I took part in this Twitter exchange last night:
I note the exchange for two reasons. First, I have to take seriously anyone who played on Sultans of Swing. Second, because the mistake is commonplace and worth noting.
The idea that the size of the national debt is a threat to well being is, prima facie, wrong.
The so-called national debt is made up the savings of pension funds, life assurance companies, banks and foreign governments in the main. They are no threat to anyone.
It's also a simple fact that about one third of the debt is owned by the UK government, meaning the debt to GDP ratio is actually less than 70%.
And what, anyway, does this debt represent? It is the money created by the government as a result of its spending not yet taxed back by it. It is, in effect, the national money supply.
Why has that increased? There are two main reasons. One is that commercial banks have not created enough liquidity to ensure the smooth operation of the national economy.
The other is that the amount of money needed to provide liquidity within the economy has increased because what is called the velocity of circulation of money has slowed considerably since the global financial crisis, but also because since the use of cash declined considerably, more money is required to compensate for that. The government has provided it by not taxing back money it has created.
Does that create a risk - as David Knopfler went in to claim in a follow up tweet? No, not at all. 100% debt to GDP is now the ‘new normal'. It simply reflects the need for money in the type of economy we now have. There is nothing more to it than that.
Should we then worry about this and try to reduce the debt, which is incidentally the exact opposite of Bank of England policy since it is planning to sell more debt back into markets over the next year? My answer is we need not worry about this, although the Bank has its policy wrong.
The reason for my suggestion is that providing the liquidity - or money supply - to the market that the market needs is precisely what a government should be doing and is responsible economic activity. Just as, incidentally, providing a safe place for money to be saved is also a vital function of government.
What is dangerous is trying to stop such essential actions. It seems though that most economists and commentators want our politicians to do just that. Problematically, the politicians are listening. That's the real crisis that we have.
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What Knopfler said, could have been said by a trained parrot. If Knopfler was talking about guitar playing – then one listens. In the case of economics, then his views are worth no more than mine (as a non-expert & non-parrot) & considerably less than yours (as an expert). His comment is interesting in that:
a) he repeats a meme that is all too common
b) he has not educated himself (or perhaps he only reads the Torygraph or Daily Heil?) on matters of national finances.
He is thus in this case “everyman” – lacking curiosity and accepting when the ruling elites say about national finances.
On the matter of guitar playing I put forward one of the more interesting tracks I have heard , done in one take and made up as they went along……..9 minutes of genius:
https://www.youtube.com/watch?v=f3dW5F6GKTs
A good track…
The country is full of monetarily illiterate voters and politicians who believe the country is dependent upon foreigners buying the country’s government debt. That’s the dire situation the country’s in which is a classic Catch-22 situation! Because the country’s not self-sufficient it depends upon exporting goods and services which in turn increasingly depends upon having a healthy and well-educated workforce which in turn depends on government spending. The country wants to save too and running a persistent trade deficit will not provide money for this only a government deficit will. Understanding all this is completely beyond the ken of most people in this country. It can only be changed through re-education.
Completely agree, MMT should be taught in latter school years. Richard’ blog is always a revelation to me, who would have thought there is more than one way of extracting wealth from society and doesn’t have to be the low to middle earners footing the bill. Money is created by debt/borrowing and that is essential and normal. No wonder the MSM clung on to Thatchers “household budget” analogy made it the norm and refuse to let go. Long may Richard keep educating us, I one appreciate his efforts.
Thank you
Great explanation.
How much of debt is the money in circulation?
Surely much of that is created by banks? What are the proportions?
Is it not true that the supply of money must reflect both the number of families and firms multiplied roughly by the prosperity of people, all of which is increasing over time? Ignoring climate catastrophe we all want increasing prosperity!
I remember reading a good analogy: a baby sitting circle. Each couple had an allocation of tokens but no baby sitting happened because everyone hung on to their tokens just in case. The solution was to give everyone some more tokens and the whole thing kicked off!
