Money in, money out

At this time of political decision making, much of the debate on the media is about how an incoming government will finance the spending it proposes. Unfortunately, most of the discussion is full of misunderstandings, half truths or just completely wrong. There is no direct link between tax and spending when you are the UK government. 

Money in, money out

If I buy something, a financial transaction takes place. A number in my bank account is made smaller and another number in someone else's account is made larger by the same amount. This is how all financial transactions are carried out. The numbers represent multiples of a unit of account called the ‘pound Sterling’. The sum total of all the transactions carried out in the UK over a year is called the Gross Domestic Product or GDP. 

Where did my pounds come from? For the most part, I earned them by selling my labour to a company. Where did they get them? Most likely, they were subcontracted to do a job by another company. Continuing backwards, every trade that occurs passes those pounds from one financial identity to another, be it a person, household, small business, large corporation or other institution.

It should be noted that these pounds don’t physically exist any more than points on a scoreboard exist. The notes and coins that many associate with money represent only about 3 per cent of all the pounds in circulation and they are really little more than official vouchers that represent pounds in an account somewhere. The vast majority of pounds exist as a number on a ledger of some form, mostly bank accounts.

At what point did these pounds start their journey through the economy? After all, there are trillions of them out there. Where did they all come from? Who issued them? Did they instead spontaneously arise through some process of value creation?

We certainly have the ability to add value to something and we talk about 'making money' in the language. You can acquire raw materials from the earth; maybe clay, stone, metal or wood. By turning them into something desirable, even valuable using your craft, skill and artistry, you now have something that you can sell. You can make money from it. But you are not actually creating new money. Pounds are merely being passed from someone else's account to yours. You have gained pounds that you didn't have before but someone else had to take a loss of pounds of equal size.

New money

In the UK there is one entity that has the legal right to issue the pound. This is the UK government. How does it do that? Essentially all that has to happen is that somebody goes up to a keyboard in the Bank of England and, with a few clicks, makes a number in a bank account larger.

Here is the process in a bit more detail. Every commercial bank in the United Kingdom has an account with the Bank of England. It is called a reserve account because it represents that bank's reserves. If the government wishes to purchase something from company XYZ Ltd., it has to instruct the Bank of England to credit the reserve account of the bank with which XYZ Ltd. has an account. The commercial bank can then credit XYZ Ltd.’s current account and the government gets what it was after.

By this process, the UK government has created new pounds. This is because only the UK government has the power in law to issue the currency. It didn't have to get the money from anywhere. It merely created it.

From that transaction onwards, the new pounds in XYZ Ltd.’s current account can flow to the accounts of other identities; maybe to their employees or to equipment and raw material suppliers. The pounds jump from account to account, being decremented from one and incremented to another, enriching the population and increasing GDP. 

As an aside, there is another mechanism by which pounds in the economy can be created. Commercial banks are able to do so by creating loans to their customers. However, these pounds have a relatively short life because they have to be paid back, effectively cancelling them out.

The bank will also receive interest in addition to the return of the loan amount and those pounds represent real income for the bank. They can continue their journey from account to account, perhaps used to pay the salaries of the bank’s employees, cover the costs to the bank of its buildings and infrastructure, or be the profits that go to its shareholders.

The pounds’ graveyard

What is the ultimate destination of the pounds? Some will spend extended periods sitting in savings accounts. However, in the long term, pounds will end up being returned to the government as tax, to be destroyed, deleted, wiped out, removed from existence much like how points can be deducted from a scoreboard.

In summary, the UK government spends money into existence and then destroys it by taxing it out of existence. The reason they do this is all about power and control. 

Power and control

Whatever the style or politics of a government, it represents the most powerful entity in a country. It makes the laws and it enforces them. If it can’t do that, it fails to be the government and a more powerful force then takes over. In some instances, the switch from one government to another is bloody and violent. Fortunately, in many countries, the process has been refined to one where the population gets to vote on who has the power to make the laws and thus the changeover is peaceful.

Any government will have an agenda, things it wishes to achieve, whether it is creating new infrastructure, fighting a war or looking after the sick and needy. Such goals will require the physical resources of the land but more than that, they will require the labour of people. The government needs people to build things, to be soldiers on a battlefield or to care for others. It could simply try to force people into these roles, a strategy that has little long term success. Alternatively, it could pay them.

In order to pay someone for service to the government, a currency is required. This can be anything that represents a perception of value. This is where tax is useful. If a government (being the most powerful entity in a country) imposes a tax, an obligation to the government, it has to say what it will accept as payment.

In the UK, only pounds are accepted as payment for the UK government’s taxes. It won’t take US dollars, Icelandic króna, supermarket vouchers, pretty seashells or gold. It must be pounds Sterling.

With taxes in place and a currency in which it must be paid, the government has created a monetary system. The population must acquire the pounds so that they can pay their tax obligations. This frees the government to purchase anything it wishes to acquire that is priced in its currency. This puts pounds where the population can acquire them. It has created an economy.

Limits on spending

This monetary system has some interesting properties. First, since the government creates the pounds when it spends, there is no numerical limit to how many pounds it can generate. The logic of the arrangement is that the government can always make a payment. It can never go insolvent. It cannot go broke.

This is a scary statement to many folk who imagine visions of freely-spending governments bringing on hyperinflation. However, it is worth understanding up front that just because there is no numerical (so-called fiscal) limit, there are nevertheless real constraints to a government’s spending. The resources (mostly labour) have to be available in the first place. 

If such resources are scarce, their price will rise as government and everyone else tries to outbid each other to acquire them. This is inflation. As long as inflation is at a low level, the UK government is free to purchase what it requires to achieve its goals.

Why tax?

Another property of the UK’s monetary system is that the revenue from taxes does not pay for government spending. This is another scary statement that runs completely counter to the common notions of tax and spend. The vast majority of the public believe that taxation directly pays for government spending, yet it does not. However, it is required to make that spending possible, even though there is no direct link between the two.

Taxation is required for other reasons. As discussed above, it forces acceptance of the government’s currency. It makes the currency legitimate because we must have the pounds to pay our taxes. In a real sense, a pound is a tax credit.

Taxation also acts as a means to take the currency back out of circulation. If inflation starts to become a problem, the removal of money through taxation acts as a brake against the spending of people and businesses. Higher taxes mean they don’t have as much money available to outbid one another for resources and this puts downward pressure on prices.

A minor role for taxation is as a tool to help modify the behaviour of the population. Things and actions deemed bad for us are taxed in order to discourage them. Taxes on fossil fuels, smoking and alcohol are examples of these. In some cases, negative taxation is used to encourage other behaviours. For example, the US government offers tax credits to those who buy a new electric car in view of its lower tendency to pollute the environment.

Why borrow?

If the government is not limited fiscally (it can generate as many pounds as it wants and give them to somebody), then why does it need to borrow? It’s a good question and one whose answer lies in history.

Through the 19th and 20th centuries, the value of major currencies was directly linked to gold; this shiny, yellow metal being thought of as some kind of absolute measure of value. For example, in the late 1930s, 35 US dollars were directly exchangeable for an ounce of gold. This placed a severe restriction on the amount of money available to a country. A quantity of the metal had to be kept in vaults in case the government was called upon to exchange its currency for actual gold.

In this arrangement, governments are really currency users, not currency issuers. If such a user government wanted to carry out extra spending, they either had to raise taxes or borrow from the market. However, when it came to borrowing, and being the most powerful entity in the country, the interest offered by a government was considered to be very low risk, if somewhat low in rewards too.

Starting in 1971, the US pulled out of the ‘gold standard’ arrangement. The world’s major currencies followed suit over subsequent years and for the most part, they now exist as so-called ‘fiat’ or sovereign currencies. This is the situation we have today for the UK, US, Canada, Australia, Japan and many others. (As a side note, this isn’t the case for the Eurozone countries, each of which have essentially become currency users since the Euro is outside of their sovereign control.)

As stated before, countries with sovereign currencies can always make their payment. Their governments therefore do not need to borrow, yet they still do. The UK government sells certificates known as bonds or gilts that guarantee that, upon return of the original sum, a payment will be made which we call interest. As we have seen already, they can always make this payment.

The government does this because the financial institutions who trade in these gilts expect it of them. Also, many of those in government still act as if the gold standard is in place. Gilts are therefore a major means by which the government spends money into the economy. This spending benefits investors and pension funds. However, the government didn’t need to borrow the money. They just thought they did.

