A: No one has to pay.
I can imagine the fog in an economist’s head confronted with my question and answer. This new thinking appears as alchemy to orthodox economists. Conversely, what they trot out appears to me as an outdated theology, an irrelevant contorting of how many angels can dance on the head of a pin.
Their hand wringing is hollow, “Things cannot go back to how they were. No More Austerity!” they cry, “The New Sense of Community will not stand for it!”
Chests puffed out quickly deflate as that thread of managerialism runs deep, doesn’t it? Someone HAS to pay for this Coronavirus aid package that Rishi Sunak has found tucked behind the sofa cushion! They sweat bullets feverishly calculating the final cost and devising ingenious ways for only the hated bankers and Richard Branson to pay for it, before finally acknowledging that maybe the darkest, quietest voices in the Tory Party have a point….maybe taxes do need to go up, maybe some services do need to be cut.
Any Liberal Democrat who carries on dancing to that Tory tune will lead us to our final death throes. So let me be clear.
They are wrong. To quote the All Seeing Eye (ok, Professor Stephanie Kelton, a leading proponent of Modern Monetary Theory), “there is an inflation constraint, not an insolvency constraint…… we need to budget the nation”. For those at the back, or those of you (which, let’s face it, is most of us) who put your trust into the loudest economic voices over the last 40 years, things do not HAVE to go back to the way they were. There is no bill that we HAVE to pay back (apart from that one to Turkey for PPE that doesn’t work).
Money is not the issue, the government can spend almost as much as is required to get us through this crisis and it doesn’t HAVE to be financed by taxes and/or borrowing (what constrains a government and a country is its real-world resources not its invented currency). After we get through this, austerity, tax rises and service cuts can remain the feverish fantasies of the small-state sycophants, never to be unnecessarily inflicted on the rest of us again.
Embrace this reality and we can truly stand for people across the country, offering them hope for the future rather than the dread of an unpaid bill.
* From Oldham East & Saddleworth, Mark Kenyon is a party member, activist and candidate in the May council elections
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65 Comments
Desperate wishful thinking.
Sure, we don’t need to worry yet. There is headroom to borrow, thanks not least to the coalition’s efforts to get borrowing under control. There will be a big deficit this year – whether or not this becomes a problem longer term depends on how well the economy bounces back. But there will at the very least be extra interest payments in the years to come.
But printing money to escape a debt problem is the last refuge of the scoundrel who tries to borrow their way out of debt.
If this kind of wishful thinking worked, all the economic basket cases around the world would be economic powerhouses.
There are things that Liberals & Social Democrats would cut, subsidies to Industries that churn out CO2 for a start. We could start now by telling The Airlines to stand on their own feet.
We could also stop subsidising Mortgages.
More generally, Governments all round the World will be building up Huge Debts which will have to be paid off gradually over decades. Theres no point raising Taxes until the Economic Recovery has built up some momentum & that is Years away.
To whom do we owe money?
From whom do those to whom we owe money get the money to lend?
There’s only two ways out of debt. You pay it back or inflate it away (a kind of controlled default). Both have costs and benefits. The nearest comparator is probably the post WWII debt mountain. This was mostly inflated and partly taxed away over about 50 years. Truthfully, I’m not sure that people really worried the debt which never became part of the national narrative. But they did notice the periodic devaluations, cyclical swings in taxation and creeping inflation which were all part of that policy choice. Having said that, the inflationary post WWII story is a lot better than the post WWI and 2008 (failed) attempts to pay it off. On balance I would try inflation, but to pretend that there is an easy cost free way out of debt is just Alice in Wonderland. Someone always pays, the only question is who: Creditors or Debtors.
@ Mark Kenyon,
” Q: Who has to pay the bill? A: No-one has to pay ”
This is true providing the words “the bill” are added again after “pay”. Because there can’t be any question of a bill for a currency issuing Govt. But there may be a need for us to pay higher taxes. You need to be precise to keep people like Joe Otten off the case. Joe doesn’t have a clue what we are talking about and probably never will.
You’ve said yourself “there is an inflation constraint”. So why would that possibly be a problem? You can probably figure out that it will be a problem if supply falls off faster than demand in the coming months. If that happens, and we don’t know yet if it will, taxes will need to rise and/or spending might need to be cut. Not to pay any bills but to control inflation.
Prof Bill Mitchell explains further starting with “Let me state clearly, at the outset, there may be an inflationary spike….”
http://bilbo.economicoutlook.net/blog/?p=44871
@ Steve Trevethan,
“To whom do we owe money?”
You owe some of it to me. I own some premium bonds. The govt (we) owe a lot more to everyone who has bought gilts, national insurance certificates and all the other types of issued debt which is used for our savings. We even can treat money in a safe or a piggy bank as savings which can be used by the Govt. If the govt overdoes the spending there will be an inflation problem.
“From whom do those to whom we owe money get the money to lend?”
It’s money earned in the economy but not spent. If we don’t spend it then the Govt should to keep the economy moving. But they shouldn’t overdo it and create high inflation.
@ Peter Martin. Given the fact that most people’s income will have fallen during the lockdown, and debts will have risen, it’s more than likely that most people will try to rebuild their finances rather than going on a spending spree, so inflation isn’t likely to be a big issue. Moreover even if it did start to seriously take off then the BoE could raise interest rates or introduce other borrowing curbs.
The biggest danger is that companies will cut investment so curbing growth.
It is surely significant that an increasing number of Tory MPs are arguing that we should treat the government borrowing during this crisis as a one off long term debt, presumably financed by the Treasury issuing long term gilts, if necessary bought by the BoE! It seems that Tory MPs are prepared to change their tune even if Joe Otten is not.
@joe otten – “desperate wishful thinking” if your question is, “why doesnt everyone just print money?” then your answer is “because the monetarists told us it was bad because they wanted to shrink the state whilst also providing an income stream for remaining state spending”. Apart from that, it’s good to see that you’re in favour of the crippling debt burden being imposed on us all.
