Why Fiscal Credibility Is Still Important

Piles of money. Photo credit: czbalazs - http://www.sxc.hu/photo/1236662Of the many phrases that pepper the UK’s political discourse, the oft used ‘Magic Money Tree’ has to be the most grating. Its employment is a rhetorical device used to shut down any talk of government  spending by hawks who believe any movement away from a narrow focus on  cuts as a weapon for reducing the deficit  is not only ill-advised, but belongs to the realm of fairy tales. More sophisticated commentators know that macroeconomics is more complex than that and government spending can – in some circumstances – reduce budget deficits.

After the financial crash of 2008 the UK’s public finances were in a perilous state and the electorate concluded that the Tories, in coalition with Liberal Democrats, could be trusted to repair them. After some success, the Conservatives alone were given a chance to finish the job in 2015. But two years later – somewhat prompted by a promise to spend more by Labour – the public’s appetite for so-called austerity has significantly diminished.

Politicians on the centre-left of politics, who are supportive of public spending, may see this as an opportunity to call for extra money for state spending. For so long the political narrative has been dominated by low taxes and spending cuts, and the opportunity presented by Labour to change that focus may prompt many in the centre to call for some fiscal easing. Liberal Democrats need to tread carefully at this political moment.

While Jeremy Corbyn has managed to challenge the post-recession fiscal consensus, there is little evidence that he has any better solutions in addressing the effects of a long period of deficit reduction or any credible plans in terms of rebooting the economy. Labour still has a credibility problem: yes, its manifesto was costed (in as much as both columns on the spread sheet tallied), but it lacked plausibility in terms of priorities and sustainability. Liberal Democrats can’t outdo Corbyn on spending promises, but they can come up with carefully crafted tax and spend policies based on improving the value of services, and ‘bank for buck’ capital investment schemes.

At present, Labour look like the most obvious winners of the next general election, but there is still much to play for. Whether in government or not, Labour’s fiscal plans will fall apart under detailed scrutiny or implementation. As Labour’s economic policies unravel there will be an opportunity for Liberal Democrats to make the case for properly thought out and costed spending plans. Approaches that promote progressive policies and keep a keen eye on the public purse will be called for. Luckily for the Liberal Democrats they have a leader who has credibility on both counts.

* Steven Duckworth is treasurer of the Social Democrat Group, which is being formed to celebrate and develop our social democrat heritage, and to reach out to social democrats beyond the party. He writes in a personal capacity.

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  • David Evershed 5th Oct '17 - 7:32pm

    Public spending has increased every year since the recession in 2008.

    Continuing to increase spending during a recession is Keynesian economics. But Keynesian economcs also requires running a surplus during the growth periods that we have had for many years now.

    So we have not actually had austerity in the last decade but added another trillion pounds of debt for the next generation to repay or refinance at higher interest rates than today.

    In 2010 the coalition should have cut public sector wages by 10% as they did in Ireland. The would have enabled the deficit to be eliminated by now. There would have been more public support for it in 2010 when the emergency was recognised. As time passes, people are less concerned about putting public finances on a sound footing. By not doing so, we will be in a weak position to use Keynsian economics when the next recession comes.

  • Peter Martin 5th Oct '17 - 7:39pm

    government spending can – in some circumstances – reduce budget deficits.

    Possibly. The budget deficit is what Government spends into the economy minus what it gets back in taxation revenue. Why doesn’t more come back than the Government spends? I’m sure there is no need to point out that this is not arithmetically possible, at least not consistently. So there’s always less coming back than going out and that is because everyone else, including our overseas trading partners likes to save in pounds.

    Are savings a bad thing? Are budget deficits a bad thing? They are, to the penny, exactly the same thing so the answer has to be the same for both questions.

    After the financial crash of 2008 the UK’s public finances were in a perilous state

    Were they? People had ceased their net borrowing after the GFC and started saving. So you were saying that people’s finances were in a perilous state because they weren’t spending so much?

    After some success…..

    All that happened was that interest rates were reduced so that the private sector could resume their pre GFC borrowing pattern. More net borrowing means less net saving which means lower Govt deficits. Remember? That’s not so difficult.

    Look. This is just simple arithmetic. If the UK as whole runs a trade deficit, or a current account deficit, then someone in the UK has to do the borrowing. That’s either you and I borrowing to buy land and property which naturally causes house prices to rise or it is Govt running a deficit. Or a bit of both.

    The Government thinks it is doing us all a favour by pushing the debt burden on to young house buyers so that it can have a smaller deficit.

    Well, if you understand the sectoral balances, which shouldn’t be beyond anyone who a few functioning brain cells left, you can see it really isn’t doing us all a favour at all!

  • Peter Martin 5th Oct '17 - 7:45pm

    @ David Evershed,

    “But Keynesian economcs also requires running a surplus during the growth periods that we have had for many years now.”

    This is only true for a country running balanced trade. The UK runs a significant trade deficit. So we have pounds net leaving the economy to pay for it. Someone in the UK has to borrow those pounds back to stop the economy falling into recession. That, in part, has to be the Government even in times of relative good growth.

  • Peter Martin 5th Oct '17 - 7:50pm

    Peter Martin,

    If anyone wants to try to understand how the economy works they might at least have a think about this:

    Quote from John Maynard Keynes

    “If the Treasury were to fill old bottles with bank-notes, bury them at suitable depths in disused coal-mines which are then filled up to the surface with town rubbish, and leave it to private enterprise on well-tried principles of laissez-faire to dig the notes up again (the right to do so being obtained, of course, by tendering for leases of the note-bearing territory), there need be no more unemployment and, with the help of repercussions, the real income of the community, and its capital wealth, would probably become a good deal greater than it actually is.”

    In other words “bridges to nowhere” can be economically beneficial. But even so we should try to avoid these and do something of direct benefit with the money we spend.

  • @ David Evershed “So we have not actually had austerity”. – Tell that to the food bank users.

    “In 2010 the coalition should have cut public sector wages by 10%”.

    I sometimes wonder how we even got 7.4% let alone what universe some people live in. So Liberal Democrat policy should have been to transfer the sins of those pillars of responsible capitalism, the Lehmann Brothers, onto the poor old nurses, teachers, firemen, social worker, police, armed forces (?) et al.

    And what would you do about the endless strikes and civil unrest that would provoke Mr Evershed ? Send in the Spanish police ?

  • Labour’s current spending plan banks on those who have previously taken every legal step to avoid paying their fair share of tax grasping the idea that, to steal a line from the coalition years, “we’re all in this together”. It’s as unrealistic as the Tories’ belief that ease the burden on the wealthiest and they will happily create wealth for others rather than just maximizing their own pocket. Still, I don’t think we can state the coalition was in any way successful without recognising that we weren’t in it together, and that the growth was overly built on personal credit card debt and cut services were propped up by already overstretched local government.

    “Approaches that promote progressive policies and keep a keen eye on the public purse will be called for” and this is where we can make our move.

  • There is a Magic Money Tree and it’s called the Bank of England which creates money and when it does it now we call it Quantitative Easing. We could have growth of 3% and inflation of 2% while creating 5% more money every year.

    Steven Duckworth, the UK’s public finances were only in a perilous state if you think the UK is like Greece, if you knew our history you would know it was not perilous. Labour proposed £48.6 billion more spending a year and £52.5 billion of increased income and states of this £52.5 billion of new income they think £3.9 billion will not happen because of behavioural change. This is not a call for increasing the budget deficit, it is a continuation of neo-liberal economics.

    We have called for increases in investment to be paid for by more government borrowing, which is a movement away from pure neo-liberal economics.

    @ David Evershed
    “But Keynesian economics also requires running a surplus during the growth periods that we have had for many years now”.

    You are incorrect and many people believe as you do.

    Keynesian economics requires a government to reduce spending once full employment has been achieved and the private sector can employ more people who are currently being employed by the state. We have not has full employment in the UK since 1974 or if you were using Beverage’s definition since 1955.

    If public sector pay had been cut by 10% in 2010 this would have pushed the economy into a deep recession (which we only just missed) and of course reduced government income and increased the deficit. If the government then managed to get the economy into growth there could well have been recruitment and retention problems in the public sector.

  • “Beverage’s definition”

    I’ll drink to that……… probably in Old Peculier.

  • Peter Martin 5th Oct '17 - 11:02pm

    @ Michael BG,

    “Keynesian economics requires a government to reduce spending once full employment has been achieved…”

    I’m mainly in agreement with you but I do have some reservations about this statement. We’ve pretty much got full employment in London and the S.E. of England now but still have high levels of unemployment in the regions, Wales, Northern Ireland, Scotland etc.

    So more spending could produce more inflation in the SE of England and therefore generally in the UK economy but without reaching what might be called full employment. In addition many long term unemployed aren’t easily employable and more spending could still create inflation before the jobs for the unskilled longer term unemployed are created.

    So we do need to be smarter in our approach to these problems. We can’t just recreate what may have worked in the mid-1950s.

  • @ Peter Martin

    You are correct increasing public spending or cutting taxes to try to increase aggregate demand could over heat London and South-East England. In the past London and South-East England were not the economic heartland of the UK, it was more diverse. Also there was not a large pool of unemployed people and managing aggregate demand was effective, but it did stimulate wage increases when employers had to compete for scarce workers and reduced inequalities.

    You are also correct returning to work those who have been unemployed for long periods of time is not easy. Increasing aggregate demand on its own is unlikely to help these people. However government employing these people would increase public spending and give these people current work skills, so when the economy grows and the private sector have a need for these people they will have current work skills and be employable and can transfer to the private sector. It might also encourage UK employers to employ these people rather than recruiting workers from foreign countries.

  • I would agree with the author that fiscal credibility is an essential element of maintaining confidence in a socially democratic economy, within which individuals have both the capacity and economic freedom to provide for themselves.
    It is an axiom of Liberal Democracy that it is the individual and not the state that is best placed to determine how he or she will earn a living and how he or she will utilise those earnings.
    The role of the state is to regulate markets to ensure economic freedom (including most importantly the housing market), to direct resources to the provision of public goods (including the NHS and Education) where markets cannot efficiently provide such goods and to provide a safety net that allows individuals to cope with disability, unemployment, old age and housing poverty.
    Public sector spending has grown dramatically since the days of the Asquith administration in the early 20th century http://www.truevaluemetrics.org/DBpdfs/Economy/UK/UK-Government-Spending-1900-2014.pdf, when a 600 ship British navy absorbed 25% of government spending alone.
    It is essential that the state only commands resources at a level that it needs to provide essential public services and an adequate safety net. It is individuals (rich or poor) who are best placed to determine on what they should spend their own money on, not the state. If we keep that axiom in mind in determining how taxpayers money should be spent, we will not fall into the socialist trap of assuming the right to command the lions share of the individual resources of all for the benefit of an all powerful state and its functionaries. It is then the economic activity of individuals and firms that powers the economic growth needed to provide public services and not state diktat.

  • Peter Martin 6th Oct '17 - 8:01am

    @ Joebourke,

    If we keep that axiom in mind in determining how taxpayers money should be spent

    A local council spends taxpayers’ money in the way that is commonly imagined. Central government spends the money first (otherwise it wouldn’t exist) and collect taxes later. So instead of saying ‘tax and spend’ we need to put it the other way around and say ‘spend and tax’.

    “It is then the economic activity of individuals and firms that powers the economic growth….”

    That’s true to an extent, but central government has to create the right conditions for growth to occur. We had steady growth up until 2008 with only minor downward blips now and again. But what has happened since then has been more than a blip. So, according to your theory, “individuals and firms” have since taken it upon themselves to decide that we’ve had enough growth and we don’t need any more?


  • Peter Martin 6th Oct '17 - 8:24am

    @ Joe Burke,

    …… the economic growth needed to provide public services and not state diktat.

    This is the usual neoliberal argument. The GDP has more than doubled since the 1970s. But then when we were only half as wealthy as we are now we could afford things, like the provision of social housing and free education for all, that we supposedly can’t afford now.

    So whilst I would argue that GDP is a valid economic parameter it doesn’t tell the whole story. It doesn’t say anything about how income and wealth are shared out. The level of GDP, in itself, is not really a problem. It isn’t that much different, even on a per capita basis to what it was 10 years ago and we all seemed happier then than we are now.

    The way it’s shared out has changed though. That is different.

  • Steve Trevethan 6th Oct '17 - 8:32am

    Perhaps “money trees” do exist. Do they grow in tax havens? It seems that only the privileged rich may gather their fruits.

  • How bout replacing ‘magic’ with ‘slight of hand’ 🙂

  • Laurence Cox 6th Oct '17 - 11:09am

    @Peter Martin
    Quite right. This is exactly what Richard Murphy writes in “The Joy of Tax” which I reviewed for LDV here: https://www.libdemvoice.org/review-of-the-joy-of-tax-by-richard-murphy-53361.html

    He writes:
    “Taxes must do six things….
    1. Reclaim money the Government has spent into the economy for re-use;
    2. Ratify the value of money;
    3. Re-organise the economy;
    4. Redistribute income and wealth;
    5. Reprice goods and services;
    6. Raise representation.”

    This is from the beginning of Chapter 8, but the rationale for each of these is covered in Chapter 3. As you have noted it is not “tax and spend” but “spend and tax”.

  • This has been a fine debate, but the politics of it are much cruder. It seems that if you take even a slightly looser position on fiscal policy than the other lot, then you get to condemn them with hellfire for an ideologically-driven dismantling of the public sector, every time a spending question is raised.

    This is such an enjoyable argument to make that it becomes easy to convince yourself that a looser position is a good one – even if you are opposing others in your own party rather than the government.

  • Laurence Cox 6th Oct '17 - 11:25am

    @Mark Valladares
    Yes, the public sector pay cap is in effect a pay cut for public sector workers. It is just a way of achieving over a period of time what the government could not achieve by a direct cut in pay. Likewise, for savers the net return on money invested is negative in periods (as now) where the inflation rate is well above the interest rate on zero-risk investments such as building societies’ savings accounts. Inflation is a redistributive tax taking money from those with savings while giving it to those with debts; indeed it is the continued inflation in our economy that has driven the house-price boom by making it attractive to go into debt to buy assets like houses.

  • Steve Trevethan 6th Oct '17 - 12:25pm

    Might it help if we were to have clear statements on our theories and practices concerning the creation, storage and distribution of money?

  • Peter Martin 6th Oct '17 - 12:46pm

    What might make some sense is to talk about “magic resource trees”. They definitely don’t exist. Instead of asking if we “have enough money” to run the NHS we should be asking if we have enough resources to run it. Do we have enough doctors, nurses, buildings etc. If not, do we have the people available we can train to do the necessary jobs.

