A new commentator left the following comment on this blog after my most recent video. They started with a quote from me:
‘And bonds in particular behave very differently in the MMT worldview. These aren't debts. These are simply money put on deposit with the government, because that is the safest place for people like the City of London to save.
There isn't, therefore, an obligation to make repayment because these are voluntary arrangements between what is in effect a banker – the government – and those who've got surplus money that they wish to find a home for.'
Then they asked for an opinion on it before asking a pertinent question:
On the assumption that we are talking about govt treasuries (‘bonds') doesn't the govt. issue these to banks (through the Central Bank) to match its fiscal deficit and don't these get further bought/sold by domestic and institutional investors which then determines the price/yield on these on a day-to-day basis? So, isn't there a sovereign obligation for the govt. to repay the principle and interest on these debts? And, doesn't that then place a check on the amount of the fiscal deficit which a govt can safely run? Isn't that what happened in the UK in 2022 after the ‘mini-budget' when the govt announced a slew of tax cuts and additional expenditure proposals, which sent the bond/treasuries market into a spin?
That question is fair, but I would suggest that some of the assumptions in it are misplaced. That needs explanation, hence this blog post, because this seems of wider interest.
First, matching deficits with bonds is a chosen rule, not an economic necessity.
The UK government has not always issued bonds to “cover” its deficit. Until 2006, it also made use of the 'Ways and Means' account it held at the Bank of England. This was, in effect, an overdraft facility. Government spending was financed directly by the Bank, as always, and bonds were only issued if there was a policy reason for doing so; in other words, if circumstances were right, monetary policy required it, or there was demand to provide safe assets for financial markets. Flexibility was the watchword.
It was only after 2006 that the Treasury and the Bank of England essentially agreed to end routine use of the Ways and Means facility and move to a system where deficits were matched by bond issues of varying types, from very short-term Treasury Bills to long-term gilts. This, though, was not an economic necessity. It was simply a political choice to change the convention of the monetary regime. Nothing in the nature of money or government finance required the new arrangement, excepting, perhaps, the Maastricht Agreement, which no longer applies in the UK.
Second, there is no requirement to pay interest on borrowing from the Bank of England.
Since 2009, the Bank of England has purchased hundreds of billions of pounds of government bonds under its so-called quantitative easing programme. At one point, it owned more than a third of the entire stock of government debt, and it still owns around £700 billion of that debt.
Those bonds are assets of the Bank of England. But the Bank is part of the government. There is no external creditor here. There is, therefore, no economic necessity for interest to be paid on those bonds at all. If the Treasury and the Bank wished, they could agree that such payments should cease, because in reality they are nothing more than money being shifted from one arm of government to another. It is a political choice by successive governments to still pretend that these interest costs exist, when in fact they are then returned to the government as income.
Third, paying interest on central bank reserve accounts is also a choice. Commercial banks are required to hold reserve accounts at the Bank of England. These are the balances that make the payment system function. Since 2006, the Bank has chosen to pay interest on these reserves. But again, that is a choice. The Bank of Japan and European Central Bank do not pay interest on all their reserves: other models are available, in other words. The Bank of England could follow their example. There is no obligation to continue.
So where does that leave the question of “sovereign obligation”? Of course, when the government issues bonds to private savers (and I stress, that is what they are: they are not investors because the government is not dependent on the funds received to undertake its activities, since they have already been paid for by the Bank of England), it undertakes to repay them at maturity, with interest. But that is the product of a set of rules which the government itself has chosen to create. But, as I note, the government could fund itself without issuing bonds. It could fund itself without paying interest. It could, if it wished, change the terms on which bonds operate. In other words, this totally artificial human construct called the bond market can have the rules under which it operates, and even the understanding of why it operates, altered if the political will to do so existed. As a consequence, there need be no hard, external “brake” imposed by markets on the government's fiscal capacity. That there is a pretence that such a brake exists is the consequence of neoliberal political policy choices, and nothing more.
