I posted this Twitter thread this morning as a reaction to the government's desire to take 'non-fiscal steps' to tackle the recession that is now very rapidly developing:
The problem for the government in the developing economic crisis is it doesn't want to take on more debt. But no recession can be solved without the government doing just that. So what is the trade-off? Should it balance its books or ensure people are fed and warm? A thread...
The problem is that due to external pressures the government can't stop the prices of oil and gas and so road fuel and domestic energy and almost all food from rising. Wages are not rising though, and the government does not want them to. So, 5 million or more people face poverty.
These people have no financial margin for error left. They have no savings. Their incomes from wages or benefits are not rising to cover costs. They have too little discretionary spending to cut to cover the cost increase of necessities. Most have rent or mortgages to pay.
These households have only a few bad choices available in that case. They could borrow, but have very limited access to sufficient or affordable credit and limited capacity to repay. Alternatively they could go into mortgage or rent arrears, and so risk losing their homes.
Or they can choose between heating their homes and cooking food, and food itself. As the recession deepens and more and more lose their jobs as discretionary spending falls the number facing these stark choices about poverty will only grow, and maybe by millions.
In a country where there is enough food for all and every house could be kept warm with sufficient fuel for everyone to cook that this situation even exists is an indication of policy failure. We should not be in this position now. But we are.
In the face of this crisis the government is now saying that it will not take on any more debt. The consequence is that it is not planning to spend any more to help those in need. One thing follows from the other. It is disguising that by saying it is looking for 'non-fiscal solutions'.
There are no 'non-fiscal solutions' for a debt crisis that will drive millions of households into poverty, unless starvation is described as such. Presuming that the government is not seeking that outcome (and that is a big assumption) it has no choice as to what to do.
When money is the answer to this problem and households have none, and the private sector will not provide the affected with more or affordable loans, then only the government can solve this problem by making the necessary cash available.
It's not rocket science to say this. Money is either generated by creating new economic surpluses. Or it is reallocated to those who need it through new taxes. Or it is created by private sector lending. Or the government has to create it. Those are the only options available.
In a recession there are no new surpluses to be made. The government is refusing windfall taxes, and they are in any case too small in size and too slow in impact to solve any problem now. The private sector is not going to lend to impoverished people. So the government must act.
The reality is that, as this analysis shows, the choice is simply between people going hungry, or cold, or losing their homes, or the government creating the money required to ensure people are not forced into poverty on a scale we have not witnessed for nearly a century.
And the government can create this money. More than £400 billion was created to tackle Covid, which meant not a penny of the cost of that crisis was paid for by borrowing or taxpayers. It was all paid for with newly created money.
Where is that money now? In the government's accounts it's represented by new deposits held by the commercial banks with the Bank of England. That's it. It is just new money. And why is it with the Bank of England? This needs explanation.
Remember that the Bank of England paid this new money to the commercial banks on behalf of the government in exchange for the promise the commercial banks made to pay it on to those it was due to. That's how payment from the government to people works.
Tax and government borrowing, incidentally, works the other way round. In that case people ask the commercial banks to pay the government, and it flows from those banks to the Bank of England. This is how money moves in and out of the government.
But why does the money end up still being deposited with the Bank of England by the commercial banks in that case? That's because most new money does not leave the commercial banking system. After all, when we're paid it's only if we take out cash that the money leaves a bank.
Most of us are not paid in cash. And even if we are and we then spend cash whoever gets it pays it back into a bank. Just as if we pay someone by bank or card payment all we actually do is move money between bank accounts.
That's how banking works: it's just an accounting system in which money is just a record of debt owing to and from people recorded on bank statements. Money is no more complicated than that.
So, when the government creates new money what it actually does is pay money into the banking system as a whole. Which bank has it may change. And who they use it to pay money too can change. But the new money simply puts more money into banks, which they then hold with the Bank.
