I posted this thread on Twitter not long ago:
Labour has announced that it would promote a Recovery Bond right now if it was in office. It's a policy I wholeheartedly support. In this thread I explain why it's a good policy for the UK right now.
After ten years of Tory government the UK's in a poor economic place. Ignore Brexit and it's still underinvested, its infrastructure is poor, its social housing stock too limited. Its banks are dependent on quantitative easing for their survival, and almost failed in 2008 and 2020
On top of that QE has, whilst successfully funding government and keeping inflation low, forced savings into speculative activity like the stock exchange, which keeps the City happy but very rarely ever funds a new job. The result is an over valued market that could topple.
There's another dangerous aspect to that savings bubble. It represents the growth of ever greater inequality in the UK that is going to be crushing for generations to come.
What is needed are four things. First is new capital for investment. Second is a Green New Deal. Third is safe savings. Fourth is better use for government subsidies to savers of about £60bn a year now. The Recovery Bond could address all these.
ISAs collect more than £70bn in savings a year. Pensions do more than £100bn. The total tax subsidy may be £60bn a year. Now offer a Recovery Bond, guaranteed by the government. Make them the only thing available in ISAs. Offer them in pensions. Up to £100bn could be raised a year.
Offer 1% and that will happen. And to all those yelling ‘that will cost £1bn extra year' I don't hear complaints about the current £60bn subsidy to free market savings now, so I don't get the issue.
What I do know is that this money could get directed to new housing, green infrastructure, new transport systems and better local power generation. Literally, Jobs in Every Constituency of the UK. Nothing else can do that.
And although government could fund this, it won't because its worried about inflation from borrowing, rightly or wrongly.
The Recovery Bond does something unknown in the UK for decades. It will link savings directly to investment. And savers will need to be told what they're funding. There's a massive social gain from this.
There is another win. That is to inter-generational solidarity. Savers are usually older. New jobs are usually required by the young. This plan would link the two with a single aim.
And there is another win too. Drawing money out of an over-heated stock market will stabilise it and reduce the risk of a crash.
But let's not forget the environmental gain too: we need the money to deliver a Green New Deal. This type of hypothecated bond could do that.
Of course it will pay interest rates over the odds. So the amount anyone can save may need to be restricted. And we may want to limit the bond to people living in the UK, but ISAs do that already anyway.
But the point is the Recovery Bond does at a moderate interest cost put tax subsidies to social use, provide a safe place for savers, pay an attractive interest rate, create jobs, and build a Green New Deal.
What baffles me is why the Left are objecting because they think it might increase interest costs a little. That's price well worth paying for the social, capital this bond will create, plus all the other gains.
I welcome this proposal. It is Labour delivering joined-up thinking at very low cost that can transform millions of lives. That's got to be good news.
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As I’ve said previously I’m still trying to work out what MMT is all about. On the one hand I’m hearing an argument that there is no need to pay any interest at all on money borrowed by Government. The BoE can supply that for free. On the other you are saying that it would be a good thing if Govt paid 1% on “recovery bonds”.
The justification is that extra money could get directed to the kinds of worthy projects mentioned in your article. But the MMT line is that government spending should be constrained by neither the bond market nor taxation revenue.
Having said that I would be happy to shift some savings out of accounts into recovery bonds which pay out virtually nothing! 1% is definitely an improvement!
What I think MMT is all about is summarised in points 1 to 7 in this
https://www.taxresearch.org.uk/Blog/2018/11/09/modern-monetary-theorists-need-to-take-a-long-and-hard-look-at-how-they-are-campaigning-if-their-case-is-to-be-won/
MMT explains what happens
I think it enables a range of socially useful policies not otherwise possible
But I also think some who support MMT talk nonsense
For example, they say we don’t need government bonds. We don’t if we also want to abolish banking as we know it/ Oh, and pensions too. Plus foreign exchange holdings. So that is just nonsense
And it will be said by the pure MMTers that I will have sold out by promoting these bonds. I deny that. MMT says we can have governments run deficits, as QE does. But government deficits are private savings and if they are into in gilts then they’re in volatile savings media. I see no advantage to that at all – so I am coming up with a different option
Remember pure economics rarely provides an answer to anything. Politcal economy can. I do political economy.
