I posted this video on YouTube this morning:
The transcript is as follows:
We really need a national debt in the UK. If you listen to our politicians, you wouldn't believe that. They talk about the national debt as if it is some sort of curse that we must get rid of. And that is so untrue, it is ridiculous.
Now let me explain why I think we need a national debt. Firstly, as I've explained already in another video, when the government spends, it creates new money.
Then it has to collect that money back to prevent inflation. And that's what taxation does in the main. It cancels the impact of the new money creation that the government does whenever it spends by literally bringing that money back in by way of taxation. But it doesn't always want to cancel all the money it's created.
In fact, most of the time it won't, because either there's been inflation - it's modest, but nonetheless real - and it therefore needs to leave more money in the economy so that there is more liquidity in that economy to make sure that there is enough money to go around - or it wants to stimulate the economy by literally spending a bit more than it collects by tax.
But that means there is that extra money in the economy and ultimately that won't be spent because the first person who gets the money clearly will benefit from it, pay their taxes on it, and then spend it. Whether that's on employees, whether that's on expenses for their business, or if it's an individual, on literally keeping their household going.
Then the next recipient will receive the money, pay the taxes, and then spend, and so on, until somebody, somewhere down the line – it doesn't matter how far they are down the line – somebody, somewhere, will save.
Now, what's the role of the national debt? It's actually there to mop up those savings in exactly the same way as tax is necessary to mop up cash in the economy to make sure there isn't too much inflation.
We need to have a growing national debt if the government runs a deficit to mop up the excess cash that ultimately is going to be saved as a consequence of that excess spending that the government has chosen to make. That's why the government has to make available savings facilities to people so that they can return that money to it to effectively balance the equation with regard to the issue of new money.
So the national debt plays an essential role. in managing the money supply, but it does some other things as well.
In particular, the national debt is largely made up of government bonds. Now there's nothing secret about government bonds, they are simply deposit accounts issued by the government for fixed periods of time.
So - one year, three years, five years, 30 years, 70 years even - with a fixed interest rate over that period, and then they are repaid, normally, by issuing another bond to replace the old one.
But the point about the national debt is that it provides a very safe way of saving for large companies. You and I, if we put our money into a bank account, we get a guarantee from the government that £85,000 that we deposit with any one bank will be guaranteed to be repaid even if that bank fails.
But if you're a large company who wants to put a billion pounds into a bank. that guarantee isn't worth a lot. £85,000 is, well, peanuts compared to the amount they've got on deposit. And we have known since 2008 that banks can now fail, because they did in that year, as part of the Global Financial Crisis.
So how do money markets work instead? The large companies who want to save buy government bonds from banks, and then they sell them backwards and forwards, in what is called a repo market. But the government bonds provide the security for that. Literally. The City of London couldn't operate without government bonds being in existence.
And there's another fundamental reason why we need government bonds. About a quarter of the bonds really in issue in the UK are held by overseas governments, or overseas companies who want to hold sterling to facilitate trade. So, we need them to have that account here, and we need bonds to make that possible.
Finally, every single private pension in the UK is ultimately underpinned by the existence of government bonds which are the only guaranteed income stream which will exist for the remainder of a person's life once they reach retirement age.
Those are essential parts of the UK economy that government debt through government bonds facilitates.
We couldn't do without them.
We need a national debt.
When our politicians say it's got to be repaid, they're talking nonsense. Because nobody - nobody with any sense at all - nobody who knows anything about economics at all - nobody who knows how the city of London works at all, would ever want that to happen.
So I just wish they'd stop talking that nonsense, and talk about the reality - that we need a national debt, and thank God we've got one.
Thanks for reading this post.
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The UK has had a national debt for over 300 years. It is necessary part of the economy which would not work without it. It should be called the national savings.
That video is to follow…
I like the reference to the £85,000 guarantee to bank accounts to explore this; but would emphasise that the form of guarantee treats the bank deposit differently from bonds. The bonds are tradable, but not guaranteeing the nominal price (save at redemption, at a future date). The bond is tradable at a discount to the nominal price. The price today is not guaranteed. The price of money is fixed (save for inflation). On the other hand the £85,000 treats the nominal bank deposit balance exactly as money; a promise to pay the bearer guaranteed at nominal face value by the sovereign. It also follows that taxpayers’ money is not taxpayers’ money. The taxpayer does not own the money he or she holds. The taxpayer holds a basic redeemable IOU; an entitlement to be paid, not ownership of the IOU, which belongs to the sovereign entitleld to redeem it. The money belongs to the money-IOU guarantor – the sovereign.
Accepted
But maybe for another video
Apologies to be slightly off-topic, but how then does it work for countries in the Eurozone? I assume the policy is the same but with countries having wildly different levels of economic requirements, how do they balance it all and is the Euro a bad idea because of this? Or is it a good idea for those it serves, i.e. the richer more stable economies like Germany, and fails the poorer economies like Greece?
