Theresa May is getting desperate. Yesterday she revived lines first popularised by a man she likes so much she sacked him in as humiliating a fashion as possible; that is George Osborne. What she said was that if we give nurses a pay rise we will end up with a debt crisis like Greece.
I know that I am not alone in, yet again, despairing at the economic illiteracy a UK politician, but let me spell out why this is complete nonsense since a number of people have asked me to do so.
The explanation is actually quite straightforward and is that in 2010 when its debt crisis became apparent Greece was (and still is) in exactly the same position as a household with regard to making payment of the sums it owed. This is because Greece's national debt was denominated in euros, and for all practical purposes Greece has no control over the creation of new euros, which is a task it agreed to devolve to the European Central Bank when joint the Eurozone, over which it has no effective control. What this means, in blunt terms, is that if Greece is to pay its euro debt then it had to and still has to generate the external income denominated in euros to do so.
That need to earn foreign currency to pay debt has, however, been a nightmare for it. There are a number of reasons but the main one is because by 2010 Greece was already, relative to Germany, a much poorer country than it had been when it had joined the Eurozone because of the relative differences in productivity between the two. What this means is that each worker in Germany always generates much more income per hour worked than does a worker in Greece, and the disparity has only grown over time. Despite this they had suffered a fixed effective exchange rate over that time, meaning Greece's real ability to generate the foreign currency it need to service the debt it had incurred was already much reduced when the crisis hit it.
But that problem was compounded by the fact that Germany, via the European Central Bank (which it effectively controls) refused two things. One was an effective change in the exchange rate. The other was enough debt waiver to leave Greece with anything like the level of debt it could really manage out of the income it was likely to be able to earn in euros. The only option left to Greece then was to react in the way a household must do if it has incurred debts in the past which its current income makes it hard to service and when it is not allowed to go bankrupt, which Greece cannot. This meant it had to unavoidably cut its spending to save internally earned euros to service externally due debt. To put that another way, it had, in effect, to use its available income to pay its creditors rather than to meet the current needs of the country, which in this case really does have no choice but behave in the way a household does because it does not have the power to create its own currency.
So, why is this different from the UK? There are three real reasons.
First, the UK has its own currency. And, as importantly, over 99% of its debt is denominated in that currency. What that means is that, unlike Greece, it does not need to earn what is, in effect, a foreign currency to pay its debts. It pays it with its domestic currency, and that means its ability to repay is dependent on what income generation happens in the UK and is not related in any way to what it can earn from outside it, which is Greece's alternative priority. This means the UK's capacity to repay is vastly greater than Greece's: domestic earnings massively outweigh external ones in both cases.
Second, because the UK has control over its own currency it can use QE to write off its debt, and it has done so. £435 billion of UK national debt is now owned by the UK government as a result of its government sanctioned QE programme and this debt is, in effect, completely cancelled as a result. Importantly, the UK has not asked anyone else if it might write off debt; it has done so of its own choice, and it can do so again as often as it likes simply by the creation of new domestic currency (on which issue, note what I also say, below).
Thrid, and again because the UK has its own currency, it can let its exchange rate float and so if it is more or less productive than another state realign its currency to allow for that fact to reflect its capacity to pay. This is vital.
Put these facts together and the simple fact is that the UK can always repay all of its debt: if there was ever any doubt about that it could prove it could by simply just repurchasing all of that debt using QE using newly created many (which it can then require the recipient banks to deposit back in the Bank of England) and the debt problem could be immediately solved, completely By making it disappear. And if a problem can always be made to disappear it does not really exist. As a result there is no international agency, bank or bond vigilante who can in any way gang up on the UK on its debt because we have the perfect weapon to counter-attack, which is to literally get rid of the bonds. And nothing can stop us doing so, although I would not recommend doing this except in extreme circumstances.
And, because of this and because differences in UK productivity as measured in our currency and the productivity of people in other countries measured in their currency can always be adjusted for using the exchange rate, we can afford pay rises to meet domestic wage, social and economic pressure without in any way threatening our ability to repay debt: all that happens a a result if we are considered to have overpaid is that the value of our debt repayment in the hands of the foreign person who might owns it changes, often to their disadvantage, which is the exact reverse of what happens in Greece.
So, fundamentally, Greece is in the mess it is in because of the euro and we have Gordon Brown to thank for the fact that we are not and so are in an utterly different economic environment. But, it seems, Theresa May does not understand such basic issues relating to the economy of the country of which she is prime minister.
