A comment was posted by regular commentator Kit W-N overnight on yesterday's proposal to issue bonds to reconnect public savings with public purpose. The issues he raised are important, so I reproduce much of his comment here before addressing them:
Sounds like a great idea for several reasons but I'm still a little confused about the detail.
The government doesn't actually need to issue these bonds, the money is available anyway. So am I right in thinking….
1) The aim of the bonds is to attract savings that might otherwise go into private speculation into government bank accounts that are ringfenced.
2) Savings placed in specific bonds can only be used for the investment in that area.
Does this mean that if NHS bonds are way more popular than housing bonds we can all expect caviar for lunch in hospital but still too much homelessness, or will the reality be a single wad of money which is spent across the board and the real distinction is ‘which pretty picture would you like on your savings bond?'
Does, or indeed, should the amount of government spending on these areas depend purely on the amount of savings bonds issued?
I'm not trying to decry the idea, I want to understand how this works in practice in a country which can issue as much currency as it deems appropriate.
I fully appreciate the emotional engagement that goes with issuing these bonds, but how much of that is real and how much of it is marketing?
Paying the interest to people in the community rather than a foreign bank is obviously a very positive step of it's own.
These are fair questions, and they highlight some important points.
One is that MMT is not a manifesto, or a mandatory set of instructions. It does not prescribe what governments must do. It explains how the monetary system works and, in doing so, it opens up policy choices. It does not close them down.
One of those choices is for the government to provide safe places for people to save. I entirely agree with Kit that the government does not need to issue bonds in order to spend. But that does not mean it should not issue them. That is a quite separate decision, and I have long argued it should do so because the UK's financial system could not survive without them.
But that is not why these bonds should be issued. These bonds serve a strong social purpose.
Firstly, if people wish to save, I believe that government has a duty to provide secure savings vehicles where people's money is put to good use and is not used in the casino of the stock exchange. At present, far too much is exposed to that risk, as I outline in this morning's video. And a lot more is saved in cash in ways that provide no economic benefit, except potentially by reducing the rate of inflation, albeit very indirectly. Both of these risks threaten society, and since markets have failed to provide alternatives, it is the government's job to do so.
Secondly, that means putting those savings to use for social purpose. This should be, I suggest, as the capital for investment in housing, the NHS, energy, local government or other public priorities.
Thirdly, that does not mean spending should be determined by the popularity of particular bonds. Government should spend according to need and the availability of real resources, not according to how many people buy NHS bonds rather than housing bonds. The labels on the bonds are primarily about giving savers a choice as to where they would like their savings to be directed, but that said, the label must be meaningful: the funds must be directed to the use for which they have been saved, and accountability must be built in. However, the chance that this would replace all government funding in any area is low, and the needs for investment are, anyway, enormous. What matters is the principle: savings are being channelled into productive capital formation rather than speculation.
Fourthly, there is another benefit. If savers provide the capital via ISAs and pension funds, as I suggest, with ISAs only available if saved in these funds, the government saves significantly on the current cost of subsidising such schemes (which amount to about £80bn a year in total, all of which is lost to the City of London as a form of direct subsidy for the nearly useless savings products it sells), recouping some of that money for social advantage as well. This then means it would only have to make good any gap between the financial return the investment generates and the return savers require, less the cost of the saved subsidy. The cost to the public purse can therefore be quite modest, whilst society gains the full benefit of the investment.
So there is an element of engagement, and if you like, marketing. But it is much more than that. It is about creating institutions that connect private saving with public purpose, something our present financial system does remarkably badly. At the same time, it is about turning currently wasted public cost from subsidising harmful savings products into a public gain at numerous levels, including by:
- Reallocating savings to public purpose
- Reducing financial risk
- Breaking the bond market myth
- Ending PFI
- Creating employment
- Reviving the local economy
- Creating the assets society needs
- Supporting climate transition
- Providing safe returns to savers.
What is there to lose?
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I suppose my biggest concern about these bonds is that this or a future government could remove the money from, say, an NHS bond and shovel it into the gaping maw of the MoD with little to no constraint. All it might take are sufficient shrill screams of “the Russians are coming” from the defence industry and its cheerleaders in the media. We’re already seeing elements of this in the “guns before roads” proposed in the defence investment plan.
