The national debt is nothing more than the savings of people with money to spare. It's not a threat to our well-being, it won't bring the economy down, and it doesn't need repayment. Our grandchildren (if we have them) are not threatened by it. That money just needs to be put to good use.
This is the audio version:
The transcript is:
All savings deposited with the UK government are part of the UK national debt.
I say that for good reason, and that's because most people do not understand that simple, straightforward statement of fact.
If we understand the national debt to be money owed by the government to people who deposit funds with it, and that is what, at present, we describe the national debt as, then things like Premium Bonds are part of the national debt because you can go and buy a Premium Bond, you can save with the government as a result, and as a consequence, the amount of the National Debt goes up and, as a consequence, you, as the owner of a Premium Bond, become one of those people who is causing nightmares to right-wing politicians, journalists, commentators and others, all of whom are screaming that we must repay the National Debt because it is a burden upon our grandchildren.
You might plan to leave those Premium Bonds to your grandchildren in your will, and if you do, your grandchildren will thank you because they have very obviously got monetary value. They are a savings account that you may wish to pass on. But the point is that, apparently, they are a burden on your grandchildren.
It's a very interesting idea, isn't it, that they are burdened by you giving them a savings account?
Or is it that other children are burdened by the fact that they've got to repay your grandchildren the savings account that you held with the government?
Look, none of this does make any sense at all; let me be clear.
What I've just said is complete nonsense in the sense that you are not causing a problem by saving your money with the government.
If you, instead of saving your money with the government, went into Barclays or Lloyds or NatWest or Santander or whoever you might choose to bank with and placed your money on deposit with them, there would not be hordes of commentators and financial journalists saying, “Oh, the borrowings of these banks are out of control. We must ensure that they repay all their depositors or they're about to go bust.” Not in the slightest would they say that. They would, in fact, celebrate the ability of those banks to attract deposits which supposedly strengthens their balance sheet because they have a hard core of depositor funds on which they can rely if anything ever goes wrong in the bank.
Yes, that is really true; “they can rely” because you are a creditor of the bank, ranking not far ahead of the shareholders if the bank was to go bust. You provide the bank with security.
Well, the deposit that you provide with the government is very similar. You save with it. You provide it with money. It increases the security of the government.
It does also provide you with a very safe return for your money because there is only one institution in the whole of the UK that cannot go bust. And that's the government, because it can always create some more money to repay you, whatever sum it owes you, whatever happens, and no bank can do that.
So, what is wrong with saving with the government? Nothing at all. In fact, my argument is that we should probably have more national savings in this country. Not only of Premium Bonds, but National Savings and Investments accounts, and even more government bonds or gilts. Those, too, are just savings accounts. You don't buy many of those, I suspect. Less than 1 per cent of all government bonds and issues are owned by individuals, and most of those individuals will, almost inevitably, be quite wealthy because you have to be a pretty sophisticated investor to buy them in most cases.
Instead, the vast majority of the ones that are owned by people in the UK are owned by UK pension funds, banks, or life insurance companies. Why do they own them?
Because they are the bedrock of private pensions.
They are the bedrock of the insurance funds that companies need to maintain if they are in that industry to guarantee that they can make payment out when claims arise.
And they are the basis on which the banking system of the UK operates when it comes to overnight banking arrangements, which are too complex to discuss in detail here, but which are a necessary function of the whole banking arrangement and for which purpose gilts are needed.
They're also required by foreign governments who wish to hold sterling and foreign companies who wish to hold sterling. They don't want to hold that in the bank. Why? Because banks can go bust and the government can't. So they hold bonds instead.
But all of them are doing one thing. They are saving with the government.
That is what the national debt is. It's a savings account. And yet, we obsess about the fact that it's terrible.
We wouldn't with anyone else. Why did we do it with the government? Because, well, I don't know why. I said because, and then I ran out of steam because there is no explanation for this paranoia about the national debt.
Except, perhaps - and this is a big perhaps -we are paying too much interest on it at present. And that is undoubtedly true. The government is paying too much interest.
But everyone in the UK economy is paying too much interest at present because the Bank of England is keeping interest rates far too high for the sake of our economy.
We shouldn't be obsessing about the fact that interest rates are too high for the national debt's sake. We should be stressing that interest rates are too high for people who've got mortgages. We should be stressing that interest rates are too high for business, whether small or large. We should be stressing about the fact that far too much money is being diverted out of the productive economy and paying wages and everything else, or funding the growth that we want, to instead be used to pay interest on passive savings accounts. So yes, there is a problem with the cost of the national debt, but it's a much bigger problem than the cost of the national debt. It's the cost of interest.
So, let's stop this paranoia about the national debt. Let's celebrate the fact that people want to save money with the government and encourage them to do so because it's a great place for them to save. Let's find constructive uses for that money, which is something I've long proposed.