    Of course if there is a national emergency, like a major war, then we all instinctively understand what is needed. We don’t say we have a large National Debt or there’s a huge budget deficit to consider – so we’ll just have to surrender!

    In other words, we have to understand the difference between available real resources which are finite, very limited and the money which we create to allocate these resources to our chosen areas of priority.

  • @ Joe Bourke

    In your list of the role of the state you do not mention managing the economy to achieve something. For me this something is full employment I thought for you in the recent past it was a non-accelerating inflation rate of unemployment (which is a higher level of unemployment than my target), and that recently you had modified this position and now think one of the roles of the state is to be the employer of last resort which would mean unemployment could be much lower than my old target of less than 3% of the working age population unemployed.

  • David Evershed,
    Well done for trying, but you are on a loser here. Your words are true but their obvious consequences are so dire that heads are in the sand up to the waistline.
    A gem was
    “the UK’s public finances were only in a perilous state if you think the UK is like Greece,”
    We have just had our credit rating lowered again and as I have said before, I think I am the only one left who can read a graph. This, and all the other serious indicators are flashing bright red and Greece (or worse) is where our children are heading.
    Another was
    “but central government has to create the right conditions for growth to occur.”
    I sometimes wonder why there are so many poor countries, in the world, when they only have to follow that simple advice then they collect the tax receipts and give out free health care, lifetime learning and the like. Shimmples.
    So David, thank you but you can’t win. The magic money tree, that inexhaustible and inexplicable fountain of all the comfort and wealth we, the British, feel we are ‘entitled’ to, will be defended to the death by hordes who are determined that the myth be kept alive.
    Not a single scrap, vestige, trace or particle of idea as to where Britain’s wealth (to underpin all that money) will come from. Except, of course, the time honoured “invest in skills and infrastructure” piffle.

  • Steve Trevethan 6th Oct '17 - 2:38pm

    As a nation, do we own our £ money, do we borrow it, do we rent it or what?

  • Peter Martin 6th Oct '17 - 3:53pm

    @ Steve,

    We, or rather the government/BoE create the pound.

    Once upon a time, many years ago, a pound, like most currencies, was guaranteed against a quantity of gold. So the pound was an IOU of the Bank of England which was redeemable against a certain amount of gold. The BoE could create as many pounds as they liked providing they had the the gold.

    That’s now changed. And it is the same for all other currencies too. There’s no gold involved any longer. The BoE has been nationalised so it’s effectively now part of the Treasury. But the BoE still creates pounds. As many as they like. The Treasury creates gilts. As many as they like which the BoE can swap for pounds.

    That’s the way it is. The pound can also be understood to be a tax voucher. Something that the government will always accept in payment of taxes. This gives it a desirability and therefore makes it worth something.

  • Imagine a time when our country was in the biggest crisis it had ever known before – or since. When we had been almost defeated on every battlefront and the enemy were opposite our shores. We were in debt up to our eyebrows and beyond.

    It was December 1942, our ships were being sunk by U Boats, we had ration books and the few private cars were sometimes fuelled by chicken waste. The only bright sign was a triumph at El Alamein in August and we were all in it together.

    On a personal note I was four months old, Dad was in the RAF, Mum was knitting my clothes, growing her own vegetables and not letting me know how scared she really was for Dad. People relied on the BBC Radio which they trusted and they watched Pathe News in the Cinema. This is what they saw and heard from a Liberal voice just before Christmas that year.

    Sir William Beveridge Talks To Pathe Gazette (1942) – YouTube
    Video for beveridge report 1942▶ 2:37

    Despite Tory Jeremiahs saying we couldn’t afford it and there was ‘No Magic Money Tree’, it came into being through politicians who had the courage to do it after the war. Lives were saved and enhanced because of it – including mine. As for ‘Magic Money Trees’, I believe in a tree that says we can do it if we really want to and if we have the courage. Anything else is a Thatcher legacy.

    PS Somewhat odd, university education in Germany is free. However did that happen ?

  • Steve Trevethan 6th Oct '17 - 6:11pm

    If we can create our own money, where is the problem in financing a society which does not have starving nurses using food banks?

  • Peter Martin 6th Oct '17 - 6:29pm

    @ Steve,

    Potentially there isn’t any problem. If Government can create £400 billion to bail-out the banks they can manage another £40 billion or so for the NHS.

    When the Government resorted to QE in 2009/2010 there were many who said it would lead to hyperinflation. This is to misunderstand the nature of our monetary economy. What matters is how much of the created money is actually spent and then respent. If the Government overdoes the spending, and whether the money is simply created or “borrowed” from someone who isn’t spending makes no difference.

    So on the one side we have higher than desirable levels of inflation. On the other is a sluggish, stagnating economy. The Government needs to steer a sensible middle course to maximise the productive capacity of the economy.

  • David,
    ” university education in Germany is free. However did that happen ?”

    “Germany’s budget surplus hits record high”

    When we, as a nation, can earn like that we can deliver on Beveridge’s promises.

    “create our own money” – we can print money but we can’t print value. That has to be earned.
    Zimbabwe created money instead of wealth. It reached an inflation rate of 89.7 sextillion percent before they realised that bit about “print” and “value”.

  • Peter Martin,

    the Bank of England has been independent of the treasury since 1997 (a policy supported by Libdems). The central bank can print as much money as it wishes. But it is also careful not to print too much. If governments print money themselves, they tend to put out too much of it, and the resulting inflation throws the economy into chaos. Institutions such as the Bank of England or US Federal Reserve were created to carefully regulate the money supply to prevent inflation. This is why they are forbidden to directly fund the government, but instead fund private economic activity that the government merely taxes.

    When banks make loans, they create money. This is because money is really just an IOU. The role of the central bank is to preside over a legal order that effectively grants banks the exclusive right to create IOUs of a certain kind, ones that the government will recognise as legal tender by its willingness to accept them in payment of taxes. There’s really no limit on how much banks could create, provided they can find someone willing to borrow it. For the banking system as a whole, every loan just becomes another deposit. What’s more, insofar as banks do need to acquire funds from the central bank, they can borrow as much as they like; all the latter really does is set the rate of interest, the cost of money, not its quantity. Since the beginning of the recession, the US and British central banks have reduced that cost to almost nothing. In fact, with “quantitative easing” they’ve been effectively pumping as much money as they can into the banks, without producing any inflationary effects.

    What this means is that the real limit on the amount of money in circulation is not how much the central bank is willing to lend, but how much government, firms, and ordinary citizens, are willing to borrow. Government spending is the main driver in all this and the central bank does actually fund the government in practice via quantitative easing..

    The independence of action of central banks is a key element of the fiscal architecture that sustains the fiscal credibility the author of this article refers to. Government spending is limited by how much it is willing to borrow which in turn is limited by the level of future taxation it is willing to impose to service that debt and the levels of interest the BofE will need to impose to contain inflation within the governments mandate.

  • Michael BG,

    I think the government does indeed have a role in managing levels of unemployment. During times of high unemployment (above 5%) that will normally require the application of fiscal policy (usually increased infrastructure spending) to stimulate demand in the economy. Once general unemployment has been reduced to a level below around 5% then fiscal stimulus may become ineffective and serve only to stoke inflation, as we have seen so often in the past. At these levels of unemployment (where higher unemployment is often concentrated in more deprived regions) , then direct measures, (rather than economy wide stimulus) like the system of employer of last resort should be employed to tackle the remaining levels of harder to reach involuntary unemployment.

  • Peter Martin 6th Oct '17 - 7:13pm

    @ JoeB,

    “the Bank of England has been independent of the treasury since 1997”

    The BoE was nationalised in 1946, In 1998, the BOE supposedly became an “independent” public organisation, wholly owned by the Treasury Solicitor on behalf of the government.

    This must mean that it later decided, all by itself, to buy up some £400 billion pounds worth of bonds as part of a QE program. Do you think this is at all likely?

  • Peter Martin 6th Oct '17 - 7:32pm

    @ George,

    “If you print more of those tokens, the value declines (ie inflation). If the productive value of the country increases, the value of that token may increase (ie the pound goes up in the international currency markets).”

    You’re ignoring the velocity of circulation. If a £10 note is spent once it has exactly the same effect as a £1 coin spent then respent another 9 times. It’s the amount of spending that determines the size of the economy not the supply or volume of money. Mrs Thatcher and Keith Joseph learned this the hard way in the early 80’s.

    The UK has a GDP of £2 trillion or so. This means there is £2 trillion p.a. of spending. If we want say 2% growth and 2% inflation we have to have £2.08 trillion of spending in a subsequent year. The trick is to get the growth without the inflation. That’s the hard bit, sometimes! But if we don’t get more spending we don’t get any growth.

    We can get more spending if we borrow money to spend. This is known as a credit boom. Often followed by a credit bust! Or Government can take the initiative and lead the spending but it has to come from somewhere.

    If the value of a token increases we’d have deflation. This means that prices fall. This may or may not be reflected in the forex markets. There’s no reliable theory or way to predict that. If anyone did have one they’d keep it to themselves and become very rich!
    Deflation is generally considered to be a bad thing. This is because incomes can fall in line with falling prices and this leads to increased levels of debt.

    That’s one thing that you’ve managed to get right!

  • George,
    You and Stephen Duckworth are correct but we have moved into a phase wherein the high priests of Topsy-Turvy are being listened to.
    I concede that their creed is attractive as it promises riches without all that diligent effort (that the Germans and Chinese have spent years doing).
    You (we) won’t be listened to until the next stage in our downward slide becomes impossible for even their sophistry to disguise.

  • Peter Martin 6th Oct '17 - 8:13pm

    @ Palehorse,

    China ran a approx equivalent to $343 billion budget deficit last year. The Chinese government just creates the RMB from its own “magic money tree” to make its economy grow.

    If it didn’t do that it wouldn’t grow. Period. As the Americans like to say. So what is ‘fiscal responsibility” in this context? What does it mean?


  • nvelope2003 6th Oct '17 - 9:02pm

    Peter Martin: I expect that the grinding hard work of the ordinary Chinese people had something to do with it. It is not a happy place sometimes.

  • Peter Martin 6th Oct '17 - 9:17pm


    Of course the Chinese Govt deficit, like any other Govt deficit, involves spending money into the economy which in turn creates the demand for goods and services which have then to be fulfilled by the workforce getting out of bed in the morning and doing their jobs.

    This is why sensible economics, Keynesian style, isn’t about a “free lunch”, or getting “something for nothing” as the neoliberals try to misleadingly claim.

  • Peter,
    I’m sorry but as I have said before I don’t debate with Keynesians. It’s like debating evolution with a Creationist Pastor from Alabama.
    Deficit or not China is making ever more sophisticated products and intends to out compete the rest of the world in both design and manufacturing and is using its massive receipts to buy up the infrastructure of all weak and poor countries (like ours).
    I post only in the hope of finding, and debating with, those who also believe that creating a competitive and ambitious spirit, in the British people themselves (before more successful nations turn us into their sweat shop) is the real challenge and answer.
    These people may well be neo-liberals. They won’t be Keynesians.

  • JoeB(ourke)

    Thank you for replying to my comment about full employment and the employer of last resort. Your 5% is as arbitrary as my 3% or Beveridge’s 1%. Currently unemployment is 4.3% and this is not causing inflation. I think you have stated you want those being employed by the employer of last resort to be paid the minimum wage. If there were 1 million employed this way it would cost £14.4 billion – £3.8 Jobseekers Allowance – Housing Benefit which would increase aggregate demand. It would also reduce unemployment down to 1.48%.

    I think you are wrong about how the Bank of England controls the money supply. The government / Bank of England requires banks to hold certain “assets” in a set proportion to the amount they lend. This has been a problem. The Bank of England wanted banks to increase this ratio and to increase their lending! While you are correct if a government creates new money to fund all of its deficit this can be inflationary if this amount is larger than the expected growth rate and the target inflation rate. However, it is possible for the Bank of England to give the money it creates direct to government rather than to the banks. I think there are economists who favour this over Quantitative Easing because it doesn’t cause an increase in economic inequality like QE.

    @ Peter Martin

    As the Bank of England owns nearly a quarter of our National Debt, it is like that quarter of the debt not really existing. It is like the debt is really of about 66% of GDP not 88% nearly to the 2009 level.

  • Michael BG,

    you can read the BofE own reports for how money is created and how the BofE exercises monetary policy to control the money supply http://www.bankofengland.co.uk/publications/Documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

    “Monetary policy acts as the ultimate limit on money creation. The Bank of England aims to make sure the amount of money creation in the economy is consistent with
    low and stable inflation. In normal times, the Bank of England implements monetary policy by setting the interest rate on central bank reserves. This then influences a range of interest rates in the economy, including those on bank loans.”

    “In exceptional circumstances, when interest rates are at their effective lower bound, money creation and spending in the economy may still be too low to be consistent with the central bank’s monetary policy objectives. One possible response is to undertake a series of asset purchases, or ‘quantitative easing’ (QE). QE is intended to boost the amount of money in the economy directly by purchasing assets, mainly from non-bank financial companies.”

    It is also worth reading Vince Cable’s 2014 speech to the Royal Economic Society (that still remains pertinent) in which he sets out a coherent and comprehensive program for the UK economy that concludes:

    ” I have identified four major areas of policy action required to make the recovery balanced and sustainable: boosting the disposable income of low and middle earners; stimulating business investment (with the help of public investment); taking action, including through the industrial strategy, to tackle bottlenecks in skills, business finance, exports and UK supply chains; and building lots of new homes. The Coalition government has put the key elements in place but it will require a commitment well beyond the current political cycle to deliver the results and achieve a recovery that lasts. This must be the coalition government’s real legacy.”

  • Michael BG,

    the Nairu rate is not arbitrary, it is based on econometric analysis and thought to be between 4% to 5% by the Bank of England https://www.forbes.com/sites/timworstall/2017/01/14/britains-nairu-is-now-permanently-lower-says-boe-rate-setter/#67db2a906a3a

    “The bank’s usual rule of thumb has been that there will be upward pressure on wages and inflation when unemployment drops below 5 per cent, because workers have more bargaining power to demand better pay when unemployment is this low. But Mr Saunders said he thought this “equilibrium jobless rate” could be as low as 4 per cent — although he stressed the uncertainty around this figure.”

    The UK currently has the highest rate of inflation among the worlds top economies
    https://www.theguardian.com/business/2017/oct/03/uk-highest-inflation-rate-oecd-brexit-prices-g7. This coupled with stagnant earnings growth and productivity levels some 15% below the average for the G7 economies does not bode well for living standards http://www.independent.co.uk/news/business/news/uk-productivity-growth-latest-sink-stagnation-decade-public-finances-economy-second-quarter-wages-a7986111.html

  • Steve Trevethan 7th Oct '17 - 7:45am

    To whom do we owe our national debt?
    What are the terms and conditions? (Any interest due?)
    Can an economic policy or theory be efficient when we have starving nurses using food banks?

