I have just put out the following Twitter thread to address some of the nonsense being said about inflation risk today, and other comments that show incomprehension about money. And yes, I know som MMT quibbles could be raised - but this is seeking to reach a wider audience with ideas they will bot be familiar with:
The usual ridiculous claims about inflation risk are whirling around the media because the government is borrowing more, and some of that is being paid for with quantitative easing (QE). So it's time for an explanation 1/
First, gov't debt in the UK right now is low: net of QE it may be just 57% of GDP right now, which is insignificant in the grand scheme of things. 2/
Second, despite £575bn of QE in the last decade the government and Bank of England has dismally failed to deliver inflation that we require. That suggests we might need more QE to create inflation and not less, and inflation is no bad thing. 3/
Third, government debt is made up of three things. They are notes and coins; National Savings including Premium Bonds, and gilts, which are, in effect, National Savings for banks, pension funds and companies. Can anyone give a good reason why we should get rid of all of them, including our money? 4/
Fourth, if big savers what to save with the government because they do not trust commercial banks (which is what is happening) should we force them to take the risk of losing their money in commercial banks? If so, why, especially when smaller savers are protected? 5/
Fifth, shouldn't we instead see this move to save with the government as a vote of confidence in the government's ability to provide economic security and instead worry about why commercial banks are not as safe, and do something about that? 6/
Sixth, government has never repaid the national debt, or ever really tried to do so since it began in 1694. Why should we plan to do so now? What's the reason for changing a policy now that's worked for more than 325 years? 7/
Seventh, if the national debt is going up it's because the private sector is failing, and not that the gov't is. If we demand that the debt be repaid who are we repaying it to? Wouldn't we just bailing out the private owners of wealth? Why should we do that? 8/
Eighth, if 'repaying the debt' would really be about giving private owners of wealth back the money they're lost in preference to providing jobs for people who'll need them and tackling the climate crisis which we should be doing, what's the justification? 9/
Ninth, weren't those in the private sector who've lost as a result of this crisis aware that they were taking risk when investing in private business? When was it that the state gave them an undertaking to underwrite their losses, which repaying the debt would represent? 10/
Tenth, anyone who claims we cannot repay ignores the fact that the government can buy back its own debt any time it likes: it has had the Bank of England create £575bn of new money via QE to do this over the last decade and none of that has to be repaid because the gov't owns the BoE 11/
Eleventh, it's vital the Bank of England does do this money creation. Right now, government loans apart there's almost no new money going into the economy and given that all the money we use is created by borrowing if the Bank of England was not creating new money right now no one would be 12/
Twelfth, in that case without the injection of new government-created money that is happening right now into the economy it would literally grind to a halt. Would anyone prefer that to this new money creation which will be used to clear a large part of this so-called debt? 13/
Thirteenth, or would people prefer that we kept as much as possible of the economy going right now, knowing that the only cost of doing so is the Bank of England technically eventually being owed quite a lot by the government, which it never need repay? 14/
Fourteenth, and if in doubt about this, think how hard you'd find it to repay your borrowings if you owed them to yourself, which is what will happen with much of the new so-called government debt that's going to be created by this recession, but which will be owned by the BoE 15/
Fifteenth, so let's not panic. The amazing thing about modern money is it can be made on demand by the Bank of England to keep our economy going, to clear government debt and to create the cash we need to keep finance going all at the same time 16/
Sixteenth, so there's nothing to worry about - because if the worst comes to the very worst all this debt will just be owed by the government to itself - and that's just fine because what's left over after that is something you really like - new money that makes your world possible 17/
And because that new money simply replaces that which would normally be created by commercial bank lending which isn't happening right now there is no chance it will deliver inflation. Instead it just keeps is going. Thank goodness for gov't and its ability to create new money in that case, I say End/
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Seventeenth (!), this NOT a step into the unknown. I think we can all agree that Japan is not Zimbabwe, Venezuela or the Weimar Republic. Indeed, I suspect that there is much for the UK to envy about Japan. So, what have they been doing?
(a) Japanese short term rates went close to zero 25 years ago, the BoJ (Bank of Japan) has been buying JGBs (Japanese Government Bonds) for almost 20 years. 10 year JGB rates have been around zero for more than 5 years.
