I have just posted this on Twitter - as a rather long thread. But it's important to explain why the debt fetishists are wrong to demand rep[ayment of what is incorrectly called our national debt, and in this post I seek to explain why:
I am bemused by those who demand that we repay the UK government's debt. It makes me wonder, do they know what it is? And how do they think it can be repaid? And do they appreciate the consequences? A thread is coming on......bear with me, because I think you need to know this.
First, what is the UK government's debt? I've immersed myself in this issue and can confidently say the Office for National Statistics's figures are wrong, most especially because they claim that the UK government is in debt by owing money to itself. That's not possible.
Whatever the Office for National Statistics like to claim, money you owe yourself is not debt, and so quantitative easing cancels about £800 billion of UK national debt right now. There are other mistakes in their numbers, but I'll just stick with this one for the moment.
So, if the ONS claim the national debt is around £2.1 trillion at present, it isn't. Allowing for the UK government owning around £800 billion of its own debt the figure reduces to maybe £1.3 trillion, give or take a bit. But that, I hasten to add, is not the end of the story.
It's important to understand that the ONS includes some things few would think of as debt in their figures. For example, around £200 billion (£0.2 trillion) of National Savings balances are included in the national debt. Whoever knew Premium Bond holders were such a burden?
Come to that, in reality the remaining gilts are, when all is said and done, just savings accounts. They are simply the safest place for long term savers like pension funds, life assurance companies and foreign governments to place their money.
The question that has to be asked then is why when the government spends more than £60bn a year subsidising pension, ISA and other saving (as it does) is it so desperate that this money be saved anywhere but with the government itself? That simply makes no sense.
So all who claim they are desperate to repay the national debt should really be asked, why are you so keen to stop people saving in the safest way they can? Because that's what they are really demanding should happen. And there's no evidence people want to stop saving that way.
And remember, government backed saving is so popular that right now people will buy government gilts, or bonds, due to be repaid in 40 years time with a negative interest rate, which means they will get back less than they actually save now. And people still buy it.
In that case there is another question for those complaining about debt, which is why are they so obsessed about the debt when the cost of interest on it as at a record low, and still falling, and in absolute terms costs less a year than it did before the 2008 crash?
On gilts and national savings, which together make up most of the ‘debt', the questions to debt obsessives is then, why don't they want people to save with the government when that's what they really very badly want to do? Why deny people what the savings market wants?
The other issue to understand about the national debt is what happens to the figure that replaces QE when QE cancels government debt because the government can't owe itself? That replacement figure is what are called central bank reserve account balances, or CBRAs, for short.
Central bank reserve accounts have around £800 billion held on them right now, and that number is growing. That figures not the same as the QE balance, but there is a relationship between the two. And that's for good reason.
When the government buys back its own debt when doing QE it creates new money within the Bank of England to do this. There's nothing mysterious about it doing so. All banks create new money by lending, and the BoE makes a loan to a subsidiary company to create this money.
Then that subsidiary company uses the money it's had created for it to buy back the government's own debt. And to record that fact the payment made has to go through the central bank reserve accounts that the UK's commercial banks maintain with the Bank of England.
It's important to note that CBRAs are only available to commercial banks. That's because they are the accounts used to move money between commercial banks and the government. There is nothing mysterious about this. They just are what they are: a collection of bank accounts.
And remember, all that bank accounts do is record debts. All money in the modern world is debt. It's nothing else. And so all that a bank account does is record who has agreed to owe who else money. It's hard to get this essential point, but vital to do so.
So, when the government agrees with someone to buy the gilts, or government bonds, that they own then a payment must follow. And since all payments from the government go into the rest of the economy via the commercial banks then the CBRAs have to go up to record this payment.
Now here's the hard bit. For most people it's mind-blowing. When the commercial banks now pay their customers the money the government owes them the balances in the CBRAs do not change. The balances between the commercial banks and their customers do but the CBRAs are not altered.
People want to think that it's money from the government that's used to pay the banks' customers. Of course, in a sense it is. But the CBRA remains untouched by the transaction. And this needs explanation.
That explanation is easy. When the government pays a commercial bank the money due for the gilts that payment does not benefit the bank. It benefits the bank's customer. So the double entry in the commercial bank is to debit the CBRA and to credit the bank customer's account.
The bank is in this sense a genuine intermediary. And all they are doing is some accounting. There are no piles of notes that change hands, let alone gold or any other such tangible thing. Money is debt. So all the bank is doing is recording changes in debts owing.
As a result of this transaction the Bank of England now owes the commercial bank more money. And the commercial bank owes its customer as a result. But when the customer then spends that money the CBRA does not change. The Bank of England still owes the commercial bank money.
The promise to pay the Bank of England makes to the commercial bank is reflected in that bank's CBRA. The promise to pay that the commercial bank makes to its customer is reflected in that customer's account. There are two promises to pay and two accounts. They're not related.
Understand those last few tweets and you understand modern banking, and very few people do. Sadly, almost none of our politicians seem to do so.
But what does this mean for the national debt? If we now have, as a result of QE, the government owning its own bonds and the Bank of England owing commercial banks a roughly similar amount instead, is the government still in debt for the value of the debts QE has cancelled?
The answer, at one level, has to be that yes, it is. If all money is debt and the Bank of England, which is owned by the government, is in debt to the commercial banks then surely it follows that the government is in debt? Superficially that seems to be true.
But then think about this a bit more. What is that sum now owing on the Central Bank Reserve Accounts that in reality now makes up about £800 billion of the supposed national debt? It is simply money. And what is more, it's money made by the Bank of England.
So, that money is something very like Bank notes in some ways. After all, they are what we also call money. And they are also created by the Bank of England. And, just for the record, as my forthcoming research has shown, they are not included in the national debt.
There is a good reason to not include this government created money - what is called ‘base money' - in the national debt. That's because base money, which is banknotes and central bank reserve account balances, is what the Bank of England call ‘the ultimate means of settlement'.
In other words, base money is the means of payment when all else fails, which is why commercial banks now need so much of it to make sure that they can function and always pay each other and why cash is also the ultimate backstop for payment in the economy when or if trust fails.
And if something is the 'ultimate means of settlement' then how can it be repaid, except by using itself? After all, this is money. That is the only available description of it that there is. That's what the Bank of England says it creates when doing QE.
So, what those demanding that the UK national debt be repaid are really saying is that this Bank of England money that keeps our economy functioning must be repaid. But what does that mean? Indeed, what is repayment of any of the supposed national debt going to mean?
First of all, let's make clear that the government bonds that have been repurchased by the government using QE can't be repaid. There is simple reason for that. They have, in effect, already been repaid. They have been cancelled in all but name. They need not be discussed again.
Then let's consider National Savings savings accounts, like Premium Bonds, which form part of the national debt. Can I presume that no one is suggesting that these accounts must actually be closed to clear the national debt? If so, let's live with this £200bn of savings some call debt.