“The total tax subsidy may be £60bn a year.”
So how much of that goes to the super rich? If I was earning, say, £500k a year (chance would be a fine thing) exactly how much pension tax relief (subsidy) could I get? Just so your readers can appreciate in numbers how much such a wealthy person could benefit from the subsidy in tax terms.
That was not the point I was making
I was making the point that pension subsidy, which is almost entirely wasted in the FTSE Ponzi scheme, is literally wasted, whoever gets it and so can be better used
Please don’t waste my time with inverted class envy
“that pension subsidy, which is almost entirely wasted in the FTSE Ponzi scheme”
I’m afraid you don’t know what pensions invest in. The most recent review of UK pension investments, undertaken by the EU in 2019 showed that 43% of UK pension investment is in sovereign bonds, the vast majority in UK sovereign bonds. Another 19% is in other fixed interest bonds. 32% is invested in listed securities.
32% is not “entirely” and 43% of pension investment is already with the government which blows a rather large hole in your “new investment ” claims.
That does not match data from other sources, by some way
Pensions are with around £5 trillion in the U.K. At most £400bn is in U.K. gilts. That’s ONS data. I can’t reconcile that with your claim. And I do my research.
My guess is Steve Smith has seen the EU’s report here:
https://ec.europa.eu/finance/docs/policy/191216-insurers-pension-funds-investments-in-equity/pension-funds/factsheet-uk_en.pdf
That looks at occupational pension schemes and reports that:
“From an asset exposure perspective, the pension funds market in the United Kingdom is mostly invested in bonds (debt and other fixed income securities account for 63,0% of total Investments), followed by equities and other variable-yield securities that also constitute a
substantial part of the investments (32,8%).”
Obviously that’s not all pension funds but you say that “At most £400bn is in U.K. gilts” but the EU figures have a figure of 671bn Euro for sovereign debt for just these pension funds, never mind non-occupational schemes. Certainly the EU report doesn’t suggest that occupational schemes are “almost entirely wasted in the FTSE Ponzi scheme”. Perhaps you should do some more research?
So much wrong in this post.
1. “Its banks are dependent on quantitative easing for their survival”
QE is designed to keep rats low. Low rates cost banks money.
2. “On top of that QE has, whilst successfully funding government and keeping inflation low”
Causality the wrong way around here. Inflation has been low which is why QE can be used to reduce nominal rates further. Not the other way around. The idea of having low rates is to allow inflation to move higher.
3. “The total tax subsidy may be £60bn a year”
Not taxing something is not a subsidy. Unless you believe that all income is the governments by default, and the amount they allow you to keep is a subsidy.
4. “Make them the only thing available in ISAs.”
This is a terrifying idea. Proscribed investments. Very authoritarian. Always leads to capital flight and less net investment when it has been tried.
5. “Offer 1% and that will happen”
No it won’t. You would have to be an idiot to invest in a government bond at such rates if you are seeking a return, given inflation expectations being where they are. Which is exactly why the only buyer of bonds at the moment are central banks. Which is I suppose why you are saying you would force people to buy them.
6. “The Recovery Bond does something unknown in the UK for decades. It will link savings directly to investment”
If you had any professional experience of investing, you would know that savings are already linked to investment. Both directly and indirectly. Even the cash in a bank account doesn’t just sit there idly by. Gross fixed capital formation and private sector net investment run at roughly 5% and 4% of GDP respectively. The private sector is by far the biggest source of investment in UK infrastructure. You don’t seem to understand this, or have checked the actual data before pronouncing on the subject.
7. “The Recovery Bond does something unknown in the UK for decades.”
It is just another government bond. Identical to any other Gilt if it has the same covenants. It is not a new idea either. Municipal and infrastructure bonds have been around for decades.
8. “Of course it will pay interest rates over the odds.”
