I wrote this at the time of the 2017 general election. Nothing much has changed since then. The question remains the same today, as does the real answer which almost no-one seems to understand, which is why this is worth repeating, with mild updates:
The most dangerous question in political debate in the UK is the one always rolled out by every journalist, on-air or in other media, which is to ask a politician ‘How are you going to pay for it?' where ‘it' is whatever the politician has just proposed to do.
Why is the question dangerous? There are three reasons.
First, it assumes that the government spends other people's money. It doesn't. It spends it's own. That's because it actually creates all money at the end of the day (even that put into circulation by private banks is done under government licence). And because it creates all money there is technically no limit on the amount it can produce if it so wants.
Second, this means that the assumption that the government behaves like a household with regard to debt is just wrong. Households can't create their own money out of thin air to repay their debts but governments with their own currency and central bank (as the UK has) can do just that. £435 billion of quantitative easing since 2009 proves this and yet everyone pretends that this has not happened, which is ludicrous. The fact is that governments and households are not the same at all because households may be constrained by the need to repay debt but governments are not.
Third, so long as the creation of government debt keeps pace with inflation and it does not overheat the economy by trying to create more than full employment then government debt is not a problem any more than having money in your pocket is a problem. And that's unsurprising because the money in your pocket is government debt. And all UK government debt is just a giant savings account for those who want an ultra-safe place to deposit their money, and what's wrong with that?
So, what's the answer to the question 'How are you going to pay for it?' in no more than 100 or so words? Try this:
We're not going to pay for it. We're going to issue debt to pay for it. That's because people like pension funds, the banking system and prudent savers are exceptionally keen to buy that debt. But more than that, government debt is just money. Read what it says on any bank note and you'll realise that is true. And a growing economy needs more money and it's the government's job to create it. So we will. In that case who will pay? You could say it's the people who are queuing up to save with the government who will pay. And we're doing them a favour by letting them do just that.
And if the follow-up question is ‘But what about repaying the debt?' the answer is:
I really think you should look at the history of government debt since 1694. It's grown, a lot, and almost continuously. And very rarely has any, at all, been repaid. And that's a good thing. Because government debt is what underpins the value of our money. So repaying it cancels money. If you don't want money I'm happy to take whatever you wish to donate, but most people see value in cash. And so do I. That's precisely why I don't want to repay government debt. It would cancel the money we all depend on to make our economy work. You may think that's a good idea. I definitely do not.
And then to the bemused comment ‘But who pays then?' which is bound to be the retort the answer is:
As I have explained the government does. It uses its money to pay. That's the money it effectively puts into the economy by creating debt that people want to buy and it's the money that people owe in taxes - which is then the government's money. So the government pays. But if what you're really saying is does this mean more tax the answer is no, it doesn't. 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 to keep the economy going. I'm not going to risk a financial crisis by refusing them the debt they need when at the same time I'd also be creating unemployment, harming those in need, be denying health care and would undermine education as well as the security and the safety of our country. Thanks very much, but I'll keep the bankers and financiers of this country happy by creating the debt they need and by providing public services all at the same time.
And if you want a slogan then it's ‘Government debt meets everyone's needs'.
Has anything changed in 2020? Not much, to be honest. I would add three things.
The first is that people are still queuing up to but government debt. As recent comments from bond traders on this blog suggested, there is a massive shortage of those bonds right now, and so any amount of debt could be sold at present. That's hardly surprising given the state of stock markets.
Second, if that changes (and it might, I accept that fact) we now know the Bank of England is willing to do direct monetary funding (DMF) of government spending, which simply means it does, in effect, provide the government with an overdraft even if that's technically wrapped up in bond issues made straight to the Bank of England.
And third, we're in exceptional times: there is going to be a massive shortage of tax revenue right now and unless you want people to starve or die, or both, then borrowing and money creation will have to happen.
But I go back to the point I made in 2017: that is just new money. That's all. And it does not need to be repaid. Not now, or ever. It's simply the money we will need to get through the crisis and it's not a real debt to anyone because the government can always keep it under control using quantitative easing if it needs to.
This crisis is going to be paid for with government money. That's it. And it's time we all got our heads around that fact.
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Excellent and easy to understand explanation – though I can guarantee that you will get plenty of Tory trolls who refuse to understand or accept it putting up comments before too long.
I’m sure you’re right
My current boss tells me that the Left are finished because the Tories have spent all the money – and he thinks he is right. The result of this sort of thinking is something the Left or progressives really need to get their heads around and right quick.
In other words, even if the Tories are voted out because of their incompetence over Covid-19, too many will believe that the Left can do nothing about it.
This issue needs dealing with once and for all. Otherwise………………………………..?
We’re doomed
I think it is understood that the world is printing money right now. We move on
It isn’t understood at all
I agree Richard but why did labour and bernie Sanders fall into the trap that taxe rises on the rich will pay for all their spending pledges? Why don’t they learn economics especially about money creation and the role of government in it? When the public hears the word “debt”, to them it is different thing and they freak out. To them it
is not money the government creates, it’s something they owe. So how are economists going to get them to understand, that all money is debt and credit at the same time?
A Doctor on twitter did not understand why the government wrote off £13 bn of debt, it freaked him out.
I hope he’s read my blog now…
Stephanie Kelton makes mild digs at Sanders in her forthcoming book…
I have no wish to be seen as a Devil’s Advocate; it’s simply an attempt to add my tuppence worth to pre-empt the inevitable right-wing trolls – and to counter the spurious and self-serving critiques you encounter as you attempt to secure more public traction for this mind-bogglingly simple, but vitally necessary, policy framework.
In my view, it is simply insufficient to assert that “so long as the creation of government debt keeps pace with inflation and it does not overheat the economy by trying to create more than full employment debt is not a problem” and, by implication, economic stabilisation will be maintained. The reality is that, prior to this pandemic, there were serious and destabilising imbalances within and among all sectors of the economy – government, financial entities, non financial entities, not-for-profit Institutions serving household (NPISHs) and households. The impact of, and the response to, Covid-19 will exacerbate these imbalances. These imbalances were generated by severe dysfunction in the housing market and in the provision of education, health and social care services, by wage repression and by the sustained capture of economic rents (including tax avoidance/evasion) by many private sector producers and suppliers that drive up the cost of living and reduce the quality of service.
These problems/crisises have not gone away – and arguably will be more severe in some respects (even if government currently is being forced to abandon previously damaging and unsustainable stances that benefitted the powerful and the wealthy and were seriously detrimental to the public interest). Excessive market power, concentration of firms, unjustified mark-ups and the sustained capture of economic rents are as much, if not more, the cause of any inflation that might emerge, as the traditional “demand-pull” and “cost-push” factors.