Now let's consider the remaining gilts, or bonds in issue. Many of these are used, just like National Savings accounts, to provide a safe place for money to be saved. Can I presume that no one wants to take away safe savings accounts? Why would you? So let's keep that part.
Another pile of gilts are owned by banks and others as a result of regulation that requires that they have access to ultra-safe money. The object is to present another bank crash. Can I presume no one wants another bank crash? So let's keep those gilts in issue.
A significant chunk of gilts - around £400bn or so - are owned by foreign governments. That's because they want to own sterling, and this is how they do it. They see gilts as being as good as money. There is good reason for that. Gilts really are the next best thing to money.
My guess is that we don't want to force foreign governments to sell their UK government bond holdings because that might create a currency crisis which won't help the UK. I doubt anyone wants one of them. So let's leave those gilts well alone too in that case.
Who else owns gilts? Banks do. They use them to underpin what is called the repo market. This is not the place to explain that market in detail. But in essence it is used to guarantee the safety of money deposited in UK banks by very large companies, usually overnight.
Most UK savers who have what they think to be ‘money in the bank' enjoy a government guarantee to make sure it is repaid. In that case I guess they won't want to deny large companies the chance to also have a guarantee on their savings. So these gilts are also needed.
So what's left to the gilt markets that might be repaid after we take all these factors into account? Not a lot to be candid. So why the obsession about repaying these gilts? It is really hard to fathom.
In fact, the only thing to say about the desire to force gilt repayment is that it is wholly destructive. It would undermine the pensions, savings, life assurance, foreign exchange and banking sectors. There are left wingers who might want this. But why anyone else? I'm baffled.
I am also baffled by the desire to force gilt repayment when there seems some desire on the part of the financial markets to own more of them. I have no clue why so many who describe themselves as market fundamentalists are so anxious to deny markets what they want.
There appears to be a self-destruct instinct in those commentators who want the national debt repaid because their beloved City could barely function without it. Do they not realise? Do they not know? Are they lying? Or do they just hate the state so much that they don't care?
Whatever the reason that people want gilts repaid is, let's move on to the £800bn on central bank reserve accounts that they also want cleared. How could that be repaid? And what will the consequences of an attempt to make this repayment be?
Remember, that this debt is just balances on bank accounts. But these are a peculiar type of bank account. They are, like all bank account balances, debt. But unlike all others, the balances on central bank reserve accounts are deliberately created to function as money.
That's because whilst these balances are technically repayable to any bank on demand, repayment on demand by the Bank of England to one bank means that the sum due to it by another bank increases. That's because electronic money has to be redeposited. That's double entry at work.
To reiterate: this redepositing has to happen. Unlike cash, central bank reserve account balances can't be lost down the back of sofas. So if a bank draws on its own central bank reserve account it inevitably does so to make payment to another bank's central bank reserve account.
That's because this is the way post-2008 that banks deal with each other. They don't trust each other not to fail. So they always demand immediate payment. And if there's a shortage of liquidity to make these payments - as in March 2020 - QE creates more of it, instantly.
So, and to be blunt, it is these balances that are keeping the banking system functioning right now. And as was proved early in 2020, we really do need hundreds of billions of pounds in such accounts, effectively created by the Bank of England via QE, to let banking function.
So why would anyone who does not want a banking crisis want these balances repaid when they play such an enormous role in the functioning of the UK economy, and the City of London? I am utterly baffled to know why. They either want a financial crisis, or don't understand banking.
But let's despite the absurdity of that wish assume that they got their way and it was decided to reduce these balances. This thought experiment is really important. Stick with me, please.
The central bank reserve accounts are debt that can only be cleared by repaying the debt. The commercial banks can't do that. The debt is base money, and not the commercial money that they create. They can't get rid of base money by themselves. Only the government can.
How can the government get rid of base money, which is what the balances on central bank reserve accounts represent? There is only one way, but three mechanisms. The way is to take money out of the economy. The mechanisms are tax increases, bond sales and austerity.
The first two mechanisms mean people pay more money to the government. That additional money payment would have to go to the government through the central bank reserve accounts - that's the only available transmission mechanism. And so the balances on them would reduce.
The third mechanism - austerity - means cutting government spending. If done whilst keeping tax and bond sales (or flows to government savings accounts) constant this reduces the flow of government money into the economy and so reduces the central bank reserve account balances.
Let's ignore that this would mean banks having fewer funds available to them, and all that means. Let's instead consider what a tax increase means. What a tax increase does is take money out of the economy - the reduction in the central bank reserve account balances shows that.
That clears the debt on the central bank reserve accounts, so those demanding this happen get their way. But there's now less money in the real economy we all live in. And that reduction means there is reduced spending power in that economy. And that means demand falls.
Falling demand always has the same outcomes. It means a decline in growth. That in turn means lower sales in businesses. And lower profits. And that then means reduced employment, which in turn means less tax is paid. Which means money does not flow to government the way it did.
A government wanting to reduce the balances on the central bank reserve accounts faces a dilemma in that case. Tax increase are not neutral. Tax increases can reduce economic activity. And that can reduce revenues. But, it has to be stressed, that depends on the tax increased.
So, for example, taxes on wealth do not reduce demand as much as taxes on the incomes or spending of the lowest paid. That's because the wealthy pay taxes out of savings. Low earners have to cut their spend or take on precarious borrowing to pay. Not all taxes are equal then.
But, whatever happens, increasing taxes usually suppresses economic activity. Sometimes that's desirable. However, few see that as being at all likely over the next few years. So why increase taxes then, when the outcome will be bad for the whole economy? I can't answer that.
So what about extra bond sales then? This means selling the bonds the government reacquired when doing QE back into the financial markets. Think of it as QE in reverse. It's discussed often. And it works, in one way. It would reduce the central bank reserve accounts.
There is one problem with reversing QE though. It could be called ‘the glaringly obvious'. This is that increasing bonds in issue to clear the central bank reserve accounts does not clear the national debt. It just shifts debt from being due as money, to being due as a bond.
Understanding that QE just simply shifts debt around is no bad thing, because it's true. But given that money (which is what the central bank reserve accounts are) is not the same thing as savings (which is what gilts or bonds are) that does not mean that QE does nothing.
QE had a purpose. It was to reduce interest rates, which has been good news for households in debt. And it reduced the cost of business borrowing too, which means many businesses that might have gone bust of late will not be doing so. That's pretty good news too.
QE had other benefits. As already noted, QE basically created the central bank reserve accounts that have provided the liquidity that banks have needed to keep paying each other without risk of a bank collapse. Staving off a banking crisis is some achievement. QE did that.
Not that I'm saying there are no downsides to QE. There are. Because the funds injected into the banking system were effectively unregulated much simply went into speculation. Stock markets have skyrocketed. The City has won more than anyone else from QE. No one sought that.
