It's a popular myth that government debt is a bad thing.
It's a dangerous myth that we should reduce government debt. It's especially dangerous that this myth is being used as part of the Tory election campaign.
First, some facts. It's a fact that the UK government does not need to issue debt. In the modern era of money the Bank of England can create any amount of money that the government requires without having to borrow or tax a penny of the sum in question. That is because all money is now, as a matter of fact, created out of thin air when banks lend money, inclduing when (as will be legal again after Brexit) the Bank of England lends directly to the Treasury. This is because all money is debt: if in doubt read what it says on a UK bank note, and realise that these are just debt, a fact that is confirmed by this cash being included in the national debt in the UK's government accounts. Quantitative easing also proved this: £435 billion of UK national debt has been monetised since 2009. There is then no technically reason why all government debt could not be cancelled (as this QE debt has, in effect, been) in this way. As a result it has to be appreciated that when the UK has its own currency and its own central bank government debt is a choice and not something that has to be issued.
But this this then leads me to state the other obvious fact: government debt is just another form of governmement created money. It's convertible into cash, as QE proves. And all it provides is a savings mechanism. But it is a very important savings mechanism. In fact it's the most secure for of saving available in the UK. That is because whatever happens the UK government will always be able to repay its debts because it can always, on demand, electronically create the cash to do so. It has that right. No one else has it in the same way. And creating that money is effectively costless: it happens simply by entering data into a computer.
Having made these obviously correct points (which appear to have passed most politicians by) let me now say why we need steady growth in government debt. There are several good reasons.
First, if we are to have some inflation (and we generally agree two to three per cent is good) then we need more money. And government debt is money. It is, in effect, the promise to pay that underpins the economy. So inflation says we need more of that debt each year. If we don't get it then the economy is starved of cash and that causes economic stress, at the very least. It might also lead to more private debt, and that is much more dangerous as it carries much higher interest costs than government debt and so constrains real growth. So inflation demands more government debt. It's the best deal for a growing economy that there is. That's why governments have to create it.
Pensioners also demand more of that debt. The annuities that underpin all private pension payouts involve a delicate juggling act that balances life expectancy against the funds available and the return that they can generate. One variable where the risk can be reduced is the rate of return and the certainty that it will be paid. The return on government debt may be very low (it's effectively negative at present after inlfation is allowed for) but it is guaranteed to be paid, and that is exactly what pensioners want. No one wants their pension to expire before they do. So, government debt is what pension annuities are very largely invested in. And as we face an increase in private pensioners as the baby boom generation retires the need for government debt to underpin their pensions is growing.
Third, banks need this debt. When most people put money in the bank they assume it is safe. That is because the government guarantees the deposits most individuals make in banks so that if the bank fails the depositor will get their money back. That is the only reason most of us trust a bank. But this does not apply to businesses depositing millions of pounds in their bank accounts overnight, as happens every night in the UK. Those businesses have no such guarantee. If the bank fails on them, as Lehman did in 2008, then they might well go down with it. So they don't deposit the cash. They enter into contracts with banks. The banks sell them government bonds in the evening, which the despoitor then own, and which cannot fail because the UK government (unlike banks) can't fail, and which the bank agrees to buy back in the morning at a slightly higher price, with the increase representing the interest due. If there were no government bonds to fulfil this role then the banking market would grind to a halt.
Fourth (and I like this one), at times like the present when the real rate of interest (as adjusted for inflation) is negative those who own government debt subsidise the taxpayer. The more debt there is the more the taxpayer is subsidised.
Fifth, interest paid on government debt is a good thing. As already noted, it underpins private pensions for a start. And a lot of the most stable savings funds. I'm not saying this is a perfectly equitable redistribution of wealth, because it is not. But I am also saying it is not income lost to the economy. And because it's taxable some is even recovered. But saying it's terrible is akin to an argument against usury and is again akin to an argument that a government should not have a role in seeking to provide a secure, stable and safe banking, pensions and savings sector in the country. I would argue that is precisely one of the roles government should have.
So we need debt, and because of inflation, growth and growing numbers of pensioners we need more of it. How much more? Notional national debt is now about £1.8 trillion and after QE it is around £1.4 trillion. Assume inflation of between 2% and 3% and how much extra debt do we need a year? Anything between £30 billion and something in excess of £50 billion would seem to be the answer. It's not a precise science: there will be swings and roundabouts.
But the point is that this new dent is vital: it has to happen or the economy is harmed. And this sum excludes debt issued for specific purposes, like an infrastructure fund. Issue less than this and the economy will be in trouble. That's a simple fact and explains why the Tory obsession with a balanced budget is so dangerous.
Which brings me to the final fallacy that needs tio be addressed, which is that one day the debt will have to be repaid. No it won't. That's because this debt is money. That makes it unlike all other debt which is denominated in money. They're simply not the same thing. Debt denominated in money has to be repaid. Debt that is money is only repaid if we want to destroy money. And why would we want to do that? Is anyone seriously suggesting that we can live in a moneyless society in future? I seriously doubt it. And in that case national debt does not have to be repaid, ever, which is exactly what history tells us.
Government debt is a good thing. The danger is inherent in the myth that it isn't.
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Hi Richard – I enjoy your writing and I’m sure you know exactly what you are talking about. I understand all the individual words of this article, yet can’t make sense of it. Is there a basic primer you can point me to that will help me understand this basic core phrase “debt is money”?
Start here http://www.taxresearch.org.uk/Blog/2013/04/19/all-money-is-a-confidence-trick-4/
And money is debt is the right way round
Worth pointing out a linguistic distinction here, Richard.
1) Money is debt in its FUNCTION as an IOU
2) Money can be A NET ASSET, that is, issued without debt connected to it as you mention above.
This distinction is important because it is the source of endless confusion. When people talk about ‘debt free money’ they are really talking about 2) above.
There is no debt free money
That’s another nonsense, this time peddled mainly by the left
i agree but my point was it’s a linguistic confusion between function and issuance.
According to Warren Mosler money is a tax credit, but I think we have reached an agreement that it can be thought of as such, amongst other things. Bill Mitchell says Money is not real – it’s virtual – and it is only a part of total net assets.
I think Warren is playing semantic games on how the government gives cash value
He does not deny it is debt as far as I know
Bill again is playing games – his point is debt is an asset to its owner
2) If you have money then you own some one else’s debt that they must repay through labour.
We are all connected in a web of credit-debt relationships, and society is this web.