  • Peter Martin 7th Oct '17 - 9:13am

    @Palehorse, To compare Keynes with a Creationist is rather odd considering that he was actually a distinguished member of your own party.

    @Steve Tevethan,
    I own part of the National Debt. I’ve got a few Premium Bonds and NS saving certs. The ‘National Debt’ is necessary for us to have those savings. It’s not a debt in the normal sense of the word. Every monetary asset has to be matched by an equal laibility held by Govt.

    @ Michael BG,
    The definition of National Debt is flawed. For historical reasons the monetary base is not included. It used to be backed by gold. So if the Govt issues extra pounds it isn’t included. If it issues gilts it is included.
    It is a similar story in the USA. The coinage isn’t included. So if the Federal Govt issues $20 x trillion dollar coins (You might want to Google that term) then hey presto! No more National Debt.
    This doesn’t make any sense at all.

  • Peter Martin 7th Oct '17 - 9:23am

    @ Joe Bourke and Michael BG,

    The only good thing about the Nairu , a term that the general public aren’t aware of, because politicians hate to let the cat out of the bag is that unemployment exists for only one reason. To suppress wages.

    It’s far too simplistic to say that 4% or 5% or whatever is the key number. Besides unemployment, we have to consider underemployment and low wage casual employment in the overall picture.

  • Peter Martin 7th Oct '17 - 11:46am

    @ George,

    “But, like you, I do like people to be honest about the costs of a proposal.”

    Ok let me challenge you to do just that. “Be honest”. You may remember that during the election campaign Diane Abbott got herself into some difficulty over the costs of employing 10,000 police officers. I think Jeremy Corbyn attempted to come to her rescue by saying the cost was £300 million p.a. This is presumably on the basis that the average salary plus overheads is around £30k p.a.

    But is this right? What about the 33% or so that each officer pays in tax and National Insurance? Should this be deducted? Should the figure now be £200 million p.a. ?

    And what about how this money is spent? Some will be on VAT, petrol duty, alcohol and tobacco tax etc. Should this be deducted too?

    And then there is a similar reduction in the net cost if we consider that the money not taxed is then respent and other tax revenue is increased too.

    So in the end all the spending does come back unless someone saves it. So Dianne’s figure of £8 million (or whatever she said) might not be quite as silly as many were saying at the time.

    How would you tackle this type of costing?

  • David Evershed 7th Oct '17 - 12:02pm

    David Raw says “Somewhat odd, university education in Germany is free. However did that happen ?”

    Of course it didn’t. University education in Germany is not free but paid for through those contributing to general taxation.

    Germany of course is fiscally responsible and does not run a government deficit – it only spends what it raises in taxes. It did have to run a very large deficit when it absorbed East Germany of course but gradually ran this down through hard work.

  • From the article: ”After the financial crash of 2008 the UK’s PUBLIC finances were in a perilous state…” [emphasis added].

    Actually, no; they were in a very good state. IIRC public debt / GDP was comfortably under 50% when the crisis struck. PRIVATE debt had soared since Thatcher to become unsustainable.

    Start with money. It’s debt even if it doesn’t look like it. Almost all (usually put at ~97%) is created by commercial banks and NOT by government. See the Bank of England paper linked by Joe Bourke (comment: 7/10 @ 12:29). For most of us (and companies too) the significant money in our lives is a mix of savings accounts and mortgages etc. – the bank’s debt to us or ours to it. It’s created with a few mouse clicks when the bank sets up a new loan.

    It’s highly profitable for banks provided they get the ‘underwriting’ right – that’s correctly assessing potential borrowers’ ability to pay back. Too many bad debts and everything goes pear-shaped.

    There are formal constraints on bank lending (capital ratios) but in practice these are ineffective. The effective constraint is the banks ability to find creditworthy borrowers. The roots of the crisis were when banks found a way round that constraint with the help of some politicians.

    It was to bin the traditional income multiple limits for mortgage lending. That seemed great to neo-liberals – a deregulatory ‘triumph’ that removed the mortgage queues that had plagued house buyers. Actually, it merely morphed the problem of mortgage availability into one of soaring house prices.

    It was good for banks another way; they could lay off their skilled and expensive lending officers and replace them with far cheaper automated credit-scoring.

    For the rest it’s been a disaster. Mortgages have sucked up a growing share of national income and that spread to the rental sector via property prices eventually blowing up housing welfare budgets. Meanwhile business lending has collapsed (except if really on property) because banks no longer have the expert staff.

    The GDP statistics look good but are misleading; it’s like a sugar-only diet; plenty of ‘empty’ calories but no protein, retail but no production. In short, it’s a Ponzi scheme.

  • Peter Martin 7th Oct '17 - 12:54pm

    @ David Evershed,

    “Germany of course is fiscally responsible and does not run a government deficit – it only spends what it raises in taxes.”

    This isn’t an indication of ‘fiscal responsibility’ when Germany’s obligations to the wider EU are considered. Germany runs a large surplus in its current account (trade) of about 8% of GDP. This means that there is always an influx of a large number of euros into the German economy. These could cause inflation if they were all spent and respent. They can be removed from circulation in one of two ways. The German Government can collect them in taxes. The German people can put them into their savings accounts.
    To put this into a simple equation:

    Govt Surplus = Current Account Surplus – Savings of German Non Govt Sector

    So if the German Government has a balanced budget it must mean that the German private sector is net saving all the all the proceeds of the German trade surplus. If they saved less the Govt would have to run a surplus.If they saved more the German Govt would run a deficit.

    Germany is being particularly irresponsible in running such a large trade surplus. This unnecessarily depresses the living standards of German people , many of whom are not at all well off, and the net influx of euros into the German economy creates a huge debt problem for Germany’s trading partners. That includes us.

  • Peter Martin,
    Sectoral balance analysis has its uses but on Modern Monetary Theory in general this is a reasonable critique from Thomas Palley written in 2013 http://www.thomaspalley.com/docs/articles/macro_theory/mmt.pdf inwhich he concludes:
    ” MMT analysis is based on the simple well-understood income expenditure
    model with addition of a government budget restraint that has the central
    bank finance the deficit. Its claims about the ease of attaining non-inflationary full
    employment via money financed budget deficits ignore the challenges posed by Phillips curve analysis, open economy considerations, and financial stability concerns. The oversimplification of the macroeconomic policy challenge is accompanied by an unwarranted policy recommendation that central banks set the overnight nominal interest rate at zero and hold it (park it) there. These theoretical and policy failings are compounded by naive political judgment regarding the possibilities of fiscal fine tuning and the political economy implications of ELR for public sector employment.
    In the current moment of high unemployment, MMT makes a valuable contribution as part of the rhetoric of advocacy for expansionary policy. However, as
    regards macroeconomic theory, MMT adds nothing new warranting its own theoretical
    label. Instead, its over-simplifications represent a step-back in understanding. In physics, the crank physicist is drawn to the idea of a perpetual motion machine that denies the effects of friction. In economics, the crank economist is drawn to the idea of a money tree that voids financial constraints and macroeconomic trade-offs. MMT constitutes a form of modern money tree economics.”

    One of the problems with Keynesian economic prescriptions was the way they were applied in the post-war period as a perpetual growth tool or for purposes for which they were not designed. We should not make the same mistake again of mis-interpreting Keynes fundamental analysis of the economy.

  • Steve Trevethan 7th Oct '17 - 5:43pm

    Is it the case that our national debt is what we owe ourselves?
    Is our money creation system a debt money system so that one person can only save by means of another’s debt?
    How can a financial/economic system which causes starving nurses to use food banks and survival debt be considered efficient?
    Ditto the high level of household debt?

  • Peter Martin 7th Oct '17 - 10:56pm


    I was explaining why Germany with a trade surplus of 8% can run a balanced budget. Not all all countries can run a trade surplus as it is arithmetically impossible. Someone, like the UK, has to run a trade deficit and that deficit has to be financed by borrowing. So the UK govt has to run a budget deficit.

    This isn’t saying anything about the extent of unemployment/underemployment in both Germany and the UK. There is always a problem of getting growth into an economy without having higher than desirable inflation and I don’t think any particular school of thought in economics has managed to fully solve that one, so I’m not sure why Palley is singling out MMT for criticism.

    Having said that, MMTers do have their own suggestions on how to achieve full employment but which I’m not sure I fully agree with! So I’m not 100% MMT compliant!

  • A DEPRESSION (as opposed to an ordinary recession) happens when a big part of the commercial banking system goes bankrupt as happened in 1929 and again in 2008.

    The best metaphor for what goes wrong is an aeroplane stalling. To stay aloft a plane must maintain sufficient speed to create lift as air flows over its wings. If it flies too slowly the lift becomes too low and the plane stalls.

    ‘Flying 101’ teaches trainee pilots how to recover from a stall; rather counter-intuitively it’s to push the stick forward and go into a dive – that’s the best way to increase speed quickly. There’s an obvious penalty – loss of height – so you can’t do this repeatedly making it only an emergency measure for when things have ALREADY gone badly wrong. If the root problem is, say, dirty fuel causing loss of power then you must sort that ASAP.

    Keynes worked out that when an economy stalls governments, like pilots, must do the counter-intuitive thing and deficit spend. That’s because, just as planes depend on adequate airspeed for lift, so economies depend on money circulating at a sufficient rate – one person’s spending is the next person’s income. If something interrupts that flow some people can’t pay back their loans; if that happens on a large scale the problem metastasises through the economy and the banks are soon in trouble. So government MUST keep money circulating at a high rate.

    Each political party adds its own prejudices to the policy mix.

    To Labour, with its propensity to address social problems by spending, Keynes sounds like the perfect justification – in good times and bad. Reducing inequality certainly helps but it’s only secondary.

    The Tory plan has been to talk virtuously’ about controlling public debt while covertly boosting private debt to kick the can down the road. Hence ‘Help to Buy’ and student loans etc. I recently met a very senior Tory (readers will know his name) in circumstances where he assumed I was one too. I put it too him that student debt was a worry, really just more national debt. He readily agreed – it clearly wasn’t a new thought. I’m afraid Clegg was played.

    And the Lib Dems? Some lean Labour, some lean Tory; we really need to get our act together as it’s an open goal.

  • Peter Martin 7th Oct '17 - 11:19pm

    @ Steve,

    Yes the National debt is what we owe ourselves. If you buy a Premium bond you are creating Govt debt. If Germany sells us cars it accumulates pounds. They can buy whatever we make with the pounds they accumulate, or they can buy Gilts from the Govt. Just why they prefer to buy up lots and lots of Gilts which they’ll probably never cash in is a bit a of a mystery, but that’s what they seem to like doing. So ‘ourselves’ includes our trading partners too.

    Yes all money is an asset/liability pair. It’s like an IOU. If I write out an IOU for a £100 I’m no better off. I hold both the asset and the liability. The two cancel out. But if I give you the IOU you only hold the asset so you are £100 better off. I’m £100 worse off because I’m left holding the liability. So if you buy £100 of premium bonds you get the asset of the bonds and the Govt gets the asset of the cash plus its still has responsibility for the liability of those bonds. The government then spends the cash in the same way you could have done. This is to keep the economy ticking over. If it puts the cash in the shredder , which is just like you tearing up your own IOU, then it is deflating the economy.

    The economy has always worked like, and always will work like this this, but nurses haven’t always had to use food banks. The pay of nurses is a political decision. Conceivably we could run an economy which required stockbrokers to use food banks instead!

  • Peter Martin 7th Oct '17 - 11:31pm

    @ Gordon,

    ” I put it too him that student debt was a worry, really just more national debt. ”

    That’s only true if students default on the debt. A performing loan is a financial asset to the lender which can be a person, a bank or a government. It can be counted as such on the government’s balance sheet to offset any other debts that might be on there.

  • @ Joe Bourke

    Creating money was so much easier when banks could just issue their own bank notes.

    You had now posted that the NAIRU is between 4 and 5%, but no one really knows. However, I don’t accept that reducing unemployment to the non-accelerating inflation rate of unemployment is the correct policy, because once it has been reduced below this level economic inequality has more pressure on it to reduce, which I think is a good thing.

    It can be argued that once there is huge pressure to increase wages, businesses have to invest to increase productivity to pay for the increased wages. Our inflation is caused by the drop in the value of the pound not wage inflation.

    What is interesting from the article by Thomas I Palley is his statement, “The critical question is not whether government can finance spending without taxes. Everybody knows it can. Instead, the question is what are the macroeconomic consequences of doing so and should government do so?”

    He answers, firstly it could cause inflation (and suggests “even in times of recession, there are good reasons to use a combination of money- and bond-financed deficits. The former injects high octane high-powered money, while the latter takes advantage of lower interest rates resulting from recessionary conditions”) or it could cause asset price bubbles. He states, “Finally, there is the problem of the balance of payments constraint on expansionary fiscal policy, which applies to both developing and developed counties. If fiscal policy succeeds in expanding AD (aggregate demand) and income, it will likely cause significant deterioration in the current account. This can be financed via foreign borrowing, but that is rejected by MMT because it exposes countries to future foreign debt problems. Absent a way to finance the current account deficit, financial markets will put pressure on countries to put a “stop” to their budget deficit “go” policies. Attempting to escape the balance of payments constraint via exchange rate depreciation exposes countries to the inflation and financial dislocation effects”.

  • Palley also states “Over the last thirty years, spurred by the political and intellectual dominance of neoliberal economic ideas, it has swung toward increased independence (of central banks from the fiscal authority [government]).

    Interestingly Palley states, “the ELR (Employer of Last Resort) wage must be below the minimum wage to ensure that the minimum wage is binding and that the ELR scheme does not draw labor (sic) away from the private sector”. He also recognises that public sector salaries could be reduced by ELR.

    @ Peter Martin
    “You might want to Google that term”

    I have no idea what you are suggesting I should google.

  • Peter Martin 8th Oct '17 - 8:50am

    @Michael BG @ Joe Bourke,

    Palley doesn’t have it right on the current account deficit. This doesn’t have to be financed by foreign borrowing in the sense that the UK would have to go out and borrow in euros or dollars. MMT advocates rightly cautions against that. If a big net exporter wants to sell us lots of stuff it gets paid in pounds. That’s all we have. So BNE then has the choice of using the pounds to buy stuff from us or buying gilts. If it buys lots of stuff from us it isn’t a BNE any longer so it saves its money and buys the gilts.

    So the balance of payments of the deficit countries isn’t really in their own hands. We can’t force anyone to supply a higher value of goods and services for a lower value. But if any country is determined to be a net exporter they’ll be creating a net importer somewhere else in the world. Another way to look at it is that they are depreciating their own currency and artificially boosting their customers’ currencies. The pound is high because Germany needs it high so that we can afford to buy their products.

