The FT would seem to have an important message in its pages for the UK Chancellor this morning. As they note:
The UK bond market has an attractive message for the current chancellor: you can loosen the purse strings. Yet when Philip Hammond stands up at the House of Commons despatch box next week, he is likely to reiterate his reluctance to increase public spending, despite conditions in the gilt markets suggesting there is scope to do so.
The market is “much more relaxed than Treasury may think about the outlook for the public finances”, says David Owen, chief European economist at Jefferies. “The public finances have improved and importantly, the UK has voted to leave the EU and there is more focus on the need for a targeted fiscal response to give growth more of a chance.”
There is plenty of other comment to support the opinion, backed by evidence of strong demand for bonds. Again, as they note:
Although real yields remain negative – two-year paper is trading at around 0.48 per cent, a discount to the 0.5 per cent base rate of borrowing set by the BoE – investor demand for gilts remains strong. Last week's long-dated index-linked syndication saw record demand.
And this is despite the plethora of negative yielding debt in the world right now. As another FT article notes this morning the scale of this debt is significant:
What does this mean? Three things. First, government debt is not squeezing out the private sector, which is the old so-called free marketeers' paranoia. If $11trn of money is willing to receive a negative return that is because there is nothing else for it to do. Capitalism has not a got a use for it. That's why it's been lent to the state as borrower of last resort.
Second, if capitalism has no use for this money it's a forlorn hope to think that markets will solve our current economic woes. Whether those woes be slow growth, limited innovation, low wages, or a balance of trade deficit the private sector will not address the issue because quite clearly there is capital in the world looking for a home and the private sector has no use for that money. To put it another way, the private sector's out of ideas.
So, thirdly, the state has a duty to use this money constructively. And that does actually mean more spending.
And yes, I know that the private sector want this to push up yields. Well, they may rise anyway: Brexit and the Bank of England's simultaneous desire to create a household debt crisis may deliver that. I don't happen to think a bit of extra borrowing will. And why not? Because those depositing money in gilts know that the spectre of QE is always present now. And they're mighty grateful for it. It's QE that guarantees the value of this debt and reduces it's yield to next to nothing. And the threat of QE means that gilts can now be used to finance the Green New Deal that we need. If only.
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Apart from a few shining examples your phrase, “the private sector’s out of ideas” pretty much sums it up. The World is awash with money that is not being invested in productive economic activity. When there are so many problems worth solving this is criminal. We should take back the money and put it to productive use.
Thanks Charles
And it’s bloody annoying because there is so much that could be done
By the private sector as well
This chap thinks he has all the answers: https://www.theguardian.com/politics/2017/nov/13/labour-accuses-john-redwood-of-talking-britain-down
(-:
“It’s time to borrow Mr Hammond”
Well I’d be happy enough to lend him, but who on earth would want him?
Could we perhaps not just give him away?
This is an interesting volte-face. It would appear that financial capitalism has dropped the “crowding-out” pretence given up on the private sector and gone Keynesian. Mind you they have often shown the potential for doing that when it suits them.
For their part the Tories are amazing. They seem to be behind the curve on everything. If nothing else at least they are consistent.
I agree Charles and Richard. Use it or loose it.
Do we need to borrow at all, why can’t the government just spend the money?
Is the reason to borrow because of our being bound by the Lisbon, Maastrict and other agreements?
For now, yes it is
At the time of the Corbynomics discussion (back then) I recall you saying that PQE, for example, could be either Lisbon Treaty compliant or at the very least, tolerable as the treaty has become practically ineffective. The ECB’s QE program and other examples were provided.
I note this merely as a point of discussion out of context, I doubt that anyone expects Mr Hammond to appreciate that point. Part of the reason I raise this is simply to note that, if it is not so and the EU treaties do preclude monetary financing, then we have something of a serious pro-Brexit / anti-EU consideration to contend with. I would hope not for more reasons than I care to mention.