There are many ways iof defining money
Base money is about £900bn right now
It could be argued the rest of debt is gilts
Since the two balance the cumultaove deficit it could be argued 100% is gvernment created
We should start asking 2 important questions to those who talk about GDP to debt ratios. How they are calculating GDP and how are they calculating public debt.
This is the approach that physics has taken with quantum mysticism. If the opposition wants to defend themselves with statistics then we can only judge that statistic if we know how it is calculated. A ratio is nothing more than a calculation, it does not govern or determine events.
Would it be a good New Year Resolution never to mention Public Debt without simultaneously mentioning Private Debt. What is happening to Private Debt? How is it being monitored and controlled? How effectively is it being used?
Private debt is the real worry in our economy – it is out of control
You do not have to worry about the government reducing the national debt because it is the saving of the rich. The lie is to cover squeasing the poor which will not affect the national debt at all.
So what did David Knopfler do when we all realised that brother Mark was the more talented of the brothers?
Did he become a neo-lib orthodox economist by any chance?
Obviously Mark Knopfler is the more observant of the two musos – that’s what makes great musicians and song writers – lifting your head away from the fret board for a few minutes and watching and reflecting things going on.
It seems appropriate to tag on what I consider be be one of Dire Strait’s best songs ever – Telegraph Rd – a song that charts the birth, life and destruction of a community similar to that we were seeing in the early 1980’s as the City of London went about its dirty business and celebrates its passing with a superb up tempo brave ‘up yours’ to Thatcherism at the end.
Well, that is as I saw it back then anyway and its still relevant even now.
https://www.youtube.com/watch?v=Q1Wp2ASqyxI
Always my favourite Dire Straits.
The best line? ‘I’ve got a right to go to work but there’s no work here to be found’
Absolutely – a right to work is a right to live.
I guess people’s dislike of ‘national debt’ – certainly right now – comes from the debt interest burden that we have and the impact it has on public spending.
The counter-argument to this is that, as you’ve rightly pointed out, such debt interest isn’t actually completely necessary anyway.
Getting that part of the message out is probably the biggest way to change the narrative.
You are absolutely right Richard people will not follow the money. They have no idea where government deficit money goes or put another way where the money for their savings comes from. Government deficit spending is simply regarded as sin because they can’t conceive anything other than their monthly household budget. What’s more they don’t want to make the effort. Put awkward questions to them and they become belligerent. This all makes them mere pawns to be messed with by equally monetarily illiterate politicians like Kid Starver! The only way forward is a new party that concentrates on structured learning in regard to how the UK’s monetary system really works. Perhaps such structured learning should initially focus on free lessons for journalists.
I should add that I focus on journalists initially because they very much provide the oxygen for politicians’ disfunctional views about the UK monetary system, the paying off of the National Debt and all that baloney.
Focusing on the content of the blog post, it is impossible to have any sort of debate on national (i.e. gov) debt without having a clear understanding of it.
“no entity can owe itself money” is a true statement. & yet assorted imbeciles think that indeed they can owe themselves money. Which means a debate on gov finance realities, as opposed to fantasies is an impossibility. It’s like me designing a power generating system with opening statement: “first we build our perpetual motion machine”. But that is exactly what vile-tory & vile-liebore have been doing for upwards of 44 years.
Two other things:
A question I picked up: “Why is it easier to decide to make the rich richer instead of preventing kids from starving & the elderly dying waiting for an ambulance?”
The label “Sir Kid Starver” made it onto Newsnight last night. Not a good look, I anticipate a reverse ferret coming real soon. Maybe we will need to move to Sir Kidding Liar.
What I cannot believe is that Kid Starver and his party are there in the starting gate for the next election and they have conceded defeat already…………….
Staggering.
Simply staggering.
I mean, why bother to run at all?
Just to tinker?
Or just to give the Tories a breather?
Democracy has become a joke I tell you.
