Debt, per se, is not bad

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There was a story a month ago about a report from the Institute of International Finance that the total amount of global debt had reached a record height of $324 trillion. It’s a huge sum, so large as to be beyond comprehension in terms of our own daily interactions with money. It’s an estimate, of course. It could not be otherwise; human record-keeping is neither precise nor transparent enough to know for certain. Let’s just accept that it’s a very, very large number.

Whether we should be worried about it or not is another question. Since all money owed by one person or body is owed to another person or body, it is inevitably the case that a total financial debt of $324 trillion is precisely matched somewhere by a total financial asset of $324 trillion. It’s just that the debt and the asset are in different hands. And whilst estimates of how much money exists in the world vary significantly, one thing we can say is that, since ‘money’ is, in its very essence, simply a way of denominating and trading debt (“I promise to pay the bearer on demand” etc.), the amount of money in the system must match, if accurately calculated, the amount of debt. An over-simplification, for sure, but if every individual and organisation were to repay all their debts tomorrow, the world would indeed be debt-free – but it would also be money-free. There would still be a pile – many piles – of physical notes and coins somewhere, but they’d be essentially worthless. And the economy would grind to a halt. Asking how much debt is the ‘right’ amount for the world economy is like asking how much money should exist. It’s a question which has no correct answer; the only thing we know is that, as the world’s population grows and becomes more affluent, the amount needed will increase. Worrying about how much debt there is, and by how much it is increasing, is focussing on the wrong question.

The right question is about who is in debt and to whom they are in debt; it’s about the underlying economic power relationships. The reason that it worries some is not the existence of debt, nor the amount of debt, nor the increase in that amount: it is about potential default – whether those in debt will be able to repay their debts. It is a concern by the rich that the poor will not be able to continue transferring their few assets to the rich, because (almost by definition) much borrowing is by those who have no money from those who have lots. What concerns politicians about the debt mountain facing the poorest – whether individuals or countries – should not be whether they are taking on debts that they can’t cover, but how and why the need for them to do so arose in the first place. And since that inevitably leads to discussion about how resources and wealth are distributed in the world, it’s easy to see why they prefer to avoid it.

Look out for the big warning sign

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According to Benjamin Franklin, “in this world nothing can be said to be certain, except death and taxes”, although, as is often the case with the most famous quotes, he may well have lifted the phrase from earlier writers. In politics, there is another apparent certainty: any politician who utters a phrase along the lines of “I want to be honest with you” is erecting a great big warning sign covered in flashing lights saying that (s)he is about to utter a major, galactic level, lie. In his budget on Wednesday, Rishi Sunak proved himself no exception. And what a whopper it was.

This particular big lie is, of course, the one about the need to increase taxes and/or cut spending in order to pay for the costs of the pandemic. In practice, the costs of dealing with the pandemic (and they are truly enormous, even if the money spent has been inadequate and misdirected in several respects) have been met by the creation of new money rather than by new borrowing. In accounting terms, it looks like borrowing since the government has sold more bonds to raise the money. But those bonds have been bought by the ‘independent’ Bank of England which has simply created enough new money, with a few strokes on a keyboard, to buy all those extra bonds. So, to the extent that the government owes this money, it owes it to the Bank of England. It also pays interest on that debt (albeit at a very low rate), and that interest is paid to the Bank of England as well. But who owns the Bank of England? The answer, of course, is the UK government. Whilst one part of the government owes money and pays interest on it, another part of the government is owed the money and receives the interest. The consolidated accounts of the UK government and all its subsidiaries and holdings would therefore show, in effect, that the UK government owes the money to itself and pays the interest to itself. The idea that we ‘must’ rapidly repay this ‘debt’ amounts to claiming that one arm of the government is setting the debt collectors on another arm of the government to transfer money from the left hand to the right. And because the interest on this element of the debt is paid by the government to itself, it doesn’t even matter whether the interest rate goes up or not – because interest payments would still be exactly balanced by interest receipts (although why the government would want to increase the interest rate on fixed interest bonds which it has sold to itself is another little mystery). It’s all part of the wonder of double-entry book-keeping.

