In today's FT Alphaville was this pure gem:
Hidden in last Thursday's announcement from the Bank of England that it intends to buy another £200bn-worth of mostly government bonds was this line:
The MPC will keep under review the case for participating in the primary market.
It might sound like dull techno-speak, but the mere possibility of the Old Lady of Threadneedle Street buying bonds directly from the government (i.e., in the primary market) is a big deal.
Since gaining independence, central banks have liked to see themselves as unsullied by politicians' whims. While the clear distinction between monetary policy and government spending blurred in the aftermath of the financial crisis, until now central banks tried to keep their distance by only buying government bonds in secondary markets — that is, from other investors — as opposed to directly from the state.
I am most annoyed that I missed this, but am delighted that the FT did not.
What, in effect, this means is that the government need no longer go through the charade of quantitative easing if it wants to use the ability of the Bank of England to create money to fund its activities in keeping the country afloat. Instead, what this means can happen is that the Treasury can now create a bond whenever it wishes and the Bank of England may buy it directly from it, without ever involving private banks. In effect, then, the Treasury can now run an overdraft at the Bank of England (even if it is wrapped up in a bond arrangement) which is exactly what is required at this point in time. It also means that private banks need no longer profit from this arrangement, which they have done to date, quite unreasonably.
In effect this means is that the Bank of England has accepted that modern monetary theory works exactly as people like me have been saying for some time. As this note suggests, the government can always spend whatever it wishes simply by deciding to do so. And as we have always said, it can do so because it has the power to instruct its central-bank to fund any sum that it wishes to spend. And tax need not ever be involved in this process.
We do, of course, know that in normal times tax will be a part of this equation, but simply for the purpose of reining in inflation, as the same FT article notes, and not to fund the spending. Now this fact is being explicitly acknowledged.
And the good news is that now this has been done the objection to mechanisms such as green quantitative easing, which were always designed to use this process, have fallen away forever. Coronavirus has changed everything, and this time for the better.
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In the aftermath of this mess, there’s going to be tremendous efforts made to get the public back under the thrall of the orthodoxy which had served the elites so well for so long. They will fail, but it won’t be for want of effort.
https://www.cbsnews.com/news/coronavirus-and-economy-best-and-worst-case-scenarios-60-minutes-2020-03-22/
“Scott Pelley: Is the Fed just going to print money?
Neel Kashkari: That’s literally what Congress has told us to do. That’s the authority that they’ve given us, to print money and provide liquidity into the financial system. And that’s how we do it. We create it electronically. And then we can also print it with the Treasury Department, print it so that you can get money out of an ATM.”
Scott Pelley: Can you characterize everything that the Fed has done this past week as essentially flooding the system with money?
Neel Kashkari: Yes. Exactly.
Scott Pelley: And there’s no end to your ability to do that?
Neel Kashkari: There is no end to our ability to do that.”
The Bank of England has always bought from the primary market it’s just that they’ve made sure they hid the fact. Here’s the American version which they got from us in the first place!
http://neweconomicperspectives.org/2019/10/the-peoples-money-part-1.html#more-11600
http://neweconomicperspectives.org/2019/10/the-peoples-money-part-2.html
Wasn’t this roughly (in effect albeit not technical process, of course) what actually happened after the (covert failure) of the issue of 3.5% War Loan in 1914; or at least similar?
Yes, it was
Lord Adair Turner, past chief of the CBI, and hardly a left wing radical gave this speech way back in 2016 in Dublin:
https://www.youtube.com/watch?v=vZCK7vC8_kU
Well worth a watch as he was arguing then that the Bank of England should decide each month how much cash to add to the Treasury overdraft (or subtract in a boom). So direct monetary financing as simply a tool of the state when running the economy. Clearly makes the point that the state can never run out of money, that Central Banks control the bond market and not vice-versa, and that the Bank of Japan will eventually (soon now) own the entire Japanese National Debt which will quietly get written off at some point.