I wonder if he played on Money for Nothing? 🙂
I don’t think so
Perhaps a useful public educational tool would be to provide a summary of the National debt (ND) from 1945 until today (or even from its beginnings in 1694). I believe the ND was around 250% of GDP in 1945 and reduced to 100% by 1963 without paying any of it back (apart from Marshal Plan funding). National debt then ‘increased’ to about 100% of GDP in 2010 due to the financial crash and QE and here we are again with a ND of around 100% of GDP after lots more QE for Covid, all without paying anything back. Inflation has a wonderful ability to erode ND as a % of GDP so the current rate of inflation should bring the UK ND debt down mightily. Meanwhile Japan has a national debt much higher than ours (around 250%) yet doesn’t seem to be on its knees. Finally, if we can’t afford the current debt, how on earth are we to afford the hundreds of billions of spending that will be required by climate change.
These charts are readily available on the web…
That’s true, however how many people (including politicians) take the trouble to search the web on this subject? not many I suspect. It’s clear to me that Government spokesmen know that most people simply accept the nonsense what the Government feeds them without question. You are doing a good job in trying to get the message out but so far it doesn’t appear to be cutting through. And with much of the media controlled by vested interests in suppressing the truth about money supply we are doomed. I believe the Green lobby, who have climate change front and centre of their agenda are best placed to get the message out that we need massive investment in green infrastructure and that, as with the banking crisis and Covid, funds are available and finally, that investing in green infrastructure could provide a massive boost to the economy.
Wait until you see the headline in the Express! Apparently, as inflation is falling so prices should fall as well.
When you’re up against this kind of innumeracy what hope do we stand?
Making the case for urgent economic education….
The national debt preoccupation is part of the domestic budget economic mindset and is either evidence of economic illiteracy or class warfare based politics or both. Advancing the alternative narrative using evidence appears to gain little traction. I too despair at times.
Off at a tangent David’s brother produced and played on Bob Dylan’s Infidels album. There is some excellent original studio footage on YouTube. Don’t Fall Apart On Me Tonight is a love song. It has a great verse that resonates with me …..
“What about that millionaire with the drumsticks in his pants?
He looked so baffled and so bewildered
When he played and we didn’t dance”
I will check that out….
Not one I am familiar with, I think
I am familiar with the Travelling Wilburys, but that’s another collaboration with Dylan
Would a narrative based on emotions make a difference? Many people go through terrible struggles every day and apathetically accept their lot in life with not much hope for the future.
Perhaps a message that empowers people and shows a way out would make a difference instead of arguing about facts. It’s the same as talking to people in a cult. No amount of facts presented to them makes a slight difference
I’ve read elsewhere that the Labour Party have to offer a narrative showing they offer people hope to aspire to better things, not just giving handouts (I know, I know). Labour must be assuming that they must appeal to a base that don’t consider themselves ‘workers’ but aspiring middle class.
I suppose those types don’t resent the wealth of the Tories like Jacob R-M as they want to be the same (they never will in a million years of course).
this is just guesswork on my part, who knows what Starmer actually plots and thinks?
Who exactly is telling you to worry about the National Debt when Truss and Kwarteng get £16,000 severance pay after only a few days of incompetent work?
https://www.theguardian.com/politics/2023/jul/20/truss-and-kwarteng-given-more-than-16000-each-after-leaving-office
How many pitchforks can you buy for £32,000 ?
Nothing comes “pain free”. Your point; that if there is a crisis, the money is found is correct, and needs to be repeated: endlessly. We are in a crisis, and there is no money. That is because it isn’t a neoliberal crisis; a crisis that serves market economy interests, or that neoliberals simply beileve will not cost them office and power; if they think it will cost the money and power? The money will be found.
The argument about 100% debt/GDP ratios being some sort of ‘maximum’ failes on two grounds: it is simply stupid, and it is wrong. The fact is Britain has typically had a debt/GDP ratio of at least 100% predominantly for the last three hundred years. We now have 100% after 40 years of neoliberalism. When Britain was the predominant world economic, industrial and financial power, with the effectively the world’s reserve currency, it often had a ratio nearer 200% than 100%. In 1945 it was 250%, and we still managed to found the NHS.
It was Britain that proved economic success, power and prosperity comes from credit; by creating it; and creating deficits and the national debt. We ended slavery by making one of the biggest Bond issues in our history and adding to thenational debt a vast sum, when the debt was already far above 100%. That was in the early stages of Britain’s industrialisation and the drive to the summit of world power.
