The issues I have raised in my discussion on what I consider to be the misstatement of government debt by the Office for National Statisticsin my discussion on what I consider to be the misstatement of government debt by the Office for National Statistics has given rise to some, fairly predictable, uninformed comment; some decidedly informed comment and some comments that may have inadvertently raised issues that I find interesting.
Regular readers of this blog will know that this is not the first time I have raised this concern. But it may be the right time for me to pursue it in further depth, and I am planning to do that, although in what form is not yet clear. Since, however, this blog exists as a bouncing board for ideas, let me offer another one now. There will be others in due course.
That idea is a think exercise: it is not a proposal. But it is an exercise with a purpose because it gives rise to a question that needs an answer.
The think exercise is this. Presume that the UK government decided to repay all its upstanding gilts. At 31 March 2019 there were £1,240 billion of these, given that they had already purchased more than £500 billion of gilts by value by then. And imagine at the same time that they repaid the balances on National Savings and Investment accounts outstanding at that time. This would amount to around another £167 billion, a sum which has again gone up a bit since then, but which fact does not change the exercise.
The government could do this, of course. It can, as we know, ask the Bank of England to create the money to permit this. And the Bank would do as it was asked, because its veneer of independence is just a charade.
The result would be that the UK government balance sheet as at the date of repayment would be restructured. Now there would be no debt on it. There would instead be a substantial, in fact equal and opposite, increase in the sum on central bank reserves due to banks on that balance sheet. There would, in other words, simply be more cash on deposit, which at that time would then have amounted to around £2 trillion.
And now let's presume that the government decided that it was going to pay no interest on central bank reserves held by banks. This would not be hard to achieve. It could either change base rate, or simply change the law or regulation on this issue. As it is, right now we're discussing an issue of just 0.1%pa. So no-one need get worked up about this issue.
And what we would then have is a government balance sheet where literally all the so-called government debt had been replaced by what can only be described as cash deposits.
Now, of course it can be claimed that these cash deposits are liabilities. But that is an almost meaningless claim. First, it takes some imagine to suggest that cash created by choice by a government is a liability. Second, the only means by which this liability can supposedly be ‘repaid' is by actually using the currency in question, which would then have to be immediately redeposited in the central reserve accounts, which suggests it is not a liability at all. And third, even if one bank did make a call on the reserves (and that will, of course, happen, day by day) the call is matched by a deposit in another bank, exceptional circumstances that will be covered by effective government guarantee apart.
In other words, what the think exercise shows is three things. The first is that government debt need not exist. Its existence is not a matter of necessity, because it can be cleared. Its existence is, then, a matter of choice. That's not a position most of us are in with regard to our liabilities, of course. But is a so-called liability properly called a liability in that case?
The second is that the liability that supposedly exists could be substituted by cash at any time, which is a right peculiar to the government alone as a the sole currency creator.
And third, that if that substitution with cash took place the supposed liability cannot as such be repaid, because the only mechanism to repay this liability that is denominated in the currency of the country is to use that same currency, which would be an entirely circular transaction.
This, of course, should not be a surprise. It most certainly won't be to those who understand modern monetary theory. And all I have done is explain within a macroeconomic framework what happens if a person goes into the Bank of England and asks that they be be paid the £20 (or whatever) that the Bank says that they have promised to pay on demand on a note of that denomination, whereupon they will be paid another £20 note.
The point is actually very straightforward. Since government debts - whether NS&I balances or gilts - are simply mechanisms for depositing money, which money was itself always created in the first instance by the government spending it into existence in the economy and then deciding not to tax it all back, all this debt is already simply a form of money deposit account, even if the gilt variation is in the form that can be traded as debt. And therefore all debt can be substituted by money. And that money cannot be repaid by the government because any attempt to do so does not change the amount of money in circulation.
That is not to say that the amount in circulation cannot be changed. Tax can reduce that sum of money in circulation by destroying the money paid in its settlement, whilst more money creation can increase it. But as it stand as, the so-called debt can't be repaid from the perspective of the government as a money creator.
But in that case why is it called debt?
And why is it shown as debt on a government balance sheet?
Shouldn't it be described as something else?