So that’s what I heard on Radio 4 this morning.
Better than a pointless rate cut.
Hopefully green new deal can follow – we will need something to get the economy moving again.
That the government can print money has never been in question – not by the BoE or anyone else for that matter. So this is hardly a case of agreeing with MMT.
The real question is what are the consequences or printing said money.
Typically when you do so you weaken the currency, and inflation increases through two main mechanisms. One being the direct effect of the weaker currency on import prices, and the second being the reduced faith in the value of the currency by it’s holders. Price level increases tend to remain elevated above their natural state if you think the government is likely to continue printing more and more currency.
So far MMT has taught us nothing – not least because none of MMT is new at all.
Where most economists have serious disagreement with MMT is when it’s proponents claim that printing this new money, electronically or otherwise, will not have a significant effect on inflation (with the caveat of full employment being needed to set inflation off, though typically this full employment bound is ignored by most MMT campaigners).
Serious economists also disagree with the idea that tax can be used to truly control inflation. In theory it could be, but there are physical and political limits to how effective it would be. Politicians would be unable to, in reality, raise taxes sufficiently in the face of their voters should the need arise, as well as raising taxes having a significant delay in any effect it would have, before any substitution effects come into place. It just isn’t practical or realistic. There are also limits on tax rates themselves (you can’t raise tax past 100%, or tax more than the current asset base. It is present and backwards looking) whereas interest rates have no such issues (there is no upper limit to interest rates, and they are forward looking, which tends to act as a much better control for forward looking inflation).
The MMT crowd also like to claim that spending has to come before taxation – going as far to present this as a new idea. The truth is, in a given economy it is pretty immaterial which you treat as happening first. Both happen concurrently, rather than consecutively, which leaves a gaping hole in one of MMTs tenets. What matter more are the levels of demand, investment and consumption – these are what really drive the economy, growth, tax revenues, debt levels and price levels in an economy.
All MMT tries to do is increase demand through more spending – in this case payed for by newly minted electronic money instead of debt. But given MMT then requires increased taxes to remove the inflationary excess from the economy, you are back at square one is economic terms. You may as well just have debt financed in the first place.
Which I suppose is why MMT remains very much a fringe economic theory. it doesn’t tell us anything new (Chartalists told us the very same things) and all it really does is increase government spending via printing money, then increases taxes to remove excess cash in the market to control inflation. When debt financing increases spending and increases taxes to pay off the debt – albeit in a manner which can be controlled with a greater degree of certainty and isn’t subject to the limitation of tax rates and political whimsy.
The government and BoE are likely to engage in more QE, but this is very different to MMT – which is just printing new money.
With respect, that reveals a pretty poor understanding of MMT based on contempt rather than any willing to understand the issues
If you think tax has no impact on inflation you are living in cloud cuckoo land
If you think monetary policy still works you are part of the problem
And a failed economist
I never said tax has no impact on inflation. I did say it is a very poor means of controlling it. Tax receipts are backwards looking, and there is no direct correlation between inflation and tax receipts. This makes trying to increase or decrease taxes to control forward looking inflation at best a game of chance.
At least with interest rates, they are forward looking. The forward rates directly affect real rates based on inflation expectations.
As for monetary policy working, at the zero bound it is certainly less effective. However, it is still much more effective than the pure guesswork tax rate based control of policy MMT would entail.
Part of the problem with MMT is that it makes several very large assumptions:
– closed economy.
– Inflation is essentially ignored until full employment.
– input/output based model
What this means in practice is that MMT dramatically simplifies its treatment of inflation.
First, it essentially disregards it at some bound, treating employment as the main driver of inflation. Depending on which MMT formulation you are looking at, typically that inflation will either remain low or constant until full employment is reached. Basic L shaped Phillips curve.
Which unfortunately, in practice we know is not correct. We know (by observation) that you can have high unemployment and rocketing inflation, caused by a myriad of different factors through history.