    Now that interest rates are as low as they are it really makes very little difference whether the Government spends by borrowing or creating more cash. Cash is an IOU that pays no interest to the holder. Bonds are an IOU than pay a tiny amount of interest. Palley doesn’t seem to get that.

    I agree with Palley on the way that an ELR or Job Guarantee would probably work in practice which is why I’m somewhat cool on the idea. I’m not really 100% MMT compliant in this aspect. But everything else in MMT seems sound enough.

    I was suggesting that you, or anyone else reading this, might be interested to Google the topic of the “trillion dollar coin” to understand the imperfections in the way National Debt is defined.

  • Steve Trevethan 8th Oct '17 - 11:15am

    As money is an asset/liability pair [Neat expression P.M.!] can the government and the non-government/private sector both break even/make a profit at the same time?
    Ditto trading nations/groups of nations?
    If the pay of nurses and stockbrokers depends upon political decisions, does this mean that the “market” is not self-regulating?
    Does this mean that the predominant economic theories and/or policies are exercises in the disguising of power plays by those with financial, political and communication powers?
    Should we include the world finance-economics situation when considering our national situation?

  • Steve Trevethan 8th Oct '17 - 12:48pm

    If you can make your own “fiat” money, why do you need to “borrow” it?

  • Steve Trevethan 8th Oct '17 - 1:48pm

    If the Bank of England is independent and/or competent, how did it not foresee and give warning of the 2008 financial “crash”?
    How is it fiscally credible and/or competent, to sell away influence and/or control over your national money, which is key to governmental performance, to whoever cares to buy it, irrespective of allegiance, reliability, motive etc.

  • Laurence Cox 8th Oct '17 - 2:30pm

    This discussion on money has been fascinating, but I think that we are looking at symptoms, instead of causes. If, instead, we look at UK productivity we see that it has been effectively flat since 2007:


    If we can identify how to get UK productivity back on to the rising track that it was on up to 2007, then we can get back to having real wages rising through sharing the benefits of increased productivity, while prices stay stable.

    There is a more extended analysis in:


    This is a House of Commons Library briefing paper, published last month. The comparisons between productivity growth in US, Germany, France and UK since 2007 (page 8) show that these countries have continued to improve productivity at a time when the UK’s productivity has stalled. Clearly, they are all doing something that works even though the US approach is grossly different to the Eurozone approach.

  • Peter Martin 8th Oct '17 - 2:36pm

    @ George,

    “To a certain extent, pretty much every government in the last 70 years has run deficits during a downturn”

    Pretty much every government has run deficits. Period. Downturn or no downturn. We all believe in fiscal credibility but it’s a mistake to equate fiscal credibility with a balanced budget. The budget deficit has to equal everyone else’s savings. To the penny. So if you think the Govt shouldn’t run a deficit you are also saying we shouldn’t have savings. We shouldn’t buy Premium bonds. We shouldn’t buy gilts etc.

    I’m not sure why you have a problem with all this. It’s very simple. Maybe you find it difficult to accept ideologically?

    Sometimes a deficit is appropriate. Sometimes a surplus is appropriate. It all depends on what everyone else is doing as much as what government is doing.
    This is real fiscal credibility.

    “I feel this issue – that to run a deficit we need to be able to find people to lend to us – is not sufficiently considered by those who say we shouldn’t worry about the deficit.”

    This is exactly where you go wrong. We don’t ask the Bundesbank for a loan. Why would they buy up UK gilts when the yield is pitifully small and at the same time everyone is predicting the pound will fall due to Brexit? They buy up Gilts so that they can maintain their export surplus to us.

    They know they have to recycle the pounds to keep us being able to afford to buy their products.

    PS The government sets the 2% inflation target. The BoE is supposed to use only monetary policy to meet it.

  • @ George Kendall

    Lots of Keynesian economists would state that Keynesian economics includes tax cuts and running a budget surplus “during times of prosperity”. This is not the same as Keynes actually writing these things. I would be interested to know where Keynes wrote these things. The question for me is what should the government do when there is not full employment? It is the test for full employment which is important as I think it was for Keynes and it was for Beveridge. Therefore it is not wrong in Keynesian terms to run a budget deficit if there are more than 1 million people in the UK unemployed. We have not had less than 1 million unemployed since 1975 (https://i1.wp.com/newsimg.bbc.co.uk/media/images/46193000/gif/_46193798_unemployment_466.gif). However government needs to look at what the consequences are of doing this (see my quotes from Palley above).

    It would be simpler to see money as the way we value goods and services and property (including movable property). A society could use cows as their money. Today money has no value accept to value other things which we value. In the past it was possible to pay your taxes in items (wheat, corn, animals) rather than in money.

    You are correct that the selling of a nation’s debt will affect the interest the government has to offer to people to buy the debt. However the debt owned by foreigners is still in sterling and is not such a problem for a nation as debt issued in foreign currencies. So a government does have to accept that the market for its debt is not infinite and I do not know of anyone who believes that the market for a nation’s debt is infinite.

    I refer you to my quote from Palley above that making central banks “independent” of government is a consequence of the “dominance of neoliberal economic ideas”.

    @ Laurence Cox

    I think we need to encourage business to invest to make workers more productive and increase our productivity, one way is to increase the National Living Wage and the Minimum Wage and another is to restrict the migration of people into the UK to stop the near total unlimited supply of labour we have.

  • ” and I do not know of anyone who believes that the market for a nation’s debt is infinite.”

    All Keynesians believe that, without exception. At least I’ve never heard of one prepared to discuss the measures required to end the debt dependency. That seems beneath them and they leave all that mere detail to the proles.
    Of course they spout from the usual insignificant piffle about “invest in skills and infrastructure” and “improve our productivity” and “rebalance our economy”.
    I often wonder why they don’t share these stunning insights more widely then the world would have no poor countries anymore.

  • Peter Martin 9th Oct '17 - 8:30am

    @ George,

    It’s easy to find articles such as the “independentreport” which you linked to earlier which claim to know what Keynes thought about running surpluses in the good times. Keynes style of prose doesn’t make for easy reading, but from what I have read I have detected a shift in his views from those he held in the 20’s to those he held a couple of decades later.

    That’s wouldn’t be at all surprising. He famously said:

    “When the Facts Change, I Change My Mind. What Do You Do, Sir?”

    And the facts did change in the 30’s when he saw large scale unemployment which wasn’t explicable using existing theories.

    So it is quite possible, even likely, considering the volume of his writings, to find some quotes that might suit your POV. Though I must say I haven’t seen the one about having to run a surplus in good times.

    But, most importantly, we don’t think like Marxists. We don’t take a quasi religious view to whatever he might have said. We use his understanding to develop our own understanding.

    And it isn’t difficult to understand that if money is leaving the economy to pay for our net import bill that someone, ie government or the private sector, in the UK has to borrow it back to keep the economy working. This is just as true in the good times as the bad times. Otherwise it will fall into a state of depression. Previous govts have understood this as well as anyone. Unfortunately their solution, if that is the right word, has been to lower interest rates to get the private sector to do more borrowing so the govt can do less.

  • Peter Martin 9th Oct '17 - 8:55am

    @ Michael BG,

    You’ve said,

    You {George Kedndall} are correct that the selling of a nation’s debt will affect the interest the government has to offer to people to buy the debt.

    I’m not sure he is. Let’s have a think about this.

    Government spends money into the economy and gets some of it back in taxes. It doesn’t get it all back for obvious reasons. So there is always a glut of spare pounds out there in the economy looking for a home and looking to earn some interest. The bigger the deficit, the greater the glut. If Government didn’t intervene, the natural rate of interest would, for an economy like the UK’s, be zero.

    But the Govt doesn’t want it to be zero, at least in what might be referred to as ‘normal’ times. So it gets its Monetary Committee in the supposedly independent BoE to decide what interest it will pay. It’s currently 0.25%. It may or may not be increased to 0.5%. This is not the result of any change in supply and demand. If the Govt wants 0% it can have 0%. If it want 5% it can have that too. It’s just a matter of choice.

    Longer term interest rates are easily manipulated through the process of QE. If the Govt wants these to be reduced it instructs the BoE to buy up bonds. This raises their price, the increase price determines the yield, and the effective interest rates are effectively lowered. If the Govt wanted longer term interest rates to rise, it, sorry, the so-called independent BoE, would start selling them again.

    So George’s statement is really not correct at all!

  • @ Palehorse
    “All Keynesians believe that, without exception”.

    You provide no evidence for this and then talk of “debt dependency”. Perhaps you misunderstood me. No one believes a government can run a budget deficit equal to the GDP of the country or more than that. This is what I mean by saying no one thinks that the market for a country’s debt is infinite. I am sorry I was not clearer. The amount of national debt has no arbitrary limit, but there must be a point at which it becomes too large a share of GDP, but I don’t think the UK has reached this level since 1692. The largest it has been is just over 260% of GDP in 1819 and 1821. Since 1962 it has always been under 100%. (https://www.ukpublicspending.co.uk/spending_chart_1692_2017UKp_17c1li111tcn_G0t_Three_Centuries_of_UK_National_Debt)

    @ Peter Martin

    I think you are incorrect. The interest on government bonds is not identical to the Bank of England rate. Therefore even when the bank rate is 0.5% the government issued bonds with a higher rate. From this chart (https://www.economicshelp.org/wp-content/uploads/2016/07/10-year-bond.png) it appears that between 2008 and 2011 the interest rate was sometimes 4% and not lower than 3%. At no time since 2011 has the rate fallen below 1%. It seems logical to conclude that this rate is set by the market and not by the government.

  • But Michael I offered evidence. This blog is full of economists defending borrowing with not the slightest trace of ideas as to how to turn that situation around (apart from the trite and superficial such as “invest in skills and infrastructure”).
    Worse, I read that we should be proud of being economic failures and having a deficit and have seen the Germans reproved for being successful and annoying their trading partners for being better than them.
    I have asked repeatedly “Forget this arcane economic gobbledegook, tell me when the turn round comes? and from where? what form does it take? industrial? agricultural? what?”
    The nation needs a serious business plan, not esoteric economics, and that will require immense debate and big challenges to how we see and organise ourselves.
    “improve productivity” is just as thin and useless as “do better”.
    I detect a lot of intelligence in some (not all) of the economic voices here and yearn for the day when they will stop playing with economic models of planet earth and become nationalistic, patriotic and selfish in the cause of our childrens’ future and deploy their brains in breaking free from this addictive Keynesian narcotic that makes debt the only path to prosperity.

  • Peter Martin 9th Oct '17 - 12:58pm

    @ Michael,

    You’re right. The interest rates on bonds aren’t the same as the base rate and I didn’t mean to imply that they were. Bonds are generally sold at auction. It is frowned upon for the BoE to be an active bidder in those auctions. So they get around that by buying up bonds which are already in the possession of others. The net result is just the same. The price of the bonds is higher, therefore the interest rate is lower, than if the BoE wasn’t active as a buyer in the bond market.

    It therefore doesn’t follow that it is the market which sets longer term interest rates.

    @ Palehorse,

    “Worse, I read that we should be proud of being economic failures and having a deficit and have seen the Germans reproved for being successful and annoying their trading partners for being better than them.”

    If you made wine and I made beer, it perhaps would make sense for us to trade wine for beer. Occasionally if you had more wine than I had beer it would make sense to take my IOU so you could use it later. It wouldn’t make any sense for you to take so many IOUs that in the end I couldn’t possibly supply you with enough beer to make up for the years and years you’d been in surplus with the supply of wine.

    If Germany wants to supply us with goods and services in we, in return, supply them with only about half the value of what we receive, who is being the success and who is being the failure?

  • Peter Martin 9th Oct '17 - 1:27pm

    @ Michael BG @ Palehorse @ George Kendall,

    The National Debt is about 90% of GDP. This is roughly the same as someone who earns £50k a year after tax or about £80k before tax having a mortgage on his house of £45k. Sure he might prefer not to have it but he’d hardly be losing any sleep over it.

    I realise I’m being a bit naughty here by mixing up the macro with micro, but there’s still a valid point to be made. Just like the person with the mortgage has real assets in his house and other possessions so too have we all. We have to look at both sides of the balance sheet. Public debt isn’t quite the problem it’s often made out to be.

    That’s probably not true of the level of private debt. The private deficit is now higher than the Govt’s deficit. Neil Wilson does a good job of collecting the sectoral balances. The graph on this link is reasonably up-to-date. The heading is a little misleading.


  • ” who is being the success and who is being the failure?”
    When the British go bankrupt the Germans will have to sell to someone else (they will only have another 191 countries to target). Many of them will be successful and will trade their smartphones, their copper, their oil, their medicines their wheat and rice for the Porsches and Mercs. This is how it all goes as some countries get richer and others poorer as the wheel of history turns.
    The Germans (or any other of our suppliers) will not care if we join the list of impoverished nations that can’t afford their products. They don’t sell many Audis to Zimbabwe or Venezuela either, but, no matter, there are as many rising nations as falling ones such as China, the Gulf and Eastern Europe soon.
    You have invented a rule book that none of the 193 separate countries out there recognise or play to. Because of this seductive Keynesian drivel we are talking ourselves out of the increasingly desperate need to rediscover our need to compete. Soon we won’t have anything to trade – beer, wine, cars, ships- nothing, so all that IOU stuff is completely irrelevant – we just move ever closer to a terrible end game.

  • @ Palehorse

    I don’t think we are talking about the same thing. I had hoped I had made it clear that no one believes a government’s budget deficit is infinite. I think it is impossible for a country to have a budget deficit larger than the GDP. Please post a link to a country which managed to have a government deficit larger than their GDP.

    I am not aware of anyone calling for our national debt to be above 260% of GDP. If you know of someone doing so please post a link. However some people are not bothered by the size of the national debt but this is not the same as saying it should be over 260% of GDP.

    It seems you are bothered by the size of the government’s deficit and the size of the national debt; have you a way to reduce both for the UK and continue to increase our GDP as much as running a government budget deficit does. Even Germany runs a government budget deficit sometimes for 2001 and 2007 (see charthttp://newsimg.bbc.co.uk/media/images/39399000/gif/_39399555_german_budget_gra203.gif) and at least until 2012 (see https://www.economicshelp.org/wp-content/uploads/2014/10/changes-budget-deficit-08-15-600×405.png).

    @ Peter Martin

    The link you posted didn’t work for me.

    I would be happy for the Bank of England to buy government debt straight from the government, but as Palley pointed out in the article linked to by Joe Bourke above there could be problems if the whole of the deficit was funded this way. I also accept that if the Bank of England is buying government debt the interest rate should be lower. However even if we accept the Bank of England acting in the market they do not take sufficient action to set the interest rate, only influence it, therefore the market does set the rates.