That money should actually be used for positive engagement. For example, there should be savings accounts to encourage investment in schools, hospitals, the Green New Deal, transport, everything else that we need as communities, and this saved money could become the capital for that. But whatever we do, let's stop being silly about the national debt.
It's just our savings. It's private wealth. And the only thing we have to make sure about is that it's put to good use. And then we should celebrate the fact that the government can do that.
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I suspect that talk of the national debt is fear mongering, and a deliberate deception to justify the attacks on welfare and any government spending on health, education and so on, so that the very people who rely on government spending for these, which is most of us, will also join in the attack. Why anyone would wish to create and foment a society that undermines rather than supports people I cannot fathom, it seems to me to be a form of cruelty for the sake of being cruel. I guess it creates a context in which it becomes possible to drive down wages, keep people fearfully working, foster a callous competition instead of cooperation, which likely suits those who wish to exploit and profit from others.
Much to agree with
The BBC says that “unfunded” spending increases borrowing costs:
“Liz Truss’s 2022 mini-Budget was a prime example of the price of lost credibility. Her failure to provide plans for how her government would fund the biggest tax cuts in half a century, and a lack of independent vetting of those plans, caused borrowing costs to soar. And so too did the cost of new fixed-rate mortgage deals – which are also linked to those markets.”
Which is nonsense because the rates spiked briefly then went down again. Weird how the BBC doesn’t seem to understand that the Bank of England caused the borrowing costs to “soar”. Funny how prices reported by the BBC never just “increase”, they always “rocket” or “soar”. And we pay for this reporting service under threat of jail.
This claim is nonsense
Borrowing costs soared because the BoE announced QT the day before Kwarteng announced tax cuts. That is what caused rates to soar.
Premium bonds are not a long-term source of funding for a government as they could be redeemed at short notice.
You miss the obvious point that the government can easily control the cost of premium bonds, by changing the prize rare whenever they want. Plus of course the amount of premium bonds in issue is relatively small compared to other forms of government borrowing.
The cost of the government borrowing longer term, is set by the market, not by the government, and once bonds are issued, the government can’t change the interest rate. So this is nothing like premium bonds at all.
The vast majority of government borrowing is through fixed rate and inflation-linked gilts.
Oh dear, another ignorant troll.
If you knew anything about gilts you would know the interest rate paid in them neber varies over their life. You don’t apparently know that. Nor are any of your other comments any better informed.
Richard,
You miss the point – the government needs to borrow at all seems, and in doing so it is subject to the prevailing supply and demand factors at the time which will set the cost of issuing debt.
This so not the case with premium bonds, where the government has full control over the interest rate / cost of prizes.
Which is why (amongst many other reasons) gilts and premium bonds are not comparable, and pretending they are is purely designed to mislead.
Regardless, premium bonds are a debt owed by the government to savers, and should be accounted as such.
Whether that debt is a problem is a very different issue.
You miss the point.
The government never needs to borrow. It has its own bank.
And it does not borrow anyway, it takes deposits of funds it in the first place created.
Mr Thornton,
You are writing as if government is just another corporate borrower. It isn’t. You can’t look at Government’s balance sheet like any ordinary corporate borrower (even if you could find one that was up-to-date. Government isn’t just a financial institution, ‘primus inter pares’ with the private sector. It is on a higher order of existence; it is sovereign (the ultimate, responsible money issuer with the absolute right to tax), which both determines and enables the private sector to function at all. Part of government’s sovereign responsibility is to offer its people and institutions a risk-free place to invest the money government ultimately created and owns (money is not owned by investors, who possess only a redeemable IOU, claimable by government on redemption). Institutions invest in government bonds on grounds of providing a secure, risk free investment offering a stable return (safe asset theory). Nobody; no private institution can offer that proposition or anything near it, because government can always redeem; no matter what. Private institutions, however are mere Risk institutions, and can always go under. They go bust; the banks, spectacularly. The only protection the public has from banks going bust, and taking down the whole financial system with them; is government. We know that, because they have an established predilection for bringing forward financial armageddon. There is your starting point.
It is the risks of the private sector that you need to worry about most. We know that because if government doesn’t endlessly clean up the Augean stables of one private sector financial calamity after another, nobody does. And a lot of people lose a lot of money, endlessly.
Thanks
“Premium bonds are not a long-term source of funding for a government as they could be redeemed at short notice.”
A single premium bond may be a short-term source of funding, but on average, and overall, there is about £120-billion in savings over time, which can be considered a long-term source of funding, the total amount generally increasing over time.
Precisely
But Ian, trolls don’t like aggregate facts: they are very small minded
Again, this cannot be said enough.
Government bonds are not ‘just savings accounts’, that is highly misleading. Whilst premium bonds are protected at face value, government bonds are not and as we have seen very recently, government debt can suffer huge falls in value as interest rates change.
