Modern monetary theory (MMT) days that governments have no need to borrow. Governments can, it says, always create the money that they need. Which is true.
What is more, MMT says that if governments do borrow, what they are actually doing is paying interest to use funds that they have already injected into the economy that they have, by choice, decided to not tax back, preferring instead to leave them in the economy to provide liquidity, and to maybe stimulate economic activity.
And I agree with all that. It is true. There is no doubt, for example, that if a government runs a deficit - and there are very good reasons why in economies where there is a desire for increased employment plus a little inflation such deficits are needed - then the result will be increased private wealth in the form of savings. MMT knows this. It even promotes this idea as explanation of what happens.
And there are those who say within the MMT community that government borrowing is not needed even though the spending of government-created money that would replace borrowing as a mechanism for deficit funding would also create savings balances.
Which is why I break from many in MMT at this point, and do so unashamedly. I see no harm in the government borrowing back the funds that its deficit has, by definition, created. There are several reasons for saying so.
First, controlling interest rates is a key MMT objective. The aim is to have them as low as possible. The government needs to influence markets to achieve that goal. It can only really do that by being in the markets. Since it is in the money markets in a big way now there are few who doubt it has significant control over interest rates as a consequence. And I think that is a good thing.
Second, let's be clear that the inclination to save is something that some people have. That inclination is not created by governments, or their deficits. From my own observation of the lives of many people as a professional accountant I would suggest that a minority of people are savers by inclination: I suspect it is fewer than 15% of the population, although some of course never get the chance. But for those who do save it is habitual, and even necessary to their wellbeing. So, saving is going to happen.
Third, what happens to those savings matters. They can be wasted by being placed in speculative bubbles, which is what happens when they are used to buy shares or to buy second-hand properties, both of which are speculative activities delivering almost no social gain to society. Alternatively, they can become the basis for social investment. I would happen to describe lending money to the government as social investment. I have done so for a long time.
In that case it is my belief that MMT is missing a trick here. Just as some in MMT did forget the social policy functions of tax when they, for too long, viewed it as the balancing number in a fiscal equation, so too are some in MMT forgetting the importance of saving, and the mechanisms for social change it is capable of funding, most especially right now when interest rates are so low, even if it is not strictly necessary for a government with monetary sovereignty to borrow.
What I mean is that I do not think that a government should be indifferent to saving. I think it essential, for example, that a government should accept a role as borrower of last resort. By that I mean that it should provide the cautious saver with a place to deposit their funds knowing that, unlike every other institution, the government will be able to repay it. Of course this security for the same should come at a price in the form a reduced interest rate, but so what? If the saver is happy with the bargain why shouldn't the government provide them with the security that they want and which supports their wellbeing?
Presuming a government accepts that role - and in the UK it does - then this is evidence that a government is not indifferent to saving. In that case nor should it be indifferent as to what they are used for. The government should, then, promote the idea that saving is not a passive action, but is instead an active choice.
This is despite, or even precisely because we known that the economic impact of saving is to withdraw funds from the economy. The act of saving is an alternative to spending, whether on consumption or investment goods. It does as a consequence inevitably reduce demand in the economy unless, that is, the process of saving is linked to capital creation that might otherwise not take place.
Cash deposits do not result in this capital creation: we know they are not required to fund bank lending.
And nor does stock market and property investment result in capital creation. Very little capital creation in the UK private sector is now funded by share issues. Those share issues that do take place are almost invariably linked to merger and acquisition activity now, and so are linked to ownership change and not capital creation. Much property investment is linked to land value, and building. Buildings acquired are, in any case, usually second hand. And the most common forms of savings - into which the UK government pours subsidies via the pensions and ISA systems totalling at least £60 billion a year - are almost all invested in these types of dead-end activity. No wonder savings have a bad reputation amongst economists.
There is, however, an alternative. This is saving for a purpose. Much as I think hypothecated taxation is both wrong, and not even technically possible, I think hypothecated saving is desirable. I suggested this as long ago as 2003, suggesting back then that savings should be redirected via local authority bonds to socially useful activities such as infrastructure and transport spending, social house building, green transformation, and so on. Nothing has changed my mind since.
At a time when many want to save what strikes me as incredibly odd if the fact that after allowing for QE repurchases the government has so far this year undertaken no real net borrowing: allowing for debt now owned by the Bank of England the money markets have not really contributed to government spending this year.
I suggest that makes no sense at all. There are accumulating piles of savings at present. The government should be providing a use for them. And it should be doing so by offering to use the funds in question - locked into reasonable length bond terms if appropriate - to fund the job creation programmes that we all now know are needed.
