Money is an illusion

"What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this (and the paper does admit, if you read it carefully, that the central bank does fund the government after all). So there's no question of public spending "crowding out" private investment. It's exactly the opposite.
Why did the Bank of England suddenly admit all this? Well, one reason is because it's obviously true. The Bank's job is to actually run the system, and of late, the system has not been running especially well. It's possible that it decided that maintaining the fantasy-land version of economics that has proved so convenient to the rich is simply a luxury it can no longer afford.

But politically, this is taking an enormous risk. Just consider what might happen if mortgage holders realised the money the bank lent them is not, really, the life savings of some thrifty pensioner, but something the bank just whisked into existence through its possession of a magic wand which we, the public, handed over to it.
Historically, the Bank of England has tended to be a bellwether, staking out seeming radical positions that ultimately become new orthodoxies. If that's what's happening here, we might soon be in a position to learn if Henry Ford was right."

The truth is out: money is just an IOU, and the banks are rolling in it | David Graeber

David Graeber: The Bank of England's dose of honesty throws the theoretical basis for austerity out the window

theguardian.com|By David Graeber

Comments

JamesValencia
18 Mar 2014 7:06

Precisely.

Some of us have been going on about this for ages, in an amateur way. Money is an illusion floating on a cushion of belief. When that belief deflates, then the value of money goes down.

So the common argument from the right: "There's no money, my Gran never borrowed a penny, avoid debt" is a fiction born of ignorance and conversative instincts.

The only important thing is exchange and division of labour: Will A accept a promise from B which can be passed on for something from C ?

That is the amazing power of money: Instead of exchanging potatoes for coal, and coal for entertainment, say, the exchange is made abstract, and infinitely more fluid.

Unfortunately, the massive increase in exchange and consumerism that this fluid exchange brings seems close to making us extinct, because we are destroying our environment.

Incidentally, that nobel prize winning economist Paul Krugman from New York has been saying things not far off this for ages.

It is interesting that the banks have just cottoned on.

montfleury
18 Mar 2014 7:00

I had to move from science into finance a while ago. For a time, I really did wonder if the amount of money in an economy was a conserved quantity like mass-energy. No one I worked with seemed too curious as to the fundamental properties of money, which I found odd, but let slide because, you know...rock the boat, emperor's clothes.

With hindsight I wish I had persisted with asking those questions. It turns out that money is more akin to the particle/anti-particle pairs produced by quantum fluctuation rather than more conventional matter.