I just posted this on Twitter, inspired by a regular commentator here:
A Q&A on the national debt. Who are we borrowing from? On what terms? When is repayment due? Is this sustainable? The answers are, the government borrows from itself via the Bank of England. This is effectively costless. This never need be repaid. And it’s completely sustainable.
— Richard Murphy (@RichardJMurphy) November 20, 2020
Of course there are short cuts to get this in 280 characters. But four questions and answers in that space is worth doing on an issue as big as this.
And why is this not repayable? Because QE is money creation. It's not borrowing. And the end result is new government created money in bank deposit accounts. And if the holder demanded the money back the government would just create new money to make the repayment, meaning that overall no repayment would take place. And that's why repayment is not, in effect, due.
The money can be cancelled by additional tax due.
And it can be cancelled by new borrowing.
But it can't be repaid, because it can only be repaid with itself. And that changes nothing.
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I though I understood QE. but now I’m a bit confused.
You say “if the holder demanded the money back…” HMG have just given the commercial banks money in exchange for bonds. Transaction over, both sides happy I presume. What money could the banks demand back from whom? Haven’t the banks just been given their money?
“the government would just create new money to make the repayment, meaning that overall no repayment would take place.” Again, after QE, what repayment of what is now due to whom?
What I am saying is that if this is debt it can’t be repaid … they can’t get their money back precisely because they have already got it …. so it’s not debt, it’s money
You get the whole point
It just confuses everybody involving the BoE. There was never any need for a Bank of England in the first place. The ordinary person’s involvement with banks when they take out a loan or “flex the plastic” is they have to pay it back.
I keep explaining it
Most people don’t get it
Re need for BoE. I think conditions were a little different in 1694, but today the same thing could be done by the Treasury. So scrap The Bank and call it something else. Also “debt” needs to be renamed to encompass real debt owed to third parties and money created purely by the Govt.
Also heard on Radio Scotland this morning the presenter buying into the narrative that “the debt needs to paid down” without ever questioning the assumptions, followed by Prof David Bell of Stirling saying that we have always paid back our debt.
I have no problem with having a central bank
I just have a problem with the pretence that it is outside government and with it being given the power to constrain democracy
OK, I did understand after all. In the sentence I quoted, “the holder” means the post-QE new holder, ie. the BoE. And you point out the logical nonsense of the BoE demanding repayment from, er, the BoE !
I’m increasingly persuaded that one of the chief problems with having a government central bank as opposed to a mere treasury or exchequer is that most voters perception of banks is that they involve counting whereas dealing with the many varied threats that a nation faces through time require monetary modulation, treasury inflows mostly but also outflows, nothing to do with counting. It’s true, however, that government needs to offer forms of safe saving that help mitigate inflationary effects (War Bonds are an extreme example.). The trick is to present this service not as means of funding monetary modulation.
I entirely get what you are saying
I wonder how hard this will be to communicate?
Excellent! The BBC ought to be told. See their contortions in https://www.bbc.co.uk/news/business-50504151
I may blog on that one….
Salient!
I think I’m just about keeping up.
I think this would be better wording:
And why is this not repayable? Because QE is money creation by the Bank of England. It’s not borrowing. And the end result is new government created money in commercial bank reserve accounts. And if the holder of the bonds (the Bank of England) demanded the money back the government would just create new money to make the repayment, meaning that overall no repayment would take place. And that’s why repayment is not, in effect, due.
Except is that quite what is happening just now? The DMO is selling say £30 billion per month of bonds which are bought by bond traders. So £30 billion goes to the Treasury who are spending it on Covid. So the Treasury £30 billion ends up quite quickly in private sector bank accounts and thus in the reserve accounts at the BoE. Meanwhile the bond traders sell the bonds on to the Bank of England Asset Purchase Facility for £30 billion plus their profit. They then use that £30 billion to buy another issue of DMO bonds and repeat the process. So this is not quite the same as the original QE which created money that simply went to the banks without any actual spending by the Treasury. I would say at the moment that this time the QE is having a real impact on the economy because the money is being spent on wages (furlough), and things (PPE). Original style QE had little real impact and mostly led to loads of cash sloshing around the financial markets.