So, what about 2022 and the Truss “mini-budget”? That is the inevitable response to such suggestions these days. My suggestion is that a bond market sell-off occurred after Kwasi Kwarteng announced his tax-cutting budget in 2022, for which he provided no funding details. However, it is essential to understand what actually happened.
The prevailing media narrative was that markets simply “lost confidence” in the government's fiscal numbers. But that is not the whole story. What really tipped markets into crisis was that the Bank of England's announcement the day before Kwarteng spoke that it was going to start proactive quantitative tightening, or, in other words, it was going to begin proactively selling off government bonds it already held as a result of acquisitions after the global financial crisis and during the Covid period.
That decision to flood the market with gilts at exactly the moment the government implicitly also announced a significant increase in bond issuance as a consequence of the tax cuts it was planning created a perfect storm. Yields rose sharply. Pension funds, which had used complex leveraged strategies tied to gilt yields, suddenly faced margin calls they could not meet. A wave of insolvencies was threatened in the UK pension sector.
The Bank of England was forced to intervene within days with an emergency bond-buying programme, effectively extending quantitative easing as a result, to stabilise the market.
This episode demonstrated not that the UK government “ran out of money” but that the Bank of England's own actions in managing the bond market can create or relieve a crisis. In other words, it was the central bank's mismanagement of money creation and destruction that caused the meltdown, proving just how important government money creation really is.
What to conclude then? The real point is that claims that governments must always balance deficits with bonds, and that they must always pay interest on those bonds or on central bank reserves, are false. These are conventions of the last twenty years. They are not natural laws. Once we understand that, we can see that the government's real limits are not set by “bond markets” but by the actual resources available in the economy - the labour, skills, energy and materials we can bring to use – and by the inflationary pressures that might arise if spending exceeds those real capacities. That is what MMT has always said. And it is why I continue to argue that we need to stop treating self-imposed accounting conventions as if they were laws of nature. They are not.
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Government departments are subject to strict external scrutiny. The National Audit Office (NAO) audits their accounts, checks that money is spent in line with Parliament’s intentions, and assesses whether programmes deliver value for money. Its findings feed into the Public Accounts Committee, which holds senior officials accountable for whether departmental activities serve the public interest.
By contrast, the bond market — through which the government raises finance and on which it pays tens of billions in annual interest — operates under a much thinner layer of accountability.
Primary market (issuance): The Debt Management Office runs auctions transparently, and its accounts are audited by the NAO. The FCA regulates participating banks and the Bank of England monitors systemic risk. But there is no NAO-style assessment of whether the cost of debt, or the distribution of interest payments, represents value for money for taxpayers.
Secondary market (trading): Oversight is limited to market conduct and financial stability. The FCA prevents manipulation; the Bank of England intervenes in crises. Yet this market plays a decisive role in setting yields, which drive up or down the cost of public borrowing and influence wider economic policy. Despite its fiscal impact, there is no democratic scrutiny of whether these outcomes are in the public interest.
The result is an accountability asymmetry. Departmental spending is tightly examined for honesty, efficiency and effectiveness, while debt servicing — now one of the largest items in the government budget — escapes equivalent review. In effect, vast flows of public money to bondholders, many of them overseas, are treated as a technical necessity rather than a political and economic choice worthy of public audit.
It’s time for a change.
1931 the Bank ofEngland got it wrong
2008 failed to see what happened
2022 got the sell off wrong
But it is supposed to be obvious we need an independent bank.
Special pleading from the bankers?
Yes
There is a video to come
1825. Worst Banking crisis in BoE history. Financial system closest ever to collapse – the BoE (pre-fiat currency), thought at one point it had run out of money………
Now it can’t…but it won’t stop it doing so
It was a matter of perception, and sleight of hand. This is how the money world created absurdity: they paid Rothschilds eye-watering sums, literally to transfer gold bars, back-and-forth between London and Paris, as required, to keep the whole financial illusion in place. It was musical chairs. Which hole in the ground the gold (that was never called on in the real world) was safely held in was what supposedly “mattered”, to keep the supposed “equilibrium” in place.
