The Chancellor, in another closely co-ordinated policy announcement with the Bank of England, announced yesterday that the government does now plan to issue green bonds.
I welcome the move. I argued strongly in its favour much earlier this year, when the head of the UK Debt Management Office argued strongly against such a move. As I said then (and repeat now, with minor edits):
The FT has reported that:
The head of the UK's Debt Management Office has poured cold water on the case for issuing “green” government bonds, saying it could end up costing taxpayers more than standard gilts.
Robert Stheeman, who is in charge of raising billions of pounds a year in the bond markets on behalf of the government, said the creation of “green gilts” – government debt with proceeds earmarked for environmentally friendly projects – would be a “symbolic” step unless investors were prepared to pay more for them.
Sir Robert, who has run the DMO since 2003 and has a mandate to keep expenses down for taxpayers, told the Financial Times he is sceptical that issuing green bonds would be cost effective because it could prove difficult to create a big and liquid market.
“One of the natural ways you minimise cost is you try and ensure all your bonds are as liquid as possible,” he said.
“In our case that usually means building up benchmarks to £20-30bn size. Smaller one-off bonds tend to fragment that process and the market is not necessarily willing to pay a liquidity premium for those smaller bonds.”
I post that as background, and because this issue is important, and important to me. I have been arguing for green and alternative bonds e.g. from local authorities, throughout this century.
In that case what I might call the rather narrow-minded approach of Sir Robert needs to be considered.
Background
First, let's consider some background. Whilst it is a fact that under the currency conditions that existed until the 1970s it was the case that the UK did need to issue gilts to make good deficits, that has not been true since then. I rather strongly suspect that the Debt Management Office ignore this fact when undertaking their work. They simply accept that what is done is what has always been done, and so week in and week out they manage their books by issuing gilts.
But the truth is that this is not necessary. When there is a fiat currency in issue in a country, and when there is a stable currency, and when there is an independent central bank, then there is no need for gilts to be issued, except by convention and because of international agreements (that exist right now, but may not when we leave the EU).
It is possible that all government borrowing could instead, for example, be from a bank and not be financed by gilt issues. And it is also possible that the bank making the loan could be the Bank of England. And that also creates the possibility that the loan need not have interest charged on it because the Bank of England is, after all, owned by the government. It could then simply lend to itself at a zero interest rate.
This, I stress, could be done. It isn't. That's because of paranoia that this would lead to excessive borrowing and so inflation, and you might think that is simply a neoliberal political imposition to prevent socially-minded government seeking to meet the needs of society and you may well be right. But I stress, it is possible.
The important point about knowing that this is possible is to appreciate that bond issuance is not necessary, or required. It is done for a policy reason. So arguments about cost, serving taxpayer need and all the rest of the case Sir Robert makes is not really true, because none of his activities are strictly necessary. His office exists to fulfil a policy purpose. It does not exist to fund the government, because the government could fund itself using an overdraft from the Bank of England at zero cost.
Why bonds are issued
It has to be asked why bonds are issued in that case. There are a number of reasons. I do not have time to elaborate in detail. I hope this will suffice.
First, bonds are issued because that's what we've always done and many cannot think of anything else. Do not dismiss this is possibly the most important argument of all, because it is. The bond market exists because the bond market exists and it suits some very well for it to be perpetuated. Bonds are, then, issued to support the status quo.
Second, and coming to more important issues, the bond market creates the most secure form of saving available to anyone. The UK government simply cannot default on its debt if it is in sterling because it can always, and without exception, instruct the Bank of England to make payment of that debt for it and it always will. As such bonds are the place for savers in the last resort. And long term savers have traditionally wanted that; gilts used to be fundamental to pension funds for this reason, for example, although less so now because the rates are so low (see below). Bonds are in this case issued to provide a savings mechanism.