Last week the EU issued a €17 billion social bond to be used to fund job generation, amongst other things. It was 13 times oversubscribed despite offering interest returns that were only just about positive in most cases. The UK could be doing the same. More than that, it should be doing the same. And these bonds should have specific programmes attached to them to make clear why they have a social purpose. They could also have a regional dimension attached to them as well, if desired. Why can't people save for where they are? I think this might work especially well in Scotland.
I entirely accept that the projects in question could be funded without borrowing. But that's not the point. If they were savings would be creating disruption in the rest of the economy, and will be held in institutions that have risk attached to them, which may then need bailing out at cost to the government. Why not align the government's role as lender of last resort and social and economic goals as well? There is a greater good to be done here, and a new approach to saving would let it happen. Back this up by changes to pension reliefs and ISA tax reliefs to require saving in such bonds and the arrangement could be sold with ease.
Why can't we do some joined-up thinking on saving?
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I think that’s an excellent idea Richard. Especially if it could be done on a local level. It’s been mentioned in an American context on an MMT Pdodcast (Christian Reilly). Something like Municipal Bonds (MuniBonds). It’s also a good tool alongside tax to take money out of an overheating economy and control inflation.
You really need to write a book on your version of MMT. I’d buy a few copies 🙂
BTW Could you do a YouTube on CPI and CPIH as sometime as I thing understanding how price inflation is calculated is important.
Julian
The savings issue is going to video
I will make a note of the CPI one…
“There are accumulating piles of savings at present.”
I guess you mean savers are accumulating piles of savings?
The media coverage of the economics of a pandemic has been very poor. The fact the that 300 billion is on the BoE books is hardly ever discussed. That the 300 billion must necessarily have become private sector savings is not discussed.
The fact that the economic crisis is distributional, some have plenty of money and some not enough, is not discussed.
I think we learn a lot about economics from economies in difficult times but not sure I have heard anyone on the BBC talk intelligently about this. But may be I missed you?
And I agree green bonds would be a good idea. Offer 2% and then go and build all that off shore wind and liquid air storage.
Thanks Charles
“Back this up by changes to pension reliefs and ISA tax reliefs to require saving in such bonds and the arrangement could be sold with ease.”
Sounds like when you say “selling”, you actually mean “forcing”. Otherwise if these bonds sold themselves you wouldn’t need to change pension tax reliefs or “require saving in such bonds” to see them, would you.
Why should be tax relief be given without social gain?
Please explain
You have a very narrow description of social gain. It looks like only the government spending on things you approve of qualifies.
You seem to forget that the private sector’s outputs are a social gain as well. People wouldn’t pay for them if they weren’t, and even if you take the very narrow definition of social gain you do the private sector is involved more heavily in the provision of things like housing and green energy than government.
You also seem to think that pension investments shouldn’t gain tax relief unless invested with government. Apart from the coercion involved here, there is a benefit to government to letting people provide for themselves in old age. Plus of course those pensions are taxed when drawn.
What startles me the most though is the authoritarian and incredibly narrow view you have. Force people to do what you want. Deny them the ability to make their own choices, and force your will on them instead, to invest in things you deem appropriate.
It is quite a frightening view you seem to have. Someone of a liberal or democratic mindset would maybe suggest government creates the investment vehicles for people and give them the choice – maybe even incentivize them to save in a particular way.
Instead, you “require” people to invest only with government – which I assume would be run by like minded left wingers only – and would punish them financially should they not bend to your will. At best it is authoritarian, at worst it is proto-fascist.
Nothing I said denied the important role of the private sector. I am firmly committed to the mixed economy.
But I am not committed to the rentier economy. It adds no value. Most of the financial services sector falls within it.
All I am saying is I want state subsidy to go towards social gain – things like work, mush of which will be done by the private sector – and that subsidy be for the promotion of collective gain. Whereas you want to add to the excessive charge structure of financial services, which explains why it is greatly over extended in the UK and why U.K. pensions deliver such poor performance – by demanding state subsidy for non gainful activity.
Why is that acceptable?
And if you so firmly believe in the private sector why do you need ££60bn of state subsidy? Surely you can see how absurd your argument is? What your fear actually is (and it’s so transparent it’s almost possible to smell it) is that if state subsidy was taken away what you do would nit be viable. So you’re actually terrified of real market forces because you know your game would be up.
Behind the charade you’re just a free rider on the state rightened that’s I might call you out and use the subsidy for better purpose.
Here in France, there are two such schemes, both paying 0.5% tax free.