The idea that ‘debt’ must be repaid is a seductive one for most of us, because it reflects the reality of the world in which we live. It doesn’t reflect reality, however, for a state which controls, and borrows mostly in, its own fiat currency. Such Governments rarely, if ever, repay their debts, and those to whom the money is owed rarely, if ever, demand repayment. Indeed, most of the time, people are queuing up to lend more by buying government bonds and savings vehicles, not asking for their money back. The UK has had a continuous national debt since 1694 and has never repaid it. Some individual elements of the debt appear to have been repaid, of course. There was something of a milestone in 2006 when the debt from the second world war was finally ‘repaid’, to give just one example. But in 2006, the UK’s total borrowing increased, rather than decreased. Effectively, the UK, as it has done historically, simply took out new loans to pay off the old ones – that isn’t the same as paying off debt. Professor Richard Murphy has calculated that for every pound which the UK has borrowed since the end of the second world war only 1.7p has actually been paid off. And it isn’t a problem.

Where is the demand for debt repayment coming from? Are pension funds demanding to cash in their bonds? Are the overseas countries with holdings in sterling to facilitate trade with the UK demanding their money back? Are holders of Premium Bonds and other NS&I savings products demanding to cash them in? The answer is ‘none of the above’. The demand that debt be repaid comes solely from an ideological standpoint which demands a small state and hates public spending even more than it hates taxes. The demand for repayment is coming from the debtor, not the creditors. If the public sector did manage to eliminate the budget deficit and run a regular surplus which was used to reduce the national debt, it would mean that the private sector had to build up a corresponding debt, because (that wondrous double-entry book-keeping system once again), a surplus in one sector must always be balanced by a deficit in another. Since ‘debt’ is simply another word for ‘money’, there are only two ways of getting rid of it – by cancelling money or by transferring the debt to someone else. Neither of those are what the economy currently needs.

That brings us to a second important lie in what the Chancellor said. He claimed that he was protecting people from the economic effects of the pandemic, yet his demand that the UK ‘repay’ the non-existent ‘debt’ arising from QE, through a combination of tax increases and spending cuts in a few years’ time, isn’t protecting people from the impact at all. It’s merely deferring the impact and spreading it over a longer period. And, as ever, the approach chosen by a Tory Chancellor is to make sure that the impact falls most heavily on those who can least afford it. Attacking the pay of popular public sector employees in the process looks tone-deaf to most of us, but 'Richi' Sunak and his ilk didn’t get to be as 'richi' as they are by promoting fairness.

Taking from the poor to give to the rich

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One of the advantages of the oft-debunked household budget analogy applied to government finances is that it is easily understood by people. That in turn allows ideologically motivated governments to create and promote false dichotomies about priorities for spending. The decision, for instance, as to whether to maintain and increase pensions has nothing to do with spending on health or education. And International Aid has nothing to do with the pandemic (or with housing ex-servicemen, to refer to a common meme on social media). ‘Looking after our own first’ may be a powerful message, but there is nothing other than ideology stopping the government from looking after our own anyway, and cutting spending on aid is more likely to boost the wealth of the wealthiest than to help a single homeless person. The simpler explanation is that just as the current government believes that the rich should stay rich whilst the poor remain poor, they believe that the same should be true internationally as well.

Of course it’s true that money spent on x can’t be spent on y, but the idea that we therefore must choose between them is dependent on the assumption that money is in limited supply. The counter-intuitive truth is that we can have as much money as we want. Limits apply only to the goods, services and resources on which we can spend that money: create too much money and inflation will result unless taxes are increased. In practical terms and in current circumstances that means that any decision to cut International Aid has nothing at all to do with pressure on domestic finances. The government is simply seeking a convenient excuse for reneging on (another) international commitment. And if there is one consistent truth about the current government it is that it is always the poorest – whether at home or across the world – who will suffer the most. That is an ideological choice, not an economic necessity.