Third, the existence of this secure asset provides an essential alternative for the safe deposit of funds for those for whom government guarantees on cash deposits do not work. That is, companies and those with more than £85,000 to deposit. Government bonds are then the backbone of the so-called repo market, which is at present fundamental to the smooth operation of the City of London. I happen to think that important still: when banks are not reliable (and they are not), and funds deposited with them are at risk (and they are) then the government needs to create an alternative form of currency for the safe deposit of funds. In effect government bonds provide this. The government issues bonds to support the financial markets, in other words.
Fourth, and vitally, bonds can, like tax, take currency out of circulation in the economy and so can help control inflation. This is an economic function.
Fifth, in the process of regulating the supply and demand for bonds they can be used to set interest rates either directly or indirectly via the quantitative easing process. This means that the government did have (but now has not) a valuable mechanism for control of the economy. Again, this is issuance for an economic management purpose.
Those are the reasons for issuing bonds. In summary:
a) To support the savings market;
b) To provide an alternative savings mechanism;
c) To control interest rates.
But, and important to note, is the fact that bonds are not issued to fund government spending.
Bonds and government spending
I stress the last point noted above. Bonds do not fund government spending. That spending can happen whenever the UK government wishes by it simply instructing the Bank of England to make a payment. It is purely convention, as previously noted, that the resulting overdraft at the Bank of England is then cleared by a form of debt issue. The issue of bonds is not then a mechanism for funding government spending, even if it appears otherwise.
Bonds and 'taxpayers' money
The claim by Sir Robert that the cost of borrowing must be minimised for taxpayers is profoundly wrong. Government money is not taxpayers' money. Tax is collected to recover the spending the government makes. If the government did not spend the money into existence in the first place it would not exist for the settlement of tax. This has, then, to be true. Factually, taxpayers' money is simply destroyed upon receipt at the Bank in that case, just as all loan repayments destroy money in a fiat currency system.
But Sir Robert's claim is also deeply wrong because it perpetuates a falsehood in addition to the false belief that governments have no money of their own when money is necessarily of their creation. This falsehood is that the government is beholden to maximise return to taxpayers. This is simply a deeply corrupt form of the false thinking that companies only exist to maximise return to shareholders. The latter is emphatically not true, and we know it. Companies have a plethora of purposes and so does the government. To suggest maximising taxpayer return is one of them is simply wrong.
So what are green bonds for?
The logic if green bonds is that they supposedly fund green investment. As noted above, that is not true. They do not. At one level it could then be argued that they are simply not necessary. Borrowing at zero per cent from the Bank of England could be said to be a better deal.
And Sir Robert is right to say that:
“Any government can choose to do what it wants for the environment in investment terms, regardless of how it borrows,” he said. “I think that's quite important . . . I do think there are a number of investors who would love to have sovereign green bonds in their portfolios. What I would like to see is what are they going to pay me for it?”
In the past, the UK government has not earmarked revenues from specific taxes or debt for particular purposes, and doing so would require a change in the law.
That is “not an insurmountable problem. These things could be done,” Sir Robert said. “Ultimately this is a decision for ministers. Were ministers to decide this is something we should do, not only will we do it, but we would make a success of it.”
I accept this point there. And if existing gilts would behave very much like green gilts - and the article makes the point that this is likely- then what is all this about? I suggest that it is something much more profound.
Why we need green bonds
We need green bonds for four reasons.
First, people are going to save. That's a fact. They do save. They have rational reason for doing so. And that saving needs to be secure. It is already the case that the government carries enormous risk to ensure that this is the case. It guarantees the cash deposits of most people in this country, effectively underpinning the banking system in the process. The question has to be asked as to whether a better form of saving could be found in that case.
Second, subsidising pensions costs well over £50 billion a year. And subsidising ISAs costs several billion more a year. Both inject substantial amounts of saving into the inherently unstable stock market. And stock markets provide very little funding for any form of investment now. New stock issues are incredibly rare. As a result, this massive cost is being used for no social or economic gain. It merely supports gambling. This is ludicrous.
Third, most people do not understand the risks that they do face in their savings, and that is because there is massive opacity around such savings mechanisms. This is dangerous. I have explained why.
