I have published the latest video in the Economic Truths series this morning. In it, I argue that it's widely claimed that our national debt threatens the well-being and stability of the UK, which is quite absurd when the national debt exactly equates to the value of private wealth that the government has injected into the UK's economy. Why is it that those talking about the national debt do not seem to know this stuff?
The audio version of this video is here:
The transcript is:
Government deficits create private wealth. That's what the government's own data tells us. The data I'm talking about is the information published on what are called the sectoral balances.
Now these things matter, although very few people seem to understand them. In every budget report there is a sectoral balance graph published and it looks like the chart I am now putting on the screen.
There it is. A pretty graph with four lines on it. The lines in question represent the four sectors of the economy. As you will see, the blue line is the government. The yellow line is households. The purple line is the rest of the world. And the green line is business. And, according to a theory created in the 1990s, which I think is entirely valid, those four between them represent all the sectors of the economy that we need to consider when we are talking about what are called the sectoral balances.
And the sectoral balances represent which part of the economy is lending to which other part of the economy, or if you turn the thing on its head, which part of the economy is borrowing from which other part of the economy, because as a matter of fact every lender requires a borrower, and vice versa.
So, one of the things that is obvious about this chart - and the chart in question runs over the period from 2010 to 2029, although let's be clear that the greyed-out bit on the right-hand side is very obviously, as a consequence, a projection. What is very obvious about this projection. is that if you add all the numbers together, they come to nothing. And there's a good reason for that. If every borrower requires a lender, and vice versa, then all borrowing must equal all lending. And everything on this chart is denominated in sterling.
So, what we see - and let's look at one particular period – which is that in 2021 - households suddenly had massive savings and at the same time, the government had the most enormous deficit.
Why did the government have an enormous deficit in 2020/21? Well, that's very obvious. It was paying for the furlough scheme and everything else that supported the economy during the Covid era.
At the same time, businesses and households could not spend money. Businesses could not invest because there was nothing to buy. Households couldn't get out of their own homes to go and spend money. As a consequence, they saved enormously.
Now, did the government's deficit create the savings? Or did the savings create the deficit? That's a really good question because what is apparent is that we can look at this chart in both ways.
The way that most people want to look at it, who are at least enlightened when it comes to economics, is to suggest that government deficits create private wealth.
And that's very obviously true. If you look at this chart, whenever the government is running a deficit, the amount of private wealth goes up. People are owed money. Owning a debt is private wealth. Savings are debts from whoever you've deposited your money with. Therefore, private wealth has increased.
So, the idea that government deficits are somehow terrible for people is, in this one chart, shot to pieces. Because very clearly, government deficits aren't bad for people. Government deficits are great for people. They have more savings. So, what's the problem?
There is, however, another way of looking at this, and that is that people's savings and savings by the rest of the world and savings by business create government deficits.
And actually, that's just as true. This chart represents what is called an accounting identity, something that has always to hold true. And if, as a matter of fact, the people of this country decide not to spend, the people who hold sterling from overseas decide to increase their sterling holdings, and business decides not to invest but save its funds instead, then the reality is that if all of those are in surplus - and you will notice that around the Covid era, that was true of all of them - then what happens is that the government has to run a deficit because somebody has to be the borrower of last resort. And the borrower of last resort in our economy is the government via the Bank of England and its central bank reserve accounts that it supplies to our commercial banking system.
So, the fact is that the deficit is not within the control of the government. The deficit is, instead, within the control of the private sector.
If the private sector decides to borrow to spend, the government has a small deficit.
If the private sector decides to save, the government has a big deficit.
So, whilst you can argue that deficits create private wealth, government deficits are also created by the decisions of the private sector to save. All of these things are true simultaneously.
But unless we understand that there is this, well, symbiotic relationship between all these elements within the economy, we can't understand the economy itself. Nor can we understand what a government deficit really means. And nor can we understand the nature of private wealth, which is, in no small part, related to the scale of the government's deficit.
This is core to your understanding of economics. This chart tells a truth. The fact is, this equation has to work, and therefore it's fundamental to understand it.
Government deficits create private wealth. But, private wealth decides whether the government has a deficit or not. This relationship is fundamental to economics.
