I posted this thread on Twitter this morning:
Over the next year the government is going to run a deficit. If we look at the 12 month period the forecast is for about £75bn, based on March 2022 estimates. But this is now going to get very much worse. A thread….
We now know inflation is worse than expected. We know the deficit was bigger than expected in August. We know that even after price caps inflation is expected to exceed 11%. And we know recession is very likely. The deficit is likely to increase as a result.
But we also now know there will be £30bn of tax cuts. There is no evidence that this will lead to growth.
We also know energy support for households might cost £100 billion. I suspect the uncosted business package might add £50 billion to that sum.
In addition, with the Bank of England intent on increasing interest rates I suspect government borrowing costs will increase by well over £20 billion in the next year.
Add just that data together and the deficit in the next year might easily exceed £275bn. That is wholly unprecedented in UK economic history.
And now the Bank of England has announced that it will also be selling £80 billion of the government debt that it technically owns back into financial markets over the next year.
Add this factor into the mix and what it means is that the Treasury plus the Bank of England will be seeking total funding of £355 billion (or more) from financial markets over the next year or so.
There is no precedent for the government and its agencies wanting funding of this sort from financial markets in such a period. In the years of maximum deficits (2009, 2020, 2021) the deficits were very largely or entirely covered by quantitative easing.
When QE is used the BoE creates new money for use in the economy; the Treasury sells bonds to the financial markets to apparently reclaim that money from markets; and the BoE then purchases bonds of equivalent value, effectively cancelling those bonds and the demand on markets.
As a result, nothing like the sums to now be demanded from the financial markets has ever been sought before. So, the question is whether it is plausible to seek £355 billion or so?
The answer is that it utterly implausible without some massive conditions being attached. One of those will be considerable interest rate increases, which will be disastrous for the rest of the economy, as I have explained on other threads.
The other condition to note is that funding for investment in other activities by financial markets is bound to be reduced if £355 billion is sought by the government and its agencies, again increasing the risk of recession.
These conditions are too big for the economy to bear. The recessionary impact of them is far too big. So the question that has to be asked is how this sum might be funded instead?
QE could be used for this purpose, but only results in an increase in the balances held by commercial banks on deposit with the Bank of England on which base rate interest is paid, which is a significantly increasing cost. That makes that approach inappropriate now.
In that case the current level of funding requirement requires three things. One is the cancellation of BoE plans to sell bonds they own: this is obviously a wholly inappropriate plan now.
Second, QE should not be used utilising existing arrangements where commercial banks see their base interest rate bearing deposits with the Bank of England increase gratuitously as a result.
Third, instead the new money that the Bank of England must necessarily create to fund the planned level of government spending (because all state spending is initially funded in this way) should be advanced interest free to the Treasury.
Then, fourthly, when those funds are spent into the economy they should be credited to what might be called special reserve accounts to be held by the commercial banks with the Bank of England on which interest of no more than 0.1% should be paid.
I am aware that this sounds like a technical issue, but it matters. These special reserve accounts need never be repaid. The interest rate would make them affordable into the future without limit, or concern.
But it's also the case that technicalities are going to matter greatly on this issue. I doubt the capacity of the financial markets to provide anything like the £350bn it is assumed by the government that they can fund in the next year.
Without alternative and technically plausible answers to this funding issue it is very obvious that within the next year we are going to face a financial meltdown. So far this issue is not being discussed.
The absence of an OBR report to accompany the statement from the Chancellor this week only exacerbates the surreal lack of macroeconomic debate about the crisis we are facing.
My sense is that the government is at present doing fantasy economics. The reality is that their plans are going to crash down remarkably soon.
We should be very worried precisely because the government is pretending it isn't and the Bank of England is determined to make things worse. If we do not get a sense of reality from either soon my sense of foreboding can only grow.
And one final point: what I am suggesting is as close to a modern monetary theory solution as I can get within the constraints of current central bank arrangements in the UK. And I am suggesting it because only MMT can address this crisis.
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At the risk of pedantry….
MMT cannot save (or not save)…. it just IS. It is a theory that describes reality.
I would prefer…
“Only an understanding of MMT can save us from Trussonomics”……but really can ANYTHING can save us from Liz Truss??
Following the understanding MMT provides is an action, not a description, so I am inclined to disagree….
And nothing will as such save us from Truss, but self-funding using the principles of MMT is the only ay she can, I think, deliver her plans
Firstly, as ever, keep up the good work Richard.
However, apart from your regular readers and the unknowable minority they represent, I think that QE falls into the unique category of the most important, least understood and least publicly discussed Government policy since the end of the second World war.