  • Peter Martin 9th Oct '17 - 5:33pm

    @ Michael BG,

    Yes sorry. Try this.


    £400 billion of bond purchases is a lot of “influencing”! I’ve always understood QE as being mainly about lowering interest rates rather than the other motivations that have been suggested. Now that they are as low as they are, any further QE will have little effect.


  • Peter Martin 9th Oct '17 - 5:43pm

    @ Michael BG,

    I don’t think its possible to have a rational discussion with Palehorse. If we say it is quite safe to expand the economy until either inflation starts to be an issue or until we have full employment, he’ll say (in fact he has said) that we can do that because we can’t have budget deficit which is infinite.

    If we were driving along the road we couldn’t suggest that it would be safe if he went a little faster. A little faster then translates into infinite speed in his mind.

  • Peter Martin re student debt (comment 7/10 @ 11:31 pm)

    You are right about the double entry aspect – one person’s liability is another’s asset; that’s elementary double entry. My anecdote about the senior Tory looked past that to the deeper economic reality that accounting rules easily obscure (and are often intended to obscure).

    When people attack Keynes they are attacking a myth manufactured over many years by rival party PR machines – a good or bad ghost according to political preference. In fact, Keynes was a very successful investor (proving he understood the real world) and subtle thinker who worked out the necessary but counter-intuitive response to a banking collapse.

    That gives the Tories a problem; they cannot be seen to make a Keynesian response or their supporters would explode in indignation after years of being told that anything ‘Keynesian’ is socialist and spawn of the devil.

    Yet the fact remains: the banking system is a key utility and when it goes bust it MUST somehow be rescued. One way is to prop up banks while deficit spending to keep activity levels (and hence earnings) in the economy high enabling people to services their mortgages. (Better ways exist but aren’t so banker-friendly!)

    So the Tories devised a cunning plan. They could square the circle by manoeuvring students to take on loans thereby effectively privatising a big chunk of deficit spending. The result is to peg back the public sector deficit and, as far as their base is concerned, Keynes was never involved. There’s even a fringe benefit for their plutocrat supporters: it creates a lucrative new asset class they can buy up cheaply. This is classic disaster capitalism.

    However, it will reduce students’ future net income making the economy smaller for years to come and so reducing government income and increasing spending. Also, I’ve heard estimates that around 70% of student debt will never be repaid because of the earnings floor. If the economy does badly that figure will soar so it’s a real stretch to call it ‘private’ debt.

    This is all about rearranging the deckchairs and (my guess) leaning on the accounting rule-setting bodies to be ‘flexible’ and ‘helpful’.

  • Keynes lived through tumultuous times including WW1, the great depression, the hyper-inflation of the Weimar republic in 1923, the abandonment of the gold standard in 1931 and WW2. In financing the war and abandoning gold at the outset, many of the belligerents suffered drastic inflations. Price levels doubled in the US and Britain, tripled in France and quadrupled in Italy.
    The UK is only now getting around to repaying some of the WW1 debt https://www.theguardian.com/business/2014/oct/31/uk-first-world-war-bonds-redeemed. Some of these consolidated gilts were originally used to finance the South Sea Bubble crisis of 1720, the Napoleonic and Crimean wars and the Irish potato famine.

    The practical or market limits on UK debt issuance can be measured by the ratings of credit rating agencies like Moody’s https://www.moodys.com/research/Moodys-downgrades-UKs-rating-to-Aa2-changes-outlook-to-stable–PR_372649 which give an indication of how secure Investors may consider the real returns after-inflation. The credit rating is used by sovereign wealth funds, pension funds and other investors to gauge the credit worthiness of debt thus having a significant impact on the country’s borrowing costs. Having been recently rated stable but downgraded to Aa2 from Aa1 this would suggest the UK debt to GDP ratio is approaching the limit where costs in terms of higher interest rates/bond yields may begin to outweigh the economic benefits of further borrowing.

    If the economic outlook for the UK improves then ratings (and hence borrowing room) may improve, but we do not appear to enjoy too much latitude for significant increases in low cost borrowing at present. It is not default that bond investors fear but erosion of their invested capital via inflation.

  • Peter Martin 9th Oct '17 - 6:42pm

    @ Joe B,

    The ratings of the credit agencies are meaningless drivel as far a countries like Japan, the USA and the UK are concerned. At one time they gave Japan a lower rating that Botswana.

    Haruhiko Kuroda the Japanese finance minister at the time did his best to explain why it was all nonsense. It was a nonsense for Botswana too. The UK can never default on any debt denominated in pounds. That’s not to say that there isn’t an inflation risk for anyone lending to the UK, but that’s nothing new. When the inflation rate has been much higher the agencies have still managed to find a way of giving a AAA rating.

  • “If we were driving along the road we couldn’t suggest that it would be safe if he went a little faster. A little faster then translates into infinite speed in his mind.”

    I ask, again and again, then when does this borrowing slow down again? and why ?

    “If the economic outlook for the UK improves ”

    Why should it improve?

    The world isn’t the same as it has been for the last few centuries. We lived essentially from our own resources and traded a bit of wool and tin.
    We have now expanded to the point where our population is completely unsupportable. The world is now fiercely competitive with new eager populations to take from us all of our revenue earning activities. They’ve already taken textiles, metals, manufacturing and are coming for the rest.

    The Keynesian cycle says borrow in the lean times and repay in time of plenty. What times of plenty will there be?

    I say if you can’t tell me when borrowing will stop then I reply then it must be infinite (the laws of physics being what they are).

    You reply it will be limited when the lenders refuse to lend anymore. That’s right and that’s where I have been leading.
    Now ponder what that will mean.
    What it will mean if the cycle doesn’t conveniently bounce up again? – and I foresee no mechanism for it.

    It means we will not be able to buy food, oil, medicines. What on earth else can it mean? There are scores of countries out there with people as intelligent as the self assured British who know all to well what that situation feels like

    So please don’t accuse me of irrationality. Work out for yourselves what must happen if the bounce back (for the British) doesn’t happen any more.

  • @ JoeB

    I couldn’t see in the article on Moody’s rating change anyone predicting what the increase in government debt interest will be. If it rises to above 4% it will be stupid for the government to buy “4% consols” which have no date for redemption.

    @ Palehorse

    I am not convinced that Keynes actually stated governments should run a budget surplus. It seems he believed that aggregate demand might not be able to be increased to provide full employment and so being the employer of last resort becomes the best option for achieving full employment. However I do accept that as the economy improves the need for the government to keep such a large deficit decreases. The UK had budget surpluses during the Labour government (1999-2001 https://www.ukpublicspending.co.uk/spending_chart_1900_2020UKb_XXc1li111tcn_G0t)

    As a Keynesian I believe the budget deficit can be reduced when there is full employment and the national debt can be reduced when economic growth is greater than the government budget deficit.

    I note you have not provided any links that I requested.

    If the UK government decided not to have a budget deficit this would not mean “we will not be able to buy food, oil, medicines”. If the world decided not to sell us their food, oil and medicines we would have to look for alternatives and bring in rationing. However I don’t know what circumstances would have to be for this to happen.

    It seems you are a doomsayer with no solutions for how to solve the problems you see.

  • Peter Martin 10th Oct '17 - 12:13am

    @ Palehorse,

    “I ask, again and again, then when does this borrowing slow down again? and why ?”

    OK let me give you the benefit of the doubt and I’ll explain.

    The borrowing will stop when lenders stop wanting to be lenders. When the Germans, the Dutch, the Danish, the Swiss, the Chinese, and others don’t want to buy any more gilts because they think they’ve already got enough and they have decided to stop being net exporters.

    So you might want to ask them. You probably won’t like it though if and when they all decide to do that. The pound will fall and those holidays in Spain will be more expensive.

    You can’t have it all ways. You have to choose two out of the following three:
    1) A high pound. 2) Low Debt (both external and internal) 3) A Healthy Economy.

  • Peter Martin 10th Oct '17 - 12:42am

    @ Michael BG,

    “the national debt can be reduced when economic growth is greater than the government budget deficit.”

    You need to specify National Debt relative to GDP for this to be possibly true. The rate of inflation matters too. So we could have a high rate of inflation which reduces the real value of everyone’s savings and so reduces the real level of National Debt. That’s not really a desirable solution.

    But let us assume we don’t have any inflation. The government runs deficit of say 3% of GDP. This means that we have to have growth of 4% for your statement to be true. The 3% of deficit will be money injected into the economy to produce some growth but will it produce 4% growth? I doubt it. Maybe we’ll just all save more. Maybe we’ll buy more imports with it and the exporting country won’t spend their money with us except maybe to buy some extra gilts.

    So its easier said than done! It may even be impossible to do what you suggest. The Govt’s deficit is in the hands of what others want to do. How much they want to spend. How much they want to save. How many imports they want to buy. . The only sensible approach is to try to run the economy at close to full capacity, but without inflation being out of control, and let things like the deficits and exchange rates take care of themselves.

    If the economy is bubbling along and the deficits are high, it will be because people will want to lend us money. There’s not really a big problem there.

  • “I note you have not provided any links that I requested.”
    And I won’t, because you can do your own research.

    “It seems you are a doomsayer with no solutions for how to solve the problems you see.”

    ” If the world decided not to sell us their food, oil and medicines we would have to look for alternatives and bring in rationing. ”

    ” You probably won’t like it though”

    Very true, gentlemen, I am a doomsayer and the last two quotes are the first indications yet that you start to see the final fruits of the Keynesian dream.
    It isn’t just me that won’t like it. None of us will.
    Contemplate what the political scene will look like then. What the streets will look like? How intense the anger will be? And where that anger will lead to?

    And for all that to happen all that is required is for the good old economic cycle to fail this time round and no bounce (for the British) to ride to the rescue.

    Don’t ask for links. Read the business and financial press, look for the true indicators. Bear in mind that the politicians don’t like to be unpopular so criticising the govt. is one thing exposing the actions that we will have to take will scare the voters. You can only get a true picture from your own studies.

    As to having no solutions, well I do, a whole paper in fact, but not to be revealed yet. It would be ridiculed as too extreme and radical. It needs to fall on more desperate ears than we have at the moment. We are in a ‘phoney war’ between the era when Britain was the richest countries in the world to being one of the poorest.

    Suffice it to say that the consequences and demands will not fall on the very poor (they have nothing to lose) or the very rich (they are insulated and can move themselves and their money out of harms way) but on the comfortable middle.

    As a hint, to restore our productivity is not a robots and automation issue, it is about the millions who add nothing useful but who manage to keep themselves looking busy.

  • Peter Martin 10th Oct '17 - 2:48pm

    Simon Wren – Lewis has said a few things in the past that I wouldn’t entirely agree with. But, this article on MMT is very fair and it looks like he himself may be moving in this direction.

    Austerity is about governments pretending the Consensus Assignment still works when it does not, because interest rates are at their lower bound. We are in an MMT world, where we should be using fiscal policy and not worrying about the deficit, but policymakers don’t understand that . I think most mainstream macroeconomists do understand this, but we are not often heard.


  • Peter Martin,

    credit ratings are an important factor for all governments – fiat currency issuers or not. This is the basis on which institutional and overseas investors determine their currency exposures or portfolio weightings. For domestic institutions, erosion on capital as a consequence of inflation is the key risk;for overseas investors exchange losses on declining sterling values is an added risk.
    Why then do Investors buy bonds with negative yields? That question is answered in this economist article https://www.economist.com/blogs/economist-explains/2016/02/economist-explains-6

    Some bondholders like central banks hold bonds as part of their foreign exchange reserves; insurance companies need to hold bonds as part of their reserves; pension funds, own bonds to match their liabilities; and banks, need government bonds to meet liquidity requirements and also to pledge as collateral when they borrow in the money markets. When the BofE buys bonds from these institutions, they need to replace them with newly issued bonds.This is how the BofE indirectly funds government deficits.

    There are bond buyers who think that it is possible to make money on gains from appreciating currency despite the negative yields. .There are also those who will accept a small loss on government bonds to the risk of much bigger loss on other more volatile investments.

    Since the 2008 financial crisis, fear has made government bonds appear a safe haven from turmoil in global markets, even when their return is negative. As global economic growth stabilises and global markets return to normality bond yields will begin to rise, as investors demand positive returns on their invested capital.

  • Peter Martin 10th Oct '17 - 3:52pm

    …. as investors demand positive returns on their invested capital.

    There’s really only one reason for the British Government to pay interest on bonds and that is to match what other countries are doing and keep the pound at a higher level. So any move to higher UK interest rates will have to be part of a wider global move to higher rates and there is little sign of that happening either in Europe or the USA.

    Am I right in thinking that you’ve posted links to Randall Wray? Or am I thinking of someone else? Anyway, here he is explaining why its nonsense for S&P to give Brazil a rating.

    “Moreover, Brazil’s federal government can never become insolvent on obligations denominated on its own currency”.


  • @ Peter Martin

    You are correct when you wrote, “You need to specify National Debt relative to GDP for this to be possibly true. The rate of inflation matters too. So we could have a high rate of inflation which reduces the real value of everyone’s savings and so reduces the real level of National Debt.”

    Indeed, let us put high levels of inflation to one side. When the economy is near to full unemployment the government needs to reduce its deficit because of inflationary pressure. Therefore the conditions which I was writing about are when the economy is growing more than the size of the deficit, which I think was the case between 2003 and 2008 (government budget deficit between 0.54 and 1.39% of GDP (https://www.ukpublicspending.co.uk/spending_chart_1980_2017UKp_17c1li111tcn_H0t_Current_Budget_Deficit_As_Percent_GDP) and economic growth between 2 and 3% (https://www.economicshelp.org/wp-content/uploads/2012/11/economic-growth-yearly-1949-20101.jpg).

    Therefore as a Keynesian who believes that the UK can achieve full employment again, I do expect the government deficit to be a lower share of GDP than the amount the economy grows in a year. If I was Prime Minister I would ensure that the important members of the Cabinet were all working towards full employment linked to higher minimum wage levels as the method to reduce the deficit.

    Was your comment of 2.48pm today in reply to one made by Simon Wren (which I can’t see)?

    @ Palehorse
    “And I won’t, because you can do your own research.”

    I think this is bad debating tactics and risks the other side concluding the reason you will not provide the links is because they don’t exist.

    I wrote, “However I don’t know what circumstances would have to be for this to happen.” Writing “And for all that to happen all that is required is for the good old economic cycle to fail this time round and no bounce (for the British) to ride to the rescue” and telling me to read the business and financial press does not inform me of what the correct circumstances are; it is a refusal to debate.

