This morning's Economic Truths video is now out. In it, I argue that the obsession with the UK's national debt is absurd.
The UK government has no need to ever borrow money. It can create all the money it wants, when it wants, from the Bank of England. The reality is that the City is desperate to save its excess funds – created by government spending more than the sums it reclaims in taxation – with the government because the government alone can always guarantee to repay funds saved with it.
But that's not borrowing. That's the government offering savings facilities as a favour to the City.
The audio version of this video is here:
The transcript is:
Governments do not borrow from financial markets.
I know that everybody thinks they do. I know that Chancellors of the Exchequer say they've got to keep the City of London happy, and they've got to constrain borrowing because the markets might not give them the money that they require. I know all this nonsense is talked about all the time and the national debt is discussed as if it is going to bring doom to us all. And it's all a load of utter nonsense.
Let me explain why. I have already explained in another video that the government creates the money that it spends. Every day, so long as there is a legal budget, the government can tell the Bank of England to spend whatever money the government requires, and the Bank of England has no choice but to extend the government's overdraft to put that money into circulation to pay for whatever the government wants.
That is a matter of fact.
Taxpayers do not fund that process.
Tax exists to reclaim the money that the government puts into circulation.
But also, as a matter of fact, the government sometimes decides, for its own very good reasons, that it does not wish to reclaim all the money that it has put into circulation in the economy, but wants to leave some out there in use.
Why does it do that? Well, first of all, because it wants its money to be used, and we want its money to be available to us to use, let's be honest. We'd have a pretty poor economy without government-backed money in circulation, so it has to do that.
And secondly, it might not want to reclaim all the money that it has put into circulation because it wishes to provide a fiscal boost to the economy. If it spends more into the economy than it taxes back, it increases the amount of economic activity in the economy, it delivers growth, and we're all feeling happier as a result.
So, for those two reasons, it won't always tax back all the money that it spends into the economy.
But remember, spending always comes first in this process. It has to. If the government didn't spend money into existence in the first place, there would be no money to pay tax with, and if the government spends but doesn't claim all the money that it has created back by way of tax, it's left out there in the economy, and eventually somebody won't spend it.
Of course, most people will. Most people spend most of what they get in terms of income. But some people save, and when they save, they want to put it in a safe place. They could put it into stocks and shares. They could put it into their commercial bank account, or, and this is incredibly common, they will entrust it to a pension fund.
Pension funds hold more money than anyone else in the UK. Over six trillion pounds of money is deposited in our pension funds. Now, pension funds have a diversified portfolio that they put their money into. Some they put into shares, some they put into property, some they hold in cash. But quite a large part of the money that is held by pension funds also goes into government bonds.
Government bonds are quite simply savings accounts created by the government where somebody puts their money in on a certain date and is guaranteed to get a repayment 1 year later, 2 years later, 5 years later, 30 years later, up to 70 years later. All of those are possible. The point is that somebody wishes to place their money away securely, knowing that one day in the future, they will want it back.
And the person who is best able to guarantee repayment in the whole of the UK economy is the government. Why is that? Because the government can always create more money to make repayment and nobody else has that ability if it comes down to repayment of their own debt. Even a bank can't do that.
So, the government is the safest place to save, and that is precisely why pension funds, and also life assurance funds because they too have fixed commitments to make repayments in very many cases, will save significant sums with the government because of that guarantee that repayment can be made.
So, what are the sums deposited with the government that we call the national debt? Are they government borrowing?
Why would it have to borrow? Think about it. The government can create all the money that it needs whenever it wants by asking the Bank of England to create it. So why does it need to borrow from somebody other than the Bank of England, which is its own personal bank? It doesn't need to borrow from anybody else.
And we know that's true because the government did, of course, borrow from the Bank of England after the global financial crisis. That's what the quantitative easing process did. And it did it again during COVID, a total of £900 odd billion. So, it doesn't need to borrow from the City of London as a matter of fact. But it is quite willing to take the deposits from the City of London that they want to put somewhere very safe.