@james fowler – “there’s only two ways out of debt”…..maybe for you and i but for a currency issuing government there’s another option…create the money (as long as there is sufficient real world resources to spend it on).
If this logic was right any country could spend as much as it liked without any consequences. which is clearly not the case
@ Simon McGrath,
“If this logic was right……”
It is subject to the provisos I have added above.
“……. any country could spend as much as it liked without any consequences”
No-one is actually saying that. The consequences are too much inflation if the spending is overdone. Too much recession if it is underdone. But my guess is that you actually did know that anyway.
@ Graham,
Possibly, even probably, you’re right. Yes there are people who have lost out. On the other hand there are a lot of people still in receipt of their full income who don’t have much to spend it on at the moment. So, at some stage they might decide to catch up with their spending . There is nothing to be lost by keeping an open mind and waiting to see what happens.
Who pays the bill? The answer is the same people who paid the bill after the financial crisis.
Workers whose wages don’t keep up with inflation eroding standards of living. Those saving for retirement as their savings earn zero interest and are eroded each year by inflation. Pension funds that invest heavily in government bonds that pay negative real interest rates and payout meagre annuities as a result.
Who gains? The same higher net worth investors that gained from the effects of quantitative easing after the financial crisis. That is investors in the stock and property markets or anyone that invests in real assets rather than being reliant on depreciating money savings, falling real earnings from employment or fixed pension income.
Mark, I’m in favour of being honest.
Anyway, how do you suggest we start. Slash taxes across the board by 20% and replace the shortfall with printed money? (Maybe you’d prefer spending, but this way we could sell MMT to the Tories, right, and then it might actually happen.)
Have we, so far, only discussed the transference of money?
Might we also consider its creation and storage?
Might we play the Q.E. card again?
Might it be appropriate for the finance industry to pay back the money taken out of the “high street” economy to protect it in 2008?
Might we have had fewer deaths and less suffering if less had been taken out of the “real economy” to sustain the financial economy?
Ditto if the already poor had not been made even poorer and so more vulnerable to Covid by “Austerity (for Some”)?
P.S. “and forgive them their debts” by Michael Hudson is well worth reading!
@joe otten – i’m advocating that we dont fall into the elephant trap set by the right and so often blundered into by the left…..no we do not have to cut spending or raise taxes to pay for coronavirus aid. If the Tories choose to “pay for it” with borrowing, cuts or taxes then we should call it out for what it is – an ideological choice, a monetarist choice, the choice of a party uninterested in closing the inequality gap.
@ Joe Otten,
“replace the shortfall with printed money” ???
I don’t know what planet you live on. Maybe you still use gold coins there? But here on planet Earth in the early 21st century all countries use “printed money” or money created in a computer digitally. If Govts didn’t “print” any we would be reduced to a system of barter. Govts have to know what they are doing. But often they don’t! Or rather what they might be underdoing or overdoing. It should, of course, be neither one nor the other. Neither too little nor too much.
You should come and visit sometimes and see how it works!
@steve trevethan – if a form of QE is what’s needed to make it palatable then i’m all for it. QE was money creation and spectacularly bad at everything other than lining the pockets of the already wealthy. However, it was money creation disguised with much smoke and mirrors…..
You’re right – if they do an inquiry into coronavirus, then i hope austerity policies are shown for what they were.
@ Joe Otten. The Government has already received the money it is paying out by taking out an overdraft at the Bank of England and the bank has simply added this as an asset on its balance sheet. In principle the debt can remain on the balance sheet indefinitely. The Government might choose to repay the debt to the BoE by issuing gilts, but if there isn’t enough demand from financial institutions the BoE can buy the gilts itself. The difference between the two approaches is that at some time in the future the bank might choose to sell on the gilts, but it’s under no obligation to do so.
And of course none of these activities actually involve printing money. They are merely transaction entries on the bank’s balance sheet. What of course the bank has done is create money, but that’s one of the roles of a central bank if you have a fiat currency. How else do you think the bank has bought up gilts on the open market and even considered buying up corporate bonds, all as part of QE?
@ Mark,
“no we do not have to cut spending or raise taxes to pay for coronavirus aid.”
But what if the coronavirus aid takes up so many of our real resources that we start to have an inflation problem? Maybe we won’t but it’s possible.
Suppose you’d been around at the start of WW2. Would you have said “no we do not have to cut other forms of spending or raise taxes to pay for the war effort” ?
Both you and Joe are quite wrong in your own very different ways.
@ Graham,
I agree the phrase “printing money” is quite incorrect for the simple reason it’s all done in a computer these days. But the political right likes to conjure up images of Governments having their printing presses running at full tilt! This then leads to the idea that everyone will need a wheelbarrow full of cash to buy a loaf of bread and that it will be cheaper to paper the wall with banknotes than wallpaper.
On a narrow level QE can be considered to be an asset swap. The bank swaps money for bonds. So what’s the problem? On a wider level the bank is buying the bonds from the bond traders who have only bought them from the Govt because they know they can sell them to the BoE. It’s a nice risk free earner for them.
So why doesn’t the government and the BoE cut out the middleman and trade the bonds and the cash directly? That would be the sensible thing to do. But this is taboo. Neoliberals would rather have sex with their own mothers than allow this. But it really doesn’t make any difference when you think about it!
@ Peter Martin I entirely agree that there’s much sense in the BoE buying gilts direct from the Government. However I’d be interested to know what institutions sold gilts to the BoE as part of QE. It won’t have been pension funds because the want to hold bonds to meet long term commitments, and insurance companies too have obligations to hold a proportion of their assets in gilts. To put it another way, there is a demand for gilts from at least some financial institutions, and particularly for long dated gilts, ideally of 30 to 50 years duration.
@ Peter Martin I’m not entirely convinced by your analogy with WW2. It wasn’t so much the Government cutting spending on some services to pay for others but actually diverting human resources away from some activities to concentrate on others.
Of course then, as now, the Government doesn’t have an entirely free hand because so much of our economy is dependent on imports, though of course no one seems to worry too much about the balance of payments these days.