And what is that something else? Might it just be capital? After all, that's also a credit on the balance sheet, but it is not debt. Why isn't it treated as such? And why, in that case, isn't its increase celebrated?
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I have no problem with your thought experiment. The language of finance has arisen to provide cover for mechanisms of social control. My own way of visualising the problem is to imagine there is no money at all. There are just agreements to do work on projects if they are worthwhile. Providing the labour and materials exist, work can always be done. We would just have to make the agreements with our fellow countrymen. Money is not really needed. If unemployment occurred we could simply agree to do some more work on useful projects. Think of it as a human ant colony!
If we introduce money to this system, which may simplify keeping track of all the agreements in place, it is for us to define how it works. We could say that it is just a system of tokens to help us keep track of who needs to do what. Or, we could pretend it has a special status and invent all sorts of rules that govern its usage, which we could then abuse to make sure people are forced to agree with our view of what work must be carried out.
But we do have money
And I am doing an exercise relating to money
“But is a so-called liability properly called a liability in that case?”
No it can be called a “reciprocator” because there’s always a demand for safe “net financial assets” we call savings which only in aggregate balance sheet terms a government can provide unless the country runs a trade surplus.
(To do the later in aggregate global balance sheet terms other countries must run deficits which has the negative effect of driving down currency value and therefore increasing the cost of imports (which the UK imports a lot). Long term this may result in increased exports but that is by no means certain when other countries are currency rigging and using subsidies or trade restrictions of various types.)
You can similarly ask, what would the double entry be if the Bank of England prints a new £10 note for the government.
Dr £10 cash and Cr £10 reserves? Not sure where else the credit would go so reserves seems like the best choice to me. There is no liability there. Maybe ‘Turnover from printing cash’ that then gets transferred to reserves anyway?
It is the seigniorage account
OK, so what happens if the government prints £1.5trn or so of new money to pay ooff all it’s debt, then pays not interest on those reserves.
The broad money supply is about £2.5trn at the moment, so will have instantly increased it by 60%. The base money supply is only £100bn.
What do you think happens to the value of the Pound and to inflation if you dramatically increase the money supply by over 50% overnight?
I’ll wait for your response before making some other points.
Nothing at all
Gilts and NSI are effectively already in money supply as they are liquid
So as I say, nothing changes
I’m sorry but that is a ridiculous answer. By that logic the government could simply print as much money as it likes and swap it for any asset it chooses – after all most of those assets will also already be in the money supply as they are also liquid.
You make several mistakes. Your first is a failure of basic asset/liability accounting. The government has already used the money raised from bond sales, against the liability of the debt itself. Now you come along and create another asset of the same size to repurchase the debt….and are left with 2x asset and 1x liability. Cancel one from each side, which is basically the act you are talking about, and you are left with free assets. Which is nonsense.
This comes from your second mistake. Thinking that the government can create value out of thin air, rather than just money. Of course, back in the real world, if you roughly doubled the money supply overnight you are likely to create a huge amount of inflation and roughly halve the value of the currency.
All you are suggesting – which is nothing new by the way – is that the government can monetize it’s debt. In your example, were it to be done overnight, those bondholders you repay will have lost approximately half their money in real terms. Let alone everyone else who is suddenly poorer thanks to the inflation the government just created. The government might have repaid bondholders, but the amount they repaid is not the amount they loaned them in the first place, in real terms. It is known as an implicit default.
So in principle, governments can print money to repay their debt as you suggest. But it is not a good idea. All you manage is a huge amount of inflation, a weakening currency and inevitable economic ruin. Countries have tried exactly what you have proposed, and it hasn’t ended well for them – ever.
If you were right I would be wrong
But I did not claim value creation
I claimed money creation
And I never claimed asst creation
Or free assets
I did nit even say a single credit was removed
I just said the credit can not be repaid and so is incorrectly described as a debt
All the rest is what might politely be called complete nonsense that you made up
And that did not prove your case
But it does prove you have no idea about what you are discussing
No, what you have done is claim that:
1. Government can print more money to pay of debt.
2. That as a country we would be richer because of it, given the government would now have no debt and the bondholders would have been repaid. I.e. printing money creates value.
3. There would be no negative effects in terms of inflation or currency depreciation for doing so.
From this logic, which is very obviously flawed, why stop at just printing money to pay off debt as there are no downsides in your view.