Our supposed national debt is then not a debt at all. It's actually a bank deposit account, in effect. The government is running a banking and savings system for the City of London, where it lets these people place their money with the government for safekeeping, guaranteeing that it will be returned at some fixed date in the future, with interest being paid in the meantime, admittedly at a lower rate than anybody else pays. But that's because there's no risk associated with this savings account.
So, let's stop all this nonsense about, “we are dependent upon the City to provide finance”. No, the City is dependent upon the government to provide it with a savings opportunity.
And why does the City need to save? The City needs to save because the government has created more money than it has claimed back through taxation.
In other words, this sum that returns to the government was created by government spending in the first place. The deposit that is saved with the government was, in fact, created by the government.
So, there is no crisis and never can be a crisis about government borrowing when the government is simply providing a safe place for deposit for those who are holding the money that the government has created until the time comes - if the time comes when the time comes, and it may never - that the government decides to tax that money back.
It's a very different view of how the economy works, but it has a great advantage. It's the truth.
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May I suggest that the Government should be looking at what are the reasonable needs of The City ie for Pensions Funds, Insurance, need for Security etc and limit its creation of Government Stock to what is needed for that purpose?
Its worth pointing out that I have seen it said that Singapore that has a Budget surplus issues Government Stock for precisely this reason.
As I have also said in the past it may be desirable to issue Government Stock in much the same way MMT says the Government levy’s taxes to ‘cancel back’ excess money especially in the savings and investment markets
I would argue that is what it already does
All correct.
Government should….
Decide what we need/want that it’s in the best position to deliver.
See what we can actually deliver.
Allocate and execute spending/delivery.
Decide how much of that spending needs to be drained to prevent inflation.
Use a mix of tax and gilt sales to achieve it.
The question then is ‘what mix?’.
While tax and gilt sales both drain money they are quite different in their impact on behavior. I will act differently if I am taxed a pound or buy a gilt for a pound. Tax is
permanent removal, my gilt feels like I am saving and have the money.
Getting the right mix of tax, gilt sales and money creation needs continuous adjustments in the light of events. The aim is to achieve equity in tax, sensible interest rates and price stability.
Thanks
You know, I am glad that you wrote this post but I am also severely struck by the fact that you should not have had to write it.
As late as 2008 we had a private banking created crisis where state controlled central banks had to bail out the privately dominated money distribution system.
You would think that with that being done in broad daylight it might have helped people to learn a thing or two about these matters but alas not.
And the reason why this so is because (1) our politicians are in on the deceit of the people on these matters by the capital order that enables them to win elections because this system funds them and (2) our media and academia have been captured by the same liars who fund our elected members.
All too nicely sewn up if you ask me.
You might be right
The problem, if people wish to discover where there is a real one in this broad area; is found in the ability of Britain to buy the goods and services it requires. In order to do that, Britain imports more than it exports, and virtually all it exports now (apart from oil and whisky, which have made major contributions) are the City of London’s financial services (which are of declining value because they are a survival of past and declining advantage). They are not enough.
The problem is the balance of payments. Britain’s pride is that it is a great trading nation. Unfortunately it is a lot better at importing than exporting; and if you wish to do that, you need the capacity to acquire the goods you buy. There is much heat about this at the level of theory; but if you wish the luxury to import more than you export, then the best position to be in to do that is to be the world’s reserve currency (most of the theorists promoting this are American). Britain isn’t in that unique position, but seems to think it can live forever of the vapours of past glory.
Britain has a balance of payments problem. It used to recognise that, and obsess about that, from the end of WWII, when reality struck home. In the 1960-70s we obsessed about it. It didn’t fix the problem, but it obsessed. Then the neoliberals came along, and nobody bothers now. Now we borrow too much, and obsess about that. But we still have a balance of payments problem, and we still haven’t fixed it, whether Britain wants to notice or not.