Or to put it another way, she's denying real people pay rises they deserve and need on the basis of her own ignorance. And that makes her unfit for office.
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Great post Richard.
Could you please explain why politicians, governments and mainstream media have not embraced MMT or specifically why we will never be like Greece.
I saw a youtube video of you from 2015 with Andrew Neil on the BBC politics and you tried to touch on the subject but his constant interruptions obviously made it impossible for you to articulate the point.
Thanks
If I get time
I suspect the reason is because MMT demonstrates that the State is infinitely more powerful (especially financially) than any private sector agent, and given their firm belief in “private good, public bad”, this would be a catastrophic reality to accept.
Do the events related to joining the narrow range of the ERM (and Black Wednesday) show that, for a brief period, we were indeed like Greece?
Not like
But we did restrict our freedom and we saw the cost
I think she knows full well everything you outline. She’s hoping the average punter doesn’t and thinks household when it comes to all things economic.
@Leigh If TM & Co do understand this, what is the point/benefit/outcome she/they are striving for?
@ Roger Hunt:
The point is to use austerity as the false justification to carry out political policies that would otherwise have been impossible, politically, to rationalise.
If you subscribe to a political ideology that supports cutting public spending in order to starve both the public sector of funds and thereby ripen it up for profit-making privatisations, as well as starve the population of well-paid jobs, employment and housing security, and decent benefits, so that a cowed and desperate low-paid workforce is compliant and available to service those privatised industries and services, then you need the cover of a national crisis in order to carry out those policies which are, in reality, to the great detriment of the vast majority of the population.
Creating a false and ongoing crisis (the public sector Debt and Deficit bogeyman) is the tactic of choice. It relies, however, on the continuing ignorance of the general population in order to succeed.
Which is why not only politicians, but the entire gamut of the mainstream print and television media, have been co-opted into promulgating, without let-up, this government-as-household, UK-as-Greece, economic nonsense, to the exclusion of any other economic message.
If the people knew the truth about the money creation in a country such as the UK, with its own sovereign, non-convertible, fiat currency, it would demand an instant halt to austerity, and public spending to be increased to enable “Functional Finance”: ensuring that the economy runs to its maximum possible potential, for the benefit of its general population, and not solely that of the banks, corporations, and the wealthy.
That’s why they are lying to you.
Agreed
She is trying to shrink the public sector because the Tory Party has a visceral dislike for collective action in the public interest. This is about ideology not economics. Deficit reduction just happens to be a great justification for cutting public expenditure because most peopole have no idea how the macro economy and the money creation works. It really is that simple.
@Mr Shigemitsu
If this be an explanation where does it leave the Labour Party?
What kind of conspiracy is this? Is it really the subject of a master plan or rather a conspiracy of covenience of those who, for now, achieve a comfortable lifestyle.
I just don’t get how many reasonable, fair and smart people can go along with something which is so bad.
@ Roger Hunt,
There are those who know it’s nonsense but whose interests are suited by the continuing pretence; those who mindlessly accept it because it suits their worldview, “sounds like common sense” and who may also benefit from continuing austerity; and those who believe it because they accept authority unquestioningly, and are too incurious, lazy, or frankly not intelligent enough to explore alternatives.
Where each individual Labour politician fits along that spectrum is anyone’s guess.
IMO, there’s probably a fair distribution right across the board.
So Larry Elliot has an uncritical article in the Guardian today ‘Ending austerity means increasing taxes or deficit, warns thinktank’ which reports on a report by the Resolution Foundation which includes the statement:
‘Matt Whittaker, chief economist at the Resolution Foundation, said it was no surprise that squeeze fatigue had set in. “But recognising that fatigue is very different to doing something about it. If we want a serious discussion on ending austerity, we need to get serious about prioritising what spending we really want to see rise and how we want to pay for it — and that means tax rises for most of us.’
The Resolution Foundation has as its mission statement:
‘The Resolution Foundation is a non-partisan and award-winning think-tank that works to improve the living standards of those in Britain on low to middle incomes.’
If the people who have plush offices in Westminster who think they are helping the downtrodden believe this stuff then what is to be done?
Remember Resolution is ruin by Ed Miliband’s former chief of staff
I hate to say that’s not where to look for economic understanding
That would be Mr Bell.
