In this morning's video I note that the national debt is widely misunderstood.
The reality is that this is not a burden. It underpins UK banking. It's fundamental to UK savers.
And a part of it in the UK represents the government's way of creating the money supply on which we all depend.
Repaying it would be absolutely disastrous.
The audio version is here:
The transcript is:
The national debt need never be repaid.
What I've just said is a simple, straightforward economic truth.
We've had a national debt in the UK since about 1694, when the Bank of England was created to lend a little over a million pounds to the then new William and Mary, who were on the throne together in a very strange situation that developed after what was called the Glorious Revolution. And we've never really got rid of the national debt since then.
There must, therefore, be a good reason for having it. Nothing survives for 330 years without somebody benefiting.
Now, one group who have obviously benefited enormously from the existence of the national debt are those bankers in the City of London who've dealt in it.
And you could argue that that's why it still continues. And I most certainly would agree with that to some degree because, and let's be very clear about this, they do undoubtedly benefit from trading in the national debt, and as I've explained in another video, they also badly need the bonds or gilts that make up most of this debt, to underpin their activities as City bankers.
So, the national debt exists to keep bankers happy, and repaying it would very definitely make them very unhappy because they would not have the bonds that they need to literally make sure that the UK economy could function in the way that it does today, using the City of London to underpin our whole banking system.
But there's more reason than that as to why we don't need to repay the National Debt. Because let's be clear about why the National Debt in its modern form, i.e. that which has existed since there has been no relationship between the money used in this country and the gold standard, must continue and never needs repayment.
This national debt exists because the government has spent more into the economy as a consequence of its spending programmes that have been approved by Parliament than it has collected back by way of tax. That is a simple, straightforward statement of fact. That is how the national debt is created. There has been too little taxation.
Which fact has, of course, kept most people quite happy because I have noticed that quite a lot of people don't like paying tax, or at least grumble and groan about it, even though they know that it is incredibly important for the sake of balancing the economy. So, the national debt exists because there has been under-taxation.
The only way to therefore clear it is, of course, to raise taxation. And in fact, to raise taxation in a way that covers past spending. That would most definitely be unpopular, but it's also fundamentally unnecessary because the national debt does not just represent more money spent into the economy than has been collected back by way of tax, it actually represents our money supply.
That money that has been left over circulating in the economy is not just represented by notes and coins - and there's around £80 billion of those in the national debt, by the way, because the government does owe them to the people of this country, which, fact, it acknowledges because it says on each and every £5, £10 and £20 note that might come into your possession, “I promise to pay the bearer on demand the sum of whichever one of those it might have been.”
Therefore, the notes and coins issued by the government are debt, but more than that, the money that has been left over by the government inside the national economy is part of our money supply. Not all of our money supply, because as we know some of that is also created by private commercial banks when they lend to people like you and me if we go and ask for a loan, but, a significant part of our money supply. Something like 40 per cent of it is government-created. And it is represented by, as I have said, the national debt.
Do we want the government to stop making money for our use in the national economy?
Would we like them to withdraw it?
Would we like that to imperil the operation of the City of London?
Would we wish, therefore, to actually have a future where all money supply was created by private banks at its whim, which is exceedingly volatile when it comes to situations like lending during the course of a recession, when the money supply by commercial banks falls dramatically? I really don't think so.
I really do think we want the government to continue to play this role in producing this money supply which is fundamental to our economic well-being.
But more than that, let's be clear. Again, as other videos have explained, the national debt represents private wealth. Because, after all, all that happens when the government issues gilts or bonds is that private people, whether in their own names or through pension funds or other savings arrangements, end up buying them. And, therefore, any increase in the national debt represents an increase in private savings. Far from this being a burden for those who own the national debt, this is a benefit.
I've heard so many politicians say over so many years, “Oh, we must pay off the national debt, which is a burden on our grandchildren.” They are so wrong. The lucky grandchildren in question will inherit a part of the national debt because it will form part of the private savings that their parents or grandparents can pass on to them.
There is nothing wrong with owning a part of the national debt. If you have an account with National Savings and Investments, you do own part of the national debt, because those are also included in the figure, and that includes things like Premium Bond holders. And most of us know somebody who's got some of those, even if we haven't.
So, the point is, the national debt is actually something that people want to own. There is no desire to repay it. And repaying it would be a wholly destructive exercise.
Have we got the right level of national debt, therefore? Well, that's obviously a good question. And it may be the subject for a separate video in its own right. But let's just point out the fact that the UK has a lower national debt in proportion to its national income than most other countries of similar size that are doing quite well for themselves. Not all, but most.
And that, therefore, indicates that we have not by any means stressed ourselves by having the level of national debt or state-created money supply, which is what we're really talking about, that we have. In other words, we don't need to repay the national debt and doing so would be an outright disastrous thing to do.