They could – but it would be clear they had and the anger would follow
As you have explained, the government does not need to borrow in order to spend. The labelling of government savings accounts or bonds to “fund” specific projects undermines this fact and reinforces the neoliberal mantra that governments must borrow (or tax) in order to spend.
Making government bonds and national savings accounts more attractive to the public and redefining ISAs to redirect funds to that end remain excellent objectives of course.
Politely, stop talking total crap if you want to post here.
MMT is not a manifesto.
It enables choice.
And govermment choice to use a capital is essential to protect society from the current use of savings.
Your two paragrpsh are utterly inconsistent with each other. Please don’t waste my time with nonsense, and learn that MMT is a small part of political economy, not what defines everything.
I am bored with this form of zealotry.
I may not have expressed myself clearly. My point was not that government savings products are undesirable because government does not need to borrow to spend. I fully support the ISA reforms and the encouragement of government-backed savings vehicles.
My concern was only with the presentation of such products as a means of “funding” public expenditure, because that risks reinforcing the widespread misconception that government spending is dependent on prior borrowing. As I understood your article, the case for these savings products is broader than that: they provide a safe home for savings and can redirect capital away from less socially useful uses. If that is your point, then I think we are largely in agreement.
It is broader – but we also have to play to the audience there is.
Let’s be realistic about that.
Thinking about this since yesterday, I read a little about War Bonds, and learned that they paid less than ‘the market’. Today, we are being encouraged to save via shares, the cash ISA allowance is being reduced. We used to be encouraged to save at a bank, now people who cannot afford to lose on the stock market are being told that shares are the only place to ‘grow’ their savings.
Could the government or local government issuing bonds ensure they at least kept up with inflation? Linked to an index rather than fixed rate? How are the wealthy to be persuaded to buy them; we don’t expect from them the patriotism that sold people war bonds, as we are told they will all leave if we tax them more. Plus, their fund managers will say ‘does not compute’ – buy assets instead.
I love this idea and I want this to work, but an increasing percentage of us in the UK don’t have anything left over for savings, many people are not saving into a pension because they don’t earn enough, or they are too stretched trying to save for a home.
It seems to me we would need some other changes before the savings capacity was there. The better off middle classes are raiding their savings to help their children, those with less are simply not able to save, and locking away money for decades when there is so much uncertainty is not a ‘rainy day’ fund.
I was all sunshine yesterday, but can you help with these rain clouds that came in the night? Are they valid concerns?
A question please: you say ISAs cost the government about £80billion per annum? How do you estimate this figure given that the direct costs of loss of revenue are only about £10 billion?
The figure is £80bn for ISAs and pensions
That’s an impressive list of practical and political plusses, at the end of the post.
It’s a bit of a no-brainer really, isnt it? Why would anyone be against it?
The City will
The city shouldn’t determine national policy
From the comments this idea has legs so, time for some detail. First, what bonds, precisely, are offered? Second how will they be distributed/traded? What tax status will they have?
First, I favour fixed rate bonds of varying maturities – like gilts. There would a range of issuers and maturities (eg. Defence, Health, Education in 2, 3, 5, 7 and 10 year maturities). Every 6 months a new suite of bonds would be announced with coupons set at prevailing rates.
Second, they would be distributed via NS&I and individuals would hold them there. Prices would be determined by the BoE – they would produce daily at 11am a yield curve (derived from the gilt yield curve). This would determine a price for each bond and people with money to invest would place an order (before 10am) to buy the bond at this price. (Note; if you want to invest £1,000 you will not get £1,000 face value because the bonds will not trade at par but, with the price and amount to invest known, the face value is easily calculated). Bonds would be issued on demand by the DMO.
If investors want their money back they sell at this same price less a margin to cover costs of NS&I. These bonds would be cancelled.
Third, these bonds would be eligible for ISAs (with tax relief on equities limited on future ISA contributions).
Finally, as a first step (and valuable whether or not full implementation happens) NS&I should offer this service in Gilts. It would be a small step to connect people with government “borrowing”.
These bonds are specifically not tradeable, IMO. Savers need certainty. Trading destroys that. People understnad this. Let’s not complicate matters: there is no need to do so.
But I like option 1.
We agree on 3.
Is option 2 just a way of varying the price between major issues? Is that really necessary?
Tradeability does not destroy certainty. If a saver buys a 10 year bond the annual interest will be fixed for those 10 years and they will get their money back at the end… with certainty. But, if I have no mechanism to “get out” I would want a rate of interest higher than an equivalent gilt (which is freely tradeable).