I will find a couple of hours this week to look into the origins, constitution and funding of the Resolution Foundation. I feel it is important to understand how institutions like RF can present themselves as promoting the interests of the downtrodden but use tools which lead them to present policy which leads to the opposite outcome.
Perfect!
One thing of note. The Tory government has been attempting to treat our economy like that of Greece; Trying to balance the books, drastically cutting back on spending. The public sector wage cap has been holding the value of the £ high relatively internally (MMT – Government as the monopoly issuer, sets value of currency), which has held back increase in wages… and is shafting productivity in the same way the high value of the Euro messed up productivity in Greece.
Unless the government start getting a grip with economics… we will end up like Greece, I am sure. And this has nothing to do with the Deficit, but rather the flawed economics the Tories are following.
And the public just don’t see it, but believe the lies that Labour caused the 2008 GFC. 🙁
That’s a blog for tomorrow
Hi,
excellent explanation, I was thinking the same (due to reading your blog) when I saw May bring up the analogy during PMQs. However something I’m interested in, and sorry if this a stupid question, but how does the UK control the exchange rate of its currency? you mention ‘Thrid, and again because the UK has its own currency, it can let its exchange rate float’ what do you mean by float? I’ve also read elsewhere that the UK has control of its exchange rate, when I would have thought that on a global market it would be more down to how other countries valued our currency or investment in the UK which would effect our exchange rate?
No country has real ability to control its exchange rate: market realities have a role here. Floating means just that
But with regard to debt this is not an issue: we pay in sterling
And real pay rises that boost the economy will in the end raise the exchange rate
Thanks for explaining that. Steve Keen also did a brief spot on this topic on RT.
I really don’t know if TM is actually ignorant/stupid or it is all part of a plan. Watching this administration and their announcements I suspect that they are directed by the comments pages of the Daily Telegraph/Mail. Truly, just delve into those places and you will see the drift of government policy. They are simply playing to the gallery, their core supporters live in an idealised world based in the 60s where anyone who wanted to work could get a job, if you had worked hard and gained qualifications then the opportunities open to you were vast.They also believe in the ‘Just World Fallacy’ whereby you get what you deserve. So the rich must have earned it and the poor are just plain lazy.
Without some seismic shift in journalism, I don’t see how this misinformation can be challenged.
Ignorant or malevolent? To be ignorant, it would mean that she has never discussed any of this with her husband. Or that her husband is ignorant, too. He couldn’t be successful in his line of work without knowing exactly how this all fits together. The veil is slipping. Just needs a few more tugs.
If only there was a trusted (and unbiased) national broadcaster with a dominant position in all forms of media which could educate the populace and point out that the Prime Minister was either ignorant or telling porky pies. Something like, erm, the BBC, perhaps?
Yeah, obviously too much to hope for.
A clear & lucid explanation that even I can understand. Just like previous blogs relating to how our economy really works. Confirming once and for all that May and her government are knowingly deceiving UK citizens and thereby causing them intentional harm. That surely is some form of indictable offense. And if not actually a breach of law then certainly the basis for a vote of no confidence. (The issue is also raised today in Progressive Pulse – http://www.progressivepulse.org/economics/deceit-not-ignorance).
@John D If TM & Co are “Confirming once and for all that May and her government are knowingly deceiving UK citizens and thereby causing them intentional harm” …
What is the goal here which TM & Co are pursuing?
Given that Kamal Ahmed(BBC) Andrew Neil(BBC) and Rebecca Long-Bailey(Labour) also spout the same macroeconomic nonsense are they all in on the plan? Or is it that lots good people are not as clever as they believe they are?
There is a neoliberal objective to bias the returns in the economy to capital. There of those you mention may well be in on that. I have no idea why Rebecca Long-Bailey parrots it as well, mimicking John McDonnell who does seem top believe this stuff, but you’d better ask her for her reasons because they’re beyond rational explanation by me.
@ Roger Hunt.
Richard has graciously replied very concisely on my behalf. If you need a longer explanation you could read this – http://newpol.org/content/neoliberalism-austerity-and-authoritarianism. If time is at a premium jump to the conclusion. If still not convinced you could check out Prof. Mark Blythe on YouTube – https://www.youtube.com/watch?v=2v8m-J8sgik / https://www.youtube.com/watch?v=NQGCoiakycQ; or Steve Keen – https://www.youtube.com/watch?v=Au2N07eHa-Q. But, hey, you can Google equally as well as me! Neo-liberalism is the biggest Northern European con since the established Church.
Ow!