(b) Japanese Government Debt is around 200% of GDP, in the UK this figure is about 80%
(c)The Bank of Japan owns over 50% of all JGBs. In the UK the BoE owns roughly 25%.
(d) The Central Government deficit over that period has averaged about 7% in Japan (versus about 4% in the UK).
And what has this crazy, reckless, profligate policy delivered for Japan?
(a) The general price level in Japan is roughly unchanged over the last 25 years. (In the UK what cost £1 25 years ago now costs roughly £2)
(b) A pretty civilised society with decent infrastructure and trains that run on time.
Has the policy worked? In one sense, no – the economy is hardly booming…. but it was CERTAINLY the right thing to do. It HAS prevented depression and the risks of inflation that everyone feared at the time (yes, me, too as I was living there in the late 80s and 90s) never came close to materialising.
So, Rishi… come on in, the water is fine. Spend more, monetise the debt and invest in all our futures.
Precisely….
I haven’t heard much about Bitcoin lately. Can’t that sort out all our problems?
NO NO NO
Sorry to go off thread, but I need help! I thought I heard Priti Patel, Home Secretary making a bizarre statement during the daily briefing today, but have only been able to pick up this, the official government.uk statement, in which the written text says this: “As the world begins to emerge from what we hope is the worst of the coronavirus pandemic, we must look to the future and protect the British public by reducing the risk of cases crossing our border.”
Now? This is late May. did it not matter much in early May? April? In March? In February?
I think I heard her dispense with the words “the world” in the briefing itself, and just said “As we begin…”; but I stand to be corrected. What I wish to know is, what on earth does this mean? Does it mean that we only need to worry about new cases of infected people coming in to Britain from abroad, once the rate of infection in Britain has statred to decline: in which case, what on earth does that mean? How does that work; does the virus have a diary and an iPhone?
Would anyone care to help? I need this carefully deconstructed and explained. This is the Home Secretary. This matters. Trust me, I am worried.
You need to be worried
She is totally and utterly incompetent
Only that’s too kind
She’s viciously ignorant of the consequences of her actions
Agree with you 100% on Patel. Utterly useless – but a totally loyal soldier for Johnson, and an arch Brexiteer, which is why she’s where she is.
Regarding the 14 day quarantine. Surely the main purpose is to keep people from leaving the UK (or England at least). That is, once lockdown is eased further in places like Greece (which I understand intends to restart its tourist industry quite soon) and elsewhere people from the UK tend to go for their summer holidays, what the Government doesn’t want is thousands of people jetting off and spending money abroad. That money needs to be spent here so it boosts our severly ailing economy. So, what better way to stop people travelling abroad without actually telling them they can’t: simply scare them into not going by putting in place the 14 day quarantine law (plus hefty fines).
The key area I keep telling people is that the Government owes no one the money but itself and since it is sovereign ………….well, what the heck – especially at times like this – so I’m glad to see that in your most excellent reasoning.
Thanks.
Instead of clapping carers every Thursday, the Government could give them all sodding pay rise too, backdated to February and not flinch a bit.
I still think however that the scaremongering is having an effect because I’m not sure that the Government is pulling all the stops to help everyone as it claims. The Toryies are good at this – claiming they have done stuff when they haven’t or only half of it.
I agree
Candidly, the clapping is getting pretty embarrassing now that the government so obviously really does not care
Is this nation up to a slow hand clap though? Personally doubt it at the moment the misery will have to get much worse to provoke such a reaction.
Great list Richard. But it will still probably challenge the target group which you define as “a wider audience with ideas they will not be familiar with”. It’s such a vital task though so can I perhaps ask, if you had to prioritise say 3 of these numbered points, as being the ones most likely to make a connection and then stick, which ones would you select and why?
What would you recommend?
I thought you might ask that! Fair enough. Can I think about it over night? But I would then love to see your choice; you are a lot better informed than me (as are others on here who might also care to give it a go).
It may be question of the day, tomorrow….
Hi Richard, great to see someone attempting to ‘lift the veil’ on money creation. I am an avid follower though still have large gaps in my understanding. The piece of the jigsaw I have trouble with is debt interest. I always assumed that the government paid interest on the gilts it issued and that this amounted to quite a significant slice of annual expenditure, approximately equivalent to spend on defence last time I looked, which admittedly was a long time ago. Is that debt interest going up as a proportion of national expenditure, or does it simply not matter because any shortfall can be made up through QE? I’m also wondering about the government’s Ways and Means account at the BoE. Is that funded by QE or debt on which interest is payable?
