I have posted a video this morning in which I argue that when the government discusses what it calls national debt, it forgets something really important - that if it supposedly owes money, there must be someone it owes to. Those people it might owe it to are either households, businesses, or people from overseas saving in sterling in the UK. And if all those three groups decide to save - as they often do - then the government has no choice but to borrow. And that means the government can talk about the national debt as much as it likes, but in reality it has very little practical control over how big it is.
The transcript is:
If you believed our politicians, you would think the government's books never balance. Let me promise you, the economy always balances.
The evidence of this comes from a theory called sectoral balances. Sectoral balances explain how the economy works by reducing our understanding of it to just four groups of people.
There's the government, there's households, there's businesses, and there's the overseas sector. That is everyone else in the world who's not in the UK right now, but who does use sterling.
The critical point of what we're talking about is sterling. The balances of sterling.
Of course, if you were in France, you'd be talking about the balances in euros. And if you were in the US, it'd be in dollars. But I'm talking about the UK, and this is the balances in sterling.
Now, when we're talking about sterling, if the government borrows money, somebody has to lend it to it.
If households save, they must have somebody who they can save it with.
If businesses borrow, they must have somebody they can borrow it from.
If the overseas sector saves in the UK, they must have somebody who wants to use that money.
It is not possible to have a saver without a borrower. That is the fundamental point that the sectoral balance analysis depends upon. You can't have a borrower without a saver. Now I know that challenges some modern theories of banking, but in aggregate terms, this is true.
If we look at the macroeconomy rather than the microeconomy, this theory holds true. Every single saving in the macroeconomy must be matched by somebody who borrows. So if the government says it wants to run a surplus - and quite a lot of political parties do these days - what they mean is they want to save, and necessarily, somebody else in the economy must borrow.
Now, usually, when they forecast that this situation will happen, they forecast that households will borrow to match the government's savings, i.e. the surplus the government makes is matched by a deficit in households because they have to borrow.
Companies, by and large, actually run themselves around neutral, most of the time in the UK. They neither really net borrow or save very much. They, broadly speaking, reinvest what they earn.
And the overseas sector has for decades saved in the UK. In other words, because the City of London is a hub for international money, it tends to be saved here. So there's lots of foreign money saved in sterling.
Now, if lots of foreigners want to save in sterling, and households by and large want to save in sterling, and companies quite often do save in sterling, the inevitable consequence is that the government has to borrow, because you can't have all three of those groups in society deciding they'll save without there inevitably being a borrower somewhere.
And that borrower, in that situation, can only be the government.
Now, the critical point about this is, and it's absolutely critical - I cannot emphasize that enough - that means that the government is not in control of its deficit. It can't be because the decision over whether it has a deficit or not is actually made by households, businesses, and the overseas sector deciding whether they're going to save or borrow, and by and large, they're inclined to save.
If they save, the government borrows, it must run a deficit, and there is nothing the government can do about it. End of story. Finished.
The government cannot control how much it borrows from year to year. It can't repay the national debt if people don't want it back - savers don't want to be repaid - and it has nothing it can do to change that because the decision is not theirs to make.
They are the person who has to borrow when everybody else saves. There is literally no other choice. So all this nonsense that politicians talk about, that they're going to repay the debt or anything else - it is total nonsense. They can't make those decisions. It's not within their power to do so.
PS: If you're wondering why I did not include a sectoral balances chart it was because I thought it was too much in the time available. Comment on whether others agree with that would be welcome.
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I think it was Wray who pointed out to Al Gore, then desperately promoting the notion of balanced budgets, and preferably government in surplus, that immediately following each of the six periods when the US had operated such a surplus there had been a recession of varying severity.
Thanks.
No need for sectoral balance chart.
I think your key point is that for every saver there must be a borrower. And, stated that way how could it be otherwise?
So what would happen if, for some reason, the government refused to issue bonds to soak up the money people wanted to save?
As far as I can see, the money would end up in people’s bank and savings accounts. And this would mean that the banks and building societies would end up with a large reserve account balance. And reserve account balances are included in government borrowing (they are money owed to the banks). So, as you say, there is no way for the government to avoid borrowing if people want to save. It is not within their control.
