The economic commentators are in a panic this morning. The government, they are saying, has overspent in August. The figure for what they call borrowing is a record for the month for five years. They obviously think that everything is falling apart. This, of course, is nonsense.
The government spent what it had to, and it recorded other expenses – like the cost of some sorts of government borrowing that will not be paid for decades – because it thinks it has no choice.
And the government did not raise as much tax as it wanted, because they think no one wants to pay it.
At the same time, everybody wants more spent on the NHS, education, social care, new housing, investment in industry, solving the migration backlog, climate change, and so much more, so the government did not actually spend enough.
These are the facts. And despite all that, there is, according to the Bank of England, capacity for at least £70 billion more in bond sales (via quantitative tightening) to be made into the financial markets than the government needs to supposedly fund its own expenditure over the next year. In other words, these reputedly wise people think that financial markets want to buy many more government bonds than the government is willing to supply by running a deficit.
The problem for all market commentators is that this is very hard for them to admit. It simply does not fit in to their narrative, when the fact is that government borrowing (which is actually nothing more than government deposit taking) is something that people really want, just as much as they supposedly don't want to pay taxes and do want the government to spend.
The clear and unambiguous message from financial markets today is, then, that those markets actually want more – and bigger – deficits, which is the exact opposite of what commentators are saying.
In fact, just as recent market data is showing that private savers are pouring money into government-guaranteed cash ISAs, so too is the City desperate to put more money into government bonds, which they, too, know represent the only safe place from them to save in the world when financial markets are going mad, valuations are extreme, and any sense of certainty has long since disappeared.
The message of today is not that there is a crisis of government, but rather a crisis of understanding. The real message from today's data is one that neither the markets, nor the public, nor the government are yet willing to say out loud and yet it is glaringly obvious if you just appraise the facts..
The truth that the markets and people saving in cash based ISAs are saying is that they think that the government is well under control, doing exactly what people want, and markets and individuals throughout the UK are responding in the only rational way possible: they are committing their savings in the only way that the government guarantees is safe right now, saying in the process that the government is the only person they trust.
The only problem is that market commentators don't see the world for what it is, or market signals for what they really are, or human behaviour for what it actually represents. Right now, across the UK, massive votes of financial confidence are being cast in favour of the government and its capacity as the banker everybody wants to use to ensure that they have a safe place to deposit their money. And that is why we have high government debt. It is because people want there to be high government debt.
That is the only message we a take from what is happening, and the only one we need to hear. Everything else is ridiculous noise. It's time the world noticed.
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Thank you for an article which contains crucial information and questions.
Might answers to your so relevant questions include the following?
1) Promoting control of the citizenry, and their children/future voters, through fear which works because the citizenry is deliberately put and kept in ignorance
2) Job security and/or promotion for career politicians, orthodox economists and shallow/shifty market commentators
3)Dominant herd instinct
Maybe
Or just ignorance and dogmatic blindness?
The ignorance and dogmatic blindness is the failure to recognise that without sufficient democratic control over capital Frankensteins will emerge!
https://akjournals.com/view/journals/032/69/4/article-p485.xml
In short the Neoclassical economic theory that the market alone will optimise national or collective well-being is bunkum! Now Frankensteins have emerged in both the East and the West of the planet.
From what you say it seems to me, and that while it isnt quite as simple as all that, acting as the deposit taker of last resort would prevent no end of tears later as the money heads towards Laughing Boy on the 3.30 at Catford or other sure fire investments
Also of course it might ease some short term inflationary pressures by taking money out of the economy even if only temporarily
I love this posting as an explanation of bonds especially the phrase: ‘ government borrowing (which is actually nothing more than government deposit taking)’ . Could you create an entry in the glossary under Bonds which includes such gems? Under Glossary for ‘Gilts’ it has ‘see bonds’, but there is nothing under Bonds!
I must do that.
The philosopher, Plato, maintained that we cannot blame people who simply don’t know unless they choose ignorance in preference to knowledge.
Most people( I guess around 80%+)have no knowledge of how the economy really works. They only know how their own finances work. They can keep a check on payments and receipts, but will struggle with accruals and prepayments. They might do their own net worth, but not depreciation or discounted cash flow.
So, we cannot blame them for not knowing the government is able to create its own money cannot go bankrupt.
Everybody else has no excuse for not being able to understand the logic explained clearly in Richard’s article. The only possible conclusion is that many people are knowingly suppressing the truth they know for sure because it doesn’t suit their own ambitions. This is disingenuous as well as foolhardy. Acting as if the facts were different to what they are is costing society dearly. Facts are sacred, or should be.
We need to keep repeating the facts and challenging those who try to use their own ‘facts’. It will be a long job.
Today in the town of Matlock, Derbyshire, we went to the local post office to find all the shelves empty of stock. Enquiring why, we were told that the post office was being franchised out, having its 9 staff reduced to 4 and they would be on minimum wage.
This is a really busy post office. All the banks have closed down in the town I think with the exception of a building society.
The new owner said he will put “employees and customers at the heart of everything IDS does”.
Hmmm. Up yours, I say.
What a country. And our politicians allowed this to happen.
That is why our politicians don’t mean anything to me whatsoever. I’d have more regard for a slug.
“The only problem is that market commentators don’t “WANT TO” see the world for what it is”
There, sorted.
The “market commentators” are PAID to say things & they do – & the chimps in the BoE use these “comments?” (my farts contain more information) in their interactions with the likes of Reeves to convince them of TINA – we must sell the money we owe ourselves onto the markets
(I’ve just written myself an IoU – decisions decisions – sell it to somebody? or just tear it up – yessss, it is a hard choice, I will need to think).
And we have these imbeciles running government.
The difficulty – for Rachel Reeves anyway – is that investors literally “aren’t buying it”.
The yield on 30 year gilts (the return needed to tempt the marginal buyer) got down to 0.5% per year in 2020.
A year ago it was 4.35% per year.
It’s now 5.56% per year, higher than at any time since 1998.
Investors may be wrong, but they have not been desperate to flood into government bonds. They have been requiring higher and higher yields to do so.
Oh come on. Crass comments are out in force this morning. This ignores the role of central bankers. Fur heaven’s sake, please engage your brain before drawing crass conclusions here. The rate changes are largely / entirely base rate and QT driven. That’s it, and candidly nothing else. Why pretend otherwise? Engaging with facts helps.