There was a Government inquiry; very detailed, with a long list of key witnesses saying jaw-dropping things; reading would be hilarious, except that it wasn’t fiction. It was ‘real’ (in a world created solely by calculation, confusion, fear and untethered human imagination). Much like now.
Has there been any clear reason given for the Bank fo England to conduct such a sell off the day before a budget? It seems an extraordinary strange thing to do. I detest Truss and Kwateng, but they have continually tried to wash their hands of the responsibility of the turmoil. I’d hate that they were correct.
No one else has done it.
Could we have a social banking system …. a not for profit where any profit goes into new social homes, education, NHS, mental health etc. How did we end up having a banking system that is owned by the Government but is run like a private company.
We could.
It’s called the government.
10/10 for clarity.
Bob Forsyth
Thanks
“This episode demonstrated not that the UK government “ran out of money” but that the Bank of England’s own actions in managing the bond market can create or relieve a crisis. In other words, it was the central bank’s mismanagement of money creation and destruction that caused the meltdown, proving just how important government money creation really is”.
This episode (the Truss-Kwarteng crisis) actually highlighted the failings in both the BoE and Treasury in failing to regulate the pension funds; the “complex leveraged strategies” (Liability Driven Investments, LDIs) had allowed pension funds to increase their investment risks without anyone at all noticing (or caring). This fundamental failure (which I find hard to believe would have happened if many pension funds had remained the mutual funds they were originally set up to be – specifically to avoid the risk-taking propensities of joint-stock companies) was a failure of regulation of financial markets. The Government carries the can, but its big mistake was for the Treasury (no fount of wisdom, given its track record), to trust in the ‘wisdom’ of the Bank of England.
House of Commons, Work and Pensions Committee
“Defined benefit pensions with Liability Driven Investments”:
“LDI played a role in helping schemes to improve their funding level when interest rates
were low and scheme deficits high. However, we are concerned that this was funded
by leverage (borrowing), the inherent risks of which did not get sufficient attention
until a crisis hit. This happened in September 2022, due to the economic turbulence
which followed the ‘mini-Budget’, when sharp rises in gilt yields, unprecedented in
their speed and scale, resulted in LDI funds being required to post additional collateral
at short notice. To meet collateral calls, and reduce leverage, LDI funds had to rebalance
by selling liquid assets or asking their DB pension scheme investors to provide more
collateral. When this rebalancing could not be achieved quickly enough, LDI funds
were forced to sell gilts into an illiquid market. This risked reinforcing the downward
pressure on gilt prices, creating a downward spiral which the Bank of England had to
intervene to stop.
The Bank’s intervention allowed LDI funds to rebalance and rebuild their resilience………. The Pensions Regulator said in April 2023…most pension schemes had improved funding levels ……….External analysis raises questions as to how confident we can be about these improvements in funding levels. ” (Summary, p.3)
Thanks, John. Much to agree with.
A little jumbled in the end … I was crudely editing out just to fit 400 words.
Hello Richard, Thank you for this clear explanation of a subject that has confused me for some time. One thing that I am still unclear of, however; if the Bank of England is a part of the Government, why can’t it write off the 700 million debt?
It could.
There you go.
That is the answer.
And its own accounts reflect the fact it is not real.
Thank you Richard. Every day for years I have been coming to this blog, and every day I learn something more about the mysteries of the economy, which the powers that be are intent on keeping in the dark.
Thanks
Further to my comment about the “drainage” inherent in money creation which can be found under Richard’s recent post “MMT v Keynes? Who is the winner?”:-
https://www.taxresearch.org.uk/Blog/2025/09/02/mmt-v-keynes-who-is-the-winner/comment-page-1/?unapproved=1041054&moderation-hash=05e595149cc859d4198d0354b332f508#comment-1041054
I think the following additional comments might be useful. Democracy has to be linked to the use of money because historically market capitalism shows it cannot provide low and stable levels of employment and often adequate levels of income to all to pay an equitable level of taxes especially indirect taxes like VAT.