There has also been a real downside to this upside for the City from QE. QE has undoubtedly created greater inequality in the UK, and elsewhere come to that. Much of that has been disguised. Governments have been able to claim their economies have recovered. But at a real cost.
This cost of QE has been suffered by those who have been let behind by QE. Reversing QE will not change that, any more than it will reduce the national debt. The redistribution upward has happened. It can't be undone now by shuffling the new wealth distribution around a bit.
So, new bond sales created by reversing QE will not address the problems within the economy, and nor will it reduce the national debt. And tax increases will be really harmful. So we're back to austerity as the only option. And that policy that has failed for the last decade.
Austerity seeks to reduce the flows from government to the rest of the economy through the central bank reserve accounts whilst hoping that tax revenues and the inward flow of funds to the government do not stall. It always was a naive assumption. It still is.
The government is the biggest spender in the UK economy. It's also the biggest employer. And the biggest supplier of savings accounts. The assumption that somehow it can change its behaviour in one way - cutting spend, for example - and leave everything else as it was, is absurd.
Austerity cuts the flow of government created money into the economy. The impact is much the same as a tax cut. Demand in the economy is reduced. So employment falls, and so does tax revenue. But austerity is like a very targeted tax increase. And it hits the least well off hardest.
That the least well off should be hit hardest by austerity should be obvious. The biggest parts of government spend are on the sick, the elderly, those with disability, those on low incomes and the young. Of course they are the least well off. Austerity inevitably harms them all.
Austerity can reduce balances on the central bank reserve accounts. That is indisputable. But the fall in the central bank reserve accounts is not as big as the cuts made because of falling tax revenues and savings inflows to government. And is the cost a price worth paying? No.
So let me summarise this long thread. It's claimed that we need to reduce the national debt. But first of all we need to state it correctly in numerical terms. And then we need to understand what makes it up.
Roughly half the national debt is made up of gilts or government bonds when those gilts that the government already owns are taken out of account. And these bonds are just savings accounts, in effect.
But these savings have a massively important role in the economy because the holders of these accounts know that the government can never fail to repay these accounts. That's because the government can always create the money to repay. That repayment is guaranteed then.
And in the world post-2008 the ability to repay is fundamental. The trust that existed before then has gone. We know banks crash now. Those demanding gilts be repaid ignore this. They are living in a fantasy past.
In the real present gilts underpin the smooth operation of banking, pensions, many savings products and foreign exchange markets. Since each of these is pretty darned important to the UK suggesting that bonds be repaid is akin to economic madness.
And it's also mad to say that cancelling National Savings is a good idea, and yet around £200 billion of national debt is in this form.
But the craziest demand of all is that we get rid of the money that now underpins the smooth operation of our entire economy, whether by tax increases or austerity, given that bond sakes don't work for this purpose. But then, as I have noted, nor do tax increases or austerity either.
So, what do we do? If repaying the national debt is undesirable, what next? There are four simple things to say here.
First, celebrate the fact that something that is a legacy from the gold standard era of money - which the national debt is - has morphed into something so multi-facetedly useful in the modern money era. Thank goodness that we have it.
Second, stop thinking this ‘debt' needs to be repaid. The whole reason it exists is that people absolutely trust that the government can always repay it but quite emphatically do not want them to do so. Its virtue is that it continues to offer safe savings opportunities.
Third, stop all talk of ‘our grandchildren having to repay this debt'. That's utter nonsense. They too will need it to make the economy work. And the lucky ones will own some of it, because the national debt is private wealth. The real issue is, how can some more have some of it?
And last, stop worrying about the size of the national debt and instead ask whether we are using it wisely. The question is not whether the national debt is a problem, because of itself it is not. The question is whether or not the policies that change it are the best available.
If austerity is not wise - and it is not - and many tax increases might be destructive right now - what spending and tax policies do we really need to deliver national prosperity? That is the real big issue for current debate.
So now let's come to my last point. Debate on debt repayment exists for a reason. It's not that deep down anyone really wants to repay the so-called national debt. But those promoting debt repayment do so to stop us thinking about what the state can really do for us.
The state could promote full employment if there was no debt obsession. It could also reduce inequality. It could consider a basic income. It could deliver a Green New Deal. All of these, and more, are possible. The state could care, in a word.
But those promoting debt repayment try to stop these things that would benefit most people in the country happening by promoting a false, and deeply harmful obsession with the so called national debt. I hate to say it, but that's because they don't want the state to care.
The national debt is really no such thing. It's actually savings and money. The real job is to spend those sums wisely. Let's move on and talk about that, and so show that we do care.
But that's for another day. The end.
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Posted this on Twitter? Your barking mad..
The last thread of this length got read at least 45,000 times on Twitter and was seen by 750,000
Barking mad?
I don’t think so…..
Exactly
Thankyou so much
I am one you have reached through twitter, which brought me to this post and others here
Well done
Amazing explanation and fantastic reach
Thanks
Barking mad to post on Twitter?
Only better place to post it would be on the side of a big red bus. Experience indicates that people read messages on buses 🙂 (And apparently believe them)
23,000 reads on Twitter so far and seen by very many more
Vastly more than here
Even the end of the thread is seeing many thousands of reads – so a lot of people got through it
Not mad at all
But hard work
So, the obvious faulty thinking is what we know in that we are taught to think that Government money creation is just like high street debt – as Graeber said – debt money with menaces.
The menace here though is in paying down what is just a record of money creation as if it were a debt like a high street one.
When in fact that is not the case. There really is a God of the Pound here on earth and it is made up of the Holy Trinity of the Treasury, the BoE and the Government. The City is just a user (and abuser).
Added to this is the Neo-liberal negation of State power because frankly they see the State as inherently evil – just like von Hayek intended (and although he has a point looking at the Nazi state, when the State can and should help its citizens during say hurricane Katrina or the flooding of the Somerset Levels or Covid, the Neo-lib small state mantra leaves such states incapable of helping at all – it is an ideology that simple does not work in the real world and should by now have been totally repudiated world wide).
The reason why the numpties in the Treasury and the Johnson Junta want people to stop saving with the State of course is to release the funds into the market to prop up their mates in the City. Private is best of course! (Not). Loads of fees to be had there using the faulty thinking you describe.
I think that what you are suggesting then is that: All money is debt.
Get rid of debt and……………
You’ve got fuck all money (or just about).
This post of yours illustrates to me how tied up we are by debt delusion and myths concerning money.
But also indicates that we have people in Government and the Civil Service who do not believe in Government.
So why are they there? It is about time they were shown the door. For good.
You work very hard at this stuff (and there was I thinking you were taking a break!!).
You’re a beast of intellectual burden pulling a myth breaking plough behind you, tearing up the roots of lies.
Good luck to you and us and long may you succeed.
Plough on Richard. Plough on.