Gie’s a job

This discussion of sovereign money throws up other important aspects that concern a government’s role in society. By showing that a government is not fiscally constrained but only resource constrained, it begs the question, ought not the government be managing those resources for the best?

By imposing taxes on the population and forcing everyone to use the sovereign currency, the government has essentially created the phenomenon of unemployment. Here it is defined as being anyone who wishes to work in order to pay the taxes but who is unable to find work for whatever reason. In those cases, the government could employ them in some capacity and pay them a wage. This notion is called the Job Guarantee.

The Job Guarantee is a means to manage the available but unused labour in the economy. It can be thought of as a ‘buffer stock’ of labour, ready to be bought up by the private sector when needed. There is no end of jobs needing to be done in the country and the government could use local authorities, charities and other civic institutions to offer employment opportunities. The rate of pay would, purely by market force, set a baseline for wages without there being any need for minimum wage legislation.

There is already an arrangement for a buffer stock for the country’s labour. It’s usually referred to as ‘the dole’. It is an unproductive, means-tested, bureaucratic system which catches people who have been made redundant or can’t otherwise find work. It pays them very little, and it tries to find jobs for them in a private sector which, at that point in time, clearly doesn’t want them.

When work cannot be found, the current system leaves people unfulfilled, unskilled and unfamiliar with the discipline of work. In doing so, it damages them in the eyes of the private sector who are even less likely to take them on. A Job Guarantee would benefit society by maintaining a person’s employment record, giving them skills, experience, references from managers and the habit of regular work attendance. 

The Magic Money Tree

With a proper understanding of what money is and how it works, we can see that the current popular conceptions are deeply flawed. The money that the government spends is not ‘taxpayers’ money’. It’s the people’s money because the government are elected by the people, whether or not they pay taxes.

When someone says the rich should be taxed to pay for the things society needs, they have it the wrong way around. Sure, the rich should be more heavily taxed but only because they are too damn rich, Their excessive accumulation of money raises profound issues of influence and power. However, their money is not required by the government to pay for things.

When someone says that we need austerity in order to balance the books, they are either ill-informed or they are being mendacious. It isn’t the government’s books that need balanced. It is the economy. The government’s deficit is our surplus. Any attempt to balance the government’s budget must extract money from society as a whole and, as we have seen in the UK over the past decade, this can have an especially detrimental effect on those with the least margin.

Counter intuitively, the government must spend into the economy in order for the private sector to be able to spend and save, as well as to pay our taxes. In a sense, there is a magic money tree, but this version of MMT is called Modern Monetary Theory.

It confounds the left because their mantra or taxing the rich to redistribute to the poor is undermined. The government is perfectly able to lend support to the more impoverished parts of society without targeting the rich. This doesn’t mean to say that the billionaires shouldn’t be taxed. We merely need to know the real reason they are.

But MMT also confounds the right. Their ideology of small government acting like a household, balancing their budget and punishing the poor with a programme of austerity is shown to be false and pointless, unless the point of it is to deliberately impoverish those who are already short of resources.

With an understanding of MMT and a clear moral compass, the UK government can spend as necessary to raise all parts of society, and it can tax only as necessary in order to permit that improvement to take place.

Things Are Not How They Seem

Among the giants of science stands Galileo Galilei, by all accounts a genius who could describe the world in a more accurate fashion and would use the experimental technique to verify his ideas.
In the early years of the 17th century, Galileo came into conflict with the Roman church because he had embraced the idea of heliocentrism, a model of the Solar System which had the Sun at the centre and Earth going around it. The Pope and the rest of the Roman establishment held to the belief that Earth was at the centre and that the Sun, planets and stars revolved around it. Not only did the Bible support this notion, it appeared to be self evident. One only had to look up at the sky and see all these things rise in the east and set in the west.

After many years, in the summer of 1633, after they had tried Galileo, the Roman Inquisition announced that he was suspected of heresy and placed him under house arrest. Under threat of torture, Galileo recanted his heliocentric belief. Yet his subsequent writings show that such recantation was disingenuous.
I tell this story of Galileo to show how a deeper understanding of reality can sometimes struggle to be accepted against established modes of thought. When nearly everyone thinks they know how something works, and all agree with each other on a flawed notion, they can become passionately defensive, even confrontational and violent when a better, more accurate and nuanced model comes to light.
Even in the modern era when space flight has been commonplace for over half a century, most people believe that astronauts float around inside their ships because there is no gravity in space. Look at the pictures. It's obvious, isn't it? Yet the truth is that Earth's gravity is almost as strong where they are and that in fact, they are permanently falling around the planet. Things are often not as they appear.

These examples of mistaken popular thought are given to show how the Establishment and the population as a whole are able to move along with faulty models of reality and can, on occasion, attempt to maintain their errors through the use of more forceful tactics than mere logical argument. I believe this is what is now occurring in the understanding of money and in particular, with a school of thought that has come together under the title of Modern Monetary Theory.
MMT is a lens through which we can better understand how an economy works. However, its ideas cut across popular beliefs, and as it gradually spreads through society, some take to increasingly forceful means to counter it. Below is a description of MMT and some of the conclusions that stem from it. It is written from the perspective of the United Kingdom but it applies to any country where the government issues its own currency.

The government's IOU

MMT starts out with a simple statement; the United Kingdom has a sovereign currency. 

This currency has a unit of account called the pound Sterling. It is not tied to gold or anything else. Only the UK government has the legal and sovereign right to issue the currency. This necessarily means that a government with a sovereign currency cannot become insolvent. It can always pay its debts and it can purchase anything that is priced in that currency. This is the first idea that sticks in the throat of popular thought, but it is the case.

When the government needs to spend, it asks its central bank, in this case the Bank of England, to electronically increment the accounts of those from whom it wishes to purchase. It doesn't need to borrow and it doesn't need to tax in order to do this. A proof of this fact is the programme of so-called 'quantitative easing' that occurred when the 2008 financial crisis happened in order to pump money into the banks. They did this by purchasing loans (which they call government bonds) from the banks. By July 2012, the Bank of England had created £375 billion in this programme and it is still doing so, heading towards half a trillion pounds Sterling. It is notable that this creation of money has had little effect on the UK's inflation rate.

When the state creates money, is it essentially creating an IOU, and being the issuer of those IOUs, it can always, always repay them - with its own IOUs.

Gimme your money!

So where does taxation sit within this? Watch any political TV programming in the UK and running through it is the notion that government spending is paid for from the revenue that comes from taxation. The population as a whole believe it and the politicians seem to believe it too, though it is possible that they are merely agreeing with those who would elect them. But if the government issues the currency (and it does), it does not need to raise money through taxation to provide spending revenue. So why does it tax?

The purpose of taxation is threefold. First, it gives legitimacy to the currency. What this means is that the population has to pay its obligations to the government in that currency and only that currency. Therefore, they have to acquire the currency and that forces its adoption. There are serious consequences for those who do not meet these obligations which can include a term in jail.

Second, taxation allows the government to control the amount of money in the economy. If government spending has been excessive, it may find that it has been outbidding the private sector for the country's resources. This is inflationary but can be countered by removing money from the economy through taxation.

Finally, taxation can be used as a tool in an attempt to affect behaviour. This is where the government taxes those things that are perceived to be bad for the population, typically tobacco, alcohol, diesel fuel, excess income.

For these three roles, taxation is an absolute necessity but it is a mistake to believe that tax is required to raise income for government spending. This is a myth, yet it is a powerful one that has been carried over from the days when the currency was tied to a gold standard. The UK went off the gold standard in 1971, yet based on the output of the media, it would appear that essentially all politicians, political pundits and the public believe that government spending is directly paid for through taxation.