Arguably there is a much bigger policy agenda than simply increasing government spending without igniting excessive inflation and it will require concerted economic regulation across most sectors and the stringent policing of market mechanisms to promote productivity and prosperity, to avoid destabilising imbalances across all sectors and to maintain economic stability.
Of course all those issues need to be addressed
Their existence creates inequality, inefficiency, rent seeking and much else
But they don’t create inflation
I have no wish to make this more complex than it is. I’ll simply link to a piece by Fullwiler, Grey and Tankus published by Alphaville in the FT:
https://ftalphaville.ft.com/2019/03/01/1551434402000/An-MMT-response-on-what-causes-inflation/
on which you posted many moons ago.
The excessive focus on general price indices, without any meaningful examination of what was really driving these price indices, was designed and intended to reinforce the dominance of monetary policy in relation to economic stabilisation, to evade consideration of sustained rent capture in specific sectors and to emasculate elected governments. Conversely, an excessive reliance on fiscal policy to restrain inflation may be equally problematic, but for different reasons. The requirement to delve more deeply and to assemble and apply a much broader range of policy tools and regulatory instruments may appear daunting and excessively complex, but I fear it can’t be avoided.
I’m asking for wholesale reform of economics
Not just for some fiscal policy
Sorry, but what part of that did you miss?
And haven’t you noticed we now have a job guarantee?
There’s really no need to be so touchy. I’m simply highlighting areas where your case appears to be vulnerable to attack and might need some shoring up. But you obviously believe you have all the angles covered. Good luck.
I’m saying that I am aware of it, and am covering it
You seemed to disagree
Given how many issues I cover here I could not see why
Apologies if that seemed touchy – but things are pretty stressful right now, and your own style is far from cooperative, very often. In fact, it’s usually very aggressive
There’s no point trying to engage if you choose to treat friendly constructive criticism as aggression. Over and out.
Paul
If you’re not aware of it your aggression towards most on the left is very high and has often caused me concern
Richard
As a final comment, a simple explanation. My ire is directed at those, ostensibly on the left, whose antics repel the millions of voters nominally in the centre who are not averse to, and could be persuaded to support, a liberal, internationalist, social democratic programme of government firmly rooted in a mixed economy – but without whose support it will not be possible to secure sufficient democratic consent for such a programme.
But you really need to understand that politics is a broad church
Your rhetoric is significantly more alienating than mine
Someone pointed out to me on Facebook that Fitch downgraded the UK to A-
Not sure how to answer that one, but I would also imagine that they are somewhat pissed off by the fact the goverment just changed the law so they have direct access to central bank money instead of having to borrow from the private banking sector. Therefore, the banking sector don’t get interest payments on the Coronavirus money.
Can someone help?
Does it matter is my question?
Who cares? The world will but £45bn of UK debt this month
Are they put off by A-? Clearly not…
The system is for another era
Rating agencies need to reform, urgently
Richard, I know you have dealt to some extent with this point in a previous post, but please bear with me if I press you on it. When the CV crisis is over, and the economy is motoring towards full use of available resources, will all/most of this extra money now being created have to be destroyed again , ie taxed away, to avoid the inflation problem?
No…
https://www.taxresearch.org.uk/Blog/2020/03/30/tackling-the-post-coronavirus-economic-myths-runaway-inflation-and-tax-increases-are-not-around-the-corner/
The vacuity of the question becomes more apparent each day.
Faced with an existential threat and possesseing the primary resources to counter it – human ingenuity, engineering / scientific capacity, buildings, equipment and labour – just imagine the stupidity of saying we can’t do anything because we have no money.
I think Keithp hits the nail here. I have tried (and seemingly failed) many times to convince friends that money is something very different to what I tend to call wealth (for want a better word). Wealth is the output (goods and services) created by the factors of production Keith has listed. Fetishising money must not obstruct that process. But clearly my powers of persuasion require considerable burnishing because I rarely seem to score a hit. All advice gratefully welcome!
Money is a unit of measure
Think of it like this: there is, in theory, no limit to the number of goals that can be scored in a game of football: Liverpool v Small Village Utd will be a rout over 90 minutes. Saying we should restrict the money supply is like saying that there are only ten goals that can be scored and then the game must end
But we know a game last 90 minutes
So we should allow as many goals to b scored as can be in 90 minutes
We should not, in other words, restrict the output for the sake of limiting the ability to measure it
It reminds me of a joke I read a while back.
An Alien lands in New Orleans a year after Hurricain Katrina looking for intelligent life.
It sees all the destruction and goes up to the nearest humanoid and asks what has happened.
The humanoid explains that a year ago a big wind blew all the houses down.
The Alien, a little confused, then asks why the buildings have not been rebuilt.
“Is it because there isn’t enough materials?” asks the Alien.
“No, we have the materials” replies the humanoid.
“So, is it because you don’t have enough humans to do the work?” asks the Alien.
“No, we have enough people” replies the humanoid.
The Alien, now completely confused, asks “So why have these homes not been rebuilt?”
The humanoid replies, “Because we don’t have enough of these small green pieces paper”.
The Alien returns to his spacecraft, concluding that there is no intelligent life on Earth.
Thanks Richard. That is a potentially useful ‘football’ analogy and the more good analogies we have at our disposal, then the better we are placed to address the cognitive dissonance that often seems to be associated with this subject. Thanks also to Vinnie for his ‘economic lubricant’ analogy further down.
As you say, money is indeed a unit of measure (and that which it purports to measure is what we might call wealth). And since it provides such measurement utility, its probably fair to say that Money’s primary usefulness is that it provides a convenient mechanism for the exchange of wealth.
However, the way I currently understand it, money is not wealth in itself and therefore cannot be used as a store of wealth (you emphasise this point further down), although it can be used as a token that bestows an entitlement to stored wealth. Rightly or wrongly I see this as vital distinction that sometimes gets lost.
But a problem with the ‘money as a measure’ angle is that it not not a fixed measure like a metre or a kilogram. There is no absolute ‘yardstick’ (as it used to be called when I was a lad) against which to calibrate our measure.
So we have the added difficulty that not only does the magnitude of that which we would like to measure vary (i.e. the perceived utility of what is produced) but the length of the ‘tape measure’ that we use to measure it with, can also vary from one situation to the next.
Money reflects underlying worth
That’s why stock markets can crash and no money need be lost
The recognition is that value has dissipated
Tye only problem is that we put a £ sign in from of the supposed value of the dissipation
Richard can you see inflation rising as a result to around 4-5% percent as a result, which will benefit savers and new potential house buyers? Not a bad situation by the way, as the ridiculously low interest rates is creating asset bubbles and benefitting landlords with multiple houses.