But probably not far off target
@John D
I am well versed in all of these references and others. My concern is to work out how it is that so many reasonable, fair and smart people don’t call out the madness.
I gave up my membership of the Labour Party because I could get no traction even with senior shadow cabinet members to put the truth out there.
I am not surprised….
LAbour works firmly within the Oberton Window, only daring to open it a very little
@ Roger Hunt.
Apologies Roger if I misunderstood your query. Your concern as to why the madness is not called out by ‘so many reasonable, fair and smart people’ is shared by most of us here. My belief is that they do indeed call it out but at this stage of our history they are still largely voices in the wilderness. Why? because those with control of the power (government, media, commerce, education etc.) do not wish this inconvenient truth to enter the public mind-set.
I previously referred to the established Church as the other great N European con, and I wasn’t being fscetious. For over a millennium ‘the Church’ deprived the people from knowing and understanding the scientific truth about creation etc. in order to maintain its control over their lives. Dissenters were quite simply murdered in cold blood.
Thankfully Neo-liberals find it more difficult to eliminate their opponents (although some may argue there’s a neo-liberal agenda in wars). However, in our society they do control the education system and the media … except the Internet – and that’s the game-changer. It’s all about protecting their anti-democratic power base and their illicitly extracted wealth. It’s a conspiracy of the 1% against the 99%. And it’s worked pretty darned well for them, but their time is now up.
Why doesn’t the Labour Party take them head-on in parliament? Quite simply because it’s shxt-scared to do so, for fear of being ‘rubbished’ by the MSM. The TINA mantra is firmly rooted in the public’s subconscious. Proof, if proof is needed, is that Theresa May has clearly been advised to revert tactically to ‘reminding’ the nation that they, the Torys, are still having to clear up the mess left by the previous Labour administration. They know the household budget analogy works. It’s a political ace for them. Liam Byrne has a lot to answer for.
What more to say? Again, apologies if I misread your initial comment and also if this isn’t an appropriate answer either. But at least I got it off my chest! I think most of us who read Richard’s blog share your frustration. Sometimes we have to remind ourselves that most people don’t spend their time thinking about macro-economics. They are (understandably) too busy having to live within their ‘household budgets’. However, I sincerely believe we are at a critical point in our socio-economic history. Such times are frustrating for progressive thinkers because it seems to take an eternity before radical change becomes the norm. You only have to see what a hold institutional religion still has on the USA! http://www.washingtonexaminer.com/gop-lawmaker-tim-walberg-god-can-take-care-of-climate-change/article/2624585.
Best wishes — John
I like Mark Blyth and have watched a fair few interviews and lectures of his. Seems to me like he’s of the opinion that gov debt needs to be repaid! Is he just wrong or am I missing something?
There are occasions when government debt can be repaid – when the economy is overheating, for example
Otherwise thinking so is just bizarre
Why does anyone opposed to austerity want to bring the economy down?
Perhaps Labour are sticking with the established line for now to try and avoid being slated by the press, in the hope of getting into power next time and changing the narrative from within.
As you’ve said before, Richard, Jeremy Corbyn’s adopted a lot of your ideas so he and McDonnell should hopefully be aware of this key element of your thinking too.
Or maybe I’m just being eternally optimistic.
Maybe…..
I’ve noticed that some people are posting informative and educational comments that RM might approve of on the Guardian’s website, even referencing Richard’s blog and ideas, for example under this recent article:
https://www.theguardian.com/business/2017/jul/08/ending-austerity-means-increasing-taxes-or-deficit-warns-thinktank#comments
For those who can brave the comments arenas of the main newspapers, this might be one way of helping change the discourse.
Wow….so I see
I wonder if I might pick your brain cell on a couple of technical questions which have been bothering me.
Given that there will be external (i.e. Non UK Government) holders of each Gilt issue which the Government now holds as part of its QE operations, how do these parties get treated when the government effectively decides to ‘cancel’ their holdings ? Surely there will be some sort of inequity of treatment of the different types of holder should they undertake to ‘cancel’ their holdings, and this will cause distortions in the market price of these holdings, when the size of the issues is effectively reduced ?
Secondly, if the liquidity created by QE ultimately not need to be withdrawn from the system via selling the bonds into the market, why are the US Government now beginning to cease reinvestment of maturing debt, effectively doing what it is claimed need not be done in the UK ? Perhaps the US could do with your intervention !!
I realise these are not easy questions, but your take on things appears to be different to the experts out there.