Currency issuers and users

A logical conclusion from MMT (that is, the notion that the UK government issues the currency) is that there is no such thing as "taxpayers' money". To tax is to decrement an account electronically. The money is destroyed in much the same way as football authorities might deduct points from a team's score in a league as a punishment. Thus, MMT shows the essential error of the policy of austerity. The story repeated by the politicians is that because the UK government had spent too much compared what it had taxed, that the budget had to be balanced. This thinking stems directly from Margaret Thatcher's belief that a government had to act like a household. While such financial housekeeping is true for "currency users" like households, companies and states without a sovereign currency, it is not true for states that do have a sovereign currency because they are "currency issuers".
The job of the currency issuer is not to balance the budget. It is to balance the economy; to ensure that the resources of the economy are fully utilised. This distinction between currency users, who have to balance their incomes and outgoings, and currency issuers, who should be balancing the economy, is crucial. This means finding the balance between maximum employment and inflation.
Thus an enlightened government, one that understands money theory, will spend as necessary to keep unemployment low yet will not spend so much that government work begins to outbid the private sector because to do so would cause inflation. It would not worry about so-called "deficit spending" because it would understand that the government's deficit is the private sector's surplus. This is simple double-entry book keeping. The deficit of one entity is the surplus of another.
The government must run a deficit if the rest of us are to have money for our economy. The government that attempts to run a surplus will starve the private sector of money. We saw this with Clinton in the US who ran a government surplus. He unwittingly forced his country towards private debt to maintain their standard of living and this lending bubble burst in the crash of 2008.

Job Guarantee

To sum up, when someone says "taxpayers' money", immediately wonder whether they are referring to UK tax or some other entity (e.g. Council Tax or taxation raised by a nation like Scotland). For the UK, there is no such thing. Further, it is worth understanding that a knowledge of MMT gives a government a wider range within which to enact policy decision. They can do more, as long as they don't cause inflation.
Thus we get the idea of the Job Guarantee, a facet of MMT that is really a policy decision and, in my opinion, ought not to be included as part of the MMT framework. Nevertheless, the Job Guarantee is a means of keeping people employed and therefore ready for the private employment market. The Job Guarantee would offer employment to anyone who wishes it and would replace conventional unemployment benefits. It would also do away with the minimum wage legislation because it would pay a living wage that would then set a market base from which the private sector could hire labour at a suitable higher wage to tempt them away. It would keep skills practiced and in place and allow people to maintain their habits of going to work on a regular basis rather than living off benefits. It would inject money directly into the wider economy, where people buy and sell goods and services that promotes real growth rather than tying vast amounts of currency in loans that do nothing.

The Mechanisms of Money

This essay was written in 2018, soon after I first learned about modern monetary theory (MMT). I was using the task of writing as a way to orgainse my thoughts. In its original form, while being mostly correct, it contained a few inaccuracies that were formed from misunderstandings about the topic of macroeconomics. The version of the essay given here was updated in 2024.

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Over recent months, I've become fascinated by a way of looking at the economy which has overturned my understanding of how money works. It has been an uncomfortable discovery because if it is correct, then just about every pundit and politician who comments on the subject is plain wrong. That surely can't be? And a voice in my head keeps reminding me that highly paid commentators and politicians who discuss this country's economy on the media cannot be repeatedly making the same mistake. Yet the logic of what I've learned continually leads me to that conclusion.

Is this just a mistaken notion that I've picked up? Is it a meme that is faulty, but has the necessary attributes to infect my overly receptive mind, one too eager not to question? Or is the fallacy contained in another meme that has passed like the common cold through the public and the heads of the establishment? I think it matters because if those in power are wrong about this, it has profound implications for how our economy is controlled. It means that the levers they pull do not operate how they think.

False economies

Across the UK's political and media world, there appears to be a deep misunderstanding of what money is and how it works. Across all outlets; TV, newspapers, radio and online; from politicians and pundits alike, the core message is that the UK government, of whatever hue, levies taxes to fund its spending. In other words, it has to be run like a household and can only spend what it takes in. If it wishes to spend more, then it must borrow money from somewhere else; from the banks, the money markets or maybe from other countries. The narrative maintains that if spending continues to run ahead of taxation then the size of the government's debt will only increase, burdening future generations with crippling repayments.

The vocabulary used continually reinforces this notion. Any example of government expenditure is unremittingly referred to as having been paid for at the taxpayers’ expense. The need to balance the government budget is constantly driven home. Austerity must be applied to overcome earlier reckless spending. During the 2015 General Election campaign, UK Prime Minister Theresa May stood at a lectern during a televised question and answer session and told a nurse why her wages could not be raised. “There isn’t a magic money tree that we can shake that suddenly provides for everything that people want.”

I think that this narrative, which I agree sounds completely reasonable and common sense, is flawed. It is based on outdated concepts of how money is created and how it then flows through an economy. It is a myth, a successful meme that has the requisite characteristics to be passed from person to person while failing to be adequately challenged. But the mistaken assumptions that pervade this notion unfortunately lead those in power to incorrectly operate the economic levers that are available to them; operational errors that pertain equally to the political left and right. Whether this is deliberate on their part for the sake of following a particular dogma is another question.

Fiat currency

The core question that must be addressed is about the nature of money. Most of the major economies have what are described as 'fiat' currencies; that is, their money is not based on anything solid, like gold. They are also known as 'sovereign' currencies because only the sovereign power in a country has the legal right to issue them. Their value is arbitrary, accepted on perceptions of the strength of a country’s economy. As a result, the exchange rates between the various currencies can and do vary. It was not always so.

Across the turn of the twentieth century, it was normal for major world currencies to have the value of their money linked to a precious metal, usually gold. For example, for a century, the US dollar could be exchanged for the yellow metal at a rate of $20.67 per ounce. Then in 1934, President Franklin D. Roosevelt revalued it to be $35 per ounce, essentially creating 40 percent more dollars out of the gold reserves that the US had in its vaults.

During WWII, the US dropped the gold standard so that it could pay for its role in the war; all the planes, ships, tanks and ordnance it wielded across Europe and the Pacific. After WWII, in an effort to stabilise the shattered economies of the world, an agreement was entered into at a place called Bretton Woods in New Hampshire, USA, whereby the exchange rates of 43 major world currencies were fixed to the US dollar, which itself was fixed to gold.

Then in 1971, President Nixon took the US off the so-called 'gold standard', and the dollar became a fiat currency. This effectively ended the Bretton Woods agreement, and it caused the other currencies to also become fiat (though many, including the UK, failed to recognise the profound change). As a result, the exchange rates between them now float (the pound sterling, the yen, the Australian and Canadian dollars being the major examples). The exchange rates between these countries depend on many factors, in particular, the strength of a country's economy, normally gauged by its inherent productivity and its gross domestic product, or GDP.

The source of money

The way a sovereign currency works, along with the abilities that it offers to its issuing government are described in what is known as modern monetary theory (MMT). This theory describes the core mechanisms of monetary systems, whether they are fiat or tied to something external; e.g. gold or anothr currency.

MMT acts as a lens through which we can better understand the effects of policies within a country. It is usually most useful for a country where the government is the sovereign issuer of currency, but can also be applied where it is not; e.g. Euro countries. This pan-European currency is a recent entrant to the international currency scene. However, it breaks the link between national sovereignty and the issuance of currency. MMT can illuminate the repercussions of that change.

Most of the development of MMT has occurred in Australia and the US and so illustrations tend to be based on the Australian and US dollars. It begins with a handful of basic truths about the nature of money in a sovereign currency, and then goes on to explore the consequences that flow from those.

Back to basics. With a sovereign currency, since money has no direct relationship to the value of anything solid, it begs the questions; where does it come from and what gives it value? MMT points out that a fiat currency is created by a sovereign government as the currency of that country. The denomination of the currency, be it the dollar, pound, yen or whatever, is what is known as the "unit of account." In the UK, this is the pound Sterling and no one else in this country is allowed to create pounds Sterling currency. If they do, they are committing counterfeit.

When the UK government imposes a tax or a fine on a person or a company, only the pound can be used to pay that obligation. It is possible for anyone to create or use other currencies in this country; e.g. printed vouchers, supermarket loyalty points, US dollars and Bitcoin are all examples. However, taxes to the UK government cannot be redeemed with them, for very good reasons.

MMT posits that for a country with a sovereign currency, the link between tax and spending is broken. It is pointed out that a sovereign government creates money merely by spending. If it requires goods or services, or if it wishes to give money away for policy reasons (think state pensions, child allowance or other benefits), it does so by instructing its central bank to credit the 'reserve accounts' of the commercial banks so that they can then mark up the accounts of companies, organisations and persons as necessary. The government might be buying anything from aircraft carriers, motorways and bridges, paying for soldiers, scientists and civil servants; or maybe just purchasing paperclips for parliamentary offices.

