A remarkably short thread from Stephanie Kelton:
The simple fact is that no one but a government can behave as it does.
Government debt is actually national savings.
In my opinion, it's not debt at all. Maybe it's time we renamed it.
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So elucidate – she asks what is the answer – I can’t think what it is. So a liability is actually an asset?
The government ‘borrows’ back its own money to provide a secure savings account for savers, pensioners and bankers
It is a social service, not a necessity
I kind of , I think , understand the first sentence ( although I thought you regard savers and bankers with disdain – bankers I can understand but not savers ).
No idea what you mean by your second sentence. Unless you mean all government behavior is a social service ( which it should be on some levels ).
Still think you’ll find selling the notion debt is an asset will be a hard sell to voters.
It is a liability technically
By default that means it has to a private asset
How hard is it to persuade people that their savings are an asset?
@ Donnie Brasco
Hope this helps from Prof. Randy Wray: “Why Do Governments That Issue Their Own Currency Bother To Sell Bonds? ….. it’s impossible for the government to borrow back dollars, just like it would be impossible for you to borrow back your own student loan debt, or for Pizza Hut to borrow back its own coupons. Rather, a bond sale is just a swap of one government-issued asset (cash) for another (bonds) which pays interest. It doesn’t change the amount of assets or liabilities out there, only the form.” – https://www.youtube.com/watch?v=pex89N9Oqog.
Cash and bonds are both assets within the currency-using economy. That figures because if you look at the consolidated balance sheet of the currency-issuer they are both liabilities.
Since true borrowing within the currency-using economy is an exchange of a financial liability for a financial asset, not an exchange of one kind of liability for another, we really should stop describing bond issuance by a currency issuer as borrowing.
Worthwhile to note that bond issuance by states or EU member countries that are not also currency issuers is true borrowing.
As a saver I don’t currently own Government bonds..what would change my mind to when gilts can be created at will to fund all aspect of Government expenditure? The demand can never be greater than the supply so how can I make a return. And that is the point of savings..
That is not the point of saving
Saving is a process of retain8ng assets until needed
The return is incidental
“Saving is a process of retain8ng assets until needed. The return is incidental”
Richard with the greatest respect this is obviously not true.. if this was then everyone would sit in National Savings and the Fund Management Industry wouldn’t exist..but the Fund Management industry is massive and people invest in Private Equity, Emerging markets etc etc etc precisely to make a decent real return..on this occasion there is no debate or conjecture, this is what happens!!!!
With respect, of course people will take returns if they are available
But that is not why they save
It is an incidental
james says:
“Saving is a process of retaining assets until needed. The return is incidental”
“Richard with the greatest respect this is obviously not true.. ” No, not obvious….not at all.
James, I suggest you are confusing savings with investments.
And as we are frequently told the value of investments can down as well as up. Savings ….shouldn’t. Interest on savings in practice does no more (and usually rather less) than match to inflation or (rarely, but theoretically possibly) deflation of the currency.
You, and the finance industry, take it as a given that it is permissible to make a profit by renting money without providing any added value. What I refer to as handling other people’s money with sticky fingers. That is how we play the game, but it isn’t written in stone that we must. Nor is it a natural law; it is a convention which we observe. Most of us to our cost.
Usury was forbidden by the ancient religions because it was known from experience what damage is done to a society by allowing
a privileged minority to make profits from doing no useful productive work.
Saving money for a rainy day is something else entirely.
It’s debt, Jim, but not as we know it… it’s debt because it’s IOUs… but ‘Government debt’, and the two words should always be used together in this context, is not at all the same as debt in the usual sense and the distinction needs always to be made.
I don’t really understand that – the Swiss are running a budget surplus, and their savers, pensioners and bankers seem perfectly happy.
A tax haven offer the option to save in the currency of other nations, almost by definition
I meant persuading voters government debt was an asset was the hard sell. We all know cash savings are an asset ( I may be stupid but not that stupid ). What you are trying to sell is that government debt ( ie a lability ) is actually an asset. In anyone’s world that is a hard sell.
I said it is national savings
They are assets
Did I say whose?
Do we sat banks are in trouble for taking deposits?
Why is any government when it does the same?
Swiss have world league private debt due to their pathological phobia of illusory govt debt. Their Minsky Moment awaits.
