Over the last week I've been arguing that the government gilt purchases made under the quantitative easing programme effectively cancel that debt. Being realistic, as the IFS predict, we're running big enough potential deficits over the next few years to mean there will in practice be no capacity to resell this debt. The reality is that as money supply is falling but for quantitative easing we could not also resell the debt. So for all practical purposes it's cancelled. That means in net terms over the last seven years from 2005 to 2011 inclusive we've borrowed a little under £35 billion a year in net terms, and that is less than we did in each of the years 2005, 2006 and 2007.
Do long as the banks do not lend this situation will persist. Bank lending has been the way we've made the money that the country needs to keep the economy going. As long as banks don't lend, and that looks likely to be for some time to come since without an increase in one of consumer demand, business investment or net exports their lending is bound to fall, then it will fall to government to both fill the gap in the economy that they create by their inaction and at the same time create the money that's needed to keep the economy going. So, I can pretty confidently predict that if, as the IFS suggest, the government deficit will be £120 billion next year, £99 billion the year after that and £79 billion in 2014-15 then you can be pretty sure that quantitative easing in those years will be £85 billion, £65 billion and £45 billion respectively leaving net borrowing at around £35 billion a year. Total government debt despite the deficit will, therefore, be no more than about £750 billion or so in 2015 which will be, give or take, about 50% of GDP, a figure that will be vastly lower than elsewhere in the Eurozone in particular. And we won't have inflation as a result because, as a consequence of the actions of this government which have pushed almost 3 million people now o9nto unemployment, with that figure bound to rise over these years, wage inflation pressure will be virtually non-existent whilst the collapse of demand in the Eurozone will tkae the pressure off other prices too.
It's pointless arguing about the opportunities that this provides to this government: it is clear that this government only has the main of destroying the state sector and public well being. It will do this for doctrinaire reasons whatever the economics of the issue. So the question is what opprtunity does this provide to Labour?
First, it has to tell this story. Politics is about telling credible stories about how the world works. This one is such a story.
Second it has to claim credit for it. Labour created quantitative easing.
Third it then has to say the debt crisis is not an excuse for all that has happened: there has been no debt crisis. The pain we're going through and the much greater pain to come is not and cannot be justified by the economics of this situation: they will have been imposed by Tory choice.
Fourth, we could then plan a very different economy. We could then plan to borrow for growth. After all, we're hardly borrowing at all now. Net borrowing of just £35 billion a year by the government is not enough net borrowing to meet the demand of pension funds for UK government gilts to underpin the pensions of baby boomers now retiring in ever increasing numbers - and it is those gilts that are actually used to pay those pensions. So the government may actually need to borrow more to meet the demand for gilts.
What might it do with the extra lending? Well, it could invest in the Green New Deal for a start, making this country much less dependent upon carbon fuel and much more fuel efficient in the process. That would provide a massive rate of return on the spending incurred in the future, and help our long term exchange rate. And it could build all the hospitals, schools and other infrastructure we need without recourse to PFI. It could even build the flood defences we need - to stop the Wash and 50 miles inland flooding, for example. We could also build the social housing that is so obviously and desperately needed in the UK; housing that would pay for the interest on the borrowing with the rents received.
The point is, once we understand that our borrowing is now already under control we can then talk about what we really want to do with the economy. And because of quantitative easing, whether it was planned to achieve this outcome or not does not matter, our borrowing is now under control. And in that case we can plan for the sustainable growth in jobs we need.
Now of course as employment would rise quantitative easing may cease to be possible as the risk of inflation would then be real. I accept that. But that doesn't matter. By the time that became an issue those then in work would be paying enough additional tax to make sure we need not need quantitative easing anyway. A virtuous circle of debt reduction would have been created.
All this is possible: we just have to realise that quantitative easing has delivered the solution to our debt problem. Why are we waiting?
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Quick question, Richard. It makes sense to me that debt held by the central bank is not debt at all: but if you are talking about issuing gilts that is borrowing. So in what sense is the debt not going to be resold? It may be different issues but is it not the same thing in the end? Sorry if that is a stupid question
The debt held in the central bank is gilts.