  • @ Joe Bourke and Peter Martin

    The article that Peter Martin linked to makes interesting reading. It might be safe to assume that the credit rating agencies are not a good judge of the true credit rating of a country or even its ranking, but if lots of people believe they are, they can influence how willing people and institutions are to buy that countries debt and so affect the interest rates set on the debt.

  • Peter Martin,

    Simon-Wren Lewis makes the important point – “You will hear from MMTers that taxes do not finance government spending, or that spending comes first, but you will hardly ever see the government’s budget constraint which makes all such semantics seem silly.”

    Felipe Rezende in speaking of Brazil then writes “…as long as policymakers believe that the federal government faces a budget constraint due to the inappropriate application of the household budget constraint to a sovereign government, there will be resistance to adopt an alternative policy.”

    Brazil has a history of volatile inflation and political instability. This is reflected in the credit ratings attached to its debt as the Fitch note explains https://www.forbes.com/sites/kenrapoza/2017/05/19/safe-for-now-brazil-credit-rating-holds-amidst-crisis/#54743d021abc

    Credit ratings matter because they guide investment decisions and the bid prices for bonds offered at auction. In the Moody’s rating of UK debt they report “Weaker public finances will imply a further delay in reversing the rising public debt ratio. This places the UK among the few highly-rated European sovereigns where the public debt ratio continues to rise. Moody’s expects the ratio to increase to close to 90% of GDP this year and to reach its peak at close to 93% of GDP only in 2019, two years later than the latest government plans. Moreover, while the UK government benefits from one of the longest average maturities of its debt stock among advanced economies, the cost of the debt is comparatively high with Moody’s preferred metric — interest payments as a share of government revenues — at 6.3% compared to a ratio of around 3.6% for most other Aa2-rated peers.”

  • Peter Martin 10th Oct '17 - 6:56pm

    @ Michael BG,

    You can create the conditions required to have growth and a low public deficit. Or at least you could from 2003 onwards. The Government created a housing boom so everyone jumped to get on the bandwagon by taking out loans. If we go back to the fundamental point that the Govt Deficit = Everyone Else’s Savings, we can see that the way to boost the economy without the deficit increasing is to persuade everyone else to borrow more and save less.

    Everyone else includes or overseas trading partners. Persuading then to save less by spending their pounds on UK exports rather than running a surplus and saving their money would work. Except it’s hard to persuade them.

    It’s easier to persuade homebuyers though. At least it was in the 00’s but less easy now.

    We’ve created a bubble in the housing market so it’s not a good time to buy IMO. That bubble has to deflate and when it does the option of running another credit boom won’t be an option to get Govts out of a hole. And that’s a good thing! Credit booms are not good instruments of economic policy.

    PS. A friend of mine sent me the Wren-Lewis link on FB. I thought it might be relevant to the discussion.

  • Peter Martin 10th Oct '17 - 7:09pm


    Moody’s, like all the ratings agencies, are full of you-know-what. Even the quote you supply shows their staunch neoliberalism. What are “weaker public finances”? This is household economic thinking. I’ve just heard it on TV. Hammond won’t have the tax revenue to finance his spending plans etc etc etc.

    “The economy doesn’t work like a household”. Go into your bedroom. Get out a sheet of paper and write that out 100 times! Just like you had to if you’d misbehaved at school! 🙂

    Govt should spend counter cyclically. When its revenues are high it should spend less to prevent the economy overheating. When its revenues are lower it should spend more to stimulate the economy.

  • Michael,
    I am sorry to be so terse (although I’ve no intention in providing information I know isn’t wanted). I would hate to be thought rude. Please forgive my frustration but I have not asked for links only for the opinions (not links to those of others) as to where the Keynesians hereabouts think the economic turnround (specifically for the British) will come from. And when.
    Because I can’t see it. I see no new industrial or commercial workfaces opening. No new agricultural wonder. Fracking fought every inch of the way and the financial sector stagnant or even bleeding away to rivals.
    i see our credit rating downgraded, our debt steadily rising, the deficit making it worse and a set of political dynamics to make it even worse yet.
    One of the worst signs I see (in the financial and business papers which I still recommend studying) is , I believe, a consequence of the damage Thatcher did to the City of London.
    And that is the loss of so many of our exciting start ups which I keep my eye on. They get to about £50 million cap and then they are snapped up by a foreign giant and disappear. We are not creating new giants, new industrial dynasties and sectors.
    And these are the reasons why I am so pessimistic.
    So I won’t provide links and I don’t want yours but I would appreciate your opinion as to where our next positive swing in the cycle comes from, because I don’t think there will be one.

  • @ Peter Martin

    I hadn’t realised you were quoting an economist – Simon Wren-Lewis (note no spaces in the surname). He wrote an interesting paper setting out austerity was wrong, there was little financial market pressure for “fiscal consolidation” and monetary policy could have “offset the demand impact of consolidation” if the fiscal consolidation had happened after 2013 once the economy had grown by about 4.5% more than happened.

    Simon Wren-Lewis in “A general theory of austerity” writes, “One reason often given for why markets might be unwilling to buy government debt in a recession is that large deficits mean there is more debt that needs to be bought. Yet this argument ignores a basic Keynesian insight. Typically recessions are caused by people saving more, and the last recession was no exception. In the US the savings rate for households rose from below 4% to over 6%, in the UK from around 6% to over 11%, and in the Eurozone from about 13% to around 14.5%. This increase in saving needs somewhere to go. So although the supply of new government debt might increase in an economic downturn, the number of people wanting to buy financial assets also increases” (https://www.bsg.ox.ac.uk/sites/www.bsg.ox.ac.uk/files/documents/BSG-WP-2016-014.pdf).

    @ Joe Bourke

    He also writes, “Canada and Japan were two notable major economies that did not switch to austerity in 2010. Neither appeared to suffer any adverse market reaction.”

    He doesn’t have a very good opinion of those in financial markets either, “Perhaps even more important is the interest they (economists from the financial sector) have in exaggerating the unpredictability of financial markets, so that they become like high priests to the god of an unpredictable financial market.”

  • @ Palehorse

    Thank you for posting again. I don’t ask for evidence that I am not interested in. I often click on links provided and comment on what is on the link. From Peter Martin’s link I found the Simon Wren-Lewis “A general theory of austerity” article. He writes that people should not rely on financial and business writers for the understanding of economics.

    I don’t believe in “magic new industries” as our saviour. We don’t need to control any particular sector or market, but we do need to have economic growth and successful businesses in the UK. I can understand your apprehension over foreign take-overs of successful new companies. It is part of globalisation. My concern is not so much with the ownership but with the ability of government to tax the profits made in the UK by foreign owned companies.

    Your pessimism makes me seem optimistic, not a natural position for me. 🙂

  • Peter Martin 11th Oct '17 - 8:27am

    @Michael MG,

    I’m not sure about Simon W-L’s argument. I think he’s saying that there can at times be an imbalance in the amount of debt that needs to be bought and the amount that is for sale. If all money was in electronic form then all savings would have to go through the banking system and the government could theoretically then always have enough buyers for its bonds.

    But it can’t know about piles of cash in safes or money in piggy banks etc. As interest rates are low maybe many prefer to keep their savings as cash. These are savings too and they do need recycling to keep the economy going. So Govt should just spend what it takes to do that, creating the money rather than borrowing it, and only back off when economic activity is back up to the level it needs to be.

    I’m not sure about saying things like “recessions are caused by people saving too much”. If people want to save their money then that’s fine. They don’t have to spend it if they don’t want to. But we need to create the conditions where Governments feel that they can step in and aren’t going to be pilloried by those who don’t understand how the system works and start to fret about leaving debts to our grandchildren and all the other nonsense we often here.

    This type of discussion isn’t about politics at all. It’s about how the economy actually works now under a Conservative government. It would, of course, be the same for any other government too. So it’s fair enough for anyone to want a larger or smaller govt. A more right wing or a more leftwards govt. But it isn’t fair enough to try to pull the wool over people’s eyes and say the economy works in the way it does not. That’s why its so frustrating at times to get those who try to impose their own ideological agenda on what should be a simple matter of our accounting system.

    Ronald Reagan is considered something of a hate figure on the left. But, economically, he did a good job on the US economy. He didn’t fret about deficits. He reduced taxes to create the demand needed to create jobs and grow the economy. That’s what we should expect from the political right instead of all this penny pinching and austerity economics.

  • George,
    ” I am genuinely concerned that this country may be about to go into a downward spiral of catastrophic government”

    So am I. I predict, as do many a Corbyn/McDonnell episode, probably during which the borrowing, already far too high, skyrockets on handouts and industrial interventions which are ill founded and all of which fail at massive expense.
    Then the markets lose faith and the worst of my predictions comes true. I fear most who it will be that the nation will turn to then. It can only be an extreme left or right wing backlash.
    Middle of the road Lib-Demmery won’t stand a chance.

    And that really leads to my objection to Keynesianism. It has been used (rightly or wrongly) to dull the senses of those who are capable of knowing better. I have no objection to deficits. I ran one for many years (a mortgage) but I had a plan to reduce it year on year. But a national plan is needed now and time is running out and as long as ” we can continue borrowing until full employment returns” that time is being squandered.

    But again, I know my pleas will fall on the deafest of ears. The biggest problem the British have is that the average citizen believes that bad things only happen to other countries and God will somehow preserve his chosen people. We will need an economic version of “Dunkirk” to shock us into reality and I’m not sure we will get through that without terrible consequences for a lot of innocent people.

    I accept Michael’s defence of globalisation but only if we are the ones on the winning end. We are not. We are definitely having globalisation done to us, not us doing it.
    There is much I would like to discuss but I can never get beyond “borrow until the cycle allows us to pay it back” and the most flimsy, superficial and flawed plan there is which is “invest in skills and infrastructure”.

  • Peter Martin 11th Oct '17 - 9:41am

    @ Palehorse, ( and maybe George too!)

    Your debt for a house isn’t the same as the Government’s debt. Everything has to sum to zero. The Govt has to hold the negative numbers so that everyone else can hold positive numbers.

    The world has national debts totalling some $65 trillion dollars – or the equivalent in different currencies. Who do we owe it to? Mars?

    All money is created by crediting and debiting accounts, and that money functions as a unit of account, medium of exchange, store of value, and record of debt. Every debt has a corresponding credit denominated in the unit of account of that jurisdiction, so that all debt as someone’s liability is someone else’s asset, which nets to zero. Since money is not only someone’s debt, a payable, but also someone else’s credit, a receivable, it is just as true to say that the world owns over $65 trillion in financial assets as it is to say that the world owes $65 trillion in financial liabilities.

    If there were no credit-debt relationships, that is, if all financial liabilities were extinguished, then there would be no money, and exchange of goods and services would be reduced to barter.

    Or to put it another way: stop fretting about things you clearly don’t understand!

  • “Or to put it another way: stop fretting about things you clearly don’t understand!”

    That gratuitous insult is the reason it is not worth debating with Keynesians.

    I am not concerned with the world’s debt, to Mars or anyone else.
    But ours.

  • Nonconformistradical 11th Oct '17 - 10:21am

    Quoting from George Kendall

    “However, I am genuinely concerned that this country may be about to go into a downward spiral of catastrophic government, from a government that destroys our trade access to our largest market – and thereby destroys much of our industry – to a Corbyn-led government that, as Vince puts it, appears to believe that “budgeting is just a bourgeois hobby”. If that happens, and the markets decide that lending to us at a low rate of interest is too risky, the austerity of 2010-2015 could seem like a vicar’s tea party.”

    Perhaps people should be reminded of the 1967 devaluation and Harold Wilson claiming the pound in our pockets had not been devalued.


    And see also what was going on in 1976:

  • @ Nonconformist Radical I well remember Harold Wilson’s broadcast – though it’s interesting to compare the 14% fall then – with tan even bigger fall under this self styled ‘fiscally responsible’ Tory government.

    Teresa’s pound in her handbag has gone down much more than Uncle Harold’s did in the sixties. To an extent Bouncing Boris and the Govey person must be responsible for that…. the Monarch and BAE job losses are just the start.

  • Peter Martin,

    “Govt should spend counter cyclically. When its revenues are high it should spend less to prevent the economy overheating. When its revenues are lower it should spend more to stimulate the economy.”

    This is precisely what has been happening in the UK since the financial crisis. Deficit spending of between 3% to 11% over the course of the last ten years. Read Vince Cable’s 2014 speech to the Royal Economic Society to improve your understanding. of the practical choices governments face in allocating resources and how these choices can or should be made https://www.libdemvoice.org/a-longer-read-vince-cable-on-recovery-and-beyond-37988.html

    The governments management of the economy is about creating favourable conditions for the exchange of goods and services in the economy. In the long-term the principal tools are structural – Fiscal and Monetary policy serves only as tools for fine-tuning of temporary imbalances in the economic cycle and do not address the economic fundamentals of improving trends in standards of living.

  • Let me try and unpick the several overlapping themes in this thread.

    Firstly, there is understanding and responding to a banking crisis. That’s what my own earlier comments were about. Get it wrong (as we have) and we end up with a millstone round our neck.

    Secondly, there is the thorny issue of government debt. Tories think it’s like household debt which is a serious category error – households can’t issue currency, governments can. That’s a big part of the reason for the wrong response to the banking crisis. That just happens to lead to policies that important Tory factions like – see my comment about student debt. It also ‘helpfully’ obscures the political decision about who should bear the huge losses arising from the banks’ failure.

    MMT is a great analysis of how money and credit work but is policy neutral just as knowing that the planets orbit the Sun is important if you’re sending a probe to Mars but doesn’t tell you how to do it. However, to some left-wingers it sounds like a perfect justification to spend like a drunken sailor.

    Thirdly, there is the question of economic strategy – how we will earn our living in the future. Palehorse is right about this – it is a monster problem that the political class (all parties) has no idea about. Since Thatcher the Tories think they have cracked it – leave it to deregulated markets – as they plan for post-Brexit Britain.

    What Thatcherism actually started was an epic consumer lending spree by the banks: house prices soared, luxury car sales boomed and GDP blossomed as private debt went from around 60% to nearly 200% of GDP. NB: this was due to bad neo-liberal economics, not ‘Keynesian’ spendthrifts.


    Thatcherism also started a great de-industrialisation seen in collapsing productivity which is now the lowest it’s been since 1893 (itself a low after the ‘Long Recession’) and below the levels when Dickens was writing Oliver Twist in the late 1830s.


    We’re now at the Wiley Coyote moment when he’s run off the cliff but not yet fallen – sustained only by limited remaining debt capacity. We need a new plan and fast.

  • Gordon,
    I agree with much of what you say but I have to challenge this bit

    ” Tories think it’s like household debt which is a serious category error – households can’t issue currency, governments can.”

