We have just published this short video on YouTube and many other channels.
This is the transcript:
The national debt is not what you think.
We're told it's debt, and it has to be repaid, but what if repaying it would crash the economy? That is what would actually happen.
The point is, the UK's national debt is not debt in the sense that you and I understand it if we owe somebody money. That's because the government creates the money that it owes. Instead, what the national debt represents is the money that the government has spent into the economy and not yet brought back from it by way of taxation.
That means the money in question has been left by the government in circulation inside the economy and that provides us with the means of exchange. How do I know that? That's because £80 billion of the so-called UK national debt is made up of notes and coins. If we got rid of the national debt, there would be no notes, there would no coins.
Worse than that, there would be none of the money that the banks use to pay each other as part of our finance system. All of that is included in national debt.
The national debt is our money supply. If we remove it, we wouldn't have a functioning economy.
The national debt is, however, private sector wealth. This is important to understand.
If you've got a pile of £10 notes, you feel you're better off than if you haven't. It's as simple and straightforward as that. But who made the £10 notes? The government did. National debt is therefore private sector wealth. What the government does is run a deficit. We, as a consequence, can run a surplus. We have wealth because the government has theoretically borrowed.
And lots of our savings institutions depend on this. Pension funds and life assurance funds are critically dependent upon the existence of the UK government's national debt because it is the safest form of savings available to these funds who save for the long term.
So you, probably, have hung your future security on the back of the UK government debt, whether you know it or not. Without that national debt, savings and finances in this country would not work.
The result is quite straightforward: without debt, our economy would collapse. Repaying it would withdraw all money from circulation. That would trigger a recession and financial crisis. Public services and pensions will be hit hard.
Debt is a tool and not a problem.
The issue is not its size, but how we use it.
If we understand it properly, we can turn the national debt from being this thing that we call a problem into something that becomes a virtue that delivers well-being for everybody, and that, in my opinion, is vital.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
There are links to this blog's glossary in the above post that explain technical terms used in it. Follow them for more explanations.
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Buy me a coffee!
As I think we agree – this cannot be said enough.
Nor can the double entry accounting element be denied either.
The only people who don’t accept this are those who reject State sovereignty and those whose ignorance they expolit.
They could be called the wilfully ignorant
Qn from bear of little brain, to help with omnibus questions…
Chancellors apparently dream of running surpluses (like Bill Clinton) – sucking more money OUT of the economy with taxes than they create and spend into it.
Steph Kelton explains that this is recessionary, I get that.
What do the Treasury models say happens, over a 5 year period of modest surplus budgets?
And as you point out – what happens to notes and coins?
And what happens in the bank money creation world?
I’m trying to get my head round how the Treasury models deal with this?
I appreciate that surplus budgets may seem a bit unlikely as we destroy our global economy attacking Iran – but is there a video in “Why surplus budgets are a bad idea”?
At present I couldn’t have an omnibus conversation on that topic.
Glad Scotland went well!
Richard, if the national debt is “the money that the government has spent into the economy and not yet brought back from it by way of taxation”, does it reduce when taxes are paid? You usually say that when we pay our taxes the money just disappears.
Tax does reduce the national debt. The national debt is our money supply – even notes and coins are in it – and so paying tax always reduces the national debt by literally destroying money.
Thank you. So billionaires and multi-millionaires should never complain about the size of the National Debt because it’s them that have the bulk of it!
So how would the government determine what the right level of national debt should be? If I’ve understood you correctly, it would be by looking at what under-utilised resources there are in the economy, such as unemployment levels. Couldn’t you also argue that the money the billionaires and multi-millionaires have lying idle in bonds, etc. is also under-utilised and therefore needs to be released from them for productive work in the economy?
Regards…Bob
IKf Tom Lehrer could make a song out of the periodic table is there a musical economist – Lehrer was a mathematician, who can do the same for the National Debt?
@John Boxall
It doesn’t rhyme (yet), but it was a 90-minute attempt to begin such a song. I leave you to guess the tune (hint, my father could “play any instrument,” he maintained, “as long as you wanted The Londonderry Air.”)
“Oh, Danny Boy, the Chancellor hears calling
From journalists and other misinformed,
They say the Debt is not sustainable
But they, they know not what happens next.
There will go bank notes and all legal tender,
Gone will be savings for our golden years,
Our Chancellor will kill the economy –
Oh Nat’nal Debt, oh Nat’nal Debt we need you so.”
Yup, it needs more work.
I have tried to explain this many times to various groups of people. At the end of the explanation, there has often been acknowledgement, “yes, they understood”. But later, sometimes even just a few minutes later, it’s just as if I had been talking to a brick wall. A friend with me at the discussion has said the explanation was clear and understandable.