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It’s very weird how “blackhole” Rachel can have two economic degrees and a stint at the Bank of England and still not appear to understand double-entry accounting in regard to the government’s role in the country’s monetary system. Is she simply being a shill for the rich or just plain dumb? Does it matter she’s undermining the country socially and economically!
It was fascinating to read Piketty on the economics of the Jane Austen era, where the National Debt created to fight France funded the lifestyles of The Upper Class
Even William Keegan declaring that Rachel Reeves is a Thatcherite!
https://www.theguardian.com/business/article/2024/aug/04/britain-didnt-vote-labour-just-to-get-a-new-iron-chancellor
How ironic that the country voted to get rid of Thatcherism and ended up retaining it. Something is very rotten with the state of British politics!
Keegan is right
So, you have tweaked my curiosity. A little thought scenario then……
What happens if the government side stops?
Does this mean that the private side of the equation starts to extract more out of the existing supply of money by raising prices etc in order to grow its wealth?
I am just trying to think about austerity and it’s effects. We know that things like services and infrastructure decline in standard but does austerity cause inflation?
I have grasped the sectoral balances concept at the macro level, but the micro level continues to throw up questions for me.
Sorry but austerity is fundamentally about making a key resource scarce, and it is time it was consigned to the dustbin.
I might need a walk to think about that
Thanks Richard, have the walk whether you think about it or not.
I was just thinking about how starvation works and how the body starts to draw in nutrients and energy reserves from itself which is only ever a short term coping mechanism and maybe that this is what happens to the money supply as well and it’s relationship with capitalism, the result being that without government money the economy basically eats itself/ consumes what it has through price gouging and exploitation.
This means that the redistributive element of the economy, badly managed enough as it is, basically breaks down completely in favour of rentiers and producers in the absence of government money – except say where as in the PPE scandal, you have govt’ money distributed directly to your already rich mates.
It is good to see Bill Keegan in the Observer this morning talking about Reeves embracing Thatcherism. I could not agree more.
Have a great walk.
@Pilgrim Slight Return
I’m not sure I understand exactly what you mean by “if the government side stops?”
Do you mean that they simply spend nothing, or it stops growing, or perhaps something else
Sorry, I’m a bit slow on the uptake
Yes my friend, that is what I am running through in my head.
Austerity is essentially the Govt side refusing to have a deficit, or spend money.
Of course the Govt can still spend money by awarding contracts to its mates and funders to bypass the redistributive effects and also fail to collect taxes. So this money stays ensconced in the elite, and does not become part of the economy.
But if the money is being reduced in the real economy – the one which us normal folk use – then I can see that theoretically affecting prices and the behaviour of markets to extract more value out of a dwindling money supply.
Good stuff. Was thinking the following two subjects would make great ‘truth’ videos (apologies if you’ve covered them already)
1. The truth about ‘Truss’ <— It was her failure to stand up to the BoE (not 'the markets decided')
2. The truth about the NATURE of 'The Debt' <— It is ONLY a PROMISE to accept £s sterling as payment for a tax demand (not, as most imagine, the government is in hock up to its neck to some external super-rich entity for X hundred gazillion £s…..The 'OMG! How are WE going to pay them back!' reaction…there simply is no THEM involved)
A neat explainer.
Another part of this equation is the velocity of money ( the measures the number of times that one unit of currency is used to purchase goods and services within a given period of time). In the UK and other Western countries the velocity of money has slowed as money supply has grown. Some relationship to Quantitative Easing?
Could we deduce from this that to increase GDP the Chancellor and BoE should be taking effective action to increase the velocity of money? From this perspective resources in the economy and confidence both look to be in short supply.
No
It’s a pretty meaningless concept
£100bn per annum paid in debt interest, money which could be better spent in helping the poorest in society or for the NHS or for Social care.
I know what I think the money should be spent on – I can’t understand why you think it is better spent subsidising investors?
Neil
I know you’re a troll
You have clearly never read anything I have written
I’ve read lots of what you’ve written, it’s mostly bollocks.
I repeat the question, why is paying £100bn p.a. to investors a good use of taxpayers money rather than funding the NHS or taking children out of poverty or improving social care?
Since I gave argued time and again that it is not and it is unnecessary you are the one talking bollocks.
The framing is interesting.