Though many often disparagingly describe this as 'printing money', it is a faulty characterisation. The UK government does not print money to buy what it wants. Only about three percent of the currency in circulation in the UK is in the form of printed notes or struck coins. The crediting of accounts is achieved merely with keystrokes on a computer keyboard. It is the job of the central bank to keep the score. There is no movement of banknotes or gold from one place to another. In this arrangement, money is an IOU from the government, stored on a ledger, and they can create as many IOUs as they see fit. Likewise, paying a tax involves the debiting of accounts. Again, the central bank (the Bank of England in the UK) keeps score.

The value of the money is therefore not intrinsic and the concept of a currency is merely a scorekeeping exercise of government IOUs. In the distant past, you could theoretically present banknotes to a central bank under a promise that they would exchange them for gold or silver. Now, were you to present a £20 note, all you'd get back is... twenty pounds!

The money in the system can be likened to points in a game. Is a football league limited in the number of goals and points that can be handed out during a football season? No. They are created on a league table as and when required. All that matters is that someone is keeping the score.

In the game of Monopoly, the banker dishes out money from the bank, either at the start of the game or as the game plays out. Imagine a situation where the banker runs out of cash, what with all the salaries that are paid out when the players pass Go, and with all those Community Chest payments. What happens then? The rules of Monopoly state "If the Bank runs out of money, the Banker may issue as much as needed by writing on any ordinary paper." As long as there is money in the game to keep it going, it doesn't matter that it was created out of thin air. Likewise, with a fiat currency, the sovereign government can generate money as required. Furthermore, the UK government can never go broke for it can always issue money to pay its debts. It cannot be forced into default.

A fiat currency offers a government two important abilities that suggest how economies can be better controlled by those who have their hands on the levers of power. These abilities are concerned with how governments spend and how they tax.

Government spending

With a fiat currency, a sovereign government can purchase anything that is priced in its own currency, and it can do so at will. Indeed, it is important that it does so because this is the only means by which money of a particular currency can enter the private sphere. Once there, the money can be used in transactions, either by people selling their time and labour (salaries) or by them spending the money they earn in shops and on services. All this spending is what is aggregated to a figure that states the size of a country's economy, its gross domestic product.

It is important at this stage not to run away with the notion that such government spending is unconstrained. It is not. There are fundamental limits which are discussed later.

With this freedom, the government can spend on whatever it feels will best serve its purposes. By doing so, money is created that will circulate around the economy. If the government limits its spending, it will likewise limit the money that can flow through the economy.

Distinction must be made between government-issued currency and the pounds that are issued by commercial banks as loans. As numbers in accounts, they appear to be exactly the same. They are not. Bank-issued pounds have a defined limited lifetime, set by the loan term. When a loan is made, not only is the borrower's account marked up by the loan amount, a loan account is also created with the same number of pounds entered into it. They are 'negative' pounds, a liability that balances the asset. When a pound is repaid, it is deleted. The government's currency has no term applied to it when it is issued. Eventually, it will be returned through taxation when it is also deleted. If the government spends more than it taxes, it will be in deficit, but the private economy will be in surplus, able to save the excess pounds.

Taxation

The legal power invested in a government gives it the right to levy taxes on its population. The population must therefore acquire the currency to pay their obligations. Given that it can create its currency at will, why would a sovereign government wish to levy taxes? It must do so to force its currency to be the dominant means of exchange in the land. As a result, most everything in the country will be priced in that currency, and this allows the government, as the issuer of the currency, to purchase whatever it needs. In other words, taxes are a means by which a government can bring a country's resources to itself. (In times past, other means included forcing people to serve, usually in the military, using conscription or more direct physical coercion.)

In a gold standard arrangement, the amount of currency was limited by the quantity of gold in the government's vaults. In this arrangement, the quantity of available money was fixed and if the government wanted to purchase something, it had to acquire that money from the limited pool through taxation. This is taxation for the sake of revenue generation and the arm of the UK state that deals with taxation, HMRC, still has an R in its name which stands for revenue. The name is obsolete now that the UK has a fiat currency. When it wishes to spend, it creates the money. All that is really happening in taxation is that an IOU is being returned to the government. In a particular sovereign country, it is likely that legal contracts will also be written to use that country's unit of account which reinforces the acceptance of that currency.

As a historical note, the word, revenue, is derived from French, 'revenir' which means 'to come back'. This hints at the true meaning behind taxation, the return of the government's currency back to itself. Added to that, we still talk about filling in a 'tax return'. We are indeed returning to Caesar that which is Caesar's. 

There are plenty of instances where taxation is used to raise money for spending where the taxing authority does not have its own sovereign currency. Examples of this include local councils and authorities in the UK. Add to that, the individual states of the US and the countries of the Eurozone. They do have to manage their funding in the household model and for them, taxation is a major source of income. Like you and I, or any company and business, they are users of the currency. The UK government is an issuer of the currency. The distinction is important.

With a fiat currency, since taxation is not directly required to fund government spending, what else is it for beyond legitimising the currency? At the most basic level, it is about the wielding of power. Coercion is used to force the sovereign currency to be accepted over all others, allowing the government to provision itself. Beyond that, the government can use taxation as a lever of policy. Progressive taxation of incomes can be used to reduce the gap between the richest and the poorest. Taxation can be used to affect behaviours that the government deems bad. For example, they can heavily tax vehicles and fuels that cause the emission of noxious gases, and lightly tax those vehicles that do not. Tobacco and alcohol are two widely consumed substances that cause individual damage and so are heavily taxed.

But what about inflation?

The prospect of governments spending willy-nilly raises an immediate fear in most folk because they feel certain that it would result in rampant inflation. This is a pervasive part of the accepted meme. It seems clear to people that if a government 'prints more money', then that money will obviously become less valuable and prices will increase. The narrative insists that taxes and borrowing are the only source of government revenue. But this is to think about money as if we are still in a gold standard world. We are not and haven't been for two generations.

Objections to MMT always raise the examples of Germany between the wars and Zimbabwe in more recent times among others. Regular repetition on the media reinforces the impression that these cases clearly demonstrate what happens when governments print money without adding the context of each case. However, studies have shown that hyperinflation does not occur in stable democracies. Rather, it is a symptom of an economy under extreme stress.

The German example is irrelevant to MMT because it occurred during the time of the gold standard. Further, Weimar Germany was being forced to pay punishing reparations after its defeat in WWI which it could not do. It had lost the Ruhr Valley, a major part of its productive capacity, to France and Belgium. It needed that capacity to buy the gold with which it could pay. Printing money was a symptom, not the cause of its hyperinflation. It did not have a fiat currency.

The Zimbabwe case was a convergence of three powerful influences. The country's agriculture sector collapsed because the government forced land ownership to change to those who were less capable of farming it productively. Zimbabwe then saw a steep rise in imports to compensate for the drop in local productivity. Meantime, the economy was mismanaged by the government, particularly by the imposition of price controls.

In the MMT concept of fiat money, inflation is a symptom of the government's inability to properly manage the country's available resources, primarily people. It must be careful that its spending does not overstretch them. If the government buys so many goods and services that it takes up all the available labour and more, the price of labour will tend to rise. In other words, wages will rise because the private sector has to start outbidding the government for the time and energy that people have to sell; i.e. their labour. And if wages rise, then so does the cost of goods and services that were created by the labour bought with those wages. This is inflation.

In other words, inflation is a sign that a currency-issuing government has spent too much. It has put too much money into the economy, and must take some money out of the economy. This can be achieved either by taxation, which destroys the money, or by selling securities or bonds which are savings accounts that are held with the government. These can temporarily remove money away from where it can be spent.

On the opposite side of the balance is the situation where the government has spent too little. Now the country's resources are underused. Unemployment rises and the affected workforce can grow stale through lack of use as skills are forgotten, new skills never learnt and people get out of the habit of turning up for a job. Thus unemployment is a sign of a lack of investment in an economy.

Deficit and debt

When it becomes clear that, for a country with a currency-issuing government, the money must come from the government, it allows us to gain a deeper understanding of government deficit and debt.

The government's deficit is the difference between the amount of money that a government has put into the economy and the amount that it has taxed back out. Despite the negative connotations that are consistently applied to the concept, it is a usually good thing because the government's deficit is our surplus.

