Friday, 27 November 2020

Abject drivel is too kind a description


In the light of the Chancellor’s statement earlier this week, there has been a lot of coverage of the scale of the UK’s national debt, with speculation about how and when it is to be repaid. The media have aided and abetted the government’s ideological nonsense about ‘unsustainable’ levels of debt, and the BBC have unquestioningly parroted the same line. Chris Dillow takes the BBC’s political editor, Laura Kuenssberg to task for her claim that the UK’s credit card is “absolutely maxxed out”, describing it, entirely reasonably, as “the most abject drivel”, before wondering “how can any sentient being utter something so stupid”, and going on to explain why it is so wrong. And Professor Richard Murphy also has a useful short video explaining why government debt is not like a mortgage or credit card.

The BBC compounds its error in this article which purports to ‘explain’ the debt and its consequences, which includes the statement that “This year the Bank [of England] is buying £450bn worth of bonds, which makes it much easier for the government to borrow money”. The problem with that statement is not that it is inaccurate, but that it is only half the story, and it’s the missing half which is important. Anyone who really wanted to understand and explain what was happening here would go on to ask the obvious supplementary question – ‘so where does the BoE get the money to buy those bonds?’. The answer is that it simply creates that money, magicking it into existence by pressing a few keys on a computer at the behest of the government. I understand that it’s counterintuitive to believe that money can just be created at the press of a button, but it is the reality of a fiat currency like sterling. As the Bank is a wholly owned subsidiary of the government, money owed by the government to the BoE is effectively money owed to itself.

As a result of the programme of QE which started with the financial crash in 2008 and has been stepped up during the pandemic, the government now ‘owes’ some £875 billion – or 40% of the total national debt – to itself. It’s nothing more than a book-keeping nicety to describe this as being, in any meaningful sense, ‘debt’. Yet the allure of the comparison with a household’s credit card is so strong, so all-pervasive, that people are willing to swallow it hook, line, and sinker – and tolerate the pain which the government plans to impose on the least well-off in society to repay the debt to itself. ‘Abject drivel’ is far too kind a description for the BBC’s coverage. It would also be an utterly inappropriate label for the claim by politicians that the debt is ‘unsustainable’. Whilst the journalists might merely be suffering from ignorance or a lack of awareness, the politicians are guilty of deliberately misleading in order to promote their own view of the role of the state and the interests of the wealthiest. They must not be allowed to get away with it.


Jonathan said...

Instinctive/counter-intuitive: government debt. Out of respect to your arguments I watched the video by Prof.Murphy. He makes a point that I understood on one level, but maybe not on another. Ok, its clear that the Government can create money to balance any debt so is not in that sense in debt. Got it. But it does not deal with the separate question of whether creating money in an open-ended way is a good idea. Is there really no downside? What about (1) inflation (2) the cost of paying interest on the 60% that is not Government created, and (3) creating money puts the spending power, great power, into very few hands and allows them to make wholesale changes unaccountably. Maybe this explains the fear and worry of the "maxed credit card" canard.

John Dixon said...

" does not deal with the separate question of whether creating money in an open-ended way is a good idea" No, you're right, the video does not deal with that (although he has other videos which do). But no-one (as far as I am aware) is advocating creating money 'in an open-ended way'. That would eventually lead to inflation. But, as long as there is spare capacity in the economy, the government can continue to create money to employ that capacity. (I'll accept that that's a bit of an oversimplification - in the real world capacity is not entirely fungible, so one needs to consider where the capacity is, but the principle is valid.) The limit on money creation then becomes not some entry in the books masquerading as debt, but the capacity of the economy.

"Is there really no downside?" That depends on whose interests we are considering. In terms of the 'real' economy, full employment is in the interests of most people, isn't it?

I dealt with the inflation question above. As to interest payments on the 60% not owed by the government to itself, well, yes there is a cost. At the moment annual interest rates over the debt as a whole are minimal, and the OBR's own figures released earlier this week suggest that the BoE base rate is going to go negative in the near future. But even if that doesn't happen, any interest rate which is less than the rate of inflation means that people are basically paying the government to borrow their money. Why would they do that? In simple terms, security and certainty - the sort of security and certainty which comes from knowing that the government can always repay the money. Can interest rates go up in the future? Well yes, of course they can. But the probability of that happening in the next half decade or so is close to zero, and what QE has taught us is that interest rates aren't driven by 'the market' to the extent that many believe. As long as people are queueing up to lend money to the government (and they are!) government has a great deal of control, in practical terms, over the level of interest payments. People tend to forget that the UK government has had a continuous national debt since 1694: sometimes it's gone up, sometimes it's gone down, but it has never been completely repaid. Why would anyone believe that after more than three centuries that is suddenly going to change? Bear in mind also that much of the UK's debt is on long maturity bonds - and the lenders are happy with that.

"creating money puts the spending power, great power, into very few hands and allows them to make wholesale changes unaccountably" Not entirely sure what you mean by that. I'd agree, though, that one of the problems with the way QE has been done is that a lot of the money has ended up in inflated asset prices rather than in spending in the 'real' economy where most of us live. And an awful lot of the money created in recent months has gone to the chumocracy of the Conservative Party. It doesn't have to be that way, though.

The question, ultimately, boils down to what we see as the main priority of economic activity. Is it to ensure full employment, or is it to protect the wealth of the few?

To be clear, I am not (and I don't think that anyone else is either) arguing that governments can or should create money without limit in all circumstances and at all times. The argument is, rather, that in an economy with spare capacity, the supply of money should not be and need not be the arbiter of what we do. Government debt is a fact of life; it is essential to the economy. If all government debt was repaid tomorrow (think pension funds, National Savings and Investments for instance), the result would be disastrous. All government debt (except the artificial debt owed to itself) is balanced by savings and investments - it has to be, that's the way accounts work. There is no magic number beyond which it becomes unsustainable.