I liked this from Deficit Owls, an modern monetary theory site:
This is a statement of fact, and not opinion.
So, every time a politician says it wants the government to run a surplus (as the LibDems do) then the question has to be 'who do they want to run the deficit instead?' Right now given that the overseas sector insists on saving in the UK, and I do not see that changing, the answer is the private sector, whether that be business or households.
So, these politicians want private debt - already at dangerously high levels - to grow? Why is it that they want to push people into debt?
Who is going to ask them?
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The private sector itself can be split into two parts – with those in debt in one half , and those in credit in the other half.
When those in debt become too indebted, they go bankrupt, and need to sell stuff to those in credit. Keeping a government surplus guarantees that there will be a continual supply of those going bankrupt, as it becomes more and more difficult for anyone to keep their heads above water. What we will see in the private sector, is a continual transfer of assets from the poor many, to the rich few.
This process continuing, with the line between poor and rich gradually moving so the number of poor increases, and number of rich decrease. This goes on until even the Banks start become insolvent. At which point, there is an economic crash, and the government must bale out those banks to prevent them going under.
It is an economic game of monopoly, which results in the very few getting all the wealth, and the many getting nothing. The game only ends when the government steps in to prevent the banks failing.
Tony Weston says:
“…. game of monopoly,[…] ends when the…. “…….board is swept off the table scattering pieces, cards, money and all under the sideboard and at least one person storms off to his room. 🙂
I agree with your view that the overseas sector continues to be content to be a net lender to the UK while all other sectors are net borrowers, but it does mean that we are almost totally reliant on the greed and self-interest of foreign investors and savers. Sentiments can change and, while the rest of the EU in aggregate and much of the East Asia are net lenders, the inevitable transformational changes in these economies over time – particularly those in East Asia – will reduce the flow of net savings and dampen the appetite to invest here.
But I agree that, in the medium term, it makes perfect sense to seek to transform our economy while these savers appear content to provide the net finance. However, the transformation will act, and has to act, on the net balances of the domestic sectors. While all of the non-government domestic sectors are net borrowers in aggregate, there are large numbers of net lenders and net borrowers within them. This is particularly the case in the household sector and why income and wealth inequality is so debilitating.
The transformation is also required to ensure that the economy will be able to take advantage of the inevitable future reduction in external savings which will be accompanied by increased consumption and demand for goods and services in those economies that are now net savers. And I would, of course, argue that significant net lenders such as Germany and the Netherlands should reduce their external imbalances more rapidly.
All of this highlights the moronic economic illiteracy of the Lib Dems. Even the Tories, though they would never admit it explicitly, are relying on the greed and self-interest of external savers. The only concern I have is that Labour’s policies could push external investors to the limit of their comfort and appetite too soon. It is primarily in that context that I worry about the nationalisation of currently licenced and regulated utilities.
Following on from my last point above, the IFS has issued this briefing note on Labour’s nationalisation plans:
https://www.ifs.org.uk/election/2019/article/labour-s-nationalisation-policy
The IFS doesn’t do “macro” – it doesn’t have the resources or competence (so its pronouncements in this area are always iffy). But it does do “micro” and has the resources and competence. In summary, the authors raise the obvious question: what does Labour hope to achieve by exposing itself to the complexity and conflict of such a major change (and almost certainly retard the implementation of climate change policies) that it can’t achieve by changing the licensing and regulatory arrangements for the current businesses?
Even Jeremy Corbyn’s mentor and political hero, Tony Benn, marvelled at the powers the Thatcher governments granted to regulators – that far exceeded those he possessed when Secretary for Energy in the late 70s.
The only hope is that in the best outcome of the election with Labour forming a minority government relying on the support of other parties it will have to row back on nationalisation. It would be a very limited U-turn. Try changes in licensing and regulation first and if that doesn’t work, nationalise. Indeed, applying demanding licensing terms and effective regulation would either compel the robber barons to behave or, if they couldn’t, to relinquish their licences.
I personally do not think nationalisation is nearly as important as tackling climate change
@ Paul Hunt
I rather agree
http://www.progressivepulse.org/economics/in-favour-of-a-form-of-nationalisation-but-with-the-co-operative-dividend
There is a very profound assymentry in information between regulators (who lack info) and the regulated (wh have info). I speak as somebody who has interactions with Ofgem and UK DNOs. No form of (imporved) regulation will ever remove the info assymetry. An example of this power imbalance is the rates of return generated by monopoloy network operators. Most of the DNOs are private – but Nat Grid is public – visit the FT site – you will see what I mean. 5- 6% return – from a monopoly – really?