UK sectoral balances. Government deficits equal private sector surpluses - to the penny!

MMT points out that in general, a government must run a deficit in order to satisfy the desire of the private sector to save. In the big picture, the private sector does not save the money generated by commercial loans as that must,by some means, be paid back and thereby deleted.

If a government tries to reduce its deficit, it can seriously damage its economy. An example is the austerity policy applied in the UK after the 2010 General Election (two years after the 2008 crash). In that time, growth in GDP has been below typical.

Perhaps a more striking example is from the US. In an effort to appear to be fiscally conservative, the Clinton administration drove down the US government's deficit. In its final two years, it managed to turn it into a government surplus; i.e. the spending was less than the tax receipts. At first view, this appears to be a laudable achievement. However, the resultant lack of money in the wider economy caused the currency users; the individuals, households and businesses; to rely on excessive borrowing to support their spending, particularly when buying property until in late 2007, gorged on sub-prime mortgages, the lending bubble burst to begin the 2008 crash.

A government's debt is not the same as its deficit. Strictly speaking, its debt is the sum of all the securities or bonds that it has placed onto the market. These took pounds out of the system but at some time, that money will be paid back with interest. This is not a problem for a government that issues its own currency. It can always repay those securities and their interest. That's why they are considered by investors to be extremely safe investments. It is notable, however, that this debt is always characterised as a problem. It is never shown for what it is, the sum total of all our savings. In simple double-entry accounting terms, the government's debt is our surplus. The national debt is really the national treasure.

Political push-back

The mechanisms of money described by MMT run counter to the dominant narrative that is heard throughout the media and from all wings of the political establishment. This narrative contends that, in essence, government spending is directly dependent on money flowing from taxation. It is as if tax money flows into a bank account which the government can access when it wishes to spend.

To put it in the same metaphor that Margaret Thatcher used during her rise to power, the UK government is like a household. It cannot live beyond its means. Money in and out must be the same and the books have to balance. If household spending exceeds income, the deficit must be borrowed and, at some point, the day of reckoning will come when that borrowing will have to be paid back.

MMT contends that this metaphor is flawed because the government is the sole issuer of currency which is essentially government IOUs. It can create IOUs as it sees fit and it makes no sense for it to borrow its own IOUs. The constraints that apply to a sovereign issuer of currency are not the same as those that apply to households, companies or non-sovereign states. Unlike a sovereign government, a household cannot create the nation's currency.

This undermines the political right, who insist that taking money in taxation must be minimised so as not to be a burden on the free market. They continue that if the income to the government is reduced by this action, then so should be their spending. This reduction in government spending suits a right-wing agenda because it chimes with a belief that governments tend to get in the way of personal and business freedom and ought to be scaled back as much as possible. Their assumption is that tax directly funds spending. They don't understand that it is only government spending that creates the money that the private sphere relies on to produce its profits and savings.

The political left also come unstuck through MMT, even though some think of the theory as being a leftist concoction. The left demand that taxation and government spending be used as a tool to force equality in society. They believe that the relatively rich should be highly taxed and the relatively poor, less so; even to the extent that they be untaxed. This is taken to the point where those deemed most needy are gifted benefits in the belief that these benefits are funded by money taken from the rich. If need be, the left will spend more than they gather in tax in order to cure the social problems they perceive, borrowing in the process with the hope that future economic success will pay off the debt.

The left don't realise that the government can help the needy without taking from the rich, Robin Hood style. Nor do they understand that the government ought to heavily tax the rich because money is a tool of power and if too much power goes to a few individuals, that undermines the power basis of the government, be it democratic or autocratic.

Thus both sides of the conventional politic are stuck on the assumption that taxation generates revenue that goes to fund government spending. And if the government needs to spend more than it taxes, it must borrow. This is thinking in the gold standard model and MMT shows that it is wrong.

MMT shows that government spending is not limited by taxes; that taxes are not linked government spending. The fact that MMT runs against much of the dogma of both left and right means that it is often a target for attack from the establishment. Once upon a time, the same was true of heliocentrism, the idea that the planets revolve around the Sun. We now know that despite the objections, it is true.

Borrowing

Since the unit of account in a currency (the pound, dollar or whatever) is essentially a government IOU, the government cannot borrow its own IOUs. It may appear to do so; it takes money as bonds and national savings and pays a guaranteed interest rate, but it can do so merely because it has the ability to pay 'interest' at any time using its own sovereign currency. The receipts taken as bonds or national savings are a bit like taxation, except they are voluntary. Like taxation, they take money out of the private sphere and as long as someone keeps the score, the government can repay the same amount, plus the interest. In fact, under a fiat currency, the issuer cannot go broke for they can always write more IOUs. That's not to say that they should try to go broke, but it illustrates the fundamental difference between a sovereign currency issuer and a household.

What has tended to happen with governments is that they insist, even to the point of legislation, on forcing government borrowing to cover any shortfall between spending and taxation. Therefore, having created money to spend, if they don't then destroy an equivalent amount by taxation, they create savings constructs and call that government borrowing (via bonds and securities). They then assume that one day, the money will have to be paid back using taxation money. It should be clear that this is a fallacy as they can pay the value of the securities any time, along with the interest because they are the currency issuer.

This has an interesting repercussion when it comes to interest rates. The raising of interest rates is always sold as a means to combat inflation. MMT points out that this is not the case. A rise in interest rates moves pounds from borrowers (generally the less well off) to savers and lenders (generally the better off). It reduces the spending power of the former and raises it for the latter. It also raises costs for businesses who often use credit as a means to fund inventory and investment. These costs are passed onto the consumer, raising prices; i.e. inflation. Further, it increases interest payments to those who hold government bonds. Effectively, it increases government handouts to those who already have pounds in proportion to how many pounds they have.

The Bathtub

Proponents of MMT use a metaphor of a bathtub to help explain their thinking. The bathtub represents the economy in terms of the private sphere; companies, individuals etc.; not the government. The water in the bath represents the money that is swilling around the economy, essentially the GDP of a country. There is a level within the bath which represents the point where the available resources, primarily labour, are being fully utilised.

The inflows of money are from government spending but also from business investments, where money is put into the machinery of the economy in order to build things, to develop better things or on pure research. Another inflow comes from the export of goods and services, when other countries buy our stuff and they pay us in a way that is eventually exchanged to our own currency, thereby putting money into the economy where it can be spent by the population.

Money is taken out of the bath by taxes, quite obviously, but also by savings. Saving is generally seen as a good thing and at a small scale, it is. But if everyone were to suddenly decide to save far more than they do now, it would be catastrophic for the economy because far less money would be available with which people could buy and sell. The other means by which the bathtub empties is by imports. When we buy stuff from abroad, money leaves this economy and is therefore not available for spending here.

If too little money is available to the private sphere, then fewer people are buying and selling. There will be lay-offs and unemployment, and the capability of the people to do things and make stuff is underutilised. It is inefficient. Worse, continued lack of use erodes the ability of those resources to come back into use. Skills require practice, and as technology moves on, unemployed individuals fall behind in their knowledge.

If, however, too much money goes into the economy, it will overreach the country's ability to produce, buy and sell. Companies will begin to outbid each other in order to attract the relatively scarce resources. This raises the price of labour and eventually, the price of goods and services. We have inflation.

We can see that through judicious taxation and spending, a wise government can tune the economy to remain at the point where the resources of the country are, to all intents and purposes, fully utilised but not any more than that. Taxes must be levied as necessary to give legitimacy to the currency. Beyond that, they can be used to control the amount of money in the economy; a way to counter the pressures that might cause inflation. They may also be used as policy tools to control behaviour and address problems within society; essentially to tax the bad things like atmospheric pollution, alcohol, cigarettes, environmental damage; whatever. An important point to take from this is that revenue generation is not the purpose of taxation for a currency issuing government.

A wise government can use its ability to spend its sovereign currency to supply things we might need, like roads, sewage infrastructure, defence, environmental protection, health care, education and investment in knowledge and culture. But they must do so only insofar as they use up spare capacity in the economy. Essentially, they should spend to ensure that there is almost full employment.

Austerity

In the years that followed the 2008 global economic crisis, the UK governments (of both political tendencies) pumped tens of billions of pounds into the banking system to prevent major UK banks from going bust. The pounds were created out of nothing using computer keyboards to increment the accounts held by those banks at the central bank. This action increased the national deficit because that money was not directly balanced by taxation. As an aside, since much of that money ended up in property, it did little to stimulate the economy.