Thanks
Good point
The only true reason the government needs to issue treasury bonds is to mop up the reserves they’ve issued to the banks which will enable them to raise base rate above zero. Manipulating base rate is an alternative tool to regulating inflation or deflation by other means. The problem with manipulating base rate, however, is that by making money more expensive it contributes to inflation. The overwhelming majority of voters have no understanding of this and buy into voting for political parties that believe the vile lie stemming from the extremely wealthy that government has no money of its own. This means they fail to understand the central purpose of taxation is to free up resources for the government to use.
https://www.levyinstitute.org/pubs/OP_72.pdf
http://bilbo.economicoutlook.net/blog/?p=50005
The government could also, of course, simply issue bonds as a banking service
There is no reason why it should not do so
wouldn’t “exchange” be a more appropriate word than borrow?.
two equal flows rather than an obligation to repay.
HI Richard,
From your piece ” if the government borrows money, somebody has to lend it to it.” I have never heard (or maybe someone can enlighten me if I missed it) any Political, Economic or other journalist ask that very question, to either a Chancellor or party leader or BoE governor. Never comes up on Question Time or other political “analysis” programmes.
It is , perhaps, a question everyone should ask of their PPC.
Regards
Indeed….
I’ve never really understood why so much of this is ‘theory’.
Money is synthetic. It’s made by us. Surely we know how it works?
Luckily, MMT tells us how it works. They just need to drop the ‘theory’ bit. Maybe ‘Modern Monetary Fact’?
Indeed. Strip away any policy possibilities and nobody will disagree with MMT. Also, it’s not modern so “Money” would be a good description.
Agreed
davidn:
I think “theory” in MMT is used in the sense of “a formal statement of the rules on which a subject of study is based, or of ideas that are suggested to explain a fact or event” (Cambridge Dictionary definition), rather than the looser sense of being merely an opinion or speculation.
Agreed
You seem to think that the only option people have is to save / invest with the government.
The issuance of government bonds is the outcome of running a deficit. A lower deficit means lower supply of bonds, and lower interest for the government to pay.
Which results in less demand for bonds as better opportunities are available elsewhere.
Can you explain why the government is constrained by what you call a deficit when issuing bonds? Why can’t it meet demand for bonds? It’s way bigger than that.
Where did it say that the government is constrained by a deficit when issuing bonds?
It should be obvious that the issuance of government bonds is linked to the difference between the amount the government ‘spends’ and the amount it ‘earns’, with bond issuance making up the difference. Economist call this a deficit.
The more bonds it issues, the more interest it needs to pay, due to the higher nominal amount issued and the higher coupon that will be necessary to clear higher issuance of bonds I.e what is called supply and demand factors.
The demand for these government bonds is linked to the expected return on those bonds and the alternatives returns available elsewhere.
The more binds issued, the higher cost to the government.
You said it
And then you repeated it
And you do realise that no government needs to issue bonds if it does not want to?
In fact, do you know very much about any of this at all?
In Singapore they don’t typically run deficits but still issue government bonds. Why? As a service to savers.
Now, bond issuance and deficits are linked but only in that bond issuance drains reserves and dampens the inflation that might be generated by deficit spending.
Let me remind you of Randall Wray’s argument:-
“Government sells bonds to reduce downward pressure on interest rates.”
https://www.levyinstitute.org/publications/if-government-can-print-money-why-does-it-borrow
The issue of governments creating treasury bonds for savers is a political choice for those who have the ability to save. A form of welfare. Meanwhile those on inadequate wages get means tested for welfare top-ups!
If the public choses not to save with the government, what happens? Does government spending go down?
QE
Or, the government funds itself, as in 1914
https://bankunderground.co.uk/2021/01/18/how-britain-paid-for-war-bond-holders-in-the-great-war-1914-32/
Interesting discussion.
Just like to point out that Gary Crosby used to play for Nottingham Forest and is currently assistant manager at Mansfield Town FC. Just saying.
A nuance to your statement that the government has no practical control over its deficit. Savings are created by government deficit spending dollar for dollar and so the amount of deficit spending is actually in control of the government.
As you say, all savings created by the deficit spending have to end up as government “borrowings” either in reserves or bonds as a result of the way fiat money is created and the sectoral balances. That is just the way money creation works and that process is not in government control – except that the laws and regulations that the government made to establish a fiat currency made it so.
Within that framework, the ownership of the savings has been transferred from the many to the few by the way our economy operates, supported by a captured government that legislates to support this unfair distribution.
I disagree – as QE proved, unless we include CBRAs
There are other options for saving
And the government can offer a saints facility beyond book balancing, if it wants
Richard, when you get a spare 5 minutes (I know!) please could you do a glossary entry on sectoral balances? Thanks
Yes…
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