So far the bubble of our currency as a mechganism for saving has not burst. There are heavy freign savings in sterling. If that changes we are in deep trouble.
Unfortunately these issues are not discussed. The focus is on ourselves, and begs the serious questions.
We claim to be a trading country, but we decide on Brexit, ignore the balance of payments, can’t manage our borders in or out of Europe, and don’t invest – notably in Britain. Labour is going to produce growth, without investing in it; and the private sector, over the last fifteen years hasn’t invested in Britain: whether interest rates are 5.25% or 0.1%.
And it really doesn’t matter who you vote for; Labour or Conservative, the fiscal rules remain the same. The fiscal rule difference on debt (the one that matters); hangs on whether the debt falls at some unspecified point over a five year period, or the end of a five year period. Please. The whole policy is on wheels.
The illusion is that we are now completely independent. But I doubt if the BoE or Treasury believe that, or we wouldn’t need the current pantomime.
Just to demonstrate how we have hit the buffers because of the is obsession with deficit reduction, The Department for Science, Innovation and Technology (DSIT) has announced a cut of £1.3Bn spend on innovation and research; £800m from a University of Edinburgh project for a £800m supercomputer, and £500m on AI projects.
And there is Scotland’s future in a nutshell; blown away less than three weeks after Labour seduced the Scots to vote, to have ambition summarily destroyed.
The Union. This is what ‘Better Together’ means. Brexit. Now this. What’s the upside? Well, there is always the two-child cap, the Winter Fuel Allowance termination we can bank on continuing; and there is always more Farage, budget cuts and Austerity to look forward to, for the next fifteen years – and no growth; and somewhere in there the return of the Conservatives in Government; and the way things are going, rather sooner than you planned for. Memories are short in the digital age.
That is absurd…
I think Steve Keen is now tackling this in his Minsky dynamic systems monetary modelling programing partly due to the ongoing argument with MMTers about imports.
The balance of payments problem is symptomatic of an unbalanced economy. The finance sector is a cost of doing business and adds little to real GDP. The UK needs to get back to making things (logically for the GND Green New Deal to reduce climate warming impacts) but needs to finance the infrastructure.
The big banks do little to help commercialise the great ideas/research of the UK. A model for financing this comes from Germany, Japan, China, Korea, USA where lots of local small often not-for profit banks lend to local business’s. Note over regulation is currently damaging this small bank sector, much better local bank examiners (like local tax inspectors) who can spot upcoming problems and guide the banks rather than Basle III for this sector.
There should be a return to central bank “window guidance” on lending a percentage of bank loans for real GDP, not the parasitic finance sector (FIRE Finance, Insurance, Real Estate).
Might part of the problem be the misleading of the under educated majority by a badly educated mini-minority and/or those who are, consciously or unconsciously,rentier shills?
Essentially we live in a two-tier society. One tier understands it (well, some of them will) and has access to money, the other tier (you and me) doesn’t and won’t. It’s grotesquely anti-social as it holds back overall human development by only affording opportunity on many levels to those of a certain class, no matter they may not actually be the best for the job or whatever. Favour the connected over the able, generation after generation, and eventually that generational incompetence will add up and it’ll all crash.
That seems to be what’s happening now.
Is it true that, under certain conditions, pension funds are required by law to hold some money in gilts?
Regualtion essentially requires that, yes
What regulation is this, Richard? I have been a pension consultant for almost 35 years and n]know of know such regulation, please can you enlighten me?
Tracey Wiliamson FFA
Scheme Actuary
If you are sure, then I agree.
But equally, I note there is no one of your name and qualification I can find on the web
Replying to “Tracey Williamson” (if that is your real name):
The requirement is stipulated in the 1995 Pensions Act. I found this after a 30 second internet search: https://publications.parliament.uk/pa/cm199900/cmselect/cmtreasy/154/0021603.htm
Try harder, troll.