In terms of De-carb, the DNOs are a mix of both gatekeeper and road-block – I speak on the basis of 1st hand info and e-mails trails. UK DNOs operate using the principles of the Scicilian mafia – demading money – with menaces. Nothing short of public ownership and control will change this system. Ofgem (& other “regulators”) are nutless, gutless and pointless – and the tories have made them so.
“I personally do not think nationalisation is nearly as important as tackling climate change”
I think that’s right if we can tackle climate change investment via private sector investment in some of the social and physical infrastructure spending we are going to need.
So….nationalisation it is. Unless there’s to be sea change in private sector investment priorities. 🙁
I want to use sustainable cost accounting to change private sector behaviour
I will be talking about it to 70 pension funds and their investment managers tomorrow
“I want to use sustainable cost accounting to change private sector behaviour. I will be talking about it to 70 pension funds and their investment managers tomorrow.
Well I hope you are sufficiently persuasive, because there needs to be some fundamental change in private sector finance thinking and behaviour or we’ll just get a remake of the 2008 Disaster movie in HD Technicolor, with upgraded special effects.
The number of winners in that scenario will be vanishingly small and they don’t need the money. They’ve already got more than they know what to do with. I don’t believe we have enough time to to waste another decade failing to sort out another finance sector implosion.
“I agree with your view that the overseas sector continues to be content to be a net lender to the UK while all other sectors are net borrowers, but it does mean that we are almost totally reliant on the greed and self-interest of foreign investors and savers. ”
Not at all.
We buy things from the foreign sector. They get sterling in return, that they like to reinvest as government bonds. I wouldn’t consider this as evidence we are totally reliant on them.
The other alternative would be for them to buy some British stuff, but this means we would have to work more to manufacture it, and send it to them.
I guess they could just go and put sterling denominated banknotes under their bed, rather than ‘lend’ it back to us by buying UK gilts… but, then the government could just run a larger deficit to take up the slack.
“we are almost totally reliant on the greed and self-interest of foreign investors”
Are foreign investors more or less greedy that UK investors?
No…
@Charles Adams,
You appear to be ignoring questions of control and political power. Economists frequently catergorise economies. In this context a useful categorisation would describe the US, the UK, and to an extent Canada, Australia and New Zealand as Liberalised Market Economies (LMEs). (The Irish Leprechaun may be found in a corner of this box.) There are no effective policy controls on capital flows. In contrast, Germany is probably the best example of a Co-ordinated Market Economy (CME), but most advanced economies on the continent would fall in to this category. While there may be no formal capital controls, there is a high degree of policy co-ordination. Similarly the advanced East Asian economies could be described as CMEs. But the emerging economies in the Far East which are the principal international net lenders have a mix of state control and direction and some functioning markets. And there is considerable centralised political control on capital flows.
Having all domestic sectors of an advanced economy being net borrowers is not a serious issue while external investors are happy to be net lenders – though it can conceal major internal economic dysfunction, but it matters for economic stabilisation (for both deficit and surplus countries) in the event of inevitable economic shocks, the antics of the disaster capitalists, shifts in sentiment and major policy shifts in surplus countries.
I blame neoliberalism..
Hopefully, Richard (both Richards in fact), neoliberalism is on the Skids.
The reason for private debt is the ‘financial elite wish to perpetual servitude. A government that puts more money into the economy by running a deficit enables us to make choices either by saving, thus deferring consumption, or spending that money into the economy therefore increasing consumption or paying off the mortgage or whatever, which gives the individual the opportunity to raise their standard of living and have control of their financial outcomes. Democracy, I suppose. A government surplus and thus private debt increase means the exact opposite.
I’d love a more detailed explanation of how the deficits work, and why a deficit in one sector means a surplus in another. The meme makes sense, but more detail would be useful.
Let me work on it…
+1. I understand the concept but still have difficulty getting my head around the practical reality of it at times.
Another useful campaigning tool would be some kind of fact-sheet regarding government spending. The first objection the Tories throw back is that increased spending and deficits will lead to inflation and then we end up in crisis like Argentina, Zimbabwe, or Venezuela. Some ready-responses to those kind of accusations would be helpful to combat that opposition.
– Why would increased spending not lead to that type of crisis?
– What are the practical constraints on increased public spending?
– How high can spending go without encountering problems?
– What are the risks or downsides of increased public spending, and how do we mitigate against them?
I am totally on-side with the argument that our economy has a huge amount of under-utilised resource, which well-targeted government spending could unlock, and that the ensuing benefits, economically and socially, will pay for itself and then some on-top. But I don’t have an answer to someone asking what the limit is on public spending to stop us ending up like Zimbabwe.
I’ll try to get to it…
But time is pretty tight right now