Not sure you understand how bond yields work. The interest rate you talk about is the coupon, but the yield is the real interest rate you will receive. If the yields on Gilts are lower, you will be getting that rate of return not the 1% you are arbitrarily picking out of thin air. You could have said 10% and you’d still get the same yield. Doesn’t matter.
With all the above it’s not exactly a surprise to me that literally nobody is the remotest bit excited about Starmer’s announcement – there is literally nothing new to it. He may as well have said the government will just borrow more to spend more on investment. That’s it.
You then add a layer of nonsense over the top to take it from dull to just stupid.
1. £200bn of QE in March 202 was to save banks.
2. QE has funded the government and has kept inflation low. A fact. It should have increased the rate, but has not.
3. Wrong. Tax relief is a subsidy. It’s not not taxing something. It is subsidising an actriivyt. Get your facts right.
4. If tax relief is to be given anything can be proscribed. Indeed, what’s frightening is that it is given indiscriminately now.
5. There is £225bn on current accounts now and maybe £1 trillion earning 0.5% or less. Those people are not idiots. They do not share your risk appetite.
6. Oh hevean help us, you believe in fractional reserve banking. Which shows how little you know about anything. Even the BoE says that’s nonsense. You have not heard…says it all.
7. No it’s not, for the reasons I gave.
8. This is a cash deposit. You work out the interest rate on a cash deposit account by looking at….the rate.
You got everything wrong
1. No, QE was not aimed at saving banks, Not least because QE does not affect the net statement of their balance sheets. It just swaps bonds for cash, which are both Tier 1 liquid assets. Banks don’t suddenly gain more assets from QE, which is what you are implicitly suggesting.
2. You are totally wrong regarding the causality of inflation and QE. Lowering rates or QE does not reduce inflation. Quite the opposite, it is aimed at raising it. Falling demand and other factors have reduced inflation, and QE and low rate policies target raising the inflation rate. You’d think Professor of economics would understand this.
3. Tax relief is any government program or policy initiative that is designed to reduce the amount of taxes paid by individuals or businesses. It may be a universal tax cut or a targeted program that benefits a specific group of taxpayers or bolsters a particular goal of the government. This is very different to a subsidy.
By your definition any income which isn’t taxed is a subsidy, and by extension all money belongs to the state first before being gifted back to the individual through a “subsidy”.
Your view also makes the assumption that government is better at spending money than the individual, which it has been shown countless times not to be. Such a view would also tend to favour a command economy, which again have been failures whenever tried.
4. Proscribing investments does not lead to more investment. It leads to less. It is a deeply authoritarian move which impinges on basic freedoms. It isn’t a surprise that the only government to have used this policy in recent history was the Apartheid government of South Africa. It is a horrible idea.
5. There are plenty of low yielding cash and cash like assets at the moment. Cash itself has the advantage of liquidity, which your bonds do not. Low yielding bonds are still held as collateral and for interest rate hedging purposes by insurers, but the are not held as investments because they basically yield nothing in nominal terms, or in real terms negative.
Bonds are also inherently risky, thanks to interest rate risk. Which is magnified thanks to such low rates, and don’t have the protection of a natural real rate of return. In risk weighted terms, holding government bonds is just as risky as holding a diversified basket of high quality equities at the moment, but without the return.
6. I never mentioned fractional reserve banking. I did mention the statistics for Gross Fixed Capital Formation and Private Sector net investment. Neither of which has anything to do with fractional reserve banking.
What they show is that the Private sector invests heavily in the UK economy, to the tune of about 9% of GDP every year. Which is far more than government has ever done. Yet you seem to think only government invests and all private investment is speculation.
7. It’s exactly the same as any other government bond. You give no reasons as to why it these new bonds are any different other than general assertions about what they can be used for (so can other government bonds) and things like inter-generational solidarity.
Which matters not a jot in terms of how the bond is priced.
8. “You work out the interest rate on a cash deposit account by looking at….the rate.”
Which rate? Cash rates are overnight. Annualized rate? With or without compounding?