Why would a bank hold the money with the Bank of England? Because a) it's the safest place to hold it and b) the accounts on which they hold it are also the accounts that banks also use to pay each other: the Bank of England is the bankers' bank. That's why it's a central bank.
And how much do these extra deposits that the Bank of England created for the government cost a year? At present the total for the £400 billion or so that Covid cost is about £3 billion a year paid in interest on these deposit accounts, from which our commercial banks benefit.
£3 billion a year might seem a lot, but in government terms it's less than one two hundredth of total tax receipts, which makes it small change.
I think that for maybe £50 billion or so a year - and maybe less - would keep British households out of debt now. The borrowing cost on that will be less than £0.5 billion right now. That would be the cost of injecting the money needed to keep the country out of poverty right now.
The government won't do this because it says it will not take on debt. But all the new debt it would take on is actually just new money that never need be repaid because right now our economy will need that money to function.
There's good reason for saying that. Usually our money is created by both the government and commercial banks. But in recessions banks lend less, meaning they create less new money. So the government has to create more money if there's to be enough money to keep the economy going.
In that case this debt does not need to be repaid. Nor is there a burden on future generations, unless you happen to think that the money we use is a burden that future generations will not want (about which I think you will find they disagree: they'll be happy to take it).
So what the government is saying when it says it will not help people with the debt crisis they're facing is that although it could create all the money required to solve this problem it just does not want to do so, although it could by creating all the money required to do so.
To put that another way, instead of creating the new money that people need to stay warm, fed and in their homes the government would prefer people starve, go cold, and be evicted from their homes.
And making this new money is really easy. It just requires a few keystrokes on a Bank of England keyboard and the job would be done. That's how all the money to pay for QE was created. That's how the poverty that this recession could create could be addressed as well.
So, when this morning the government says that it is looking for every solution to this crisis except for anything that involves them spending more money they're lying, because they know the only solution is for them to create that new money or for people to be ruined.
And the Opposition has to note this too. There is no windfall tax solution to this crisis, although such a tax would help. And more taxes on wealth would definitely help tackle the inflation we've got.
But it is more money that the government needs to spend. And only the government can create it. If they're to really provide an alternative solution to this problem Labour and the SNP have to say that. If they do it would help. If they don't, we really are in very deep trouble.
In summary: for the sake of debt paranoia millions of people might suffer, wholly unnecessarily.
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Typo: “because not says it will not take on debt” — ‘not’ should be ‘it’. This is a serious one.
Edited
Thanks
Gosh I wish I could edit my writing errors on here.
So, this is where Cameron’s low wage economy he crowed a lot about in 2010/11 got us in the end?
Well done Dave.
It’s just failure after failure after failure since 2010.
Exactly. You are so right, PSR. How I wish things were different. If wishes ere fishes, &c. But they aren’t.
” (about which I think you will find they disagree: they’ll be happy to take it)” should be removed as it confuses the message. It doesn’t matter what they think. You could replace it by: “If you think this, you would be mistaken as new money creation is never a burden on future generations”. which emphasizes what you said before.
I’ve been looking at the ONS public debt numbers published today to try to work out what they are saying. They don’t make it easy to read.
https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/march2022
Down around figure 7 they are trying to explain the Bank of England’s contribution to public sector net debt – that is, the impact of QE.
They say the Bank of England holds £734.9 billion of conventional gilts (redemption value) but they leave that out of account and only record the £112.1 billion difference between that amount and the £847.0 billion of reserves created to purchase gilts. Then they add about £192 billion of SME loans, concluding that the Bank of England only adds £318.7 billion.
Are they really saying that the total amount of debt – excluding gilts held by the Bank of England – is about £2,000 billion, and QE only adds £300 billion on top?
The same report gives the DMO numbers below figure 6 – £1,500 billion of conventional gilts, and £500 billion of index linked gilts, in issue. But the APF holds £734 or £847 billion of former… So the “real” amount held by third party investors is about £1,150 to £1,250 trillion.