More importantly, why has this failed every time it has been tried before, and would suddenly work now because you say it does?
I have done none of the things you claim
Please stop lying
Or I will block you henceforth to save your own embarrassment at being unable to read and comprehend what I actually said, including that this was simply a thought experiment
Alan does it not occur to you that the money is in savings because people want it to be so? Why should they suddenly want to go on a spending spree?
In her book “The Deficit Myth”, Professor Kelton suggests that such a scenario would be deflationary rather than inflationary. From the Bondholders perspective, their wealth is unchanged. Instead of holding £X worth of bonds they now hold £X worth of cash. Their income, however, has decreased as they will no longer receive the coupon payments. When people feel poorer then tend not to go out and spend.
Rather than rush out on a spending spree I think it is more likely that they will invest in riskier assets causing asset bubbles i.e. Stock market, Housing market, Less than investment-grade bonds etc.
Where this might not apply is a practical consideration… I may be mistaken but unless the bonds are callable they can’t be redeemed until maturity so to pay off the national debt overnight would mean the BoE QE’ing them i.e. buying the bonds at market price and if trading above par the the bondholders wealth has then increased as they realise their profit. Like I say I may be mistaken about redemption. I still don’t think they would go out and spend generally but invest in riskier assets.
I was not suggesting this would happen or that it was even desirable
I was making a point about debt
Thank you ‘ debt’ – why indeed?
I’d like it to be called capital because all you have to do is compare the USE the Government money is put to and its effects on the monetary system and society compared to the debt issued in the private sector for – what – exactly?
The theoretical blindness is in the use of the Government money – what it is used for and the benefits of that use. It ties in with the question you once asked which was something along the lines of lamenting why there was not enough money for our needs.
Calling Government money ‘debt’ strips it of its benefiting properties, and makes into something negative and to be avoided. To me Government spending has always been capital investment in the country. The quality of a country’s education system, public services and infrastructure etc., are all forms of the expression of capital.
More to come on this PSR
Indeed, the problem with Government “debt” is all the negative connotations – maxed out credit card, living beyond our means, a burden for our grandchildren etc. To most people debt sounds bad, falling into debt, unable to pay my debts, taken to court, bankruptcy. And the usual suspects play on that telling us the debt is “unsustainable” and that the books will have to be balanced and therefore taxes will need to go up and public spending will have to be slashed because the government finances are just like a household’s.
“Capital” is a much more user friendly term. After all, some of the “debt” is more like a mortgage, an investment in assets – social or physical capital that will have wide-ranging long-term benefits for citizens.
But is the term “Government Debt” written in stone by the international accounting standards for public sector finance?
And a further question: does the amount of debt matter? As you say, in toto it will not be repaid, even if individual tranches will be repaid, eg when Gilts mature or when depositors transfer savings from NS&I to their private bank accounts – but these are usually followed by other depositors saving with NS&I or new Gilts being sold such that the total “debt” or “capital” is not much changed.
Further, the ratio of capital to GDP varies greatly among nations from over 200% in the case of Japan to the low teens and even single digits. As long as the capital is in the country’s own currency and most of it is owned domestically, is there really a problem?
Well, it is in the UK where a plutocracy has taken over the government and they and their useful idiots like the FT are intent on further austerity, “to pay for it”, and the subsequent trickling up of wealth from the poor to the rich.
Does it matter? Yes. Because understanding how the economy really works matters to the wellbeing of people and the term debt is being used to prevent that understanding, and to harm that wellbeing
I am not an economist (a physicist with long experience in local govt) so I am trying to find simple language to help me understand & describe the situation. From looking at how UK ‘debt’ is made up, a large proportion of it is insurance and pension savings. Whilst it obviously is capital I’d prefer to call this an asset base or ‘savings’. QE largely bought corporate bonds (?) which ended up in bank accounts so that is more assets (or capital assets). Foreign holdings in GBP gilts are (I think) a genuine debt but only make up a small proportion and are a sign of confidence in the UK?
Be grateful for any comments / clarifications.