Right-wingers are deceitful in their response.
They will not tell you who needs to create money as a unit account to rectify this situation. They cannot say the licenced banks can respond because as James K. Galbraith has told us these banks are interested in lending as much money as possible to make a profit.
Right-wingers are also always telling us that if government has the power to create money they will over create and trigger inflationary pressures.
So what is their response to the above “drainage” problem caused by our society’s use of money? They simply don’t have one and rely on gas-lighting hard of thinking voters to put their political representatives into government office!
Neoliberalism or what we also know as Thatcherism, or Neo-Monetarism (Rachel Reeves’s “black holes”), is therefore intellectually bankrupt.
I wish you could put this to the BBC economics editor Faisal Islam, and ask him to do a programme on it – to lift the lid on ‘THE BOND MARKETS’ – which are portrayed as the stealth bomber looming over everything the government does .
Its clear hardly anyone in or out of the BBC really knows any of this. even if its framed as you versus a true believer economist so the BBC can exercise their usual ‘impartiality’ it would still be very enlightening.
One glimmer of hope – in Newsnight Victoria Derbyshire was a bit non plussed that Zak Polanski came right back at her accusing him of wanting to ‘throw money’ (always a giveaway phrase) at the NHS – the first leading politician to say that investing in the public sector can create growth etc etc
There is a very good analysis of the Truss meltdown in FT Alphaville by Toby Nangle (September 1st). In short, Truss’s attempts to blame the BoE and establishment conspiracy are wrong…. although the BoE is not without blame, Truss/Kwarteng bear the major responsibility. I agree with that.
I would answer your commentator slightly differently.
Gilts (principal and interest) are a sovereign obligation and must be paid. But, just like any other spending the government makes, they just ask the BoE to make the transfer…. which may/may not push the government into an overdraft. There is no need to issue new gilts to meet these obligations
Banks do buy gilts but the majority are sold direct to investors (often via Primary Dealers). These investors pay for the gilts from their Current Account held with a clearing bank. This, all other things being equal, will reduce the clearing bank’s CBRA balance. The government will now pay interest on the gilt… but less interest on CBRAs (as they are lower as a result of the gilt sale). Note, BoE and HMT are all “government” so it doesn’t matter who pays.
To sell gilts or not to sell gilts? From a “cost” perspective it is just a trade off between interest paid on gilts and interest paid on CBRAs… which currently is “full remuneration at the Base Rate”.
In short, governments have complete control over interest rates – both Base Rates (set by the MPC) and gilt rates (by altering issuance patterns or QE) and quite a lot of control over how much the “interest bill” is – first by controlling the level of rates and, second, by reducing the interest paid on CBRAs.
This sounds “too good to be true” and it is. What would happen if we chose to set base rates at 1% and conduct QE to keep 30 year gilts at 2% and chose to cut interest paid on reserves? Well GBP would take the strain.
This is what Trump is angling for in the US and the USD is down 10% so far this year… what price the dollar if he succeeds?
She was wrong to blame conspiracy.
She was right to blame the BoE. John Warren provides more depth on that.
She failed to recognise her own incompetence.
If I read John Warren correctly (and FT Alphaville makes the same point) it was a broader failure on regulation (of Pension Funds and the gilt market) rather than QE…. .although certainly QE did not help.
Now, you know I have long been a critic of BoE on QE and QT acting robotically without regard to price or circumstance… and their QT announcement was wrong, for sure. But when allocating blame it falls overwhelmingly on Truss and Kwarteng.
We’ll have to disagree.
I say a score draw (to quote the pools teleprompter of old).