The government can and does create money, but commercial banks can and do create money too. Both kinds of money are used to buy government bonds. What makes you think this is so noteworthy?
Banks only create money under government licence
There is no other way they can do it
So it is all government money
So Kelton has made a banal point sound interesting by leaving out an important detail. The simple truth is that money used to buy government bonds is created either by or under licence from the government. So what?
So why does the government swap money that carries no interest charge for bonds that do?
If you do not see that as an issue you do not get economics
For the related reasons that a stable currency and stable inflation are desirable.
Yes…..
MMT is the best possible way to deliver that
If MMT wants to be taken seriously its cheerleaders will have to do better than dressing up platitudes as insight.
It would appear you could not spot an insight if it hit you between the eyeballs
“or the related reasons that a stable currency and stable inflation are desirable.”…Yes…..”MMT is the best possible way to deliver that”
The problem is there is no evidence to support conjecture. The evidence for printing money to pay for things points in the other direction i.e it has caused massive problems..maybe not for economic insight but because too much control falls into the wrong hands without checks and balances (other than FX and financial markets) and therein lies the problem and the inherent risk to adopting this process. I understand Mosler”s argument that you must put your faith in democracy but a Government hanging on to power by a thread is elected but i personally wouldn’t trust any party with this kind of control.
MMT is happening day in day out, whether you like it or not
It is not a policy prescription
It is what happens
The policy prescriptions can be laid over it
And it is now the best means to control inflation
“MMT is happening day in day out, whether you like it or not..It is not a policy prescription..It is what happens”
Well everyone will agree a government with its own currency cannot default ..BUT the currency can become baseless and this has basically the same effect..so as it stands i see no evidence of a real life example of a country successfully freeing up the printing presses then curtailing inflation through taxation (as they exhaust natural resources) . But there are lots of examples where printing of money has debased a currency.
I don’t see the the policy implementation you advocate as a corollary of MMT anything more than being conjecture.
You don’t see because it works
And you refuse to recognise that it is…
“ I don’t see because it works”… please excuse my ignorance but please enlighten. I have seen QE successfully reduce long term interest rates and prevent deflation, but that is not the same thing..
Which country has successfully adopted PQE? and then stopped inflation though tax rises??
Try 1945 onwards if you might, in effect
TomMcCann says:
“I don’t see the the policy implementation you advocate as a corollary of MMT anything more than being conjecture.”
So how did ‘we’ bail out the banks to the tune of £435 billion ? And run QE programmes in the US, EU and the UK. These major economies have not gone into hyperinflation after the creation of (an estimate I saw recently) of 20 trillion (Dollars probably )
I suggest there might be an element of QED there. MMT works.
It WILL go to bagwash because the wiseacres refuse to recognise that the result has been to produce rampant asset inflation. I’ve actually been told by someone from the financial ‘community’ that inflation means ‘general inflation’ so asset inflation doesn’t exist. OH! Really ? You, and a few others vastly more influential, seem unwilling to accept the logical necessity to balance money creation with taxation so we will crash the asset markets again.
Hey Ho. And we wonder why we have financial crises, when the City of London is the official centre of Cloud Cuckoo Land.
So we are all believers in MMT and PQE but we don’t realise it??? ..and there in indisputable evidence that it works??..but only you know this Richard? All sounds bizarre..
Andy – QE suppressed long term yields, not the same thing
I suggest you go and do some proper reading and stop wasting my time with fatuous comments
Sam:Both kinds of money are used to buy government bonds.
That is simply wrong. The only kind of money that is accepted for settlement for buying government bonds is government money, reserves. I do not like the way Kelton expresses some things here; ultimately government debt and private debt are exactly the same type of thing, they are both debt, but “The money to buy the bonds is supplied by the seller of the bonds” is exactly correct.
But the government does not actually owe anyone
How is that debt when owed to the government?
Calgacus: what is your source for this claim?
Bonds sold in the primary market, that is when they are first issued, can only be purchased using bank of england reserve money.
However, once the bonds have been issued, the market makers might decide to sell them to you with bank credit on the secondary market – so, you get a loan, transfer the money to them, and you get the bond.
Its worth pointing out that should you be with another bank to the market maker, the act of transferring money to buy the bond, will involve your bank transferring some of its BoE reserves to the market maker – so, in effect it is buying the bond with reserves.