I can’t see inflation pf much above zero percent
With millions unemployed and incomes crashed where is inflation going to come from?
I was thinking this may happen with the extra money in circulation from the Keynesian type policies, but maybe this will only be the case in full employment and you will almost certainly be right with the massive increase in unemployment we will be facing in the short to medium term.
Can you see their being a housing market crash/reset, which will last for the best part of the current decade?
Thirdly, owing to the employment uncertainty, can you see their being a political opening for a party to capitalise on introducing a UBI. If the Labour Party won’t enact this in their manifesto: perhaps SNP, Green Party or a new forming left leaning party would?
A housing crash seems inevitable – large numbers of people have no income left to cover mortgages
There will be many forced sellers
I am hoping radical mixes of policy are going to be on the agenda – but let’s see how that develops
As an ordinary punter, ‘debt’ has nothing but 50 shades of negative connotations.
So can we substitute the acronym ‘QE’ for ‘debt’ in the conversation/debate ?
And so, instead of ‘printing money’, are we ‘QE’ing’ it ?
None of those are possible
Because we can issue debt
We can use QE
We can create money
And we will still tax
But is government debt ‘debt as such? No
It’s merely a deposit arrangement for those who want to save with it using money the government created in the first place
I see you are still putting forward misleading and inaccurate statements out about debt, QE and monetization.
Let me again correct a few for you.
1. Governments only create a fraction of the money supply. Base money or M0. In the UK this is about £82bn, whereas broad money supply is £2500bn.
You are also misleading in part, and wrong in other when you say that banks need to government license to create sterling. Banks do indeed a license to extend credit. This has nothing to do with creating sterling. Nor are banks the only or sole creator of credit.
Also important is that any bank or financial institution can create GBP credit, licensed by the UK or not. The only requirement is that they be able to fund that GBP exposure. Which is very easy to do through the FX forward market, for example. No UK banking license required.
This is one of the may reasons why interest rates are so important to control the money supply. No other policy tool can affect this process in the way rates can.
2. Governments are constrained by the requirement to repay debt. QE does not remove that debt, and as I said before on the other thread I commented on, QE does not remove that necessity. It merely delays the inevitable. Nor is QE costless.
You are trying to build the argument, once again, that governments can print and spend as much money as they want (true up to this point) but can do so without any cost to taxpayers or the economy in terms of other effects (manifestly false). The assumption you are making is that this new money creates instant value, directly adding to GDP and does not dilute the value of that new money at all.
3. This is just nonsense, any which way you look at it.
The creation of new government debt (though elsewhere you say this will just be new money) will tend to be inflationary. Which means you are likely to drive inflation higher with that injection into the economy.
This means that your claim that as long as the creation of government debt keeps pace with inflation you won’t overheat the economy is actually the reverse. They are auto-correlating, so if inflation increases more debt will only make inflation worse, not keep it under control.
You also claim that inflation won’t occur unless there is full employment. This comes straight from the MMT playbook, and again is manifestly false. MMT uses an incredibly simplistic, model free version of a Philips/ISLM curve, where you get zero inflation until you hit full employment.
In reality, and this has been tested and observed repeatedly, the sectoral nature of an economy means that you start to see inflation well before full employment. In simple terms not all sectors of an economy hit full employment at the same time, but the ones that do drive inflation higher before the whole economy has hit full employment. Your simplistic case for inflation also ignores any externalities, such as oil and food prices, import costs and the exchange rate.
You are also wrong that government debt underpins the value of money. By this logic, government must issue debt for any wealth to be created. This is simply not true. The two are simply not correlated. UK total wealth is about £15trn, yet government debt is only £1.8trn. That should immediately give you an indication that you are wrong.
By your logic more debt would increase wealth, directly and linearly.
Money has value as a medium of exchange, but only has value as long as people feel that as a medium of exchange it can store that value. The government affects this, but can’t directly control this relationship. The important word to focus on here is exchange.
Money only has any value in relation to something else – the exchange. Unless of course you think pieces of paper or digital bits have some intrinsic value. Those pounds are valued in relation to other assets, be it other currencies, physical assets like property or financial assets like equities and debt.
You seem to think, given you advocate printing money to create new value, that the two are totally independent.
In reality, it is the economy as whole which underpins the value of the currency. Governments and heir policy can and does affect that, but far more important are the asset base, economic growth, productivity and interest rates.
To put it into context, there have been many instances around the world, over the course of recent history that governments have tried to increase the size of their economy simply by printing money. By your simplistic logic, they should have all got richer, and the currency should not have seen any real change in it’s value.
However, this didn’t happen. You would see an increase in the money supply, but no causal increase in GDP (and often the reverse). The currency would tend to weaken, imports become more expensive and both drive inflation, which as it goes higher further acts to weaken the currency (as real interest rates move lower). It is a downward spiral.
You have also often seen currencies collapse thanks to the extreme end point of this mismanagement. Even in countries with little or no national debt. On the flip side, there are many countries out there with little or no national debt, despite being incredibly wealthy. Examples like Norway, Switzerland, Brunei and even places like Botswana.
Not only that, but for the 4 countries mentioned, all have relatively stable debt/GDP ratios over the last few decades, yet their currencies have to a greater or lesser extent shown dramatic changes in value through the FX market. This should given you a clue that the value of the currency has little to do with government debt.
The amount of debt a country has does not act as an indicator of wealth and government debt does not underpin the wealth of the nation or the value of the currency.
What you are doing is making a misleading and wholly incorrect statement with the motive being to reinforce your agenda of more spending, be it through debt or monetization, is an unadulterated good, with only benefits and no costs.
Your incorrect analysis of government and debt being the only drivers of wealth in the economy inevitably leads you to false conclusions. I note that you have been beating the same drum for a long time, even when the economy was growing (and deficit levels were falling). You even link to a 2017 article you wrote, before this current crisis.
Government and the debt it creates is an actor in the size, health and wealth of an economy. At times (such as now) it is right for it to act aggressively, but you are wrong in saying they are the only actor. By far the bigger driver of economic growth is the private, non-government sector.
If what you were saying was true, bigger government and more debt would lead to increased growth rates. Yet the data we have, from the world at large suggest that national debt and growth have little or no correlation (and what correlations do exist tend to be negative) and size of government (in percent spending of GDP) again is very weakly correlated, with once again the correlation tending to be negative at higher levels of government spending.
This being the case, why are you not only pushing for more government debt and spending in this climate, where it is almost certainly warranted, but at all times, regardless of economic conditions, and why are you misleading people when you suggest that it would create value equal to the new debt or money created without any associated cost or risk?
It is simply not true.
