One of the questions I have been asked to address in my video series is whether or not the UK could still appear to go bust, as it is claimed happened in 1976 when the then Labour Chancellor, Denis Healey, requested a loan from the IMF.
The answer is no (apologies for the spoiler), and this is why:
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Nice one with ‘leave a chancer’ but I think you mean Labour Chancellor.
That one was a dictation error!
In 1971 Heath passed the Competition and credit Control policy which saw an increase in credit. This put a lot more money into the economy. I bought a house for just under five thousand in 1970 and sold it in 1973 for £10,800. Inflation seems to have been a consequence of the CCC, and with the quadrupling of the oil price, we saw big rises in the cost of living. The more muscular unions responded by wage demands and strikes. Enoch Powell, by then out of favour with the Tory establishment, exonerated the unions, saying they were just responding to circumstances. This became the age of prices and wages policies. The Conservative press blamed the unions for the inflation and continued to do so for years, as they did the application to the IMF.
Indeed dig out the statistics on house mortgage loans and the under-writing ratio of the average UK house house price to gross annual income between 1970 and 2019 and see this ratio has nearly doubled.
Five decades of house price hyper-inflation yet many monetary illiterate voters still foam at the mouth that if the UK operates on a Double Currency (government and bank created money) the government created money will immediately cause hyper-inflation.
Of course, these voters will find all kinds of excuses for the house price hyper-inflation like more women working conveniently ignoring much of their earnings getting swallowed up by unnecessarily high house purchase mornings.
Both corrupt Conservative and Labour governments have led to this mess by failing to clamp down on bankers’ under-writing mortgage loan standards and failing to build enough affordable homes.
https://www.theguardian.com/money/2016/mar/14/tony-cherie-blair-property-empire-worth-estimated-27m-pounds
https://www.thelondoneconomic.com/news/exclusive-investigation-uncovers-media-pay-outs-property-empires-nepotism-parliament/02/06/
“mortgages not “mornings”
More haste less speed!
We all do it…. 🙂
I”m not sure it’s entirely fair to characterise government policy in 1976 as trying to protect the value of sterling. Treasury officials wanted to allow the value to decline, but felt it necessary to manage the rate of decline, to avoid additional price increases that would hamper their attempts to control wage rises. (A Treasury document in February 1976 argued that a devaluation of 20% by the end of the year, to $1.60, would be economically desirable, but that only a 10% devaluation would be politically feasible).
There was another factor at play – antipathy by Treasury officials to import controls. ‘New Cambridge’ economic advisors (Nicholas Kaldor, Wynne Godley and Francis Cripps) argued that British industry was not in a strong enough position to benefit from the export opportunities that continued devaluation would bring. Instead, they suggested, import controls should be introduced, allowing a reflationary domestic policy to reduce unemployment without further worsening the balance of payments. Their proposals received enthusiastic support within the cabinet from Tony Benn and Peter Shore, but were viewed with increasing concern by James Callaghan and Dennis Healey.
Going to the IMF for a loan was a convenient way for Callaghan and Healey to ensure that import controls would be avoided, as this was one of the conditions of the loan. It was also convenient for them to be able to blame the IMF for the public expenditure cuts they were also keen to introduce!
Richard,
Much as I admire your videos and subscribe to your description of MMT, your certainty in today’s “Can we go bust?” makes me nervous. Can I explain why?
I’m not an economist but as I understand the economic happenings of the last 20 years, the Black-Scholes equation which led ultimately to the financial crisis of 2008 was initially hedged around by a number of assumptions and provisos which were correctly taken account of in the early days of derivative-based trading. Once human nature kicked in and people started ignoring these provisions, lots more money was made but eventually the house of cards collapsed.
I hope I’m not seeing a similar thing happening with MMT. It seems to provide all the answers but its assumptions and provisos are not being emphasised to anything like the same extent, while human nature remains the same. Your definite “no” to the question of whether the UK can go bust may depend on those provisions continuing to be taken account of and on the loopholes yet to be exposed in MMT not being manipulated. Can we rely on that? I prefer to never say never.
My assumption here is that the government can buy its own debt.
That did not happen to any degree in 1976.
Now it is commonplace, to the tune of $ trillions.
I think my assumption is wholly based in reality, and not equations.
I accept that irrationality exists but I also suggest that there are some facts. Oddly, this is now one of the most certain of those.
There will be always be those who will say that we could technically default or have already done so by carrying out QE. The argument usually is based on the assumption that printing money causes inflation and that robs holders of sovereign debt. The government’s creditors are seen to be taking a haircut. Of course this is largely semantics. Inflation is very low, it’s hard to say that at the moment, which is where MMT comes in useful. The government is not refusing to pay its debts, the world has changed the way it manages debts over the last 40 years, defaulting is nigh on impossible unless you are a failed state.
QE involves buying debt at market prices
How can that be called defaulting?
Well if QE is used to buy gov debt,it isn’t market prices is it? as in the markets do not want it, so the BoE buys it instead.
Don’t get me wrong I totally agree with you,this is not a default at all,just there are those smart Alecs who will say it is. I find it a rather stupid argument.
I agree: it is
Is the Labour Party really any wiser after all these years? I note John McDonnell thought the government operated off a credit card and nobody has a clue what Keir Starmer and Annielese Dodds believe about Britain’s Double Currency (government and bank created money). Do they know it has it, why it has it, and how it all works together?
https://labour.org.uk/wp-content/uploads/2017/10/Fiscal-Credibility-Rule.pdf
And now you know why I could not work with John McDonnell, who then had the nerve to say I was a poor economist
He’s forgiven, but not forgotten for that
Good – as always,
Slightly concerned about the last sentence “it won’t happen again – we have learnt”. Have we??
I suspect that the opposition to MMT (which really wants to avoid wealth redistribution) will focus on the risk of a “sterling crisis”…. and we need a full, coherent rebuttal. This video goes a long way…… but it will need another video about FX rates and why they do and don’t matter.
Noted……
On the list
Maybe another for the to do list ? – Velocity of money.
https://www.youtube.com/watch?v=8wAa9DqHZtM
Massively down…..
Congratulations .
You summed up 1976 extremely well.
Both Harold Wilson and James Callaghan were obsessed with retaining the value of the pound and used it as an anvil on which to slaughter the left of the labour party.
In retrospect it shows that false ideas are as dangerous as any political movement.
We both have witnessed several in our lifetimes:
1. the numbers of houses being built each year as a bellweather of economic performance
2. the balance of payments of external trade as a symbol of economic success
3. the rate of inflation as a symbol of economic mismanagement
4. money supply as a proxy for beating inflation.
5.the level of unemployment as a proxy for beating inflation/economic mismanagement
6. the value of the currency as a proxy for beating inflation
7. the level of interest rates as a proxy for beating inflation
8. the adverse influence of the EU , the ECHR and ECJ in thwarting the UK in its mission
9. the need to lower taxes in order to stimulate economic performance.
10.The beating of inflation as a product of domestic policy.
You could do a video on each one of these as examples of totems worshipped by governments of the past as over-simplistic, mis-leading, and ultimately discarded once it’s sell-by day was passed.
The idea of totems is powerful
Morning. Some while back you ran a piece of mine. In the current climate it struck me that a more recent piece might be interest.
See https://www.lobster-magazine.co.uk/free/lobster80/lob80-uk-manufacturing.pdf