So why do politicians, journalists and commentators talk about it? Is it just ignorance, or is there some other motive which is intended to simply reduce the scale of government activity as a consequence of trying to restrict the increase in debt and, therefore, deny people the services they want? I think it is this latter point that is their true agenda, but whatever it is, they're talking nonsense and something that is contrary to the well-being of this country as a whole, including most people in it.
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I really like the way this blog has been presented, because it focuses on why people have any money at all.
The money they have, they don’t own; they don’t own it, because the owner (the BoE/Treasury) can redeem it (the government owns it, what you have is an IOU – and it is a circularity), or the Treasury can tax it all back, if it chose to do so. That would leave all of us with precisely nothing.
As for eliminating the national debt; you can do it; but if you do, you just don’t have an economy. The economy depends wholly on circulating debt (the proof of that is in our own history; Scotland in 1707 joined the Union with England. Scotland had no debt, and it was bust. England was far wealthier, but so loaded in the debt that generated the wealth it had, it had it pay Scotland to accept a share of England’s debt; and it did so by increasing the debt of the Union! The Scots joined – because they knew no debt was absolutely ruinous).
The other important fact is that the debt not only need not be repaid; it hardly ever is repaid. It is rolled over. And how Governments measure any fall in debt that is “achieved” is very rarely ever achieved by reducing the actual total quantum of debt. It is done instead by measuring the debt in a way that allows you not actually to reduce the quantum, but look as if you are reducing the debt.
Instead of reducing the quantum the measurement is made of a mathematical relationship Debt/GDP, and success is provided by a fall in the percentage. This is typically achieved without reducing the debt, but relying on three variables to move; time, inflation and GDP (a complex, imprecise abstraction) to do the job instead, without actually reducing the debt quantum. And then claim the “national debt” is being reduced, when it isn’t.
If this wasn’t true, Government would be impossible.
Thanks, John. I appreciate the comment.
John’s comment to me (as well as accurate) is redolent of one thing that Ms Kelton helped me to understand in the ‘real’ making of money and wealth: Sovereignty.
And therein is the problem we face.
From Neo-liberals/libertarians there is an effort to deny state sovereignty in the ‘means of production’ of money. An effort to portray the state as just like the rest of us – subject to debt from private markets or ‘the market’. Constrained. Exploitable.
It is a denial of state power by undemocratic forces.
To me the national debt is just a ledger line with money going out from a body who is the legal originator of fiat money it issues as a result of it’s sovereign currency creating powers allied to its duties. This power is even more important in my view than its borders or laws because – without it – those items would be nothing anyway.
It reminds us of the undemocratic project behind crypto.
Blair’s removal of Clause IV of the Labour party that called for the removal of common ownership comes into mind too. Owning the money supply was not in that clause, but really as a ‘means of production’ the BoE actually is owned by the state no matter what people say about Brown’s bill that surreptitiously ALSO attempted to neuter state power in finance to get elected.
In many ways the means of state money production is a democratic issue and can be seen as ‘commonly owned’ because we have a periodic say in who manages that system. It is part of reciprocity between the state and its citizens that (for example) ‘Public Choice’ tossers constantly attempt to undermine.
So these discussions and posts raised on this issue are really quite urgent and important. It is bad enough that the truth about our money (and I use the word ‘our’ from an unashamedly democratic and nationalistic point of view) is constantly obfuscated and lied about by bent politicians and the disgustingly rich whose patronage of the former is a huge part of the problem.
Basically, this denial of state sovereignty in the means the production of money can be summed up in one word: Theft.
It is the ongoing covetous appropriation of our money by undemocratic and greedy forces and needs to be watched. State money is a democratic issue. Or should be.
I like the new post format and appreciate your hard work.
Thanks for the post and observation
PSG wrote: “From Neo-liberals/libertarians there is an effort to deny state sovereignty in the ‘means of production’ of money”
Denying the state its sovereignty over money, puts the control of money into private hands where it can charge for its use as interest.
We “give” banks our money, and the banks charge us for the privilege. They lend out money at significantly higher charges.
We pay for things using digital currency, and there is a charge for the privilege.
Every aspect of neoliberalism is about extracting a profit.
We need to remember that because Charles II (effectively a war lord government which was the historical norm for the UK ) defaulted on loans so the private sector needed to control the government repayment of loans hence the initial setting up of the Bank of England under private sector control. There was another issue though which needed to be resolved which was that monarchical war lord governments only tended to coin money for their own purposes much of which was involved with imperialistic aggression as opposed to pure defense of the realm. Insufficient money was being created for the purposes of general market exchange hence the development of paper currency issuing pegged to so-called precious metals such as gold and silver.
