I am not often inclined to agree with Chris Giles at the FT: poor old Chris has his head in the sand of dogma far too often to usually make much sense but a couple of quotes from his offering this morning are worth noting (as long as you ignore the packaging they come in). The first is this:
The message from the British government's independent economic forecaster [The Office for Budget Responsibility] will be that Brexit will hit the nation where it hurts most: its wallet.
And the second is:
This is a time for evaluation and explanation of the public finances rather than rigid rules.
Since the second quote is always true this has a stopped clock telling the time correctly twice a day quality about it, but that is not to undermine its truth.
But in that case let's start with the glaringly obvious. This is that the UK is forecast to borrow £55 billion this year:
I think it will turn out to be more, but let's stick with the official estimate.
Then let's note that the Bank of England is forecast to do £60 billion of QE using government debt this year.
And then let's recognise that as the government's own accounts show, QE cancels government debt. This is hardly surprising: if the government owns the Bank of England which owns the government's debt then the government owns its own debt and you can't owe yourself money. It's as simple as that: Emperor's new clothes stuff, to be honest.
So this has three consequences.
The first is that the national debt is not £1.6 trillion as people keep saying: it's £400 billion or so less than that. And I think that to lie about the size of the government debt is really quite serious.
Second, it means that if things go to plan the size of the UK national debt will fall this year. I admit that will only be by about £5 billion but it is a fall: in net terms debt it being repaid, albeit by QE.
And third this means that the official view of the public finances is just wrong: if a deficit is a measure in the change in net government debt from one year end to the next it is possible that the government will run a surplus this year.
And it will do that without creating enough inflation to meet its targets.
But despite it we are apparently dedicated to austerity when that is the last thing we need. Wallets do not need to be hit, in other words.
So I agree with Chris Giles: we do need some evaluation and explanation of the public finances. We could start by explaining what the real national debt is. And what the real deficit is. And we could continue by explaining that we don't need austerity as a result. In fact, we could do with a dose of extra spending. That would be a proper evaluation.
But I can't see Chris Giles and the establishment saying it. Why? Because they want to impose the misery of austerity on people.
Nor can I see Labour saying it. And that one is a lot harder to explain.
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Thankfully where I work (an arms length management company) although wages have dropped (I now earn around £2.5K below the average wage after tax whereas at 2010 I was £1.5K above it) we have continued to invest in new homes, infrastructure, training and even apprentices whereas the Council where I work has made immense cuts.
All I can say therefore from a micro perspective is that spending in an economy works – it keeps it moving and sustains so much – my job, private sector contractor’s jobs, suppliers jobs – it works.
However, a lot of our spending is from reserves created by managing previous budgets well. That money is being eroded and we know that there will be less money in the future and this will mean (guess what?) less output which means of course work will reduce for everyone in the chain of work.
There is no logical explanation not to spend money that I can see based on the issues about Government spending that have been explored in depth in this blog.
It’s senseless and its only objective seems to be to manufacture a false need to reduce costs so as to make a lot of public sector work attractive for further privatisation.
And I agree with you about Labour: they have no excuse to be silent on this issue. But the Greens and others must pipe up too.
It is clear, as you say, that QE amounts to debt forgiveness for the Government. And that if that holds the national debt is more like £1.2trn, not £1.4trn. But will it hold? We have two possible economic futures, after all. First, permanent low-growth, low-interest ‘Japanification’ of the British economy – and perhaps the world economy. In that case the BoE will never sell the gilts it purchases, and so Government debt of the total QE size is forgiven (the rest is not forgiven but low interest rates makes that no problem).
Second scenario: a return to economic ‘normal’, i.e. 3-5% growth, 5% interest rates, and a return to inflation as the chief monetary economic problem faced by the BoE. In that scenario, the BoE may have to sell gilts, as this would be a key tool in its counter-inflationary arsenal. Also interest rates at ‘normal’ would be a much larger burden on the tax payer regarding the national debt.