I am afraid to say that this is your usual nonsense
1) Not true. Money is not note and coin. It is much broader. You know that. And the BoEW says it creates money. Check its web site. Check the Canadian documents I posted recently. Central banks are government owned. They can and do create money at will. You are wrong. And no money can be ultimately be made without the central bank of the government of the country responsible for that currency agreeing: hence why the US has had to create dollar credit lines at present for use in other countries. You are, very simply, showing your ignorance or willingness to not tell the truth.
2) They are not required to repay debt. They can recycle it at will. We have in the UK since 1694. And we will. We don'[t issue perpetual debt, and there is reason for that. But we are under no obligation to repay the national debt, albeit we recycle it. You are wrong. You do not understand macro issues.
3) Amusingly you ran out of numbering here: I think that’s funny. That’s what happens in a world without enough counters (i.e. money). There are numerous arguments under this heading.
To answer some: I note you see no relationship between government debt and foreign exchange. That can be argued to be true in the case of the USA. I am not sure I agree with other currencies: over issuing money can have an exchange rate impact. That’s why I say money supply must be controlled.
I also note you think I believe money equates to value: that’s absurd, because I do not. I have never said such a hinge and nor has anyone in MMT. Money is debt: it is only as good as the underlying collateral. Government does of course have the ultimate collateral, which is tax revenue. That is why only its money counts and why it need never be repaid.
I am amused by your belief in the old Phillips curve logic. Good luck with that one.
Likewise with IS/LM. The MMT version of this is the only version now left extant that I know of.
Why you equate money supply with national wealth is beyond me, or I suspect anyone else.
But you are right, currencies can collapse with extreme mismanagement. That’s why MMT is about the exact opposite. It equates money with true underlying value. You clearly do not. Nor do your ramblings around the issue make any sense, at all.
I have tried to be polluter in response, but bluntly, you are economically incoherent and know just enough to offer dogma and not argument.
I really do not think you will get on here again.
To answer your points, whilst trying to ignore the various insults and ad hominem attacks you make. If that is you being polite….
1. As I pointed out, broad money supply, M4, is about £2500bn in the UK.
Governments and central banks can indeed print money, but they on the whole, don’t. Certainly not in the sizes you are suggesting.
Commercial banks can and do extend loans in foreign currencies. They do not need central bank or government approval to do such things. The FX swap market is totally unregulated, and through that any bank can lend or borrow any currency.
The only caveat to this is that they need to cover any short position in a currency (assuming they don’t already have it). They don’t need to go to the central bank to do this, and will just go to the market once again to cover.
Where you are getting confused is that central banks offer swap lines to improve liquidity and manage short term interest rates. Not to govern who can and can’t borrow or lend in a given currency. If there was huge demand for a currency, you would see short term interest rates spike higher, so the swap lines are in places to provide enough liquidity to bring short rates back towards the central bank target or refinancing rate.
2. You are talking in terms here. Recycling debt still involves repayment. Any additional debt still needs repayment.
Importantly, that debt still is a net cost to government.
You are trying to make out that debt is cost free, and never needs repaying. It simply isn’t the case.
3. I didn’t run out of numbering – unless you did. I addressed your numbered points, then you stopped numbering them….
But to back to the topic in hand.
“I note you see no relationship between government debt and foreign exchange.”
I never said this. I actually said the opposite. Increasing the amount of spending in the economy, through debt or monetization, can increase inflation. Increased inflation without the corresponding increases in interest rates (and thus lower real rates) will tend to cause a currency to depreciate. Your plan is to increase debt levels or print money at or above the rate of inflation, which will act to compound that inflation.
What you think the effect on a currency would be if by design money supply was always increasing, debt levels were always increasing and through that inflation was always under upward pressure, all the while with interest rates floored near zero?
Nor did I say anything like this:
“I also note you think I believe money equates to value”
What I actually said was that money only has any value in relation to something else, as a medium of exchange. I even went as far as to say that pieces of paper or digital money has no intrinsic value.
So once again you are putting words in my mouth, and trying to argue your case against a straw man hat you have created.
I even highlighted my point by comparing the amount of government created money (M0), government debt and broad money supply (M4), all of which are fraction of the size of total wealth. All those accumulated assets still ave value, with or without the government and it’s issuance of money or debt.
You however have no compunction in saying mutually exclusive things, and stating both as fact.
You implicitly are claiming that newly printed money, through monetization of debt, will create value. Monetization implies there is no underlying collateral, certainly not in the form of debt.
You then try and make the caveat that the underlying collateral is in the form of tax revenue. In this, so far you could be correct. But then you say that monetization has no cost to taxpayers.
So in your world, a government can print money, with no cost to taxpayers. That in itself defies logic, but then why would a government do it if not to create value, so again implicitly you are saying that this money printing creates value.
It can’t all be true. Yet you repeatedly say it. It actually pains me that you don’t seem to understand the frailties of your logic here. Or worse, that you do but forge ahead with this nonsense regardless.
You go on to say only government money counts. Which is I suppose why governments and central banks spend so much time trying to control (both up and down) the broad money supply, which is mostly non-governmental. (that was irony by the way, in case you miss it and try and twist my words again). This also belies your wholly statist view of economics.
As for the Philips curve. MMT hasn’t really proposed an inflation model apart from the most basic Philips curve. I.e. no inflation till full employment, and no externalities.
This, as any economist should know, is rubbish. The assumption that the whole economy will hit full employment at the same time is junk. What happens is that certain sectors do, so you see inflation pressures tend to occur well before full employment. You repeat this trope often, saying that we don’t need to worry about inflation till we hit full employment. If MMT was such a good model, then surely it would be applicable anywhere, yet repeatedly around the world we see countries with persistent high inflation and high unemployment. Blowing MMT’s claims about inflation out of the water.
“Why you equate money supply with national wealth is beyond me”
Again, I didn’t say that. Do you ever really read what I say? Or is it that you just prefer to answer questions of your own devising, allowing to answer whatever you may fancy at the time? In doing so, avoiding the question I pose entirely.
I did equate government debt levels with national wealth though. I did this to try and illustrate the point that government debt levels and spending have little to no direct correlation with the wealth of a nation.
This highlights several things. You are trying to make out that government debt underpins the value of the currency and the wealth of the nation. It does neither.
I don’t want to get into a debate about MMT, but it offers nothing new to the debate. It is just a re-heated mix of post-Keynesian analysis. It equates money with underlying value though. Certainly it’s main proponents do. Most, including you, offer only one recipe for all situations (in your analysis 2017 and 2020 both need more debt /money printing) and between that and the removal of interest rates as a policy tool (inherent in MMT) it is the very recipe for extreme mismanagement of an economy. The very taxidermy of it.
At this point, you could actually answer the points I have raised, rather than repeating the same falsehoods you have already gone over ad nauseum. Certainly, the articles you have written and your answers to me betray a significant lack of understanding of central banking, finance and basic economic principals.