Agreed
Government debt is private wealth as a result
Thanks – will check that
This money is debt interpretation is not as helpful as you seem to think.
For example, it renders the second paragraph of this article total gibberish.
“The government does not have to issue debt”; but money is debt and the government definitely needs to issue money.
Similarly most debts are measured in money, making for a highly circular definition of money and debt. Under this circularity the language of money is almost certain to contain paradoxes similar to Russell’s paradox from set theory.
Money needs to be a basic, foundational concept, cf “money is what the government accepts for the payment of taxes”.
But money is more than that
And all money is debt
But debt can be issued in various forms
Interesting points. A concern around your fifth point, the more national debt we have, the more interest we pay to service the debt and the less taxpayers money we have to spend on other public services, like the NHS. I believe we currently pay around £50 billion a year, which is similar to the combined annual spending on defence, police services, fire-protection and prisons etc. (see table 6.4 National Statistics).
Three questions please:
1. is this public sector debt interest paid out of real taxpayers money, or debt?
2. am I correct to think that an increase in debt interest results in less taxpayers money to spend on other things, e.g. the NHS?
3. foreign creditors own around 40% of the UK national debt and a weaker pound will cost them money. In the purely hypothetical scenario where the pound gets weaker, say due to a disagreement with the EU, are you concerned that these foreign investors sell UK government debt pushing up interest rates?
Links:
– interesting article here:
http://www.telegraph.co.uk/finance/economics/11187727/Its-time-to-come-clean-about-our-national-debt.html
– link to ONS results: https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/mar2017
You need to read The Joy of Tax, but it’s pretty much summarised here
http://www.taxresearch.org.uk/Blog/2017/04/10/the-economics-of-scottish-taxation/
The point is tax is not required to pay for spending – the government can create any amount of money it wants at will. It doesn’t do that to prevent inflation: that is what tax is for
So interest does not constrain spending on other things unless we’re at full employment and have inflation – which has not happened for a long time
And re foreign owned debt: if there is pressure on markets the government can QE the debt – just as a company buys back its share to keep the price high the government can do this to keep the debt price high which means the interest rate is low
In other words, the problems you imagine do not exist
A case in point is Japan where the central bank has ‘bought back’ massive amounts of Government debt to the extent that the Debt/GDP ration is 230% when I last looked. There has been constant talk of the ‘bond vigilantes’ refusing to buy the debt and causing a collapse of the economy and credit downgrading -this has not happened and the country still functions.
Bill Mitchell has summed this up well:
‘The Japanese government can never run out of money (yen). It is impossible. Therefore it can never become bankrupted.
2. The Bank of Japan can maintain yields on JGBs at whatever level it chooses, at whatever maturity range it targets, and for as long as it likes. The bond market investors are incidental to that capacity and are supplicants rather than drivers.
3. The size of the Bank of Japan’s balance sheet (monetary base) has no relationship with the inflation rate.
4. If the Bid-to-Cover ratio fell to zero — that is, private bond dealers offered no bids for an auction — then the government could simply instruct the Bank of Japan to buy the issue. A simpler accounting device would be to stop issuing JGBs altogether and j
just instruct the Bank to credit relevant bank accounts to facilitate the spending desires of the Ministry of Finance.
5. If private investors choose to buy other assets once the risk in international markets subsides then the Japanese government (the consolidated central bank and treasury) could just buy more of its own debt — to near infinity. End of discussion.’
On this I entirely agree with Bill
Richard. When talking about the way banks create money etc I think it should be emphasised more that what counts is the banking system, not just individual banks. (Well I think I`m right in this…)
It seems to me (looking at the older blog linked to above) that many of the naysayers assume that banks work as individuals and of course looking at them in that light it`s difficult to see them “getting away” with money creation. (Similar to the `family finances` picture of the economy)
When people realise that the £200k taken from Barclays to buy your house immediatley goes back into HSBC at the cost of a few electrons it is easier to see how the system can be kept in balance.
The banking system is a whole
And it is licenced, of course, by the BoE who underpins it
Well done, Richard. A perfect and succinct rendition of how the monetary system works. Unfortunately, as your respondent Neil demonstrates, very few people will understand it when we are conditioned to think of National economics as being the same as a household’s. You mention that your obvious points have “passed the politicians by”, but what’s worse is that they have passed the media financial commentators by, so nobody is telling the public. Even worse, I believe that less than 50% of the public never read a newspaper; if they do they only read the headlines.
You also mention the fact that the Bank of England is at present restricted from “lending” to the government (this refers to Article 123 of the Lisbon Treaty). It is more correct to say that the government is restricted from incurring overdraft facilities with its central bank (the wording of the Article). That is, to me, the single most compelling reason for exiting the European Union. The whole wording of the Article is in any case nonsense because the Bank does not “lend ” money to the government, it creates it on the government’s instructions.
All accepted!
Thank you for that – sounds like something the Bundesbank & its supporters would have slid into the “Treaty”. But of course, Mrs May-hem would never give that as a reason for exiting the EU.
As that respondent, I should say that thanks to http://positivemoney.org/how-money-works/how-banks-create-money (linked from comments in an earlier article Richard pointed me to) I’ve now had my eyes opened and I start to get it. As a former teacher, something that frustrates me though is the near impossibility of finding any discussion of this topic that doesn’t dissolve into jargon within a sentence or two, making it hard to fully get to grips with. For example, even the best of intentioned explainers will suddenly mention Qunatitative Easing and the purchasing of government bonds as part of a supposed ‘introduction’ intended to enlighten the reader. At that point I’m back to being mystified. Maybe once I get my head round it all maybe I can write the ‘words of one syllable’ guide I probably need myself!
Please do!
Neil, a word of caution. Although Positive Money’s understanding of the way the monetary system works is fine (try their two publications “Where Does Money Come From?” and “Modernising Money”), their proposed remedy is not, in my view, the right one. They want to force commercial banks to maintain 100% reserve capital and prevent them from creating money – i.e. revert to loanable funds. They want the state, via its central bank, (the Bank of England) to be the sole creators of money. But as I see it the monetary system actually works perfectly well, and all we need is for the government to target full, adequately paid employment and stable inflation, then banking would take care of itself. If we finish up with a higher deficit of spending over tax appropriation so be it. If you want more reading, Warren Mosler’s Seven Deadly Innocent Frauds, available as a pdf from his website, and L Randall Wray’s (a bit more weighty) “Modern Money System” are good. I have written a 20,000 word pamphlet that tries to put it in everyday terminology, but I am still not happy with it. One of these days it might be on Kindle, but don’t hold your breath.