I must accept that this could be me and the way I tell it, but perhaps this suggests that there is, perhaps, a more fundamental reason behind the inability to realise and relate to the truth of what is going on. It’s as if there is an emotional blockage being caused by the truth; perhaps it’s also throwing doubt on other aspects of our financial system and they cannot cope with the implications.
So, is it just me or has anyone else encountered this type of reaction? If they have, have they found a way around the issue?
This is fundamental economics. I haven’t checked any text-books lately, so I don’t know how they explain National Debt. I don’t see how else it can be done, other than how Richard explains it here.
People will believe whatever they want. We live in a world of alternative facts thanks to Trump et al.
Willful ignorance indeed!
Richard I have about 200,000 pound saved in the UK which of course is part of the UK debt. So when I cash it in and transfer it to euros for me in Ireland the UK debt will reduce by a very small amount. I should get a bonus for helping to reduce the government debt.(just joking).
You will still have pounds when you cash in the debt. You will do an asset swap into a cash current account from a savings account. Then you sell your currency to buy euros. The pounds still exist. They just have a new owner. You do not change the debt at all.
@ Richard,
“That’s because the government creates the money that it owes. Instead, what the national debt represents is the money that the government has spent into the economy and not yet brought back from it by way of taxation.”
This is how it should be defined but isn’t officially. The official definition is very much about how many bonds/gilts are sold and how much other official debt is issued. This is a better definition because it recognises that debt is created when money is itself created and that everything else is just an asset swap which doesn’t affect the debt at all.
Does it matter? I think it does. Using the official definition means that we shouldn’t count the bond holdings of the BoE. An argument that you yourself have made. Under this definition it doesn’t matter a jot who owns bonds.
People get steamed up about the amount of interest paid on that part of the national debt held in Government Bonds. It is a lot of money, I believe around 10% of total spending. So it looks bad to people. But is it? It depends on how much good it does. A lot goes into pension schemes. So that might be a good thing, unless it means that the less well off are paying more tax to offset the interest being earned by better off people with good pensions. Then I guess it might be a somewhat unfair. Likewise with some of the other investors, like insurance funds. Who benefits? Who pays? What kind of redistribution is happening? Does the bond market really serve a socially useful purpose? All that sort of thing troubles people, if they peep under the covers.
The right approach
Is this explanation solely about national debt in national currency? How about national debt in foreign currency?
We do not have any.
What I can’t understand is why politicians of all parties continue to either fail to understand this, or pretend that they don’t to continue the ‘household purse’ analogy that allows them to dismantle everything valuable about our society.
Is it deliberate?
Whilst possibly on dodgy ground here because I’m not a qualified accountant, I recall a conversation I had many years ago with my own accountant. In my business, our customers pay up front for a service that we provide over the next 12 months. We book these as sales on a pro-rata monthly basis, even though we have all the cash up front. I asked the accountant why we constantly had a liability on the balance sheet even though we had no debt. He explained the revenue recognition and deferred income rules – the unrecognised revenue is shown as a liability as it is effectively the obligation for the future based on the cash received. I always used to think “liability = debt = bad”, which I suspect many people do. However, in our case this liability very much represents the life blood of the business – it is the other side of the cash in the business and to some degree is our “money supply” from our customers that allows us to deliver the service over time. Also, if we were to repay it, we’d go bust. As I said, I could be comparing apples and oranges and there are many here with a better understanding than me, but after getting this liability idea straight in my head, I found it a much easier hop, skip and a jump to understanding the whole national debt/deficit myth angle (that and reading Stephanie Kelton’s book at least 3 times so far). I think a basic appreciation of double entry bookkeeping should be required of all MPs, civil servants and journalists!
Your logic is right, as is your double entry.
Thank you Richard, I really like this explanation. Just watched your video about banks too – again, thank you for the insight.
Does this mean a country has no choice but to be in “debt” – as a really basic example to make sure I understand this…. imagine no money existed at all. The BoE create £10,000 to lend to me. But they charge me 10% interest, meaning I will owe the bank £11,000 after a year. Therefore, does the bank now need to create that extra £1000 so that I can pay the interest – and does this cycle go on ad infitinum?
There is a video coming on this.
And no, the bank does not need to create the extra £1,000.
The confusion comes from looking at one loan in isolation. In the real economy there are many loans and many payments happening all the time.
When the bank creates £10,000 and lends it to you, that money enters circulation. You spend it, and it becomes someone else’s income. Banks also spend, on wages, dividends, suppliers,and those payments put money into the economy too.
Your interest payment comes out of that existing flow of money. It is a transfer of income to the bank, not a requirement for new money to be created.
New lending does happen continuously, so the money supply tends to grow over time. But it is not necessary to create new money simply to allow interest to be paid.
So no infinite spiral is required. Interest is paid out of the circulating money in the economy, not from a separate pool that must be created to match it.
Thank you