Tim
The first part is great but Twitter imposes constraints
I am not sure I agree with the second part in 2009 the debt was created by spending as n7cg as now
No QE is created otherwise
Richard
Thanks Tim – I did understand after all – I misunderstood which “holder” of bonds Richard was referring to, and your rewording clears that up.
Hello Richard.
You’ve written a great deal about QE, and done videos too, but I still have a couple of questions about it.
Are there in effect two different types of QE?
One being BOE – BOEAPF created new money, to repurchase gilts from the market, to recapitalise banks.
Two being BOE BOEAPF created new money, to purchase new gilts issued by the Treasury for specifically this purpose, to get around the Maastricht Treaty, and fund the government. Thus missing out the bond market.
On the same theme, is it pointless to continually buy gilts back from the market using QE, because this money just boosts the wealth of the rich, without necessarily improving the finances of the general population? Thus in effect although the government can’t run out of money, if the public isn’t seeing the benefits of QE through improved local services and quality of life, then what’s the point? It might as well be considered broke. Or maybe not broke. That’s a bad analogy, but certainly in this case QE wouldn’t be helping.
Also, once the U.K. eventually Brexits, then is there no excuse for the government not to use its Ways and Means account at the BOE along with QE to fund itself?
Finally I was reading this on the BBC website, and it just seems wrong to me https://www.bbc.co.uk/news/business-50504151
Thanks
Gordon
Yes, there are
See http://www.financeforthefuture.com/GreenQuEasing.pdf
And https://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/
It’s Friday night so I won’t do more now, but I clearly need to do so, soon
Oh the frustrations!
This from BBC reporters again, “we are borrowing £20+ billions a month, out total debt is now some £2.3 trillion, more than our economy produces…blah, blah, blah,….we will have to pay this back at sometime”. No one ever asks, “who do we owe all this money to? Where did it come from? What happens if we don’t pay it back to…from whence it came?” We are all doomed. ..
My single problem with this is that I want their answer, not yours. I want to keep asking until THEY answer; cnetral bank and banks, especially the politicians, the economists and the media commentators on economics; their detailed answer to each question. We can then sink our teeth into their answer. Richard, you giving the answer draws its own teeth; their ‘answer’ then is their evasion: to turn it into a ‘boo-hurrah’ exchange in ideologies; to find relief from being ‘on the spot’, to wander off into a generalised sneer at MMT without answering anything at all, in the knowledge that in the media ‘that will do’.
I like that….
And John is right – that these are the are questions that should be asked.
The head of the fire service union did an admirable job on Friday night’s C4 news when interviewed but you can tell that he just ‘ran out of road’ – he had no explanation to offer and just did not seem to know anything about the more heterodox approaches on offer.
Trade unions and the Left need a refit in the battle against Neo-liberalism – new ideas or good old ones brought back from the margins.
What they have to offer at the moment is not fit for purpose. In fact, they have nothing to offer. NOTHING.
News reporting on gov debt is truly a case of Project Fear where, strange to say, the household analogy of a mortgage does not get an airing since a “borrowing” of 1 times earnings is seen to be easily doable and undermines their austerity case.
Mr Mc Darby,
I like the simple cogency, the close comparative resonance of your analogy. This should be used widely; above all to test the cogency and coherence of the answers from the disciples of the household analogy; because the household analogy we know is risible – households do not print their own currency. If you really believe they can, then try it.
Not being critical here but on the comparison with mortgages that the public are happy to abide by the government could “borrow” up to 5 or 6 times GDP ie £6 – £8 trillion. Though of course in the case of government the money is created by themselves so this analogy is absurd as Richard and others have so clearly pointed out, showing up the economic illiteracy of the mainstream media “pundits”.