They get paid sterling
They deposit it in a bank
They can sell it for another currency of they wish: see earlier comments in this thread by others on the consequences
Does it distort market prices? Of course; that is the aim of QE
I have no clue why the US are planning to unwind QE when their economy is in the state it is. It will end in tears
What Richard has written is basically true. However it is not true to say there is no risk. For those of you old enough to remember the 1970’s – the collapse of Sterling from 2.40 down to nearly 1.60 to the dollar and the subsequent embarrassment of the Labour govt calling in the IMF should make us pause for thought. QE appears free now, because it is being practised in the G4. If we were to do it again and (key point) alone and the markets got a sniff of a potential book transfer to right off debt, then I would fear for the value of GBP. The currency is the pinch point of a govt that is doing monetary financing
This is nonsense
First, in the 70s the whole world was only just off the gold standard really – the US came off in 1971 and the rest of us with it. We had no idea QE was possible. I f we had we would not have gone to the IMF
And you ignore the impact of oil on the pound, which is why it fell
And third, we can always do QE alone, just as the EU is now. And markets can’t change the value of the pound without fundamentals shifting for long – value comes out. And writing off debt has nothing to do with the value if the pound to other currencies because well over 99% of it is valued in pounds.
I am sorry – this is old style bond vigilante propaganda and it is no longer releavnt
am no bond vigilante, just aware that no successful exit from QE operation has ever been conducted. There is QE still going on from the Fed and BoE to roll over the debt that redeems, we should see the plan for the Fed to wind down this some time between now and year end.
I know the current fashion is all about flow rather than stock in QE holdings as in govt budget deficits. But if the flow is all that matters – then why not write of the debt held by BoE now?
even you say
“although I would not recommend doing this except in extreme circumstances.”
I have an open mind to all the risks. Just not sure that the man in the street understands the role of banks or Cen banks in money creation enough. Good on you for attempting to shed light on the matter.
cheers
If there is no demand for this debt back in the economy – and no need to suck the money out of the economy – and higher interest rates might be a disaster for it – why in that case unwind?
That’s the question I just do not understand
I meant to say
write off debt***
There is a force that drives this stuff. Among Conservative MP’s there’s clearly a mix of ignorance, often repeated self-serving but inaccurate memes, but also some fanatically pursued ideology – yesterday I heard one of them tell a BBC interviewer that maybe public sector pay rises would be a good thing as they would boost economic activity – result! However, minutes later we had a Steve Baker MP saying something like that he had “just heard his colleague spouting Keynesian nonsense”.
That John Maynard Keynes’s economic theories could be considered nonsense gave me a shock. From what I learned at university Keynes is to Economics what Darwin is to Evolution. But it turns out there is an Economic version of Creation theory and it is going strong. If you google Steve Baker, who is one of Theresa May’s latest appointments, you see he set up something called The Cobden Centre, which espouses “the Austrian theory of the Business Cycle” and also chairs “The All-parliamentary Group on Economics, Money and Banking”.
It is this line of thought that motivates the Conservative leadership, and our Government policies, tempered only by some necessary vote-chasing pragmatism. I would very much like to see a blog from you Richard on why this is the case, and what might be the consequences.
If I find the time
I am doing rather a lot of requests right now
I’m a Labour party member in High Wycombe, Steve Baker’s constituency. We are gearing up to wage a continuous local campaign here in from now till the next election.
Any extra arguments you can give us would be very much appreciated.
Also whatever you think of Steve’s politics and economics ideas he seems quite prepared to engage in discussion on the subject of the money system. In fact it was hearing him talking about his desire for monetary reform at a recent hustings and a brief email exchange that prompted me to get more interested in all this stuff myself. Yes, that’s correct, my rightwing Tory MP helped me get interested in MMT!
I don’t agree with the Austrian School or Steve’s specific ideas for monetary reform but he does seem happy to engage in a discussion on the subject. I hope to have a conversation with him at some point in the near future. If we agree on only one thing it is that the system, as used at present, isn’t working that well. I believe it can work well in its current form, Steve Baker believes it needs a radical overhaul before it can ever work correctly.
Although I feel like there is a general conspiracy on the right to deliberately dupe the public about the true nature of our money and financial system I think there are also many on the right who are not cynically exploiting the public’s credulity. Many just believe politics necessitates short simple messaging and believe a bit of lying is mandatory since the other side are quite prepared to do the same.