Lebanon’s central bank has just turned to the IMF for a bailout https://www.ft.com/content/ae2484c4-8bc1-11ea-a01c-a28a3e3fbd33
” While it is a shopworn adage that countries cannot go bankrupt, Lebanon palpably has.”
“The central bank’s governor since 1993, Riad Salameh, continued to attract dollars from Lebanon’s diaspora and around the Middle East by offering ruinously high exchange rates. He called this “financial engineering”. Some economists, including former central bankers, called it a Ponzi scheme.”
Depositors in Lebanese banks, where 70 per cent of deposits were in dollars, are being denied access to their savings. They were rationed to withdrawing about $500 a month. Bank withdrawals or credit card payments are priced at the official rate of 1,507 Lebanese pounds to the dollar, which was last week worth an average 3,700 in the parallel market.”
“The government’s latest rescue plan, approved late last week, understates Lebanon’s external financing needs, even allowing for debt restructuring. It also dodges to what extent it will “bail in” bank depositors — confiscating wealth to recapitalise a bust system. This is explosive. Last week’s firebombing of banks in north Lebanon is a portent.”
We have seen this before with Russia’s confiscation of bank deposits in 1998. President Putin is going there again with a levy on bank deposits to fund the pandemic, tapping nest eggs held by the country’s pensioners and middle-class households much as Cyprus did in 2013 https://www.theatlantic.com/business/archive/2013/03/everything-you-need-to-know-about-the-cyprus-bank-disaster/274096/.
At least these countries are up front about what they are doing. Keynes in his 1919 essay https://www.pbs.org/wgbh/commandingheights/shared/minitext/ess_inflation.html wrote:
“By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security but [also] at confidence in the equity of the existing distribution of wealth.”
@joseph bourke – you’re offering Lebanon as an example of where printing money doesnt work? The war torn country with little local economy or productivity. Decades of struggle that has destroyed infrastructure, and a currency which is not sovereign as it is pegged to the US dollar.
As an alternative, i’ll offer Japan. The G7 country with $10 trillion debt (or 240% of its GDP).
It’s amazing how LDV’s financial gurus can get so excited about hypotheticals. Don’t they know there’s still a war on? Win the war first, if you can, and worry about the cost later. The IMF seems happy with that as long as we keep the receipts!
Now, I might be a bit thick; but, as virtually all countries must be in the same boat, why don’t they do what our government did recently with the NHS debt, namely just cancel it and start again? If a bill needs to be paid, then I guess we shall have to do what we did with our post WW2 debt and just pay it off over a number of decades. To do this, direct taxes will have to rise, that triple lock on my pension will have to be reviewed, and, quite frankly, we shall have to decide to live our lives more simply.
We must pay; i.e. the community; viz. the State. Tax.
It happened to us all, only we must pay.
Arguments as to whether we suffered by our leaders’ reactions begs the
question – no individual or organization can take the financial cost.
The matter for discussion is just the time to be allocated. “Just”!
But the question was ‘who?’.
@ Graham,
“It wasn’t so much the Government cutting spending on some services to pay for others but actually diverting human resources away from some activities to concentrate on others.”
Yes this is exactly right. The problem, to a large extent, is that we are up against the constraints of language. When we write out a cheque to HMRC, or make a bank transfer, we know we are “paying” our tax. The fact that the money is destroyed, just like a theatre ticket is torn in half, doesn’t really cross our minds. The government is stopping us doing what we would like to do our money so that it can do something else.
So, this is why I have asked Mark to be more careful when he says “no-one has to pay”. This is giving a false impression. We’ll still have to write those cheques!
Does the currency of the debt matter?
Do all debts have to be paid?
Hudson, quoted above, is most informative on this.
Just a thought. Maybe, because we managed to claw our way back to credit worthiness over the past ten year, admittedly at great cost, could be why we were able to borrow such large sums of money to help cover our present plight.
So, while I would have gone for a Keynesian approach back in 2010, it could be that, more by accident than design, we have ended up being able partially to repair that roof, when the rains came, even though, at the moment, those leaks haven’t altogether gone away. So, all you coalition knockers, perhaps it wasn’t all that bad after all. I hope that last remark doesn’t open up Pandora’s box again.
“We shall have to decide to live our lives more simply”, says John Marriott. Yes, quite right…….. and while we’re at it, it’s time to shine a light on the complex global international financial web of care home providers in the UK.
Remember the collapse of Southern Cross – the wobbly state of Four Seasons now ? Now it’s the biggest, HC-One, (who took over Southern Cross in 2011).
Yesterday, on the Isle of Skye, the Care Inspectorate took legal action over the running of a private care home where seven residents have died in a coronavirus outbreak. The inspectorate has asked the Sheriff Court to cancel the registration of the HC-One-owned Home Farm facility in Portree after an unannounced inspection on Tuesday. The Care Inspectorate raised “serious and significant concerns” about the quality of care. So far, 30 of the home’s 34 resident have tested positive for Covid-19, as well as 29 staff.
NHS Highland is already said by the local MSP to be effectively running the home, with additional NHS management, nursing and direct care resources being put in place with the aim of “improving and sustaining the appropriate quality of care”
Can it be right that Britain’s biggest care home provider (HC-One) should be part of a complex corporate tax structure, with 50 companies, six of which are registered offshore either in the Cayman Islands or Jersey and a further five in the UK as foreign entities ?
HC-One was put up for sale in May 2018 for £1 billion. Its immediate owner is Libra Intermediate, based in Jersey and the ultimate owner is FC Skyfall LP, based in the Cayman Islands. Earnings before interest, tax, depreciation and amortisation were about £130 million in 2017. The company paid out dividends of £42.3 million in 2017 and £6.2 million in 2018.
Surely we must provide care for the elderly in a more seemly and secure way than this. It shouldn’t be corks bouncing on the waves of financial turmoil fuelling global and
international tax ‘arrangements’ …… with any survivors being fed on Trump’s chlorinated chicken.