Mr Hughes,
Forgive me, but I think you miss the point. Exploring the household analogy reveals only its incoherence; so why would you not wish its defenders to be obliged to explain it? We know it is indefensible. We should be encouraging examination of its absurdity by pushing the envelope of the analogy to destruction, not merely peremptorily dismissing it. Let the ‘houshold budgeters’ at last publcly tie themselves in a Gordian knot of incoherence, that is entirely of their own impenetrable making.
Remember Napoleon’s great maxim; never interrupt an opponent in the middle of executing a blunder. The household budget is, and always was, an utterly absurd analogy, that has public resonance solely because of its strong sense appeal to common sense domestic rectitude; but it has no economic or rational substance, and has only survived critical examination through the blanket promotion by the media of carefully unexplored tabloid-level guff. So explore it.
Always good to see new ways to state what QE is concisely.
It is tough to get people to understand that the “nation” does not function like a “household” economically speaking. People listen politely and accept the logic but in the end say “sounds too good to be true”….. followed by “and if it sounds too good to be true then it usually is not true”. People always want to anchor the abstract (which is what MMT is for most people) into something concrete (which their personal experience of finance is).
Perhaps we need to explore the way that the Economy IS like a household!
We can’t afford a gardener so does our garden lie fallow? No!
I am about to go out to plant trees. The constraints on this project are my time and (lack of) skills – not money.
Now, I could have said to my wife “I will be dead before the trees are mature and I don’t get out of bed for less than £100 a day so I won’t plant the trees”…. but (because she gets MMT and loves our children) she would reply “OK, I will pay you £200 a day…. and don’t worry where the money comes from, I will sort it out.” I would then get out and work hard for my £200 …. but because we have a joint bank account now cash would move. The result would be a greener future for our kids.
I know that this is not a great analogy but you see where I am going…… at a family level, jobs around the house are not constrained by money and we constantly do things for our children that have no immediate benefit to ourselves.
Is this the image we should employ when trying to demolish the current ideology?
…. must go into the garden – perhaps you can hone these ideas better than I can!
Warren Mosler used such analogies
So has Stephanie Kelton
Why not?
I like Tim’s comment that QE is not borrowing– it’s money creation
however picking up Clive’s first sentence about getting over what QE is exactly
we need an alternative word to ” create “. It’s too whimsical
damned if I can think of one —without losing our audience
is the following a help ?
UK Govt. can INJECT more money to improve
the economy because it controls the issue of money into our economy
this is why QE has paid for much of our wages. our fight against Covid & helped out the private sector in our hours of need
And inflation is nowhere in sight
What’s not to like
QE is money creation
I entirely agree with Tim
I watched Strictly editing QE
Just came across this article.
Not a subscriber, so couldn’t read the whole thing.
Looks like MMT is getting out there.
https://www.thetimes.co.uk/article/when-normal-economic-rules-don-t-apply-a-magic-money-tree-could-start-to-make-sense-bz56srcvj
Finally covered this morning
Thanks
🙂
Ben Chapman in the Independent today seems to be moving in the direction of MMT
https://www.independent.co.uk/news/business/uk-national-debt-government-spending-coronavirus-b1759371.html
[quote]Should we ‘balance the books’?
A misconception that has been encouraged by several politicians, particularly those in favour of smaller government, is that the public finances should be run like a household with outgoings tightly controlled to match earnings.
For a household whose monthly income is, generally speaking, fixed, rising debt can quickly become unsustainable. Debt therefore often has negative connotations. But for every debt there is a corresponding income for a creditor, such as private citizens through their pension funds.[/quote]
Let’s hope….
I think you should write your own version of this BBC News article and
circulate it.
Coronavirus: Where does the government borrow billions from?
https://www.bbc.co.uk/news/business-50504151
Coming soon
Today
Came across this. Not a subscriber, so not able to read the whole article. Looks like MMT is gaining traction though!
https://www.thetimes.co.uk/article/when-normal-economic-rules-don-t-apply-a-magic-money-tree-could-start-to-make-sense-bz56srcvj
Is Magic Money Tree (MMT) a deliberate acronym to discredit Modern Monetary Theory (MMT) or just a coincidence?
I may comment on it tomorrow
Enough blogging for today