    I am not a Tory (if I were my father would rise from his grave and haunt me for ever), but it is true. Many don’t want it to be true because it means a country (like a household or a business can go bust). But there are scores of countries out there which can not pay their teachers and civil servants, can not buy medicines for their hospitals, fix the pot holed roads etc etc. Why don’t they just issue currency then? Shimples! Their problems solved and their people can move out of the favellas into nice three bed detached on a new estate.

    But most of the rest is sound. I blame Thatcher for although I lived through an era when TU policy was destroying us and she was right to check it, she should have then extended a conciliatory hand and rebuilt the nation in some sense of partnership. Churchill would have done. He spoke of using every tool to smash the Germans down but then after victory, picking them up, dusting them off and making them friends again. Thatcher was vindictive in victory – and the consequences remain.

    I also believe her creation of a “Loads-a-money” culture in the city has given us the opposite of institutions supportive of long term investments. I hark back to my previous words. Our little start ups don’t stand a chance. They never become Intels or Apples. The “red braces” gang (my term for the London corporate lawyers, financiers and all the rest) descend on them. These are ‘deal makers’ now not investors for the long term. It’s just make a quick deal and move on.

    That’s why I oppose Keynesians. They see the nation as an economic and accounting system problem to be fixed by financial mechanisms. No it’s not and the Chief Accountant shouldn’t be made the CEO. I agree with you that we need a new big plan and fast. I also think that plan is actually radical and extreme but right in the political centre!

  • Another good summary, Gordon.

    Vince Cable in the 2014 speech referenced above highlighted four major areas of policy action required for a balanced and sustainable economic recovery: boosting the disposable income of low and middle earners; stimulating business investment (with the help of public investment); taking action, including through the industrial strategy, to tackle bottlenecks in skills, business finance, exports and UK supply chains; and building lots of new homes.

    Implementing such policies is going to be all the harder in the face of Brexit, but is all the more necessary as a result. I think we need an immediate and determined focus on these issues with policies such as:

    1. Aligning NI thresholds with personal allowance thresholds and developing an integrated system of tax and welfare on the basis of a negative income tax.
    2. Root and branch reform of the housing market through the use of Land Value Tax, relaxation of planning restraints and public funding of local authority housing developments that is not restrained by the PSBR.
    3. Banking and credit reform particularly around mortgage lending to release capital for productive investment.

  • ” stimulating business investment (with the help of public investment); taking action, including through the industrial strategy, to tackle bottlenecks in skills, business finance, exports and UK supply chains; ”

    This is my particular interest. My problem is that I have seen exactly this tried umpteen times. Hands up those who remember the promises when the Manpower Services Commission was announced? anyone remember the MSC at all?

    Since then – zillions of rebirths of the same thing. So what’s new?

    I’m not being mischievous. This isn’t easy. The govt typically appoints some famous stiff to lead it. They go round in circles for a few years and then relaunch exactly the same thing with a new title (and the latest ‘celebrity name’ to lead it).
    There is much more debate and challenge needed to lead to Gordon’s plan which has to both big and above all new.

  • Palehorse,

    there is much more detail in Vince Cable’s 2014 speech. With respect to training and innovation he writes:

    “There is one crucial respect in which public investment must be supported if growth is to be sustained. Training and innovation are major contributions to long-term economic growth as shown in a recent major study by LSE economists (they estimate that half of growth can be explained in this way). This government has created a strong architecture for training and innovation: the first through apprenticeships and HE reform; the latter through a big increase in investments in the Technology Strategy Board, including the Catapult system and through protecting science spending. The architecture only creates strong foundations, though, with a commitment of public funding alongside private. The current system of protecting large areas of public spending for political reasons and concentrating cuts on around 20% of the total seriously undermines a strategic commitment to economically productive spending.”

    To be a high value, high skills economy you need to develop and maintain a strong base of trained scientists, engineers, managers and technicians with practical skills in automation and advanced manufacturing. Expansion of degree apprenticeships and adult learning accounts will, I expect, be part of the policy mix.

  • Joe,
    Again, it pains me to criticise what is, I know, well intentioned, but this is built on the same flawed premise as all previous attempts and all of which covered exactly the same ground over and over again.
    Frankly, if it were that easy the nation would have become rich long ago.
    The flaw is that this is all supply side. There is no focus on demand. I used to be an MD and we trained extra apprentices, more than we needed. We called them Community Apprentices but we had to be clear. We had no vacancies for them.
    I knew lots of other MDs and I can only say that no serious company is short of applications for apprenticeships. There are always far more (by a huge margin) than are ever accepted. The govt already makes a contribution but if Vince wants to pay more what can that do but just increase profits (a bit)?
    I have said before, you can train a thousand youngsters in vehicle mechanics and put them in a big room. They don’t transform into BMW. You just have a room full of people wondering what to do.
    It’s the demand that’s needed – not supply of skills . That’s the easy part. We need to work on ways to create an eager, hungry for success, entrepreneurial atmosphere not more courses on random subjects.
    I am sorry to sound like this but we have to move the debate from this sterile supply answer which just has to disappoint like all its predecessors.

  • Palehorse – I’m unclear about your objection to the household/government category error. They evidently *are* different categories and that *does* make a difference. Greece (like households, a currency user) was wrecked by the financial crisis; the UK (a currency sovereign) started off in roughly an equally bad position but was merely damaged. The Greek economy was asset stripped to save French and German banks while, as a currency sovereign, the UK had the freedom, the ‘sea room’, to respond to the crisis reefs.

    But… that does *not* mean there is limitless sea room and that we can ignore the reefs.

    Nor does it mean that we can simply print our way to prosperity. Sound currency is a necessary but not sufficient condition for long-run prosperity. Maintaining it requires sound institutions (financial and other) run with competence and integrity. These have all been badly eroded over the last 40 years in the UK and their much reduced quality is now a big part of the problem.

    The idea that a currency sovereign can print its way out of trouble cost-free is a lot like belief in a perpetual motion machine. Believing in it only means you haven’t spotted the flaw – there has to be a price or an energy input as the case may be. In the case of money printing beyond that required for economic growth, I think the answer depends on where the newly-printed money is directed. (These are tentative conclusions and I reserve the right to change them!)

    In the UK newly printed money has gone to the banking sector so it’s overwhelmingly stayed in the FIRE sector, especially property and shares. These are huge markets so the impact has been well diluted making the price impact large but not hyper-inflationary as some warned it would be. Of course, it’s has been damaging in other ways – housing costs are now wildly unsustainable and are sucking up ever-more welfare budget. What goes around, comes around.

    OTOH if, post-Brexit, the government decides to pay for imports by money-printing then I expect that would cause hyper-inflation very quickly. That’s what triggered the hyper-inflation in Germany (it was war reparations rather than imports in that case).

  • @ Peter Martin

    I am not aware of the things you say Simon W-L writes as I had not heard of him until yesterday.

    It is Keynesian to suggest that an increase in the amount saved will cause a downturn just like a tax increase (it is a “leakage” C + S + T + M = C + I + G + X).

    @ Palehorse

    Keynes was considered the saviour of capitalism, without him and this policies it was suggested that Marxist theory would have come to fulfilment and capitalism would have been overthrown everywhere.

    England, then Great Britain and then the UK has had a National Debt since 1694 on which we have not defaulted unlike before this (e.g. 1676). So long as we keep our central bank there is no reason to think this will change.

    Simon Wren-Lewis in “A general theory of austerity” writes, “Although politicians on the right repeatedly use household analogies when discussing government debt, anyone who has completed just one year of undergraduate economics knows that such analogies are false”.

    @ Joe Bourke

    The Vince Cable speech you link to clearly points out that from 2010 the coalition government was cutting the deficit. If it had not made the cuts the economy would have been stronger (between 2 and 4.5%) and once the economy was growing it would have been possible to reduce the deficit gradually over time. It was a failure of politicians to run the economy for the benefit of the nation.

    I agree with you about aligning NI thresholds with Income Tax Personal Allowances but want to see a Citizens Income not negative income tax. I also agree about local authorities not being constrained by the PSBR to build new council houses and the introduction of LVT on non-residential land to encourage development and house building. There needs to be something done to encourage banks to lend to business rather than for purchasing property, perhaps regulation is the answer. I also call for employers to pay more towards training costs to sort out skill issues as well as supporting the National Living Wage and increasing it beyond £9 an hour. There is very little a liberal government can do to assist exporters or build UK supply chains.

  • Palehorse,

    If you read the 2014 speech you will see a range of analysis discussing policies needed to generate consumer demand, public and private investment and structural changes.

    One of the major short-term challenges we face is the need to more than double new housing starts and the infrastructure that goes with it. .That requires finance and labour with the requisite construction skills.

    The UK is a wealthy economy by any comparative measure. However, domestic demand can only be sustainably increased with productivilty improvements/population growth. Exports have not grown significantly despite a significant trade weighted devaluation of sterling since the financial crisis.

    Vince Cable speaks of the need for focus on productivity and investment which is what drives long-term trade competitiveness. “British tradable activities may have become less price sensitive, both for good reasons (a move into upmarket, luxury goods and specialised, niche services) and bad (the hollowing out of domestic supply chains in the long period of de-industrialisation and, subsequently, during the financial crisis). And, a related point, there are some deep-rooted supply issues, notably the availability of credit and skills, and the task of rebuilding UK supply chains which the industrial strategy is designed to address.

    Brazil has a population of 200m, vast natural resources and is mired in recession with 12m unemployed after a 15 year commodities boom that brought in great wealth to the country. .It is a complex story, but had they followed the example of Norway with its Oil or Chile with its Copper reserves and kept back a portion of the windfall for more straightened times, they may not have found themselves emulating Venezuela today with cities like Rio unable to pay teachers, nurses, police offices and pensions
    despite the country being a sovereign currency issuer http://www.bbc.co.uk/programmes/b08v07nb

  • The two graphs I linked earlier (comment 11/10 @ 1:16 pm) each make more sense in context of the other (and I only found the productivity one yesterday). Together they are the smoking gun on neo-liberalism and, indirectly, point to a way forward.

    But … I think we should be wary of jumping straight to specific proposals to do this or that. Those two graphs say to me that neo-liberalism is not just a bit off-piste but directionally wrong and that implies we need a paradigm change. That’s difficult for an individual to achieve; very, very difficult for an organisation (or a political party).

    It was only when Luther first questioned, then rejected the spiritual authority of the Pope, that we got the reformation. The 95 Theses he allegedly nailed to the door of Wittenberg church fell on fertile ground across much of Europe and so spread virally, overturning the old order.

    So, the first step is to get our thinking straight or we will end up merely recycling old nostrums. We must understand exactly what is wrong with the established world-view and work out what it should look like as Luther did.

    If we can do that then most of the needed policies will become obvious; my sense is they they will find a ready market for fresh thinking.

  • Gordon,

    there was an interesting documentary last night on the Russian revolution. When Lenin was speaking to the St, Petersburg soviet he didn’t speak of Marxist economics or dialetical materialism – he spoke of ending the Great War and bringing the soldiers home, bread and jobs for the workers and land for the peasants. Simple ideas that were easy to understand

    The paradigm change in thinking we need is in the role that debt and land plays in the distribution of income and wealth in the economy.

    The UK comprises 60 million acres of land (42 million acres of “agricultural” land, 12 million acres of what is called natural waste (mountains, bog, moor and so on) and six million acres of the urban plot (houses, shops, businesses).

    Assume that every household becomes entitled to the average rental value of an acre of land (1/2 acre for a single person household) as a natural birthright on attaining the age of majority. That entitlement is used to defray taxes on the rental value of unimproved land that is occupied by households and businesses.

    What impact would that have on personal debt, mortgage interest and rent payments and the distribution of income and wealth in the economy?

  • Peter Martin 11th Oct '17 - 7:42pm

    @ Michael BG,

    Sure, if people save more and the Government doesn’t spend more, or tax less, to compensate then there will be a recession. But is the recession caused by people saving more or the Govt not responding to their desire to save more?

    @ George Kendall,

    I think you’ve often claimed to not understand what the term neoliberal means even you know its explained in its own Wiki entry and is a valid word in the Oxford English dictionary.

    I’ve given you definitions before. Let me try another way. A neoliberal is someone who :

    1) Says the economics of a currency issuing government can be compared to a household.
    2) Says that Govt debt today will have to be repaid by our Grandchildren.
    3) Start talking about Zimbabwe and the Weimar Republic as soon as anyone argues for an increase in the Government’s deficit spending
    4) Thinks that the Govt actively goes out to seek a loan to cover its deficit spending.
    5) Thinks that the ratings of the credit agencies make the slightest difference to the Govt’s ability to sell bonds.
    6) Thinks that their Premium bonds may never be redeemed because the Govt will run out of money.
    7) Claims that its possible to “cost” a party’s promises in the manifesto without do a full scale simulation of how any extra spending will affect taxation receipts.
    8) Thinks/claims that cutting Govt spending and/or raising taxes will close the Govt’s budget deficit in any easily predictable way.

    I could go on but I’m sure you get the idea.

  • Laurence Cox 11th Oct '17 - 7:53pm

    When even the IMF are saying that higher taxes on the rich will reduce inequality without adversely affecting growth,


    can we stop arguing about whether what we are proposing is fiscally credible or not and just spend money on what is needed, recovering it through a more progressive tax system.

  • Peter Martin 11th Oct '17 - 8:54pm

    I think MMT’s credibility has suffered badly from being advocated by people who say deficits don’t matter, so it’s fine to, as you put it, spend like a drunken sailor.

    I’m touched that you have a concern for “MMT’s credibility”. Where have you read anyone say “deficits don’t matter” (except perhaps when Dick Cheney said it?) or that it’s fine to “spend like a drunken sailor” ?

  • Michael BG,

    Vince Cable specifically addressed the level of fiscal consolidation conducted during the coalition and the reasons behind it.

    “…the Government (contrary to the popular political narrative) has also used counter-cyclical stabilisers to offset the downturn in 2011 and 2012. Some of our critics accuse us of ignoring the lessons of Keynes – of having a naïve and simplistic aversion to the use of public debt to support the economy. They could not be more wrong.

    Consider this. In the first Coalition Budget, we anticipated borrowing £37bn in 2014/15; down from the £150bn we were borrowing in 2010. In the next two years, we were hit by a slowdown, such that the taxes that the OBR predicted for 2015 fell by £60bn. The government’s reaction was to increase expected borrowing for 2014/15. In the latest Autumn Statement, we now expect it to be £84bn, or £47bn more than before.

    This is not the policy of a government fundamentally allergic to borrowing. Keynes would have said: let borrowing take the strain when a weak economy causes your finances to deteriorate. That is what we have done.