I would strongly suggest though, that you stop misrepresenting the idea that governments can print money costlessly, never repay debt and use this money to create new value. It simply isn’t true.
My guess though, is you will react with more rhetoric and retreat to the echo chamber of those who do not challenge you. You aren’t an expert in this field, and it shows.
With respect to you, I am now bored with this reiteration of the economics of 1928
It did not work then
And right now what you suggest would lead to a country where millions would, quite literally starve]
I have met those who are quite indifferent to that, but I am not and what I am proposing is economics that will work – and which does in fact work – despite all you claim
As I have evidenced, governments do, for example, create money, but you deny completely it
You are a complete waste of time and absolutely no expert at all
You’re no longer welcome here
With respect to me? You have shown none at all. You have not answered any of my points, have claimed i said things I did not, created straw man arguments and resorted to insults and ad hominem attacks, again.
Are you always this professional?
Like claiming my suggestions would lead to millions starving. I have said no such thing. I pointed out that your suggestion – print near limitless amounts of new money would not be riskless or costless. I also said that with rates so low, it would be a much safer and more manageable way for governments to simply issue debt in the regular way to support the economy.
The way you say this is some attempt to cast aspersions on me, and for you to gain the moral high ground. I could easily turn it around on you though. The countries that have followed monetization policies such as you propose have actually left their people starving. Yet you are proposing such a scheme.
Nor did I ever say governments can’t create money (well, central banks). Once again you are claiming I said things I did not.
As for being an expert. I won’t bore you with my background, but suffice to say I have first-hand, practical experience of the matter I am talking about. No doubt you will simply assert your expertise over mine though.
How though can you call yourself an expert when you don’t understand basic aspects of finance or central banking, as I have pointed out several times above, which are common knowledge, well understood and not controversial in any manner. You make statements like “no money can be ultimately be made without the central bank of the government of the country responsible for that currency agreeing” which is manifestly incorrect, which any graduate trainee would know. I could list more of your false assertions but what is the point. You’ll simply come back and claim I don’t know anything and you, despite not having any experience in the field if finance or central banking, are the sole expert in the room.
The main one, which you keep repeating, is that money can be printed (true) without cost to taxpayers (false), and with no risks (false). At one point (I think on the other thread) you stated that inflation would be zero forever. Which you said to get out of answering a question you otherwise could not. Such an answer makes you look nothing short of ridiculous. Inflation isn’t even zero now, let alone zero into the far future. You keep propagating this myth to your acolytes and fellow believers, despite evidence (real evidence, unlike what you provide) to the contrary. It is deeply dishonest and I am not sure how anyone could call themselves an expert, between the mistakes you make, the lack of knowledge you display and the falsehoods you are peddling.
Let’s leave all the ad hominems aside
Let’s leave all the ridiculous claims in your other comments aside
Let’s look at this:
The main one, which you keep repeating, is that money can be printed (true) without cost to taxpayers (false), and with no risks (false). At one point (I think on the other thread) you stated that inflation would be zero forever.
You agree money can be created
It us nit true it is cost less. I have said there is a cost at full employment. There is not otherwise. Your claim is false. There is then a risk. Your claim is false. Fiscal policy believes that risk. You forgot to mention that. Job creation provides the gain that makes the risk worth taking. There is no free lunch – actually, job creation provides the chance if free breakfast, lunch and dinner to push the metaphor. Which is why this is worth doing. You ignore that. Your banking / finance background means you discuss only wealth. I discuss people.
Can we have low inflation for a very long time and do we know how to do that? Yes. Will we. Nit if people like you are in charge.
And should we issue debt still? Yes, as appropriate to ensure control of interest rates is maintained, but nit if it would result in higher rates.
Are any if your claims true then?
Yes: you agree governments can create money. But what you hate is that this could g3 used to liberate people to have better jobs. You want to maintain existing wealth structures. I know they are destructive. As do all the major economic agencies (IMF etc). All your complete lying about what I am saying – and you keep lying, making claims that you will never find evidence to support and which I have corrected time and again – reveal three things.
First, your willingness to misrepresent the truth.
Second, your fear that it us true.
Third, your paranoia that MMT might empower people
I suggest you need help. We want a better world, and your fight to keep a deeply flawed one us doomed.
Your apologies for all the misrepresentations will be noted when sent. Until then, please go and waste someone else’s time
I think you are actually saying that we can’t do anything without money, that we cannot create money as a facilitating instrument and that the quantity of money in existence determines the extent of what can be done. Using this logic we therefore have no response to existential threats and must succumb to the virus.
Twelve monetarists marooned on a desert island would say “we can’t build a shelter and we can’t fish because we have no money”.
I think your theorising is distorting your common sense.
🙂
Thankfully, this wasn’t the conclusion when war war broke out in 1939!
“Sorry guys. We just don’t have the money”
@keithp, that’s a brilliant metaphor/analogy/story/whatever the right term for it is – I plan to steal it and use it as often as I can get away with it.
JJN.
So what do you suggest that the government should do right now?
Pretty much what they are doing. Deficit spending financed by debt, with some QE to lower rates and ease credit spreads.
It is cheap for governments to issue debt at the moment, so there is simply no need for the monetization that Richard Murphy suggests. Nor is monetization risk or cost free, which is a claim he is making.
I covered the last point in detail on a thread about a week ago.
And QE is, as I have punted out, never repaid
So you agree with me
Thank you
JJN.
What does underpin the wealth of a nation?
Productivity, value added and the asset base (which is the proceeds of the first two).
Let’s do a simple little thought experiment.
You have a house worth £500k. GBPUSD is 1:1. So the house is worth $500k.
Now let’s say the government comes in and prints money, to the tune of the hundreds of billions of pounds Murphy is talking about. The markets take fright at this overt monetarism and the value of the pound plummets to 2:1.
How much is your house now worth?
There are only two possible answers here. Either, the house is still worth £500k, but now that only equates to $250k. Or, the house is still worth $500k, but which equates to £1m.
This example in a very simple but neat way shows the effect of currency debasement. Either people get poorer (your house is worth less) or it shows how currency debasement can have dramatic effects on inflation. it also shows that in and of itself, the pound is worth something only in relation to another asset, as a medium of exchange. Something Murphy seems to have forgotten.
Both are typically pretty bad, and both scenarios have played out many times historically in different countries, to different degrees through the course of recent history.
But that is not what I am talking about so thus is pure and utter nonsense and shows you have not read a word and are fighting your own devils, but most definitely not me
@JJN
But that’s an awful though experiment, if only because your premise of “print £bns leads to debasement of the currency” has been shown to be incorrect within literally the past 12 years.