My guess is that the former scenario is more likely than the latter, i.e. the ‘Japanification’ of the British economy. But that raises another problem: there is then no argument for ‘special measures’ such as People’s QE. After all, systemic money-printing, as opposed to emergency money printing, takes us to Zimabwe and the Weimar Republic and the destruction of the middle classes.
Your analysis may be right (I don’t actually know, being an economic dunce) but I’ve never yet read any suggestion that Japan was on the road to Zimbabwe or Weimar.
Have I missed something?
Isn’t it time we stopped calling it the ‘National Debt’?
What do you suggest instead?
National equity?
National capital?
How about ‘National Savings’? (https://ralphanomics.blogspot.co.uk/2013/10/national-debt-should-be-renamed.html)
It’s really National Prosperity Money since for economic growth you need the money to actively circulate so that it can be used to contract with each other for goods and services. Whilst savings are necessary it withdraws money from this contractural use:-
See Bank of England’s article “Money creation in the modern economy.” (Second article)
http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx
Any of the other suggestions would work – National Equity/Capital/Prosperity. They all give a positive message for the future, whereas ‘Debt’ is entirely inappropriate and negative.
I’ve posted it before but for anyone who hasn’t yet watched it, this presentation explains quite simply how a modern fiat currency economy operates. Although it’s for a US audsience, the principles are the same for any currency-issuing sovereign state. Specifically regarding the ‘National Debt’ one could jump to #28.20. https://www.youtube.com/watch?v=bHQCjFebIf8.
For how much longer can the neo-liberal ‘balanced budget’, austerity rhetoric maintain any credibility whatsoever? Without a properly functioning macro-economic framework, no governemnt policies can make sense. Furthermore they will be destructive, as it being witnessed here and in the Eurozone. On this one point at least Bill Clinton was right – “It’s the economy, stupid” (just a pity he didn’t understand how it works either!).
I think there may be a blog in this at some time
Thanks
Richard
Of the two of Giles’s comments you quote the second is as you say indisputable (and can’t be repeated too often either).
But for my part I think that the first embodies a view about ordinary people’s motivation which is highly questionable, namely that “their wallet” is what most matters to everyone without exception.
That may well be what the spivs in the City believe and what solely motivates *them*. But is it just as true of everyone? I don’t believe so: I think to believe that is just plain cynicism.
Whatever those who’ve never ceased to deplore and bewail the Brexit vote may choose to think, the fact is that in part it reflected a decisive rejection of the view that the thing people care most about (or even the *only* thing) is their wallets. Whether wrong-headedly or not (take your pick) they think about plenty of things other than just money. There can be no room for doubt that some – however contemptuously and patronisingly others may dismiss their opinions – were and continue to be motivated *at least as much* (I would suggest *more*) by a sincere conviction as to the vital necessity of Britain reclaiming its previous power to make its own decisions and not be subjected to decisions made in Brussels, ie of becoming again a sovereign nation instead of only one component in an increasingly federal European state EVEN THOUGH THAT MIGHT MEAN THAT BRITAIN BECAME POORER AS A RESULT.
That a lot of their fellow-citizens had the temerity honestly and sincerely to hold that view and to exercise their democratic right to vote accordingly is a fact that many of those on the losing side of the referendum result don’t seem able to come to terms with – as shown by the wailing and gnashing of teeth going on in certain quarters.
But it’s a fact all the same, like it or lump it.
The better way of justifying an explanation is for the nation at a time of uncertain economic implications from a Brexit is to have an definitive and complete official assessment/explanation of where the nation’s money can come from to promote economic growth. It is no longer good enough for the financial interests of bankers and the super-rich to dominate this matter and shroud it in secrecy. Money is after all primarily a communication tool that allows us to contract with each other for the goods and services we all need. It accordingly has a public utility aspect to it!
Any assessment/explanation must look carefully at the detailed and comprehensive MMT analysis of money creation:-
http://heteconomist.com/exercising-currency-sovereignty-under-self-imposed-constraints/
http://heteconomist.com/government-spending-under-alternative-operational-arrangements-in-a-nutshell/#more-15234