Phil
The investors are insurance and savings funds, I agree
QE is £735bn gilts and £10bn corporate debt
Overseas holdings are significant but are effectively currency deposits
Richard
I think re-reading your post Richard you hit it on the nail. The problem is most voters fail to understand the two primary characteristics of the UK’s sovereign monetary economy. They fail to see the government both doesn’t have choice and does have choice. That it doesn’t have choice in creating the country’s currency with no liability to others but it does have choice in how it targets saving schemes such as gilts and National Savings schemes.
Effectively the questions for voters become do you like living in a monetary economy and if so what choices are necessary in setting one up!
Most would agree they like the benefits of a monetary but immediately get lost on the mechanics of setting one up!
Correction. Should read – “like the benefits of a monetary system”
“They fail to see the government both doesn’t have choice and does have choice.”
Thank you Helen, this was helpful. The key to promoting new thinking must rest, I would have thought, on showing what choices are open to a government and what are not. The choice it does not have, as you say, is that it must create money (for a money system to exist at all). This should be obvious to most people. What happens next is much less obvious and I think and where the (deliberate?) confusion arises. By using gilts to release the money into the economy, the notion of “debt”, of not having an amount of something, becomes tangible. You have the gilt and the government has the money. Suddenly it has a debt equal to the value of your gilt. Yet it was a choice of the government to organise things this way. It introduced the notion of debt by using gilts (and other savings). What is difficult for most people to clock (myself included) is how debt it really an arbitrary accounting mechanism and not a real thing. I guess that we are so used to not having real money that really does have to pay back that our minds are already made up.
If you rename it I’m not sure capital is the correct term – that should refer to all of the factors of production in a given part of the planet’s surface (including intangible ones, to the extent they can be valued). Clearly government issued fixed interest securities have a relation to that since the coupon is paid out of the flow created by the factors as they are employed in productive activity but I’m not sure that makes them capital. The same is true for other kinds of security such as equities. I think it makes more sense to think of all of them as tradable fiduciary claims but I do think you need to distinguish them somehow from the underlying actual assets. There’s also the point that money created by the sovereign can be used to employ assets or create new ones, in which case the connection to capital is direct but it can be used simply to enable consumption in which case it’s not so clear.
I will think on it
Love this thought exercise.
After all the debate and toing and froing, all this so called national debt is basically just money in circulation. That is the whole issue in a nutshell….it’s not debt it’s just money. Most people understand what money is ,no need to drag into detailed debate about who has the assets/liablities/debts/credits et etc….it’s just money. You may want to give it a bit more official weight by describing it as Sovereign Money in that it would all be issued by the state, which woul simply be using its historic capacity as the official issuer of money.
The big issue then would be the status of commercial bank deposits. Currently bank deposits are not Sovereign Money so this would have massive implications for the banking sector. Money would run from bank deposits to Sovereign Money.Don’t get me wrong I’d love to see this happen,I think that could be managed over time to reduce bank created debt/money,then we would have a situation where the state totally controls the money supply and banks would no longer be able to do that…which would be terrific for the economy as a whole, as the risks of future bank led boom and bust lending cycles vanish! The gov could then control the money supply in an entirely open and transparent(democratic) way. Increasing it or reducing it (via spending and taxes) as the economic situation required.
So In my view it is not a worry, but the banking sector,jhoih
would obviously hate it,ergo it would never get off the ground.
Government bonds are ‘near money’ so there is no change in the total money supply arising from turning gilts into cash. The cash is, though, a liability of the Bank of England and thus there is no change in total government ‘debt’, it is just not gilts. If the government really wants to get out of debt and remove the liabilities then it would have to levy a 100% windfall tax on the cash and thus destroy it all. As I say at my talks the only way to get rid of all debt is not to have any money, period.
Correct
And there is no chance of such a tax
Richard,
With Tim’s point in mind and your agreement with it, I’m even more confused why you said this above…
“the only means by which this liability can supposedly be ‘repaid’ is by actually using the currency in question, which would then have to be immediately redeposited in the central reserve accounts, which suggests it is not a liability at all”
The currency (which I’m guessing belongs to the private sector as a result of all those bonds being bought off them) wouldn’t be ‘used’, it would be ACCEPTED by government in the process of a ‘mass taxation to pay off the debt’ event. Moreover, nothing would be “redeposited” as the liabilities would be destroyed once and for all by that act of taxation.
