I was asked this question on the blog last night and, to be candid, was just too tired by the time I finished work to answer it. This morning, it seems like it might be worthwhile addressing both issues it raises in a blog post:
Richard two questions one related to the above one not so……first you seem to be MMT light in regards to looking at taxing and borrowing (isa etc) as a means to paying for increased infrastructure….is this an attempt to fit into a more orthodox fiscal thinking ie are the political parties so fiscally dogmatic that it's the only way to engage with them?
This part of the question relates to my suggestion that funds from both ISAs and pension funds might be used to fund public investments in the climate transition, social housing and other infrastructure needs.
As I have long made clear, I reached an understanding remarkably akin to the core elements of modern monetary theory (MMT) before I ever read anything by an MMT author. I have never, as a consequence, felt bound by anything that they say. I agree with quite a lot of what Stephanie Kelton has to say. I do so much less with Warren Mosler and Randy Wray, and to be frank, Bill Mitchell dresses up a pile of claims as MMT when they are simply his political prejudices. So, if you say I subscribe to MMT, then presume that I think that governments do always spend before tax, and tax is used to control inflation. That's all that needs to be said, albeit I place vastly more emphasis on tax in that process than most in MMT do because many MMT exponents get the whole nature and significance of tax wrong. In summary, my support for MMT has always been qualified.
It is also necessary to apply sense to any economic theory. These theories are like maps: they are ways of interpreting the territory but are not the territory itself. They provide a selective view. That is why I have more than. one mapping app on my phone. Google Maps is great, but if I am walking, the OS app is brilliant (one of the best I own and well worth the cost). Each has a different, selective view.
MMT is like that. It has a use in describing the way the government spends and why it taxes, but to pretend it answers all questions is just wrong. In particular, it only really addresses the issues around base money (cash and balances in central bank reserve accounts) and commercial bank money does exist.
So am I trying to fit into orthodox thinking, or do I think MMT just has not got an answer to all questions? I am certainly not doing the former. What I am proposing for ISAs and pension funds is not orthodox thinking. Mainstream politicians have not thought about using tax incentives for saving to provide the capital for public investment. So, I do not think I can be accused of appeasing conventional thought.
At the same time, I am suggesting that just because MMT says that a government can fund all its spending out of money creation if it so wishes, that does not mean that is the only way public investment can be funded or that it has to do this. As a matter of fact, there is a thing called financial capital. It has been used to fund the private sector. It is, therefore, real: we can see the evidence.
All I am saying is that if that financial capital can be used to fund the private sector, it can also be used to fund the public sector.
So, I am simply suggesting that an identifiable phenomenon called private capital be redirected for use for public benefit. If it can be capital in one sector it can also be capital in the other. That seems obvious to me, even if not (it seems) to almost anyone else. Such is the way that change happens: what is staring us in the face as a solution to a problem does, at some point, become apparent. This is my answer to the problem of funding public investment.
Turning to the other question asked by Andy, it was:
Also and kind of related can you answer a question regards gov bonds used to cover public spending shortfalls….when these are issued we are told it's to bridge the deficit gap for that tax year but what happens when the lender removes their deposits after the bond has matured….the shortfall still exists (eg 2022 treasury bond for £100 million is issued and taken up by depositer for 10 year period bearing a yield fir thst period) . Do the BoE just wipe that £100 million shortfall out or is it then just added to the national ‘debt' after the 10 years?
The answer to this one is simple: the government issues a replacement bond, and the financial markets subscribe to it, and the world carries on as before. The interest rate may have changed, but that's about it. And if the government issued the new bond and there were no buyers (which is incredibly unlikely), that would not be a problem: the government could just QE it and hold it until there were buyers. It really is that simple. We are not in hock to financial markets, whatever politicians would like us to think.
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I think I’d always unreflectingly thought that using private investment for public works either meant something like pfi or would be unlikely because where would the profit be at the end to pay dividends? But this has made me realise that I’d not really thought it through. Though I’m still trying to process the idea -is what is being proposed that the government uses something like bonds to ‘reward’ the investment -in place of profits for dividends?
I am suggesting the givernment issue bonds for the public to save in – as easily accessible as bank accunts – and that the funds desposited be used as captial for public works.
I would even hypothecate the funds which i would never do for tax.
So, a climate fund
A health fund
A Scottish fund
And so on
It could fill in the gaps
Interest would be paid at base rate
And local authority or regional funds? But underwritten by central government 100% – not like (e.g.) US bonds issued by a city that then goes bankrupt.
Yes
And remember local authorities only go bust due to central government underfunding. Unless they do property speculation that should be banned.
You’d consider hypothecated funds.
Would you also consider inflation-index linking (with, say, near zero nominal interest)?
Might that be attractive as a store of value in the retail savings arena?
No
“Mainstream politicians have not thought about using tax incentives for saving to provide the capital for public investment.” Most people & politicians are well aware of NS&I (National Savings & Investments). Which has been funding government ‘investment’ for 160 years.
No it is not used for that purpose. The funds deposited are retained as cash.
The various French Livret savings accounts held by most French people at private banks are used by the government to help finance social housing, urban redevelopment, energy transition, social economy,.. . Some are tax free as well as earning interest but have small maximum limits ~22,000 euros (x 50 million account holders) = 1,100,000,000,000 million euros = 1,1 UK billion
Livret A
https://www.economie.gouv.fr/facileco/livret-a-fonds-destination
Livret de développement durable et solidaire (LDDS)
https://www.economie.gouv.fr/particuliers/livret-developpement-durable-et-solidaire-ldds
Interesting
Yes indeed. I hold both of these Livrets, topped up to max.