I agree re PM
Their prescription would strangle the economy and is wholly unrealistic
Diagrams can often help -I found J. Alt’s ‘Diagrams and Dollars’ useful (http://neweconomicperspectives.org/2014/01/diagrams-dollars-modern-money-illustrated-part-1.html)
But I agree it is often difficult to negotiate the labyrinth of concepts, may of which keep returning you to square one like snakes and ladders with too many snakes!
Like you, I’m an ex-teacher and have been at this ‘game’ for some years. I now feel that ‘money’ is nothing in itself and we need to focus on real resources and the way internationally economies can balance each others needs without the imbalances created by imports and exports (e.g French farmers committing suicide because cheaper imports come from Eastern Europe destroying their livelihood -madness!).
Richard ( if you have a moment!)-I’d be happy for you to pass my e mail to Neil as I’m part of a network of people looking at these issues and ‘self-educating’ offering mutual support and exchange of information -thanks.
Last done….
Thanks Nigel – heeded. I also just found this which appears to be another ‘plain english’ explanation. http://www.michaeljournal.org/articles/social-credit/item/banks-create-money-as-a-debt – but I haven’t looked beyond to what is proposed as ‘solution’ there either.
So how can we get this driven across, when politicians and journalists alike continue to behave as if the government must raise money to spend? I’m thinking about the interview this morning with John MacDonnell by (I believe) Nick Robinson, Nick kept going back to the “How are you going to pay for it?” question.
It’s frustrating that we’re being denied the standard of Public Services we should deserve because of cowardly politicians and a dominant macroeconomic hegemony that would rather see people suffer and die than admit the truth!
That ‘how are you going to pay for it’ question is what is killing the UK economy
The liberation of the people is dependent upon finding a short answer
It’s difficult to think of a short answer that doesn’t either a) sound confrontational, or b) completely alienate the Flat-Earthers watching at home.
The ship has sailed for now, but the Left will need a solid answer by 2022 which needs to be used in every interview with perfect message discipline. Answers to follow-up questions like “What about inflation?” also have to be pre-determined and stuck to.
An analogy that needs tweaking:
“Money is to an economy as water is to the human body. And asking spending to be matched by tax increases is like asking a person to drink only as much water as they urinate. A responsible journalist wouldn’t be demanding that politicians starve the economy of the resources it needs to thrive”
May be the reply to the ‘how are you going to pay for it’ is to say ‘don’t you understand basic economics?’
Why does no one know this within the BBC – it would help so much if they did?
There is a blog coming on how to deal with that question
How much does a policeman cost? Zero.
Or a nurse or a Doctor? Zero too!
Politicians and the media seem incapable of intelligent discussion on this topic.
If we want to calculate how much an extra public sector worker costs (to current taxpayers) we need to discount all the extra tax paid due to the extra worker. First the worker pays income tax and NI, council tax, VAT, duties on fuel etc. The part of the cost that is not immediately repaid in tax is most likely spent on food or other goods and services. This spend creates extra income for others in the economy who consequently pay more tax than they did before. Excluding savings and tax avoidance, the extra cost of the extra worker is exactly zero.
So if money is not the thing what limits the number of public sector workers? The answer is supply and demand. If we try to create too many posts in public service we drive up wages and drive down productivity. So the key is to decide if there is a demand or need, e.g., the economy is less productive/happy than it could be because of crime, bad health or poor education. If there is evidence that we can improve things then government funding is a simple win-win.
Where there is need, the cost of government spending is zero (or negative).
Why does a physicist get that when almost no economist does?
I wrote that argument years ago
I should update it
Love it – when I was working for Sony in the 1980s, I make a rough hack at how much of my wages went on tax – very roughly 60% (when you lump in VAT, tax on fuel, tax on dirnk, tax on “other stuff” plus of course PAYE/NatIns).
Taxpayers do get back the portion of the worker’s income that is taxed, but for the rest of it they (that is, society as a whole) have to give something in exchange– the goods and services that you mention. So that’s the cost right there. The people who provided the goods and services also have to pay taxes, yes, but that does not eliminate the cost.
I don’t get why tax subsidises pensions – your points 4 and 5. Being monetary sovereign means the [federal] governments can never go broke [except deliberately] and never need to save or borrow their own money. In this vein, taxes are not needed to pay for any government debt, pensions included. Taxes are money previously issued coming back to the government to be taken out of circulation, forever. Apart from being a way to legitimize the currency, taxes are costs which can control the money supply. So if the government in its annual accounting fails to spend back more into the economy that it withgraws in Tax, we have a so called budget surplus. This is no surplus but a spending hole requiring the non government sector to fill to balance the books. This can and has led to recessions. Amazing the politicians don’t recognize this fact.
So all government spending is with new money being net credited into the economy. So pensions are paid directly through Treasury instructions and no savings are required to do that.
But the article is a good one otherwise. We need more bloggers like you to take the fight for reality economics to the government. Their falsehoods are doing great damage to the economy and thus to society.
My point was lending to the government at negative interest rates does transfer wealth to it
I presume you agree?
Richard, aren’t you strengthening the ‘meme’ that ‘taxes pay for things’ by talking of a negative interest rate being ‘a taxpayers’ subsidy’? Taxes aren’t about paying the debt down, so when effective negative rates are reducing the debt how can there be a subsidy anywhere?
I accept that risk
Is that relevant? The government has no money itself, so it has no wealth. apart from its note printing. As Roger Malcolm Mitchell puts it” the government has and doesn’t have money”. All money is in the private sphere.
Payment instructions are not changed into a liquid form until the numbers appear in the customer’s high street bank. Even then it’s always transferred through the subsequent transactions between banks as numbers. Any actual cash, vault cash, has to be purchased from the central bank. So IMO commercial banks don’t create money. They create credit and use the national government created currency to give it meaning. So USE not Create money.
Interested in your thoughts on that issue. I’m still trying to work it out.
in the sense that money is owed by government it is in the private sphere
So government debt is private wealth
I agree with you on private banks: they work under government licence
Is there a government licence? Richard Werner said in an article that ban lending has no statute or law to permit it. It’s just grown from centuries of use. Do you agree?
No I don’t.
There’s a banking licence.
Of course it is regulated under licence
I always barely, just about understand this stuff when I read it, then it slips through my fingers. With that in mind, any comments on my thought: what light does this shed on leftist protests that the Tories have created more government debt than any Labour government?
