The Economist who saw 2008 coming — on China and the West

So, you know, you've described, you also just now described China as an engineer-led state, but you also described them as running substantial budget deficits that channels them into infrastructure and production capacity rather than austerity.

Yeah.

How does

that model actually work? Well, this is where you need to know the accounting.

And on this front, I've invented the only software package that enables that at the moment.

That's at least the only one you can get for free or low commercial price, which is now called Ravel.

It was called Minsky.

And it's designed to do integrated double entry bookkeeping analysis of an economic structure, whatever that might be, a company, a country, et cetera, et cetera.

When you put government deficits into that, it becomes obvious that the government doesn't borrow money when it spends.

It creates money when it spends.

And equally applies to paying interest.

If they issue bonds, which they do not have to do to create money, issuing bonds is not an action which creates money.

The creation of money is a simple decision to spend more than you take back in taxation.

That creates money.

Now, that's fiat-backed money.

That's money bought by the power of the state.

And the power of state should not be trivialized, even in a weak state like America or Germany, let alone a strong state like China.

So the state can back its money in that sense.

It doesn't need to be back to gold or the usual commodity fetish that so many Austrian-style economists have.

So fiat money is one of the two main forms of money that are a market economy has, the other being credit-based money created by the banking sector.

So banks create money by making more loans than they get repayments.

The government creates money by spending more than it gets back in taxation.

So that's actually, it's not a question of it's bad to run a deficit.

It's necessary to run one to create fiat backed money.

And then the question is, how much are you creating? How does that compare to your current physical resources? How are you using it to mobilize the creation of new resources? That's what actually matters.