“Neither a borrower nor a lender be.” So says Lord Polonius to his son Laertes in Shakespeare’s Hamlet.
Good advice for young people starting out in life, but the modern economy of the 21st century depends on the constant circulation of money and credit. We all need to borrow to buy a house, for University etc. Firms need to borrow for investment in equipment and working capital. Government needs to borrow to finance infrastructure. That’s good borrowing.
If, however, debt is being racked up to buy imported tack or fund boozy nights out, we would think of that as bad borrowing.
There has been much comment on the part that the increase in household debt has played in fuelling growth in the economy prior to 2008, and that it is the slow process of unwinding Britain’s massive debts – public and private – that is slowing down our recovery. Ben Broadbent, former Goldman economist and MPC member begs to differ The truth about UK debt. He points out that households’ total wealth, including housing, was worth eight-times annual disposable income at the end of 2010 and crucially, despite the rise in house prices and the subsequent recession, that’s above the 25-year average.
It is a similar picture for the business sector. Before the crisis, Britain’s private sector was borrowing from the rest of the world, but it was building up foreign investments to match. That’s in stark contrast with countries such as Portugal and Greece, who were indeed borrowing a lot more than they invested. Our net overseas debt, as a nation, is not enormously greater than other countries’. In any event, it is no larger now than it was in the mid-1990s.
For the first time, HM Treasury has prepared Whole of Government Accounts . These accounts put a value of £1.2 trillion on government assets and a similar figure on the liability side for borrowings and other liabilities. The net public service pension liability has been estimated at £1133 billion and this accounts for virtually all of the net liability reflected in the accounts. The major public service schemes, with the exception of the local government scheme, are met from general taxation as employees retire and draw their pension over a number of years.
The National Infrastructure Plan requires an investment of about £250 billion in the next five yrs and £ 400 billion over 10 yrs on infrastructure including high speed rail, energy, aviation, water and wastewater, roads and highways, and high speed broadband. This is a higher spend than in the past and signals a change in focus from social infrastructure such as hospitals to economic infrastructure. The intention is that 70% of the funding will come from the private sector.
We should not delay. Borrowing for economic infrastructure is good borrowing. It adds to the stock of productive assets in the Whole of Government Accounts and the public wealth we can pass on to the next generation.
* Joe Bourke is an accountant and university lecturer, Chair of ALTER, and Chair of Hounslow Liberal Democrats.
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25 Comments
Very good point. The bank side of the problem,of course, was related to the ratio between deposit and loan. Generally accepted that between 80-86% is highest safe loan to deposit. During the mad days following de-regulation the UK casino banks were above 130%. In turn leading to an exponential and uncontrolled bank deficit. The rest is not history but still with us. Joe Public may have been profligate but finance houses were knowingly reckless as well as stupid. Support responsible banking, Credit Unions, in their move to proper investment and support Vince Cable in establishing an industry bank, dare I say it on the German model?
Hmmm. I have some issues here.
First I don’t believe those figures for total government liabilities. If they are going to include public sector pensions liabilities then they must surely also include state pension liabilities. Then there are a third of a trillion in PFI liabilities. And at the moment they still need to incorporate liabilities picked up during the credit crunch – toxic asset guarantees and effectively nationalised banks’ liabilities. Just after the general election I was at a lecture by John Redwood who estimated it more like £4.7 trillion.
Second, in the private and household sector especially, the assets and liabilities are not owned by the same people. Here the housing bubble has a big part to play: those with the assets are those lucky enough to have bought before monetary inflation ramped up real estate prices and those with the debt are those who weren’t and who were subsequently coaxed into getting onto the ladder at artificially increased prices and with artificially depressed interest rates in a desperate attempt to get on the ladder in case it disappeared into the stratosphere without them.
And third, the debt market is supposed to be where savers and borrowers co-ordinate their various preferences, and that is impossible while we have an elastic state run money system that uses artificial manipulation of interest rates to achieve macroeconomic policy aims rather than co-ordination of different individuals’ time preferences.
Government borrowing crowds out private borrowing for investment. The “National Infrastructure Plan” tries to pick winners and will inevitably cause dislocations in the borrowing market which affect the least well connected and least off the most. Just as an example, if you happened to be a high speed broadband supplier would you now bother to invest on your own at the moment, when you can see that government is prepared to pay £100m to subsidise it in ten cities? Probably not, you’d put more effort into lobbying for that scheme to be extended to other cities/regions since your return on investment will be greater when subsidised.
