Myth
The national debt is going to squeeze the life out of our economy. We have to stop it growing, even if it literally kills us to do so.
Replies
There is no such thing as a ‘national debt'. There are notes and coins, National Savings and Investments accounts and the bonds that pension funds, life assurance companies, banks and overseas governments like to save in. And there is also the £635 billion the government includes in what it calls the national debt but which it actually owes itself. Where's the debt in all this?
Reply 2
We don't call bank deposit accounts ‘bank debt'. Nor do we say banks must do everything that they can to repay those deposit accounts as soon as they possibly can. So why when the government provides savings facilities, which we call the national debt, do we say it's such a bad thing so they must repay it as quickly as possible?
Reply 3
We have almost never reduced the savings accounts balances that are described as the national debt since it began in 1694. When we have it's been by tiny amounts. So why are we so obsessed with repaying it now?
Reply 4
What some call the national debt is actually private wealth. This must be the only type of private wealth that some in society are desperate to destroy right now.
Reply 5
The national debt is wrongly named. Some is the Nation's Cash. Some is National Savings and Investments. And the rest is National Bonds - the capital of the country that people are really keen to buy. But none of it is debt as we normally think of it. So what, precisely, do we want to get rid of?
Reply 6
Just try getting rid of what you call the national debt. We'll have no cash. We'll have no safe savings accounts. The bank, pension and life assurance sectors will find it almost impossible to function, and foreign governments will have nowhere to save the sterling balances they're really keen to hold. So sure, you can try to get rid of it. But what are you going to do about the economic chaos you'll create as a result?
Reply 7
All our cash is included in the so called national debt. If you don't want your cash I'd be pleased to have it.
Reply 8
Because we have what's called a national debt on which interest is paid the government can, through the Bank of England, control interest rates in our economy by setting the rate it is willing to pay. That's been used to keep interest rates low so that we can afford our own interest costs. Would you rather the government lost control of interest rates and your mortgage and credit card costs sky-rocketed?
Reply 9
The national debt lets the government control interest rates. And that is one of the tools used to control inflation. Without the national debt it would be much harder to control inflation. Is that what you want?
The evidence
Government borrowing provides significant advantages for any economy, and so it is to be welcomed. There are numerous reasons for saying so.
Firstly, government debt stabilises the banking system. We know that gilts are, for example, critical to the operation of what are called the repo markets and that there would be considerable difficulty in providing fiscal and financial stability without them being available for this purpose. Banks own significant quantities of gilts, at least in part for this purpose.
Second, government debt is critical to the supply of secure savings products, whether through mechanisms such as National Savings and Investments, through which £167 billion is saved at present, which sum is included in the national debt, or through what are called gilts - which are the savings bonds the government issues. Pension funds and insurance companies are major holders of these government issued savings bonds. They are just savings depositories. People want to own government debt because it is the safest place for them to put their money. Why are we going to deny them that opportunity?
Third so-called government borrowing includes notes and coin, which our economy still needs. About £76 billion pounds of the government's debt is in this form at present. Do we want to do without it?
Fourth, government debt also provides a mechanism to control long term interest rates, whilst if central bank reserve accounts of clearing banks are also considered to be part of the national debt (which they are when treated as a liability of the government when consolidated into the Whole of Government Accounts) then this borrowing can also be used to very effectively control short term interest rates as well. Without national debt we would, then, lose control of interest rates. That would be deeply prejudicial to economic management of the economy. It may well also have a significant impact on the control of inflation, which would be exacerbated if the amount of debt was reduced. That would also be deeply economically uncomfortable.
In normal times all these facts (for that is what they are) relate to matters that are profoundly advantageous to our economy. In fact, it is entirely reasonable to suggest that significant levels of government borrowing are a major and beneficial instrument of control within any developed economy. In that case it is very hard to see why so many are inclined to exercise moral judgement on the subject of the so called national debt, or on the exercise of the economic control that it provides, or in providing the security that it affords to the economy as a whole. Prima facie it is hard to believe that there is any moral reason to condemn government debt.
