Who is lending to the government?

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The Guardian has a long-running series where a reader asks a question and comments are invited, with the best being published. This weekend the question was:

The chancellor has borrowed an unprecedented amount of money. Who is lending it to him, and where did they get it?
Sean Boyle, London

I had the second reply:

The answer is really very easy. In the last year it has been the BoE. Using quantitative easing the bank has bought, in real terms, almost all the net debt issued by the government to pay for the coronavirus crisis. The crisis has cost £400bn. Quantitative easing might turn out to be a little more or less than that in the past year. So, in other words, the government has borrowed from its own bank. And for the record, it had to do that because as data makes clear, everyone else in the economy has been saving. That’s what happens when most people cut their spending. Saving reduces the money supply by taking money out of circulation. The government had to make good that shortfall to keep the economy going. This is not rocket science, but almost no one in the Treasury and almost no politician seems to understand that this is the case. That lack of understanding is the biggest economic problem that we face. Richard Murphy, Cambridgeshire

Is that completely technically accurate? No. Is it the clearest I thought I could do? Probably. I make clear that there is direct monetary funding (even if the Bank of England denies it). And I make clear this is essential. I also draw out the political dimension - which is the denial that this is possible, which contrasts with the necessity that it happens. I deliberately make clear the link with saving. Perhaps I should have been more explicit that government deficits create private wealth, because they do. I thought I would have only a few words to use - and worked within that.

I am pleased that most answers were well informed. There is one disappointing answer, which is this from those linked with the Gower Initiative for Modern Monetary Studies:

We are the authors of a 200-page study entitled An Accounting Model of the UK Exchequer, which explores how UK government spending works in great depth. In the UK, the Crown, in the form of HM government, asks for money and parliament authorises its issue. Alongside this is an elaborate Wizard of Oz routine involving gilts and Treasury bills that distracts from what is happening behind the curtain. There is a belief among the government and their advisers that exchanging sterling for gilts and Treasury bills (after the spending has already happened) helps support monetary policy in some way. Over-emphasising the importance of what is a largely useless financial instrument swap provides a convenient excuse for government inaction. An excuse that is suddenly forgotten the minute a bank needs bailing out or a pandemic strikes. Andrew Berkeley, Richard Tye and Neil Wilson, London

The second sentence is correct. The third adds to the confusion and the fourth would leave 99.8% of people confused - and so solves nothing. What the 'largely useless financial instrument swap' did do was keep banks solvent. Maybe GIMMS are not interested in that, but ignoring reality does not help. Maybe too they are not interested in suggesting why direct monetary financing of government is worthwhile - which is what I would read from their answer, when they actually support it. MMT really has got to sell itself better than this, because this does not work. An obsession with the mechanics of financial instruments rather than a focus on economic substance will get MMT nowhere.

In contrast, Positive Money had a go at addressing real issues. I can't reproduce another answer here. Follow the link.

It was good to get the answer out there. Good too to see many understanding the reality. But Zimbabwe did appear, of course. There is still work to do, and it would help if those who support MMT took opportunities like this to sell the advantages of the approach rather than snipe.