Thanks, Tony Weston, for explaining that. And the only thing that matters to the government vs the non-government is the initial deal. What happens after that in the private sector doesn’t affect Kelton’s point.
It is tough to think of actual exceptions to a (slightly more general) “only reserves for bonds” statement. Here is one: the Louisiana Purchase, the sale of which was through Baring and other banks that got US bonds, for which they transferred ready money to Napoleon. So if you are financing a transfer of sovereignty over 2,140,000 km2 then I am sure you can easily get government bonds without first giving government reserves to the government. Otherwise, good luck. (Of course you can think of the same deal as Baring etc buying those bonds with reserves and the US government giving the reserves to Napoleon.)
As for the other point,
Richard Murphy: But the government does not actually owe anyone .. How is that debt when owed to the government?
When a government issues a pound note or a gilt, they are both debt, they are both (almost) the same thing. Nobody is confused by saying a 1 pound note and a 10 pound note are basically the same thing; and that is almost the same sort of difference as that between a note and a gilt. But people hallucinate that there are completely imaginary differences. (FDR: “government credit and government currency are one and the same thing” got it right.)
The government certainly does owe the holder of a note or a gilt something. They can be used to pay taxes. They can be used to buy things from the government. In general, they can be used to cancel a credit-debt relationship going the other way, of the holder owing the government. Taxation and purchases are merely special cases of this. What the government owes a creditor, a bondholder, a noteholder is this recognition of its debt to holders and cancellation of the debts of holders to it, going the opposite way. That’s it. That’s all there is to commerce, as Mitchell-Innes said. There is nothing special about government here.
The problem is that people avoid using the primary dictionary definition of debt used here as an immaterial, social, moral relationship, a human universal, in favor of some secondary, derived, historically particular and irrelevant and logically inapplicable definition having to do with interest or dates or what have you.
But if one doesn’t do this, and speaks logical and ordinary English or any other language instead of automatically lapsing into thinking with logically inappropriate jargon, something which is rarely done, so familiar is this jargon then one sees that of course government debt is debt, just as private debt is. The basic difference is that the government is much bigger than you or me (the frontispiece of Hobbes’ Leviathan). And this is a really, really big difference, which makes people use the government’s debt as money, and treat it as a “thing”, which they can do as individuals, but not when they consider the whole Leviathan.
My question is whether they are debt in the sense that in truth there is no actual obligation to repay at all, and that repayment is intensely undesirable
I stress I am playing with ideas
But the reality is that they are capital
Another introduction to MMT website: https://modernmoneybasics.com
Their take on “Bonds”: https://modernmoneybasics.com/facts/#Doesn%27t+the+government+have+to+borrow%3F
The UK should stop issuing bonds and instead offer term deposits at the Bank of England offering rates of interest similar to those offered on bonds at the moment. The Bank of England can never run out of UK pounds, so the savings of the institutions that deposit money with them will be 100% guaranteed and the ludicrous narrative of national “debt” will be consigned to the dustbin of economic history (hopefully with all neoclassical macroeconomics) and the public will then see austerity for what it actually is – an ideological decision masquerading as economic necessity.
Tony Rooney says:
“The UK should stop issuing bonds and instead offer term deposits at the Bank of England offering rates of interest similar to those offered on bonds at the moment. ”
Presumably there is a good reason why that apparently simple prescription wouldn’t work ? I suspect in part it’s because the market in bonds allows flexibility in being able to avoid seeing out the full term of the deposit (?) Because a bond is of fixed duration a run on the BofE isn’t possible, yet the bond holder can get liquid cash via the bond market (at profit or loss dependent on current circumstances) at any time.
Is that how it works ?
This is true of the bond market, but could be equally feasible of term deposits. Different time periods of deposit offering different rates of return. Also, the ability to withdraw at short notice with penalties to pay as a result. It would simply remove an asset class (bonds). This may be viewed as a good, bad or neutral thing, but the removal of the pernicious “national debt” narrative would far outweigh any negatives.
I agree that government borrowing, especially from the Central Bank is not debt. The traditional way of thinking about this is causing unnecessary harm to many developing countries. For a sad commentary, see link below:
http://www.centralbank.org.bb/_economic-insightbb/printing-money
I like Tim rooneys post. I’d add, isn’t so-called national debt like national capital? It’s one way to express the net worth of the uk? This treats the sum as a below the line credit balance that represents the net amount invested in the economy. Why would you seek to repay this? I don’t see companies rushing to repay their capital, unless of course they don’t want to continue to exist.