David Raw, as is so often the case, you are absolutely right. But just watch the Conservatives hide behind the great efforts of local staff to cope with the inadequate resources they were given, while they totally ignore the destruction wielded by the directors skulking in the shadows.
@Mark Kenyon “for a currency issuing government there’s another option…create the money (as long as there is sufficient real world resources to spend it on)” Spot on we are in the lucky position of being a country that has its own currency and therefore can print/invent as much as we like – of course there are real world consequences of doing this although I believe it is the correct thing to do in the current circumstances
Those consequences include a fall in the value of the currency and potentially inflation or even worse hyperinflation. If individuals and nations want to preserve wealth going forward then in my personal opinion they need to hold Gold (and Silver) – Gordon Brown’s decision to sell half our reserves of Gold between 1999 and 2002 will look an even worse decision than it already does.
The best time to pay back any bill is as soon as you can. If it is shared equally between businesses and people, grateful for overcoming Covid and is transparent perhaps a Covid tax that is short term most will accept it. It is also a good opportunity to close those tax loopholes, penalise those contributing to climate change and those evading tax.
@ David Evans Thank you, David.
If it’s right and feasible for NHS Highland to take over Home Farm Care Home on Skye, I see no reason why the model could not be implemented throughout the UK. Whilst it wouldn’t be a panacea it would mean staff could be integrated into NHS employment and paid and valued accordingly with appropriate training, career opportunities and professional standards.
It’s another example of how outmoded the ‘market model’ is with some Lib Dems in trying to deal with every situation. It’s time to dust down the works of Charles Masterman and the other progressive ‘New Liberals’ and consider again the role of the state.
If the Lib Dems don’t do this then I’m sure the Starmer Labour Party, the SNP and the Greens will.
Mark,
The principal purpose of money creation by the central bank (as against private banks) is to halt debt deflation. Money creation begins with the creation of private debt by banks. Most debt takes the form of mortgage lending on commercial and residential land or leveraged investments in the stock markets. In a deep recession when mortgage loans repayments and rents go unpaid on a large scale the Property and share valuations that underpin bank lending start to decline threatening bank solvency. When there is a systemic collapse in the banking system the debt previously created through mortgage lending ends up on the states books. The alternative would be a long-lasting great depression and mass unemployment. Money creation doesn’t pay for ongoing goods and services it simply underpins the existing stock of debt.
Our income is what we are able to produce in the form of goods and services for domestic comsumption and for exchange with overseas producers. Our standrard of living is determined by the kinds of goods and services produced and how efficienctly they are produced in comparison with other countries – so called comprative advantage. Keynesian economic theory is relatively simple and is focused on effective demand i.e. sufficient demand in the economy to employ the productive resources of the country. We live in a monetary economy, where money influences economic behavior. Money creation is essential to halt debt deflation. Fiscal stimulus is necessary to pump prime economic recovery. And contractionary monetary and fiscal policy (higher interest rates and taxes) may be necessary to control inflation once a recovery is underway.
Japan had their property and stock market bust in the late 1980s. They have had negative real interest rates, quantiative easing and fiscal spending on airports, roads and bridges across the country on a mass scale for three decades- with little impact. You cannot overcome structural problems with money creation. In Japan, Zombie companies have been kept allive for thirty years. The debt overhang and low interest on savings of an aging society depresses consumer spending, makes consistent economic growth and real wage growth virtually impossible https://www.japantimes.co.jp/opinion/2019/05/26/commentary/japan-commentary/japans-labor-shortage-low-wage-puzzle/#.Xr63rHVKiCg
@ JoeB,
“Money creation begins with the creation of private debt by banks.”
No it doesn’t.
The banks need to have something to measure what they are creating first. So in the UK it is the pound. In the USA it is the dollar. In Japan it is the Yen. These are all the creations of a currency issuing government. The banks aren’t creating dollars as such. The dollar is the monopoly issue of the US government. The banks are creating their own IOUs expressed in dollars. So the dollar , the pound , the yen are used as units of measure like the foot or the metre.
Incidentally anyone can create money. The problem is getting it accepted. Even bank money isn’t universally accepted. The Governments want real dollars and real pounds as payment of taxes.
@ Joe B,
“While it is a shopworn adage that countries cannot go bankrupt…..”
Except it isn’t.
For an start, any of the euro using countries could involuntarily default on any loan. They aren’t in sole charge of the currency they are using. The UK is in charge of the pound but could still involuntarily default if it couldn’t repay a debt in a foreign currency. Clearly we aren’t in charge of the US dollar.
Neither is Lebanon. I suspect what has happened there is similar to what happened in Argentina. ie Unrepayable debts denominated in a foreign currency.
Of course, all countries have the option of voluntarily defaulting on any loans as happened in Russia. Theoretically, I could receive a letter from the Government saying “Sorry about those Premium Bonds you bought, but, we can’t afford to pay you back!” That probably wouldn’t be truthful but I still couldn’t do much about it.
Marx was the person who analysed society and drew the conclusion that it is driven by economics, particularly by the relationship between the owners of the means of production and the labour force. However, it seems to me that over the last 40 years or so we haven’t been driven by economics but by political ideology using economic theory to justify politicians’ views of how to organise society. As a result, we have reached the point at which our society more closely resembles that of the period of Victorian industrialisation, which Marx observed, and even the period before that, when aristocracies ruled, than at any other time since WWII. Labour’s recent flirtation with the idea of state ownership and extreme left wing ideologies has proved that this is unacceptable in the UK. We should be concerned that this concentration on out of date ideology has, in fact, allowed the consequences of modern capitalism to run amok in our society. The vulnerable are being exploited and ignored, while the wealthy protect their gains and seek to consolidate them through the exercise of political power. The rise of the meritocracy no longer exists.