Fourth, the disconnect between people's savings and anything that they can identify happening in the economy means that a massive industry - the financial services sector - does appear to most people to exist without any apparent social purpose or gain to society. The impression is, regrettably, not unfair when most banking activity supports property speculation and most stock exchange activity is simply gambling.
There is then a need to issue green bonds not because they are inherently necessary to fund green infrastructure, but because there is a need for a vastly better savings market than the one we have.
That better savings market would:
a) Be transparent as to the cost of government support;
b) Link saving to social purpose;
c) Be transparent;
d) Minimise risk for the saver
e) Provide the funder for bond issues that the government thinks necessary.
In effect, this is the basis for my proposal for issuing green ISAs and linking pensions to green investments, made in December. The need is to make savings relevant for a social purpose that the government should be promoting and not because, per se, this is pre-condition for green investment, although whilst the government insists that there must be bond issues then this arrangement also happens to completely fulfil that need as well.
The price paid in the form of interest is tiny compared to the current cost of supporting savings. In that case, very politely, can debate on this issue (whilst appreciating that the rates used are wholly indicative and not prescriptive, and not suggestive of a flat rate for all issues) be within that context?
But the form of the suggested saving - replicating the massively successful cash bond market - is deliberate. People want such products.
And that this will apparently cost more than gilts is not the point: the social gain of making explicit the subsidy to saving and linking that subsidy to the social gain of green investment is the whole point.
And that, I suggest is a price worth paying for the value it provides.
In that context, what I am saying is Sir Robert is guilty of knowing a price but seems quite unaware of value. And that has been a failing of markets for a very long time.
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I approve of (almost) anything that will raise investment in “greening” the country. As you observe, issuing bonds is not necessary but if it removes a barrier in some people’s minds then I would support the idea. Perhaps it could be done through NS+I as a Green bond or ISA. If it were and people flocked to deposit money then it could give a clear political signal that the people want a Green Economy.
More particularly, it might dispel the idea that the Environment is only the concern of noisy, left-wing youngsters. Most of my neighbours are conservative and vote Conservative…… but as one pointed out passionately to me “I am conservative, I want to conserve what we have. Unless we engage in a huge, expensive national effort all that I wish to conserve will disappear in fire or flood.” …. I found that slightly encouraging……and suggested he vote Green at the next election.
You get it….
Accusing someone of knowing the price of everything and the value of nothing is one of the worst insults. It’s a charge of humility in the sense that people value friendship, leisure, environment, helping others and much else that they will give up time and money to pursue these things. The person being insulted is aware that we are all different and would want to let prices do prices should do and let values be decided by the people.
Excellent post. This should be a must read for all civil servants at the Treasury and Bank of England …..and last but not least, for all politicians!
My first reaction was that the banks are not gonna like that. But on further thinking they probably wouldn’t mind. At the end of the day they just want to make a profit out of shuffling bits of paper and moving money, They are in fact the only types of companies that exist just to make a profit. I can’t see any banker claiming that there is any other purpose to a bank. Not that it matters ,other than they have a very strong lobby, but they could just as easily make money trading green gilts as any other gilt. So they shouldn’t really need to object to this plan either. Besides it would make them look more green.
My only minor point would be in your summary of reasons for bonds. c) I would say is not to control interest rates but to control money supply via the use of interest rates. The Government uses interest rates to either discourage or encourage saving and so add or remove money from the system.
Did Sir Robert Stheeman actually say “the cost of borrowing must be minimised for taxpayers”? Or are those words that have been put in his mouth? (I see what the newspaper says above, but the word “taxpayer” does not appear in any direct quote that I can see. That appears to be a gloss that has been added somewhere.)
From its March 2020 accounts, the main aims of the DMO include “to carry out the government’s debt management policy of minimising its financing cost over the long-term, taking account of risk” and “to carry out the government’s cash management policy of minimising the cost of offsetting the government’s net cash flows over time, while operating within a risk appetite approved by ministers”.
The DMO’s annual report does not mention taxpayers at all, except in its “Statement of changes in taxpayers’ equity”(!).