As to Clive’s comment, the credit bubble was little to do with deregulation and more to do with this artificial tinkering with interest rates by the state and the central bank. If the state holds interest rates below the true market interest rate it signals that it wants monetary expansion by its client cartel of authorised money producers – the banks. If it does so for long enough, the capacity for borrowing amongst what one would call “prime” borrowers is exhausted and they have to write riskier loans and find ever more imaginative ways either to spread that risk or hide it. If you don’t believe me on this, you could take it from Eddie George, former, and late, governor of the Bank of England when he told MPs in March 2007 that they had deliberately suppressed interest rates in the early part of the noughties to encourage a boost in consumer expenditure (by said consumers taking on debt) to try to prevent a recession that was at the time affecting the US.
We can only properly make reasonably accurate decisions about borrowing if and when we sort out this fraudulent elastic money system we have and are honest about our long term liabilities.
Jock, are you suggesting a return to the Gold Standard?
Well I am not a gold bug, no. I’m more Hayekian free banking type, but recognise that in a free market for the production of money commodity based inelastic money might very well win out. And, like Hayek, I don’t believe a gold standard currency, whilst still managed by the state, would provide the stability I seek. I certainly do not think that compared with what we have gold is a “barbarian relic” or whatever it was called. But I have very much enjoyed and been enlightened by Detlev Schlichter’s “Paper Money Collapse” book.
To heck with it – why be so defensive. Compared with what we have today where livelihoods and savings can be destroyed by malinvestment because of bogus signals sent by the people who control the money taps, hell yes, anything but the status quo, even a proper, non-state mediated gold based system would be better (wouldn’t call it “gold standard” since that evokes a system that was still open to abuse by governments).
It’s frankly a bizarre and unbalanced argument to count all future pension liabilities without counting the future tax potential revenues alongside them. Government is unlike a company in that it can compel people to give them revenue without their individual consent.
@ Jock
Can I ask, have you studied economics at university level? I’m just curious because I can’t believe anyone who had studied the subject in any depth or breadth and had to justify their arguments in relation to actual facts could actually believe in Hayekian theories.
I am currently doing so. And am heartily unimpressed with the whole field of macroeconomics. Are you saying that all Austrian school adherents are uneducated fantasists? Frankly it is those that believe in some idea of national aggregates and accounts, and certainly in “animal spirits” who I think are living in a dreamworld. Have you ever read “The Use of Knowledge in Society” for instance? How can one disagree?
Oh, and by all means try and account for future tax income to balance against the future pension liabilities. At least we’d get an idea of the trajectory that taxation is going to have to take in order to fund them in a future where pensioners get close to outnumbering earners. That should scare the children enough to want to find a better way that will not fleece them blind to pay for the generation ahead of them.
And folk from all parts of economics seem to agree in this New York Times debate that the models we are used to teaching and learning are now failing and other perspectives need to be brought into economic education. I particularly like Nicholas Nassim Taleb’s suggestion that “simply, we would have great jumps in knowledge if we avoided teaching these models, and replaced them with anything, even gardening classes.” 🙂
@ RC
Speaking of the economics of credit and banking crises, our esteemed Business Secretary Vince Cable* said this last year:
“In modern times, the best analysis has come from Friedrich Hayek. As Meghnad Desai has put it: “The current crisis is very much a Hayekian crisis” – caused by excess credit, leading to bad investments that eventually collapsed. ”
*That’s Dr Cable (PhD Glasgow & MA Oxford in Economics). Suppose that meets your criteria.
This idea that there is good and bad borrowing, depending what the purpose of the borrowing is is tediously simplistic. Surely it also matters how much is borrowed, whether the debt can be serviced, and what if anything the debt is backed by.
As a new self-study student of macroeconomics, partly inspired by a desire to understand Joe’s posts and people’s replies, I agree it’s a peculiar subject. Borrowing seems to be a way of moving liquidity from later to earlier. Whether it is good or not depends on the effects. But private industry won’t fund 70% . We the people will – because private industry will borrow and we the people will pay through extra future taxes. Which might create havoc for pensions, and is anyway odd since private industry will also use the infrastructure to advantage. Definitely a difficult subject!
I don’t know if it will produce a ping-back, but in case it doesn’t I have responded in more detail to “RC” on my own blog.
@Richard Dean: by the way while I’m at it, something I’ve been meaning to ask for a few days – what does it signify that you and some others have an orange background and birdy round your name when you comment?