Nor is the existence of government debt any indication of some sort of failure as some like to suggest: instead having a significant national debt is a necessary instrument for any government seeking to control its economy. No wonder that what is called the national debt has been so popular for more than three centuries in that case. If there is a moral position that requires justification it would be the claim that government debt should be reduced or even eliminated when it is not at all clear why that should happen.
These claims do, however, presume that it is understood precisely what government debt is. All that government debt actually represents is money spent to date by the government that has not yet been recovered by way of tax charge. It is, then, by definition, a measure of the fiscal stimulus that the government has been willing to supply to achieve common goals for society.
The question to ask in that case is why that is something that we should be worried about? Is it the fiscal stimulus that is wrong? Or is it the common goals of society that are wrong? What else can it be if there is a problem with government debt?
The national debt is massively misunderstood. It is weaponised by those who would wish to shrink the state, which is what repaying it would require. But perhaps most importantly it is no one thing. It is:
- The National Cash
- National Savings and Investments
- National Bonds, when structured as gilts
- And National Capital, maybe, for that debt which the government owns through the QE process.
But all of these play a role in the economy, and the paranoia about them is quite unjustified.
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If this information was understood by the masses so much would be different. How do we get this message out there wider. This, I feel is the source of all socioeconomic inequality, which inturn is the source of all human discontents. Every social ill – take today’s race issues, Black Lives Matter, at its root is socioeconomics. The root of that – the national debt myth.
You are a modern oracle of Delphi, Richard.
I’ll take your word for it….
The Oracle at Delphi lived off ambiguity: they were never wrong because their answer always answered a question requiring a binary decision, and their advice always met both eventualities. Then, as now, people fell for it: so not Richard, but it meets standard of the Oracle of Neoliberalism.
The apologists of neoliberalism are all busy trying to incorporate MMT without conceding anything; it is a trick so they can face two ways simultaneously.
Very true
[…] when used and explained appropriately, is not an issue for governments. I have explained why this morning. Jersey needs to take note, and very […]
[…] our relationship with what is supposedly called government debt, which is why I have issued a myth buster on that issue this […]
Excellent, and happy to see our NS&I savings are making a contribution. 🙂
Perhaps the graph of historical debt would be useful here. Perhaps a separate blog on the question of interest rates, how they function, and the connections with debt and inflation would be useful. There is some evidence that the usual assumption about how interest rate affects inflation is less than robust. ZIRP might be another option to explore.
I thought I’d done those already?
I should have added links…
So little time, so much to do…
Indeed you have (apart from ZIRP?), although repeating the debt graph here would be useful.
Aside from that, I was tentatively suggesting another Mythbuster (when you have an idle moment, LOL). Since interest rate management is conventionally seen as “the key economic tool”, it might be useful to deal with that separately.
OK….
This article in The Guardian today seems to show that economists are moving in the right direction, even if they still have some way to go!
“How worrying is Britain’s debt? Surprisingly, we economists say: not very”
https://www.theguardian.com/commentisfree/2020/jun/12/britain-public-debt-economists-coronavirus-deficit-austerity
I actually blogged that survey a week or two ago
But if those talking to Labour and running the influential think tanks deliver debt-obsessed views that survey really makes no difference
Very helpful.
I think that making the case that taxation is a principal method used to control the debt from becoming ‘out of control’ helps to reshape the narrative. It allows for spending now – whilst keeping tax on the menu as an important part of the overall process.
Many economists are moving to the spend now narrative and I think people will accept it.
Changing the public mindset will take a generation and that is not a bad thing as it allows time for a consensus to occur.
The key, is the amount of interest payments. These are payments that disproportionately go to the richer half of the population.
As you suggest, while interest rates are low, especially if below an already low inflation rate, then the rich are not gaining, so it is ok.
The problem comes if interest rates are increased in a belief it will control inflation. Could a higher national debt limit public spending by making the levying of taxes more difficult & inflation rates & therefore interest rates more sensitive to any increased public spending?
And when is that going to happen?
