Common sense would have it that balancing a budget makes sense. I guess it all goes gack to Dickens and his maxim that if income was £1 then spending £1.025 was a recipe for disaster and 97.5p a platform for happiness (even if it works so much better in pounds, shilling and pence).
The trouble with the maxim is it's, in the long run, true for households (when inflation is adjusted for).
And it's almost never true for economies as a whole, or their governments, as Sam Brittan argues, eloquently, in the FT this morning. As he puts it:
I have no doubt Oliver Cromwell could balance the UK budget with sufficiently draconian measures. But there are such things as conflicts of objectives. The aim of the macroeconomic side of a national budget should be to help balance the economy. George Osborne's comparison, when he took office as chancellor, of the national budget to “every solvent household in the country” was wrong, wrong, wrong. Around the same time Sir Mervyn King, governor of the Bank of England, called for a grand bargain in which lower domestic demand in deficit countries was offset by an increase in domestic demand in the surplus countries. Predictably there was no such bargain and the half- million increase in UK export sector jobs he hoped for did not materialise.
And, as he rightly notes, agreeing very much with what I said this week, they won't without international cooperation, which is the antithesis of Cameron's intention to stand alone whilst complying with every demand of 'the markets'
Nor will they happen without innovative thinking of the sort Lord Turner has called for. As he noted:
The crucial mistake was a failure to recognise that debt issued by a nation within a multinational currency zone is quite different from debt issued by a nation which also issues its own currency — it is inherently more susceptible to default risk, it is inherently less likely to be perceived as risk-free.
Which is why we aren't Greece. And why we don;t need a balanced budget. And why Osborne is wrong: badly wrong.
And which is also why for us QE has worked by simply cancelling debt - something I have suggested and which I think he implicitly acknowledged has, in effect, happened. I suggest something more radical: make it explicit.
The ground seems to be clearing for radical rethinking on economics. The errors are being acknowledged now: that's the basis for building change. I just hope some serious alternative thinking is embraced. Turner may just be the man to do it.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
While we’re about it perhaps now we can lay to rest the myth banks lend anybody anything. I was watching Max Keiser on Andrew Neil’s show the other day and while there were disagreements all were in agreement that societies can’t do without banking. I beg to differ. What we need is money creation and that’s simply one aspect of banking. In fact, having money creation and storage under the same roof is what’s reinforced the bankers’ centuries-old scam that the money they ‘lend’ you comes from customers’ deposits. That misconception needs to be done away with. Money creation should be understood for what it is and undertaken by specialists with the specific brief that new money mustn’t be introduced in a manner that will devalue the currency. So, if you want to build a hat factory and you need funding, you can have new money created for it in appropriate amounts. If you want to buy a new hat though and you don’t have the money, you’ll have to borrow it from a lending house which will operate on a full reserve basis (or a 100% reserve basis, La Coppola assures me there’s a distinction) so you’ll have to have a quid to lend a quid, no more fractional reserve nonsense. Whatever, we need to separate these functions, money creation and money lending. Banking was always a scam. Let’s not have any more banks.
“lending house which will operate on a full reserve basis (or a 100% reserve basis, La Coppola assures me there’s a distinction) ”
Any bank operating on a full reserve basis, by definition cannot lend anything. All deposits would have to be reserved at the central bank and hence would be unavailable for lending. You can operate full reserve banking of demand deposits, i.e. non-demand deposits can still be lent out, but guess what, UK banks generally hold liquid assets equal to their demand deposits, hence it will have no difference.
Then we’ll stick with the ‘have to have a quid to lend a quid’ definition. Anyway this wouldn’t be a bank. There wouldn’t be banks as we know them, this is the point I try to make.
If banks had to purchase the credit from the central bank, which would then nationalise money creation and keep it under democratic control, I see no reason for banks not to perform their basic function of taking deposits and lending. Economic growth requires credit creation.
At what rate would you envisage the banks buying credit from the central bank and why please?
“At what rate would you envisage the banks buying credit from the central bank[?]”
The central bank would decide the quantity and the market would decide the rate. I don’t understand why the banks are only charged seignorage on note and coin.
“and why please?”
Because that’s the only way banks would be allowed to create loans.
Having control of your own currency does allow you far more leeway in terms of the use of government debt, but in a very open economy you run the risk of damaging your currency and driving up inflation. The UK has thus far avoided this, because foreigners are quite happy to hold Sterling (the cynic in me is that allows various undesirables to buy up London property – according to stat I saw recently, over 50% of central London sales were to foreigners over the past 12 months.). But lose this safe haven status (or position as money launder) and the UK could face a very different prospect, with foreigners not prepared to hold UK govt debt and residents desperate to externalise their assets. And then the economy degenerates into a currency depreciation/price inflation spiral. And I have invested in enough emerging market countries around the world to see where it all leads.
Respectfully: that’s the standard dairy tale of the bond markets that is utterly discredited
So you believe that if Greece had it own currency, it would have been fine despite the high levels of government debt and a deficit over 10%. And that Greek citizens wouldn’t have moved all of their money out of Greece, causing the currency to collapse, and inflation and interest rates to sky rocket. Yes the Greek government wouldn’t have had any risk of going bankrupt, but would have utterly destroyed the economy in the process. Only countries with large current account deficits would be immune, given they don’t have need for foreign currency. Large current account deficit countries will always rely on attracting foreign capital and be at the mercy of global bond markets.
Tax evasion is another issue
That could have killed the economy
But that’s not what you draw attention to
Your analysis is selective and ignores key causal issues
@Tom’s latest – you say “Yes the Greek government wouldn’t have had any risk of going bankrupt, but would have utterly destroyed the economy in the process.”
Can you tell me how your description above differs from what is now happening to the Greek economy?