Personally, it was not until I found your website that I came across a complete explanation that made any sense of the fragments of reality, from amongst a blizzard of misunderstanding, misinformation and downright lies, that I had been able to glean from the rest of our media.
Please keep it up and maybe one day it will break out into public consciousness in the same way as did the euphemistically called phone-hacking scandal. In reality the greatest criminal conspiracy this country has ever seen.
Thanks
Here here!
Share these threads with people you know who are not regular readers.
Well, we have a fantastic line up in the Tory party – the Deadly Quartet of:
Liz Trussed -Up by her own ideology as Prime Minister
Quasi-Intellitengt – Chancellor of the Exchequer
Jacob Reeks of Money – Business Secretary
James Dumbley – Foreign Secretary
and whole list of other sub-intelligent people to run our country including a self-hating unpleasant, corpulent ugly woman now in charge of the NHS who knows she’s unpleasant, corpulent and ugly and goes around taking it out on everyone in the country who also know that she’s unpleasant, corpulent and ugly.
Just look at what money can buy these days eh, in Toryland!??
And BTW anyone, if you think that my satirical comments above are cruel, sexist, racist and uncalled for, well just consider for a moment before you launch into another pointless identity politics tirade that just defends rich ignorant people of all colours, creeds and corpulence, the suffering that these creatures are going to inflict on innocent people in the country.
And to think that some of these bastards think that we deserve it!! Because of course it’s NOT THEIR policies that have made the country this way – oh no! – it’s because we are all weak and feckless apparently!!
Yeah…right.
The pity of it all is that many people swallow the Tory narrative to the extent that they suspect that their own problems may be the result if their own weakness and fecklessness.
Why does any interest at all need to be paid on the special reserve accounts?
It doesn’t
But 0.1% is neither here nor there
There’s nothing in MMT, and I’m including the Job Guarantee aspect of it, which is particularly left wing. Just as the left can argue that the Government can spend more without increasing the rates of taxation, the right can argue they can reduce the rates of taxation without having to match these with reductions in government spending.
This is effectively what is going on, much to the concern of some orthodox neoliberals in organisations such as the so-called ‘Office of Budget Responsibility’ who have been neatly by-passed by Truss and Kwarteng by simply dropping the word ‘budget’. Maybe it’s a ‘Special Fiscal Operation’?
This has wrong footed many on the Progressive liberal centre-left. They have managed to be both against the increase in National Insurance Contributions and against the removal of that rise in just the space of a few months.
I’m not sure you’ll agree with Stephanie’s last sentence. We’ll just have to see how it all works out! My money is on it not working out well at all!
https://stephaniekelton.substack.com/p/can-liz-truss-do-it?utm_source=post-email-title&isFreemail=true&utm_medium=email&fbclid=IwAR1_20MolmwxPfYkNgXtLMDeFeN7A1JxiBLXFTvU-mYFet_nyjKAuie0AxA
Are we now at risk of an economic collapse similar to that now playing out in Sri Lanka?
No because we do not have foreign denominated debt
Our problems are home grown
Havig read Kelton’s piece above, I’m still not convinced about what is happening at all.
Especially when you consider that Rees-Mogg is saying that the government can afford it? I don’t see MMT here at all.
Why? Because you still hear that there is a rise in debt levels from borrowing without any clarification at all that the government is effectively borrowing from itself and does not have to enforce repayment on itself.
And look at the government agendas elsewhere – asking for job cuts and savings on the railways and civil service.
Money production is being used as an IOU to get Truss through the CoLC to justify public sector cuts later in other key areas of the economy that can be opened up to rentiers once we go into recession.
We’ve got to remember that the Tories still see the money system as a closed system – closed to wider society anyway but not their mates and funders. Anything they put in they will claw back in the mistaken belief of once more balancing the books when they think that Truss is out of the woods.
A new narrative or old new narrative will be found and used to confuse us all again.
No one believes the Tories know what they are doing
My impression is that the right has always been more politically opportunistic in serving their wealthy members and less rooted in principle than the left. Which is why they are often more politically successful.
This is what leads them to constantly attack the left for “poor management of the economy” (with significant success), while themselves running up huge deficits when in power. Even while apparently prioritising “austerity”.
The parliamentary left ends up stuck in a shrinking box of trying to prove they’re competent while also sticking to the “rules” that prevent them doing anything that could actually prove their competence by delivering on any of their supposed principles.