The ‘Livret A’ (established 1818!) has morphed into something which largely funds investment in social housing. Almost everyone has one (55 million) with a total of €324+ Billion on deposit
The ‘LDDS’ (Livret de développement durable et solidaire) is much more recent (originating in 1983). It now has a total of €119 Billion. Since 2016 it has expanded its raison d’être from providing investment in SMEs to finance for things like insulation in old buildings and also grants to enterprises involved in the ‘social economy’ and ‘solidarity’.
Not sure that either one would be popular with the party currently ‘in charge’ in the UK.
Good to know
Just when I thought I was getting to understand this stuff, you tell me that by buying an old (second hand) house as our home I undertook a “speculative activity delivering almost no social gain to society”. It seems life choices that are both ethical and aesthetic are going to be difficult in the new economic regime!
But on topic, given National Savings have had popularity in the past, a Green Inflation-Linked Bond replacing extinct predecessors and allowing important strategic national investment outside the complicated balancing demands of Budgets would surely be beneficial.
Homes are not investments…they are for living in
Saving in second hand property is what does not in my opinion create value
I don’t understand this Richard. Do you mean “second homes” rather than “second-hand homes”?
No – I mean second hand properties – but only investment ones – so you can call it second homes if you like
My main target is the investment property market – and so second homes do fit that bill
Jeffrey Lau and John Smithin’s paper makes a reasonable argument for government bonds (or indeed by extension government guarantees for certain non-government bonds) which I tend to agree with on the basis that the government’s role in modulating deflation and inflation is a difficult task often through circumstances beyond its control and it doesn’t seem unreasonable that those who try to save should have some form of protection albeit this is value limited.
https://www.researchgate.net/publication/5172361_The_Role_of_Money_in_Capitalism
I have been thinking about the potential and challenges for Welsh independence and I think something like this would be a necessary early step. If secured savings vehicles were available to support social and economic development, supported by regeneration funding, the impact could be substantial. Strong accountability and transparency would be essential.
Our coop has recently benefited from loan funding linked to investment support consultancy and a social purpose grant. This excellent program has convinced me of the importance of savings being invested into real economies as part of a joined up approach.
Thanks
Good luck
[…] Cross-posted from Tax Research UK […]
Richard,
Do you have any practical experience of financial markets or the pension industry?
More than the vast majority of financial commentators
Less than us, of chryselephantine, possible
But why not answer a question for me?
How much experience do you have of macroeconomics and political economic thinking?
Unless you answer that don’t expect your next comment to be posted given the tone of the opener
Let’s be 100% honest Richard, you have limited formal economics training and zero real experience in the majority of areas of financial services – banking, asset management, pensions etc.
Your actual real expertise is purely as an accountant with a focus on tax, and even then much more at the simple, individual end of the scale, not with large, multinationals.
And yet you repeatedly view yourself as an expert in all of these areas, often claim that market practitioners are wrong and repeatedly belittle or shutdown those that can offer a lot of facts, but which would contradict your random claims.
This blog would have much more credibility if you actually tried to explain your contrary opinions, rather than just censoring those who won’t subscribe to your world views.
Bruce
Weird how I became a professor at four universities now….
And for five years was a professor of political economy
Whilst for 38 years have been a chartered accountant
I shut down people like you because you troll
…. but some of his readers DO have direct and long experience in the financial markets. So, please DO ask a question – but in the spirit or enquiry rather than confrontation.
Surely saving, as provision against future liability eg replacing my car or maintaining my house rather than relying on credit is a good thing?
I didn’t say people should not do it
At a personal level it works
Fir the economy as a whole much of it achieves very little
This is a macro / micro conflict
I have seen it suggested that rather as in the past that the private sector should issue bonds rather than ordinary shares which rather makes sense in terms of what you are saying – the bond only lasts as long as the item its intended to buy
The private sector does issue bonds. Lots of them.
Look, its plain to see why – running such a scheme (even one similar to France) makes the State look useful and stops it being a cash cow for the rich.
The extreme libertarians in the Tory party won’t have that.
And the free-market worshipping fan boys/ fan girls in the so-called centre-Left won’t have it either.
well it has become clear to me as a saver that my standard of life is diminishing quickly,if government has a money tree and can print into infinity why on earth do they need my savings? well its apparent that they don,t, at the rate of capital draw down most average savers are going through at the moment how long before we have no savings? and as a result even less to leave to our children, penury awaits lots of folk who have followed governments advice and save for there future.
Whats left to invest in with a return, i would like to know how pension co,s are making a living these days.