The 500 year trend is downward interest rates
And inflation is not anticipated by anyone
Shall we worry about the real world?
Base interest rates were 2% in 1950 and steadily climbed for decades, spiking as high as 17% in the 1980s. There is no guarantee this won’t happen again & maybe even more quickly.
Interest rates are only low now because demand has been taken out of the economy by allowing rich people to store their vastly increasing wealth in unproductive & untaxed ways. If we try to tackle that & we should, it may drive inflation by bringing huge demand back into the economy. This is where I see the difficulty with the current growth in money supply.
There is
We know how and why it happened now
Knowledge really does help
Heard Jeremy Vine snippet this afternoon – he seems to have completely forgotten your contribution, being a bear of little brain.
Letting a BBC economic editor get away with the claim that the tax payer is funding the furlough payments – because the “government is a tax payer”!
Hence mass deprivation of the order of Maggies monetarism of the 80’s is inevitable!
From memory that was 3 million unemployed according to the daily news counter – there are in excess of 7 million on furlough – so double at least of the 80’s.
I’ll resist cursing them.
Don’t
I think that this is very good Richard, thank you.
Lord O’Neil was on BBC this pm saying that he was OK with the ‘debt’ but warned that it would not be OK if the economy continued to tank as the markets would lose faith in it.
From hero to zero very quickly. But the BBC………………….honestly.
And as for O’Neil’s point, the Government has not really done enough, so having done too little will just – I worry – make the whole idea of Government support look bad and undermine it.
And I think that this is deliberate.
We are dealing with extremists in the Tory party I’m afraid, supported by received wisdom on the nature of money among the population.
The markets will nit lose faith
That’s just another myth
They know the Gov’t has limitless money
They know that keeps the price where markets want it
[…] Cross-posted from Tax Research UK […]
Un-taxed pounds since 1694 oh where oh where can they be?
In the hands of private citizens that’s where they be!
That National Debt is clearly no travesty!
Very good
Does the idea of a “National Debt” originate in the creation of the BoE?
As far as I understand it, the BoE was created when the then King wanted/needed to borrow money to rebuild the navy.
He borrowed the money (£1 million) from wealthy merchants/bankers. In exchange they formed the BoE and were granted a royal charter. This allowed the BoE to issue the equivalent of the £1 million lent to the King, in loans to the public. The interest on both the King’s and public loans was 8%.
The King used taxes to pay the interest on the loan. He then borrowed a second amount from the BoE after he had spent the first. The BoE was then able to create further loans to the public for the equivalent amount.
The King never paid of the original loans.
I believe this is the basic account of what happened. (Please correct me if I have got it wrong)
So the idea of government “debt” and “borrowing” comes from those times. State financing has changed but the terminology has stuck????
The logic does remain
Money has changed too though – and that’s the real issue
Sorry. I penned that late last night and it’s a bit incoherent.
To debunk “government debt” and “borrowing”, a historical perspective may be good way to go.
To understand how banking has evolved over time may really help to explain how it works today?
I read a brief history of banking in the front of Modernising Money. It was a great way to see how we ended up where we are now, but left some questions unanswered.
The Crown, prior to the creation of the BoE, did use taxes to pay for its expenditure. (What did the King accept in payment of tax? Gold, chickens, tally sticks, notes? Was everyone taxed?)
But once the Crown borrowed from the BoE, tax was used more to pay the interest on the borrowing than directly funding government expenditure.
When did the BoE stop lending to the public?
The BoE became the means by which the Crown was financed. The BoE lending to the public, facilitated the “lending” to the Crown.
When did the Crown start accepting BoE bank notes as payment of tax?
Regional banks also started to use BoE bank notes to pay the difference when swapping back their bank note with eachother. (Clearing houses). This lead to the system of CBRs being used for interbank payments.
Once, the Crown did borrow and have a debt. A debt that it never pays off.
I’m not expecting you to answer the above questions by the way!!!!
I’m just trying to show that an understanding of the history, helps to understand the present.
Others can do the history better than me