Richard, I would really heartily recommend Detlev Schlichter’s book I mentioned above. Very readable expose about what really happens in the real economy when people tinker with money supply.
@Jock — the orangey thing indicates member of the party registered with the site.
So if I comment with this email address it will give me one?
RC, you should be ashamed of yourself. Jock wrote a detailed argument and all you can do in response is cast lazy aspersions instead of addressing anything. You’ve shown yourself up as someone who prefers tribalism and stereotyping to rational argument.
For the record I have a degree in Economics from the London School of Economics and I wholeheartedly endorse Jock’s remarks.
Jock: Here’s one of the posts the explains how to get the logo – https://www.libdemvoice.org/how-to-show-youre-a-party-member-when-you-post-a-comment-27953.html
Clive Peaple,
“Support responsible banking, Credit Unions, in their move to proper investment and support Vince Cable in establishing an industry bank, dare I say it on the German model?”
Count me in.
Jock,
On your first point – accrued public sector liabilities (and PFI obligations) are included in the whole of government accounts because a contractual liability exists. State Pensions are not a contractual liability in the same way – they are set annualy in the finance bill and could, theoretically be reduced to zero, (if a chancellor did not value his life). The total liabilities in the accounts are 2.4 trillion. Were provision to be made for future expected state pension payments (liabilities of the national insurance fund) than the total net present value of all implicit government obligations would probably be around the 4.7 trillion you mention.
On your second point, it is certainly true that housing wealth or net worth in the lower/median income ranges is concentrated with those who acquired property before the big price rises in the early noughties. It should be noted that by far the greatest proportion of household debt is held by the higher income deciles – this includes the debt of rental property investors who have piled in over recent years.
On your third point, you appear to be referring to matching (or mismatch) of short term savings with long term loans in the banking system/debt markets. Surely differential short and long term interest rates accomodate this function.
As to government borrowing crowding out private borrowing this will not be the case where government is running a counter-cyclical economic policy (i.e. running a counter-balanacing deficit when the private sector is net saving and running an offesetting surplus when the private sector is net borrowing. The private sector is net saving now and the corporate sector is sitting on an uninvested cash pile of over £700 billion. Without the government developing financial vehicles for capital investment – that provide the security and rate of return that pension funds and the like need – this surplus liquidity will probably end up in a property bubbles in Asia instead of in much needed domestic investment.
I will comment separately on your final wider point.
Thanks for taking the time to reply, Joe.
On the third point, not really. That would assume only a market interest rate co-ordinating the various time preferences of consumers and producers. I’m saying that what we have is a system in which the state, via central banks, deliberately distorts those market signals in ways that will always result in winners and losers. Most of the winners will be in the people who get first access to the new purchasing power created and most of the losers will be ordinary individuals and businesses who base their savings and investment decisions on those signals.
On the point about government borrowing/counter-cyclical policy etc, my main problem is with trying to treat “the national economy” as an homogenous entity. It is not and cannot be. This is where, dare I mention him again, Hayek’s (or if you prefer, Mises’) better understanding of the problems of planning and centralised co-ordination comes in. Economics is, or should be, about how *individuals* satisfy their needs and preferences – as in “humans act”. The aggregations politicians, economists and central bankers use to influence their use of macroeconomic “levers” themselves hide these individual preferences in ways that inevitably distort decisions about those individual preferences. Changes in relative prices between economic goods are masked by trying to produce “inflation indices” etc. The very cycles you would like the government to counter with counter-cyclical borrowing and investment are themselves created (or at least greatly exaggerated) by the very measures used to “guide” macroeconomic policies.
There is *no* “national economy”. It is a political fiction that might as well have been designed to shovel wealth from those far away from the political/financial power bases to those closer to it. I accept that this is *probably* not the original intention, but it is the unintended consequences and the only way to change that is to take the state and its cartel of privileged licensed money producers out of the distortionary money supply mechanism IMO.
Jock,
you may find our recent discussions on monetary policy in this forum of interest Getting radical with the money supply.
In the accounting and finance profession we apply microeconomics to a wide range of routine tasks including pricing, financing and investment decisions and there is a general consensus as to the efficacy and usefullness of the underlying theory of firms and production based on real world experience. Not so in the field of macroeconomics, where we have observed continued failure to anticipate the economic effects of public policy.