Now in my myth buster list
The answer is that the debt is a very small part of gov’t spend – and is steadily declining….
I will do it
Richard
UK Treasury printing own money in 1914-1928 (no need for taxation): http://leconomistamascherato.blogspot.com/2019/12/currency-and-bank-notes-act-1914-very.html
Note: as soon as they stopped, you had 1929…
Link from that same website:-
https://actionnetwork.org/petitions/bank-of-england-come-clean-stop-secret-business-bailouts-now/
UK government hiding what businesses are recipients of coronavirus bailout money through confidentiality clause. Obvious opportunity for corruption but that’s Tories for you!
Money creation as a method of taxation
(From: A Tract on Monetary Reform, J.M.Keynes, 1923, pp. 41 ss.)
http://leconomistamascherato.blogspot.com/2020/04/banking-money-creation-as-method-of.html
But this is a gold standard story
Novara media’s resident economist James Meadway was on tonight to the fairly large audiences that Novara now gathers on youtube- explaining that yes, the government debt that has accumulated due to the virus does eventually have to be paid back, but it isn’t an issue due to low interest rates and inflation in a growing economy – just like the WW2 debt was paid back over time.
Dear Richard – does any of the above make any sense? Was the WW2 debt “paid back”? To who?
Who is the government borrowing from at the moment, private sector by issuing bonds?
Or from the bank of england? Or both?
Is James talking bollox?
He is talking nonsense, I am afraid
The idea that national debt has ever really been repaid is nonsense
It is rolled over
I showed yesterday that the credit to buy current bond issues has already bern created by the Bank if England
Notionally the private sector are buying bonds right now – but out of the proceeds of sake of bonds just sold to the BoE
I seem to remember some years ago reading that the war debt had finally been paid off (mainly to the USA). What would all that have been about?
The debt was refinanced
That is all
It means nothing
So is war debt, in 1940s money, still with us 80 years on in ‘contemporary’ money but eroded in value by cumulative inflation? And is it in dollars or pounds?
In reality it is
You’ve missed the more important point.
Cov-19 is only a dress rehearsal for the more drastic “wind-down” of non-essential economic activity we need to applu to avoid the worst consequences of overconsumption. New money MUST be tied to commitments to a circular economy, regenerating land andmarine biodiversity, decarbonisation and recharging our (global) topsoils with carbon. We need to normalise the concept of ecological recovery and adapt our economic and social behaviour to suit.
If we dont do this, any “revival” of the economy will be pointless, simply speeding up the slow motion strain crash we’re in the middle of.
I tie it to a GND
Less consumption, definitely
Doing less, not necessarily
OK. I asked for this so here goes, starting with my adopted selection criteria.
Firstly I start from the premiss that most people have very little understanding of what money is; where it comes from and where it ends up (I certainly did not until this year and I still consider myself to be in the foothills of understanding).
Secondly, I make the assumption that most people already accept that the government is obliged to accept massive additional debt at this time but believe it will have to be paid back at some stage (maybe that’s a big assumption on my part).
Thirdly, I assume that most people understand that the BoE controls the supply of money (which they see as notes and coin or its electronic equivalent) but they do not understand the role that the private sector banks and financial institutions play in money creation. So they worry that allowing the government/BoE to create money without later clawing it back through either increased taxation or decreased expenditure (i.e. more austerity) will inevitably lead to inflation.
But since I found it rather difficult to eliminate so many of the original points, I have resorted to cheating and in effect, combined number 10 and 14. I also slightly tweaked other bits to fit.
So here is my tentative shortlist:
1. Original number 11. It’s vital the Bank of England does do this money creation. Right now, government loans apart, there’s almost no new money going into the economy and given that all the money we use is created by borrowing, if the Bank of England was not creating new money no one else would be. So without the injection of new government-created money into the economy, as is happening right now, it would literally grind to a halt.
2. Original number 17. Because that new money simply replaces that which would normally be created by commercial bank lending, which isn’t happening right now, there is no chance it will deliver inflation. Instead it just keeps us going. So thank goodness for gov’t and its ability to create new money.