Assuming we think that number matters at all: figure 6 shows we’ve had many decades in the past with public debt (aka national cash, national savings, and national capital) around 150% of GDP.
Andrew
There is a blog coming…this is drivel, as usual
Richard
I am lost for words about the morality of what the government is intending to do in response to this crisis. It is utterly disgraceful. Sunak’s ‘budget’ was bad enough; but this sinks to much lower depths. Possibly even into the sewer, though I am reluctant to go that far.
Nye Bevin’s famous speech in Manchester in the mid-40s comes readily to mind, though I would add: with some exceptions. No one I know can think of a government, Tory or Labour, as perfidious or sunk in depravity as this one — the worst in their lifetimes. The core of this malady is, of course, Johnson. I don’t think this is too strongly stated, but I may be wrong.
Bevan was spot on – but since this is a family blog I will not repeat what he said about Tory-v.r…n.
However, I think it is a mistake to imagine that this can be attribute to the current Oxford Bullingdon crop of imbeciles – this has been a long time a brewing and goes back to mad-Thatcher and her “crew” who excreted memes such as
“The state has no source of money other than the money people earn themselves.” Pathetic.
As for my regard for the Tory-s, I’ll let the Bard via Exeter in Henry V speak for me:
Scorn and defiance; slight regard, contempt, And any thing that may not misbecome The mighty sender, doth he prize you at
Compare and contrast with today’s Labour leaders. Rachel Reeves has just said how glad she is we have a Tory Government, not a Labour one.
Pardon?
In effect, she said she’s glad we don’t have a Corbyn-led government.
“Rachel Reeves, who did not serve in Corbyn’s shadow cabinet, was quizzed by Times Radio today, over whether she thought the Islington North MP would have been a poor prime minister.
“Yes, I’m pleased that he’s not prime minister,” she said, adding: “… but I don’t like the prime minister we’ve got either, and that’s why I’m campaigning for Keir Starmer to be the next prime minister – a Labour prime minister.””
https://www.politics.co.uk/news-in-brief/labours-shadow-chancellor-pleased-corbyn-is-not-prime-minister/
The typo “non-final solutions” (end para 7) is a little unfortunate!
Corrected
Thanks
Really good points, really well made. Except for one little thing. You fall short of spelling out the consequences. You say “the government would prefer people starve, go cold, and be evicted from their homes.” While that is true, it is not the whole truth. You stop short because, after that has happened, or even during the process, people will die. Probably large numbes of people. Is there a reason you don’t say that?
Yes
I just hope it will not get that far
So do we all.
But, surely, it is necessary to tell it as it is because there are a terrifying number of people out there who don’t seem to understand the reality.
Great clear article for those willing to read and take it to heart.
I doubt the refusal to create the necessary funds has anything to do with any debt paranoia, rather it’s because they don’t want to give the game away about how money can be created as necessary. If we can create it to order for covid, and then to stop people starving and freezing, why not for school dinners, for the NHS, for education grants and on and on as a matter of routine? Once people get their heads around how a national economy actually works, the wealthy, as a class, stand to lose much of the social advantage afforded them by privilege. This then is about the ruling tribe or caste forming the wagons into a circle. In the UK, it’s the status quo that’s sacrosant, nothing else. It’s at times like this one realises just how rotten Britain is.
You may be right
It’s difficult to say how much debt paranoia among the wealthy is real and how much is affected. If your own understanding, or should I say misunderstanding, of macroeconomics is such that you end up supporting policies that are to your material benefit then you may have little incentive to probe any further.
What is annoying is the number of people on the left who seem genuinely suffering from debt paranoia and thus fail to promote long term policies that could make the economic situation of the majority of the population any better. Add to that those who are too fearful of being ridiculed to say what they really think and you have a situation where the idea that there is no alternative to many of the government’s policies seems plausible to many.
Bill is right in my view – the money and power creation of the Bank of England has simply been wrestled from the hands of the nation so that it is controlled by and benefits only the top of echelons of society in this country through the back door that our polity has become – a parliament of back seat drivers – very rich ones at that.