I created that data
I did so to simply counter another popular myth
I’m sorry but you are pretty much wrong in every statement you make above. It is actually quite worrying that you may be teaching this to students.
Banks do not create “money” out of thin air. They extend credit – which is M4, not M0 as you seem to assume. You seem to be continually misunderstanding M0, M4 and where debt sits in the money supply. Hint : it’s not in M0.
QE has most definately NOT cancelled any of the UK government’s debt. it is still sitting there both on the BoE and Government Balance sheets. When the BoE stops rolling that QE over (which is likely to happen soon, given the FED is likely to start reducing it’s balance sheet this year) that debt will have to be repaid.
If that debt were cancelled, as you suggest, QE would have strayed into overt monetary financing, when the stated purpose of QE has been to lower long end interest rates. There have been some arguments that QE should be used as helicopter money, or your “People’s QE” idea, but as of yet this has NOT happened.
Fundamentally, QE is NOT monetary financing of deficits, and is wholly reversible. Helicopter money, or PQE if you prefer, was suggested by Milton Friedman in 1969 and differs in that it is NOT reversible and forms overt monetary financing.
The UK government can, as you say, print money to pay off all it’s debt. This would NOT be without cost though. Specifically, you would be increasing the base (M0) money supply to repay the debt, which would lead to higher inflation directly and indirectly through the MV=PQ relationship. It would also lead to a likely collapse in the confidence of the Gilt markets – through higher inflation and the overt monetary financing take their toll on the long term outlook. You would also likely see a crash in the value of the pound, given the government would be doubling the number in circulation every 2 years by your estimates.
To address your numbered points:
1. Inflation does NOT say we need more government debt each year. I’m not sure where you get that from. You then contradict yourself in point 4.
2. Pensions do require some government debt in their portfolios. But QE has repressed those annuities, and overt monetary financing would drive inflation higher, and destroy those pensioners with fixed annuities.
3. Banks do not “need” government debt. They are forced to hold onto some by regulation for Tier 1/Basel 3 requirements. This represents a cost to them, as it takes up balance sheet for little or no return. From memory, Banks only hold about 9% of UK Gilts.
The loaning of government debt is called the Repo market. Banks do not lend corporates government debt in return for cash as a security. If thy did, the corporates would be *paying* the bank interest for holding the more secure asset. Corporates place cash with banks through the short term money markets and these are usually unsecured, uncollateralised deposits. Typically the Repo makret exists for institutions to cover any short positions in bonds or free up balance sheet by lending them out when they have too many. If anything, it works in the reverse of what you suggest – pension funds will lend bonds to access cash, which they then re-invest in higher yielding securities.
But it is important to note – banks do NOT typically give corporates bonds in return for deposited cash.
4. This is rather twisted logic. Yes, if real yields are negative you are essentially inflating away debt. If you issue lots ore debt though, real yields are likely to go positive rather quickly – leaving the country in a rather difficult situation. If you then overtly monetary finance this away, you likely spike inflation and crash the value of the currency. Not great to build a platform for a stable economy on.
5. Not sure you are really making a point here. having some government debt is a good thing. Having too much is a bad thing. You seem to think governments can simply deficit spend without any caution.
Again though, it seems you have confused M0 and M4 when you say debt is money.
M0 in the UK is 82bn. M4 is 2680bn. You are suggesting we increase M0 by 30-50bn a year (though I dont know where you have plucked you estimate from). Again, by conflating M0 money and debt, you have made a crucial mistake. You can repay government debt and yet still have an increasing money supply. The two are NOT mutually exclusive.
Likewise, you can have dramatically increasing debt levels and a falling money supply – which is exactly what we saw during the 2008 crisis.
Whilst I am not saying governments should never run deficits, doing so without control and ad infinitum is a very dangerous idea to take forward. You would either end up with very large government debt/GDP ratios, which have been shown to reduce growth, and also ever increasing debt serevicing costs – or – as you are keen to argue – the government can simply print money and overtly monetary finance their debt away. Which is guaranteed to send investors running, inflation higher and the currency lower. Hardly the basis for a stable economy. indeed every time OMF has been tried it has been an unfettered disaster.
What can I say bar thank heavens that there are people like me to counter these errors
Just bout everything you say is wrong and I really can’t be bothered to repeat why
But start with the obvious fact that Mo and M4 are both government debt – as a matter of fact – and go on from there, ad infinitum
Wow. I can only say that you level of self-assuredness (or simply self-delusion) is mind boggling. You have no formal training as an economist, make the most basic mistakes and clearly have little or no idea how the banking and finance system works.
I also note that you simply are unable to argue the point when someone challenges your assumptions – you just brush them off. This blog is essentially an echo chamber.
M4 is most clearly NOT government debt. It is mostly made up of credit extension by banks. I’m not sure where you get your “facts” from.
Your whole argument seems to stem from the basic assumption that governments can print money, so can never go bankrput. Then you go to the next fallacy, in that because QE hasn’t caused runaway inflation (because it is inherently NOT OMF, which again you don’t seem to understand) that governments should keep printing money to spend – because of course that will make us all richer and we can have everything we want!
Of course, back in the real world, we know that OMF will spike inflation higher whilst eroding the value of the currency. At which point interest rates will have to rise. What you are suggesting is not new by any means, and has been tried (to destruction) many times over, all with predictable results.
I note that another poster above uses the Japanese argument to “prove” that it can be done. Japan is rather a special case. Firstly, it is worth noting that their national debt includes a fully funded pension system.
Secondly, it is also worth noting that Japan is moving AWAY from QE now, as they have reached the limit of what it was achieving, and it is starting to have undesirable financial stability effects. Don’t ask me – ask the BOJ.
What has the result of all this QE been? A huge build up of debt, with associated debt servicing costs (even at zero yields). It has depressed the Japanese export economy, destroyed local pension fund investments (they are essentially all foreign based exposure now) and it hasn’t led to the GDP growth that you are saying it would.
You argue that tax is really used to contain inflation. Japan might well prove to be the test case for your theories on debt. To stop their debt to GDP increasing they are either going to have to cut spending dramatically (which you say they needn’t) or increase taxes (but inlfation is low, and they can print money). Your third way is essentially saying that debt/GDP doesn’t matter. This implicitly means that this debt will have to be monetized.
AS we know, monetization of debt will spike inflation higher. Which will hurt growth (and therefore also tax revenues – but you seem to imply that tax revenues are independent of GDP growth as they are solely used to contain inflation). This would essentially be game over for Japan. Their debt service costs would spike even higher still, and they would be forced to default – which in real terms means (hyper)inflating their way out of the debt trap. In real terms, this is the same thing.