No one asked you to save
You chose to
And you’re much better off because you did than those without a safety net
But this is not the way to provide for pensions – as I have argued for two decades now
Of course, MMT can mean different things to different people. Whilst the realisation that governments do not need to borrow in order to spend is the “lightbulb” moment in understanding MMT it does not follow that governments should NOT borrow ever. Draining/adding liquidity from/to the economy can be done in a variety of ways and to insist that only a particular method is used would be foolish – taxation and borrowing both have a role. How much you drain/add will, in the main, determine the inflation rate but HOW you drain/add is important, too. It will allow other policy goals to be attained in addition to simple inflation control.
Government borrowing allows savers to save safely. Interest rates paid by government act as benchmark rates for private sector borrowing (and the level of private debt in the economy is important). Government borrowing can act “instantly” as a drain liquidity from the economy (whereas tax changes might take longer to implement) which might be handy to prevent speculative bubbles. Going a step beyond interest rate policy, credit controls also might have a place (we don’t tax food and booze at the same rate, why should all borrowing take place at the same rate?).
Should government borrowing should be hypothecated for particular purposes? If it allows us to undertake the huge investment that is so clearly needed then, yes…… but let’s be clear it is a marketing gimmick and not necessary from an accounting/economic perspective.
I agree with all that
Including the last – which is true in theory, but in practice it may well work
Here’s my take on the issue of personal savings and why they are important. These are somewhat philosophical thoughts and I am thinking out loud here in order to provoke a debate.
(1) The role of the state is to provide what is necessary for all citizens to thrive and to achieve their full potential. In return all citizens have an obligation (a “debt”) to the state and to all other citizens to strive to fulfil their individual full potential.
(2) Part of the debt owed to the state is redeemed by paying taxes. Part of the debt to the state and to everyone else is redeemed by striving for self reliance.
(3) A failure by any citizen to reach his/her full potential imposes a burden on everyone else. So what the state provides cannot be unlimited as that would create a condition of dependency and nothing useful would be done.
(4) Individual savings are an element in building self reliance so that in “hard times” citizens are not wholly dependent upon the state to provide. Savings should, therefore be encouraged.
(5) There are then two more questions;
(a) what amount of savings are needed ?
(b) how should those savings be used?
Richard’s article addresses (b).
How do we answer question (a)?
The answer to (a) is the same as ‘how much pension saving do I need’, to which there is no answer
Quite a lot about retirement savings in the comments…….. I feel a video coming soon!!
Once again it is the difficulty of micro prudence versus macro results.
The amount of savings held for retirement will only decide how future resources are distributed amongst the old. If we all save more for our old age we might feel better off but we will just be chasing the same pool of resources. What we need when we are old cannot be stockpiled (like money) so, for that reason, pensions are always pay-as-you-go.
We may not be able to stockpile “care”….. but we CAN invest today in things that will free up more people in the future to have well paid jobs in the care sector. Crudely, if we build flood defences now then our children won’t have to and will have time to look after us. That is why the Green Deal NOW is so important for today’s workers who will be tomorrow’s retirees.
You get it
Why don’t the great and good economists?
Maybe the answer to (a) is that you save as much as you can manage and if it’s not enough the state helps you out. But at the same time the state supports your efforts to achieve your full potential and thereby increase your capacity to save as much as you can. This means a and b become two sides of the same question.
So if folk don,t prepare for there future by saving for it what is there future when they reach an age where they are unable to work with no back up? begging to the Government?
As for the state pension it will be gone, folk will be working from the cradle to the grave as it was in yester year, private pensions are not the way forward as folk do not earn enough to contribute for the pension they will require, failing that it will be stolen from them.
Why should the state pension go?
You realise that like it or not that unless we are to cull the elderly (and I think some think that acceptable) pay as you go pensions are the only way ultimately to pay for ll in old age?
Savings can only ever top up
And to use savings as a source of pension funding is – as is now painfully apparent – impossible for all as the micro logic cannot extend to macro reality
The first of the three points in the article above is flawed. Richard Murphy says the state needs to be “in the market”, i.e. buy and sell government debt so as to keep interest on the debt as near zero as possible. Actually all the state needs to do to keep interest on state liabilities at zero is simply to cease issuing any liabilities that pay a positive rate of interest! i.e. the only liability (if you can call it that) should be zero interest yielding base money (as advocated, incidentally, by Milton Friedman).
Put another way, if the state DOES borrow back some of the money it has issued, it then ipso facto raises the rate of interest on state liabilities to ABOVE zero!
I am sorry – but this is nonsense
Got any actual REASONS for the “nonsense” jibe?
