Before the election, I said that we Would face the worst inheritance Since the Second World War. Taxes at a 70 year High, Debt through the Roof, And Economy only just coming out of Recession. When BBC asked a Professor at the London School of Economics about that claim, he responded, "I struggle to find a Metric that would make that statement Correct."

Good People could do Good Things, Bad People do Bad Things. For good People to do Bad Things, it takes Religion. In my opinion, it now takes Economics. Economists do not model the monetary sector in the macro models. They leave money out completely. The UK has its first Labour Party government in over a decade. You'd have to be living under a rock in the UK to not know that a major focus of this budget is to eliminate what Chancellor Rachel Reeves called the £22 billion pound black hole left to her by the Tory party. Let's have a listen.

Debt at 100 of GDP. That is the inheritance that they left in black and white. Departments had been allocated money that they were spending, but which did not exist. The money was not there. A £22 billion pound black hole which, if not tackled now, will pose risks for years to come.

And that's the point I want to investigate. And these sets of videos, because that's a very common belief in economics it's a common belief in the popular public. It's a common belief amongst journalists, and it comes from economic theory as well, which enforces this. And in fact, it's a source of these views. So let's take a look at a typical economics textbook here. This is, Gregory Mankiw's macroeconomics textbook from 2016. And this is the very first mathematical model that Mankiw introduced to his students, based as usual on a supply and demand diagram. So he calls this the, this is the market for loanable funds. The good that's being sold is money, loanable funds, there's a supply curve, which in the early model is shown as fixed. It's shown as rising, as their interest rate goes up in later models, demand, which comes fundamentally from the firm sector, borrowing from the household sector, which slopes down, the lower the interest rate, the higher the level of demand, you reach equilibrium as in almost every economic model. Now, what if the government gets in the way? Well, this is the argument. Again, this is the next page of Mankiw. What's the effect of an increase in government spending by Delta G? The immediate impact is to increase the demand by the same amount. He's assuming the total output is fixed. That doesn't have to be the case, but I'll, stick with his assumptions here. Disposable income and consumption is unchanged. Therefore, the increase in government purchases must be met by an equal decrease in investment. Government purchases, crowd out investment, and this is the drawing, pardon me, of the same argument. Here's the supply curve before the government gets involved. The government borrows this gap here that reduces the supply rate available to the private sector, which drives up interest rates and reduces the level of investment and that's the future catastrophe that Reeve sees and she has this in common with most economists around the world except me as you'll soon see and most journalists. So here is the same situation playing out in Australia where the Australian Labor Party government is trumpeting the fact that it's for 2 years in a row now, it's run a budget surplus rather than a budget deficit. So taxation has been greater than spending and that's, talking up its economic credentials and bring down the cost of living. If you look at, what Reeves has said in her own speeches after, becoming, a chancellor rather than being in the opposition. Balance the books. This is the necessary achievement. there's been growth figures coming in, but we still got to balance the books. We have to get spending equal to income. And this is the driving principle of this way of thinking. And what she thinks will happen if the government does that and gets out of the way of the private sector, there'll be a boost to investment. This is what Robert Peston reported. She said to labor party MPs, sometime before if we show as I believe we will, that economic stability is the hallmark of labor governments. There is no limit to what we can achieve because with that stability comes investment with investment comes growth. With growth comes prosperity. Fundamentally, this argument bid in reverse. If the government reduces its spending, there'll be more investment and that will lead the economy to grow more rapidly. And as I said, that's a conventional economic belief. Now, one thing which if you're not trained in economics, you will find remarkable, and if you are trained in economics, you think it's natural. Economists do not model the monetary sector in the macro models. They leave money out completely. They have models of how money is created, which I can show are wrong, but they fundamentally don't do what is essential to understand the monetary system, and that's do double entry bookkeeping, because what banks are fundamentally is engines that create money and distribute money using the principles of double entry bookkeeping. Now, as it happens, I've designed the only computer program in the world that enables you to look at this from the perspective of an overall economy. You can do the double entry bookkeeping and see what your financial situation is, what the rest of the world's is, and so on. And I think it's critical that people who are worried about this approach, coming out of a social democratic party. You expect it from the Tories, but cut back on government spending proposed to eliminate a winter subsidy, to keep pensioners from freezing to death during winter as that's going to be good for the economy Coming out of a social democratic party, there's something going wrong here and I think it actually is necessity for any Labor Party activists who want to reverse this trend in government policy to actually understand it themselves by being able to build these models. So what I'm going to do here with a Ravel model and I've just put the beginnings of it here on screen before I started doing the recording. I want to show what Rachel Reeves thinks is the situation for government borrowing and that is consistent with what economic textbooks teach. It's consistent with what media, journalists in general also believe. The government has to tax before it can spend. Taxing for the government is like income for a household. If the government has spending which is greater than its taxation that it has to borrow money. That borrowing of money sets up 2 problems. First of all, it's taking money away from the rest of society. So there's, therefore a fall in economic activity because of the government's excessive spending and borrowing to cover that spending means there's less available for the private sector. So the economy slows down as a result. So we're going to get a greater rate of economic growth if we can eliminate that budget deficit and provide more money for the private sector to invest. Now I want to examine that and say, what does it look like when you put this together in double entry bookkeeping terms? And what the fundamental vision of loanable funds is that households save and firms borrow from households. And then the government doesn't save and also borrows from households, and that's what causes a problem. So I'm going to quickly bring up a design table here where you can see like this in more detail. Take that zoom in a bit. And what I'm now going to do is put in the sort of transactions that happen necessarily in the economy, whether you have a government or not. Firms reducing output, workers being paid wages, workers consuming, and so on. And the way you fill these things up is you create an extra row here. And I'm going to say, for