You seem strong on abuse and have no arguments
For the record, I am sitting waiting to take questions as an expert witness in the EU Parliament
Maybe I have other things on my mind instead of writing rebuttals to you, which I note others are doing quite effectively in my absence
I’ve made a long post including several arguments. You have failed to counter any of them. Instead you have simply dismissed everything I have said as wrong – because, well, your a Professor, right? And you are too important to answer trifling little questions, like the fact that you might be talking utter rubbish – worse still – teaching it.
You do seem to be very keen on making yourself out to be an expert. Many others seem to disagree with your closely held opinion of yourself. As far as I can tell, you have no formal education in the field past an undergraduate degree, no significant peer-reviewed work in the field, and are essentially self-appointed as an expert, not least through your unending self-promotion. You certainly are the only “Professor” I know of without a higher degree of some kind.
I also hear that you are quick to ban people who disagree with you from your blog. I assume that pointing out your lack of knowledge will quickly get me banned – the cowards way out.
Guy
I explained that you might not have been the only priority of my day
Despite that you clearly think you should be
And offer me abuse because I might not agree
And yes you will be on the banned list because self important idiots who have not read their subject and who hide behind silly names are time wasters in my opinion and are not worthy of having their opinion heard in polite company
Apologise, use your real name, publish your full CV and show you have done some reading and I may let you back
But until then I will afford you the respect you don’t deserve by ignoring you
Richard
Every one of your “arguments” is just a repetition of the received “wisdom” preached in economics courses. And every one of them is provably wrong. It’s just not the way the money system actually works when you take a close look.
But a closed mind is impervious to evidence, and the longer you go on the less credible you become.
This is really quite funny
What I have written is the exact opposite of what is in most economics text books and what is taught
You want evidence? Read the Bank of England Quarterly Report First Quarter 2014 which says that those text books are wrong and that money has to be understood as being made out of thin air
I do not then agree with all in that report: they are still behind the curve, but getting better. The trouble is they’re just a bit too close to banks
But the problem of credibility is all yours.
Dude! None of this “As far as I can tell, you have no formal education in the field past an undergraduate degree, no significant peer-reviewed work in the field, and are essentially self-appointed as an expert,” means he’s wrong, does it? 🙂
@ Richard Murphy
Publish my full name and CV? So you can go after me with my employers like you did the writer of the FCA blog? No thanks.
But I’ll tell you for free that I’ve worked in finance for the last 20 years, and have two further degrees to my name.
As for that BoE 2014 report, again you are confusing yourself. They do not agree with you, and state very clearly that QE remains on the balance sheet and will have to be unwound and repaid.
@ Bill
It doesn’t mean he’s wrong, but unfortunately he is.
FCA Blog’s writer was appropriately found guilty for professional misconduct and fined for it but you have sym0athy with him
I think that says all we need to know
That and the fact that you’re a coward, although you made yourself pretty easy to find
Shame Linkedin does not mention the other two degrees or any qualification in economics at all. But the fixed income part makes sense. No wonder you want to believe you still have relevance
Richard has not suggested overt money financing. You should look to Adair Turner for that.
Re: debt/gdp ratios and growth, if you are thinking of Reinhart and Rogoff you should know that they made a mistake and it has been shown that there is no statistically significant correlation between debt/gdp and growth.
Can’t see the right place to satisfactorily reply here, so I’m just jumping in… this “M4 is most clearly NOT government debt. It is mostly made up of credit extension by banks.” Who licenses banks to give credit, indeed to function at all? Ultimately government, so therefore, M4 can be viewed as government (licensed and approved) debt. Debt created by government agents, how about putting it like that? I believe that’s the thinking anyway.
Bill
You get it
I never said they were the same
But I did make clear I think private bank created credit is premised on a government guarantee based on debt
Richard
@ Charles Adams
Murphy has implicitly suggested OMF. The idea that we can “cancel” QE debt is just that. Likewise the assertion that debt will never have to be repaid.
Reinhart/Rogoff made a mistake by ommiting five lines of a spreadsheet – but it didn’t dramatically affect the results. That being that debt/GBP over about 90% tends to be an indicator for low growth countries. note that they also never implied causation. So there is a correlation (you can look at UMas for that as well) but not necessarily causation.
I am in fact entirely relaxed about OMF which as a matter of fact has happened with the QE debt which will never be repaid, as Adair Turner has rightly pointed out. We discussed it over dinner a whole ago.
And as a matter of fact debt does not need to be repaid and itsn’t, it’s just rolled over. I suggest very long bonds as a result, or perpetuals. But for bond traders they are a nightmare. How to make money is their qeustion. Your question, no doubt
The fact you have stated the myth MV=PQ, the Quantity of Money, immediately shows why you lack the required understanding of fiat monetary. QoM remains in the realm of gold standard thinking. It stopped being relevant when the Bretton Woods system collapsed in 1971, though there have been many attempts to revive similar systems (such as the “snake” ERM and other currency pegs), which usually end in failure when the political consequences of maintaining the peg (high unemployment, suppressed domestic demand) become too difficult to bear.
You also fail to explain why increasing M0 will result in inflation, yet (apparently) increasing M4 (banks extending “credit”) would not – why would too much money from one source chasing too few goods and services increase inflation, yet broadly equivalent money from other sources not?
@ Daniel
MV=PQ is not a law, but it is a generalist approach to how the money supply can affect the price level of goods. There have been criticisms of it, mostly surrounding the idea that money supply is not the only factor to affect price levels, but it has nothing to do with “gold standard” thinking as you call it. It applies in fiat currency systems as well as closed systems.
M0 is base money. Notes and coin in circulation and central bank deposits. In the UK this is currently 82bn.
M4 is a very broad definition of the money supply (try this http://www.bankofengland.co.uk/statistics/Pages/iadb/notesiadb/m4.aspx).
M4 includes all the credit creation from banks – which Richard Murphy quite wrongly calls “money creation”. Credit and money are NOT exactly the same thing.
Typically, a retail bank extends credit. The end user might see that as money, but in real terms it is credit, as that person also has an equal an opposite liability. That money then circulates through the system through various transactions and creates more deposits, more credit extension etc. This is known as re-hypothecation. Banks can do this to an extent dependent on
a) regulation
b) the M0 money supply.