3. Original Number 10/14. Anyone who claims we cannot repay ignores the fact that the government can buy back its own debt any time it likes. For example, it has had the Bank of England create £575bn of new money via QE to do this over the last decade without causing inflation and none of that has to be repaid because the gov’t owns the BoE. If in doubt about this, just think how hard you’d find it to repay your borrowings if you owed them to yourself; which is what will happen with much of the new so-called government debt that’s going to be created during this recession, but which will be owned by the BoE.
Ideally, I would also like to weave-in Clive’s excellent points about Japan but that was not part of the original brief.
I am reposting this to the myth’s post
I need a record of it….
Thanks
I cannot do everyhting this weekend…and take a little time off
Treasury Notes: Their Present Advantage and Permanent Value
August 3, 1916
LAND & WATER
http://leconomistamascherato.blogspot.com/2020/03/treasury-notes-their-present-advantage.html
Worth reading
Please go on Novara media and explain this to them.
I beg you. They are the leading progressive voice for the UK on youtube, and unfortunately being utterly misled on government spending, stuck in a household analogy world, being led by James Meadway, who they regard as an expert.
I dream of a day when you can get on their show and essentially read out the thread above, and open their minds.
Happy to do so
Where are they?
Novara media are a youtube based outlet, with a website and podcast.
Rose in prominence during 2017 and are pretty much the UK’s defacto no.1 youtube channel for left-leaning (i hate that term but there you go) or progressive folk – people who want to see government play more of a role in shaping society, lets say – now on 75k subs and growing quickly.
They are generally a good bunch, fronted by Aaron Bastani and Michael Walker – but unfortunately undermined by a misguided view on government spending and what is possible. In the run up to GE’19 they asked Paul Mason to assist and he did this ‘wonderful’ video
https://www.youtube.com/watch?v=VOTII5_2KA4
Since then, whenever the debt is discussed they bring on James Meadway, their resident economist who advised John Mcdonnell a few years ago….who seems to think MMT is some kind of conspiracy masquerading as an apology for rich people to not pay taxes.
My ears bleed when he talks and its just depressing that the relatively young audience who follow Novara will be listening to all this. I have emailed them and suggested to get in touch with you last year but they never replied.
Michael Walker did say last year he would like to do something on MMT, but that was 6 months ago.
If you want to reach a wide and mainly young audience, it’d be a fantastic opportunity to get on their show.
I will contact them
If you want to do some quick research into Novara Media AND their relationship with James Meadway AND their reaction to Dharshini David’s terrible video all in one 15 minute clip, you could do worse than look at their recent video from a couple of days ago:
https://novaramedia.com/2020/05/22/johnson-in-retreat/
Start about 23 minutes in.
Not a hint that £200 bn of QE has been done this year and that this is how the markets are buying debt
Meadway says there is no need for government funding Of the deficit right now when £200bn has been done and it is expected that another £100bn may happen very soon
That’s not clever
It’s misleading in fact
Yes I absolutely agree on this.
They would do very well with you
I admit I am completely unfamiliar with it
I suppose the obvious question about MMT is..
If there is no cause for concern as the government merely owes money to itself then why can’t the government simply borrow ever more without limit to, say,increase nurses and teachers wages by 50%, build all of hS2 a bridge to Ireland and any number of other projects.
Very simple ….. there will be inflation
The spend has to be in available resources
If you over inject cash in proportion to available resource (the constraint is full employment) then inflation follows
Who can you trust to know how much money to print, where to spend it and when to stop?
We have had almnost ni income infalotion in the almost decade
Smething is working in that regard
It seems that the government has some cometemnce here
Who would you trust?
How are we defining resources here? I’d be inclined to think nurses etc, underpaid as they are by some standards, represent a considerable resource. Bung’em, I’d say. Others, too. But you’d need an efficient mechanism for removing excess through tax. However, I’d be inclined again myself to regard that as a resource and would support creating money for it. So, what counts as a resource?
Who can you trust to make the decision about what, when, how much, and when to stop spending? That’s literally the reason we have democracy – so that we get to pick the people who make those decisions for us, and so that we get to replace them out if we don’t like the decisions they make.