This is where the closed economy fallacy starts to present. MMT models tend to disregard external factors, be it import prices, exchanges rates, external interest rates and many other factors besides. MMT ignores most external factors to an economy, including external actors on the price level. It focuses primarily on government spending as the engine of growth and driver of inflation, drawing a direct relation between spending, inflation then taxes. This again, as we know, is not a good assumption – but we will come back to this.
For example, how would dramatic increases in the oil price (which would increase inflation typically) be dealt with by MMT based tax policy? Under MMT, you would have to increase taxes to control said inflation. But in this case you would have to do so in addition to any other tax rises needed to combat inflation caused by the increase in money supply from MMT’s money printing.
So, coming back to the direct relation between spending (and growth), inflation and taxes. MMT incorrectly models economies as simple throughput systems. In other words, government prints money, spends it, achieves growth. Growth and money supply cause some inflation, which is then combated by the government removing money from the economy via tax rises. I assume this is where you get your spending must come before taxation mantra.
In reality though, it doesn’t really matter which comes first. Governments are always spending and always taxing. It is a cyclic, complicated system and economies are non-linear. What does matter is the effect that each step has on the economy and it’s metrics. MMT tries to change a variable, treating the rest of the economy as static, hence spend then tax. In the real world economists are measuring rates of change over time.
This is another area where MMT falls over badly, and another reason why trying to control inflation via taxation is unworkable. MMT doesn’t have a methodical or systematic way of linking spending to inflation to the taxation needed to control it.
For example, is the government spends an extra £100bn into the economy, how much will the economy grow in GDP terms? How much will it increase inflation? Then how much do taxes have to rise?
MMT sidesteps these problematic questions to its very idea by effectively ignoring them. Going to back to what I said above, it assumes no (or low) inflation till full employment, whilst alos moving the full employment boundary down from the normal 4-5%, thus opening the door to significantly more government spending – via printing money. Once full employment is reached, MMT tends to go very quiet about what would actually happen in terms of inflation control, other than repeating the mantra that taxes can be used to control inflation.
Again, I don’t doubt they can be, but they are a very poor tool to do so. Apart from the backward looking aspect, they are subject to he mercy of physical limitations as to how high they can be, political limitations (imagine the government trying to raise taxes significantly before an election) and the fact that substitution will start to take place at increasing levels of tax, causing a feedback loop in the economy. Second order effects tht are increasingly hard to predict.
Which is why MMT doesn’t have a solid, mathematical model of how to treat this very important problem. It is important to answer (to some degree of accuracy) the question of how much inflation will the extra government spending cause, and how much will we need to raise taxes thereafter.
This is where traditional monetary policy has a major advantage. It is much simpler, and doesn’t require much more than the current situation and expectations for growth and inflation to come to at least a first pass decision. I’m not saying it is a perfect science by any means, but it is a lot stronger in founding that any MMT based decisions can be, by their very nature.
So, having presented the various, serious problems with MMT, I hope you understand why it is not taken seriously by the vast majority of economists or politicians. There are a handful of (typically hard left) economists who support it, but much of their support seems to come from an ideological standpoint. That being that government is and should be the main driver of the economy, and government could and should do more. This seems to be regardless of the available information, and despite the flaws in MMT that are so regularly pointed out to them. I am still to see a true, mathematical representation of how in could work in practice. Not least because one doesn’t exist. Yet MMTers want governments to abandon the current system and gamble on MMT being correct!
Is it that hard to see why they don’t go for it?
Helen: i didn’t claim any correlation between deficit spending and inflation. Quite the opposite in fact. Price levels can change with no action from the government at all, or can be driven higher or lower by increased government spending. I’m not sure what your point is.
I did say though, that why bother with MMT money printing, when you will have to remove that spending from the system through higher taxes, if deficit spending achieves exactly the same thing?