Since then, the current UK government has used the size of the deficit as an excuse for a policy of austerity whereby government spending is cut back wherever possible. They explain that, like a household that has splashed out a bit too much on holidays, the latest large screen TV and Christmas, they must tighten their belt to reduce the deficit. Thus, taxes are kept high, grants to local authorities are squeezed and the wages of those in jobs which are financed directly or indirectly by the government (nurses, firefighters, etc.) are prevented from rising even with inflation.

MMT shows the folly of this approach. By cutting back on government spending, the government is reducing the amount of money in the economy. In doing so, they are throttling it, depriving it of the ability to drive the buying and selling that is the very hallmark of a healthy economy. In their attempt to balance the government budget, they fail to appreciate that it is the economy that should be balanced, not the budget. A carefully controlled government deficit is a good thing because if the government is in deficit then the private sphere must be in surplus. Except for exports and imports, that's where the government's money went; into the private sphere.

The tools

Once it is understood that a government with a sovereign currency is not restrained in its spending by its tax intake, then the inevitable question comes up; how should it spend government money?

One of the major proponents of MMT has suggested that a suitable policy for ensuring nearly full employment is to guarantee a job to all comers; the Job Guarantee scheme. This recognises that unemployment is merely an indicator that resources are being unused. In this arrangement, the government would find things to do for anyone who wants a job. It would only pay around minimum wage levels in order not to outbid the private sector and would include rules to insist on attendance on pain of losing the job. The job guarantee doesn’t address the issue of whether the jobs being offered are in any way desirable employment for the money offered.

As an alternative to this scheme, a government can simply choose to buy goods and services on the open market to achieve the goals to which it aspires. It can then play the market like any other customer and can do so to the point where full employment is achieved.

This is comparable to the Apollo programme to land on the Moon whereby companies across the US were hired to build the machines and facilities required for the task. 400,000 people were involved and the programme pumped a huge amount of money into the American economy. The stimulus helped the US to maintain its economic strength well beyond the achievement of the goal. The technological payoffs are still being felt. But it is then incumbent upon those in government to properly manage the contracts involved, something for which politicians are not renown.

Finally the government can directly employ people, paying them from the public purse to supply a service. In the UK, members of the armed forces are paid this way via the Ministry of Defence. As above, those in power must manage this use of resources, though this will be without the mechanisms of the market. Again, politicians are not known for their skill in large-scale management, except perhaps in times of war. However, they can set up agencies to manage projects on their behalf.

In summary

The takeaway points from this essay are:

• When it comes to budgeting, governments with sovereign currencies are intrinsically different from households, companies and non-sovereign states.
• A government with a sovereign currency cannot go bust as it can always pay it debts.
• For a sovereign currency, money is a scorekeeping exercise and as in a game, points (units of account) can be created and destroyed at will.
• Taxation is necessary for a currency to have legitimacy and as a device to control the economy.
• Taxation does not directly fund government spending. It can be used as a policy device, to help control undesirable behaviour.
• To the penny, a government deficit is a private surplus. For the private sphere to be in surplus, the government must be in deficit because it is the government that spends money into existence.
• Only the government can create money. If anyone else does so, it is counterfeit. A commercial bank that lends money must balance that lending with a loan account - a balancing liability.
• A government with a sovereign currency has the power to spend in order to maximise the use of a country’s available resources. It is then incumbent on them to do so responsibly as excess spending will cause inflation. But if the resources are available, it can do it.

Gravity - a review

I read one review of this stunning film that wondered why it was called Gravity (the review was in the Guardian - and it was positive) since most of the movie's scenes are set where there is a lack of gravity.

And there's the rub. At the altitude the film is set, Earth's gravity is almost as strong as it is here on the surface. It's just that the spacecraft and all the other debris are travelling so fast horizontally that they permanently fall around the planet, apparently weightless. But the reviewer doesn't understand this and thinks he knows how it should be up there. Stuck as we are in an environment where everything falls down, most of us are like the reviewer in that we have little idea how things work in the highly newtonian realm of spaceflight.

Gravity does dominate up there and I'll bet Director Alfonso Cuarón knows it. He and the team behind this movie seem to have researched the details of space flight very well indeed. Their work has a reality that is utterly compelling and believable. The lighting and textures of the ships, their components and, most important, of Earth itself are as if taken directly from the reams of photography that has come to us from recent actual space travellers. Yet Cuarón has carefully bent the truth enough to allow his story to play out so that it probably requires a geek to be able to pick holes in the technicalities.

I'm often described as a space geek and I saw much that I could pick at - in the physics, procedures or storyline. But I didn't care and neither should anyone else. This vicarious trip into the glorious vacuum above Earth was a treat, a reminder of our puny selves in a great universe that does not need nor care about our presence. The film accurately portrayed the beauty of our home and the place it has near our Sun while pointing out that we only get to exist off the planet by our intelligence and wits. This could also be true for our species on the planet if we want to maintain our civilisation.

The movie's first shot is very, very long, and bravely so, displaying Cuarón's sensitivity to the IMAX format. In it, Clooney and Bullock sadly start out as an annoying double act. He is seen showboating around the Shuttle and Hubble in a jetpack with a carefree wisecracking one-dimensionality that was in complete contrast to the film's spatial and metaphorical depth. No astronaut would ever act in such a cavalier fashion. Bullock, meanwhile, sets a tone of a barely professional astronaut who, at the drop of a space wrench, turns into a panicking insult to the intelligence of womanhood.

I struggled to buy into Bullock's character until the second half. Her daughter's backstory gave some 2001-esque depth and emotion to an otherwise simpering little girl of a character who did not display much of the toughness and competence I would have expected from anyone in the US astronaut corp. Only towards the end did she show the kind of thoughtful pluck drilled into these hard-nosed technocrats.

The claustrophobic quality of the spacecraft interiors inhabited by Bullock sat in awesome contrast to the infinite exteriors rendered by Cuarón's special effects team. This is perfect material for the Imax 3D format. Such care had been taken with the details. So many nods to real events in space flight - interior fires, flooded capsules, crashing Soyuz. I nearly cheered when I recognised the constellations in view over the night-time Earth.

The re-entry scene was stunningly realised. I felt like I really was seeing hardware passing through air at 5 miles per second. It was the visual highlight of a visually stunning movie. As I left the cinema, I heard a guy behind me say to his friend, "That's what Imax 3D was made for." Amen, my friend.

Hybrid car - continuing impressions

It just so happened that my hybrid Yaris was bought at the same time as my son was attempting to climb all Scotland 282 Munros (mountains over 3,000 feet or 914 metres) in a single season. Consequentially, I've done a lot of driving around in support of his endeavour and this has given me a lot of experience with the car. Overall, I'm very much enjoying the car as I get to understand its characteristics. With all these miles around the country's Highlands, I tend to keep my fuel consumption between 65 and 70 miles per gallon.

Then we left for a three-week spell to cover his final push to the end of the challenge. During that time, I felt a change in the car's performance. Gradually, over the first week or so, the car felt a little more sluggish, as if something was holding it back. It seemed to need a little more power from the engine to get it going and was less keen to drop into fully electric mode at slow speeds. As a result, the battery discharged less often and, for the first time, I saw the battery display show it as being full.

The consumption figures reflected this change. Throughout the three weeks up north, the consumption stayed solidly around the 60mpg mark. I became increasingly certain that something within the car had changed. I was convinced that my driving techniques were very similar to what they had been before the trip, when I had been following my son along roads further south. The sense that something was holding the car back was a disappointment and I began to think of how I would approach the subject with the mechanics. "Hi, I think I've detected a 10 per cent drop in my car's performance. Can you run a battery of tests to confirm this?"

There are a lot of possible sources of increased friction and the obvious culprit was a soft tyre so I made a point of checking them. Nope. Perhaps one of the brakes was the problem but how do I check that? That or any problem with the car's traction system would have to await specialist work when I return. What made it worse for me was that the early part of the tip was during a heatwave when the atmospheric density was lower and therefore so was the drag, something that should have countered my perceived problem.

Then we made the long trip back.