I think part of the problem is mainstream ignorance and the way it is reported. The attached link which I saw in LinkedIn demonstrates: https://www.linkedin.com/posts/barry-white-766073a0_is-britain-really-facing-a-1970s-style-activity-7368925986878410752-fgRS?utm_source=share&utm_medium=member_ios&rcm=ACoAAAIutCYBBJLRJyye84LaWzGY46wk6UAWOCY
Maybe, in addition to your other great work, you could post your blog content to LinkedIn? Worryingly, there are quite a number of ‘influential’ (?) people on LinkedIn who portray and disseminate neoliberal doctrine and the household analogy.
I do post elected links to LinkedIn
I am not sure about reposting whole posts. Why? But, I admit I am not a LinkedIn fan: I don’t want a job, why do I need LinkedIn?
Because despite what LI says about itself, it is not simply a job-seeking/recruitment space. A lot of people on LI use it to share views, exchange information and have conversations exactly as you do on X. It’s much more like ‘facebook for business people’ (including small business owners).
I do share your posts when I can.
Thanks
I get that – and see you there. But it is not my focus.
My posts get around 12,000 views a week there right now.
Why do you think drives neo-liberals to self impose those anti-scientific rules?
My take on this is a combination of:
1-A way to increase easily profits without the hassle of innovation and long term risky investment, so we have reached a soft limit on the productivity growth. (hypocrisy)
2-MMT means that anything goes (democratic print giveaway becomes an option, it was the same argument with universal suffrage) in terms of money and people are clinging on money as a resource because it is difficult to quantify the real resources, they are not a single currency or convertible to each other. (moral closet)
I think you are wasting my time with spurious questions that are poorly framed.
I struggled to understand the section that started “That question is fair” and ending “They are not”.
It seems to me that it is impossible to use increased tax to reduce inflation without also reducing the deficit.
Investors see significant inflation and productivity risks within the UK, so they will require higher yields to compensate them for those risks.
Not sure why that is a controversial opinion – it’s just basic (economic) common sense?
There are no investors.
They are savers.
And there is no risk, government can always pay.
Meanwhile, what they demand will create the situation you descibe.
What sort of crass argument are you presenting?
Just watching PMs QT.Badenoch,
attempting to explain government increased borrowing costs, said it was because the government had “maxed out” its credit card.
Very sadly this is still the standard of debate in Parliament.
Indeed
Pathetic
Thank you for your excellent videos Richard, although I confess I am still struggling to understand certain points. I asked ChatGpt the question, “Why does the government issue interest paying bonds when it doesn’t need to?”. In short it said they do so because they are,”essential tools for monetary policy, financial stability, and market functioning”. But is it also because it benefits the super wealthy and the government has vested interests to maintain this status quo? What I think I have learnt from your videos is that the size of the national debt doesn’t actually matter and the government can run a deficit permanently subject to it controlling inflation? So all this doom laden talk at the moment about 30 year gilt yields being at record levels and the country facing economic meltdown if it doesn’t cut the deficit is just scaremongering guff?
Try this:
https://www.taxresearch.org.uk/Blog/2024/05/08/why-we-have-a-national-debt/
https://www.youtube.com/watch?v=M2kVowF2HyA
And yes, it is all scaremongering guff.
It seems wrong to me that the BOE is independent – it is a failed experiment. Surely the time has come to acknowledge this and make it part of the Treasury again, perhaps with it’s own Minister to make it answerable in Parliament.
There is a video coming on this.
One of your very best posts. Very clear. Great explanation of an important issue. 🙂
So what happened in 2006 to cause a change in the way the government used the Ways and Means account? My digging suggests very little changed in 2006, just a formalisation of what had been happening since 2000 when the government largely stopped using the Ways and Means account. And why did that happen in 2000? Largely because of, as you mention, the Maastricht Treaty, which meant the UK was forbidden from using central bank financing (i.e. the Ways and Means account). This is a problem because, IMO, central bank financing (a.k.a. the creation of money) is essential for the proper management of the economy. Although this prohibition may be more relaxed in practice it does seem like a poor idea to ratify a treaty that you will then need to break.