Richard: Unfortunately, I think the world has made a decision on MMT. More than once in fact, given it is not even a new theory. Chartalism reworked and rebadged, and not even for the first time. Be as rude you like, and feel free to call all non-MMT believers failed economists, but do understand that the application of MMT is full or practical and theoretical holes, which is why no-one is rushing to try it.
One could almost call it a failed theory.
I think you might be as bogus as your comments are obviously false
In what way are my comments false? I have offered a critique of the problems with MMT, which are well known and well understood. So much so that most economists don’t hold it in any real regard. It tells us nothing new, and gives us no new tools for managing an economy.
Or it could just be that you are trying to shut down debate because you and MMT have no real answer for the questions posed. This is a common theme from the MMT crowd when pushed to give those answers.
Specifically, how does MMT model inflation, how does it deal with price level increases caused externally to an economy, and how does that translate in a working sense to the tax level needed to control inflation.
MMT is nothing new, and in practice is unworkable. That is why it isn’t a popular theory and no government around the world is willing to try it. There is no conspiracy behind it.
With respect, there are still people who believe in the gold standard, rational expectations and much else
None of that makes sense
And I have answered your questions this morning – including that some inflation cannot be controlled via tax or interest rates. Now we have to think regulation, price controls, capital controls and more
I make clear, you cannot answer your own questions with any of the thinking you have
I’m not I follow you. The gold standard does not require a belief system – all it is is a link between a currency and physical gold reserves. How it works, it’s benefits and it’s (many) problems are known.
MMT however is a belief system. It has never been tried (for good reason) because it doesn’t have answers to a couple of the very basic but important requirements of control of monetary policy. Specifically, how to adjust policy in the light of inflation.
As you point out, some inflation can’t be controlled. But at least by adjusting interest rates you can roughly control forward interest rates and inflation expectations. By doing so you can adjust the price of credit. Through experience we know roughly what the effect of rate moves will be on those forward curves. Moreover, interest rates can be adjusted very quickly, and the effect on rates and forward inflation expectations is very quick and direct. It is not a perfect solution but it is workable.
With MMT you are forced to try and adjust tax rates.
There are several problems with this, as I have pointed out. Particularly that MMT doesn’t have a model to suggest how much (or indeed which) taxes need to be changed. And it is extremely difficult to gauge what a change in tax rates will do to receipts, as the relationship is decidedly non-linear. This immediately makes the control of inflation via tax rates extremely difficult. What makes the problem even more impossible for MMT to function is that taxes receipts are only received over an extended period of time, so any changes made give no indication as to their effectiveness for potentially years. By which point the situation will have already (and I suppose inevitably) changed.
This should come as no surprise to any economist, and the lack of an inflation model, the lack of a model to describe the effect of taxes on inflation, then the practical difficulties of using tax to control inflation all make any real world application of MMT as a monetary policy unworkable. It would be guesswork. Which is why governments don’t use it, and mainstream economists don’t take MMT seriously as a means of controlling monetary policy.
Those are the problems with MMT, which you haven’t offered any rebuttal to.
I am not sure what you mean when you say I can’t answer my own questions. I didn’t ask any of myself, only you. As i said, MMT is well understood, not least because there is nothing new within it. Governments can print money and spend it. They can do so without issuing debt. Tax can be used to (try, badly) to control inflation. None of these main points of MMT are controversial. What is important is how exactly MMT proponents claim this will work in practice, and does it offer any advantages over conventional monetary policy controlled via interest rates.
Current evidence is that MMT can’t answer questions regarding how it would work in practice, and nor can it show any real advantage over traditional monetary policy. This is even more the case when debt yields are so low!
Please do ask me any question you like, and I’ll be happy to answer. But it would be kind of you to do me the pleasure of answering the points I have laid out regarding MMT and its many failures, rather than trying to deflect attention by denigrating me and other economists. It doesn’t make you look good.