The 2010 general election was principally about the economy, specifically financial credibility. The 2015 general election will probably be even more focused on the economy, taxation and public service provision, than the last election. It behooves us as Liberal Democrats to develop and present a coherent and persusive economic policy platform that engenders confidence in the party’s credentials for financial competence.
Macoeconomic policy can undoubtedly be improved upon and adapted by keeping an open mind to heterodox schools of economic thought. Of all the material I have read since the financial crisis, I have found the most prescient and compelling to be the 1986 book of Joseph Schumpeter’s student Hyman Minsky ‘Stabilising an Unstable Ecomomy.’ Minsky outlines his financial theory of investment and explains why the global economy has experienced periods of debilitating inflation, rising unemployment and marked slowdons – and crucially why the credit crisis of 2007/2009 was inevitable. Many top economic thinkers and financial writers now use the phrase ‘Minsky moment’ to describe the financial crisis.
In developing policy macroecomics cannot be considered independently of the political context and public policy cannot be developed independently of the macroeconomic context.
John Kenneth Galbraith in his 1987 seminal work ‘A history of Economics’ had this to say in his concluding paragraphs:
“..economics does not usefully exist apart from politics, and so it will not, one hopes in the future. The political asymmetry of the Keynesian revolution – the assmmetry of the political actions required to remedy general underemployment as compared with those required to arrest a general excess of demand – has been adequately observed. Failure to recognise the practical consequences of this was, as it remains, one of the major misjudgements in modern economics. Another serious mistake has been the belief that monetary policy is politically and socially neutral – that the revenue that high interest rates return to those who lend money has been other than a rational manifestation of the self-interest of those with money to lend. Wrong as well, has been the failure to recognise the political role of economics itself in the dialectic between the business enterprise and the state. The continuing survival of classical theory can be understood only when it is seen that classical beliefs protect business autonomy and its income and serve to obscure the economic power exercised as a matter of course by the modern enterprise by declaring that all power rests, in fact, with the market.
The separation of economics from politics and political motivation is a sterile thing. It is also a cover for the reality of economic power and motivation. And it is a prime source of misjudgement and error in economic policy. No volume on the history of economics can conclude without the hope that the subject will ne reunited with politics to form again the larger discipline of political economy.”
By pure coincidence I was just discussing Minsky and his moment with a friend online at about 4am this morning!
From what I have read of Minsky Moments (which is not a lot) I feel this is more Austrian Business Cycle than Minsky Moment in that, as I put it, the elastic band has been repeatedly stretched and relaxed through monetary policy over decades, never allowing real malinvestments and dislocations to unwind properly for fear of being seen to preside over recessions (they create the boom, the illness, but cannot stomach the bust, the medicine). At some point the band will be worn out and will not relax but break, and personally I think this one is it. I’d been predicting it previously, before I knew about the Austrian Business Cycle for instance, as the biggest Kondratiev Wave yet.
Nothing will really change until and unless we do something about creating sound money IMO. We’ll go through all this still periodically, and if we continue to try and prevent recession through monetary policy they will get bigger each time. After all, monetary manipulation to prevent (a politically damaging for Labour) recession is exactly what Eddie George did and knew this was “storing up trouble for my successors” to “sort it out”.
But I’ll swap you Galbraith quotes (well a paraphrase since I no longer have the book) – in “Money: Whence it Came and Where it Went” he talks about the economics profession deliberately obfuscating what they do from otherwise perfectly intelligent but non-economics-insider people and that the method by which money is created is “so simple it repels the mind”.
I agree with him on politics and economics. My main reason for doing this degree now is that my employer of fifteen years has finally decided to offer a course explicitly in “Economics and Politics” (though even so the link between the two is not well made, yet – modules in each are delivered by people in different departments with no connection or experience of the other’s subject – and I hope to be able to get them to improve that during my time). As an anarchist, however, I would prefer for that to expose how politics and economics have gone hand in hand knowingly to cause reckless economic crises to further political positions (Labour would likely not have got in again in 2001 had they had a recession since it was only having persuaded the city they could “manage” the economy that enabled their ’97 confidence).
I don’t know how I missed that earlier thread on “radical” approaches to money supply. Needless to say they are not radical enough for me by the looks of it but I will read through the discussion!
Oh, and I agree with you (I think) on Micro versus Macro. I intend/hope to be a good macroeconomist and a very bad macroeconomist 🙂
Sorry – that should be a good *micro*economist and a very bad *macro*economist 🙂