example, let's say, firms pay wages. that's going to be a transfer of wages, which will be, several hundred billion pounds for the year, in the UK economy. So you're going to have minus wages coming out of the firm's account and going into the household's account. And you'll notice that before I hit the, click outside this window here, Ravel is doing a calculation that makes sure the accounting is correct, doing it much more simply than you have to do if you're actually doing an accounting degree because the basic rule in double entry bookkeeping is that your assets minus your liability equals your equity and therefore at the aggregate level and in each individual transactions, assets minus liabilities, minus equity must equal zero. So Ravel is checking this all the way through as you type an entry here and said, okay, you've typed minus wages into the firm's liability, meaning the bank has liability to both firms and households, deposit accounts for you are your assets, they're a liability for the banking sector, so to transfer, one liability, the banks goes down, another one goes up, the balance is zero, that's properly entered, then we're going to have, households consumed. And that's going to be another flow. For all the best of intentions, people like Rachel Reeves are committing catastrophes. I remember saying, back in the days when I worried about religion a bit, saying that good people could do good things, bad people do bad things. For good people to do bad things, it takes religion. In my opinion, it now takes economics. So people, for the best of intentions, I have no doubt that Rachel Reeves believes what she's going to do will benefit the economy. It's going to penalize the economy, but you have to be able to see this through double entry bookkeeping at the financial level to understand why. Okay, back to here. So consume. So it's a minus and a plus. So that row balances. and then I'm going to have firms borrowing money for a whole range of reasons. Investment. Working capital and so on. So that's going to be an amount of money coming out of the accounts of the household sector, and that's going to go to the firm sector. I've got to click again to make sure that yellow band comes up. So there's that row balanced and of course you've got to pay interest. So it's going to be a flow from here, minus interest, and I'll type a subscript by typing an underscore key. And then curly brackets to subscript all of the text after there, so it's, this is little technical details in Ravel, which again I would like people who want to take on the orientation the Labour Party has now got under Starmer and with Reeves as the Chancellor. You have to understand this. This is the only way really to be able to prove that what's being done with the best of intentions is the worst of ideas. So minus interest coming out of here, that's paid by the firms, to the households. And then one little things, how do the banks get on the act here? according to loanable funds, banks are intermediaries. They enable savers to interact with borrowers. So they've got to be paying an introduction fee. You might call this the Ashley Madison theory of banking, which is what I do call it. But anyway, let's say so bank fee. So that's going to be a payment which goes from the households and that goes to the equity, the short term equity of the banking sector. The equity of the banks is like their own personal bank account. And then that's the account they can spend out of. It's not their long term equity, It's their short term equity. Things they pay wages with they buy goods and services themselves. That's where they get their income. So I now type a plus fee over there, and that's now balanced. And then we're going to have bank spending, because banks actually do spend. They spend very slowly, but they do spend. So I'm going to have minus spend coming out of here, and that is going to go on the firm sector. I'm going to just make it simple to, include spending on the, household sector as well, but it's, I'd start having fractions everywhere on the table. It gets a bit messy. So I'll just assume it all goes there. I will put taxation on both the household sector and the firm sector when I get to that level. So that's the basic idea of laying out a table. I haven't got the government involved there as yet. And that's where I've got a few more rows here. So we're going to have taxation. And in that case, I'm going to say, half the tax is taken from firm sector and half goes from the household sector, but of course tax revenue goes to the government. So taxation is going to increase the bank account of the government, and now I'm going to have 0. 5 times tax taken out of the firm sector and 0.5 times tax taken out of the household sector, and I've made a mistake, as you can see, I have to put the minus keys in. And this is what Ravel is there for, to check and make sure your logic is correct. So I can go back here and click, and put a minus there, and click over here, and put a minus there, and now that row is correct. So this is the advantage of doing this using a double entry bookkeeping. There are programs called system dynamics programs that let you model flows and stocks and so on. But none of them have this particular tool. So there's taxation. Now if the government spends, that's going to come out of the bank account of the government. So minus spent here. And I'm going to be subscript and type gov for government there and put 0.5 of that to go on the firm sector and 0.5 to go on the household sector. Okay, so that's got government spending and now I'm going to include one, of course you've got to, of course the government is now going to borrow. So this is going to be the government selling bonds. So that's the form government debt takes. You and I might go and get a mortgage from a bank. The government sells bonds. And then those bonds promise an interest rate. So of course, that's going to be extra revenue for the government. So bonds go in here as a positive. And to make it simple, I'm going to assume that only households are the ones who buy the bonds. Otherwise, I point fires all the way through the table. It gets rather messy. So the households who are also actually, necessary. to mimic the model of loanable funds because it's supposed to be the household sector providing the funds so the government borrows from the household sector. So minus bonds there, that line is correct. I'm going to include one more line, which is interest. So once you've got the bonds, you've got to pay interest on the bonds. So government pays interest and that's going to be an outflow from the government account of minus interest subscript gov and that goes to the household sector. And then there's one more row I'm going to add here which is Open Market Operations, because the central bank, the Bank of England in the UK's case, is always involved in buying and selling bonds off the non government sector. You'll see why this changes when I put the whole model together. So open market operations, and that, Is, you buy the bonds off the public, then you increase the amount of money the government, the public has, the private sector. And that turns over here, that increases reserves. So that's a very simple but accountably accurate model of what the textbooks think goes on when the government borrows money. You don't have a complete picture of the financial system until all, financial assets are also shown as financial liabilities and vice versa. So you have got reserves shown as an asset, firms, households and government shown as a liability and banks as equity. I now need to have another set of tables, four in fact, which can have reserves as a liability and these three as assets and all the other consequences

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