The government borrowed £62bn in April. Twitter is hyperventilating.
These were my contributions to that platform, so far this morning:
There is another thread to come, being written now that will appear as a blog here as well.
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I liked this quote, which was in The Guardian:
Jeremy Thomson-Cook, chief economist at financial services group Equals, says we should welcome the jump in borrowing – the alternative is worse.
“The UK’s budget deficit is at the highest level since records began in 1993. This is a good thing; if your house is on fire, you don’t ask the Fire Brigade to only use a certain amount of water.
The water will need to keep flowing and the deficit will continue to grow because the alternative — a deeply scarred economy – is far worse.”
That’s correct
Richard,
Your third contribution (Government bonds are just a savings mechanism….) would be a very effective basis for conveying the nature of money and debt to those who don’t understand them. I’ve read about money countless times on your posts but something about the way that comment was framed or worded made it jump out. It would be a good way to get through to people.
I’ll keep saying it then
I am also saying ‘gilts in issue’ rather than ‘debt’
Hi Helen, the easy thing to remember is that all money is debt. A £10 note is an IOU from the state and the Bank of England balance sheet includes a liability (i.e. a debt of the bank) of £70 billion for the notes in circulation. So that £70 billion of notes is also part of the National Debt. If anyone says they want to ‘pay off the government debt’ then what would happen is that there would be no money. Just like matter and anti-matter, except without the explosion. In personal terms if I have an asset of £30,000 of shares and a debt of £30,000 on the credit cards, then I could sell the shares and repay the cards. At that point the debits and credits cancel out and I end up with a nice big zero – no assets or liabilities.
Prof Mosler explained gilts (government bonds) as simply the Central Bank having current accounts (the commercial bank reserve accounts and the Treasury accounts) and savings accounts (or term deposits). A gilt is a term deposit / savings account at the Central Bank. If the state repays a gilt then the money simply moves out of the savings account and into one of the commercial bank reserve accounts (and that bank allocates it to your current account) at the Central Bank. That all then helps to see that there is no direct economic impact from repaying a gilt as it just switches funds from one account to another. There is of course potentially an impact if the state decides it has to tax us all to the value of the gilt repaid. Though the tax is not actually repaying anything as tax payments = money destroyed. You saw that more clearly in the old days. If you took your tax payment in cash into the BoE and paid it in at the cashier’s desk (there is a banking hall and a cashiers dept) then they simply put the used notes in the incinerator. When the bank was paying out money then that was only new notes.
I agree with every word Helen Elliot has posted above. Your third tweet, “Government bonds are just a savings mechanism…” is golden. You have a clear way of explaining things Mr Murphy.
Can Government bonds also be described as a means of tax avoidance? Better to buy bonds than get taxed which would be the only other option government can use to remove money from the economy, to create the space for more government spending???
No – they cannot be tax avoidance because they’re exactly akin to a bank deposit account
I’m saying “tax avoidance” a bit tongue in cheek.
But if the government didn’t issue bonds then it’s only option would be to tax the money out of existence.
I’d rather put my money in a savings account than have it taken off me and destroyed!
🙂
Well done Richard, well done. It needs to be said time and time again.
Thank God for you.
What needs to be said about George Osborne’s coments, who seems to be promoting himself these days as the experienced, responsible architect of nevessary and successful economic management under the coalition? It almost seems as if he is hoping to position himself for a political comeback – maybe when BJ has self-immolated.
He’s wrong?
Does any more need to be said?
Yes – over and over and over again. Because Osborne is like HG Wells red weed – spreading his odious misinformation about austerity and the need to “balance the books” on Mainstream Media and wherever he goes. If this goes unchallenged, it becomes “the truth” and, much like “the science”, becomes tantamount to a religion which no amount of logic or reason can sway its adherents from believing.
Why anyone gives him airtime is a mystery to me – or at least it would be if I hadn’t already fathomed out that he’s given airtime because he supports the narrative that the Tory government wants to promote. It’s all the filthy electorates fault for being prone to catch viruses, thereby hurting the rich capitalists who see an unpleasant dip in their logarithmic growth in wealth and get jittery.