The DMO is an executive agency of the Treasury. It doesn’t have any aims of its own, save for those that are set for it by the Treasury. You can argue with whether those should be main aims, but as a civil servant Sir Robert is simply tasked with meeting them.
I was reading an article around a week ago about a City I know very well, Aberdeen.
It describes shop vacancies in Union Street, the main shopping street.
It has been the subject of articles on many occasions.
What disappointed me yet again was the omission of converting the fine empty granite buildings into sustainable accommodation.
The talk always seems to revolve round retail.
Whether people agree or not, the time of the High Street has passed, Covid-19 has merely accelerated the decline.
I am unsure whether Councils can raise funds for sustainable accommodation, a condition must be to use natural materials, no chemicals allowed. We have an abundance of Sheep Wool for insulation, plenty of lime, we can use recycled bricks and stone, and heat and ventilate using solar and GSHP’s or ASHP’s.
Involve local colleges and universities in developing these traditional skills, the old builders knew a thing or two about green building.
Where is the initiative?
If we carry on with flogging dead horses, we will never progress.
Meanwhile, in other news:
https://www.theguardian.com/environment/2020/nov/10/people-drive-fly-climate-crisis-global-poll-green-recovery-covid-pandemic
The obsession with the High Street ahs to go
Or rather the realisation that having people living in City centres is crucial to their survival is critical
The rest I agree with
Is this taking us in the right direction??
https://labour.org.uk/wp-content/uploads/2020/11/GER-10.11docx.pdf
Yes
Not bad
Not bold enough
Lacking financing detail, but recognisable with what I want
Labour activists appear to hate it
I’m glad you have had a rethink on hypothecated funding/taxation.
It may not be strictly necessary under MMT but serves other purposes.
Mainly legitimating and endorsing buy in to investment in specific spending programmes and taking away toys from the financial services industry.
I still completely oppose hypothecated tax
Bill Mitchell discusses the pros and cons of issuing public debt in detail here, and concludes we could achieve all necessary policy goals without it. I must leave it to other participants here to take apart.
http://bilbo.economicoutlook.net/blog/?p=45108
Bill and I disagree on this
But he does not believe in the mixed economy and I do
Richard, I am with you until the paragraph “Bonds and government spending” and where you say
“bonds do not fund government spending”.
I have been thinking deeply about this and the MMT narrative for a while now. I am not going to assert that the conclusion I have come to is right but I decided I should share my thinking in the interests of a search for truth.
The problem lies in a distinction between “necessity” and possibility”. “Bonds do not fund spending” is a statement of possibility. “Bonds can fund spending” is a statement of possibility.
Your argument starts discussing “necessity” and the switches over to “possibility”.
Here is what I think. It POSSIBLE for bonds to fund government spending but it is not NECESSARY for them to do so. (The same applies to tax revenues but I’ll leave that to one side for now as this is a discussion about bonds).
In the opening paragraphs of your post you argue that issuing bonds is not necessary to fund spending and that is true.
But you also seem to concede that it is possible that bonds fund spending because you describe the past when this was both necessary and possible in the monetary age before 1971. I fail to understand why what was possible in the pre-1971 monetary world is not still possible in the fiat currency world. The nature of money has not changed since 1971, only its form.
A bond is a swap of one promise for another. The government gives you a promise to give you your money back after a defined period of time and to pay you interest in the meantime. This removes money from your account/reserves and moves it into a government account. From there it can either (a) redeem part of the government debt with the central bank (b) transfer it to somewhere else in the economy as a payment for work done for the government under contract, or as a transfer payment (welfare) which then is spent and gets work done.
The movement of the amount of money contained in the bond does not change the volume of money in total reserves it just moves it to a different location….or sequence of locations in the system. However, whilst it does not change the overall STOCK of money it changes the FLOW because the effect of the bond is to take a reserve of savings (a stock) and get it to do work….the rate of circulation of money is thereby increased.
However it is not NECESSARY for the bond to be used to do work by “re-spending” it as it can instead be used to redeem a portion of government central debt at the central bank. There is a choice and two possibilities.