Artificial funding crises have been created to roll back the State in areas where the private sector seeks to make money and also to discredit public services to make it easier to hand over control to profiteers.
I watched the documentary about the Post Office Master scandal the other night and it had all the hallmarks of a modern British disaster – an ex-clergywoman thinking that her next calling was at the feet of capitalism, a refusal to see how the problem hurt real working people some of whom killed themselves and many were destroyed; an obsession with perception management; a reluctance to confront the truth or be accountable; all probably to make the Post Office a good buy for whoever came along and bought it. I look forward to the public enquiry – another one!
And Bernard is right to point the finger at the craven left who don’t even know what they believe in anymore. Who are all too willing to play the same ‘there are no new ideas’ game that Neo-liberalism has fostered.
Did you hear some of shit that was coming out last about Tory ideas to deal with the cost of living crisis (COLC)?
How about ‘Making child care cheaper by reducing the amount of carers required by x number of children’. That’s what I heard last night.
I mean, honestly – so you are going to deal with the COLC by making people redundant!!! And making kids less safe!
I’m sorry, but the Tory party are just a bunch of effing wankers. That’s it! This is who we put in charge!
Unbelievable. And some of us are going to stand for this!
WTF!!
Reducing MOT requirements to one every 2 years was the other one
Bill, I think you raise, clearly and concisely, a very important point here. One I have been thinking about for some time. The Treasury (who have been busy briefing the tired old burden-on-future-generations canard), and those with real power who know how the money system works, must be getting nervous. If the public start joining the dots of the pandemic-response money creation, and the MSM stop turning a blind eye to it, the game is up. I wish I knew when the tipping point will come. Blog posts like this from Richard are an important step along the way, but there are powerful forces maintaining the fallacies.
It’s rather telling that most of the examples given by ministers of “non-fiscal” actions to help with the cost of living crisis are in fact fiscal actions. Helping people claim unclaimed government benefits is precisely increasing spending, ie fiscal. They know fiscal is the only option, they just can’t bring themselves to call it that even when they do it. Just like they can’t call QE what it is: government creation of money; but have to pretend it’s borrowing.
I don’t think the ultimate issue is their refusal to spend. As we’ve seen, they’re happy to spend vast amounts on their cronies. It’s class warfare, they are not willing to spend on ordinary people, especially those most in need. And if they are forced to, they will dress it up as something other than spending, if they can. It wouldn’t surprise me if, when they inevitably do have to support millions of people, they organise it as interest-free loans, so they can call it borrowing. Just like Sunaks “help” with fuel bills. Keep on pretending, don’t look up.
in situations like this windfall tax’s should be imposed on excess profits by any corporates or rentiers and given to
those in need.
Instead of the 10 minute Saturday switch off advocated by one group, i wish we could have a widely adopted ‘dirty protest’! People turning up to work and appointments unwashed, unsprayed and in dirty cothes! Keeping clean costs money too, so if ir and heat are more important – they are – this is a necessary and far more likely to ‘kick up a *stink*’ measure. Imagine if it could go to the top, with supportive MPs fouling up the HoC atmosphere…or visitors *to* MPs. All visits to gov departments, interviews with the RW media…etc.
SOMETHING that would really make a *stink* at least about the gas & elec rises.
“If food and heat”
Need a bloomin edit option!
Sorry – WordPress does not provide one
If the government gave every person £1m – then use taxation to take the money back from the richest people – what would that cost the government, say £68m, what would be the benefits!? The government spent £37bill on the failed track and trace, and more £billions on the PPE scandals. £1m for every person would lift people out of destitution and keep the economy moving as most people would spend the money on things they need. Am I being simplistic and utopian here? I hope not.
This is hopelessly unrealistic
Sorry…..
I know I was being hopelessly unrealistic in making the suggestion, but it’s in the realms of trying something like a Universal Basic Social Income for everyone. Something has to change.
Keep the figures more realistic…..