There are clearly two issues in play here going back to England’s 1694 innovation the need for safe savings which also offer interest and the need for having an adequate amount of money in circulation. We know that net savings can only come from government deficit spending and forcing too much private sector debt onto the population triggers a loss in market demand at some point as well as inflation as it builds (the UK house price inflationary bubble). It ought to be obvious (except it isn’t with the majority of British politicians) that paying attention to the country’s money flow for both consumption and savings is absolutely critical. Instead we have arrogant politicians like Scammer & Co who evade accountability in this matter ably assisted by the mainstream media owned by the rich.
The summary is excellent here, it encourages the reader to continue to the full piece.
Thanks
I have been itching to hear the findings of the HOL Committee on the Sustainability of the National Debt. I asked them a month or so ago what is the progress and was informed that it was delayed by the disolution of Parliament and that they expected it to be pulished at “some point soon after the reappointment of the Committee”.
My breath continues to be bated.
I would argue that more than not wanting to pay off the national debt, it can NOT be paid back.
The only way to do so, is to return ALL our private money back to the government. Can’t happen.
One option is for private banks to loan out the money, but then they would also want it back with interest. Not going to happen.
The national debt is for provisioning the government. As the chairman of the US House of Representatives Budget Committee, Democrat John Yarmuth of Kentucky explains:
“There is no “national debt” in the sense that the government has to “pay back” its “debtors”. The 28 trillion dollars usually referred to as “public debt” would simply be the money spent by the US government that has not been recovered through taxes yet.” Explained in more detail here: https://www.youtube.com/watch?v=RvlpF6FZkLI
Absolutely right Ian! The British are very much asleep when they allow the right-wing media to persuade them that there can only be meaningful investment in the economy by the market and not the state!
Firstly the UK didn’t exist in 1694. It was created 13 years later. Secondly – ‘Scotland had no debt and it was bust’. No, private investors went bust because of a failed attempt to create a trading outpost in central America. They were personally bailed out as part of the creation of the union.
Sorry….
Ian,
“No, private investors went bust because of a failed attempt to create a trading outpost in central America. They were personally bailed out as part of the creation of the union”.
I have written about this several times. Private investors were bust, but the “bail out” was to Scotland, not directly to Darien investors (the “bribe” that confuses historians); technically “The Equivalent”; compensation for accepting the burden of English debt (and the revolutionary use effectively of a DCF to do it). Not all of it was passed in Scotland to private investors.
But Scotland was bust, because it had failed completely to provide a system of effective, usable commercial credit, combined with the ‘seven ill years’ of failed harvests, population decline, serious problems with mass unemployed vagrancy on an uncontrollable scale; and no way out, because the modern conception of mercantilism failed through Downing’s Navigation Acts, protecting English colonies from competition – including, vindicatively Scotland. Darien was blocked from England’s western colonies, and the prime intention to offer competition to the English giant East India Company. Only the Scottish Parliament could achieve this, and there was going to be an IPO in London, backed heavily by London money hostile to the EIC monopoly. King William blocked it. This rejection of the combined and united Scottish Parliament’s independent action effectively destroyed the future of an independent Scotland. Darien, an independent Scottish colonial enterprise was a desperate and united, but catastrophic attempt by the Scots to rescue a lost cause, by using all the private resources Scotland possessed, because there was no adequate system of national credit (and England called on Spain, since Tudor times an enemy of England, to help England kill off the colony). Union was inevitable following the disaster. Scotland really was bust. The Presbyterians had nowhere to go, and William had abandoned them. The price of Union included compensation for the Crown’s betrayal, crafted in part as payment for taking on the English national debt or there would have been no Union; which only happened some time after William’s death.
As I under stand it, is that most of the debt is peoples savings, ie money not yet spent and taxed. If this is correct, lets be clear about it if some one says that we must reduce the debt they actually mean they want to grab your savings. By the way this includes all pensions.
No, they don’t want to grab your savings. They would force them elsewhere, which would be riskier.
Thanks for a very clear and enlightening explanation.
Presumably there is a portion of national debt that incurs interest payments. Is it beneficial to reduce that part?
Yes, definitely.
A constant refrain from the media is to quote the interest payments on the national debt as unsustainable – going so far as to consider what could be done with the money if the debt were removed. This is a very persuasive argument if the « government finance is like a domestic budget » theory is accepted. You may have done it already – if so- apologies, Richard, but tackling it specifically might be valuable.
Martin Hime
Everyone ignores it improves private wealth
2.6 trillion public debt to be paid off by cancelling all public services. No pensions, nhs , law and order even parliament. Good idea
In my economics degree they referrerd to Germany in 1918 and 1940. Yes Economics is a science
True enough for those that understand. Not obvious to those that do not get how things work. I guess these are your target audience.
Martin