You fail in the second para
MMT is not a belief system
It is how the world’s economies are being bailed out now
And, fiscal policy works
Very politely – I have a real-world crisis to worry about – not your stupidity, which is shared by so many in the economics profession who have never partaken in any aspect of the real economy
“The MMT crowd also like to claim that spending has to come before taxation — going as far to present this as a new idea. The truth is, in a given economy it is pretty immaterial which you treat as happening first.”
Oh, I think I have the hang of this now; you mean like fractional reserve banking, without needing the deposit first?
Why an earth is Mr Das saying that MMT proposes a ‘closed economy’? What is he talking about? You Richard have always been in favour of a mixed economy. So are many here. MMT is not about a ‘closed economy’. It’s about stimulating the mixed economy by adding new money from the fiscal headwaters of Governments.
MMT acknowledges where REAL base (original, new) money (devoid of interest unlike that provided and created by banks) comes from. And then says how it can be used by both the public sector and the private sector – together, contemporaneously for the benefit of everyone. And not just at times like this – but always. If we’d had a bit more MMT in the past (real money) maybe 2008 would not have happened eh Mr Das? Nor God knows how many crashes we have had since 1979.
Has Mr Das not considered that many economists won’t discuss MMT because (1) they do not understand where money comes from (2) that many economists are themselves ideologically strapped to the idea that markets are wise and are the best allocators of resources and determinants of value (really?) and that most of the same bloody economists didn’t even see 2008 coming – as the Queen herself noted publically.
Therefore, MMT is not for your run of the mill economist. MMT is for pragmatists who know how the world really works.
And let’s get one final thing straight. The real reason (in my view at least) why MMT is not adopted is because very very powerful vested interests know very well that MMT would crowd them out of producing fiat money with interest. This is debt not only for people – but for Governments also. That’s right: wanting to issue new money for profit is why MMT struggles. There is no other reason not to try it. This reason is also deeply undemocratic, and why I have come to think that most British politicians are weak, lily livered morons whom I refuse to vote for anymore.
MMT doesn’t propose a closed economy, it assumes one to simplify (and essentially ignore) the problems caused by externalities. It means MMT can ignore the effects on inflation of exchange rates, FDI and external price changes. Which are all rather important to any economy, let alone a large importer like the UK.
Closed economies simply mean all activity takes place within those borders, and is a terrible economic appoximation for anyone other than North Korea. A mixed economy means something different, so you are talking at a tangent here.
Economists are well aware of how various different forms of money are created. MMT teaches us nothing new about this.
MMT proponents would have the government dramatically increase the money supply, which would likely have created inflation and an asset price bubble. If anything, what MMT proposes would have made 2008 worse, rather than better. We would have been left with no growth and higher inflation, which is specifically the situation MMT is totally unequipped to deal with.
Economists do discuss MMT. Occasionally. As I have said before, there is nothing new in it. DO you really think that the thousands and thousands of economists in the world have no idea where and how money is created – despite the volumes and years of work on the subject, yet only a few MMTers do?
You are making the usual market fallacy. Markets tend to be the best allocators of resources, but that doesn’t mean they are infallible. People only have a certain amount of information available, and can’t predict the future. TO turn the question around, do you think governments are better allocators of resources? history tells us that this is not the case, repeatedly.
MMT is not for pragmatists. Not least because a pragmatist would want to know how exactly it would achieve it’s goals and deal with the problems it would face. Given that no MMT proponent can ever produce a model to say how MMT would deal with inflation, or tell us how taxes should be managed in a systematic manner in the face of inflation, pragmatists look at it, then pragmatically decide that the claims made by MMT are only surface deep, and there is no methodology behind it.
Saying that vested interests are behind MMT’s failure is frankly little more than conspiracy theory. If that were the case why haven’t one party states like China and Russia tried it? Moreover, you would have though the vested interests who issue money for profit would like it, as it would make the money increase dramatically whilst flooring interest rates. It would be a massive boon to banks. Unless of course you are saying that the government should be the only one able to do such a thing, which is tantamount to saying that the government should really be in charge of most aspects of the financial economy – down to the level of private lending.