And gilts were of course issued to create the borrowing
So they can just be netted out – or cancelled even! So the borrowing is no longer there
There was borrowing – I agree. But quantitative easing cancels it
I understand that. But the bit I am not following is the proposition that the debt will never be reissued coupled with the idea that further gilts will be issued to cover the pension funds etc. Is not the issue of new gilts the same thing functionally as re-issuing the old ones? Is it your point that we are repurchasing more than will need to be issued in the future?
Ah, now I see.
My argument is right now (or after next round of QE) there will be £650 bn of debt.
And then over next three years there will be technical deficits of about £120, 99 and 79 bn.
The later require new debt issues, I agree, even if much will then be cancelled by QE. Over £100 billion of net new debt will be issued.
But that dopes not mean existing debt cannot be cancelled: what it says is if there are going to be at least £100 bn of net new debt issues anyway over next three years, or almost £280 bn gross there is no way we could sell the £350 billion now held by BoE back to market as well – which is why it can and mist be treated as cancelled as it is obviously never going to be reissued.
But the significance is big. In March 2012 under the non-cancellation calculation UK debt will be about £1,030 bn. Add on £280 bn per IFS forecasts and it will be over £1.3 trillion by 2014. I say it may only be just over £750bn. That is one heck of a difference.
So we’re not purchasing more than will be needed to be issued: there will still be issues in future of new debt. But none of the existing debt owned by BoE will go back into the market whatever happens, so we can cancel it
One further question. Recently the financial press has posted horror headlines about the trillion pound debt: and this has served to justify the need for cuts etc. But I noticed that in most cases they specifically stated that this figure excludes the bank bail outs of 2008. I took that to mean that debt held by the bank of england was not part of the trillion. Is that not correct?
No
That means the debt of the nationalised banks is not included
Ah, I see. Thanks Richard
Thank you, Richard. Beautiful!!
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RM , I have always thought you have made a valuable contribution in debating the area of taxation. But your economic theories leave me bewildered. If you could produce any credible evidence of where a Green New Deal or the like works anywhere in the world, well, I could be enlightened. I am always suspicious of quick fixes.
Try reading a little Keynes.
And Martin Wolf on the FT.
Or Paul Krugman.
And I agree – it’s not happening – but that’s because everyone has chosen recession. But they needn’t.
Open your eyes I say: my theories are well supported by a great many serious and right thinking economists. It’s only those who persist in sticking to their black boards and who have never noticed the real world who disagree.
Maybe QE isn’t being used to boost the economy like the policies in the Green New Deal, but the likes of the BRICs economies are spending and investing similar to Keynes, aren’t they?
and then there’s something happening in the US too….
It seem to me that it is a case of Orwell’s “there are some things so wrong that only a really intelligent person could believe in them”. Austerity is such a thing.
It occurred to me to wonder why this is so universally accepted. As I see it, if you leave out any analysis which rests on “class war”, conscious or unconscious ( I don’t, but am prepared to accept that we are good enough at self deception to avoid that characterisation of what we do), there has to be a reason for adherence to theories which clearly don’t work. I have the impression that the origin of all of this is fear of hyperinflation, and to the extent that is true we are making the mistake of being very well equipped to fight the last war, as was said in another context.
The focus on “sound money” is the basis for the independent central bank, which is so beloved of those who adopt the neoliberal line. In the end, the aim of that is to ensure that when things go badly wrong (as they must if you follow those theories in practice), and the society faces the stark choice of printing money or letting the people starve, the tendency of government to choose the former will be prevented. That is morally abhorrent, and it is also a failure, since it misunderstands the origin of hyperinflation. But it fits well with the neoliberal line of “incompetent eebil gu’ment”. Political control of a central bank is not to be feared: it is to be embraced, because it means that bank would have to focus on people and also that we would have a chance of adapting policy to the actual situation: notably lacking at present.
My baby beginners thoughts on this are here
http://thosebigwords.forumcommunity.net/?t=49735075
I am new to economics, so what I say may not be accurate: but for any who want to be thinking about these things at an elementary level what I am trying to do is grasp what is happening in simple terms. I will welcome any corrections.