Friday 10 July 2020

Time to stop believing the lies

The latest (was it the eighth since November?) budget from the Chancellor was a tame and inadequate effort – like many others, I suspect he’ll be back for his ninth, tenth and eleventh efforts within the month when it becomes clear just how much of an unemployment disaster is facing us. The tame and inadequate nature hasn’t stopped the fans of austerity – who believe, in essence, that the poorest should be the ones to pay for everything, by cutting services, pensions and benefits – who are at it already, saying that all this money will have to be paid back at some point. The IFS were at it yesterday saying that the debt will take decades to repay, and the warnings about pensions and services were delivered in sombre tones by the chief spokespersons for the government, otherwise known as BBC reporters.
I actually think that ‘decades’ is exceedingly optimistic – centuries would be closer to the mark. But here’s the thing – it really doesn’t matter. It’s true that the government has ‘borrowed’ a lot of extra cash as a result of the pandemic, but it’s ‘borrowed’ that money from itself. The Bank of England has simply magicked the money into existence (under the instructions of the Treasury which owns 100% of the Bank), placed it into the government’s accounts with a few deft keystrokes, and set up a loan account which nominally needs repayment at some future date. The Bank can continue to magic money into existence as long as, to simplify somewhat, one basic condition is met: there are sufficient spare resources in the economy such that inflation does not result. With potentially 6-9 million likely to be unemployed within a few months, resource shortage is the least of the worries.
Those who demand a timescale for repayment of the deficit argue that it’s currently at ‘too high’ a proportion of GDP – but there is no agreed definition of how high is too high. And there can’t be, because that limit is not an absolute one, it depends on a whole range of factors, all of which are variable. As far as I’m aware, no-one argues that the Japanese deficit is unsustainably high. It’s certainly higher than many would like, but it’s been above 100% of GDP for the last 20 years and is currently approaching 200%. No-one is panicking about that. The UK reaching 100% may also be higher than many would like (although it’s actually a lot lower if we don’t count the magic money which the government ‘owes’ itself) but there’s nothing especially sinister about 100%, other than being a nice round number. It’s ideology, not economics, which demands that the least well-off suffer to reduce the debt as a proportion of GDP – ideology based on protecting the interests of the owners of capital first and foremost.
There’s been another lie associated with the deficit in recent days too, when the PM said that it was “the might of the UK treasury” which set up the furlough scheme and distributed cash to all parts of the UK economy. It was intended as a rebuke to the Scots, implying that they could not have afforded it themselves, and as though the money that they have created belongs exclusively to the government which is generously sharing it with other parts of the UK. (Well, some of it, at least – those parts which aren’t simply being doled out to cronies.) It’s utter nonsense, as one might expect in relation to anything issuing forth from the Johnson word mincing machine.
It’s true, of course, that a larger economy can generate more financial resources at a time of crisis than can a smaller economy; but it’s also true that a smaller economy needs fewer resources as well. Asking whether an independent Scotland (and the same applies to Wales) could afford to create enough money to meet its own needs is a silly question – asserting that it can’t is assuming that Scotland would somehow be unique amongst all other states in the world. In fairness, however, I don’t think that’s the assumption that Johnson and his gang are making – they are actually making a rather different one, which is that England is uniquely able to do things which no-one else can do. In that exceptionalist mindset, evidence to the contrary doesn’t count, and since we can learn nothing by looking at what anyone else does, we can simply assert that they can’t do it. It’s a message which works only so long as the Scots (and the Welsh) are stupid enough to fall for it. Like austerity, which also only works because people have fallen for the ‘household budget’ analogy.
They want us to believe that they are maxing out the credit card so we don’t spot that they are actually maxing out their own credibility. It’s proving less and less effective in Scotland – it’s about time that we started to catch up.


Spirit of BME said...

You claim that the BoE was ‘under instruction from the Treasury’, I think that might be a conclusion too far.
The BoE like the Federal Reserve, Bank of Japan and the European Central Bank have switched on the printing press and so QE is not a problem – as everybody is doing it.
However, the new Governor of the BoE -Andy(Bill) Bailey gave an interview on a podcast some weeks ago when he stated that the Bank`s job was to stabilise the UK economy ,but not to pay the bills of the UK government. Interesting to note he was not the Prime Minister`s choice for the job and was hoisted in by Javid, - good decision. What people are drawing from this statement, is that the Bank can switch off the printing press to ‘stabilise’ the economy if HMG does not come with a realistic plan to address the debt.
The magic money tree is madness and QE is more damaging than the finest Columbian marching powder, coming off it will not be pleasant and we should recognise what the QE-stock market-bond market is -it`s a Ponzi scheme and they produce much pain, as the coming months will show.

John Dixon said...


It is in the interests of both the BoE and the government to pretend that the Bank is independent and can act to rein in the government if it so decides. But no matter how hard they try, it is still a pretence. The Bank is 100% owned by HMG and ultimately has no choice but to do as it is told. Your statement that the new Governor "... was not the Prime Minister`s choice for the job and was hoisted in by Javid" is true at the level of personalities, but it also acknowledges that it is the government which appointed him. The fact that hiring (and if necessary, firing) the head honcho is a matter for the government serves to confirm where the power ultimately lies.

The constraint on government spending arises not from the supply of money (the government can create money at will) nor from 'the markets' (especially when people are queuing up to lend money to the government) but from any inflation which results from competition for resources when there is more money available than resources to spend it on. On the other hand, when an economy has more resources than money available to purchase them (and I accept that there's a slight oversimplification involved in that statement, because there could be differences between sectors) then enabling the purchase of those resources by the creation of extra money boosts the economy without causing inflation.

All money is debt, nothing more, nothing less. That's what 'promise to pay' means. And if all money is debt, then reducing the amount of debt inevitably means reducing the supply of money; the obsession that some have with avoiding public debt and reducing the deficit is based on ideology, not economics.