….It doesn’t really matter too much.
Correct me if i’m wrong, but if the government need £1 Billion, it could either:
a) Sell 1Billion of gilts at 0.48% .
£1B of reserve money will be swapped into gilts as investors buy the newly issued securities, the government gets to ‘respend’ the reserves it collected, so in aggregate the reserve amount will stay as it is. The government now has to pay interest on the gilts.
b) The government just issues £1B of reserves, not allowed under EU laws, but even so, they would then still would have to pay interest at 0.5%, the base rate, on these new reserves they ‘spent into existance’
A) is like a fixed rate savings account. B) is a variable rate current account.
Not much difference cost wise.
@Tony
Bill Mitchells blog is a better place to get this explained but contrary to your statement there is NO interest payable under option b.
Need be paid under option b, correctly, I think
I’m sure I had this discussion before, with Neil Wilson and Richard!
The UK specifically pays interest on BoE reserves at the base rate. Unless the UK stops paying interest on reserves (which it could choose to), we will still have to pay interest on any government spending that creates those reserves.
Some countries are issuing government bonds at zero, or below zero percent yield. I cant see how that would ever work here while interest on reserves is paid.
And as I have said before, we need to stop paying interest on reserves, or at least have a separate rate
Could you clarify option b. I took it that the parties involved are the Treasury and the BoE. The creation of money is a bookkeeping entry between these two parties. Both parties are part of the UK Government. So if for some ‘technical’ reason one pays interest to the other it is not real merely window dressing.
Say I worked for the government, and supplied them with a £1Million computer system. They would pay me by keystrokes – crediting my bank account.
Well, not directly. The government doesn’t have direct access to my banks computer! Instead, they would credit the reserve account that my bank has at the Bank of England, and then request my bank to credit my account by the same amount.
The Bank of England will then pay interest on those reserves it credited to my banks account with the Bank of England.
And my bank pockets the profit without passing it on!….bastards!
would those Lisbon Treaty rules on state financing have been heavily influenced by the United Kingdom?
No. It reflects a German economic worldview.
The rules in question affect ‘monetary’ (central bank) financing.
That said yours is an interesting question nonetheless. Knowing the ways and the influence of the City people might suspect that the UK was influential. I’m not so sure. Its hard to find a history on this topic. If you want to know who the chief villain is in sustaining the prohibition on monetary financing you should look to Berlin:
https://www.reuters.com/article/us-ecb-policy-court/german-challenge-to-ecb-asset-buys-sent-to-european-court-idUSKCN1AV0PN
Setting aside brexit, what material consequences might follow from the UK ignoring these agreements and spending the money into existance?
The EU seems mega flexible in this regard wrt Italy and Spain.
If we’re going to leave we could do it now
But don’t doubt many in Weatminster think we will not be leaving
Agree, of course.
But cheekily using the chance to bring to your attention Umunna’s rejection of UBI.
Myopic or ideologically opposed?
Sadly, both IMO.
Interesting he has had significant funding from PWC in the past. So despairing, as Labour strives for radical change, that neoliberals in the party still come up with stuff like this and even more so when proclaiming themselves ‘progressive’.
[…] Cross-posted from Tax Research UK […]
Given that the FT and bond markets have rediscovered their enthusiasm for government borrowing it might be worth noting this from last year:
“Helicopters 101: your guide to monetary financing” https://www.db.com/newsroom_news/GDPBD00000292870.pdf
Its Deutsche Bank Research sharing their understanding of, and enthusiasm for “monetary financing”
Their take on the subject is intriguing. Those with a particular interest in such things should definitely take a look. The PQE/Corbynomics “national investment bank” idea is indirectly mentioned at the top of page 10.
Fascinating read.
Given this report was dated April 2016 I have to wonder why there are so few(0) aspiring, smart and ambitious politicians who have picked up on the possibility of becoming the greatest statesperson of the age and showing voters the way out of the mire.