There is discussion in some of the media as to whether Rachel Reeves yesterday trailed a change in government accounting rules to give her wriggle room within her own, entirely voluntarily imposed, fiscal rule so that she might have more opportunity for state investment.
As the FT notes:
[Citigroup's UK economist has] warned that any change that created scope for extra borrowing for investment needed to be approached with caution.
“Any suggestion of a marked increase in fiscal stimulus in the near term [is] likely to prompt an adverse market reaction,” he said.
This is utterly ludicrous. The City is willing to mop up £100 billion of UK government debt to be sold in the next year as a consequence of the quantitative tightening programme, effectively increasing financial risk within the financial services sector whilst also reducing the money supply to keep interest rates high, but the idea that the UK government might use funds the City might save with it for creative purposes is considered outlandish and unacceptable.
I have three observations.
First, end quantitative tightening. Sell new bonds instead to fund the investment we need.
Second, reform the arbitrary rules for government debt which consider only one side of the government balance sheet and not what funds are used for. This is absurd accounting by economists that is intended solely to constrain government activity. It does not reflect anything like reality, as I have said for years.
Third, abolish fiscal rules should be abolished, and Reeves should manage what is actually happening in the economy. As Keynes said:
Anything we can actually do we can afford.
Achieving that goal is what matters, not some arbitrary fiscal rule.
Rachel Reeves really should learn some real-world economics. And that, if necessary, requires telling the City its money is not needed because the government can always make its own.
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Quite. Perhaps you can get on the BBC and tell the numpties what the situation is instead of journalists and presenters just parroting noddy economics!
I wish
They make the calls
Re the problem of getting exposure for realistic economic analysis on the BBC: they could ask Andy Verrity to provide a commentary. After all he works for the Beeb, he’s in the building, he’s researched and presented some excellent analyses on economic topics (check his exposure of the Libore scandal on BBC Sounds) and he understands MMT. A prog with him discussing current issues with Richard would be worth listening to. On the other hand, senior BBC management (largely owned by the Conservative Party) may not want the public to realise that they’re being duped by politicians and have been for decades.
I have talked to Andy
I presume he knows he has to walk a very careful line
This is not ludicrous in one sense.
It is a threat made by piranhas.
They saw Truss blow up the economy and this is their moment – they are pressing home their advantage, suppressing state investment, to create chaos and market making opportunities.
Truss made them look important, and now they are not going to waste the opportunity she gave them.
In one sense – reflecting on Reeves performance and how uncomfortable she looked yesterday – I think she is scared Richard. I think they’ve got to her. I think she is under orders – and not ours for sure.
Truss certainly made history, and her shadow looms large as an apparent vindication of all that Reeves and her BoE boss, Andrew Bayley say to us. But how many ordinary omnibus passengers like me, with our very limited understanding of economics, can explain WHY Truss didn’t actually blow up the economy? I know I can’t, because it involves discussing bonds, reserve accounts, financial markets, and all that Quantitative Easing & Tightening. I’ve got hold of the basics of MMT, about money creation, the role of tax, & controlling inflation, but when s/o says that “Reeves dare not spook the markets, look what happened to Liz Truss” I begin to sink beneath the waves. Please can someone point me towards a primer on THAT topic, that I can understand, and even more importantly, talk about on the Omnibus?
That is what I hope this blog is
I need a clearer spec of what you want
All Truss did was make a speech about her plans for the future. She didn’t make any change to spending plans or the budget. With or without her “budget”, the actual budget remained the same.
That was part of the problem. She said one thing while he budget said something else entirely. The head and body of government were saying and doing opposite things. Observing one of them told you nothing what the over was doing or will do.
Investors factored in a risk premium because the government stopped making sense.
@RobertJ
Then Funding the Future needs to become your morning read.
It took me about 8 weeks of reading Funding the Future and googling for more study to be able to quit lurking and sit in this chat room with the heavy-hitters of this commentariat.
I have yet to seriously engage with any of the heavy-hitters but I am getting there.
Go on
Don’t hold back
They’re all pussy cats really, somewhere deep down (I hope)
@RobertJ
GIMMS has a helpful Fact Sheet on Bonds.
https://gimms.org.uk/fact-sheets/gilts-and-bonds/
Is that what you were looking for?