You call it a bond all the way through your post. Now you say it isn’t. It’s a bit worrying you can’t make up your mind on what it is. I assume this is because you don’t understand how pricing of interest rates work. Given you also say that this recovery bond will pay a fixed rate of 1%, which cash does not do, it is more evidence that you are flailing around in a total lack of knowledge and understanding.
It is obvious you are making this up as you go along though. These clearly aren’t cash or cash deposits, they are going to be long dated securities – bonds.
But if they are just cash, to really hammer home the point that you don’t know what you are saying, you will have in effect raised interest rates by 0.9%. The BoE base rate is currently 0.1%, but if you fix “recovery bond” cash at 1% then all cash funds will pile into that instead. Which will lead to the whole bond market re-pricing. Why hold a 10y Gilt at 0.63% yields when you can have cash yielding 1%.
The suggestion is remarkably stupid.
I make just two comments because they reveal your absurdity.
First, we don’t have savings banks. We do have clearing banks and if you are not aware QE has doubled deposits on their balance sheets. You really don’t know your stuff do you?
And your point 8 is equally laughable. If NS&I offers a rate of 1% the rate is 1%. That you don’t understand that proves the nonsense in everything else you wrote.
Please don’t waste my reader’s time again.
Richard,
You say: If NS&I offers a rate of 1% the rate is 1%.
If that is the case, would you rather have interest paid at 1% on a monthly basis, semi-annual basis or annual basis?
I’d also like to ask, if you buy a bond with a coupon of 1% like one of these recovery bonds, and it has say a 10 year maturity, how much money will you lose roughly if bond yields go up by 1%?
I’m interested to see what you think.
APR manages the issues you raise re rates, perfectly well. I suggest you take a look. The rest of us learned to do so a long time ago.
And as I note this morning, you might suggest people are foolish t hold cash, but more than £1.6 trillion is held that way
I really don’t care that you think those people fools: I care that they are respected for what, for them, is the right decision
Well done Richard, it is actually possible that the likes of you repeatedly making a well argued case slowly changes thinking. To some extent the bond idea, but most importantly your point about using money creation for jobs, not to boost assets.
I want to see how it will work before I even smile about it.
Telling people that families have accrued savings during Covid may not appeal to those who are going to food banks and worse.
So come on Keir – keep going – what else is up your sleeve?
I agree, the rest of the cupboard was pretty bare
If I were to add something to the proposal it might be that some measures might be needed to discourage some forms of investment eg Buy to Let, Farmland, Art, vintage cars etc
I am not sure how they might be linked to this bond…
I think some caution should be used whenever the term ‘bond’ is used, as it can have many different meanings. It is used to indicate a fixed term savings account that pays a fixed rate of interest to the saver (and is not transferable). It is also used to indicate gilts which are tradable and whilst they have a nominal rate of interest (‘coupon’), their yield to maturity will vary depending on their current price
If the proposed recovery bond is just a special type of gilt, I cannot see it working. Many savers do no want the additional risks of gilts, and the secondary market would quickly change the price so that the yield to maturity matched other gilts.
There could be some mileage in the former, but there are still a number of issues that would need thinking through:
a) The current best 5 year savings bond offers 1.5%. Admitably this only provides FSCS protection up to £85K, however, in order to be attractive this new bond would need to offer a rate approaching this level. It is difficult to understand why the government (ie us) would want to pay that much more to borrow funds than are already available through gilts (or QE).
b) The money deposited could be ‘invested’ in recovery projects, but what happens at the end of the 5 year period when the saver wants their money back? At best the money could be used to provide medum term loans but that would limit its usefulness.
The reality is that the government could find a range ot cheaper options to achieve the same thing. Savers are poorly served at the moment and it is difficult to find ways to achieve inflation matching returns. Howver, I’m not sure this new bond would really help much unless the saver has more than £85K and it looking for a safe place for their money. I don’t think goverments should be focusing too much time on this group of people.
This is a savings product and nit a gilt
And there is massive reason to pay more than market rates in it
What is harder to justify is £60bn of subsidy to existing savings mechanisms
Please read what I have written before commenting
And repayment, look at ISA trends and please explain the likelihood of there being a risk?