Thanks PSR
@PSR
Here are three articles/papers concerned with the merits of independent central banks drilling backwards into history that should interest you and confirm your paranoia mine too:-
https://news.vanderbilt.edu/2011/04/13/michael-burry-transcript/
https://spartacus-educational.com/Gold_Standard.htm
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3445450
Thank you muchly Helen – I will do my best to keep up!
Merry Christmas!
Richards work is full of inspiration one hope and sometimes you write wonderfully PSR.
Thank you both and merry Christmas to everyone who gets this
And to you
Thanks Geoff – Merry Christmas to you.
My postman came around this morning in the rain dressed as a Xmas pixie.
He is paid less than me, and his pension as a result of privatisation will no doubt be shite – off he went into the rain whistling a Christmas carol after I’d wished him a cool yule.
He and many others deserves better Government than what he has got. Curse them!
Here’s to 2021 BC (BREXIT COVID).
Do the majority of voters understand the origins of the monetary system they use?
No.
In particular do they understand why modern day private sector banks exist?
No.
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2724108
Does this majority have any experience of a bank that doesn’t want to redeem or retire all the money that it creates by way of loan?
No.
This majority may vote but they don’t much think about what they’re voting for. How therefore can you claim to be a political party interested in the welfare of all and not educate your membership and then voters how modern day monetary systems really work?
You can’t!
Agreed.
Especially when they also say ‘We can’t afford to help!’.
It’s a lie.
“Whatever the Office for National Statistics like to claim, money you owe yourself is not debt…..”
True.
“…..and so quantitative easing cancels about £800 billion of UK national debt right now. ”
But does it really? At least in principle, the Government could buy back all its issued gilts and other bonds which are counted as National Debt. So if it did that would it mean that there was no longer any National Debt?
Stephanie Kelton, and I think yourself from time to time, makes the point that Government’s debts are everyone else’s assets. So if there were no Govt debt, in the form of gilts and other bonds, would it mean that no-one else had any assets?
No it wouldn’t. Our assets would still be in the pounds that we had received from the sale of our gilts and our Premium bonds. So it must be that pounds are Govt Debt too. It’s just that we don’t normally think of them as debt, or IOUs, but we should.
There would be money
Then read the rest of the thread…..
How is base money debt
The concept of the sectoral balances is central plank of MMT.
But you have to include the creation of money , base money if you like, otherwise the sectoral balances don’t balance. And there has, as always, to be a double entry, with the inclusion of a negative sign for the liability of the currency issuer.
I know all about sectoral balances
And double entry – the thread refers to it
And CBRAs are money – and so private wealth
Can you say what you’re arguing?
I must admit I have not quite finished this latest ‘doorstopper’ sized Tweet, if you will excuse the oxymoron, and I confess my own lax application of effort here.
Neverthless, on an interim basis, I do surmise that one possible implication of the analysis you have generally undertaken on this matter recently, is this: rather than the appropriate institutions that require the close, critical, independent scrutiny for suspected inherent redundancy being the central banks (see recent posts); perhaps the real redundant institutions in banking are the high street clearing-banks themselves. To extend that speculative thought, if I may; perhaps the inability to see their underlying, implicit redundancy is a function of the framework of integrated, conglomerate banks that were spawned by Big Bang here and the end of Glass-Steagall in the US, from around the Reagan-Thatcher period?
What then, hypothetically should be done about it? Is this an ‘elephant in the room’ question? There are other ways to do this than simply allowing the clearing banks special privileges like nobody anywhere, in any form of business currently possesses (outside the Chumocracy of course); that is, provided with privileged status; ‘too big to fail’; special permission to destroy the whole banking system at will, not once, as in the Crash; but whenever, dependent only on the regulator (no great track record there in Britian, I’m afraid). The High Street banks possess what I would term ‘double indemnity’; they can do it again with impunity. They are therefore not really representatives of competitive market capitalism at all, but rather a form of privatised, parasitic, nationally-licensed monopolists. They are neither fish nor fowl. A special exception that nobody seems to notice, because they are everywhere.
You make an excellent point
I suspect Helen will; have something to say
Personally I have always known that what I might call the real business sector has always had two dislikes. One is tax and the other its bankers, and of the two bankers usually were much the most disliked. There was reason for that….
You hit an appropriate question then
Indeed the ‘double indemnity’ is itself twofold. The Government guarantee protects the banks as institutions, and also the individual saver in the banks (up to £85,000).
Yes
@ Richard,
“Can you say what you’re arguing?”
It’s that money is an IOU and therefore is just another form of government debt. And, that QE is an asset swap so doesn’t reduce debt.
Say we had a country which started a new currency. The government would issue say 100 million units into its economy and get back 80 million in tax. To keep it simple we’ll assume the economy is closed.
Government deficit/debt is 20 million. Domestic Assets = 20 million of cash
Say the government issued 10 million of bonds which it sold to the private sector. That doesn’t change anything.
We still have:
Government deficit/debt is 20 million. Domestic Assets = 10 million of cash + 10 million of bonds
And say then it used its central bank to buy back 5 million of bonds in a QE operation. That still doesn’t change anything.
Government deficit/debt is 20 million. Domestic Assets = 15 million of cash + 5 million of bonds
I disagree
A gilt is not the same as money – even if close to it
And a gilt can be repaid but how is base money repaid, except. by government choice – so how then is it an IOU?
I know all about that MMT argument and I get the principle but gilts do have a role in the economy – and I know some in MMT deny this – and money has a different one
And whilst gilts behave as if debt even though they are savings accounts but base money does not behave like debt. It behaves like money. And there’s nothing quite like it.
Pretending they’re the same also plays into the hands of the debt fetishists. Why do that?
PeterM,
In your response to Richard (20th Dec., 11.32am): “Can you say what you’re arguing?” (sorry, this is becoming Byzantine to follow all the issues here, but this is really interesting). You argue ‘nothing has changed’ with QE, but elsewhere (the whimsical ‘sugar’ stratagem) you say, “I can’t borrow that IOU back though. That wouldn’t make any sense. I can, though, exchange it for another IOU which promised to pay you back with more sugar than I borrowed in the first place”.
If you are paying back more, can you show the consolidation of double-entries that somehow eliminates the apparent increase in price being paid; i.e you are buying 5m by offering more than 5m presumably?
Richard,
The Garreth Rule paper is copyright, 2015. Rule refers to sources in 2011. I think he provides a really interesting analysis; not least he grasps that double-entry is a significant factor. I am still trying to absorb his paper and your Twitter-doorstopper; as well as Desan, Graeber; and then reconcile it all with Kelton, Wray et al. There is a lot to digest. I am not trying to present answers, ‘the last word’ on anything; but to advocate exploration of perhaps illuminating themes for further development of our understanding.
May I suggest that it would be invaluable if you had an avenue to open a dialogue between you and Garreth Rule.
