The Self-financing fallacy

Taxes Don’t Destroy Money — They Deposit It in a Dead-Zone Drawer

Economists love a good magic trick; the trouble is, too many nationalists are so taken in that they think the magic is real. 

In The Self-Financing State (SFS), many nationalists are reading at best the abstract of the paper and coming to the conclusion that taxes are destroyed on receipt and all government spending is new printed money.

The paper is a very good analysis of the model of UK financials and I'm not saying it's wrong, in its own terms. It's the terms I would challenge, as you will soon see. 

More importantly, what I am saying is many many people are misreading it and misquoting it, and that may be deliberate on the part of the authors as it makes it much more controversial. Afterall who doesn't love a good magic trick. 

Every good trick has a sleight-of-hand and it's often dropped right at the start; the rest is just showmanship teasing the audience until the big reveal. True to form, this happens on page one of the SFS where money is quietly redefined.

Money is no longer “pound in the pocket.” Now money only counts if it’s held by the private sector — circulating reserves, spendable deposits. 

That redefinition is crucial to everything that follows; you miss it (as most Scottish nationalists do), and the rest seems like magic.

With that, you can now confidently give the reveal: **taxes destroy money**. Whoosh! Gone.

Now look at the trick when you know the sleight of hand. Taxes destroy money (provided money is defined as held by the private sector). Of course, then taxes destroy that definition of money because it’s no longer in the private sector but the public sector. 

But with a ‘normal’ definition of money, that is, the asset of money, it’s not extinction for money — it’s at best in **exile** and transferred from the private sector to the public sector (and probably not for long). 

It’s best illustrated with a simple example. Let’s take Bob. In this scenario, to simplify things and make it easier to see the trick, let’s imagine the UK has **no debt and no deficit** — a clean slate. 

Bob pays £1 in tax from his account with his bank. His bank passes that on to the government through a debit on its reserve at the Bank of England. The Treasury gains £1 in the Consolidated Fund. That night the sweep kicks in: the pound slides to the Exchequer, then parks itself in the National Loans Fund.

Now under a deficit position that NLF balance would be used by the DMO to manage the debt position of the government. But in this scenario there is nothing for the DMO to do, the money is now parked in the NLF as a positive balance. 

The £1 still exists — sovereign, spendable, backed by the UK state. It’s not circulating, sure. It’s inert, like cash in a government mattress. Those taken in by the MMT sleight of hand call it “destroyed” because, well in their definition it is. But without that definitional change it’s not destroyed it’s just switched from the private sector to the public sector, which is what most people think taxes do. 

Taxes don’t destroy wealth — they demote it from private pocket to the public vault. The pound is warehoused, not wiped out.

They say in the days of social media that magic is just as interesting because there are many accounts explaining how the trick was done. That shouldn’t ruin magic for you though, it should just let you appreciate the showmanship on show as well as let you watch the moment the audience is suckered in. 

When you know the rabbit never left the hat, and that it was just hidden in plain sight, the fun is watching the audience.

So next time you see someone citing the Self-financing state, maybe just enjoy yourself and watch for the moment they realise that rabbit never left the hat and it was hidden in plain sight all along.