It's not their money

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Yesterday’s complete policy reversal by the Chancellor over furlough is good news – up to a point. It takes us back to where we were in March with a scheme which is merely inadequate, short term and poorly thought-through when they could have used the last seven months to refine and improve it. The way it was done looks to have been driven more by panic than revealing any indication of planning of forethought. And despite all of Johnson’s bluster about the SNP not being willing to take yes for an answer, it still doesn’t give a clear or categoric answer to the question that they’ve been asking, which was whether furlough will be available in Scotland (and the same question applies to Wales) if Scotland’s decisions differ from those taken in England after the end of the English lockdown rather than used as a means of ensuring conformity.

During his speech yesterday, the Chancellor told the SNP that the Scottish parliament has the power to raise taxes, and that if it considers these measures important it could raise funds for them. I’m sure that it was intended as a put-down, but it inadvertently underlined the key difference between devolution and independence. The only way that a devolved Scottish Parliament, acting under Westminster-imposed rules which limit its borrowing capacity and mandate a balanced budget, is by first increasing taxes to raise the necessary revenue. A state with monetary sovereignty, like the UK, can spend the money without having to raise it first, exactly as Sunak is doing. He is explicitly not raising taxes to pay for his program, and nor does he need to. And for all his talk of fiscal responsibility and the need to ‘repay’ the money in the future, he knows both that he won’t be doing so any time soon, and that neither does he need to, because the government has ‘borrowed’ the money from itself by increasing the total supply of money. When he talks about ‘repaying’ the money, he simply means reducing the overall supply of money in the economy. That’s a policy choice, not an economic necessity, and means either tax increases or more austerity, neither of which make any economic sense for the foreseeable future.

They claim that the UK Government is being in some way ‘generous’ to Scotland and Wales by ‘giving’ us extra money (a point dealt with in more detail by Peter Daniels on Nation.Cymru today), but they are tightly controlling the purse-strings more with a view to keeping us in our place than allowing us to make any decisions of our own. Money raised, borrowed, or simply magicked into existence by a few keystrokes doesn’t belong to England, or to London, or to the government – it belongs to all of us. Their pretence that it’s theirs merely underlines the nature of the relationship in their eyes – master and supplicant. The good news, if there is any, is that they don’t even understand that treating Wales and Scotland as supplicants will be counter-productive for them in the long term.

Opposition fear aids government's ideologues

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Between the plans to end the furlough scheme and the proposal that banks should force into bankruptcy any company that is unable to repay its Covid-19 related loans, the estimate that there will be only 3 million unemployed in the UK by the end of the year looks like an increasingly optimistic scenario. The Chancellor is actually right to argue that the government cannot and should not protect all jobs for ever, and even right when he argues that some of the jobs where people have been furloughed no longer exist in any meaningful sense. We have zombie jobs in zombie companies, no doubt at all. What he does not know – and can’t know – is which jobs those are. Neither he nor anyone else can know with any degree of certainty which companies (and therefore jobs) will no longer be viable in a post-Covid world. What that means is that the actions he is taking (or in the case of refusing to extend furlough, not taking) will kill not only those companies which are no longer going to be viable, but many others which could potentially remain viable. Trying to force people back into work before the demand for the goods and services which they provide has recovered is another element of an overall policy which seems designed to maximise rather than minimise the numbers of jobs lost. His insistence that tax rises and/or spending cuts will be necessary because of the size of the deficit – an insistence based on dogma and ideology rather than economic necessity – will also add to the toll of jobs.

In that context, the suggestion gaining some support in Tory ranks that the pension age should be increased to 75 is the complete reverse of what is needed. What the economy needs is for demand to recover, and that means not only that the pandemic is seen to be under control, but also that people have both the confidence and the financial wherewithal to spend. Increasing the rate of bankruptcies and joblessness and delaying the pay out of pensions all have precisely the reverse effect. If, on the other hand, the state pension were to be doubled (which would bring it up from the bottom of the world’s developed economies and closer to the average) and the pension age reduced to 60 at the same time, the effects would be very different. Nobody would (or should) be forced to retire at 60, but many of those about to lose their jobs would then have the financial security to be able to make that choice if they wished. That would reduce the number of people seeking jobs (and therefore improve the chances that those looking for jobs might find them), and give more people the confidence to spend, thereby boosting demand and potentially creating more jobs.