Thank you for helpful responses to my post https://www.taxresearch.org.uk/Blog/2024/09/24/rachel-reeves-really-should-serve-the-country-and-not-the-city/#comment-986619
I’ll take them in order.
1. RichardJM – yes, your blog has been the biggest assistance (after starting a year or two ago reading Pikkety). I have the highest regard for the content, and your commitment to reaching beyond the “economics” bubble to a wider demographic. The general public need to be able to counter the “we can’t afford it” rhetoric that comes out of the BoE/Treasury. But so far, all the wider general public are able to say, is “this is killing us”.
2. BayTampaBay – see above, yes, I’ve been reading the blog daily with breakfast, for at least that period, that’s why I understand what I DO understand so far!!
3. Anne Cruise – thank you for that link. It’s the bonds I struggle with. I’ve added it to my bookmark folder “Economics & MMT.
RichardJM – Specific issues I don’t yet “get”
– the explanation in https://www.taxresearch.org.uk/Blog/2024/09/21/when-economic-misinformation-hides-economic-negligence/ about the £100bn worth of bonds being sold but the money raised not being released for spending. to be fair, you said you didn’t have time to elaborate. I look forward to the elaboration as it will help me with an area where my understanding is weak.
– I’ve lost the link to a blog entry you wrote several months ago, which dealt specifically with the argument about “Liz Truss crashed the economy”. As I see it, she seemed to disconnect expenditure and taxation, but with the focus being on decreasing taxation (thus increasing money supply and risking inflation) but no paralell information about spending.
– While I think I understand how QE works, I’m much less clear about QT.
My motivation in all this is so I can have conversations with friends, neighbours and relatives – or as I put it in my post, fellow omnibus passengers in the deprived urban area that I live in where Reform UK made a strong showing at the July election.
There will, be video coming on QT – it is on the list to do
“I know that not everyone in this hall or in the country will agree with every decision that I make. I will not duck those decisions, not for political expediency, not for personal advantage,” Reeves said.
Sub-text: “I’ve got my new wardrobe, I’m alright Jack.”
HM Treasury: Yes, these are cast-iron fiscal rules. OK, so we weren’t entirely honest. We have others… But we’re not going to tell you what the financial position was under the Tories **when we apply the new accounting**.
The whole lot of them are slippier than Hissin’ Sid.
Wasn’t it Grouchi Marx who said “these are my fiscal rules and if you don’t like them I have others”
How can this Citigroup guy get away with making these threats. He offers no explanation as to why the markets would react adversely to a fiscal stimulus (increase in aggregate demand), simply states that if we transgress we will be punished.
Each time we react in fear to the possibility of market retribution we entrench the power of the market and license the financial priesthood to pontificate unchallenged.
Not saying that the markets are not powerful, of course they are, but granting
them supernatural status, treating them as beyond human understanding and democratic control is ludicrous. Our politicians and financial journalists should be giving us explanations not spouting ex cathedra statements.
Those will be the same ‘markets’ and organisations that crashed the economy and were bailed out at massive cost to the rest of us, whilst they carried on as before, wealthier than ever. The biggest corporate rescue of all time. Port Talbot and Harland and Wolf are chicken feed in comparison.
It’s long overdue for them to be called out – put simply, they owe us big time. They are in no position to lecture anybody
“How can this Citigroup guy get away with making these threats.”
For Every One’s Information:
If Obama had not bailed out Citigroup (and/or their subsidiaries) in 2009-2010, Citigroup would NOT exist!
Agreed
But they have forgotten it
Thank you.
Citigroup is one of three US banks (Goldman Sachs and JP Morgan being the others) and some US firms (including BlackRock) advising Labour. They have done for some years.
Readers may be interested in:
https://wallstreetonparade.com/2016/10/wikileaks-bombshell-emails-show-citigroup-had-major-role-in-shaping-and-staffing-obamas-first-term/
https://wallstreetonparade.com/2016/10/wikileaks-citigroup-exec-gave-obama-recommendation-of-hillary-for-state-eric-holder-for-doj/
John S Warren has more details, having read Neil Barofsky’s chronicle of how Barry Obama, who knew JP Morgan’s Jamie Dimon from Chicago, betrayed Main Street in favour of Wall Street.