I never mentioned tax so destruction was not in my scenario
Very much agree with you on that Tim.
The government’s ‘debt’ is merely its obligation to accept back its liabilities as payment of tax. Nothing to do with paying anybody anything as everybody seems to think.
“The cash is, though, a liability of the Bank of England and thus there is no change in total government ‘debt’, it is just not gilts.”
Historically though from a balance sheet perspective the cash didn’t arise from a liability of the government it created it and injected it. So it’s just a financial asset swap taking place here courtesy of government choice. It’s only become an “us and them” issue because the majority of politicians and voters are clueless what optimal choices have to be made to create currency for a monetary economy!
What’s lacking in considering the creation of money (currency) for a monetary system by the majority of politicians and voters is defining what binary operative factors are required. The selection of the word “binary” is related to what “choices” have to be made either imperative or optional. So, for example, taxes can’t be paid until the government has created the money (currency) means to do so but the government does have the choices whether it offers savings schemes to the non-government sector and if it decides to in what form they should take.
A nations’ people have got to be part of the nation’s capital – they actually put the capital to work by either manning the services and projects it provides or by using them.
I sense that Richard puts people people first in his writing – this thought exercise tells me that the nation’s people are part of the delivery AND consumption mechanism of the sovereign capital.
The debate or thinking has to come back to the condition of the people in a nation and how fairly sovereign money is dispersed across society?
All I see is the under-utilisation of people in the UK because markets prefer to export jobs abroad as well as a very niggardly welfare system (as pointed out by the UN), so I see an uneven distribution of cash. There is so much work that could be done to improve our commons, infrastructure etc.
But it seems OK to allot loads of fiat money in the private sector to speculative endeavours and under tax the rewards?
As far as I am concerned, there is no argument as to what printing money should be aimed at: our people.
However, as long as we say that Government investment in its people is debt, and that that investment can’t be capitalised with a jobs guarantee (the result of the investment in education, training , re-training etc) then sovereign and democratic money creation for the masses may never be realised and instead money creation will only ever benefit those who already technically have enough if it.
I so agree with you
I am not an economist but interested to see if I can understand. Here is a more careful response than my first.
If the government decided to repay £1,240 billion of gilts, it could do so, by crediting those accounts that owned the gilts. The owners of the gilts would now own cash but not gilts. It would make zero difference to the wealth of the gilt owners.
The government could also repay money it was lent by way of National Savings accounts and Investment accounts. It could do this by crediting the accounts of the lenders with the £167 billion it had borrowed. Just as in the first case, the lenders would be no worse off. They have had their money handed back to them.
Since the government has created the money (out of thin air), it would have zeroed off its debt. Nothing else has changed. The money in the economy is the same. The only difference would be that gilts and other savings have been converted into cash.
This proves that in theory government debt need not exist, money can always be created to zero it off. Its existence is a political choice. Not only that but the word “debt” has negative associations. The fear of being indebted can be used to control behaviour by, for example, winning consent for austerity.
The word “debt” could be replaced with another more positive sounding word. The important thing to remember though is the ideological power bound up with the concept. “Debt” is deeply embedded as one of those taken-for-granted ideas that is difficult to shift and can easily dominate our thinking. You would need to win the argument as well as change the word.
The government technically still has a credit – it is the ‘liability’ owing for the money, which cannot be repaid except by using g the money itself, which comes straight back
The rest you get
Hello Richard,
Three cheers for you.
I am a layman and what you have said (or thought) makes sense to me. Debt is what you have to pay back. What you create is CAPITAL and you can use it.
If we insist on calling Government Created Money CAPITAL which we can just use (wisely for the benefit of all) then all who name it DEBT will be simply and logically …..obviously wrong.
Ron
Thanks
From a (capital) appreciation point of view, the single most important issue for the 2020’s is where does all the trillions (globally) of newly created money go to. Does it flow evenly across all assets (highly unlikely), or do some assets go up massively and others under perform, or indeed even go down over an extended period. Money printing isn’t new; in the late nineties most went into the dot.com bubble, then in the noughties property was the biggest beneficiary. The last decade big tech companies got most of it but property got it’s fair share. So what for the 2020’s, that’s the million dollar question???
They should go to a Green New Deal