Being afraid that they’ll stuff up is natural; seeing that fear as a reason to try and work around democracy (by creating technocratic institutions that don’t answer to democratic processes, or other end-runs around democracy) is a good way to destroy democracy piecemeal. There are already enough powerful people out to do that for their own ends – democracy needs to be defended from those people, not undermined by our own fears.
Thanks
Well done for putting this thread into blog form – and for the original creation on twitter.
Thanks
Coincidence then? – Mishal Husain on BBC Radio 4 Today programme, at 07:30 on Saturday 23 May, asks Sir Paul Tucker, former deputy governor of the bank of England.
“Could you park the debt? The view that has been aired is that you don’t really have to pay it back”
Paul Tucker: “This is the Modern Monetary Theory view that if you can print your own money it isn’t really a real burden at all, and you can just carry on forever. You have to be really confident that it can’t go wrong. I mean, if people were to embark on printing money, what technicians call monetary financing, and it went horribly wrong and inflation went up to 20% or 30%, I mean this would be incredibly damaging. Not just to the economic fabric of the country, but to the social and political fabric of the country as well. When you’re not in office it’s very easy to float adventurous ideas, but when you’re in office you have to think about what are your chances of being right, and if you’re wrong, how horrible would the consequences be?
“ … there are no good choices … there are steps into the unknown, or there is higher taxes, or there are spending cuts, or there is what I think is going on which is a variant of trying to inflate away the debt, which is the central bank holding interest rates down for a long time, which is called financial repression.
“… how do you increase taxation and be sure to collect it, and how do you increase taxes without blunting incentives to invest and spend in the economy. I don’t have the answers to any of those questions. As one of their many workstreams on this crisis they ought to have some of their very best people hidden away, not talking to people like you I’m afraid, and thinking through what the options are. And these will al be political and they will be very tough.”
Very foolish and very arrogant.
The ‘very tough’ economic decisions then will be made by politicians for political reasons, in secret.
I don’t think Mishal Husain understood the question she asked, it was surely scripted for her and perhaps Paul Tucker was primed to ridicule MMT? Seems very odd that he mentions MMT just like that.
The question is how and why would it go to 20% or 30%?
And hasn’t he noticed Japan?
Or the fact that £435bn of QE produced nop inflation?
It’s just gross misinformation (in my kindest interpretation)
Exactly Richard.
But Tucker’s reticence towards DMF is predicated on the assumption that inflation might take off (hence he at least stops short of asserting that it is deterministically bound to do so, as those who still believe in PT = MV like to assert).
So he himself has openly accepted the concept of probability here. Consequently, if it can be demonstrated with sound reasoning that there is only a very low probability of initiating an inflationary spiral, and that there is a flame-dousing Plan B in the ‘reserve locker’, just in case, then his denouncement is substantially weakened.
Also, his condemnation of tax rises as an alternative repayment strategy actually undermines his argument against alternatives such as QE or DMF (after all, it has to be one of the four options you cited earlier and he acknowledges there are no good options, including the conventional ones).
With a bit of luck perhaps some of his listeners might have interpreted him in these terms and might just have been alerted to the existence of unfamiliar but more imaginative alternatives?
He is a man defending the indefensible, and all he has ever believed in
We should not really expect him to make sense
I was just about to post a similar transcript.
“Seems very odd that he mentions MMT just like that”
It’s the first time I’ve heard MMT referenced (and attacked) so directly on the BBC, or other broadcast media for that matter. I would like to believe it’s because they’re getting worried about the persuasive power of their pay-for narrative.
I susoect you are right
I think we can all agree that having your own central Bank gives economic flexibility.
Is that the clinching argument for Brexit?
And does the BOE give the UK a competitive advantage over say France and Italy who are tied within the narrow fiscal rules of the eurozone?
Or does it just shift the ground from interest rates to currency exchanges.
Being in the euro is not a condtiion for being in the EU so it is not a clincher – but it helps as I suspect the French would agree
Power to Create Money is Power to Tax, a Prerogative of the State
Chapter XIII (From: “Money Creators”, by Gertrude Coogan, 1935
http://leconomistamascherato.blogspot.com/2020/05/power-to-create-money-is-power-to-tax.html
(ignoramus deserve to be taxed to death by bankers)
That is incredibly small text
I hav e downloaded to a Word doc and will read later
It’s 11 pages there…