Your conclusion is therefore incorrect.
This is not to say that I (and I assume most others on this forum) believe that you can create infinite money without destroying the value of it. You obviously can’t, but the reductio ad absurdum argument isn’t a good one in this case. Nobody is talking about creating infinite money, and RM and others I have read are talking about targeting the printed money at people and businesses which need it to remain liquid (or in human cases, alive).
This is unlikely to be inflationary, because all the money going in will immediately circulate and much will return as tax. One issue is that a lot of the money will concentrate up the chain due to rent capture etc but this happened in 08 without any going to the people at the bottom at all and we haven’t seen the pound collapse, so why should it now, when injecting money at the bottom will actually be economically useful?
Alternatively, we could crash the £ by not printing money and letting the economy stall completely :p …
Agreed Johan
JJN is decidedly dangerous
Even renounced by the FT today
JJN
I’m not sure interest rates control money supply or inflation.
The main area where all that broad money has gone is into property. By not counting house price inflation in the inflation figure just hides that all that private bank created money is causing inflation.
Interest rates didn’t stop the housing bubble before the crash of 2008. The banks weren’t restricted in the amount of money they created/lent out. That’s why it all went “tits up”.
The banks have found clever ways of lending without requiring large amounts of CBRs (securities, banks expanding loans in comparative amounts etc). The BoE’s ability to control any of this has been eroded over time.
BoE direct funding to the treasury cuts out the middle man. Eventually it may even replace the broad money completely.
I have explained how central banks use interest rates to control the money supply and inflation previously.
It is worth remembering that CB’s only control short rates, and that monetary policy is not a perfect, infallible tool. Rates can be set too high or too low, and government policy changes can have unforseen consequences – the housing bubble of 2008 was set up by changes in the banking regulations in 1994’s CRA act in the US, actually forcing banks to lend more to those with lower credit scores. Quite a time lag.
Rates are however, still the best tool available. They do a pretty good job of controlling excesses in the money supply and inflation, if you look at the data. Inflation has been pretty stable around 2% for 30 years now and M4 growth again has a relatively stable long term trajectory.
The alternative is trusting MMT, which Richard Murphy claims means the government can print money with nearly no limit. The only limit being that of full employment, though that seems to be a moving target as MMT types were still saying the government should print and spend more even when unemployment was at historical lows. They claim there will be no inflation from this, and that the currency will not be debased at all (see above). Murphy himself (on the other thread I think) basically came out and stated that inflation will always, forever, be zero. Then they claim they can use taxes to control inflation, with all the many problems and implications that brings.
Not very realistic.
I have to say, the idea that the government should be the sole distributor of the broad money supply is terrifying. It has been tried, a few times. I hate bringing up countries like Venezuala or Zimbabwe in these discussions, but they are examples of what happens when government tries to do such a thing.
Nit for one minute have I or anyone in MMT said money should b3 Prince without limit
In fact MMT is very clear that there are very firm limits
Misrepresenting MMT and me completely undermines your case
JJN
Sorry. You make so many points I have to respond one at a time.
And what happens in a post growth world?
Unless you are assuming that economic growth will always be exactly zero, the idea of a post growth world is not a realistic one.
Economies will always grow and suffer recessions. They will do so at different paces, but there will always likely be some growth, thanks if nothing else to human nature.
I think you are trying to label the current economic situation, with it’s associated economic norms, and then claim those policies have failed. I’m not sure this is helpful, especially compared with other economic policies that have been tried over the years, given how successful liberal free market economies have been over the course of human history, when compared to all other models.
Liberal free markets have been successful?
Regulated markets can succeed
Liberal ones – since 1980 – have only brought crisis after crisis
You are misrepresenting the truth again
JJN.
Sorry. Last one for tonight!
If the National Debt is never going to be paid off, can it actually be defined as a debt?
Is there a cost to pay on that debt? Is there risk attached? Yes?
Then it’s debt.
Even the debt purchased through QE has costs and associated risks.
Paying off the national debt in entirety is not really the question, nor am I saying having no national debt is necessarily a good thing. But there are most definitely limits, past which that debt because a drag on an economy.
The national debt is not homogeneous. Repayments and interest payments are made all the time. New debt is added all the time. What really matters is the size of the national debt compared to the size and growth of the economy and how affordable that debt is.
But it is still very much debt.
But you have never explained what that cost is and since we have almost never paid off any debt – and then o ot Tony amounts – you have never explained when it will be incurred or what, about from country-cyclical gains, might arise
MMT believes in counter- cyclical action
In other words your claim is not based in any historical fact and MMT does nit presume ever rising debt
Once more the whole claim you make is fabricated
It’s that word “DEBT”. It frames the whole debated. It has too much of a connotation to be used as a way of describing government spending.
David Graeber describes well, the words moral connotations in his book Debt: The First 5,000 Years. There is a moral obligation to repay ones debts.
Another, less “toxic”, word needs to be used to describe the process. I can’t think what it is though!
I think it goes back to the tension between two roles money performs.
It is the means of exchange. The “lubricant” that oils the coggs of the economy. It allows the social interactions. A lack of it and things grind to a halt.
But it is also a means of storing wealth/value
The wealth/value storage sucks the “lubricant” out of the machine which then needs to be replaced. (An expanding economy will also need more money) This is what the government does by creating and spending the money into the machine.
But the mechanism for doing this also means the government has to give money to the wealth storer’s as well. A fee almost, for the privilege of creating/spending its own money.
A local currency like The Bristol Pound is meant to be spent. Not to be held as a store of “value”. Once people start to hold onto it, the amount of economic transactions reduce or more Bristol Pounds need to be created to replace the money no longer in circulation.
It’s a bit of a clunky explanation I know. It’s in need of refining but it’s a way of removing the word “debt” from the discourse.
Money records debt
Debt is created and destroyed in exchange
But the idea that money is store of value is not right: the debt is the value]
Ultimately money is a measure but if there are not enough units of measurement in existence that constrains the process of exchange – because then everyone has to wait their turn to measure what they want to exchange
There is no reason, however, for not having enough units of measurement
Refusing to create money is like saying we can’t build a house because there aren’t enough tape measures to make sure the plan is followed
Most people when they hear the word “debt” think that something is owed by someone to someone else. (And that we should all repay our debts.)
I think people struggle to get their heads round the idea of a “debt” that never has to be repaid (which is the true definition of the national debt) goes contrary to people’s logic. They just “instinctively” assume it will need to be repaid sometime. That’s the whole “burden on our grandchildren” nonsense.
In a way, the national debt is just a record of how often the government has recycled the money back into the economy.
If money were still little pieces of gold, it would make more sense. The government constantly spending then retrieving those gold pieces, so that it can spend them again.
