so if the Treasury does not borrow, there are no new reserves created.

12. The Accounting Within The UCL Paper Shows Without Any Doubt, Taxes And Borrowing are the source of Gov Spending 100% Of The Time.

13. The Government Can Never Run Out Of money Or Involuntarily Go Bankrupt Because By Law The BoE Will Always Pay The Government’s Bills, And The Treasury Can Always BORROW, but the BoE never creates new money for the Gov to spend without it being a loan.

14. The Rules Could Be Changed

Yes, we all understand and agree the U.K Government (and the U.S. Gov) are following self-imposed legal and fiscal restraints, and these could be changed. However, we should also all be able to agree, contrary to the authors’ conclusions, for the last 15 years, the data shows the U.K. Government does not borrow from the BoE to deficit spend, and thus no new reserves are created, there is no expansion of reserves and no new money is created for the Government to deficit spend.

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