It is only because of Brexit that this prohibition no longer applies to the UK. We haven’t yet taken advantage of this regained freedom but we need to do so and I hope we will.
The Maastricht treaty also manadated an independent central bank. You have argued, and I agree, that the Bank should not be independent. Fiscal and monetary policy need to work together, as amply demonstrated by the Truss/BoE budget/quantitative tightening debacle discussed in other replies.
It is only with Brexit this country has the freedom, without breaking ratified international treaties, to pursue the policies needed to correct the appalling neoliberal policies of the past couple of decades. Brexit had many negative aspects but this regained economic freedom was, surely, a silver lining.
I think we are largey in agreement on this one.
Tangentially connected…..Zack Polanski, the new Green party leader, boldly informed Victoria Derbyshire on Newsnight last night that government spends before it taxes(very encouraging). Her open-mouthed incredulity and subsequent lapse into the hackneyed rhetoric of ‘government borrowing’ and the sovereignty of ‘the market’ have generated a complaint to the BBC from me.
I have seen.
She was thrown completely off guard. And then fell back on ‘the markets’
Thanks very much Richard for today’s post – really clarifies things, as did yesterday’s on the difference between MMT and Keynses’s approach.
Thanks
In my mind it is very simple. The BoE is able to create money out of thin air which is FACT. The BoE is owned by the government. Therefore the government has endless money on tap. The only concern for the government is whether creating too much money creates inflation in the economy (which impacts upon us all and devalues money) and if creating too much money will devalue the pound on international markets (which is bad news for import businesses but good news for export businesses). Unfortunately, all this logic is lost on politicians who have been taught economics through a neoliberal lense.
Remember, none of this works without tax.
Sadly most voters are daft as a brush in not being able to see that democracy is inescapably linked to our use of money as a society. At a basic level there’s the silly argument whether taxation comes before government spending or vice versa when at certain times of the year taxation drainage will be greater than government spending and then at other times reversed. I say silly because what’s really important is not asynchronous drainage in our use of money but that everybody in our society should be able to pay taxes particularly high indirect taxes like 20% VAT without anxiety about their budgets. This anxiety is directly related to a situation where the democratic vote doesn’t seem able to secure adequate incomes for many from either the market or government as employers!
The MSM especially the BBC have been saying that government borrowing is up , who is the government borrowing from ?
Banks
Pension funds
Life assurance companies
Overseas governments and funds
Why borrow when they can print there own ?
Because we need a national debt
On the subject of accounting conventions it seems to me that the debate about MMT and Keynesianism is just the difference between two forms of cash management and it doesn’t matter very much whether you spend and tax or tax and spend.
What is more important is that the balance sheet of the UK is sound and that the impetus of the economy is maintained in the right directions for the future. “Public Net Worth ” came out earlier in the year trying to nudge the government into seeing the balance sheet as the most important issue in managing the economy.
Seen in that light if say the assets of the Uk are £20trn, spending a few billion to repair our hospitals or to build more houses for the poor is neither here nor there.
The government should stop obsessing on the details and look to restoring the big picture.
This does not mean they should be careless with their investments but they should stop acting like McCawber.
Dickens had it right.
Wow.
So wrong.
Did you watch my video on Keynes and MMT? If so I am baffled as to how you can say this.
No I was commenting on the question you posed on what is the difference between Mmt vs Keynsianism in your newsletter.
I am happy to be corrected. What has offended you?
The suggestion that MMT and Keynesianism are only slightly different makes no sense at all
They are both incomplete answers. That’s what i mean. Both address balancing the books rather than investing assets in the best way.
Not that its not important to have a rough balance but that it doesnt address the right question.