It won’t happen, of course. Not because it can’t happen; the government could implement such a policy tomorrow if it wished to do so. One thing that the pandemic has demonstrated is that a government which enjoys a sufficient degree of monetary sovereignty can do almost anything up to the point at which its spending causes inflation. No, it won’t happen because too many politicians, from multiple parties, have invested too much effort and credibility over too long a period promoting the myth that deficits are inherently bad and that governments must balance the books, just like households. What that means is that the scale of the recession, the level of corporate bankruptcy, the numbers of unemployed people, and the level of relative poverty are all deliberate political choices being made by the UK government. Worse, they are being implicitly supported by the official opposition which lacks the courage or ability to point out the fallacy in the household analogy. Opposition politicians who are afraid to challenge because they fear the ‘how will you pay for it?’ question are almost as much to blame as those implementing the policies, because they are perpetuating a myth which serves only the wealthy and powerful.

Time to stop believing the lies

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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.

Shaking the tree again

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When the Prime Minister first announced, in the light of the heavy parliamentary defeat for her Brexit plan, that she would be talking to other parties across parliament to hear their views, it was apparent that the only views in which she was interested were about what it would take to persuade those MPs to back her deal.  Alternative proposals were not welcome, although if they came from within her own party, they might get a grudging hearing.  The idea of persuading MPs from other parties – particularly Labour MPs from leave voting areas – has reached new heights with the plan to make extra funds available to those areas in return for the votes of their MPs.

It's pork barrel stuff, of course; and many will condemn both it and the MPs concerned for being taken in by it.  At one level, however, I can understand why an MP representing an area badly hit by austerity and government cuts might think that obtaining extra investment in exchange for a single vote in parliament might be doing the right thing by his or her constituents.  There are some wider issues arising, however.

Firstly, the way in which the government can find money for such bribes and sweeteners underlines the fact that austerity is, and always has been, a deliberate political choice made by the Conservative Party.  It was to all intents and purposes supported by Labour in the 2010 election, when the main argument of Labour candidates and MPs was, as I recall, effectively that Labour austerity would be better than Tory austerity.  The government could have done things differently had it so chosen, and the way in which money is being found for anything and everything to get Brexit sorted underlines the fact.

Secondly, had it not been for that deliberate political choice, it is probable that the level of desperation which drove some to vote for Brexit would have been lower, and the result of the 2016 referendum different.  There is something very ironic about the government now spending money to ensure that it delivers on a referendum vote which resulted from not spending the same money 8 years ago.

And thirdly, MPs who are prepared to vote for something which will be damaging not only to their own constituents but also to those in other constituencies in exchange for a short-term amelioration of part of the problems which led to the original vote are taking a very short-term and parochial view of their responsibilities.  They are also placing their faith in a government which has shown itself to be utterly untrustworthy and able to reverse its position in a trice.

Talking about the proposal, a Downing Street spokesperson said “we are determined to lead a programme of national renewal, post-Brexit”.  Of course, it doesn’t and never did require Brexit to do that.  In fact, without Brexit and the inevitable short term hit to Treasury revenues which will result from it, they would have been in an even better position to do it, were it really what they thought the right thing to do.  They didn’t – and still don’t.  That magic tree isn’t being given another good shake because they think it’s the right thing to do, but because it suits the interest of the PM and her party.