£100bn p.a. – what does that include? Interest on central bank reserve accounts which need not be paid at all? Uplift in the principal payable on index linked gilts, which is not due for years or decades and is recognised on a lumpy basis and not spread evenly over the term? Amounts paid to the asset purchase facility, which is a nominee for the government?
investors – these “investors” are people looking for a safe place to put their money, and in some cases a return that matches their liability profile. The government provides interest bearing securities as a service to the market. We could stop gilt issue tomorrow if we wished.
taxpayers money – no such thing. Where do “taxpayers” get their “money” from in the first place?
Ad hominem is not a counter argument.
Thank you Richard for discussing this.
In some sectoral balances graphs, an additional piece of information is added; the periods when there is a recession. It then becomes obvious that recessions are after periods of the private sector as a whole dis-saving ie the graph goes negative for their balance. The timing is significant as it shows that in the long term, (some years), private sector deficits are not sustainable. They are a predictor of political and financial trouble. Chancellors’ budgets can force this to happen through a wish to apply austerity. It just doesn’t work as a means to get the country’s finances ‘back into good shape’. Good shape is a deficit.
There is a graph here
https://en.wikipedia.org/wiki/United_Kingdom_national_debt
of the UK’s national debt (scroll down to find it) since 1692 and we have had a debt of varying size (up to about 250% GDP) over that period. It is a long enough period to say that our debt is sustainable and we shouldn’t hyper-ventilate about it. I think that it it no accident that the wealth of the country has grown, the money to do this had to come from somewhere and that somewhere has to be the currency issuer, the government. (It is also the reason why, when in the EU, we stayed out of the Euro. Being sovereign in the currency you use is vital.)
I also conclude that seeking to reduce the debt as a percentage of GDP is really not in the Chancellor’s gift.
@ Rich. Indeed it would be priceless to see “blackhole” Reeves attempt explain why the UK didn’t collapse when National Debt to GDP was much higher than it is now!
https://en.wikipedia.org/wiki/United_Kingdom_national_debt#/media/File:UK_debt_as_GDP_percent.png
Endlessly voting for Thatcherite plonkers now appears to be the sad state of country!
Allegedly Reeves was the Japan expert within the BoE.
This will have been about 15 years or so ago, when the BoJ were very busy..
It makes it even more peculiar she doesn’t understand the fallacies within the debt ratios arguments , that is, unless she is a committed neoliberal.
So if National Debt = Private Wealth
.. as one increases, the other increases (and vice versa).
What is not obvious is that Private Wealth is not distributed evenly, manifesting itself as wealth inequality.
As the wealth of billionaires increases, that of less well-off people may decrease; and this happens as overall private wealth increases and decreases.
Wealth per capita may increase (as an average), but again, the wealth of the less well-off may be decreasing.
As the quip states, when a billionaire walks into a pub, everyone inside becomes a millionaire (on average).
Perhaps a FOIA question to the relevant department will confirm this.
You are right
But I doubt I have time to do the foia
One wee adjective can reframe the conversation –
the National Debt should be more accurately renamed as the National Risk-Free Debt .
Surely, national risk-free savings?
Larry Elliott joins forces with Richard on excessive interest payment to banks for holding reserves. Will “Blackhole” Reeves pay any attention or is she enjoying being a dumb Thatcherite “Iron Chancellor” working for the rich?
https://www.theguardian.com/business/article/2024/aug/04/a-simple-solution-to-rachel-reeves-spending-cuts-stop-subsidising-the-banks
I am glad he’s joined the chorus
“I am glad he’s joined the chorus”
Took ‘is bloody time didden ”e?
I gave up reading him a long time ago. Used to be essential Monday reading.
Mind you, so was Will Hutton even longer ago. Both are now idle curiosity reads.
Larry Elliott’s piece is the only thing I have read recently that is the least positive that has emanated from the Press. The question is, does it cause the least ripple in the ether. Or like a gravitational wave nobody will notice it; correction – everyone in Press and politics will choose to ignore it, because it doesn’t fit the conventional, established lack of wisdom in our economics and politics.
Really enjoying the Economic Truths series and have sent people links.
May I suggest one thing – that you do an episode where you unite the truths into an overview that shows how to think holistically about all this.
It will happen ….
“It will happen”
That’ll be a whole book then. 🙂
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