The interest rate is fixed regularly and recently increased to 3% for both Livret A and LDDS.
Livret A is also tax-free.
Sounds somewhat similar to the Girobank or perhaps more closely National Savings, particularly with the 100% state guarantee.
The hypothecation for particular sorts of public projects is interesting. It demonstrates a real appetite from many people to invest in socially useful ways. Is that €1.1 trillion? Wow.
I recall reading Warren Mosler’s first piece on this subject in the early 90s. The salesman that covered him as a client showed the Government Bond Trading desk a copy and asked what we thought? Our reply was “that is not a theory merely a description of the way the world works…. tell me something I don’t know” (although I suspect our language was a little more colourful in those days).
I have always approached what is now called MMT in that light – empirically and through the lens of Government bond and money markets..
Of course a government can spend as much as it wishes without taxing or borrowing…. but not without consequences.
Of course a government can avoid borrowing completely (and use tax to control inflation) but it important to have a government bond market for other reasons (safe place to save, control interest rates in the real economy etc.).
Of course a government can always sell government bonds equal to its deficit (if it chooses to) – money government spends always ends up in Reserve accounts where banks will always buy gilts if the interest rate/maturity is right compared to the interest rate paid on Reserves by the Central Bank.
For me, the key issue is how FX markets behave under varying (MMT ish) policy choices and how that behaviour feeds back into inflation and the real economy. One answer is “I don’t care”, another is “equilibrium will be reached”… but neither satisfies me. FX volatility has consequences for the real economy and any plan to switch our who policy making process away from the orthodox must think about this.
We have the Truss/Kwarteng ‘incident’ as a recent example (of a different kind of ‘policy shock’). Does that give any indication of the possible FX impact, ie the relative influence of internationally mobile ‘hot money’ in cash or short-term portfolio investments, versus ‘real world’ FX flows for trade purposes? I think the estimate of gilts held by overseas actors is limited, but perhaps still significant if there was a big rush to exit? Then there’s whatever else is in other commercial instruments of varying liquidity?
The Truss / Kwarteng issue was not created by them. It was created by QT announced by the BoE the day before, which was corrected by QE. The two of them were mad, but the crisis was created by Andrew Bailey.
do’t we already use private capital for public investment?
isn’t it called ” cherry-picking privatisation”?
Read what I am proposing and stop making things up
Richard
caught you on a bad day?
you did write
” If it can be {private} capital in one sector, it can also be capital in the other”
no need to be rude !
I admit I can’t see the joke but I think there must be one
“The answer to this one is simple: the government issues a replacement bond, and the financial markets subscribe to it, and the world carries on as before. The interest rate may have changed, but that’s about it. And if the government issued the new bond and there were no buyers (which is incredibly unlikely), that would not be a problem: the government could just QE it and hold it until there were buyers. It really is that simple. We are not in hock to financial markets, whatever politicians would like us to think.”
But just QE ing all the bonds increases the money suply and leads to inflation. At which point you’ll say just tax more. But if you could tax more then you’d not have had to issue the bond, would you? So, no, it’s not that simple.
Go one then Geoff, tell me precisely why we got no inflation from QE from 2009 to 2019 and the BoE thinks we have not since then
No beating around the bush, a full explanation please since you obviously know the answer
Why would the BofE shout from the rooftops they were responsible for inflation???… any macro event is a combination of different factors. Yes the oil price ballooned post the invasion of Ukraine and yes there were supply side issues post covid… but leaving a mechanism in place designed to counter deflation in 2008 for another 10yrs was storing up problems… we had persistent growth in the money supply..and growth on the money supply contributes to inflation. That’s why virtually every central bank on the planet are trying turn the money supply around to control inflation and it is working!!! Or do you think if we had the term structure of interest rates still at near zero the current inflation numbers would be the same??… if you do genuinely believe the money supply has absolutely no impact on inflation then i think it is up to you to prove that as you will be basically saying all the major central banks on the planet are wrong and the ex accountant richard murphy is right.
I note you have not answered my question Geoff but you have changed your last name on your email and are now claimning credit for a hattrick in 1966.
You don’t know your name.
And yes, I am right and central banks are wrong. Since central banks admit it takes two years for interest rates to impact inflation and it has fallen well before that time has elapsed since rate rises it is glaringly obvious that they are wrong.
The reality is that two things happend. Supply chains sorted themseles and markets stopped panicking about war and prices fell back to pre-war levels
That is why inflation is now falling. The only reaosn it has not fallen further is that central banks have increased the price of money with considerable knock on effects
Prove I am wrong.
I know you can’t.
Not if the rich have anything to do with it we won’t.
Is it not true that goverment borrowing always has a lower interest rate than private finance. So why would use the more expensive money?
I rememder that one UK train manufacurer lost out to a German one because Germany had a lower interest rate.
I have not suggested using more exoesnive money
I suggested base rate
Richard
Going back to MMT Basics.
there is money looking for a home.
It can be invested in private sector projects, these carry an element of risk, or may be ‘undesirable’ eg Buy to Let.
Government ‘Savings’ acts in a similar way to taxation, with the Government effectively cancelling the money then reissuing it when the savers want it back.
Government can then create matching funds to spend on Social Housing, Renewable Energy, Tram systems etc etc.
But you miss the point I am describing capital.