Spend and tax, not tax and spend

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At first sight, it sounded on Monday as though the Chancellor of the Exchequer and the Prime Minister were directly contradicting each other.  The former was saying that a ‘no-deal’ Brexit could mean effectively tearing up his budget and starting again, whilst the latter said all the spending commitments in the budget would be fully protected, despite the certainty that Brexit will, overall, reduce government income, especially if it’s of the ‘no-deal’ variety.  But they’re not really in conflict at all – protecting the spending commitments in the light of changed circumstances merely means that they must be funded in different ways.  The total of the spending commitments, in itself, hardly represents a radical departure from previous policy; more fiddling at the fringes.  But the real news here, for me, was that the promise that the spending commitments will be honoured come what may is an open admission that the basis on which they’ve been telling us that public finances work is the big lie that many of us have long believed.

It is fundamental to much of what they have been saying that the government can only spend what it either raises in tax or is prepared to borrow; that the government’s income, in effect, determines what it can spend.  What the Prime Minister’s statement this week says is that the reality is exactly the opposite; the government can start by deciding what it wants to spend, and then decide later – even if circumstances change totally – how that will be financed.  Not so much ‘tax and spend’ as ‘spend and tax’.  It recognises the key fact that the government always spends money before it receives it back in taxes.  Effectively it creates money when it spends and cancels it when it collects taxes; any difference between revenue and expenditure represents either an increase in the amount of money in the economy or else is funded by ‘borrowing’ (or ‘saving’ as those of us who lend our money to the government through pensions etc prefer to call it).  If it weren’t so, where does the money to pay tax come from?

They’ve known this all along, of course, but have preferred to pretend otherwise for ideological reasons.  Pretending that they can only spend what they first collect in taxes is their excuse for not spending, justifying their desire to reduce the size of the state sector.  I think it’s good news that they’re recognising that the truth is rather different.  It would be a good thing if the opposition parties did likewise and dropped their own commitments to austerity.  The way things are going, the Labour Party is in danger of being caught out being more supportive of the ‘tax first’ mantra than the Tories, with their obsession with demonstrating how they will pay for their commitments and their demand that others do likewise.

Magic Money Trees

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One of the latest lines to come from the Tories has been the suggestion that Jeremy Corbyn believes that there is a ‘magic money tree’ somewhere.  This tree, they claim, is the only possible source of all the money he needs to pay for his election promises.  It’s actually a good line, and plays well to the idea that the government, like the average household, needs to raise money before it can spend it.  It’s also complete and utter nonsense.  There really is a magic money tree; it’s called quantitative easing. 

In essence, QE is a process in which the central bank creates new money out of thin air, and since QE started in 2009, the Bank of England has created some £435 billion of new money.  It has used this money to buy up government bonds, effectively repaying government debt by giving money back to those who loaned the money (the government now nominally owes the same money to the Bank – which the government also owns…) leaving those people free to decide how to re-invest the money which they’ve been repaid.  So governments can and do create money – and there’s no fixed limit on how much they can create.  Insofar as there is a practical limit, it’s the point at which all that extra money starts to cause inflation; a point which the UK has not yet reached, because of the overall weak state (whatever the government may claim) of the UK economy.

The bigger question is how that new money is used.  The idea behind the process was that the money would find its way into the ‘real’ economy and boost investment and productivity, but using it to repay debt by buying up bonds has merely put it into the hands of people who put it back into other financial products (and some of it even got loaned back to the government in new bonds).  The effect of this has been that very little of the money has actually reached the ‘real’ economy – most of it has ended up benefiting the richest 5%, according to an estimate by the campaigning group Positive-Money.  On their calculations, for every £ created by the Bank of England, around 8p has made it into the everyday economy whilst the rest has gone into the pockets of the wealthiest.

It didn’t have to be this way, though – there’s no hard and fast rule which says that newly created money can only be used to buy up government debt.  The same money could have been used to invest directly in new infrastructure – a proposal put forward by Corbyn in 2015, and described as People’s Quantitative Easing.  The idea is not without its problems, and is supported by some economists and criticised by others, but Positive-Money estimates that every £ used this way would generate around £2.80 worth of extra economic activity.  That means, of course, that a much lower level of money creation would have a much greater effect in terms of stimulating the economy.

In criticising Corbyn for believing in a magic money tree, the Tories are diverting attention from the fact that they already have one of which they are making extensive use, but are using it to benefit the few not the many.