The UK government cannot go bust because it is the only organisation with the ultimate authority required to create the money that's required to settle its debts. It really is time politicians understood that.
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This is the transcript:
The UK government can never go bust.
You might have been told by economic commentators that we are in danger of doing so.
At some point in time, you might hear a rumour that there is a crisis with regard to the UK's national debt, and will we ever be able to repay it, and all of that talk is complete and utter nonsense.
I repeat my point; the UK government can never go bust.
There is one very simple and very straightforward reason for saying so. Unlike you and unlike me, the UK government can create money of its own.
We can't.
You can try setting up a printing press and producing pounds of your own creation, but I promise you, you might either end up inside a prison cell, or you will find that nobody wants to take them. In either case, your venture will fail.
But as far as the UK government is concerned, this is a completely legal activity which only they are allowed to undertake because they are the people who say that the UK pound is legal tender, and they are ultimately the only people who can create it.
And just in case you hear somebody now piping up somewhere saying, oh, but UK banks can also create pounds by their lending, that's only because they're licensed to do so by the UK Bank of England, which is, of course, owned by the UK government.
So, any UK bank that creates money, whether it has its name on it, which it will, of course, in Scotland and Northern Ireland, where the banks do actually issue the notes, or whether the money is created by the creation of a loan from a bank to a person who borrows from them, makes no difference. At the end of the day, those activities are only permitted because the Bank of England says they are.
In other words, the Bank of England completely and utterly controls the process of money creation in the UK, whether by itself as a consequence of its spending on behalf of the government money into the economy, or whether because it lets a UK bank lend money or even print notes for which it then requires a deposit from them of equal and opposite amount.
My point is this. Everything with regard to money is down to the government. Therefore, the government can't go bust because it creates the money in which every single payment that it owes is denominated. The UK government only borrows in pounds. It did for a very short period borrow in Chinese currency, but that was a token gesture. Let's ignore it for all practical purposes.
Every single pound that the government owes is owed in pounds. There is no debt owed in dollars or euros or anything else of any consequence, and therefore, if the government has to pay somebody it simply creates new money to settle the liability owing, as it creates new money to make payment of everything that it does, whether it be to pay a teacher or a pension, or anything else.
Tax doesn't fund the spending.
Borrowing doesn't fund the spending.
Tax reclaims the money spent to prevent inflation.
Borrowing is simply an arrangement that the government has put in place with the City of London to provide a safe place for very large sums of money to be located because the only person who can guarantee to safely repay very large sums of money is the government because they make it, which the City of London know, which is why they want to deposit their funds with it.
That's why the government can't go bust.
It literally makes the money that makes our economy go round, and it can always create some more to pay its debts.
So, what is all this story about the government going bust about? It's all about the economics of power. People who hate the government want you to believe the government can go bust.
It can't, but they'd like you to think it can. They spread a falsehood, and I mean quite literally a falsehood or untruth, which is that the government might not be able to repay its debts, but it always can and it always will.
And what is more, it will not create inflation as a consequence. And why? Because if the debt has been created in a properly controlled and organised fashion, and that is true of all UK government debt at present, making the repayment is no problem at all for two reasons. That's because, firstly, if the money is spent, the government will be able to tax the benefits of that expenditure to the point where it will reclaim the money to rebalance the equation.
And, with regard to inflation, the money that is repaid is then going to be saved. It will ultimately all come back into a Central Bank reserve account maintained by a commercial bank with the Bank of England because that's the safest place for them to ultimately put their money; either there or in a government bond.
There is no threat to UK financial stability from UK national debt as a result. Quite literally, none at all.
And nor is there even a threat to UK national stability as a consequence of the interest paid on UK government debt, because that interest is only paid at the government's discretion.
It could reduce the interest rate.
And it could decide to not pay interest on some parts of the national debt, most especially the parts that are owing as a consequence of money creation from which only our commercial banks have benefited.
In other words, we have no financial crisis in the UK.