When the Automaton that is Osborne starts spouting about how “it all needs to be repaid” why oh why doesn’t anyone reply that all of the monies paid to furloughed workers has effectively gone straight back out into the economy and therefore, by sometimes a circumlocutionary route, back to the Treasury so, yay, the “repayment” is already occurring.
Nah – instead we get the talk of taxes and cuts in government spending and austerity in anything other than name.
So please – carry on – shout as loud as you can to whoever will listen. I do the same but my audience is small and entrenched in their views. You stand a chance of swaying opinion – a precious resource in hideously short supply these days…
The BBC’s economics correspondent discussed this government borrowing this morning “which of course will eventually have to be repaid”. No it won’t. The consolidated government’s central bank will simply issue reserves at the time the gilts are due and swap them. Even Larry Elliot got it wrong in the Guardian when he said that the government was issuing negative yield bonds. Again no it wasn’t. People were buying them at negative projected yield. One I looked at was a £100 Treasury bond issue dated 20/05/20 with a maturity date of 31/01/2023 and a coupon of 0.125%. They were hugely over-subscribed and made more than £100 each so, yes, at the moment they may have a negative yield. One day I might understand the difference between “dirty” and “clean” price.
Interesting you say that the government has repaid more debt than it has issued. I hope you will detail that in your forthcoming follow-up. I also like “gilts in issue”, and you could also say “reserves in issue”. I also use “currency in issue” as a catch-all.
George Osbourne is ‘the Damien’ of fiscal policy in my opinion. Evil incarnate is what he is. He knows exactly what he is doing, believe you me.
It must be hard work resisting the tide as you do. Kudos!
Are you aware of the recent 60 Minutes programme in which the chairman of the US Federal Reserve talked about being able to print as much money as they like as if it’s not a big deal at all? I saw the delightfully angry Jimmy Dore commenting on it. Is that a sign the idea of money’s reality becoming more acceptable?
I hope so…..
Surely government can fail though? If the private sector fails and therefore doesn’t make any taxable profit, government won’t receive tax receipts to fund public spending.
The government does not need tax revenues to survive. It is a complete myth. If (And I sincerely hope this does not happen) the entire private sector work to fail And everyone had to work to the government because there was no one else left to employ them (again, I really stress that I hope this does not happen) we would not all die, or be unable to work, and nor would we go unpaid because the government could simply create the money that is necessary for everyone to have the means of exchange that they would require to fulfil their needs, and it could also tax part of it back again, if it felt it appropriate, to make sure that other social objectives were achieved. It is simply not true that we are dependent upon the private sector to provide the public services that we enjoy
But what you are describing is a complete socialist state with no private sector, an entirely state run public economy. States approximating these have historically been a failure leading to unacceptable living standards. Further there is the problem of transition. Currently 27 million work in the private sector, 5 million in the public sector. If the private sector just imploded, government would fail as it couldn’t quickly generate 27 million jobs. In the above scenario one would assume those private investors of government bonds would quickly want that capital back, yet the the UK government would not be in a position to buy them back due to issues inherent in an extra 27 million more unemployed people in the population. Isn’t this the general logical basis of “too big to fail” in the first place?
Of course it is – and I made clear I do not want it
But I did it simply to show that your claim is not true – that’s all
we do no0t need taxes to provide the NHS
We need doctors, nurses, etc
And when we have 25% unemployed – quite soon – see who does provide the jobs because it sure as heck will not be the private sector
So essentially, the government could potentially fail to honour those who invested in gov bonds if a private sector meltdown occured. The government itself might not entirely fail and would continue in some form or another as a socialist state trying to pick up the pieces and make sure people didn’t starve.