Which is not very democratic. Though you will probably also have noted that the British people have democratically refused to elect anyone with such ideas.
You are not an economist
You are a time waster
And in the real world we have no time for people like you anymore
I will be posting no more of your utter nonsense when MMT is how the world is now working
Well Richard, to be fair, you are not an economist either. You have no formal training in it, have no experience working as one, and are calling yourself one despite clearly not having a clue about the subject.
But comments like yours above just show how thin skinned you are, when anybody dares to disagree with you or point out your pet theories and ideas are nonsense.
Of course, you’re right. Being a professor of political economy or being a peer reviewed author on the subject is no evidence of being an economist at all
And you wonder why I usually delete people like you?
In developed economies no automatic correlation of inflation with government deficit spending:-
https://mythfighter.com/2018/03/17/what-is-the-complex-relationship-among-inflation-deficits-interest-rates-oil-prices-tax-cuts-and-gdp/
Surinder.
Would MMT work in a zero growth economy because that where we need to be heading?
Very definitely it would
His can’t – because mainstream economics hankers after growth and positive interest rates
Surinder Das,
OK Goldie, you have been very long-winded so I’ll be brief:
If “traditional monetary policy” was as effective as you suggest then official interest rates would not have been stuck at near zero levels for over ten years.
If all of your (rather familiar) concerns about inflation etc. were correct, in the way that you have described them, then Quantitative Easing would have been inflationary, it wasn’t.
To that end, we should also note that to the extent that monetary financing is being used (or could be used) in the current crisis it would not be inflationary because it is merely seeking to maintain current income and demand levels not increase them.
In fact the far greater emerging threat is that of a deflationary spiral which would imply an exponential increase in the real value of private debt. That is the potential disaster that most urgently needs avoiding.
Just finally you seem to have missed the point of this post and the FT article. MMT is not first and foremost a proposal but a description of the way that the economy currently operates. The FT article merely assists in confirming that is the case.
There’s been much discussion in the press and among talking heads on radio about the eventual “return to normal” once the virus crisis recedes, and what that “normal” will look like. I think it’s safe to say it’ll look different from the “normal” we’ve been used to in recent decades and this sotto-voce decision is an important step towards establishing a view of economics based on reality and which has the potential to facilitate policy changes for the betterment of society and the environment. Let’s hope this spirit spills over into politics, governance, the constitution and wider society.
We can hope Ken
I suspect you are
So am I
If I may?
This is NOT about hope.
I can tell you now, that as soon as we have Covid-19 under some sort of control, we will be encouraged to forget how possible it was for the Government to print money.
And that means back to austerity and tropes like the IFS’ telling us that taxpayers will have to foot the bill. Make no mistake – this will be about what Milan Kundera said about the struggle over power – memory against forgetting.
I am not part of any political process now in this country. That’s my own business.
But for those of you who think you are or want to be, this remembering of what Government did or could have done better at this time is something that could go beyond hope and become something that could be made real if you seize that moment and hold onto it.
So do it.
So Austerity wash a political choice after all.!!!!!
This needs to be shouted from the rooftops but will the MSM be pointing out the significance of what’s happened to the general public? Me thinks not!
More a choice made out of ignorance. Keynes said he only knew a few individuals who understood how the UK’s monetary system works. That situation has changed with far more having a better idea thanks to MMT but there’s still a massive abdication of responsibility by British politicians to understand and inform the voters. The one party that ought to know the Labour Party doesn’t and it’s simply an empty husk of a party because of this. Its opposition simply say “where’s the money coming from” for its ambitious public spending programmes and they can’t convincingly answer a monetary illiterate public!
In reference to my last post about the Labour Party being monetary system illiterate here’s Bill Mitchell taking a well-justified pop at John McDonnell not having a clue about a sensible coronavirus economic strategy:-
http://bilbo.economicoutlook.net/blog/?p=44547
It really isn’t good enough the party’s so full of such second-rate individuals in such senior positions. The party’s going nowhere in terms of being relevant to the serious needs of the British economy!