Regulation forces them to hold a certain amount of capital against loans (credit extension). This typically limits re-hypothecaion to 10-40x depending on the type of loans. Likeiwse it will also depend on if the loans are asset backed (mortgage against a house) or not (credit card etc).
The M0 money supply ultimately limits the total amount of re-hypothecation, and thus M4, through the BoE acting on the lending banks balance sheets. Banks can’t simply lend money they don’t have. They also have to get it from elsewhere. Namely deposits, money markets and the BoE. balance sheets have to add up at the end of the day – it’s as simple as that. Through controlling M0 (and interest rates) the BoE can limit the amount of credit extension in the market.
Credit extension in general will drive inflation – I’m not debating that. Once you starting doubling M0 every couple of years though it simply becomes near impossible to do that without imposing dramatically higher interest rates.
Richard Murphy doesn’t seem to understand the difference between money and credit, M0 and M4, and seems to think that a fiat currency is a fixed store of value. As we know, fiat currencies only have any value in relation to something else. if you double the amount of pounds in circulation, it is likely to have an effect on the value of those pounds. Even the drop in the pound since the brexit vote has pushed up inflation. Is this so hard to believe?
You really need to do some reading on money written since 2000 or so
You are the slave of defunct economists
it’s amazing how people say ‘ah, but japan is different’ when Japan demolishes the argument that the bond markets can really control the spending of a Government with a sovereign currency.
There is nothing different about it.
Agreed
Gilts Guy, have you been reading ‘Jimmy Stewart is Dead’? That book reminded me of a Peston documentary in that you come away from it feeling educated but really you’ve been misdirected. I’m sure it was written with the best of intentions though. Also there’s the alleged gold standard – I think that was just part of the scam to get people of the then era to accept pieces of paper in place of gold. One could suggest the scam fell apart when French warships were allegedly sighted off Beachy Head and mass panic led to the pieces of paper themselves being declared legal tender. I’ve often wondered whether the banks didn’t start that Beachy Head rumour themselves. I don’t suppose we’ll ever know now.
MV=PQ is not even a good description of how the money supply works, it’s just a fiction Monetarists peddled to stop the Bank of England/Government from increasing the money supply because “supposedly” more prudent Private Banks could do the job better. Which 2008 ultimately proved was wrong.
Tell me this, in you view of MV=PQ, what is the value of V, and how close is Q to “Full Output”? Monetarists assume V to be 1 and Q to be so close to “Full Output” as to be constant, so that an increase in M directly leads to an increase in P. Except that V is NOT 1 and Q is currently far below “Full Output” that it is not constant, hence an increase in M does not lead to an increase in P. Those incorrect assumptions are what makes PV=MQ false.
No matter how much you claim it, the fact you cannot accept these facts means you DO NOT understand how the system is currently working, or are peddling “alternative facts” to support a failed system that leaves millions of people far worse of than they should be in an advanced economy.
Lets have a look at some of these points;
First paragraph is just wrong. It does you no favours.
Second paragraph. Banks do create credit. They are agents of the government and use government money to monetise the loans, which are liabilities. Banks have to buy vault cash from the government to pay cash to customers.
QE is simply an asset swap, toxic assets for sound ones. No money changes hands. You yourself note that when saying it is wholly reversible.
Governments do not print money to pay off government debts. They buy the debts, and in the process inject interest free money into the economy, which enables it to grow. The so called “federal government debt” is just corporate welfare. It can be used to control the money supply by allowing investors to buy treasuries and receive interest. The government is simply able to extinguish such debts by refunding the bond moneys, an intra bank operation.
Inflating away debt is the point of having inflation.
Pensions do not require government debt to service them. The government creates the pension debt by paying for them.
You do not understand deficits when used in the annual accounting Budget. Tax revenue is measured against government spending. If the governments pens more than the tax withdrawn, then it is called budget deficit. If it spends less it is a budget surplus. To balance the ledger such a surplus has to be made up by non government spending. This cramping of spending can lead to a recession, and has frequently done so. So the central government SHOULD run deficits.
Nobody in the know says government debt is always good. In boom economies a budget surplus will rein in excess spending power, but as long as the economy has room to move, the Output Gap is the fiscal space the economy can expand into without triggering unwanted inflation.
Hope this helps.
The issue that stagger me is: Why did Labour allow May to get away with the rubbish that Labour could ‘bankrupt’ the economy. They could have easily proved her to be economically illiterate on this point. They could have even quoted Trump (http://edition.cnn.com/2016/05/09/politics/donald-trump-national-debt-strategy/) and also quoted Greenspan (http://edition.cnn.com/2016/05/09/politics/donald-trump-national-debt-strategy/) both libertarian and market fundamentalists!
Labour miss opportunity after opportunity to do this and could have easily pointed out that Osborne INCREASING the deficit in 2012-13 was a main reason for increased growth but they keep attacking the Government on it’s failure to balance the books which then undermines it’s own purpose! Quite incredible which makes Alice in Wonderland look like a non-sequitur free zone!
Bill comments on that very topic today In billy blog:
“British Labour lost in a neo-liberal haze”
It seems inconceivable that nobody either in the Treasury or government undrstrands this. It’s not exactly new or rocket science. If ‘ordinary’ mathematically-challenged people (e.g. me) can figure it out then certainly more economically literate professionals in government certainly can. I’m ever more inclined to believe that actually we’re all being held to ransome simply because, over the decades since Thatcher, the main political parties have boxed themselves into a corner they dare not escape from. Having successfully convinced almost the entire nation that it’s imprudent to spend more money than you have in tangible assets (the household budget analogy) they would rather continue to perpetrate the myth (lie) than to face public / media scorn.
The Tories know that saying the Labour Party cannot be trusted with the nation’s money is an election winning tactic. And Labour has never had the courage nor skill to provide a credible counter-argument. Hence I don’t see any short-to-medium term change in public perception or understanding. As a result the economy will continue along its primrose path to perdition. If justice were to prevail then the government would be charged with criminal neglect. The imposition of austerity/junk economic ideology is wilfully inflicting unnecessary hardship on large sections of the population. That alone is a crime by any standards.
I think ‘ordinary’ people wouldn’t get anywhere near the Treasury. It seems to be entirely tribal, and if you ain’t in the tribe, ie, you aren’t one of the Establishment chappies, then you won’t be getting the job. Reality may break through some day but it won’t be any time soon I imagine. So even if an economically aware govt did get in, they’d find the civil service lined up against them. It’s a cultural thing.