The eurozone was lousy idea only vaguely redeemed by having local centr al banks with representation at the ECB, which is however German dominated.
It can be fudged to work, but it should never have happened.
Wynne Godley’s seminal paper on “Maastricht and all that” worth a read :
https://www.lrb.co.uk/the-paper/v14/n19/wynne-godley/maastricht-and-all-that
have i got it right what John Warren has just commented, Richard?
1- the govt. creates money- it owns that money- which it “lends” to the economy. {the money leaves its govt.home}
and i’ve added the next bits to further my understanding -2 to 5
2- tax payment is the return of that money, as are
3-the gilts/bonds sold ie. 2 and 3 return the govts money
4- the govt uses QE to lend out the “money equivalent” back to the economy [for the return of the gilts}
5- in QT the govt. returns the gilts to the economy and receives the “money equivalent” back. {the money comes home}
in other words everything starts with the govt creating and owning the money.
Mainly right – QE /QT is a bit more complicated than that but you are 97% ahead of most people
Worth specifying that it isdebt if you owe someone else in a currency not your own (and which must be repaid)?
The UK national debt is 99% + owed in sterling
Apologies. I meant to add something to that effect. The point being to underline that it was fundamentally not repayable in the same way and more arguably savings (IF invested productively, and that term must itself be caveated).
This was my summary of my submission to the House of Lords enquiry into the National Debt :
Why should we
worry about the
National Debt
When all it is
is money which hasn’t
been taxed away yet.
And why would
government borrow
what it has the power
to create
It provides
a save home
for your money
while to use it
you await
After all,
we have lived with it
for over
three hundred years
So why should it
now suddenly
result in tears?
Thanks
Richard I am a big fan of your economic and accounting expertise, your priorities about what we should do with our resources, and your taxation project. But this debt thing is the part I do not get.
1. Most people believe all money is cash, in vaults and the government creates all the money, like it does the notes.
2. So why not run the system they way people are hardwired. Central bank money should be spendable by all, not just the banks.
3. Then we could operate the system like Lincoln did with his greenbacks, only the money would be mostly digital just the way it is with the private banks.
4, From my old finance courses, pensions etc can boil away almost all the risk through diversification.
I accept the state can create money by spending
But you are asking it to create money be lending. Why should it want to do that? I can see no reason why it should, which is why I think central bank created currency is an answer in search of a question no one wants to raise.
Richard I think this BoE video shows that we are still under the CB thumb. The banks treat reserves like a foreign currency which is no good until they issue bank credit money. Not only do the banks collect fees for all this, they then get interest on the reserves in their CB account. It is an outrageous rentier system.
https://youtu.be/CvRAqR2pAgw?t=174
Richard – would this restatement of Rob Gray’s comment (above) be a useful base to develop a fuller description of public sector purpose and operation?
Our State, which creates and owns all Sterling money:
1. supplies newly created money to the economy by purchasing goods and services
2. taxes economic activity to remove circulating money from the economy
3. issues and sells dated gilts/bonds to withhold circulating money from the economy
4. pays interest on withheld money to the buyers of bonds/gilts
5. pays denominated sums to holders of gilts/bonds on redemption
6. buys existing gilts/bonds to increase circulating money in the economy
7. sells existing gilts/bonds to reduce circulating money in the economy
Yes
Richard, I think most experts agree MMT is basically Keynes who said
“Increased investment will always be accompanied by increased saving, but it can never be preceded by it. Dishoarding and credit expansion provides not an alternative to increased saving, but a necessary preparation for it. It is the parent, not the twin, of increased saving.”
That is we create the money to meet funding demand, and the resulting economic activity will increase the income and savings – as long as there are resources to mobilize or reallocate.
Those who believer there ‘must’ be enough saving to make the necessary investment are committing the ‘loanable funds fallacy’.
If we can agree on that, would it not be simpler to have the money created by the sovereign, rather than the banks. Isn’t that what Friedman, Fisher, Tobin, Allais and others were proposing. Do what Lincoln did – that like Lincoln’s precedent of greenbacks, government expenditures should “be financed entirely by either tax revenues or the creation of money, that is, the issue of non-interest-bearing securities. Government would not issue interest-bearing securities to the public”
https://miltonfriedman.hoover.org/internal/media/dispatcher/214916/full
The state could do this
But why would it want to?
Why does it want to take the risk of default?
And why would it make credit available when required?
Money creation by spending is one thing. But why should the state do money creation by lending? I really don’t get that. Nor can I see it happening.
Richard, Can you explain the mechanism of default?
MMT has stated the state can always issue the money and would never default.
Different countries do it differently but essentially the CB issues the money out of thin air and there is no debt service, net the different approaches by different countries. For instance one model would be the CB buys the bonds which pay interest, but then refund the interest to the government.
There can be no default on debt in your own currency
Debt is on debt in foreign currency