I would not always rely on Bill when it comes to ‘taking a pop’.he chooses some weird targets on occasion
Helen.
I’m not sure I’m prepared to give them the benefit of the doubt and say it’s just their ingnorance that caused austerity.
Kids go hungry not because there is a shortage of food, logistics or manpower. Kids go hungry because of a lack of access to money. That’s a political choice.
[…] Cross-posted from Tax Research UK […]
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]
THE DEFECIT MYTH
STEPHANIE KELTON
PRE ORDERS AVAILABLE NOW
Advocates of MMT and bold thinkers like you are needed more than ever before.
Mine is on order.
Can I recommend John F Week’s ‘The Debt Delusion’ that I am currently concluding and am about to do battle with on the negative reviewers on Amazon. Should be fun. It’s a pocket battleship of a book.
An endorsement for Week’s “The Debt Delusion” — just finished it a couple of days ago. Short, but packed with insight and clarity.
Richard. You may recall that some time ago I raised the question of whether government debt reduces when the BoE buys back TBs and Gilts during QE? The logic seemed to suggest that yes, in principle it should be possible to cancel that debt since in effect, following the repurchase, it becomes a debt owed to itself.
However, for some reason the BoE and Government do not appear to take that final step but instead, continue to acknowledge that debt rather than cancelling it.
You deal with this in your book (on page 52) showing that the government acknowledges an additional debt of £426bn whereas it could quite logically be portrayed as £51bn, net after the ‘buy-back’.
Similarly, reference to the schematic on p24 in the 2014 BoE paper indicates Government debt transferred to itself but then remaining, on its books, at completion of a particular QE initiative.
https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy
This has consistently puzzled me. Given that the government apparently has an opportunity to present itself relatively favourably on its balance sheet, why does it apparently choose not to do so?
Is this latest development featured in your article perhaps an indication that the BoE and government are now finally prepared to take that final step and create new base money without incurring a corresponding debt that it then carries on its balance sheet?
The government wants there to be debt
It was all part of their austerity narrative and the need to reduce the ‘burden on future generations’
This was politucs
The substance was and will always be that the debt in question was cancelled and will never be re-issued
Thanks Richard
I understand (although obviously disagree with) the government’s austerity narrative at that time and I understand that they wanted to avoid being portrayed as stoking up a debt burden for future generations (as part of that narrative).
I assume that when you say ‘The government wants there to be debt’ you mean that there needs to be debt because debt is money and we need money.
But my understanding was that although the £375bn bought-back debt was effectively cancelled, it was not actually erased from the BoE’s balance sheet and therefore still appears as part of what we call ‘government debt’. This seemed to be a missed opportunity for a bit of good PR (i.e. massaging away debt) which seemed odd. Why would they do that? I am afraid it still puzzles me.
Perhaps I misunderstood but I assumed that part of the significance of the latest proposal was that such convolutions could be avoided this time and new money could be created without showing up as ‘unsightly’ government debt, in this way.
If they use the debt narrative they can try to crush the size of government – which is their aim
The QE debt is not debt on the whole of government accounts, only on the BoE, but it’s a subsidiary and that is misleading. The government accounts showing it cancelled are right
Is it also time for Keynes’s Clearing Union and the Bancor?
Maybe, but radically updated
Keynes did not live in the 21 century and did not write for it
The Bretton Woods world had the Gold Standard. the Clearing Union and Bancor was designed within that context. Introducing it into a fiat world would indeed require some radical updating but the principle involved still remains entirely relevant.
Thanks again Richard for your answer to my question about the previous QE debt and how to interpret it on the accounts. I clearly need to go away and improve my understanding of those mechanisms but your answer is very useful and points me in the correct direction.
[…] all clear whether bonds of that amount can be sold. But what we do know is that the Bank of England has now announced it will buy up to £200 billion of government bonds to support coronavirus measures, and that these […]