Behind the rhetoric though there are the occasionally well thought out philosophical/intellectual positions on both the left and the right. Though we believe many on the right are wrong, I feel we should engage with and debate if any are prepared to do so.
I hope that underneath all the rhetoric, gamesmanship and distraction of politics there is a lot of overlap even between the left and the right on what we really want for the future of this country. Remaining purely adversarial negates the chance of finding that common ground.
Don’t get me wrong Richard – the work you are doing is amazing and very much needed and appreciated. Furthermore there are many on the right who really don’t want to debate in any meaningful way as you’ve no doubt found on a daily basis!
I just see an opportunity here in Wycombe to debate Steve Baker on his ideas around monetary reform and hope that could raise public awareness around this subject. It’s almost certainly too much to hope Steve could be convinced of any MMT ideas but I feel like we benefit from engaging in an open minded spirit where we are really listening to our opponents’ points and genuinely attempting to address those points in an attempt to win them over to our way of thinking rather than just score points against them.
Or maybe I’m just not cynical enough yet!
Good luck!
@Adam Sawyer,
I think you need to understand that MMT is simply an explanation of how the monetary system works in a nation with its own sovereign, non-convertible, fiat currency.
It’s a *description*, not a *prescription*.
MMT can offer a road map for politicians and economists who want to find a way out of the neo-liberal jungle and into the world of functional finance, but whether or not to use that information for the good of the country and the economy as a whole, rather than for the few, is purely optional.
So your Tory MP may well be aware of how our money really works, but that doesn’t mean for one moment that he would consider using that information to provide for an economy that better serves the 99%, rarher than the corporate and individually wealthy elite.
Don’t forget to self care Richard. The last thing you need is for you to burn yourself out.
Holiday coming
Not that I stop blogging
Because blogging is like breathing
But I do nothing else for work
“What that means is that, unlike Greece, it does not need to earn what is, in effect, a foreign currency to pay its debts. It pays it with its domestic currency, and that means its ability to repay is dependent on what income generation happens in the UK and is not related in any way to what it can earn from outside……”
Richard, are we overlooking dollar hegemony? The trade in all major commodities but importantly in energy products is denominated in dollars. Every single country must have energy. For any country to earn dollars it must export real wealth to the USA. In effect, the USA owns all the world’s oil & gas because the only the USA can print dollars and this it can do with a click on a computer. In any auction, it can outbid the rest of the world combined. That is why the US military dwarfs that of the rest of the world. Dollar hegemony must be enforced. Hence the military adventures to bring freedom, human rights and democracy to the oil producing regions of the world. Both Saddam Hussain and Colonel Gadhafi paid with their lives for daring to challenge the status quo.
Thankfully the UK has a minor reserve currency
Richard
Thanks for your blog (“why we can never be like Greece when it comes to national debt”).
Clearly there is a comprehensive misunderstanding about economics in this country, both among governments and the general population, due to systematic disinformation from our media and its absence from education curricula. This is rather important, because the absence of understanding in governments routinely causes major disasters in government policy and therefore the wellbeing of the country and its people. Actually, I suspect the central principles are quite easy to understand and would probably take only a few pages of carefully crafted simple text to dissolve the misunderstandings and explain completely. It should be pitched at a level suitable for school children of about 12 and older. Does anyone know of such a text, preferably presented in gold lettering? I would love to see and promulgate it, especially to politicians. Anything longer than about 2000 words would be useless, as many would not bother to read it. It needs presenting as many times as is necessary, to those who need to know or find it difficult to understand.
There is no such text
I wish I could manage it
Which of course means that presuming Scotland takes a share of the UK debt, Scotland should have our own currency, and make sure the share of that debt is denominated in Scottish pounds, not rUK pounds.
I guess!
I suspect Scotland should not assume any UK debt
Very possibly. But what about assets? Full share of assets, historical share of debt, carefully calculated?
Sounds good to me!
But as your article points out, what actually is the debt – if any – that the UK has with its “creative accounting”?
I do not know yet…
Hi Richard
Just finished my first run at Joy of Tax. Excellent – particularly the pithy summary provided by your Chancellor’s speech. Plan to go back in for closer reading at some point. I have a few questions, though, mainly generated by me trying to explain the ideas to others, and then being unable to answer their questions/objections.