The government will never, ever fail to repay a government bond
It’s not possible for it to have a reason to do so, ever
I really cannot see your logic
I simply offered you a thought experiment to show your logic was wrong
“The government will never, ever fail to repay a government bond
It’s not possible for it to have a reason to do so, ever”
But surely this isn’t true? If the government is broke in the sense that it’s tax receipts cannot cover the debt of its bonds (via a complete collapse of the private sector), the governments only other recourse to afford buying back bonds is to print money, over a trillion pounds. This would lead to inflation and essentially rip off those who purchased gov bonds, because the inflation would render the money exchanged for the bonds worthless. So in that sense, the gov hasn’t repaid the government bond, technically it will have done so, but it will have actually just ripped off investors in gov debt.
Seth
I’m sorry but would youy mind reading the stuff I have written on this rather than reproducing the standard meaningless arguments that the media and mail produce on such issues?
I have discussed such themes many times and there is a search function
And what you have just said is simply untrue and absurd – because if there was a complete collapse in the private sector it is the private sector that would have ripped investors off, not the government, for starters
Richard
“because if there was a complete collapse in the private sector it is the private sector that would have ripped investors off, not the government, for starters”
So, with my savings I purchase £10,000 of government bonds, and then the private sector collapses, the economy goes into a recession the likes of which we’ve never seen before, and the government agrees to buy back my gov bond for £10,000 (and others amounting to £1tn), but can only do that by printing money, leading to inflation whereby £10k is now equivilent to £500 at the time of originally purchasing the bond for £10k. The government, in issuing bonds is acting like any company and is responsible for it’s own debts, not the private sector. How is it then the private sector that ripped me off – they may have been responsible for it’s own collapse or may not in the case of a natural disaster or disease etc – as the UK gov issuing its own bonds is its own business and responsibility.
With respect Seth, this really is wasting time
Seth.
The government will never fail to honour a bond payment because it can just create the money to do so.
As Richard has said, it doesn’t need taxes to pay the interest/coupons on the bonds. That’s why a government will never fail to pay.
“With respect Seth, this really is wasting time”
With respect, you just don’t have a good answer. Governments are responsible for their debt and they risk becoming insolvent if they aren’t, as history shows: https://en.wikipedia.org/wiki/List_of_sovereign_debt_crises
Vinnie,
You’ve missed my point. If a government creates too much money, inflation occurs. i.e. The money has less value in the real world. Therefore, if a gov was to print £1.2trillion in new money to pay off all bond debts that would be a scam because gov would know that the money would not be the same value as it was when the bonds were sold, and that gov had directly caused that drop in value of the money by printing lots more of it.
When QE is used in a controlled manner with the right timing, it can be a beneficial way to control a crisis in the economy. But…
A simple concept: Money grows on trees (printed on paper, or used to be), but if you print too much you end up with wheelbarrows of the stuff which becomes worthless and a burden. A 10 year old can understand this economic concept.
I’m trying to understand Mr Murphy’s views on this and he has some very good insights on various things, but so far on this basic logical point it simply doesn’t stack up.
Ah, so you’e a troll after all, not really seeking info at all
And the opoiint you have ignored – even though I have said it time and again (but I rather strongly suspect you have not noticed it) is that a government with its own central bank and own currency that borrows in its own currency cannot go bust
Now go through your list and find what’s left
And you are a subscriber to the inflation is theft fallacy – then explain why QE has caused massive asset price inflation would you, please? Because that does not stack either
I think it’[s ypou whyo will find your logic does not stack
Sorry that you think me challenging your claims means that I’m a troll.
“…a government with its own central bank and own currency that borrows in its own currency cannot go bust ”
Countries with their own central banks have defaulted and essentially gone bust. e.g. https://en.wikipedia.org/wiki/Argentine_debt_restructuring
“And you are a subscriber to the inflation is theft fallacy — then explain why QE has caused massive asset price inflation would you, please? Because that does not stack either”
Inflation could be theft if the government intentionally printed so much money to pay off debts whilst knowing it would lead to that money becoming worthless or significantly less valuable.