Money purchase pension schemes set up with insurance companies on an endowment policy basis would be made up of three levels of added bonuses, initially an annual guaranteed bonus which would be invested in government stocks with a guaranteed return, then reversionary bonuses applied each year and then a final bonus applied at the maturity of the policy, all to purchase an appropriate annuity.
It now appears to be the government’s intension to direct pension schemes to invest a certain proportion of their receipts into UK equities in order to help support our economy.
I am not sure what your argument is
That was out the park Richard. Well done. These short ‘truth’ videos will be a fantastic resource for years to come.
PS I hope that economist Steven Hail checks these videos out (seeing that he trained City bankers, including BoE staff, for years before heading off to Oz and discovered MMT). His knowledge of bonds is top-drawer.
Thanks
Go tell him, he’s on Twitter.
If you accept the reality that spending must precede taxation it then becomes obvious that the government has no control over the deficit (outwith a fully totalitarian state).
The Deficit is nothing more or less than the net flow of savings desired by the rest of us. If I choose to save part of my salary that is an increase in the deficit for this year. Likewise if imports exceed exports that is in effect the foreign sector saving in Sterling and again increases the deficit.
Which makes the economic baby talk of “balancing the books” all the more an impossible fools errand (with Joe and Josephine public being taken for the fools)
Wait for the video…
The most succinct and easy to follow explanation of the core message of MMT. I would add that another function of government bonds is to allow foreigners to convert their sterling holdings from their export surpluses in an interest-brearing product. So the government does not borrow from foreigners either. The UK government doesn’t even borrow in foreign currencies other than in times of war and sometimes overnight by way of currency swap arrangements. Maybe that’s in a later video.
Yes….
[…] Governments don’t borrow from financial markets Funding the Future […]
From the DMO: “ A gilt is a UK Government liability denominated in sterling, issued by HM Treasury and listed on the London Stock Exchange. The term “gilt” or “gilt-edged security” is a reference to the primary characteristic of gilts as an investment: their security. This is a reflection of the fact that the British Government has never failed to make interest payments or principal payments on gilts as they fall due.”
What happens if a gilt auction fails to attract enough investors?
There are guarantors who subscribe.
PS note the position of the big red arrow in the centre of the youtube screenshot. Try to right align your text to avoid this?
Yes, noted
But not an issue on YouTube itself though…. So not a big deal as that is where this really matters.
I would like to see you interview Gary Stevenson. I think the synergy would benefit you both, as you’d both gain a proportion of each other’s subscribers.
I know there are differences of opinion, but it would be interesting to see whether discussion can help.
I agree
We have discussed this
Michael Hudson tells how in ancient times, the Palace/Temple was the creditor and the people were the debtors. In the event of pandemic, war or famine, debts could be forgiven rather than taking the people into slavery. It was called a Jubilee.
Today we are lead to believe that the State is the debtor of the private banking system. This is probably the result of history as the banking system grew out the goldsmiths etc. Money was seen as a physical entity. They -for example the Daily Telegraph- tell us the Govt has to put the opinion of a few hundred ? decision makers in the money markets, looking to maximise their profits, over the wishes of the elected government.
I ask myself why do we keep it that way round. My answer is ‘power’. The bankers can tell us money is a rare commodity which only they can create and the reckless state will only debase the value of it by ‘wasting’ it on things like public health, education and social security. Their denial of what you teach is an attempt to maintain their power and influence. If we listen to Rachel Reeves, it seems a successful policy.
Great point Ian.
Do not forget that Professor Hudson has a new book out about debt in the old word ‘The Collapse of Antiquity’ (2023).
This book sets out to illustrate how debt and its consequences for societies old and new has been largely ignored by historians much to our detriment.
Take it one step further. Think of debt issuance by the UK Gov (and any national gov with its own currency) as a mechanism to recycle currency back into the economy. In particular currency from those that would otherwise be stuck hoarding it as they’ve got nothing better to do with the currency they’ve hooovered up from the economy.