I agree that this obsession to further reduce the deficit along with further austerity makes no sense right now. It is quite peculiar how MPs have become seemingly blindsided by this. You suggested that people may be view gov debt in the way private debt is viewed, and this may characterise the attitude of some of the MPs and their advisors, for others I believe it’s driven by an iggling trepidation of either revisiting inflation incitation generally associated with further QE itself, and/or another, partially unforeseen, forthcoming economic crisis beckoning around the corner.
Look at the deficit as a share of national income since 1948, what’s the deal?
http://election2017.ifs.org.uk/article/two-parliaments-of-pain-the-uk-public-finances-2010-to-2017
Richard
As you imply the debt is not ‘debt’ It’s currency.
Warren Mosler suggested never use the word ‘money’ when you are talking about this stuff. I agree. Distinguish between currency (cash, reserves, govt bonds) and bank credit (bank deposits) and it becomes clearer. Not to most of the population though judging by the facile debate on the public finances that drones on and on.
There I get his point
Richard,
Agree with all of this, but from a ‘persuading others’ point of view the part missing is the ‘Yvette Cooper Rebuttal’. I.e. a catchy one-liner as to why the Government printing its own money to invest will not lead to a Zimbabwe situation. You’d really strengthen the persuasive power of your argument if you could come up with a simple and clear rebuttal on that.
I will have a go tomorrow
I desperately want to be able to understand this, Richard, as I feel it is such a fundamental issue regarding the running of economies. Unfortunately I fail. Please can I ask you
1. What about hyperinflation?
2. What happens when a country defaults on its debts?
3. Why do we need the ratings agencies?
What about hyperinflation? The question makes no sense to me. Zimbabwe is a clelotcracy divorced from international markets. Weimar Germany was bankrupted by reparations. hyperinflation is not an issue in the context I discuss, where it is clear that I say tax must be used to control all inflation
I have explained the UK cannot default on its debts: they are due in sterling and we can always creat more
We do not need ratings agencies
‘We do not need ratings agencies’ – I fear that flippant comment will unfortunately come back to haunt you.
Your appear to be implying that you would be as happy to buy Venezuelan or Greek government debt as you would British Government debt because you see no value in distinguishing between them ?
You mean you need someone to tell you the difference?
You can’t work it out?
That is worrying
Venezuelan currency – pegged to the US Dollar, so carries a devaluation (if/when the peg breaks) risk
Greek currency – Euro, which Greece do not issue, so they can be forced into a default position.
British currency – Issued by BoE, no peg, no default risk, which is acknowledged by the Ratings Agencies (though they still put a rating on UK debt…)
As Richard says, if you cannot tell the difference, it’s worrying!
Robert Ley -the ratings agencies were really useful giving AAA ratings to assets that became toxic in 2008!
Someone had to say it
I am glad you did
Professor Murphy was incorrect about the timiing of the election. Therefore eveything else he says is incorrect. Is this the logic we are using now ?
Have just watched this YouTube – https://www.youtube.com/watch?v=Kh7aNHJVngU.
Yes, it’s for an American audience but it suggests that what we need urgently is a coordinated, relentlss information offensive created expressly for social media – bypassing the MSM completely. Target audience = 18 to 35 year olds. Richard, maybe you could write the scripts? All that’s needed is a few media-friendly personalities (I don’t mean celebs) as presenters. It wouldn’t even be very costly.
I think the idea is good
I’m not sure about that video
I admit I have not got time to do it
>I admit I have not got time to do it.
It might be one of the most important things for the future of this planet. Getting a vast amount of 18 – 35 year olds to understand the reality of economics… that we dont have to destroy the environment because its too costly to create more solar / wind turbines etc, and have to stick with fossil fuels. etc.
I wish I could do this…. alas, I dont have the economic qualifications or charisma to pull it off… And if people like you dont, then who else is there?
:-/
How to break out of the ‘How are you going to pay for it? / Living within our means’ straitjacket really is the big question. It’s very hard to explain, even in a quiet discussion with like minded people. And politics is more like shouting to someone on the other side of the road with traffic going past.
Here’s my two pennorth again.
Money and wealth are not the same thing – Adam Smith said that in 1776. Wealth is stuff people need, money is just a way of moving it around. To create wealth, you have to spend money, there is no other way. Our means as a nation isn’t money, it’s our ability to create wealth. Money isn’t the engine of wealth, it isn’t even the petrol. It’s the oil. And the people who have a monopoly to supply this oil are holding us back.
We aren’t living beyond our means.
We are being forced to live below our means.
Hi Richard,
Firstly: love your work, but agree with others that it is critical that this message is made crystal clear so it can be re-told accurately.
I have a few questions:
1. Why do we need per capita growth at all?
2. Does increased money supply not cause increased inflation?
3. Does endless QE not damage confidence in bond markets? (does that matter?)
4. Would QE ad infinitum not become unserviceable?
5. Would it not also destroy the value of GBP?
Thanks
g
Apologies for being brief: it’s been a long day
1) we don’t, but it is the current economic goal
2) it can. But usually only if we are at full employment. Otherwise it tends to produce growth.
3) I do not advocate endless QE. It has a use. But so do bonds. Pretending bond markets are key though is just a pretence: see notes earlier on Japan
4) it is impossible for QE ad infinitum to be unserviceable but we need bonds too in my opinion so I would not suggest it
5) QE provides an economic tool to support the managrment of the economy and that supports the value of the Pound indirectly in my view
What frightens me is how much Macroeconomics has moved on from Neoliberalism and how much effort and agnotology – lies, propaganda, smoke-screen call it what you will has dumbfounded the general public who believe running a country with its sovereign currency is like running a corner shop. Its a bit like living in the Matrix – the gap between reality and perception is at breaking point.
Agreed
[…] It means we will create more debt because the economy needs it. Just to keep pace with inflation we need to create about £50 billion of new debt a year to provide pensioners, banks and other savings institutions with the government debt that they need […]
Richard,
Thinking with my accountant’s hat, does the UK produce a Balance Sheet? And if it did where would National Debt (ND) show up, as a long term liability or part of its capital?
Am I wrong, or is National “Debt” (ND) better described as State Capital?
If so, this re-framing of the terms would transform the way the media could (I stress could) talk about ND. If it is, in effect, State Capital, the net value of all the UK’s assets after deducting actual liabilities, then the more the merrier. The higher that State Capital becomes the more valuable in monetary terms the UK becomes?
It would make a nonsense of austerity and repaying debt as this would be perceived as reducing our state net worth, why would you do that? A business certainly would not. If capital was repaid to shareholders the business would quickly run out of funds to pay it’s bills and meet its financial obligations, and yet this is precisely what the Treasury clowns are suggesting we should do.