Soon we had left the winding, undulating single-track roads of the far north and were back on 2-lane roads with a higher average speed. As I emptied the tank, I watched the mpg meter slowly increment to a better figure. Then after a top-up at Pitlochry, I found it easy to maintain 55mph at about 70 miles per gallon - that was as good as I was getting before the trip.

Since then, the car's performance has been exactly as I was used to prior to the trip - the meter is currently sitting at 71mpg as I tootle around town. My current hypothesis invokes a mixture of the stop-start driving that is constant feature of the single-track road with its passing places, the very steep undulating nature of the landscape and its roads, and a notion that the road surface preferred up north is maybe different to cope with the harsher winters and the need to provide more grip. I don't know, but I'm sure happy to see that the car is fine.

Hybrid car - initial impressions

Those who know me know that I like to explore technology; like computers, synthesisers, cameras, video, GPS, aircraft, spacecraft, and so on. Unsurprisingly, even cars do not escape my interest but not in the usual petrolhead manner. Unlike just about all men I meet, my interest is not in raw power or seat-bending acceleration. I like to see efficiency. I'm an eco'miser' and love it when I get high figures for a vehicle's consumption (in miles per gallon).

Ever since I got my first car in 1983, I've kept a careful note of how many miles I drive and how much fuel goes into the car. This quickly settled into a particular methodology in order to try and gain consistent results that would be more of a measure of the car's actual efficiency and less of an indicator of my poor measurement techniques. Therefore, every time I go to a petrol station to fill up, I always do so to the point where the pump stops the delivery automatically. I then restart filling and if it stops soon after, that is a reasonable confirmation that the tank is full. Sometimes the pump does stop prematurely but I tend to know when this has occurred because I'm usually aware of how much should be going into the tank. An additional part of the routine for many years was that I would then dribble in a bit more to round the money up to the next 10 pence. However, the high cost of fuel has made this impossible to achieve accurately and I've given up on that. I do accept that all this is probably an example of mild obsessive/compulsive behaviour but I don't worry about that.

Next I take a note of the car's odometer. Until the advent of the computer spreadsheet, this figure and that for the fuel would be entered into a notebook so that once I got hold of a calculator, I could work out the MPG figure. Since I knew how many miles I'd done since the last fill, and how much fuel had been required to restore a full tank, then a simple division would yield a figure for consumption - as soon as I had converted litres to gallons. I still have the accurate conversion factor in my head - 0.219975!

This constant measurement of consumption does tend to teach one a little about the efficiency of cars. I've seen how winter driving is a lot less efficient than summer driving. This is for a host of reasons - some obvious. Headlights and fans are power-hungry and they get it from the generator which slows down the engine more when a heavy load of electricity demand has to be delivered. A less obvious reason for poor consumption in winter is the fact that cold air is significantly more dense than warm air, a detail that every aircraft pilot knows. At standard temperature and pressure, a cubic metre of air has a mass of about 1.25 kilograms. That's a lot of mass that has to be shoved aside when hammering down the motorway which is why driving at 70 mph is significantly more expensive than driving at 50. Further, that air is roughly 8 per cent more dense at zero Celsius when compared to 20C.

Then there is driving style. Every touch of the brakes means lost momentum, which had to be paid for in petrol in the first place so anticipation pays. When the accelerator pedal is depressed, extra fuel is squirted in to make the car respond. This means that if you drive by constantly raising and lowering your foot on the gas, it will cost you more than keeping your foot as static as possible. All the running gear in the car itself; wheel bearings, driveshaft CV joints, transmission gears and bearings and the engine's rotating parts; all combine to add friction that soaks up power. The engine especially has losses due to the fact that has to keep compressing volumes of air and I was trained to use this as 'engine braking' when coming to a stop.

You can take the engine out of the friction equation by going into neutral and coasting but this is frowned upon by the authorities. I've heard that if you're in an accident and you are found to have been in neutral, you are immediately deemed to be at fault - whatever happened, as you were clearly not in control of your car. I think that's patronising rubbish and I really don't understand why cars don't have a freewheel arrangement like pushbikes do. If the car is happy to roll downhill without spending more petrol, why not let it without draining its momentum with engine braking. Therefore, I have to admit, I occasionally let the car coast when conditions allow and I see substantial savings from it. What is totally nuts is the habit of some folks in the US (so-called hyper-milers) to switch off their engines completely when coasting. Modern cars often depend on the hydraulic pressure supplied by the engine for their braking and steering. Shudder!

In 2003, after many years of sharing an automatic car (rare in the UK, even now) with my wife, I bought my own car and went for a manual transmission so that my sons could learn to drive in it. I was immediately drawn to the Yaris because it had good consumption figures for the time and Toyota has a good reputation for reliability. This was a great arrangement because I was the only one driving it and therefore the only person to affect the consumption figures. What was even better was that although it was a low-end car, it came with a built in consumption meter. No longer would I have to wait to find out how my driving affected consumption. I was able to see the effects of changing styles and conditions almost in real time. This allowed me to refine my driving from an efficiency point of view - keep speed and therefore drag down, accelerate slowly, anticipate stops to limit the use of brakes and, yes, there was the occasional bit of coasting - engine running of course. In particular, I saw how driving around town is a killer for good petrol consumption. The internal combustion engine - never a terribly efficient machine for energy conversion - is just awful at dealing with the demands of stop/start driving.

I've had four conventional Yarises. (Or is the plural 'Yarii'?) All cars had 1 litre, 3-cylinder VVTi engines and all were manually geared. Here are samples of typical, not peak, actual summer consumption figures from them:

Yaris 1 (2004) - 50.16 mpg
Yaris 2 (2008) - 53.78 mpg
Yaris 3 (2010) - 58.27 mpg
Yaris 4 (2012) - 59.89 mpg

You may at first glance think that this demonstrates the gradual improvement in efficiency from the manufacturer, especially given that in 2009, Toyota made an effort to get the car's emissions down and reduce its road tax cost. But it so happens that Yaris 4 was older than 3 and was built before they uprated the range. When I first got it as a replacement after No.3 was written off, I immediately noticed that it was a very efficient car even though it was the same spec as Yaris 2, perhaps an indication that there are great variations between individual cars.

Also of note is that I found the consumption meter of the first Yaris gave readings that were only slightly more optimistic than mine - about 2 or 3 per cent high. The later ones were consistently 7 to 12 per cent high.

All this time, I had an eye on Toyota's hybrid offerings; the Prius, the hybrid Auris and now the hybrid Yaris. The big advantage of the hybrid system is that the stop/start part of driving is dealt with by an electric motor and battery to leave the internal combustion engine to supply power directly to the wheels only at speed, thereby allowing it to work at its most efficient rotation speed. All the power does ultimately comes from the engine because it also charges up the battery for use when going slow, as does the car's momentum, which is converted back to electricity to recharge the battery when slowing or braking. With careful use, the brake pads ought to last a very long time.

The Prius seemed to me to be a horribly large car for something that was meant to be efficient. Certainly too large for my needs. The Auris wasn't much better but when Toyota squeezed the hybrid system into a Yaris with a claimed combined consumption figure of 80.71 mpg, I became very interested and in May 2013, jumped at an ex-demo that became available. I thought to myself that with my frugal driving style, I've always been able to match or beat the manufacturer's combined consumption figures. Perhaps I can repeat it with the hybrid Yaris. This should be interesting.

I've refilled the tank five times since my starting fill-up and am getting a feel for its real-world performance, though my driving over some of that being far from typical. I've been making a lot of long journeys up north so much mileage has been done at 55 to 60 mph. Nevertheless, its been interesting. Here's the results:

228 miles - 16.68 litres - 62.14 mpg (64.9 on the meter, 4.4% optimistic)
358 miles - 23.95 litres - 67.95 mpg (61.5 on the meter, 9.5% pessimistic)
391 miles - 31.24 litres - 56.90 mpg (65.7 on the meter, 15.5% optimistic)
474 miles - 31.99 litres - 67.36 mpg (70.2 on the meter, 4.22% optimistic)
466 miles - 32.57 litres - 65.04 mpg (67.4 on the meter, 3.63% optimistic)

The pessimistic reading is obviously due to me failing to fill the tank to my normal point. This is shown by the apparently good second figure being balanced by the relatively poor third one. I'll know to take more care when filling up to get a consistent full indication.