It’s always possible to offset this with increased taxes to the point where taxes could be large enough that there’s no need for bond issuance: i.e. the budget is balanced. But who would be bearing the burden of those increased taxes? Would it be the parties that hoover up the currency and hoard it? Not likely, e.g. think of foreign trading partners that buy gilts as a means to peg their currency to Pound Sterling. Can’t tax them. And in general you’re not going to be able to tax the winners who hoover up sums of the currency on a recurring basis. At best, what happens when you increase taxes you’re simply lowering the amount of UK Gov bonds that these winners end up hoarding. Which is not to say that there aren’t other benefits to the rest of the population bearing the burden of increased taxes, e.g. to reduce inflation (even better reduce asset bubble inflation).
Completely wrong
Bonds take money out of the economy
Here helpfully confirmed by the BoE on their QE page where they mention QT in passing; “Now that we are reversing QE, some of those bonds will mature and we are selling others to investors. When that happens, the money we created to buy the bonds disappears and the overall amount of money in the economy will go down.” https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
The BoE currently openly beavers away at this endeavour to the tune of tens of £bns a year, merrily shrinking the economy, seemingly untroubled by the endless declarations of the need for economic growth from Labour.
Yes the UK Gov and the BoE both take money out of the economy by selling bonds, but with a big difference. The BoE lets it sit on its balance sheet. The UK Gov doesn’t – it spends it back into the economy. Hence recycling.
No different than how people think about recycling of petro dollars. The point isn’t to remove dollars from the countries the US imports oil from. The point is to recycle those dollars by spending them in the US. The spending of those dollars wouldn’t be possible without swapping bonds for those dollars.
MMT proponents like to maintain the fiction that the Gov could engage in unsterilized spending if it weren’t for for legacy constraints from when currency was on the gold standard. Hence thinking of currency as being recycled is heterodox to MMT. I suggest that until unsterilized spending becomes a reality, let’s treat it as out of bounds. If you want to spend currency, you need to get it on your balance sheet first. By recycling it via bonds or tax issuance.
MMT is reality, not fiction.
And not a single penny from bonds is recycled into the economy. It is money taken out of circulation.
When you understand the most basic things about money, call again.
@Matthew T Hoore.
Your haven’t linked to the Pensions Act 1995 regulation, you’ve linked to an article that mentions it, and omits the key caveats and rules associated with the statement made.
Most importantly you’re obvious unaware of the various updates to this Act and, more importantly, the legislation that has superseded it – including the Pension’s Act 2004.
Perhaps cease with the google searches, and leave the detailed understanding to the actuaries who are paid to understand and apply them?
‘Tracey’
Very weirdly you have changed jobs since your last comment from a major pension company to a major pension adviser, whose website does not acknowledge your existence.
I think I can confidently say you are the last person anyone should listen to on pensions.
Richard
Richard this economic truths series is amazing. I agree with almost everything you say and much what you say in this post . But there is one thing that I have great difficulty with. The BoE overdraft feature seems unique and the policy choice of interest on reserves has complicated things.
What is described below seems like borrowing.
https://neweconomics.org/2023/11/government-could-save-55bn-over-next-five-years-by-limiting-bank-of-englands-interest-payments-to-commercial-banks
https://neweconomics.org/2023/09/reducing-stealth-subsidy-to-banks
I am not sure what you are asking me?
I am not sure myself 🙂 I would have agreed that without any reforms we can have as you say the conclusion ‘Governments don’t borrow from financial markets’ (WW2 financing proved that). However by paying interest on reserves my links suggest that the banking system figured out a way around that potential economic truth.
The paper by the New Zealand Treasury seems to express the same concern.
https://www.treasury.govt.nz/sites/default/files/2023-04/t2022-2562-interest-settlement-cash balances.pdf
“Nonetheless, there is a question as to whether it is necessary to pay interest on all
settlement cash balances, or whether a zero-interest tier could be introduced. Introduction of a zero-interest settlement cash tier would effectively require banks to provide zero interest loans to the Crown.”