So, what do Liberalism and Social Democracy have to offer our country at this period in time? I think we should be turning our back on the out of date dichotomy between public and private ownership. In the modern democracy which we as a party would like to see established what exactly is the state? Isn’t it the properly elected government and departments which are responsible for carrying out policies which the majority of citizens have voted for? It is authoritarians who see society as a battle ground between the state and the individual. We see society as an agglomeration of different communities, all interacting and dependent on each other. The pandemic has brought out the love of community in many people. In an extreme situation we can see how much we rely on others for our wellbeing. We want to live in a nurturing society where our needs are respected and where we respect others’ needs too.
So I’d like to suggest that we look at economic theory as a means to achieving our aims and objectives for the world we live in, rather than something which has to govern us and rule us to society’s detriment.
Peter Martin.
most of the money is the economy is created by banks when they provide loans https://www.bankofengland.co.uk/knowledgebank/how-is-money-created
“Banks create around 80% of money in the economy as electronic deposits in this way. In comparison, banknotes and coins only make up three percent. Finally, most banks have accounts with the Bank of England, allowing them to transfer money back and forth i.e.electronic central bank money, or reserves.
Prudential regulation limits how much money banks can create https://www.bankofengland.co.uk/knowledgebank/why-do-we-regulate-banks
The stock on money circulates in the economy and spending is impacted by the velocity of circulation. The stock of money in the economy increases principally as a consequence of increased bank lending (mostly mortgage lending on ever-higher land prices) and to a much lesser extent by the government running budget deficits.
In a deep recession, lending slowdowns rapidly and the stock of money begins to contract creating debt deflation. This is where money creation by the central bank is deployed in the form of lower interest rates or quantitative easing to expand lending where possible and slow or halt the contraction of the money supply while buttressing asset values. However, in a recession, when there is little appetite for new investment and subdued demand for new loans, this kind of monetary policy is ineffective in restoring aggregate demand – the so-called ‘pushing on a string.”
In a recession, fiscal stimulus is required fora time to jump-start the economy primarily through restoring consumer and business confidence or ‘animal spirits’.
As the economy recovers and starts to operate at close to full capacity, fiscal stimulus needs to be scaled back and then withdrawn to prevent overheating.
It all starts with the creation of excessive debt based on inflated land values and the cycle repeats itself over and over with every property boom and crash like a scene from the twilight zone of groundhog day.
My hope is one day we do as Sue Sutherland suggests in her comment above and “look at economic theory as a means to achieving our aims and objectives for the world we live in, rather than something which has to govern us and rule us to society’s detriment.”
John Marriot of few words seems to sum things up well enough “If a bill needs to be paid, then I guess we shall have to do what we did with our post-WW2 debt and just pay it off over a number of decades. To do this, direct taxes will have to rise, that triple lock on my pension will have to be reviewed, and, quite frankly, we shall have to decide to live our lives more simply.”
This Reuters article goes into more detail but comes to a similar conclusion:
https://uk.reuters.com/article/us-health-coronavirus-debt-breakingviews/breakingviews-dixon-how-will-pandemic-debts-be-paid-for-idUKKBN2220Y1
“…there will be little appetite to cut spending. In fact, there will be huge pressure to invest more in healthcare and increase the wages of key public sector workers.
If governments can’t or won’t cut spending, the only other way to curb their deficits will be to increase taxes. And that, by a process of elimination, is where many will end up.
Those that do should keep two principles in mind. First, it would be wise to impose the heaviest burdens on those with the broadest shoulders to avoid a further populist backlash. Second, they could increase taxes on carbon to prevent the planet frying. That way, they can at least make a virtue out of necessity.”
“most of the money is the economy is created by banks ”
Banks can’t create pounds, or dollars, or yen or bhat. They are the monopoly creation of the govts of the UK, the USA, Japan and Thailand. All currencies traded on the forex markets are the creation of governments. The banks don’t have any magical powers. They are doing what anyone can do which is to write out IOUs using any currency as a measure- say Vietnamese Dong. These can themselves serve as money. But the Vietnamese govt has to create the Dong first, before anyone can do that.
You and I could write out $5 notes. Our IOUs. If we were trusted to honour them they could serve as “money” to anyone prepared to accept them. They wouldn’t make us any richer and they wouldn’t have any effect on the economy.
Peter Martin,
the government establishes what currency will legally serve as money by fiat i.e. by legislative order. It creates legal tender, coins or banknotes that must be accepted if offered in payment of a debt and establishes their denominations. One function of money is as a unit of account in the same way as weights and measures are .
The Bank of England article above writes “if you borrow £100 from the bank, and it credits your account with the amount, ‘new money’ has been created. It didn’t exist until it was credited to your account.”
“This also means as you pay off the loan, the electronic money your bank created is “deleted” – it no longer exists. You haven’t got richer or poorer. You might have less money in your bank account but your debts have gone down too. So essentially, banks create money, not wealth.”
This last sentence applies whether it is private banks or the central bank providing loans.
Banks finance loans by swapping one debt instrument for another in both the domestic and international markets. When the central bank buys gilts it is swapping one debt instrument (bank reserves) for another (government debt). The government regulates the supply of electronic money in the banking system.
The process of money creation does not create wealth any more than writing out IOUs does. Money creation does, however, directly affect the economy through its function as a medium of exchange for goods and services and as a store of value. Money is not the only store of value. Wealth refers to all stores of value, including both money and non-monetary assets. There is a trade-off between liquidity and store of value. While money is the most liquid asset, when the price level rises, the value of money falls and the value of real assets tend to increase. In a deflationary environment, spending is deferred and the burden of debt increases worsening recessions.
As long as these basics of how money and credit is created and destroyed in the economy are understood then the government can use monetary and fiscal policy to mitigate the impact of recessions and through the use of automatic stabilisers, smooth the troughs and peaks of the economic cycle. What they cannot do is create real wealth that takes the deployment of land, labour and capital.
@ JoeB,
There is a difference between various types of money. This is where the confusion lies. There is a difference between the ‘Bristol Pound’ and a BoE pound. If you go into a shop in Bristol you can probably buy the same amount with both. But you can’t pay your taxes with Bristol Pounds. That’s the difference.