I read your comments most days and have learnt much – and, importantly, have become a supporter of MMT. I try to share information about it, but I realise my knowledge is still based on insubstantial ground. A recent discussion with a sceptic raised the question about how long it would take the country to have enough skilled workers to tackle all the capital demands that are crying out to be done even if it could be funded. How long would it take to train a bigger cohort of skilled craftsmen/ women or would it depend on us facilitating access to immigrant labour and skills (and rejoining the EU in some way)? Probably both. So it would seem that developing a strong enough workforce base would take years and although the government might have access to the funds it would still be stymied – and in the process enable growing criticism of itself and its MMT approach to economics from bankers who are fearful of losing control and right wing politicians and reporters as well as from much of the population who see that there is little progress in repairs and the necessary developments taking place.
Is there a way through this?
Your question is totally fair.
And the answer is it will take time.
BUT, migration would most definitely help. But the constraint you note is real, and MMT highlights that.
@ Janet Ash
That’s where the political skill is needed, and politicians of intelligence and integrity, along with a media dedicated to truthful investigative reporting in the public interest, and people like we have here, devoted to telling a different story to the people we can influence.
All those are in short supply right now, even if the money is not.
But the challenging scenario you describe is infinitely preferable to the unstable deteriorating neoliberal status quo. We can do it.
Yet the media always come out with the same line. E.g. from the BBC: “The interest rate on 30-year government bonds, known as the yield, jumped to 5.72%, making it more expensive for the government to borrow money” https://www.bbc.com/news/articles/cy989njnq2wo.amp. Is there a need for a campaign for economic literacy in the media?
The claim is absurd.
For a start the government is not issuing 30 year bonds right now.
Hi Richard, I agree with your, as usual, succinct MMT based explanation about why governments need to move away from ‘bond markets’:
‘The real point is that claims that governments must always balance deficits with bonds, and that they must always pay interest on those bonds or on central bank reserves, are false. These are conventions of the last twenty years. They are not natural laws. Once we understand that, we can see that the government’s real limits are not set by “bond markets” but by the actual resources available in the economy – the labour, skills, energy and materials we can bring to use – and by the inflationary pressures that might arise if spending exceeds those real capacities. That is what MMT has always said. And it is why I continue to argue that we need to stop treating self-imposed accounting conventions as if they were laws of nature. They are not.’
Even with the MMT explanation, we are still left with the conundrum of moving from the ‘as is’. The ‘as is’ situation is that the UK has a deep bond market with the Bank of England, commercial banks, pension and insurance funds and foreign institutional investors (around 33%) as active participants, which sets day to day ‘yields’ on govt. bonds based on demand and supply. For example, after switching to ‘deficits matched by bond issue’ in 2006, can the Treasury and the Bank of England switch back to use of the pre-2006 Ways and Means facility? What would be the implications of such a transition ?
What would an MMT explanation proponent of the macroeconomy suggest as a ramp off? What are the additional resources which the government can leverage to promote efficiency in the economy (which would lead to a lower need to access the bond market)? Can it be ‘sustainable development’ (with a near zero real GDP growth), as long as the average per capita household income
On efficiency, an Economist article recently mentioned that
British electricity prices had, for decades, matched Europe’s but now household bills are 20% and industrial bills 90% higher than the average for the major European economies.
Can bond markets be the last leg of the solution, first concentrating on reducing energy costs, housing costs and tax inequality or should it be vice versa?
To answer this I am playing with quantum thinking.
Would a revival of the ( post World War II ) Keynes Bancor proposal be feasible under an MMT explanation?
It proposed a new international monetary system centered on an International Clearing Union (ICU) and an international currency called “bancor”. The ICU would act as a global central bank to manage bancor, a unit of account used to settle international balances. The purpose was to create symmetrical incentives for countries with trade surpluses and deficits, encouraging both to adjust imbalances. This would prevent the deflationary pressures of the gold standard and the deficit based adjustments of the ( eventually chosen) Bretton Woods system, which has now become fully fiat money based.
My question is theoretical ( and not based on current political feasibility).
That is, does this proposed solution fit in with MMT framework ?
My answer is it is incompatible, almost certainly. It was designed for fixed and not floating exchange rates. It would need major rethinking as a result. That is possible, but it is not what Keynes proposed.