So the next question is “how is the promise contained in the bond redeemed at its maturity date?”. If the government used it at the start by spending it to get work done it can’t repay it by just handing back the original stock of money. So it can only be redeemed by taking out new debt at the central bank — by creating new money. This means that when a government spends the money raised by issuing a bond it is simply deferring the date at which it must create new money to get work done.
Conclusion – bonds CAN be used to fund public spending but are not NECESSARY – they are just a mechanism for deferring the time at which new money is created.
I hope that sharing these thoughts is helpful.
I accept that can and do fund spending in some governments e.g. devolved administrations in the U.K.
But for the U.K. they need not and I suggest do not do so
Devolved administrations are currency users not currency issuers so they don’t have the same choices as the currency issuer. I am saying that the currency issuer has choices. The UK may not exercise those choices but that doesn’t mean they don’t exist, nor does it follow that the choice they do take (without realising or admitting they have made a choice) is a necessity.
I have just realised that what I am saying can be put very simply. This sounds like an unforgivable heresy but it goes like this…..issuing bonds is a government using its credit card. That is because by issuing bonds it is giving itself a choice of deferring the creation of new money. But it can NEVER ever “max out the credit card” as the neo-liberals proclaim because it can ALWAYS pay off the credit card by creating new money through new debt with the central bank.
No….the money was created by the spend, and the bonds redeposit it
MMT is quite clear about this
How else would the money to deposit in bonds exist?
The money was created by some original spending. It has then ended up in savings somewhere because it has not been respent by the citizen (or whoever) who how has it as a credit. If offered the bond in exchange for this
he/she has been offered a new promise….get your money back in X years time and meanwhile we will pay you some interest at y% every year. That deposit is then acquired by the government who can then either (a) redeem some debt at the central bank or (b) spend it on something. After X years have passed the government has to redeem the promise contained in the bond. How can it do that if it has spent the deposit it got in return for the bond? It can only do that by creating new money as new debt at the central bank.
Creating new money is like you or me using a debit card.
Issuing bonds is like you or me using a credit card.
Its as simple as that I think. .
NO!!
You are not getting this
The government bond funds nothing….it is a book-keeping exercise…..
Please read The Deficit Muyth
You are getting this all wrong Jim
So what’s the link between using savings to buy green bonds and green investment then?
The Green Investment Bank would be functioning as if a private entity in that regard
OK, that makes sense. But that leads to the next question. How does it repay the debt encapsulated in the bonds it has issued?
It doesn’t
It has no need to
And markets do not want them to do so
Why should a savings institution be forced to wind down its offering – because that is what this debt is – people’s savings
I don’t follow that point Richard. Doesn’t a debt in the form of a bond have to be redeemed at the maturity date? A bond is a promise to repay the bearer at the date defined in the promise and to pay an agreed rate of interest until that maturity date, isn’t it?
Jim
Please do not buy the neoliberal narrative.
The national debt is issued by government, just as money is
In fact all that is different is one carries interest
When a bond is redeemed it is replaced, either by central bank zero rate money or new Treasury interest paying money
But the continuum of money still exists and there is no redemption: the net money created remains the same
Don’t be confused by the micro legal form which is historic, and anachronistic.
Richard
It’s the continuum of money… in other words the flow… that I am interested in. Along what pathways does the quantum of money that I exchanged for a bond flow?
I thought I had already answered that
From cash to bond and back again is no more than from current account to deposit account and back again
So the bondholders have a current account with their own bank and a deposit account at the Nib and the NIB lends against those reserves created by the deposit accounts?
NO!
I just used a metaphor
Richard Murphy says:
November 11 2020 at 6:35 pm
Bill and I disagree on this
But he does not believe in the mixed economy and I do
I hold no particular candle for Bill , but I find his blog , like yours , a very educational resource, and I have found nothing there that would suggest he wants to abolish capitalist enterprises. He does though, regard Bonds as “corporate welfare”
Yes , he can be abrasive and blunt sometimes, but hey – have you ever read Richard Murphy’s blog?
🙂