We're not even remotely near a UK financial crisis.
We can never go bust in the UK.
The UK government is in control of its economy. It is all running as it should.
So why this talk about a crisis? Because those who hate government want you to believe it isn't working, when it really is, just as it should.
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Take a bow.
This cannot be said often enough.
It is the ‘s’ word folks in action – sovereignty.
Perhaps a follow up post might go into how this sovereignty is abused and monopolised by the rich?
The National Debt is around £2.6 trillion. It’s interesting to note that total outstanding lending to households and non-financial businesses in the UK is estimated to be around £2.5 trillion, and new lending each year adds about £150 billion. Unlike the Government, households and non-financial businesses can’t just create money, yet you never hear commentators saying that their level of debt is unsustainable and it’s a crisis and the country will go bust.
Agreed
Excellent article. Should be required reading for every economics, social and political studies student and every aspiring politician. We live in a critical time facing combined ecological, economic, social and political melt downs. To prevent mass global poverty, resource depletion, irreversible global warming and major social unrest we must get to grips with alternative thinking about money as a resource that you advocate
I wonder if they teach this in the economics part of the Oxford PPE undergraduate course? I really liked Gary Stevenson’s view of the economics tutors he encountered on his Oxford Masters course i.e., they don’t have a “Scooby”.
He is right on that
Very good description. 100% agree.
“The UK government is in control of its economy. It is all running as it should.”
The mere fact you had to post the blog this shows that:
a) the gov does not understand how the UK economy functions & the role of gov’ in money creation/taxation & by extention it is not in control (how could you control that which you don’t understand?) – ……………..for the benefit of citizens.
b) the economy most def’ ain’t running the way it should – e.g. 4.5m children in poverty
The other interpreation is: the gov does know what it is doing and the gov IS in control for the benefit of …………….bankers.
& thus indeed given the previous it follows that “it is all running as it should” …………………..for the benefit of bankers & other parties.
Which begs the question: why the dead silence from the MSM or even tech’ outlets such as “The Economist”.
Thanks
Do either Starmer or Reeves understand this?
It appears not
I think that they do understand it and that they are paid to ignore it.
Again, it’s virtue signalling. Only the rich are worth bailing out or giving money to because they cling to the lie of ‘trickle down’.
‘Trickle down’ is the abuse of language used by the rich to justify being the first in line for state money.
So stupidity versus corruption in politics? It’s simple to me.
We know that our our politics is corrupted. And that leads to stupid politics which is doing the same things over and over when they do not work.
The logic of that leads to wealth being piled on wealth.
Richard, I hope you wil not mind me recycling an old comment, at the end of your blog, and a long discussion with Mr Parry and Mr Hargreaves, on how tiered, technically reserves would function? I felt it was useful to see how it is done in the ECB. The two-tier system, as presented on the ECB website:
ECB “Two-tier system for remunerating excess reserve holdings” (https://www.ecb.europa.eu/mopo/implement/mr/two-tier/html/index.en.html#:~:text=How%20does%20it%20work?,facility%20rate%2C%20whichever%20is%20lower.)
All credit institutions subject to minimum reserve requirements under Regulation ECB/2003/9 are eligible for the two-tier system. The minimum reserve requirements are mainly based on bank customers’ deposits. In this sense, the use of minimum reserve requirements for the calculation of the exemption allowance ensures that the two-tier system focuses on banks whose business models rely on deposit funding, which are typically the main lenders to the real economy in the euro area.
How does it work?
The two-tier system applies to average end-of-calendar-day excess reserves over the maintenance period held in reserve accounts with the Eurosystem. It does not, however, apply to excess liquidity held at the ECB’s deposit facility. The volume of reserve holdings in excess of minimum reserve requirements that is exempt from the DFR is determined as a multiple of a credit institution’s minimum reserve requirements. This is known as the “allowance”. The multiplier is the same for all credit institutions. The non-exempt excess reserve holdings continue to be remunerated at zero percent or the deposit facility rate, whichever is lower.