I’m not sure if anyone actually offers accounts in Bristol Pounds but theoretically it’s possible. And they wouldn’t be any different from any other bank account. These contain Barclays pounds or Santander pounds or whatever. Again you can’t pay your taxes with Barclays pounds. The taxman wants BoE pounds. Of course, if we have a Barclays account and we pay our tax bill, it all just happens in the system, and we aren’t aware that the taxman does get his BoE pounds. One has been swapped for another.
So when we say banks create money we need to be more specific than we are to avoid creating a misconception that banks have more power than they do. So yes “most of the money is the economy is created by banks”. But what sort of money?
Peter Martin,
you write “most of the money is the economy is created by banks”. But what sort of money? Well, it is the sort of money we all need.
Right now there are loan applications being made by businesses all across the country. The amount of money created will be determined by the volume of creditworthy borrowers. Demand will far outstrip the amount of loans supplied. The government has offered guarantees of 80% to support this lending, a fair chunk of which will end up on the public books as bad debts. As loans are approved by commercial banks, new money in the form of bank deposits is created. What is this new money needed for? Mostly to meet payments on existing debt and lease obligations. With businesses closed, staff furloughed and business rate holidays for retail, leisure and hospitality companies, it is existing commercial rental and leases obligations on land and buildings or other leasing obligations on plant such as aircraft, ships and industrial equipment that is the problem. This new money does not expand the money supply it maintains it to avoid debt deflation.
Government borrowing is also primarily directed at existing debt and lease obligations. Funding wages, payments to the self-employed and housing benefit provides for the largest household outgoings, mortgage, and rent payments, to be maintained. Without this, there would be an immediate collapse in the banking sector.
The money now being created supports the value of loans previously created to finance the acquisition of property that is let to or owned by commercial and residential occupiers as well as lending to finance other assets – both productive and non-productive. Only a small fraction of this new money creation is related to financing spending on current production.
Were it not for the accumulation of debts on inflated land values and rents both before and after the financial crisis (the main form of rent-seeking), we would have a much-reduced need for these wartime levels of borrowing; that may well require decades of inflation/higher taxes to bring back to levels of GDP that can be comfortably accommodated within the public spending envelope.
@ JoeB,
I’m not quite sure what your problem is. You were quite happy to give Mark a sensible answer, or at least a somewhat more sensible answer, on the two types of money:
“The principal purpose of money creation by the central bank (as against private banks) is to halt debt deflation.”
It depends on the amounts involved, of course. But generally speaking, we only have a debt deflation problem in the first place because the banks have been allowed to pump up the economy by lending too much and creating a credit boom. When it looks like the banks might be in some trouble getting their money back interest rates have been reduced and there has also been a degree of fiscal intervention to keep the wheels on the plates spinning.
So, it is important to know that allowing the creation of too much bank created money has been a mistake made by governments involving all three parties in the last 25 years or so. In other words there has been far too much emphasis on the extent of public sector debt, which doesn’t create debt deflation, as we agree, and far too little on private sector debt which does.
“wheels on the plates” ???
Sorry about that. I was thinking of two possible analogies. “Wheels turning” and “plates spinning on the sticks”. In the end I opted for a mish – mash of both.
Peter Martin,
there are three types of money, as the BofE article notes – Notes and coins, reserves and bank deposits. Private banks create loans and credit borrowers’ accounts with deposits. The Central bank creates reserves when needed and credits commercial banks with deposits to their accounts with the central bank in exchange for other assets of the banks – usually gilts.
The primary purpose of reserves held by private banks at the central bank is as the linked BofE article above notes “most banks have accounts with us at the Bank of England, allowing them to transfer money back and forth. This is called electronic central bank money, or reserves.”
This regular payment inter-bank clearing and settlement process does not require any significant money creation by the BofE. That only happens on any significant scale when monetary policy is used to avoid debt deflation by pushing down interest rates close to zero; deploying quantitative easing to increase liquidity in the banking system; and reducing the stock of existing government bonds available to private investors to make room for the issue of new debt. Government tax collections and disbursements are also made through the commercial banking system. In practice, there is only one kind of money, bank deposits, used for virtually all transactions in the economy.
@ Joe B,
If you want to get super technical there are a lot more than three types of money. M0, M1, M2, …..MZM. I’d include Government bonds as a type of money. They are Govt IOUs that pay some small amount of interest. Cash is a Govt IOU paying no interest. There really not much difference between bonds and cash.
But, either money originates in the Govt sector or it doesn’t. That’s two types. If it does then it doesn’t cause debt deflation. If it doesn’t then it does. The line “banks create 97% of the money in the economy” spooks some, like the Positive Money crowd, into saying “Wow, its no wonder we have such economic problems. Let’s stop them doing that and make sure all money is Govt money.” Well, possibly that could have had some effect, but it’s too now that interest rates are as low as they are. We’ve come to the end of the monetarist line anyway.
If there’s any more stimuli needed they will have to be with Govt issued money.
Peter Martin,
no I don’t want to get super technical and start talking about shadow banking or whether store credit cards and financial instruments like derivatives constitute a form of money on the basis of a promise to pay a debt.
Georgist theory relates the phenomena of credit formation with speculation in land. Booms occur because excessive credit exists within the financial system, making the economy too indebted. Such levels of debt make the economy unstable as far too much income ends up being spent on deleveraging rather than economically productive activity. Which is what happens in a bust: debt deflation. Georgists will hold similar views on the cause of economic depressions as Hyman Minsky and Irving Fischer.
Georgists go a step further than Minsky and Fischer and try find the cause of the credit cycle in the first place. Essentially, as the value of land increases the cost of owning a home becomes more expensive. This increases the overall size of mortgages, which are assets to the banks. As the rise in asset value occurs due to inflating prices of mortgage loans and the security asset that underpins them, the bank has a greater amount of assets on its side of the balance sheet, Selling such mortgages to other financial institutions (securitisation) gives the bank the ability to expand its loan portfolio further.