That would be fun…
Apologies re confusion – but I specifically tried to bear that paper in mind
I think the BoE is ahead of the rest of the government on this – but not, maybe, at the upper echelon, although that might be politics in play
My thread is nit wholly MMT compliant – not because I am seeking to be provocative at all: I bit MMT but I am also seeking its reco0niciuliatuoin with where we are
It’s not an abstract theory. There have to be pathways to its use and the understanding I am seeking to develop is about that
If you want to write things as blog posts – tell me
Thatis open to others too
@ Richard,
I appreciate that it would be politically convenient to adopt the debt-free money argument. But as Randall Wray puts it:
“Our system is a state money system. Our currency is government’s liability, an IOU that is redeemable for tax obligations and other payments to the state.”
http://neweconomicperspectives.org/2014/06/modern-money-theory-basics.html
The answer is in the title to this post. It’s a debt (liability is a better word) we don’t need to repay. I’d go further and say it’s impossible to repay.
And I’m still unclear how the sectoral balances can possibly balance if you don’t count issued money as an IOU of the State -complete with the liability associated with it.
@ John S Warren,
The interest on most govt bonds is ultra small and in some cases is even negative. But, it’s true that when bonds are sold at auction the sale price doesn’t exactly equal the redemption price. But that’s a matter for future years accounting.
The only reason that bonds/gilts might not be exactly equivalent to money is due to the inconvenience of having to calculate exactly what they are worth at any one particular time. Theoretically the Govt could issue £1 perpetual bonds ( or multiples of £1) that they would always accept in payment of taxes. That’s what Bradbury pounds were which were issued during WW1. So they’d be functionally equivalent to pounds issued by the BoE. Now that the BoE is nationalised there is no need to do that.
I never said it is not a theoretical debt – because it is
I never said tax could not clear it, because I did
But I said it’s also not repayable expect with itself and only at government choice and to then pretend it is like other IOUs is also wrong – because it is not
You are suggesting I said things I did not
What I have said is wholly compatible with what Randy Wray said – but I am making it clear that the role of the government in this makes it an IOU unlike any other
And that point is really pretty fundamental, and beyond dispute
I don’t think MMT disagrees in many way – Stephanie makes it very clear in The Deficit Myth that base and commercial money are different
I am really not sure what point you are still trying to make
PeterM,
“… it’s true that when bonds are sold at auction the sale price doesn’t exactly equal the redemption price. But that’s a matter for future years accounting.” I am honestly not sure if that is an answer or an evasion, but I am genuinely not here to score points. My point was rather that with QE there presumably has to be a price inducement for people to sell the gilts (at least compared with their current position); in the case of pension funds or similar, who are probably reluctant sellers; unless I have misunderstood you (this thread is becoming so maze-like and multivariant I would almost be surprised if I hadn’t)?
On repurchase sale price never equals redemption price
But actually selling at nominal value is also rare now
As a highly placed official told me recently, every bond sale now reduces the national debt
@ Richard,
I hope I’m not misrepresenting what anyone said. The problem, in many ways, is the English language itself which is fine for describing the kinds of debts we are familiar with. We know that when we borrow we create debts which in turn have to be repaid. But they don’t have to be repaid when it comes to the currency issuer. It might help to just consider that everything has to sum to zero and that debt is a negative number. So it must follow that only Govt has the ability to assume the liability of the negative numbers so that everyone else can hold positive numbers.
Maybe we have ground our way to some sort of agreement if you’re saying that money is an IOU albeit not one that is like any any other. And that’s true for all Govt debts and liabilities.
MMT has always had this problem of language. The neoliberals have it easy when they try to peddle their easy-to-understand but erroneous message.
We seem to have got there
“Our assets would still be in the pounds that we had received from the sale of our gilts and our Premium bonds.”
The question I ask about that ‘thought experiment’ is, what would you do with the money? I submit that you would look for a safe asset (see ‘safe asset’ theory). In addition the new convention created by government is that everyone who had safe savings now has ‘money’ (as cash). Most of that money will now look for the safest asset possible. The safest asset is that guaranteed by the sovereign issuer of the currency (issuer of last resort) who held the savings, before they were turned into cash. Eh, hang on; in other words, we are going round in a circle …. are we not?
The point I was making….
No we aren’t going around in circles. The confusion arises because of terms like debt and borrowing which we understand well enough in our own personal context but not in the context of a currency issuer.
Richard says in the video in the link (see about the 3.40 mark)
“Actually when I say “Borrowing” here I don’t really mean borrow because the government can’t really borrow what it has created”.
Right.
I’d put it that no-one can borrow their own IOUs. If you lend me a bag of sugar I can give you an IOU for that bag of sugar. I can’t borrow that IOU back though. That wouldn’t make any sense. I can, though, exchange it for another IOU which promised to pay you back with more sugar than I borrowed in the first place
https://www.taxresearch.org.uk/Blog/2020/07/17/todays-video-modern-monetary-theory/
Hence my discussion of base money
And questions on its non repayability bar by bizarre government choice
To PeterM,
I do not think that is quite right as an explanation; but happy to be corrected. Allow me to expand. Where do I put the bag of sugar, safely? You forget that there is a mobile transactional benefit in cash, but that the donside is, I can lose it. The IOU from the currency issuer is actually worth a great deal because I do not have all the problems of storing the asset safely; I have a guarantee from the lender of last resort.
The issue you leave out of account, I think is the legal power of ‘safe assets’, the nuanced differences that the law turns into significant differences between money in its different forms; to say nothing of the psychological ramifications of these same differences. That is why Desan and Graeber are so important in exploring the history of money, or of law and money in understanding ist elusive, dynamic nature (the extraordinary impact on money and economic activity of notes over coin, of cheques over notes, or now of electronic, instant account transactions, over paper).
May I develop my point (although nobody seems interested!)? I rely on Garreth Rule ‘Understanding the central bank balance sheet’; Centre for Central Banking Studies, BofE (2015).
“…. reserves are overnight balances that banks hold in an account at the central bank. As such, they are a claim on the central bank. Together with banknotes, reserves are the most liquid, risk-free asset in the economy.” (Clews, Salmon and Weeken (2010); reference in Rule, p.10).
Currently in central banking there are “five potential roles for reserve requirements: monetary policy purposes, liquidity management purposes, structural liquidity purposes, central bank revenue purposes and sectorial behaviour purposes.” (Bindseil (2004a); reference in Rule, p.13)
CBR’s are thus different from banknotes, and in very critical ways:
“One of the biggest misconceptions is the idea that commercial banks in aggregate can choose between reserves and other assets. This supposes that the total amount of reserves being held at the central bank at any point is directly controlled by commercial bank decisions. While it is true that an individual commercial bank is free to choose between reserves and other assets, at the system-wide level the quantity of reserves is determined by accounting identities on the central bank’s balance sheet.” And: “Even when commercial banks increase their lending they cannot reduce the total amount of reserves in the system”. (Rule, p.10-11).