What is the applicable multiplier and remuneration rate of the allowance?
The Governing Council decided on 12 September 2019 to set the initial multiplier for the calculation of the allowance at six, and the initial applicable remuneration rate at 0%.
On 8 September 2022 the Governing Council decided to set the multiplier to zero with effect from the maintenance period starting on 14 September 2022.
Can the multiplier and/or the allowance remuneration rate be changed?
Both the multiplier and the allowance remuneration rate can be changed over time. The Governing Council may change both to ensure that the two-tier system fulfils its purpose.
Any adjustment to the multiplier or to the remuneration rate applies as of the following maintenance period, after such a decision has been announced.
Main technical characteristics of the two-tier system
Eligible institutions: all credit institutions subject to minimum reserve requirements (MRR) under Regulation ECB/2003/9
Allowance: a multiple of an institution’s MRR
Multiplier (m): set to zero as of 14 September 2022 – this can be changed over time
Exempt amount: amount of excess reserves up to the allowance
Remuneration rate of the allowance: 0% – this can be changed over time
Applicability: excess reserves (i.e. reserve holdings in excess of MRR) held in reserve accounts with the Eurosystem (and excluding holdings at the Eurosystem’s deposit facility)
Start date: 30 October 2019 (the start of the seventh maintenance period of 2019)
Notes:
MRR = maximum (zero; reserve base * reserve ratio – lump-sum allowance). MRR are calculated as a percentage of the institution’s reserve base minus the lump-sum allowance with a lower bound of zero. Further information on minimum reserves and reserve accounts can be found in Regulation” (ECB website)
Thank you.
This clearly works already in the EUR zone (and was modelled directly from the Bundesbank pre-EMU) so could certainly work in the UK. Indeed, why re-invent the wheel – just import their system.
Deciding what level of unremunerated reserves should be held is unknown and can only be done by trial and (hopefully not) error. Hence my suggestion that we start off small (say £100bn) and steadily increase until we see problems.
Linking which bank has to have what level of reserves to customer deposits seems reasonable but we need to be careful of the law of unintended consequences – would banks withdraw from retail banking? I don’t know. But once again, start now at a low level and see what happens.
There is no theory to guide us. EUR zone practice is a good starting point but as long as policy makers are alert to UK idiosyncrasies we should proceed immediately.
Thanks
In a functioning democracy, there would be a tipping point, at which Starmer/Reeves, and/or a majority of MPs would realise that they had been rumbled, on the
“We can’t afford it”
“Public purse”
“Maxed out the gov’t credit card”
Tufty club drivel, and, worried about the loss of electoral support, would change direction to save their seats.
But we are well past that, especially at Minister/Cabinet level (a debatable number of MPs may still be susceptible to electoral logic, but only because they haven’t got their post-parliament sinecures in place yet. An even smaller number – 20-30 – may actually genuinely want to do something to make the world a better place, but none of them are Ministers).
A fatal combination of chronic corruption (safe jobs after they leave parliament) and authoritarian control (control of MSM and laws to crush dissent) allow them to ignore public opinion with confident contempt.
It doesn’t however, give them control over “events, dear boy, events”, nor does it mean they know what to do when the crises arrive. (Tariffs, Scunthorpe, China etc)
Can enough MPs be reached, to persuade Starmer to make yet another U turn, towards economic reality (or even better, towards the back benches)?
The alternative is scary.
What you say is true.
What intrigues (and depresses) me are the games played about the reasons these self-evident truths are denied.
Do Starmer/Reeves truly not understand? If they do understand why not tell the truth? Do they fear that the voters won’t understand and ridicule them? Do they fear that understanding of these truths will open up policies hitherto thought impossible? What are they scared of?
There are two big questions ….. and I don’t have answers.
First, what about our institutional capability to manage inflation through taxation. But outsourcing policy making to the “independent” BoE or OBR has not been a roaring success. Yes, they looked good for quite a while but only while the sun was shining. In tough times both have been found wanting. We should try and do better.