And so, even though the right has no more understanding of MMT than the left do, they have nonetheless been propped up by it as an underlying reality. And so I imagine they also take the fairly superficial public understanding of MMT as a license to be even more optimistic with government finances.
I confess I don’t quite see why the same might not be true this time. One way or another I suspect the BoE won’t allow the county’s finances to fall into ruin, so they’ll end up in one way or another bailing out this debt, and Truss will have got away with it.
I think you’re being a little too optimistic on the last point
I an sure if we adopted your plan, the Tories would claim it would be inflationary. But as a very large chunk is going to energy companies abroad, it will not be circulating within the country.
Not sure what effect it would have on the foreign exchange value of the pound but other countries must be in the same circumstances.
All we know is the pound is collapsing
Not sure I agree with Skelton’s ‘no Labour government could have done this’ – politically they would indeed be roasted but at the same time, as in 2008 when Gordon Brown nationalied banks etc , business and and populace are crying out for help – so they would have had to do a big spend rescue.
But ref NeilW – Labour is marooned by its chosen positon as a minor planet revolving around the Tory sun – everything it says is defined by what the Tories do. As Zoe Williams says, ‘Labour has been dragged irresistibly into the Tory narrative’.
https://www.theguardian.com/commentisfree/2022/sep/22/uk-broken-12-years-starmer-tory-government-labour
So scared about balanced budgets – never dared engage with ‘but who are you going to tax’ – too scared to try to change the perspective with BBC interviewers, such as with Keynes – ‘anything we can do we can afford’ – or even to dare educate the interrogator with ‘govts can and do create money ‘.
They are now stranded – the Tories have shaken the magic money tree, albeit to hand billions to fossil fuel corporates with their rigged prices , and to rich households.
Labour are left looking stupid and saying they shoudn’t have increased borrowing , but without any coherent narrative about ways of financing spending – QE, Saving, taxing, borrowing etc..
Labour is going to have to work very hard to find a narrative after this…
I like the idea outlined in point 4, of creating money free of interest for the government to spend, instead of going through the bond issuing shenanigans to borrow it from the financial system which would reduce the banks’ reserves. However, I’m not sure how the Bank of England would differentiate between the old and newly created money to be able to pay the two rates of interest.
Good point – but it could all be with the new money created from now on
Or it could be allocated as a ratio og average holdings over the last year
Nothing would be perfect – the second, to attribute interest bearing accounts, would probably be fairer
Might there not be a darker side to this? If the government finances are wrecked by all this it hardly matters who wins the next election. The new government’s hands will be restricted, if not tied outright, by both the lack of credibility of the country as well as the increased future debt costs of what looks like a lot of money spent now without a plan. Deferring to Richard at this point: does this make it more difficult to make such grand gestures in the future?
So perhaps limiting the financial power of government ( = small government) is the plan lying beneath the spurious talk of growth.
A new government will need to be very clever, with all issues open and on the table to win confidence
This mess could be dealt with, but not by anything approaching neoliberalism
is this right: what you are saying about the government and MMt is the government creates money so why would it borrow money from commercial banks at interest which creates inflation or interest on money borrowed which they expect the government to pay and is then demanded from the public when they create inflated prices
Essentially, yes
Hi Richard,
So listened to R4 More or Less ( https://www.bbc.co.uk/sounds/play/m0018gql 10-14 minutes in ).
The economist stated that QE has an interest cost which the banking sector claims? Is this correct and how can this be so? As the purchase is internal via the treasury LTD company (forgotten the name) or does the £900 billion just sit in a reserve account as such and base rate interest is paid per annum ( again credit creation by the BOE/treasury) of have I got this completely wrong?
This point keeps coming up, the cost of QE is it a double entry account trick? And therefore cancels itself out and just sits there as a reserve or what is it used for? I thought I understood it, I am now not so sure (I have your book).
Any direction, quick short reply would be gratefully received
Grant
See my book Money for nothing and my Tweets for free – available free from my Twitter account or for 4.99 from Amazon
See also https://www.taxresearch.org.uk/Blog/2022/06/17/how-are-the-central-bank-reserve-accounts-created/ and https://www.taxresearch.org.uk/Blog/the-double-entry-behind-the-money-creation-in-the-central-bank-reserve-accounts/
There is no short answer
Wow, that was quick!
Thanks Richard, I thought that it would be a big ask!
I have your tweet book and I will work my way through your supplied links
This is the one area I seems to be struggling to get and this is important for any research into housing reform ie how are you going to pay for it? And what are potential negative consequences? Etc.
Thanks again.
Enjoy the rest of the day.
Grant