This is surely quite different in its real implications, from money as mobile cash. In addition, Rule writes this:
“A further misconception surrounding reserves is that commercial banks require reserves to lend. As noted above the process of creating a new loan by a commercial bank does not immediately impact on the reserve quantity or distribution of reserves in the system. When the freshly created deposit is transferred between commercial banks then reserves need to move in return, again however, this simply reflects a credit and debit of different commercial bank reserve accounts.(1) However, if for any of the reasons discussed below the central bank imposes reserve requirements, and there are no free reserves in the system, then the additional lending by commercial banks requires a higher level of reserves to be held at the system wide level.
This creates the impression that the central bank can influence the level of lending in the economy by rationing the provision of reserves, ie commercial banks must obtain reserves from the central bank before lending. This explanation supports the traditional money multiplier explanation of monetary policy, where the central bank implements monetary policy by varying the quantity of money. In reality as discussed above such an idea both significantly oversimplifies the role of commercial banks in money creation and confuses the causality between narrow and broad monetary aggregates.
As noted by Gray (2011), of the central banks around the world that impose reserve requirements, 80% of them impose them in a lagged manner. This means that current reserve requirements are imposed on lending measured in a previous period. Were the money multiplier process discussed above to hold then under a lagged reserve system new credit creation appears impossible. In addition the frameworks used by many central banks, to achieve their policy goals require that their supply of reserves must meet the exogenous short-term demand. Therefore commercial banks can assume that the central bank will ensure sufficient reserves are available to ensure that in aggregate they can meet reserve requirements. Any observation of a stable money multiplier relationship between narrow and broad money actually reflects the reverse causality. Broad money adjusts in line with economic activity while narrow money is subsequently adjusted by the central bank to meet imposed requirements.
More fundamentally the money multiplier treats the banking system as a black box through which loans are made in a mechanical way constrained only be central bank provision of reserves. In reality commercial banks and their role in credit creation is far more complex than this. While many things determine commercial bank lending, availability of reserves is unlikely to be one of them. In fact as shown by Martin, McAndrews and Skeie (2013) if the central bank is able to control conditions in the interbank market then commercial banks’ lending decisions are independent of the quantity of reserves they are holding. Commercial banks ultimately will lend if it is profitable for them to do so.” (Rule, p.11-12).
These remarks are offered by way of exploration only.
Rule’s paper is here:
https://www.bankofengland.co.uk/-/media/boe/files/ccbs/resources/understanding-the-central-bank-balance-sheet
What I wrote in my thread was wholly consistent with the first half of this – I hope. My comparison with cash was deliberately limited – and differences were highlighted I hope. I have read that paper, bu the way.
I think the second half of your note and the content of that paper is superseded by the 2014 papers on money and modern banking: this 2005 paper paved the way for them.
I agree entirely about the independence of commercial bank lending decisions and CBRAs.
But my understanding is that this paper is 2015.
Which paper? I thought the balance sheet one was 2005? Am I wrong…if so, apologies…faulty memory
I still think 2014 the dominant paper on the second theme
Thank you for that tour de force.
Thanks
Its going to take me a while to digest all this, but it all looks very tightly argued. Thank you Richard for doing all the heavy lifting needed to produce it.
That took a week of writing, on and off
Great post, Richard.
But has a typo crept in at about half-way through when you say:
“Austerity cuts the flow of government created money into the economy. The impact is much the same as a tax cut. Demand in the economy is reduced. So employment falls, and so does tax revenue. But austerity is like a very targeted tax cut. And it hits the least well off hardest.”
Where you say “tax cut” here should this be “tax increase”?
Annoying. Will change!
Richard. Thank you. It is a difficult one to follow and I will re-read, especially the parts on central bank reserves.
Interesting that we don’t normally think of National Savings as either debt or money. It looks like a good policy instrument for a new the Scottish government to explore- citizen’s bonds or a nationalised lottery ( as a voluntary tax) with no intermediary.
I believe that standard MMT narratives speak of the National debt as a means of controlling the overnight banking rates. So debt performs this as a utility.
How do we use Central banking as a way of controlling speculative attacks on a currency without foreign exchange reserves?
I do not pretend this one is easy – it is not
That is one reason why there is a fair amount of repetition
And this is not pure MMT – it is a discussion of a current practical variation on it to address where we actually are
I am well aware MMT purists will but like all I have said but my argument is we have to start where we are
Here is the text of Michael Burry’s 2010 Op-Ed for the New York Times (which can’t be easily accessed because of the NYT pay wall) concerning the causes of the 2007/2008 Great Financial Crash:-
https://blogs.lawrence.edu/economics/2010/04/michael_burry_saw_the_financia.html
It is not too hard to discern that Rishi Sunak’s and Andrew Bailey’s desire to balance the government’s books as soon as possible is of the same magnitude of financial and economic ignorance as Henry Paulson’s and Alan Greenspan’s.
It should now be obvious the FIRE sector is engaged in creating repeating cycles of both inflation and deflation if they can get away with it. House price inflation upto the 2007/2008 GFC and now balancing the government’s books in the immediate aftermath of the Covid crisis. The freezing of public sector wages is the start. You’d think anti-slavery legislation would have some bearing here but voters appear to be supine.
Just to be clear – I don’t come here thinking that you are always right Richard.
That would be unfair on you but also ignore the grey areas where some of the answers or ways forward actually exist.
What I come here for the is the quality of the questions posed – seldom are they asked elsewhere. And they should be but they’re all in on it – the banks, economists and the rich.
Given the fact that the orthodoxy we have lived under for so long has now lived beyond its practical use for the majority of mankind and the planet, we need to find a way out of this ‘Groundhog day economics’ we are in.
As I said – keep ploughing on.
Wholly understood
And I am not always right
But I get annoyed about being told I am not when I know I am 🙂
@ John S Warren,
You don’t have to do anything with real sugar. The commodity trading market is largely about taking a position on future prices and being able to deliver if requested. But that’s nearly always just a question of paying someone else to make the delivery. So the futures trading market in sugar, or cocoa, or whatever, doesn’t require anyone to store the actual commodity.
reducing this to its essentials, I submit that merely relies on taking someone else’s IOU. That IOU does not have equal ‘safe asset’ value as that of the currency issuer. In addition, remember we are not really talking about commodities with ‘alternate use’ value to their transactional and measurement value as different forms of money; we are really talking about cash v. government IOU.
[…] answer is quite simple, and that is that this has the greatest impact. Yesterday's thread has had this Twitter impact, so […]
“I believe that standard MMT narratives speak of the National debt as a means of controlling the overnight banking rates. So debt performs this as a utility.”
No. Short term rates are simply determined a decision of someone either in Govt or the Central bank. Same thing really! At the moment they are 0.1% pa in the UK.
The MMT narrative about National Debt is as Richard describes it. It’s a willingness to ‘borrow’ what both the Domestic Private Sector and Overseas sectors wish to save. Or lend.
Hmmmm….