Second, the UK is not a closed economy. Money IS a closed system – base money can only be created/destroyed by government spending/taxation or net gilt purchases/sales by government – but we run persistent trade deficits and this only works because foreigners are content to hold GBP balances. In aggregate, these can’t be “sold” because someone has to own them (unless the government taxes) but, if foreign holders lose confidence in the UK then, through a game of “pass the parcel” in the FX market, GBP does get repriced at a much lower level (or higher interest rate) where people are prepared to hold GBP. Given we import a lot of stuff this has potential to feedback to inflation and given the nature of FX markets cause instability. We need to think more clearly about how this works and what policies can be adopted to prevent damage.
A very good summary.
“…. but we run persistent trade deficits and this only works because foreigners are content to hold GBP balances”. and that has always been my central point. If you are as open as the UK, and throw away your industry, and rely on imports; but have a big trade deficit; you are then at the mercy of international markets – that will sell you out at the drop of a hat. This is the stupidity of Brexit. Britain hasn’t had a reliable trade surplus for decades. The best period since WWII was 1977-1985 (9 years); and the critical factor was oil. There are another 9 years scattered around the 1990s in the period 1948-2019 (House of Commons Library: UK trade, 1948-2019: statistics), but again oil would be at least a factor. That is eighteen years out of over seventy years, and oil production was the key factor. The “independent sovereignty” of Britain outside a big trading bloc (the EU) is a complete, absurdit illusion. Soverignty isn’t found in a vote; it is found in (relative) monetary independence. For Britain, that is a trade surplus, and we are demonstrably incapable of producing it.
So clearly explained, thank you.
So, wondering does creating a hate-campaign on taxes, boxing governments into fake ‘fiscal rules’ effectively remove an important lever that governments need to be instrumental, create money – and use taxation to reduce inflation, as and when needed?
Yes, in a word
And it is deliberate
Thank you.
Ahh, got it, demonise tax and you can castrate government, disempower by removing an important lever, as well as make people believe the government is like a running a household living in a 3 bed semi.
So following the logic to change this, rehabilitating tax and changing people’s perceptions of tax would take some of the wind out of the hate-tax campaign.
I have heard Danish people talk about tax differently, seeing taxes as pro social, a part of positive national participation.
Correct
And right re Denmark, where I have spent quite a lot of time
It’s madness that we never hear much of trickle up.
Take someone out of in-work poverty via a tax-credit, decent pay rise or lowering the inflation rate in their borrowings (or a combi of all 3).
They have more discretionary income to spend.
Local businesses expand from the extra income, thus creating more jobs.
Suppliers benefit from increased orders to the shops and create more jobs.
This leads me to wonder has there actually ever been a country that ‘borrowed’ in its own currency but didn’t pay it back?
Perhaps those who think that defaulting in a currency you alone issue is quite normal could tell us?
Yes. Most recently (as far as I am aware) Russia in 1998. They defaulted on their local currency debt but NOT on their US dollar bonds.
Why? The amount of USD debt was small and they deemed it worth paying to keep future access to the market.
Huge amounts of the local currency debt was held on an asset swapped basis by foreigners (on the assumption there could be no default) and when faced with a crisis it decided that stuffing the foreign banks was preferable to inflation that would have been caused by excessive money creation.
They did not have to default but they chose to.
@Clive Parry
Thank you – that is quite a surprise!
Mind you the Soviet Union was collapsing at the time so I suppose and suggest it is not entirely representative…
In some ways the government is similar to the banker in the game of Monopoly.
The Banker can hand out as much money as needed. As the rules of the game states:
“The Bank never “goes broke.” If the Bank runs out of money, the Banker may issue as much more as needed by writing on any ordinary paper.”
Players can go broke, but not the Banker.
Precisely
I never knew that about Monopoly. Thankyou. That will be really helpful for omnibus conversations. Must dig out my old (>60yrs pre gold standard?) Monopoly set!