The national debt is just money … and if you try to repay money you get….money
Vinnie,
“Most people when they hear the word “debt” think that something is owed by someone to someone else. ”
Apologies if you meant something else by the above, but the government DOES owe a debt, however the ‘burden’ of that debt is not at all onerous. As all it amounts to is a promise that it will accept units of that debt (and only that debt – forget Bitcoin, diamond-encrusted gold bars etc.) back as payment of taxes. That’s it. End of.
And as Richard points out above, the idea that the UK government will ever tax back the entire national debt is beyond stupid. However, notwithstanding that completely hypothetical eventuality, the fact remains that the government’s promise to accept its own debt back to extinguish future taxes still stands.
Good explanation
Would a universal income policy be beneficial in these circumstances?
A dealt with this issue a while ago: we do not have the systems to deliver a UBI
Would it be sensible for the government to take a part stake in some industries and nationalise others either permanently or temporarily?
Yes
Is there another economic model and social contract we can move to?
Not off the shelf
Modern monetary theory helps right now
Dear Richard
I come originally from South Africa. I have read your peices about MMT with interest.
My question is this.
South Africa has it’s own currency, and it’s own central bank. We have quite a large budget deficit, but overall government debt is quite low by first world standards. We have a little bit of dollar debt, but nothing significant. inflation is about 5% and unemployment is about 29%. We could also really use some growth.
Would MMT work in South Africa? What should the government be doing right now if that is the case?
In principle MMT could work in SA
The problem is that the tax system is weak and a poor instrument for control as a result
MMT requires good tax systems
I’m sorry but no one has addressed the issue of inflation caused by money creation. This is a stealth tax that no one would agree to if they knew and understood what was happening and had a choice to reject it. The value of your hard earned 50 year savings will be eroded to worthless by someone by the tick of a pen.
Tell me, where this inflation is coming from?
And why?
Not just ,money printing’, because that happens day in, day out, without exception. But why now, when the economy is collapsing?
Would it be rational to add to Stephen Ferguson’s debt explanation above that its perhaps a bit like all those banknotes in our wallets with famous faces on them, that represent a debt owed to us by the government. Nobody expects that debt to be repaid but that is not seen as a problem and the BoE always ensures that the appropriate number are in circulation to match requirements in that particular transactional niche of the economy.
That is quite fair
And the paradox is apparent – they are debt – which is repaid with more of the same
Watching this debate unfold is actually very informative for someone like myself who is most definitely a non-expert. Crudely stated it seems that in effect we have two contending theories here; MMT (Modern Monetary Theory) and OMT (Old Monetary Theory), battling it out in court.
However, would it be fair to state that we are on the threshold of an event that is quite rare in economics; i.e. an empirical test that over the next couple of years might prove categorically and irrefutably which theory is correct?
If I understand correctly, governments have now engaged in massive money printing exercises (in effect). But this is going to be of a different nature to the QE that emerged post 2008 (which incidentally left big debts, austerity and rising inequality but did not trigger large scale inflation or tax rises).
So at the conclusion of the forthcoming experiment we will have one of two outcomes.
OMT tells us we will have massive inflation, devaluation and tax rises. MMT tells us that this will not be the case. Is that a fair assessment?
If so, even though we may have some time to wait, in due course we will at least be presented with some empirical evidence; akin to that which is the conventional arbiter when such theoretical contentions arise in the field of science (arguably such experiments are rarely possible in the field of a social science such as economics).
So perhaps we can now just place our bets and await the outcome?
I quite like the OMT v MMT comparison
You are broadly right
As a slight aside – Is it coincidental that MMT stands for Magic Money Tree too?
I suspect not
JJN.
I’ll try and reply to some of the points you have raised, but there lots! Apologies if my responses come across as a bit rambling, but I’ll try and keep things to the point.
JJN 12:21
With QE.
The BoE is not going to ask the Treasury for coupon payments or the up front price back on maturity, of any of those bonds, so why bother with the process of purchasing them through the “markets” in the first place?
(I understand why the players in the “market” might not like the idea though!!!!!)
Just credit the Treasury account at the BoE with CBRs and do away with the bonds.
I’m guessing that without those bonds, the pension funds are going to to start looking pretty rocky.
Richard.
Do you see that letting the pension funds have the bonds creates stability in the markets and that it is a price worth paying by the government?
I’m concurred form previous blogs that you don’t think that doing away with broad money completely is desirable. Why not have everyone using CBRs and we all have accounts at the BoE. Private Banks no longer being the interface between the CBRs and broad money.
Can you elaborate on why you think this would be a bad idea. (If indeed you do)
JJN 22:32
You say National Wealth is Productivity, Value Added and the asset base (proceeds of the previous two)
I agree, (plus some that I will add later)
But this just shows how private banks have been failing the Nation!!!!!!!
Most broad money created by private banks doesn’t go into increasing productivity or adding value. It goes into the property market!!!!!!
It makes me laugh when economic pundits on TV and radio all sit around scratching their heads on why UK productivity lags behind other countries. It’s because our banking system doesn’t invest in it!!!!!!!
Even a numpty like me can see the problem!
(I also think that developed economies also hit a “wall” with Productivity which in turn affects growth, which in turn effects financial markets, which in turn effects us all.
If the economy transforms from “making” to services” (as the UK has) it is then hard to increase productivity. How do you provide more productivity delivering services?
Even in productive processes, productivity must grind to a halt eventually. Improvements in the efficiency of making a “widget” come through investing in new plant and machinery (at the expense of the human inputs). But the financial returns on making the “widget” slightly quicker/cheaper will not be worth the capital investment in the new machinery. Poor GDP across the developed world may be due to these two phenomenons?)
I would also add Human Capital, Educated Workforce, Good Health Care, Social Mobility, Clean Environment are also a part of a Nation’s Wealth.
I’m not sure that your use of a house in the example of capital flight is a great one.
I don’t see my house as an asset.
I see it as a home. Its value is irrelevant to me. (I do know lots of people who made a “killing” when they moved out of London though)
In your example, capital flight is caused by government creating hundreds of billions of £s.
But this is exactly what you suggest the government does right now.
I agree that governments should not create more money than the economy can absorbe, but I don’t think Richard is suggesting that either.
JJN 12:46
But inflation HASN’T been at 2% for years.
The one area where most broad money (created by private banks) has gone, has seen steep inflation!
Namely the Property Market.
Just because it isn’t included in how the official figures are constructed doesn’t mean it isn’t there. (I think it is not included to hide the fact that it IS there!)
Property inflation is “spun” as a positive, suggesting homeowners are becoming “wealthier” as the house goes up in value. But it’s just an illusion.
That house price inflation has a real detrimental effect on lots of people in society. It is not a positive!!!!!!