I agree both claims
Short term rates are decided by government / central bankers. But the means to control the rate are the CBRA balances. These do not vary at commercial bank choice: they are in effect fixed for the reasons I note and so are not as such savings decisions by the commercial banks. Buty they totally dominate the rate market and as such have a massive influence, just as QE does longer term rates
Few seem to get how much this has changed since 2008
I do therefore think you’re both right – for differing reasons
Hi Richard thank you for your work this is another invaluable blog and twitter post.
Please forgive me if I am asking a stupid question but re.
“A significant chunk of gilts – around £400bn or so – are owned by foreign governments. That’s because they want to own sterling, and this is how they do it. They see gilts as being as good as money. There is good reason for that. Gilts really are the next best thing to money.”
our government must also own a significant chunk of foreign gilts, maybe in excess of (equiv) £400b, how do they account for this? is it offset somewhere as a perpetual asset?
We own much less – that’s the advantage of being a reserve currency – and it is accounted for within the national debt as an offset
I will address this when my eventual research paper on this comes out….when being the operative word right now. It’s easier writing tweets….
Wow. Thanks.
My instant take away is the vital realisation of the difference between ‘Base’ and ‘Commercial’ Magic Money Trees.
I renemver when the QE whiz was invented and the media personalities (supposedly expert journos like Peston) were charged with selling the concept of it as a solution to the GFC whilst instilling the need for politically motivated Austerity (to create the unhappiness that would sell Btexshit).
For some reason I had the scene from Disney’s Fantasia suddenly pop into my head – A cautionary tale rebuke by the wizards, to keep us Mickey Mouses from even thinking about playing with Their Magic!
I’ll need to unpack that a bit more over the days.
As someone guilty of having gained unfairly through the Pension contributions rebate at the higher rates back in the noughties and even more unfairly through tax free ISA returns (I have withdrawn all that I had put in and still have more than that amount in) it is an unfair place when my friends and families real wages haven’t gone up and their pittance of a minimum wage is taxed turning a £120 gross into £100 net in a Gig economy.
So yes you can’t really do much about the nominal quadrupling if my house value, or the equally QE inflated shares.
But you can tax my ISA on the returns drawn above the investment I put in.
You can stop rebating taxes above the basic rate into pension contributions and limit it to a max amount per year.
It may mean that my ability to have lovely foreign holidays and buy luxuries sych as an upgraded car or whotefoods or designer footwear and expensive restaurant meals etc is curtailed as the Government Base Money is thereby ‘reduced’ without inflicting more paib on these who the government is there to provide for.
An Excellent and Thought Provoking read Thankyou Professor – More Please.
There will be more…
It is important for everyone interested in govt money matters to understand how our money system works. Well done for taking the time in trying to educate on this. It really isn’t a political issue to try to do this at all. What you are doing it is doing is explaining a system so everyone can get the gist of how it all fits together. This does have the benefit that often murky and intertwined issues can be grasped better and a certain amount of smoke removed from the battlefield.
That we can get past worrying about the size of the national debt would be a great start. Increases in national debt in time of need is nothing to be feared. It is thus totally unlike private or household debt, though even private debt can be a useful thing, Eg I can buy things I haven’t got the money to purchase now or I can set up a business that will create wealth for myself(and the wider economy) in future. Private debt has its limits in that too much can be a bad thing ,the same cannot be applied to public debt. (inflation issues aside). As long as money is needed in an economy it should be created by the state. In a recession or crisis only the govt itself can do this, as the only other money creators(the banks) stop creating money when lending rates fall. The only actor left standing on money creation is then is the govt. Without money in circulation, we all suffer.
I find it helps to see that our entire money system is actually made up of 3 different types of money.
1. Notes and coins(created by the BoE and is also a type 3 money in physical form)
2. Bank deposits .(money “held” on account in our banks)
3 Reserves or base money.(held only on paper/
electronically by banks)
It is useful to understand that we as individuals never use type 3 money. Type 3 money is exclusively for banks use. The banks initially use or “surrender” shareholder money(existing as reserves) to lodge at the BoE. They then get a bank license(which they have effectively bought with their own money) which enables them to go on to create bank money(type 2) which they then lend to us. The BoE has no direct control on the amount of type 2 money created(other than currently setting interest rates). The crucial issue here is that the type 3 money normally stays the same throughout the process(without any QE). So banks can then actually increase the total money supply by lending more their own version of type 2 money(which they do in the good times). Of course in the bas times bank lending decreased and type 2 money in existence goes down with it. The amount of type 3 money however still remains constant and is why the banks cannot affect the amount of type 3 money in existence, as that is only controlled by the BoE.
It is also beneficial to understand that bank reserves or base money is actually only a set of bank savings lodged with the BoE. It is a totally separate circuit from type 2 money. The two cycles of money never touch. The BoE uses the reserve system to act as a banker to the banks, which also happens to back the entire payments system. There is one example where we as individuals can hold type 3 money directly, that is if we lodge money at the NS&I, this is the only way we can actually have reserve money directly on account. Otherwise we just hold bank deposit money(type 2) which is only cashed in or settled/moved by our banks when we wish make payments, but the banks can only use their reserve accounts(type 3 money) to accomplish that on our behalf.
The BoE can and have increased type 3 money of late via QE ,which just means the banks now hold more type 3 money on account at the BoE. Because of the way the system works this also actually increases type 2 money by the exact same amount. These are still just promises to pay by your bank, what actually changes is the amount of type 3 money backing it. The state has in effect increased the money supply by increasing type 3 money, a job the banks normally do themselves by creating and lending out more type 2 money. This has been done because the govt increased its deficit without borrowing from the private sector, i.e taking existing reserves from private investors. This incidentally does make life a tad easier for the banks as now they will seldom run out of reserves on account at the BoE and are less likely to have to borrow reserves from other banks if they happen to have a bad day and run out of reserves ,which is the only type of money they can settle with other banks in, as no bank will take type 2 money in exchange for interbank settlements.
This may (or may not!) help some understand that reserve/base money is in fact very useful as the base for our money system. It can also be created and destroyed at will. This goes against all our instincts that money has to be earned first, this is not the case for the state. The state has a sovereign ability to create and destroy money as it wishes. That is nothing to be feared, it is as you say to be celebrated. So let us use this power to better effect.
I am not convinced banks lodged money to get. licence – but I am open to being corrected
Richard,
It’s just the initial capital that all bank owners have to lodge at the BoE to part cover the deposits they will be accepting, they are in effect buying the right to become a bank (as well as passing a fit and proper persons assessment). They have to deposit a certain amount of reserves at the central bank to start up their bank, which does of course change over the years, otherwise the BoE would not let them have their banking license.
Accepted, but that’s a tiny part of CBRAs now
That is the problem with our banks though….they do not hold enough reserves (capital). They will in general hold a little as they can possibly get away with and even then whine like hell about having to carry any!