JP Morgan, Goldmans and Citi – thats a dreadful trio representing the worst of banking and finance, especially Dimon.
Rana Faroohar’s Makers and Takers, Wall Street vs main street is good on the destructive role of finance.
We need a finance sector but not the one we have which primarily services itself. No party or government has yet shown signs of a) understanding the problem and b) having any idea what to do about it.
Rachel Reeves is yet another SAD (Selfish and Devious) politician from the Single Transferable Party. It’s both not to set down in comprehensive detail exactly how she believes the country’s monetary system works to justify her use of emotive anxiety raising terms such as the country’s in a “financial black hole”! It’s both not to think through the consequences of the overly simplistic withdrawal of the WInter Fuel Allowance when there are alternatives. Here’s one:-
“The government looks at your tax return to see what your income is. If it’s below a threshold shown by what tax you pay or don’t it automatically makes a WFA payment to your energy supplier. No need for the individual to apply you are either on the elegible list or you aren’t. If you don’t like this particular routing then it’s directly into your bank account or by cheque.”
It’s a career path to being the new thatcher once Starmer is disposed of, who knows what will happen then. We need a new centre left party or a major shift of existing labour lot to centre left.
“Tax return” suggests HMRC. Austerity cuts have seen their head count wither away. Partly explains failure to collect £bns outstanding.
This and other comments you are making are very cryptic
Might you make them less so?
“Rachel Reeves really should serve the country and not the City”
Looking back to 2008 – the comment on Obama was that he “saved Wall Street – not main street”
This gave rise to Trumpism (which fed and feeds off the disaffection of many).
The party that theoretically is “for the many” (just like the democrats) is in fact for the few.
Somebody, somewhere in the UK will leverage the unhappiness generated by Reeves/Starmer and their cosying up to the money men.
For a hint at how the markets have been captured, I can recommend:
How Big Oil Conquered the World (Documentary)
https://www.youtube.com/watch?v=Q6r8nkxCKO4
It explains how oil money has bought significant influence in pharmaceuticals, education, and global economics.
Ignorance is no excuse in a court of law. Politicians are our representatives. It is incumbent upon them to acquaint themselves with the facts of governing – money creation, investment, taxation, the relationship of government with both the Treasury and the Bank of England, welfare benefits, etc.
I’ve tried very hard to give Starmer’s team the benefit of the doubt on the basis that anything is better than the Tories but as somone with relatively moderate views, I’m finding myself well to the left of this government. Just a couple of examples: hitting pensioners was bad enough but talk now of focusing on the trivial levels of benefit fraud rather than tax avoidance/evasion is just bizarre. The inability to see health as an investment that helps the economy rather than just a cost (let alone the moral aspects). Roy Lilley and Simon Wren-Lewis are good on this.
My conviction that Reeves is a pure product of her orthodox economics, BofE and Treasury background gets stronger every day. That is all she knows – looking after the interests of the City and finance with no real understanding of or concern for the wider economy and society. She is incapable of doing anything different.
I see that Owen Jones has provided Starmer with an alternative speech he could make today…one that changes the narrative and serves the majority, not big finance and vested interests.
If only!…..
https://www.theguardian.com/commentisfree/2024/sep/24/keir-starmer-alternative-leaders-speech-britain-conference
I think mine will be recorded tomorrow and will be out on Thursday or Friday
With regard to the comments above at 9.53am, 10.17am and 10.47am in relation to the reaction of the markets to what Truss and Kwarteng did in September 2022, I would very much welcome a detailed description of the sequence of events that occurred, which led to the record drop in the value of sterling and the rise in mortgage rates. (If this has already been done by you, Richard, please say where.)
If memory serves, in one of Stephanie Kelton’s lectures, whilst of course not agreeing with what Truss did, she said that Truss could have kept her position if she had shown more resolve against the markets.
I will do it again some time
It was not apaprent at the time, I admit
Didn’t Reeves recently mis-quote Keynes by saying “We can only do what we can afford” (or similar)? I still don’t know if it was deliberately mendacious, or if she actually thinks her statement is the equivalent of Keynes’. If the latter she really is incredibly dumb.
I think it was deliberate.
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