Except for the people creating the loans/mortgages of course!!!!!
(I have a funny feeling you may have some “skin” in this particular game?)
I don’t believe your statement that the crash of 2008 was because “US banks were “forced” to lend to those with lower credit score”.
The banks did it willingly!!!
Securities were a bank creation and the driving mechanism of all that toxic debt.
Zimbabwe had hyper inflation because agricultural production fell off a cliff.
Yes, the printing of money added fuel to the fire, but the initial inflation was triggered by political decisions (land reallocation) rather than the printing of money.
Inflation is caused by either wages or prices.
Wages, if a country is at full employment.
Or (as in Zimbabwe’s case) prices, if supply can not meet supply. A shortage of food in Zimbabwe causing prices to rise as people try to outspend eachother to get their hands on the food.
I’m not sure of the details regarding Venezuela, but I imagine that US sanctions has squeezed supply but the demand is still high.
I know you know all this already!
JJN 12:52
You seem to be advocating “boom & bust”?
I’m talking about exponential growth.
If you see growth always being there, at what level (%) do you see exponential growth being sustainable?
I’m talking sustainability
Stephen Ferguson 10:25
Agreed.
But it’s not how the wider public experience debt in their own lives.
They just can’t pay off their debts by taking on more debts! (Never mind explaining that they pay off their debts with money they earn, which is itself, someone else’s debt!)
Which is in effect what the government does.
No!! Infact the government is actually creating the debt to pay the debt, whereas I can’t create my own IOUs to pay off my mortgage.
It’s that slippery word DEBT!!!! It has two different “meanings/experiences” depending if it government or private.
It’s like the government has to pay a “fee” in future CBRs to private financial institutions, to create its own money.
The government NEVER takes “on more debts” to ” to pay the [previous] debt”.
The only way it can EVER ‘pay’ the debt is by fulfilling its promise to accept said debt as payment for tax (i.e. what I said above). No more, no less.
The whole topic is however thoroughly confused by the terminology commonly used by economists, the press and politicians – in particular the term “government borrowing”. Although this borrowing is actually all about relieving the private sector of £s whilst also providing it with a gigantic savings account, the term itself invokes the scary mental image that government is getting deeper and deeper in debt. Leading to the plausible (but totally wrong) conclusion that the state will eventually go bankrupt – which is as daft as thinking the FA will run out of points.
Stephen Ferguson.
But, as Richard is suggesting above, when a bond matures, rather than paying back the original value of the bond to the bond holder, the government just creates a new bond and gives it to the bond holder.
(At least I think this is what happens?)
So the government is paying back the original bond (debt) with a new bond (debt).
So, is the government not paying off debt with more debt?
Tax (which as you say, is the same government debt) is used to pay the coupons on the bond over its lifetime, but that is the interest on the debt (coupon). The debt itself is not being paid off by the tax? (or is it?)
Out of interest, does tax always cover the interest/coupon payments on existing bonds or does a scenario ever arise where taxes were set to low to cover it?
I still have issue with the word “debt”. It’s like it has two different meanings depending on whether it is government or private debt.
My mortgage debt “behaves” differently to a government debt but the word is the same. I think this is what causes much of the confusion.
Technically it does not give a new bond – cash does change hands
But the reality is most goes straight back into bonds, of course
Vinnie,
“I still have issue with the word “debt”.”
I absolutely agree. Our minds have so many associations with the word “debt” as it is loaded with deep societal and personal meaning. Indeed its said that society itself is bonded together by debts of all kinds (not mere monetary ones). So that we can think clearly and be able to reason about ‘debt’, we have to boil it down to its very essence, which is that debt is an ‘IOU’ that the issuer of the IOU gives out.
The beauty of this is that everybody innately ‘gets’ what an IOU is. Namely:
– An IOU is just a made up thing
– If you are the ‘I’ who issues the IOU, then its you who is in debt
– If you are the ‘U’ who receives the IOU, then you have an nice valuable asset in your happy little mitt
– When the IOU is redeemed, the issuer destroys it.
So when government ‘borrows’ it accepts it’s previously issued ‘money’ IOUs (which pay no interest) from the private sector in exchange for brand new ‘bond’ IOUs (which pay a little interest). So they take one kind of IOU off the buyer, only to hand them back another kind of IOU! At that moment in time, the government is in NO MORE debt after the borrowing than before. That is except for one thing: the government is now obligated, every so often, to bung the ‘bond’ IOU holder the odd additional ‘money’ IOU.
Out of that deal the private sector gets a nice little income and the government gets to control the private sector’s spending power – by removing that spending power from people’s hands in a similar way that a ’45 day access account’ removes your spending power whilst keeping your nest egg nice and safe for the future. Everybody’s happy.
So to answer your question “is the government not paying off debt with more debt?” is no, since at no point in that process, where the government’s previous IOUs ‘paid off’ – they were just swapped for other IOUs. Actually, you are half right as a few more IOUs do get produced to pay the interest (but then a whole lot more gets produced any way due to normal government spending).
That ‘pay off the debt’ bit only happens when the government issues something else altogether – a ‘UOI’ (which, though not so well known as the term IOU is equally understandable as everybody else just calls it a ‘tax’. The very act of tax collection is the moment the government’s debt is finally ‘paid’ i.e. the government fulfils its promise to accept its own IOUs in payment for UOIs. And so that small amount of government debt is no more – gone in a mutually destructive puff of smoke when IOU met UOI!
Does anyone know.
Do some government bonds that have been issued in the past have no maturity date? They never end and coupons will still be being paid out on them until the end of time?
They now all have maturity dates
But that simply means that they are rolled over
Net repayments are as rare as hen’s teeth
See https://www.taxresearch.org.uk/Blog/2016/03/13/the-conservatives-have-been-the-biggest-borrowers-over-the-last-70-years/
Thanks for the link Richard.
(Some of the the comments are funny. The implication that Labour spending is reckless but Tory spending is due to external factors forced upon them!)
By net repayments are you referring to paying back the original value of the bond on maturity?
Does this mean that in most cases the bond is “paid off” by giving the bond holder a fresh bond?
Net repayments is redemptions exceed new bond issues
Normally, of course, all bond redemptions are covered by new issues
Sorry for the questions on technical details, but they help me understand.
So, is the redemption on a bond always covered by taxes raised or does the government sometimes have to acquire the required CBRs to pay the redemption by issuing/selling more bonds?
The government pays….using BoE created funds
Invariable it clears that sum raising a new bond
Taxes raised are not involved
Sorry, just one more quick question!!!
So are the coupons paid, solely, by taxes raised? Does the tax intake ever fall short of the annual interest due on the bonds?
No….how could it?
But the coupons are not paid by taxes, just as nothing really is