If you SHOUT at me you really should not expect a reply
Why should the state pension go?
Because if the Gov keeps increasing the age at what folk can retire, where will it be in say 25 years? 75- 80? as i said in my post you will need to work from the cradle to the grave, as it was for the miners work untill your 65 and pass away shortly after, there was a method there that the Gov knew would reduce expenditure,and it did.
But suppose this is not necessary? It’s just a way to enslave us – again
This is not true:
“First, controlling interest rates is a key MMT objective.”.
The base rate can be nominal zero by simply selling no bonds & no IOR.
Lending rates can be whatever the market wants (the one place markets work well).
The “natural rate” on (real) $,£ etc. is zero. Their rate in their secondary market is usefully controlled by the market.
Get rid of bonds and allow the public to deal/save directly in (0 %) “reserves”; leave the secondary market in these alone (besides tight lending standards; aka, Mosler’s Rules).
You can keep bonds, but purely vestigial and harmful bc allows the Right to say borrowing is an issue.
With respect, I live in the real world and have little;e time for those, whether they think themselves MMT proponents or otherwise, who play in fantasy ones
Fine – I shouldn’t have added “possibilities” to the factual in such a short comment.
But I still don’t know where you get this:
“First, controlling interest rates is a key MMT objective.”
Genuinely curious, always enjoy your blog.
I have answered the question!
Richard – I like you and your blog. But I genuinely do not see where you have answered.
Where is this suported? “First, controlling interest rates is a key MMT objective.”
No intervention (IOR or interest paid on Sov bonds) leaves base rate at nominal zero.
That is just a fact.
Yes we can allow savers to save with bonds. What gov token we allow savers to save in makes no difference.
But where do you get the idea “controlling” rates is an objective? Doing nothing makes the base rate fall to nominal zero. That is not “controlling.”
Clint
Let’s deal with some real world facts
The first is Governments will keep issuing bonds.
Second they need to do so: Banking and other markets are dependent on them and we need those markets to function
Third, savers want them and the social consultancies of not supplying nether are high
So if you want to plat fantasy MMT please do so – but I am not partaking. I engage with the real world
That means control of interest rates is necessary
And ZIRP suggests that as low a rate as possible is desired – and that is in MMT
If you cant extrapolate that, you have a problem
And please don’t tell me again we don’t need bonds: I have no more time for a lack of realism from tho9se who claim they support MMT than I do for the same from anyone else
In fact, less maybe
Richard
Warren Mosler, 2009.
” I would cease all issuance of Treasury securities. Instead any deficit spending would
accumulate as excess reserve balances at the Fed. No public purpose is served by the issuance of
Treasury securities with a non-convertible currency and floating exchange rate policy.”
And I will be quite clear that I think he’s wrong
On quite a number of issues Warren is far too narrow in perspective, like Bill Mitchell
I don’t care if ion theory that’s right: a lot of economics might be right in theory
I care about practice
We have and will need bonds for a long time to come
So can we discuss the reality please, or be consigned forever to playing on the political margins?
I am a pragmatic modern monetarist. I suspect Stephanie Kelton is too
Richard: “That means control of interest rates is necessary”
Why?
No IOR, no interest on reserves, still oversubscribed 🙂
The 0 interest safe-saving Gov-token does not matter. Can be issued from the Royal Mail or National Gallery or BOE. Makes no difference.
Why do you still think _any_ Gov token/tax-credit must pay %?
The facts clearly show that is not true (neg rates around the world, for example).
Where do you get this from “That means control of interest rates is necessary”?
Any gov token will always be sought after at nominal zero.
Tha should have read “No IOR, no interest on bonds/gilts”
Read replies to later post
Please don’t waste my time with angels on pinheads stuff
Savings will not be at zero and government ahs a role in savings
Either comment on the real world here or please don’t waste my time. I find MMT ultras as boring as all ultras
I am trying to get my head around this…………………
1. We all need savings, but,
2. If we – or the wealthy save to much it ends up with money being poured into unproductive and socially damaging schemes – buy to let, farmland, share bubbles etc
so, ideally nobody would have less than a basic minimum of subsistence, or -an excessively high income?
Which then raises a question about how we deal with ownership of companies. Smaller Companies clearly exist alongside small business’s which can be bought and sold by their proprietors. What do we do about Companies currently listed in the Stock Market? Certainly Euro seems to have a little more success in this with many Companies being to a greater or lesser extent controlled by long term shareholders such as banks, insurers etc
I have no idea however can someone come up with a suggestion.
We need to limit the extremes
And that means large companies need diverse but active ownership, not least by employees