This QE round has ensured this won’t be a problem for the banks as the reserves are now so abundant. The other problem we have is that they are struggling to lend. So the govt as even has to step in there too 100 % guarantee the loans they are making as well as flooding banks with reserves, very nice for the banks!
@ John S Warren
I would refer you to one of Christine Desan’s central arguments that the creation of money as a medium of exchange is constantly in the throes of redesign. So she sees the creation of the Bank of England as not merely resolving the problem of specie money disappearing as a medium of exchange to be melted down for its higher market value through Parliamentary permission to issue bank notes but this decentralised the creation of the country’s medium of exchange. She argues that this sharing of the medium of exchange creation is positive because private banks are in a better position to evaluate the viability of investment proposals and I think though I don’t recall her saying it anywhere but Randall Wray I’m sure says it somewhere it stops rich individuals even governments monopolising lending power and using it for unaccountable ends.
On the issue of regulating money creation powers I think there’s a big redesign discussion to be had. I tracked down the Op-Ed text (behind the New York Times firewall) of Michael Burry who shorted the market in the run-up to the Great Financial Crash because he realised Alan Greenspan (Federal Reserve governor for years) and “Hank” Poulson US Treasury Secretary weren’t doing their job and wanted to tell his story. Here it is:-
https://blogs.lawrence.edu/economics/2010/04/michael_burry_saw_the_financia.html
Clearly there is a money redesign issue here revolving around “accountability” that is actually quite complex. But it can be argued the FIRE sector now knows it can not only engage in both inflating the value of assets till the bubble bursts and get bailed out by government but persuade Treasury secretaries of governors of central banks to deflate economies through austerity policies on the basis of professing the country’s government needs to balance its books. This of course means assets can be picked up cheaply by the FIRE sector and then move on to inflating asset bubbles again. This I think is largely a Michael Hudson argument.
When I say it’s complex it’s how can you have democratic accountability of the FIRE sector when most voters are unaware of money’s historic design evolution and therefore unable to discriminate between the policies of political parties on their country’s currency creation. Personally my natural support would go to the Labour Party but it has been persistently oblivious, virtually since its establishment, to how the UK should best create its currency. Here’s Philip Snowden a supposed Christian Socialist and former Labour Party administration Chancellor of the Exchequer advising Churchill to go back on the Gold Standard in 1925:-
https://spartacus-educational.com/Gold_Standard.htm
https://spartacus-educational.com/REsnowden.htm
Scary
And apologies – I held back the earlier post to read the link
Mz Schofield,
Thanks for that. There is suddenly so much of an impetus, so much fresh thinking to reflect on and look for cross-fertilisation; from history, law, anthropology, accounting – with economics trailing in some way behind. Desan seems to me to approach this from a particularly illuminating angle from her mixture of law and history. I am waiting for delivery of her definitive work.
So much for us all to reflect on, from Richard’s Tweet-fest blog to Desan and Rule; thank you for bringing Desan to all our attention here; a masterstroke of sourcing if I may say, and a wonderful endorsement of the special, civilised forum for debate Richard works so hard to provide.
May I take this opportunity (early, but lest it becomes lost in the days ahead) to wish you (and yours) and all commenters and readers here a happy Christmas; or as happy and as it can be in these difficult times – and if you allow me, especially to Richard, our guiding host who makes it possible.
Thanks John
These exchanges make all this effort worthwhile – I appreciate them
Thanks for your contribution
“Whatever the Office for National Statistics like to claim, money you owe yourself is not debt, and so quantitative easing cancels about £800 billion of UK national debt right now. There are other mistakes in their numbers, but I’ll just stick with this one for the moment.”
I think the people at the ONS believe the above because they think the Bank of England is like any other private sector bank which has to balance its books. It’s not it’s part of the governance project to “impose” the country’s currency, it’s unit of account. This confusion together with the foolish belief the BoE can be independent and accountable means for me the BoE needs disbanding and absorbing into the Treasury Department. This at least offers the possibility of clearer understanding of the government’s role in creating currency as a governance project and greater democratic accountability. I’m sure market fundamentalist, or Libertarians, will argue the BoE plays a useful balancing role between unaccountable government power and the private sector but I don’t currently buy this!
Not do I….we are in full agreement
@ Helen,
I would say the BoE are right but for the wrong stated reasons. I would say there are enough bright minds at the BoE to understand the true reasons. It all hinges on whether we can consider money to be issued debt free or whether we should consider it an I.O.U. and hence the liability of the issuer , albeit and as Richard puts it, “an IOU unlike any other”.
The problem is neatly illustrated by what the Americans consider to be debt. For historical reasons the coinage isn’t included. So from a MMT prespective it has been suggested that if the neoliberals across the pond are so concerned about National Debt all they need do is create 25 trillion dollar coins and hey presto! No more National Debt. If they make a few extra they can have a National Surplus.
We could do the same trick, and it is nothing more than that, with trillion pound bank notes. They aren’t even a security risk. They would simply be slips of paper that could be cancelled any time in the event they were stolen.
https://en.wikipedia.org/wiki/Trillion-dollar_coin
Bizarrely, the ONS does include coins in the national debt, although you will have to take my word for that. I only know because I asked.
But they do not include notes, but the reasoning is complex, and to come.
@ Richard,
I think I wrote BoE when I meant ONS! But don’t the BoE take the same line too?
Yes, different countries do have different rules about what is counted as National Debt. I discussed the topic with Warren Mosler, quite a few years ago now, and he said that the reason printed money and reserve central bank accounts wasn’t included goes back to the days of the gold standard when it was supposed to be fully backed by gold. Even though it often wasn’t in practice.
So it’s easy enough to ‘get rid’ of the National Debt by playing on one or other of these anomalies. It doesn’t fundamentally change anything , of course.
So why worry about it, except for the reasons I have noted that money is a very special form of IOU
Another excellent and thought-provoking/-clarifying piece of work. I’ll be sharing this with my children so that they can be better-informed about economic matters which impinge so powerfully on the economy, on political thinking/ideology/policy and by extension on everybody’s lives. With an understanding of these topics, they’ll be better equipped to use their votes sensibly and, in time, pass on to their own children this understanding, so thank you for your herculean efforts.
It’s also comforting to realise it all comes down to bookkeeping in the end and that T-accounts, as all accountants know, truly are the gateway to understanding. However, a big problem in getting your message across to a wider audience is that a huge swathe of the populace have no knowledge of or interest in bookkeeping and I suspect they never will.
I agree.. and yet it is vital
Have a good Christma Ken. Maybe I will get to Scotland next year
BBC breathlessly reporting the ONS saying public borrowing was £31.6bn in November, the highest November figure on record. And public sector net debt of £2.1 trillion, or 99.5% of GDP, the highest debt since 1962. https://www.bbc.co.uk/news/business-55408444
Softening us up for Sunak’s austerity budget next year.
The national debt has increased most years since it was first created. Why should that change now?
Spot on. I nicked the last sentence and put it in a tweet.