The biggest crash in our history was an attempt to privatise the National Debt, that proved an utter catastrophe, and was in effect a private Ponzi scheme (the debt had to increase to cover the disaster). It was a disaster created by people with the same foolish mind-set as modern neoliberals; they do not understand the nature of the problem. There has been a longstanding obsessive commitment to reduce and eliminate the national debt; the ‘Commissioners for the Reduction of the National Debt (CRND)’. They have failed totally. They have failed totally because nobody is stupid enough actually to try to eliminate it, and reducing it is difficult because it the consequences for the economy, more often than not, is harmful; or worse. This they all know, is just a fact. Neoliberals use debt reduction as a weapon; but they never actually accomplish anything because the need the national debt to subsidise the so-called ‘market economy’.
Let us start with a simple question, for Rishi Sunak. How much of a subsidy is the British government paying to TaTa Group to land the battery factory for Somerset?
The cost estimate is £4Bn, allegedly. The guesses for the subsisy? £500m (straight on the deficit and national debt: simple)? More? Less? You tell me. They don’t want to tell you. ‘Free Markets’, eh?
Indeed…..
Funny how public money is immediately found to support the TaTa plant in Rees Mogg country not long after a similar plan for a British Volt plant in North Tyneside (Jamie Driscoll country) collapsed as the government refused to back it
It is “Tata” (another blooper); but it may be ta ta to public money….
The real point is that Sunak wishes you to think this is a miracle of the “market economy”; but without serious public investment to subsidise the private investment (for no guaranteed return to the public purse), it is ‘ta ta’ to the battery factory coming: and that is how a market economy really works.
I`m concerned that they will back the wrong horse- put a pile of public money into existing Lithium tech which may be on the cusp of becoming redundant. A sane government would of course be putting real money into basic research.
Again Meanwhile! https://www.theguardian.com/uk-news/2023/jul/20/king-charles-to-receive-huge-pay-rise-from-uk-taxpayers
We clearly have a sickening dissonance. Maybe the NHS specialists can hope for a real pay rise, along with those working as hard as they can, just to make ends meet. £25m in bonuses to the BOE staff? £35 million to the kings estate deferred for 2 years? Shall we wait?
That’s a royal we!
Who is running this country and where does stupidity end?
It’s always been them and us, have and have nots. But the truth is , no one has anything when catastrophe is the agenda.
I have a tweet out on this that is going well right now
Nowhere. Yesterday was it reported that the BOE had such payouts in the MSM? Apart from City AM?
Hate to say it! This government is on its knees and there is nothing looking at all helpfull.!
It certainly feels like Collapse.
Incidentally, the whole nonsense about a 100% maximum (actually 90%) is based on a famous economics paper that was full of weighting errors, and bad coding on Excel spreadsheets. The whole argument is a dud. but this is a neoliberal world of smoke and mirrors. Who cares wheter it stands up; it is right anyway. This is neoliberalism, it can’t be wrong. There is no other way.
Interesting tweet by Jonathan Lis @jonlis1 and responses:
Jonathan Lis
@jonlis1
It doesn’t matter what party you’re in: if you say ‘there’s no money left’ or ‘there’s no magic money tree’ you either don’t understand how the economy works or don’t want your listeners to
2:21 PM · Jul 18, 2023
·
54.9K Views
Agreed
They’re laughing at the Little People:-
https://www.theguardian.com/uk-news/2023/jul/20/king-charles-to-receive-huge-pay-rise-from-uk-taxpayers
https://www.dailymail.co.uk/news/article-12317585/So-restraint-Bank-England-comes-fire-paying-25million-bonuses-year.html
This is not to mention banker bonuses in the private sector.
https://www.theguardian.com/politics/2023/jul/20/truss-and-kwarteng-given-more-than-16000-each-after-leaving-office
Indeed…..
https://twitter.com/i/status/1681765291301240835
The gospel according to Tony. Spend less and tax less.
Bonkers.