So they are hardly figures to set the world alight - a slight improvement over the manual cars, but let's look deeper. As I mentioned, a lot of this driving was at speed on roads in the Highlands of Scotland. In this mode, the car is basically running as a 1.5-litre internal combustion engine driving a small, 1.2-tonne car through the air with the normal amount of drag to be expected. Only a little of the driving was in town with a few trips to work. In that mode, much of the stopping and starting is handled by the electric drive. The engine only runs either to maintain the amount of charge in the specialised battery or to provide drive once an appropriate speed has been reached or a large amount of power has been demanded.

After my third fill-up, I drove home - mostly uphill and the meter showed 60 mpg. Then the next morning, I drove to work and although it is mostly downhill, it was very slow traffic, the kind that drinks petrol for little gain. It took me 35 minutes to go 7 miles. Yet by the time I got parked, the meter was a shade under 80 mpg! Now that's where this little car gains! City stop-and-start motion with low aerodynamic drag is where it's really comfortable. I then drove up to the Highlands and back, holding a solid 56 mph for most of the time. All the way, I was able to keep the meter above 70 mpg right to the fourth refill. It does seem to show that I'm getting the measure of the vehicle; that I'm learning its ways and can finesse it into delivering a better result.

I think a lot more is still to be learned about how this car works in terms of getting the best efficiency out of it, but the main thing I'm noticing is that the MPG meter changes in ways that are very counter-intuitive to someone who finessed a manual car into its most efficient range. It is very odd when the stop-and-start of the traffic lights does not cause the consumption figure to tumble. In fact, traffic jams are an opportunity to gain on the meter as the car goes for miles, crawling along on electric power alone, using not a drop of petrol.

So what do I think of it so far? I love it!

For a small car (and remember that I'm used to the most basic models and equipment in the range), this is a very refined machine. I've driven many 'automatic' cars with various gearbox technologies and this is not only the most efficient of them all, it is by far the smoothest, quietest car I've ran. When you stop at the lights, it's completely silent. When you pull away, it glides up to speed with zero fuss. It's relaxing, gentle and well balanced. As speed is gained, the engine starts to supplement the power and recharge the battery, but above the road noise, its difficult to discern when this happens. The clever planetary gear arrangement is beautifully controlled to look after the routing of the power as needed, whether it's the electric motor driving the wheels, the engine doing so, the engine turning the motor to generate electricity to charge the battery, or the motor turning the engine to get it started. All very clever and very refined.

The regenerative concept is great. As you slow down or brake, a little of your momentum is being used to turn the electric motor thereby using it as a generator which recharges the battery. If you're coming down a steep hill (as I was after I left the Cairngorm Ski Centre), you can shift the gearstick down a notch to its 'B' position and gain what feels like low-gear engine braking which generates even more power for the battery. There is also a Neutral position during which the car does feel very eager to keep moving under its momentum (i.e. it's very frictionless), but in that mode, you're not recharging the battery.

Add on top of that that the car has lots of fancy knobs and whistles that I'm not used to. I've never had air-con and now I have dual-zone automatic air-con. I have a fancy touch-controlled audio system that also lets me monitor the car's efficiency in a nice graphic way. There's a USB socket, Aux socket, CD, FM & AM radio, and bluetooth capability. And there's a rear-view camera for reversing into tight spaces. Very nice. I don't need most of these and would happily have had a hybrid-drive car with basic equipment but I'm enjoying having these toys, given that they come with the beast.

Although the initial figures have been disappointing, I'm starting to see that it can deliver its promised efficiencies, given fewer long-haul drives. It is very much a town car and I'm looking forward to many commutes in it.

Progressive is regressive!

Throughout the 1980s and 90s, the editing suites of TV broadcasters became populated with fancy boxes called DVEs. These were for digital video effects and with each year, their sophistication rose while their cost fell. Looking back at archive programmes from the period, one can often date them by the look of any DVE effects used. Early boxes could do barely more than squeeze the picture smaller and overlay it on another.

Soon, fancy 3D effects and shading became available, and more recently, obvious DVE effects have thoroughly fallen out of favour. Now the DVE has been relegated to the electronic scrapheap as the task of processing TV pictures has transferred away from dedicated machines towards being just another plug-in software routine on a computer.

On many DVE boxes, smart engineers figured out a way to perform a trick that is, at one level, barely noticeable to the viewer yet it quickly became a firm favourite with many directors - the film effect.

To understand the film effect, first we need some background. In the early days of cinema, it was experimentally determined that to avoid flicker while film was being shown, the shutter in the projector should open at least 46 times per second. However, to save expensive film, it was realised that having brought a frame of film into the projection gate, the projector could show it twice and in the 1920s, studios settled on a frame rate of 24 frames per second, yielding a flash rate of 48 Hz. Modern projectors will show each frame three times and the resultant flash rate of 72 Hz virtually eliminates flicker, even at the periphery of vision where the eye is more sensitive to movement and change.

In the latter half of the 20th century, along came television. TV frame rates were established not so much by cinema but by the need for early television equipment to be synchronised with the alternating voltage of local electricity supplies. As a result, the USA used a scan rate of 60 Hz which is just about flicker-free, while Europe used 50 Hz where the flicker is more pronounced.

The frame rates for each region were 30 fps for the USA and 25 fps in Europe, both different from the cinema rate of 24 and both requiring different strategies to get cinema onto television.

In Europe, the most common method for decades was simply to run film through a machine at 25 fps and accept the slight speed-up of vision and sound, even though musicians with good sense of pitch were bothered by all the music being raised about a semitone. If film was shot for TV, it was simply shot at 25 fps.

Whether we see film at the cinema or on the TV, we have all become used to frames of Hollywood being shown to us twice or even three times before moving onto the next. This gives the portrayal of movement on film a distinctive judder which we don't get on conventional video cameras.

Staying with European systems and frame rates, think about someone swinging their arm through the picture. On a conventional video camera, we would see the arm change position 50 times per second. Since this is also the rate at which pictures are drawn on the screen, the motion appears smooth and very realistic. On film transferred to TV, the arm would be in a particular position for two pictures and then move onto another position for another two pictures. The brain tries to make sense of this by perceiving a straight line of movement between the frames but in the process, it not only perceives the slower update of the arm's position as a judder, it also perceives a doubling of the image so that the arm temporarily appears as two arms swinging through frame.

This juddered, broken portrayal of motion has become forever lodged in our heads as the 'filmic' look. In the latter part of the 20th century, TV directors realised that their pictures shot on video cameras, with their smooth, realistic portrayal of motion, could be made to look filmic by exploiting tricks on the DVE boxes whereby each picture could be repeated twice to replicate the juddery look.

One problem with this scheme stemmed from the way TV pictures were constructed. At the time, a single UK TV frame of 25th of a second was built up from 576 lines but that was shared across two interlaced 'fields' of 288 lines, each lasting 50th of a second. The full vertical resolution of the system, 576 lines, required both of these fields. By repeating one field as the other to make the picture filmic, the same information got displayed twice so that the vertical resolution of the filmiced picture was now just 288 lines. In other words, to fire off that nostalgic nerve that yearned for the Hollywood Dream Factory, TV directors not only gave up half of their time resolution, they also lost half of their detail resolution.

Nowadays, much TV output is deliberately shot in what is known as 'progressive' scan at 25 fps. This replicates the judderiness of film shooting while, like film, preserving the full resolution of the source image. The desire to ape Hollywood and decades of staggered movement is strong in directors and producers. But there are signs of change.

Increasingly, shooting for the cinema does not use old-fashioned film and instead, digital cameras are favoured for the savings in cost and the greater control they offer in post production. But these cameras are not limited to old frame rates. Neither are the projectors in the cinema which are also moving to digital projection from a file instead of film.

In 2009, James Cameron released Avatar in which he wanted to audience to have an immersive experience. He created the film in IMAX resolutions and used 3D technology to take people as much as possible to the world of Pandora that he had visualised. When his movie finally hit the IMAX screen, he found that there was one thing getting in the way of that complete Pandoran joyride. The film had been shot and rendered at 24 frames per second and all his carefully crafted three-dimensional movement displayed the old unrealistic judder.

For Avatar's sequel, and Peter Jackson's The Hobbit, frame rates have been increased to 48 in hope of providing a more realistic experience. What was the reaction to the initial screenings? "Ugh, looks like television." Seems nostalgia for the old Hollywood Dream Factory has a powerful hold on audiences.