Land speculation (or rent-seeking) is the root cause of how credit expansion forms. Excessive credit expansion is inherently inflationary and destabilising as Minsky observed in his financial instability hypothesis.
Greater levels of credit fuel more land speculation which drives the asset/credit boom further and further. This cycle continues until the system becomes too unstable and destabilises due to too much leverage within the economy or an external shock (such as this pandemic) interrupts the process, causing a spell of deleveraging and a resulting recession or depression.
On the question Mark poses in his article – Who pays the bill? This FT article gives a flavour of what the treasury is considering with respect to tax hikes https://www.ft.com/content/7a01b73b-d1ec-4b6e-a7b1-2d1a0060de91that includes increases to income tax and ending the state pension “triple lock” (that would involve breaking manifesto promises) and even wealth taxes.
The article concludes “None of the options on this unpalatable menu will come naturally to a Conservative government. Yet the scale of the economic problems faced means that proposals once dismissed as inconceivable are rapidly moving into the realm of the plausible.”
@ JoeB,
Why just land? The speculation that we are all familiar with in the last few decades has been on property. The share market too, but that’s another story. In the neoliberal mindset government debt is a bad thing which will mean our grandchildren will become indentured servants to our creditors. It’s all nonsense of course but I noticed that kind of thinking on Tom Arms’ last posting. Somehow neoliberals have convinced themselves that inflation is entirely down to excessive government spending and that spending by the rest of us is economically neutral.
The neoliberals do know, however, that debt is necessary to keep the economy moving. The obvious solution, to the problem as they see it, is to encourage the rest of us to do the borrowing instead. The process started in the early 70s with the Barber boom and the start of financial deregulation. The Lawson boom of the late 80s should have dispelled the belief that credit booms don’t cause inflation. We had a government surplus and 10% inflation at the same time.
So, yes, ownership land is part of the general problem but it’s only a minor part. You need to look at the bigger picture.
https://www.economicshelp.org/blog/8733/housing/uk-house-prices-high/
The Financial Times has produced an article:
“Paying for the Covid-19 pandemic will be painful” (the same one as on JoeB’ link?). The Paywall can be circumvented by Googling the title directly.
It’s the usual neoliberal nonsense.
“……the fiscal bill will have to be paid. It cannot be magicked away by modern monetary theory. ”
There’s nothing magical about MMT at all. What MMT says is that if GDP falls by N% because of the effects of the lockdown we’ll be N% worse off. What’s difficult or magical about that?
Taxes and spending will have to be adjusted to reflect that reality and to keep inflation under control. Most estimates put that the reduction at less than 10%. Yes, it is serious but most of us can survive perfectly well on 10% less until the economy recovers. We just have to make sure that those who can’t don’t have to.
Is it unarguably certain that inflation is self-evidently a Bad Thing? Obviously it is, if you’ve got lots of Money in monetary form. But what if you’ve none? Does inflation give Government an opportunity to reduce the imbalance between the flush and the skint, without too much offending the former, the prime exponents of “neoliberal” Austerity?
And anyway, is the self-evident ever unarguable? “You can’t get out of debt by borrowing more!” ?
Peter Martin,
the price of land is the problem in the housing market. Depreciating and dilapidated buildings don’t increase in value any more than used cards do. It is the inflated value of building land kept scarce through the mechanism of planning consents that allows the financialisation and securitusation of this natural resource. Capture the value of land for the public benefit and much of the problem is addressed.
Willem Buiter is a Visiting Professor of International and Public Affairs at Columbia University and an Adjunct Senior Fellow at the Council of Foreign Relations. He was Global Chief Economist at Citigroup from 2010 to 2018 and a Special Economic Advisor at Citigroup from 2018 to 2019. Previously, he was Chief Economist and Special Counsellor to the President of the European Bank for Reconstruction and Development and an original member of the Monetary Policy Committee of the Bank of England. He was the Juan T. Trippe Professor of International Economics at Yale University and has also held professorships at the London School of Economics and Cambridge University. He is the author of 78 refereed articles in professional journals and seven books.
Dismissing his article in the Financial Times or the UK Treasury view as “the usual neoliberal nonsense” does not add credibility or substance to your case or Mark’s contention that no one has to pay regardless of the immediate costs and longer-term damage that the Pandemic is wreaking.
Pension fund values have seen record losses https://www.ftadviser.com/pensions/2020/04/30/pension-funds-suffer-record-losses-as-covid-19-hits/
“For example, an individual who had saved £100 gross per month into a personal pension for 20 years would have built up a final pension fund of £41,388. Using this to take an income through an annuity at age 65 means that they will now receive just £1,663 per annum, down by 18.7 per cent on the start of the year, and 14.4 per cent lower than the previous all-time low in October 2016.”
@ Joe Bourke,
“the price of land is the problem in the housing market.”
Superficially, it might look like that in the UK. But take a look at Australia. A huge continent, with half the UK population, and exactly the same bubble in the housing market caused by neoliberal economic thinking.
On the other hand Germany managed to keep its housing market bubble free until the last few years or so. That was largely because the inflow of export money meant there was no real need to deliberately encourage ever higher levels of private sector borrowing.
Even if land in the UK was all nationalised and we paid rent to the government to use it, the housing market in the UK wouldn’t look that much different. Politicians might say they want affordable housing but in reality they want it to be expensive to act as collateral for the loans they need us, or think they do, to take out to keep the economy afloat.
Peter Martin,
this is Shelter’s report ‘Grounds for Change’ https://england.shelter.org.uk/__data/assets/pdf_file/0010/1779418/Grounds_For_Change.pdf As the introduction notes:
“Land is central to building homes. Whether we build social homes, market homes, flat-pack homes or traditional bricks and mortar we need to have the land to do it on. Yet, in the last 20 years the value of land has risen by 544%.
And high land prices have very real consequences for people and communities. They mean:
■ It is almost impossible to build the social homes we desperately need;
■ New developments are less likely to have community infrastructure like schools and parks;
■ Homes get delivered slowly at a time when they are so urgently needed;
■ Design and quality suffer—meaning we create places that local people resent rather than appreciate;
■ Public money for homes is diverted into landowners’ pockets when it could create public assets that appreciate and earn income through rent.