If they are not tradeable then what happens if a saver wants their money back “early”? After all, circumstances change and I might need the money next year or I might die. There must be a way to get cash back to savers (or their estate) and there are two ways to do this. Either they get to sell at a “market price” for the bond they own (along the lines I suggest) or they get the option to redeem early…. and this option has value so it will mean lower rates for savers.
Also, how would you determine the rates offered on these bonds? How would they alter as market conditions change? Small investors don’t want to keep checking to see if the NS&I bond rates are “competitive” (I only ever lock into NS&I fixed rate bonds if they beat gilt yields) – far easier to know that you will always deal at a fair price that is linked to the wholesale gilt market with no/little commission. If you arbitrarily fix the rates on offer it will either be “feast or famine”…. which is no good for savers or the DMO.
Last year, I was having a discussion with 2 friends – one an ex-bond trader. I asked the question: “Would it be possible to set up a scheme whereby we (the public) could purchase “shares” in the NHS, so we had some sort of genuine investment in it as a vital public service?”
We played with the idea for a bit, but couldn’t quite get a working model clear in our heads. The next day I dislocated my hip (again) and the idea fell off my radar.
Is that the kind of thing you are suggesting, Richard?
This is not shareholding – I do not want ownership – I want a loan structure to fund the NHS and much more.
Good luck with the hip.
Michael Hudson observed that the deregulation of the finance sector has meant that finance sector (FIRE Finance Real Estate, Insurance) has taken a greater part of the economy and directed it towards money making money financial instruments (“dead” savings/bonds, secondhand shares, private equity asset stripping, derivatives, etc) that add little to the real wealth of the nation eg infrastructure, energy, water, education, health, etc. The benefits of the neoliberal / neoclassical economic policy work their way up to the wealthier in society increasing inequality and leaving the vast majority worse off with austerity economics. Too much of the economy has been taken over by the finance industry which sells debt. Redirecting some of this “dead”money to real productive GDP activities via investment “bond/savings” with a base rate linked return and government backed security is a benefit to the nation and sorely needed for a Green New Deal. I understand this was the case before deregulation as central banks offered “window guidance ” to private banks as to the ratio required for lending to real productive GDP activities. In addition retail banking could make loans creating new money but separate merchant banks could not…they could only play with investors money.
I would love this kind of saving possibility.
I don’t care if it would be as lucrative as elsewhere as long as I’d have a say in it.
Would be much better at least than another point of the neoliberal pension reform here in Germany where, if this will pass, it’s then obligatory to spend additional 2% of the income into a pension fund.
You can’t decide at your own will where it will be used, it’s all predefined and I fear that a lot of it will be armament and other environment- & live-unfriendly stuff….
Well, you may get a selection of the same thing with different names I assume.
That’s not really a choice….
Thanks Richard, I wasn’t expecting that!
I would have replied yesterday, but was laid up with abdominal pains and great fatigue, fortunately nowhere near as bad as you have been suffering and now clearing to my great relief. What is it about turning 68 that suddenly makes us ill?
Other than my fixed benefits pension and Australian superannuation funds, our savings are in bank term deposits which seems a fairly safe place for them, though access to government backed bonds at a similar rate would be better. I like Clive’s suggestion about making govt bonds more accessible to the public, though the mechanism would be different in each country.
Although, technically, a different mechanism, National Insurance was set up so that workers had a feeling of what of what was being done with the money being spent. I’m sure that there was more acceptance of this scheme because of the welfare connection.
I was quite shocked to see your reply to Paul. Of course I realise that MMT defines the mechanism of how goverment spends and taxes to recover some of the money it creates. It can then choose to balance the books or not. However to say that it is zealotry to use it when I, and I suspect many on your blog and on UTube channel follow you because of this. After all there are plenty of your critics that would regard you as a zealot for daring to say that the government does not need ti tax to fund.
Wrt to savings I accept that the bond issue is a practical way of redirecting savings to a useful purpose witout causing too much negative reaction. But I for one want to talk about more radical if not politically feasible at present ideas. One of these would be to discourage saving in favour of a gauranteed income based on a tax threshold. Pay if you earn more get it back if you don’t. This could replce state pension and the benefits. I would love tos see more of that type of discussion. We need education that money should not be a store of wealth but a mean to make chices over our needs to live.