Holders of ND (or State Capital) would, at a stroke, become UK stakeholders – what a difference.
This is not the first time you have promoted debate on this topic, and you should be garlanded for doing so. The citizens who will, and are, suffering the most due to the present misguided debt repayment obsession, are the poor and the homeless. It is disgraceful.
https://www.gov.uk/government/collections/whole-of-government-accounts
There you go Bob – the almost never read UK accounts
And yes – I agree – the credit is wrongly described. It is at least redeemable capital
Is there a partial defence against the deficit-worriers in the recent IFS report, which shows that the Tory profile of borrowing is close to what Labour proposed in 2015 – we were told Labour’s plan would be an absolute disaster, were we not?
The similarity of the Labour plan and Tory actuality was “debated” on Newsnight the other day, with Evan Davis asking the questions. Mariana Mazzucato attempted to move the discussion onto concerns about private debt. Davis couldn’t see the connection, or didn’t want to. The Tory (can’t recall his name) blustered in the usual way and refused to answer the question.
Talking about private debt didn’t suit Davis of course since he wanted to discuss the political point about deficit, not any technical-sounding mumbo jumbo about debt. Perhaps Mazzucato should have complied before moving on to the technicalities?
At any rate, the Newsnight piece seemed to me to exhibit some of the problems of explaining any of this to the public.
What is bizarre though is that we saw the government printing £300+ billion of QE into the banks to enable them to work again but people still think that (1) that is why we have to now cut spending in order to pay it off and (2) even more bizarre – that they do not think that their government could do the same for them (probably because of (1))and that that is OK or something that just need to accept.
The public’s received wisdom on this topic is like a stuck needle in a scratched record that needs to be nudged on – quickly.
Sean
Although I empathise with your sentiment, I do not see a breaking point yet in people’s misconceptions about money and how the really economy works. As long as this persists progressive cannot really move things on.
The neo-libs/benignly ignorant public will always find another fall guy for our economic problems in the meantime..
Yesterday I attended a course on Mental Health First Aid and amongst the many drivers for mental illness was unemployment and economic exclusion were always present. I can only see these getting worse in the 10-15 years.
The additional problem is that people are resilient – they cope and put up with bad stuff. I’ve no idea what their breaking point is anymore.
If there is not one, then it can only be the ability for a new opposing vision for society to be provided in order to win them over.
All capital is redeemable, what the duffers in charge of our finances don’t seem to realise is that when it is redeemed, something as well as the debt is reduced: the national bank balance, liquidated assets, or tax revenues. Is it just accountants that think in debits and credits…
I am going to pursue this with my MP, the Treasury, the Bank of England and the national press. It’s something I am passionate about and it needs calling out.
The king really has no clothes! And it’s not a pretty sight.
Richard I almost totally agree with you and despair at the ignorance of posters like Giltsguy. But I really don’t get why you fail to understand the concept of debt free money as you place all the other pieces correctly. The evidence from Japan is very clear and shows the government can both issue and buy it’s own debt. The best option I have seen described is that of a two tier system:-
1. the banks continue to create money by lending as they do now
2. all state spending is direct, no bond markets and no interest
3. inflation is controlled by taxation
It really is that simple and there is no need to get into long debates about M0, M4, gold standards and dubious economic equations.
I don’t get debt free money because it simply does not exist as far as I can see
If the money is held by a person who has a debit as a result tell me where the credit is?
Do the double entry: it has to exist
It’s not a matter of debt-free money, it’s a matter of interest-free money. If the government issues the money (by spending or possibly unconditional basic income) and does not issue bonds to match any resultant deficit the money is interest-free. As a retired accountant I agree that where there is debit – which isn’t necessarily the same as debt – there must be credit. One of the linguistic problems we have is that “debt” and “credit” have become synonymous.
Sorry Richard that was poor terminology on my part and corrected very nicely by Nigel…thank you.
Interest free is of course what I meant, the debits and credits are handled as usual and the control mechanisms are spending and taxing. You know I favour, as you do, a full liveable UBI. But I believe all state spending should be direct without interest. Without the bond markets there is no such thing as government debt. There is only putting money in circulation and taking it out again.
That is plausible
What replaces the valuable functions bonds have – especially re pensions?
Is the project finance bonds?
Agree with Nigel -it is a linguistic problem we have discussed on this blog over the years. part of the problem is that Positive Money and the American Monetary Institute talk about ‘debt free money’ when what they mean is ‘Sovereign money spent into the economy without bond issuance’.
Money , its basic function, is an IOU, so, as Richard says, it IS debt in that sense. Positive Money should have worded it differently!
Agreed
Well government bonds are only so popular because of the state backed security aspect. The state can apply that sort of guarantee wherever it wants, a clear possibility would be green investment. As I remember, your green bank thoughts would fit the bill quite nicely.
But then you mention pensions, my concept of a liveable UBI is one of birth to death replacing almost everything else. If that was in place then what you’d really be talking about is giving a state guarantee to peoples savings.
I think people need to understand that any interest the government pays is a tax to the rest of us.
Noted
‘Without the bond markets there is no such thing as government debt. There is only putting money in circulation and taking it out again.’
That is close to Abba Lerner’s ‘functional finance’. That would eliminate the speculative, fee driven world of the bond market which doesn’t serve a useful social purpose.
MMTers favour a National Savings Bank, on-one creaming off fees and duplicitous administrative structures that have bedevilled the pensions industry scams.
These bond markets employ very mathematically bright people who could be employed in a socially useful activities but aren’t because of the attraction of huge salaries. Why not use their skills in scientific research?
The implementation of the bond market creates a field of powerful wealthy players who have a vested interest in maintaining the status quo, and it’s never a bad thing to have powerful allies. That’s probably why it is what it is. These dead brainy people probably wouldn’t earn anything like as much if they were put to socially-oriented tasks, which is no doubt why they work in the field they do. Far from Osborne et al being afraid of the ‘bond vigilantes’, then, they’re actually among their best friends. We have the bond market because it creates powerful allies, then, not for any reasons of financial accommodation. I suspect the new academies are formed around the same ideals, made not to educate children but to create a powerful army of academy heads who are all in favour of keeping the system as they know they’d get paid nothing like that sort of money outside it. If you stop thinking about economic efficiency and start thinking about creating and controlling power, a lot makes more sense.
Writing a blog is about learning lessons
I am learning one here!