394. Where Money Comes From with Paul Sheard

There’s a great misunderstanding surrounding government debt and its economic implications. Many view it as a financial burden that will be passed down to the next generations. But what if, in fact, government debt is a critical component to how money gets made? 

Paul Sheard is the former vice president of S&P Global and the author of The Power of Money: How Governments and Banks Create Money and Help Us All Prosper. He’s got decades of experience analyzing global financial markets and was the chief economist at Lehman Brothers during the 2008 financial crisis. 

Paul and Greg chat about the common misconceptions around how money is made and injected into the economy, government debt, and the role of quantitative easing.

*unSILOed Podcast is produced by University FM.*

Episode Quotes:

The hidden costs of cutting government spending

20:04: This is a very widespread idea that the most virtuous thing is a balanced budget. Government deficits are somehow bad. This mountain of government debt is this bad thing and a burden on the future population. Well, that's like saying we have this expanding bathtub, and we need water. The water level in the bathtub to keep expanding as well. But we want to turn off one of the taps. The tap, the government spending tap, the government deficit tap. If you do that, you're going to need to turn on bank credit creation, tap much, much more. So much more water comes out of that.

The important thing about government spending

20:48: Government debt, government spending, has various elements, but one of the very important things that it allows is for money to be created and for purchasing power to be transferred through time.

Monetary and fiscal policy intertwined

05:00: We've sort of, for good, understandable reasons, developed this world where we think of monetary policy as being one thing, that's the preserve of independent technocratic central banks, and we have this fiscal policy, but that's the stuff that's separate, and that's the stuff that politicians have to deal with, where in actual fact they're actually very, very closely intertwined.

The canonical misunderstanding of how money come in our economy

09:05: Most people, if you ask them that, "Where does money come from?" they would think they understand. They'd give you some answers. And they'd say, "Central banks create money." Or they would say that banks collect savings, and that's the money that is in the economy, or they talk about governments borrowing money. All of those things are actually wrong or not really accurate descriptions.

Show Links:

Recommended Resources:

• S&P Global 
• Japanese asset price bubble
• Quantitative easing 
• Modigliani-Miller theorem 
• John C. Williams 
• Bankruptcy of Lehman Brothers 
• Ben Bernanke
• Federal Reserve Act
• Troubled Asset Relief Program 

Guest Profile:

• Paul Sheard bio

His Work:

• The Power of Money: How Governments and Banks Create Money and Help Us All Prosper