On massive asset price inflation. Paying off gov debt is part of securing the credibility of the whole gov bond system. If gov never paid off any debt the bonds would not be seen as being as secure, confidence in them would not be present. Credit ratings, confidence, being investable etc. By offering a secure savings service to the already wealthy in exchange for extra money to spend on public services the gov has set up an arrangement whereby the general public gets value back for the debt, so it is therefore not theft, there is an exchange present.
Depending on how you look at it, this is either a legitimate way for government to get extra funding it wouldn’t otherwise have access to (unless it raised taxes), because the wealthy can buy into as they get value from it, or you could look at it as a form of welfare for the wealthy. The governments alternative to the bond system for funding is to raise taxes for the wealthy, but this ends up going down the socialist route and hasn’t ended well historically. Socialism isn’t something the UK public has ever voted for in the majority in any election except in the aftermath of WW2 when everything was in tatters. That nationalized system got the country out of a bad situation – in combination with other measures such as relinquishing liabilites such as the empire – but after about 20 years it had clearly started to have a stagnating effect on the country in certain industries. Ultimately, how the government funds things is essentially a political choice made by the public. We get a clear choice in each election, although Brexit has muddied that choice somewhat admittedly.
Seth
I am sorry – but I presume you know you are taking nonsense?
You do know that the government has not tried to pay off its debt for 326 years and its credibility has never been in doubt despite that?
I have been tolerant, but your claims lack any credibility
Please don’t call again
Richard
Seth.
Yes, a government could print too much money and cause inflation. But printing money doesn’t always mean that there WILL be inflation.
The hypothetical situation Richard proposed, where the private sector completely disappears does not mean that the government can no longer pay off its bond commitments. It can keep paying because it can create the money to pay.
I’m not sure Richard was suggesting that this scenario was desirable but was just proving the point that a government can never fail to pay out on bonds (unless it decides to).
Vinnie,
If a government with a central bank could just print money to pay off it’s debts, then it would never need to default. But history shows this isn’t the case. To pay off debts (maturity and interest) and therefore be creditworthy, a country needs money and assets that have real value, not just inflated worthless money.
Richard,
Incorrect, UK gov has paid back debts throughout history. Even undated World War 1 related bonds: https://www.theguardian.com/business/2014/oct/31/uk-first-world-war-bonds-redeemed
Have we tried to pay off all the national debt? No. Have we borrowed more instead because our GDP (real worth) increased? Yes. But we still pay back bonds once they mature and we still pay the interest on outstanding debt. We are highly creditworthy because of this. Sorry you find these basic economic principles to be “nonsense”.
Your construction of your argument is nonsense
Your time here is over
Seth.
I think we see bonds differently.
Why do you think government sells bonds?
What is the purpose of bonds?
And why do people buy bonds?
I think, that if you can answer these questions, I might be better able to explain my position.
….. As one of my friends said when the news came out…..
Only £62bn?? That’s scarcely a big night out with the boys!
But seriously, no one in the markets is batting an eyelid… the Twitterati need to get out more.
I agree with you, it seems like not a lot to be candid….and net debt is down this year so far
Richard,
I know you are a really busy man but you may like to address this BBC article, from Darshini Davis,….hitting just about every myth and panic button she can think of.
Some brief examples….
“hole needs plugging”
” (GOV)bonds, effectively IOUs – but there is a limit to how much it can do so. ”
” the emergency raft will have a price tag which we can’t escape”
The short video is even worse…..DEFICIT ALERT,(*accompanying alarm sound effect*)
“the bill could top £300bn”
“All of us having to pay the bill”
And the the worst of them all,
“there is a limit to how much investors are comfotable with the gov borrowing…..affordable?…. asking granchildren to pick up the tab (*film of cute baby cryon*)……blah, blah, blah”
Is this the best we can expect from our own “national treasure” news service? Can they really do no better than this tripe?I know you have some credit at the Beeb, can you not pass on message to their news dept?
We have a long way to go to get the message through.
https://www.bbc.co.uk/news/business-52766487
Not tonight – but – sorry – time for a rest
If anyone says they want to ‘pay off the government debt’ then what would happen is that there would be no money. Just like matter and anti-matter, except without the explosion.