I broadly share that view
This so called debt is non-repayable
Capital is also a credit in the balance sheet
Wh6 not call it capital?
“Why not call it capital?” Because it would destroy the economic, fiscal and monetary paradigm that has been dominant in government (and nearly everywhere else) for the past 50 years.
In the scenario described, the thread mixes up ownership of the 3 with creation of the 3. At the point the bonds are purchased, the 3 does not belong to the government, it belongs to the purchaser. Additionally the receipts for the bonds goto the purchaser,not the government. Now, of course if we flex the rules through indirection and allow the central bank to purchase the bonds, then yes the government is in effect borrower and lender, however that is not the stated aim of gilt based qe is it, nor would the successful measure of gilt based qe be satisfied if this were the case, ie to drive yields down.
But the asset owned was created by the government in both cases
There is no mix up at all
Ford created my car, it was their asset, then my asset. Until I sell it back to them, it’s no longer their asset even though they created it. Of course they can create more cars, but the specific car (the 3) is mine, not theirs.
You entirely miss the point
The discussion is on asset swaps with the same entity
I do favour the straight talking of MMT. There is something of a parallel with much unsuccessful social science I’ve been involved in. Lie detection is an example. They strive to do simple experiments, but over time we find most of the language they are using is wrong, other variables are needed and so on. The conclusion is we are no better at spotting lies than a toss of a coin. MMT shares something with this pointing out of the bleeding obvious – though remember this is to a world of individuals that usually over-rate their own knowledge and abilities. MMT carries the burden of telling us we’ve been conned by much economics and we don’t like being told this, even in such obvious areas as religion. Kelton is bob-on, but this isn’t enough.
I think there might have been reason for ‘borrowing’ it…. that is, if the government didn’t soak up the reserve money, then the banks might start lending it to each other at a rate less than the BoE’s target rate, thus thwarting the BoE ability to set effective interest rates.
However, considering that the BoE pays interest on reserves anyhow, this doesn’t apply – A bank won’t lend to another bank at less than the base rate, if it gets the base by leaving its reserves where they are.
Kelton is spot on in my view and Richard and others are right to support her narrative.
But those who fret that it is not enough are right too.
Did anyone see Channel 4’s interview with George Osbounre? Ouch! A masterclass in ignorance and myth making. And Osbourne was sincere. He believed in what he was saying
You look at most politician’s pronouncements about debt and ‘balanced budgets’ and you know that the wrong people are in charge because they do not understand.
The simple fact is that most people do not understand where money comes from (talk to any one at a CAB who helps people deal with debt). When people talk of sovereignty they talk of law and concepts like ‘rule’.
But sovereignty is also about printing the domestic currency into your economy with a mix of public and private or whatever is needed (and we need more real public money at this moment in time as we have enough debt). This fact is conveniently overlooked – especially by anti-statist Neo-libs and Tories.
Printing real money is an act of sovereignty. An exercise in power. One which only the banks and the DUP are deemed to be worthy of it seems.
Money is taken for granted by society. And thus no one understands it.
… if a Job Guarantee at a living wage was implemented along with a decent universal pension then savings would no longer be necessary…
Roger Stokes says:
“… if a Job Guarantee at a living wage was implemented along with a decent universal pension then savings would no longer be necessary…”
I think people would still wish to save. If only to make large purchases, pay for holidays etc and have something for ‘a rainy day’.
It’s a very comfortable feeling to have something ‘in the bank’. This is precisely why the ‘must reduce the deficit’ narrative plays so strongly. Most of us are terrified of being in debt. Many of those who are wealthy are so because they are using other people’s money and are either confident of always being able to repay, or not frightened by the prospect of defaulting.
When discussing Job Guarantee and Universal basic Income it is difficult to get past the way we have been programmed to think about money. Either scheme (and I believe you’d need a combination of both) would change our collective perception of the relationship we have with money beyond what most people seem to be able to …understand….. believe… imagine.
I think it might take a very authoritarian government to introduce such change, and authoritarians are not usually of a benign disposition in regard to the rest of humanity.