It wasn’t so long ago you were telling people to buy government bonds yielding 1%, which fell in value by 50% or more when interest rates spiked up – that’s nothing like a savings account.
You really should be more careful with the language you choose.
You should really stop writing drivel
First, as I noted, gilts are used by sophisticated investors. If they are stupid enough to crystallise losses when they do not need to do so that is their problem. Of course, most don’t and you ignore that fact. The whole point of these accounts is to hold them. Only the dealers trade them, but they are peripheral.
It is you who is writing the total nonsense.
Students Corner: Different tumes. Different spun. The relationship between savings, the Government and National Debt used to be presented and understood somewhat differently. To finance military operations and other expenditure in times of war without raising taxes to an unpopular level the Government actively encouraged people to save with the Government e.g. buy war bonds . They are also a means to control inflation and control spending in the economy by removing money from circulation unheated wartime economy.
There was a whole branch of the Civil Service who operated the National Savings Movement; a mass savings movement that operated between 1916 and 1978 and was used to finance the deficit of government spending over tax revenues. By the 1970’s there where over 7 million members. If you are old enough you’ll remember the tentacles of this movement, reached the school classroom where young children were introduced to the virtues of saving with the Government.
https://en.m.wikipedia.org/wiki/National_Savings_Movement
Indeed! When people I know bring up the National Debt, I ask them why I get regular emails from NS&I tempting me to buy more PBs and offering other types of bond for sale. Surely NS&I are acting against the Government’s policy and is that not treasonous? That usually persuades them to look differently at Government Debt.
Richard,
This is nonsense. If the government didn’t borrow and purely funded spending from money printing, the currency would be decimated and inflation would spiral out of control.
To pretend otherwise is ridiculous.
It simply could not tax sufficiently to offset this.
Even MMT understand this.
No, this is not nonsense: this is fact.
And of course there are limits to money creation – the limit is what the economy can acyually do.
But you ignore a simple truth. If money is borrowed to fudn investment then it all returns to the Treasury as tax
You think it goes into a black hole – or your comment makes no sense even in its own remarkably limkited terms. But it is not poured away. It becomes people’s incomes, after which you need to learn about multiplier effects.
And am I saying governments should not take deposits? No, of course I am not – and never have. What I am saying is that if markets want a silly price they can get lost because the government does not need to offer a silly price. That is all.
And not, once in a mil;lion years, have I said governments shyould not tax.
But you lack the imagination to undertsand that.
And you talk nonsense.
I think there’s a flaw in your reasoning here:
“you can go and buy a Premium Bond, you can save with the government as a result, and as a consequence, the amount of the National Debt goes up”
At the point that I buy, say 10 pounds of Premium Bonds:
a) The Govt has a liability of 10 pounds (the Premium Bonds I now hold), however,
b) The Govt also has the 10 pounds in cash
Therefore, buying Premium Bonds does not increase the National Debt.
Sorry – but they don’t usually count the cash
You really should pay more attention to what I have to say on this blog
Why would they not count the cash (or as you say, not usually)? When a Premium Bond is sold, the government has matching assets and liabilities. No extra government debt is created.
What happens to money received is a separate question, and whether it’s spent usefully or not
See my video on Monday
Will your video explain how the government receiving 10 and giving 10 equates to more National Debt?
It’s a straightforward query and you seem disinclined to answer it.
I did a video on that on Monday
If you can’t be bothered to look at it I can’t help you
Yup, I’d quite happily switch my Building Society ISA to a non tradable 2, 5 or maybe even 10 year Government Hospital, School or Home Insulation Bond or similar
You are not alone
It seems to me the root of the whole confusion may simply be one of language.
In the case of banks we talk about “savings” and “deposits”, as from the customer viewpoint. These are positive words, suggesting worthy activity. From the bank’s view it’s “borrowing” and “debt”, but we don’t describe it that way.
But for reasons I can’t fathom, in the case of govt it’s always described from the govt view, i.e. “borrowing” and “debt”, words with negative connotations. It’s therefore seen as a “bad thing”, and the reflection of “savings” and “deposits” is obscured.
It might be assumed that economists who are supposed to understand these things would not be led astray by such simple matters of semantics, but the more I discover about the twaddle that masquerades as conventional economics, I’m not surprised at all.
Correct
I am married to a German and live in Frankfurt. The German word ‘Schuld’ means both debt and guilt and, as one would expect, German Government spending and borrowing is also very much viewed through the lens of household monetary theory (HMT) and the same associated negative language you refer to. Just my opinion, but I think this is why Germany is only ‘happy’ when they run a surplus as this, although incorrect, implies they have extra cash in the bank
“….. the twaddle that masquerades as conventional economics”.
Music to my ears.