I agree the term bond has a different meaning to me (a bond trader) than it might mean to the general public. But to argue about the precise nature of the instruments offered or, indeed, the exact rates paid is to miss the point.
The key is that it mobilises cash savings from individuals to pay for investment in sorely needed infrastructure. People will be motivated to save by both (i) an “above market” rate and (ii) the fact that the money is going on a project that they wish to support. Whether this is 1% on cash or fixed term savings at (say) 1.5% for 5 years, 1.75% for 10 years and 2.0% for 20 years (with early redemption penalties) can be finessed in due course as we see what savers want.
I hear you on the issue of asset/liability mis-match but it would be odd if future generations had no interest in saving. It is almost certain that, in effect, savings of parents will in the fullness of time be replaced by savings of the children. Besides, if there are any bumps in the road the government is perfectly able to accept this risk (in a way that would not be appropriate for an individual). Indeed, with the longest maturity debt profile of any country in the world, the UK is well placed to offer shorter maturity bonds to individuals.
As usual, I have much sympathy with that
“What is harder to justify is £60bn of subsidy to existing savings mechanisms”
Well, we know it isn’t that amount of ‘subsidy’ because your figure completely ignores the fact that pensions are taxed. Tax relief on the way in, taxed on the way out. You’ve said before that it’s too difficult for you to work out what this amount might be (an odd admission coming from accountant) so you ignore it entirely. But ignoring it entirely is clearly absurd. The government collects significant amounts of tax from pensions. Your figure of £60bn would only be true if NO tax was EVER collected from pensions. Shouldn’t you be honest with your readers and point this out? A statement along the lines of:
“The figure of £60bn ‘subsidy’ ignores the fact that pensions are taxed. I know that they are taxed but have ignored this because I can’t work out how much future tax will be collected from today’s pension contributions. I haven’t even used an estimate. I’ve also completely ignored the fact that billions of pounds of tax is collected today from pensions arising from pension contributions made in the past. I’m just treating the figure as £0.”
The subsidy costs £60bn a year
Fact
It could be ended
Less tax might be paid in the future but maybe bit. If people still saved they would pay tax on sums earned, but nit capital retuned, I agree
If you can tell me the behavioural response I might suggest the tax
But you’d need to tell me this discount rate too and time when paid
You can’t I know
So, my claim stands as the only fact in the room
Thank you for this blog post, Richard. It confirms what had struck me about Labour’s announcement, namely:
“This is a savings product and not a gilt.”
and
“What I do know is that this money could get directed to new housing, green infrastructure, new transport systems and better local power generation. Literally, Jobs in Every Constituency of the UK. Nothing else can do that.” Vitally important for the reasons you state.
And you point out the benefits of linking savings to investment, and inter-generational solidarity.
Would your suggested £100bn be enough to achieve all that, though? Wouldn’t it be necessary for a government to issue at least twice that on top, by similar means to QE, or by issuing fig-leaf gilts purchased by the BoE? Which would surely be the right thing to do.
Good question
The GND could be done for maybe £60bn pa
I’m loving the anonymous multi named troll you seem to have attracted, with his/her own telephone book of names. But the repeated derogatory phraseology kind of gives it away. You have a lot of patience .
If the Government of any shade wanted to spend it’s currency on productive spending into the economy it could do it 24/7 without having to ‘borrow’ anyone’s money. It is ideological chose if it chooses not to.
Promoting ‘Recovery Bonds’ just reinforces the Neo-Liberal narrative that the Government is revenue constrained, operates like a household, has to ‘borrow’ its own money. Credit Card blah blah blah.
Disappointing, Richard.
You have clearly not read my justification
If you don’t like neoliberalism tell me how you would address the inevitable inequality MMT as you suggest it would create within realistic political boundaries and not fantasy land stuff?
And don’t deny it would create inequality – a favourite MMT line is that government deficits create private wealth. They do. So the instability they create has to be addressed, and tax is not part of it, of the planned deficit does not arise.
So go on, do better….