I did think that a detailed explanation of why the UK is not Greece/Zimbabwe/Weimar Germany would be good – because that is nearly always the first objection… So I’m glad you’ve covered some of that in this latest posting. I’m interested that you say the Greek budget situation is like a household budget — I’d not heard that said explicitly on the blog before. It’s definitely worth bringing that into the argument rather than just dismissing adherents to the government=household analogy as simplistic and incorrect. Better to say that the idea is correct in relation to many economies, but not the UK’s. Things would be clearer still (to me at least), if you were to run a thought experiment in which Greece could suddenly switch back to the drachma, redenominate its debt in drachma and create its own money. That would then give a nice example of where a government’s ability to “print money” comes up against constraints (presumably inflationary ones relating to productivity and inefficiencies/corruption in the tax system; but also “confidence” ones which would lead to currency devaluation). I find that people’s initial reaction to your ideas is that they are too good to be true (“magic money tree” and all that), so clearly showing where the limitations are would help to provide credibility in their eyes, I think.
Overcoming the idea that tax creates a pot from which to spend is one of the other big hurdles to wider understanding. Even your terminology seems to stray into this territory: “If only we taxed excessive consumption we would create funds for future generations….” (p. 208). But I thought that the economic (not political) function of tax was “as a means of destroying the money [government] can create and spend” (p.62). And how does that tally with the first of the six things tax must do (p.77): “Reclaim money the government has spent into the economy for re-use” (obviously can’t be re-used if it’s been destroyed). Also: “The government spends its own money…money it can create, money it can borrow and money it can collect in tax.” (p.256). This way of expressing it muddies the water, I think, if we are trying to wean people off the idea of tax filling the pot and then spending emptying it. Or have I misunderstood “destroys money”?
“Tax destroys money” suggests in turn that the chief economic (not political) function of tax is to control inflation. The relationship between tax and spending is not that tax funds spending, but that tax mops up excess money in the economy to prevent inflation. Without this mopping up, the spending would be dangerously inflationary. Is that right? In reality, then, richer people/entities should pay more tax not to contribute more to the government spending pot, but to put in a bigger shift in the mopping up operation. Also, tax levels are not determined by government spending intentions, but by the wider economic forces that influence inflation — including government spending, but also including productivity, export performance, savings rates, etc. So there is a link between tax levels and spending levels, but not a simple or direct one.
Finally, and I’m sorry this has gone on so long, I don’t understand when the government should create money through borrowing (issuing gilts), and when through spending (simply crediting a spending account in the relevant department). Presumably borrowing is only ever a good option when it is to meet demand for savings.
I’m sure you appreciate that I’m asking all this because I want to be a better advocate of these ideas.
Thanks and best wishes
James
Let me be honest, like all my books and this blog, The Joy of Tax was a work in progress. It was where I was at the time and not a definitive statement of right and wrong
I was exploring issues then I know better now. That’s how develo9pmnent happens. That’s why I keep writing
Youy’ E seen flaws and they’re there
If I wrote it now they probably would not be
But full marks for diligent reading
And re borrowing – see my blog on why we need more government debt (just google it; I have to fdo so to find anything I have written) and you will see we do not need debt for the sake of the government but for the economy
Thanks Richard. I certainly wasn’t hunting for flaws. I’m just trying to ensure my understanding is watertight. I think I’ve just grasped it, then read something that makes me doubt myself again. The central thing I’m wrestling with is whether tax does just destroy money, or does some of it still feed back into a “pot” for spending. My work involves taking complex ideas and turning them into comprehensible messages for lay people, and I think I could help get this message across. But only when I have a complete understanding. Still working on it…
It is destroyed when reclaimed. Tax destroys money
It is always new money that is spent
But I am clearer than I was in 2015 on that now
That’s the problem with learning!
Greece has problems with tax evasion and the shadow economy, hence why they are in such much trouble.
Clearly
But that’s not the issue that leaves them in crisis
That’s created by the euro
I think the euro was a great concept badly executed. It should have been I think, an over-currency, and all EU states could be dual currency if they wanted. The UK not only could but would have wanted to join that scheme, bringing with it its then strong currency.
So effectively the euro would have been the common trading currency and at least partly, the foreign currency, while member states would have kept their then existing currencies mostly as local currencies. But some probably the UK would have also kept it as a dual foreign currency, so it could still issue currency as in the article. And perhaps all member states could also have kept that option open.
I’d actually like to see some similar dual currency setup for an iScotland.
That is an interesting idea – although it feels uncomfortably like the ERM in some ways – or would turn out that way