Over the last 50 years we have created a system where almost every scrap of land for new communities and homes is maximised to deliver the highest possible return for the landowner. Almost all land value—which is created by infrastructure, communities and the granting of planning consent—flows to the landowner. But if we shared that value more evenly between communities and the landowner we could address our housing emergency and get back to doing development better.”
@ JoeB,
OK but you’re still not offering any explanation of why countries with lots of land and low populations like Australia and NZ have exactly the same problem of high house prices as we do.
Up to a few years ago we saw articles like this about German housing.
https://qz.com/167887/germany-has-one-of-the-worlds-lowest-homeownership-rates/
Peter Martin,
it is land with planning consent in Urban areas where the work is that matters. Having thousands of miles of desert around you is of no more use to a resident of Sydney than it is to a resident of San Francisco,
Positive money describes how excess credit creation against scarce building land drives up house prices https://positivemoney.org/issues/house-prices/
This article by John Muellbaeur ‘ What Germany can teach us about repairing our broken housiing market’ https://www.niesr.ac.uk/blog/what-germany-can-teach-us-about-repairing-our-broken-housing-market explains:
“In housing affordability levels and volatility, there could hardly be a greater contrast than between the UK and Germany. Even after Germany’s recent boom, average house prices compared to average incomes are still lower than in 1980, while the UK’s have rocketed. Residential housing supply has expanded far more in Germany and mortgage credit is more tightly regulated. A sensibly regulated rental market and stable German house prices have combined to produce a healthy rental sector with satisfied renters and long tenures. In the National Institute’s August Economic Review I examine the institutional and historical differences between the two countries and put forward four sets of reforms to fix the UK’s broken housing market.”
The reforms include replacing council tax with a land value tax; Public sector land banks should be able to acquire land at existing use values;long-term tenancies in the rental sector; and publicly-regulated, low-fee, ‘vanilla’ pension products to replace housing as a pension investment.
Yes Australia does have large areas of desert but they aren’t on the doorstep on the major cities but they all have high house prices.
Also I don’t quite follow the John Muellbaeur reasoning. Fair enough we can take a look at ‘ What Germany can teach us about repairing our broken housing market’.
JM is now saying that we should have a LVT even though the Germans don’t? How about following their advice by copying what they actually do rather than what we think they should do? According to this link Australia does have some LVT but not Germany.
https://en.wikipedia.org/wiki/Land_value_tax
Peter Martin,
Professor Muellbauer has published a paper in the National Institute Economic Review (No 245) https://journals.sagepub.com/doi/full/10.1177/002795011824500112 where he sets out his analysis of the UK and German property markets in detail and the rationale for his land value tax recommendations.
The Australian Capital Territory has instituted land value tax with good results as this artcle describes https://theconversation.com/abolish-stamp-duty-the-act-shows-the-rest-of-us-how-to-tax-property-105378
@ Joe B,
“The Australian Capital Territory has instituted land value tax with good results….”
Maybe. But it doesn’t change anything very much. The median house price in Canberra is still $738,864. But possibly you’ll think this is cheap if you live in London.
https://upside.com.au/articles/news/housing-markets/what-is-the-average-house-price-in-canberra
Peter Martin,
LVT collects tax for the public benefit in an efficient and progressive manner and does not of itself, as detractors often claim, impact significantly on house prices. What it does when applied to undeveloped land is incentivise bringing land to the market thereby increasing supply. That increased supply is itself subject to the availability or otherwise of planning consents. The two have to work in tandem as this article on housing in Australia notes
https://grattan.edu.au/news/if-we-believe-in-the-fair-go-we-have-to-tackle-housing/
“Housing inequality will really only fall if housing costs fall. That requires building more houses. We estimate building an extra 50,000 homes a year for the next decade would make house prices and rents 10% to 20% lower than they would be otherwise.
This is primarily a challenge for state governments. They govern the local councils that set most planning rules and assess most development applications. But the federal government can and should encourage the states to boost housing supply by reforming land-use planning and zoning laws.”
@ Joe B,
As often we seem to have reverted back to your pet subject of a LVT, which I’m not against, but isn’t, on its own, anywhere near what is often claimed for it. You are being quite gullible if you actually believe politicians, of the UK or Aussie variety, and despite what they might say, actually want a fall in house prices. Their economies depends on their staying high. Also many right wing voters don’t want to see their property fall in value. That’s the real problem, not the implementation, or otherwise, of a LVT.
So, as Stephen Khan argues in this article “The default position for politicians is to sound concerned about housing affordability, but do nothing.”
https://theconversation.com/housing-policy-is-captive-to-property-politics-so-dont-expect-politicians-to-tackle-affordability-55384
Peter Martin,
politicians, in the UK or Aussie, want to be able deliver some form of affordable housing, particularly for younger buyers, even if only to stay in power. That is why we see a proliferation of schemes like right to buy, help to buy, help to buy Isas etc.
You have asked for an explanation of why countries with lots of land and low populations like Australia and NZ have exactly the same problem of high house prices as we do. And you have been given answers from a number of different sources.
LVT has been applied in the ACT and is recommended by housing economics experts like John Mueellbaeur and endorsed by housing organisations like Shelter. We will always revert back to Land Value capture when discussing housing affordability and inequality in general because it is kand values that are the source of the problem.
“Money is not the issue, the government can spend almost as much as is required to get us through this crisis and it doesn’t HAVE to be financed by taxes……..”
Yes this is literally true, BUT …… inflation, inflation , inflation.
Whilst the mainstream is predicting a more conventional recession, and that could still be right, the more informed MMT blogs are concerned that the dreaded word hyperinflation is a danger. This is a reversal of what usually happens when MMT advocates make the case that there’s no need to always try to balance the govt books.
http://neweconomicperspectives.org/2020/03/manhattan-project-to-prevent-hyper-inflation.html#more-11695