    There is however an emerging debate over the scale of spending cuts in the next Parliamentary term. Undoubtedly some on the Conservative side of the Coalition see fiscal consolidation as a cover for an ideologically driven, ‘small state’ agenda. Indeed, it is one thing to respond to a record deficit after a long period of rising public spending, as we have since 2010. It is quite another to continue cutting hard from a position where the debt burden is falling and when spending has been under pressure for half a decade.”

  • Peter Martin,

    “Sure, if people save more and the Government doesn’t spend more, or tax less, to compensate then there will be a recession. But is the recession caused by people saving more or the Govt not responding to their desire to save more?”

    This is overly simplistic. An economy’s output of goods and services is the sum of four components: consumption, investment, government purchases, and net exports. Aggregate demand—measured as the sum of spending by households, businesses, and the government – can be sustained by increased spending in any of these sectors.

    Declines in consumer spending may be offset by increased business investment in export facing industries or import substitution. Domestic consumer spending that can only be sustained by ever-increasing levels of private debt accumulation will inevitably plateau or decline as the limit of credit expansion is reached until a sustainable level of domestic demand is reached again.

  • Peter Martin 11th Oct '17 - 11:15pm


    We can divide up the economy into Govt (G) and everyone else (EE) . EE includes our overseas training partners. G has no direct control over what EE saves or spends.

    Therefore if EE desires to save more, and therefore spend less, G has either to spend more to keep the economy fully operational or it can try to induce EE to spend more or save less. This can be done by tax cuts, interest rate cuts, or by exchange rate adjustments. G can deliberately create more inflation to induce EE to swap their money for goods. Or G can just let the economy slip into recession and try to blame someone else!

    This isn’t an oversimplification.

  • @ George Kendall

    I could not use the term “classical liberal” for “neoliberal” as I don’t see them as equivalent. Most people misunderstand “classical liberal”. Neoliberal is a belief in the vital importance of balancing a government’s budget over stimulating the economy, a belief that free markets work and publically owned industries can’t succeed. And a desire to remove regulations to free up markets. I hope you can when someone uses the term “neoliberal” read “classical liberal” if it helps you debate with people.

    @ Peter Martin

    If the economy is at equilibrium and people in the economy decide to save more this will depress the economy. It would take the government some time to notice that it needed to increase its spending to compensate for the increase in savings and the reduction in spending. I think it is in this sense that someone could state that if more people save it will cause a depression, if nothing else changed.

    @ Joe Bourke

    The parts of Vince’s speech that you quote are the same I read along with other narratives which state that the coalition government cut spending and raised taxes to try to reduce the deficit in the first two years of the Coalition government. The affects have been calculated at a reduction of between 2 and 4.5% of UK economic growth. It nearly brought us to a double dip recession. However I do agree that the Coalition government changed its economic policy, went to plan B, but neither Osborne nor Danny Alexander publically accepted that the policy had changed.

  • Peter Martin 11th Oct '17 - 11:37pm

    @ Joe B

    “….In the next two years, we were hit by a slowdown, such that the taxes that the OBR predicted for 2015 fell by £60bn…..This is not the policy of a government fundamentally allergic to borrowing. ”

    This is just the sectoral balances at work. If the Government applies deflationary measures , like increasing VAT to 20% then it is hardly surprising that the economy will slow down. So the deficit will very likely not decrease at all, as back of envelope calculations might have indicated, because those back of envelope calculations didn’t take into the account the slow down of the economy.

    So you (the coalition govt) weren’t “hit by a slowdown”. It wasn’t like this was a storm that brewed up in the mid-Atlantic! It was a creation of the Coalition’s own economic squeeze. And then supposedly highly educated politicians wonder why the economy doesn’t behave as their neoliberal textbooks would lead them to expect that it should behave.

  • Peter Martin,

    GDP growth has been positive since 2010 and unemployment has steadily decreased throughout this period, suggesting that the fiscal policy stance was about right for this period. Much of the economic growth pre and post crisis has been fuelled by the expansion of household debt and spending in the economy has been maintained by an increase in the national debt as a % of GDP from circa 40% pre-crisis to 90% today.

    There was a period of deleveraging for a couple of years in the aftermath of the crisis but household borrowing has steadily increased and returned to pre-crisis levels.

    The non-government sector is composed of groups that respond to different economic incentives – Households to disposable income/borrowing costs, business to projected demand, imports/exports to exchange rates. All of these incentives can be influenced by government monetary and fiscal policy and not solely cyclical deficit spending. There is more than one lever available to influence the direction of the economy in the short-term.

    Much of the fiscal policy adjustment is undertaken by automatic stabilisers – as growth in consumer spending slows the tax take is reduced and benefit payments increase automatically increasing deficit spending.

    These points are detailed in Vince Cable’s 2014 speech. This is why his economic commentary is taken seriously by professional economists, business leaders, academics and political pundits alike.

  • Peter Martin 12th Oct '17 - 8:53am


    “GDP growth has been positive since 2010 and unemployment has steadily decreased throughout this period, suggesting that the fiscal policy stance was about right for this period.”

    Firstly we really need to look at GDP per capita rather than raw GDP. The economy has been stagnating for the best part of a decade now. This is obvious to non-economists in that what should be relatively well paid jobs and professions don’t pay enough for young people to get on the housing ladder and may even not pay enough for them to avoid having to use food banks.


    In any case, even if what you said about GDP growth had been true, it still wouldn’t have meant that fiscal policy was correct. Governments should rely on fiscal policy but it’s been a long time since they have done that. Instead they mainly rely on monetary policy which means that ….

    “Much of the economic growth pre and post crisis has been fuelled by the expansion of household debt….. “

    as you correctly say.

    But then you go wrong again with:

    and spending in the economy has been maintained by an increase in the national debt as a % of GDP from circa 40% pre-crisis to 90% today

    It’s only partly that. Most of the spending has come from an expansion in household debt as you previously said. If I borrow money to buy a car, that doesn’t add to the National Debt. It’s my debt.

    We tend to be fixated on the level of government debt but ignore the adverse effects of private debt in the economy even when the levels of that debt are a factor of two or three higher.


  • Peter Martin 12th Oct '17 - 9:09am

    @ Joe B

    …….. his {Vince Cable’s – PM} economic commentary is taken seriously by professional economists, business leaders, academics and political pundits alike.

    If it is it shouldn’t be !

    Anyone who can keep a straight face while using the phrase “Magic Money Tree”, as I saw VC do on the TV just recently, either doesn’t understand how the monetary system works of they are deliberately lying to the public.

    Either way they don’t deserve to be taken seriously.

  • @ Joe Bourke
    “GDP growth has been positive since 2010 and unemployment has steadily decreased throughout this period”

    I remember it being reported in the News that we had a double dip recession (caused by the government). It was only once the figures had been revised was it narrowly avoided. We had two separate months of negative economic growth in 2012 (https://ichef-1.bbci.co.uk/news/624/cpsprodpb/F3F4/production/_95825426_uk_gdp_28_apr_624.png).

    Unemployment was above the figure at the general election until May 2013 (https://www.economicshelp.org/blog/8/unemployment/the-true-level-of-unemployment-in-uk/).

    “spending in the economy has been maintained by an increase in the national debt as a % of GDP from circa 40% pre-crisis to 90% today.”

    Spending in the economy by the government has been reduced. The deficit as a percentage of GDP is a better measure of how much a government is committed to spending to maintain the economy. It was reduced from £136.9 billion in 2010/11 (£115.5bn in 2011/12) to £48.6 billion in 2015/16 (https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/july).

    As Peter Martin states it has been QE that has been tried to maintain the economy, which as you state increased house prices massively.

    I would have been happier if the Coalition government had not increased VAT and made huge cuts to expenditure to reduce the deficit but had left it to the “automatic stabilisers”.

  • Peter Martin,

    “either doesn’t understand how the monetary system works of they are deliberately lying to the public.” I think this is where you do yourself and some of the arguments you put forward a dis-service.

    Vince Cable quite clearly understands exactly how the monetary system works. He couples his academic training with real world experience of having worked as an economic advisor in Kenya, an economist with a muti-national oil company and his recent tenure as a government minister. He often warns of the danger of accumulating unsustainable levels of private debt. When speaking of public sector deficits he quite clearly distinguishes structural deficits that need to be tackled from self-correcting cyclical deficits.

    Palley’s critique of MMT is valid. ” . claims about the ease of attaining non-inflationary full employment via money financed budget deficits ignore the challenges posed by Phillips curve analysis, open economy considerations, and financial stability concerns.”

    Increasing the money supply via deficit spending can and does have inflationary effects once labour shortages begin to appear. Central banks typically use a 5% unemployment rate as a benchmark for anticipating inflationary expectations.

    What actually happens depends on who gets the extra money and what they do with it. If those who get the money buy land, property values will go up. If they invest in stocks, this will create a bubble in the stock market. If they put it in their offshore bank accounts, this will lead to depreciation of the exchange rate. However, if the money is directed towards those who will spend it into the economy then aggregate demand can be maintained. This is why I believe the Employer of Last resort or job guarantee program (notwithstanding the potential political obstacles) is the right response once unemployment dips below the 5% level.

    In the UK, we appear to have had little choice but to effectively print money (via quantitative easing) to indirectly finance government deficits since the financial crisis. This money has been chanelled through the bond markets. We have seen the inflationary effects in asset prices (property and financial assets) and the resulting inequality this has generated.

    Economic management matters -it affects the lives and well-being of people all over the world. Fiscal credibility in the management of the public finances is an essential and enduring feature of a successful economy.

  • Peter Martin 12th Oct '17 - 2:48pm

    As Peter Martin states it has been QE that has been tried to maintain the economy, which as you state increased house prices massively.

    Hang on a minute! I didn’t say that.

    We had a big increase in house prices up until 2008. There wasn’t any QE until 2009/2010. So the two aren’t necessarily related.

    QE was just a quick way of reducing longer term interest rates on gilts. Now that they are very low further QE won’t have any further economic effect. For the same reason QE in the EZ won’t do any good. Interest rates are already low.

    QE is just an asset swap as Fama correctly says here.


  • Peter Martin 12th Oct '17 - 2:49pm

    As Peter Martin states it has been QE that has been tried to maintain the economy, which as you state increased house prices massively.

    Hang on a minute! I didn’t say that.

    We had a big increase in house prices up until 2008. There wasn’t any QE until 2009/2010. So the two aren’t necessarily related.

    QE was just a quick way of reducing longer term interest rates on gilts. Now that they are very low further QE won’t have any further economic effect. For the same reason QE in the EZ won’t do any good. Interest rates are already low.

    QE is just an asset swap as Fama correctly says here.


  • @ Joe Bourke
    “Central banks typically use a 5% unemployment rate as a benchmark for anticipating inflationary expectations.”

    This is a problem, which means monetary policy can never achieve full employment and politicians should be honest about it and not blame people for being unemployed, not give them enough to live on and make them jump through hoops which don’t result in employment. We as a political party need to recognise it and then have alternative policies for the employment of these 5% of the working age population such as employer of last resort as you suggest and free vocational training for those who want to work.

    I think it would have been better for the economy if instead of cutting welfare benefits these cuts were financed by the Bank of England, as the people receiving these benefits are much more likely to spend the money rather than invest it or buy a home with it.

    @ Peter Martin
    As Peter Martin states it has been QE that has been tried to maintain the economy, which as you state increased house prices massively.

    Hang on a minute! I didn’t say that.”

    Earlier today (8.53am) you wrote,

    “Governments should rely on fiscal policy but it’s been a long time since they have done that. Instead they mainly rely on monetary policy which means that ….

    “Much of the economic growth pre and post crisis has been fuelled by the expansion of household debt….. “

    Sorry, I was mistaken, you didn’t use the term QE only monetary policy.

  • Peter Martin 12th Oct '17 - 7:58pm

    @ JoeB,

    Palley doesn’t understand MMT either. Either that or he’s deliberately misrepresenting what they say.

    “claims about the ease of attaining non-inflationary full employment via money financed budget deficits ignore….”

    MMT proponents make no such claims. I think everyone agrees that an inflationary problem will arise before we do get to full employment whatever the stimulus method used. This always used to be a problem in the UK. London and the SE would overheat just when the regions were warming up. So firstly we need to think about where the stimulus is applied besides the actual size of it. We also need to think about the extent of underemployment as we as actual unemployment in our considerations.

    MMT proposes the idea of a Job Guarantee, work for public purpose, rather than paying out social benefits. The Job Guarantee also sets the floor for wages and conditions which the private sector is obliged to match. So those on the JG become the pool of labour rather the the unemployed. This is where I’m cool on MMT! It’s fine if a benevolent Govt is in charge. We’ve also to consider if JG workers can be allowed to join unions and demand higher wages. This is, IMO, where it all gets a bit tricky. But in priniciple a JG could work. There’s nothing wrong with the economics. It’s the politics that go with it that’s my concern.

  • Peter Martin 12th Oct '17 - 8:15pm

    @ JoeB,

    “When speaking of public sector deficits he quite clearly distinguishes structural deficits that need to be tackled from self-correcting cyclical deficits.”

    Except what he says is all nonsense because he always ignores the trade deficit. A typical pattern of neoliberal thought is that the government’s deficit can be reduced (and whether you want to call that structural or cyclical is neither here nor there) by cutting spending and/or raising taxation. Vince Cable was in a Government that tried it with George Osborne in charge at the treasury. It didn’t work. It just sent the economy in recession. I could have told him it wouldn’t.

    The UK is a net importer and if there are pounds leaving the economy to pay the import bill then they have to be replenished from somewhere. Deficit spending is the only option. If people in the UK want to save their money, which takes it out of circulation, then again that has to be replenished by deficit spending.

    George Osborne partially got it right. He discouraged savers and encouraged borrowers by keeping interest rates low but he did nothing about the high pound. I didn’t hear anyone, certainly not Vince Cable, saying that the pound had to come down so we could discourage imports and encourage exports and so have a balanced external account. Instead all we got was a lot of guff about having to live within our means and structural deficits etc.

    It’s all so much BS !

  • Peter Martin,

    Net saving, as defined by the OECD for national accounts purposes is “net disposable income less final consumption expenditure.” It cannot be defined or constructed as meaning people collectively save (S) more than people collectively invest(I).

    (S-I) is not “net saving” in any traditional economic perspective. (S-I) is saving net of investment. It’s extremely misleading to define private sector “net saving” as (S-I) because Saving cannot identically equal (S-I) unless I is equal to zero. Given that investment is the most important piece of Keynesian economics and the economy, it’s preposterous to present the economy in this manner because investment adds to private sector saving.

    Using a traditional definition of net saving it is clear that monetary policy, interest rate changes and QE have substantial impacts on the valuation of private sector net saving. QE was essentially a form of fiscal policy because it increased the valuations of private sector financial assets by bolstering the financial system. If you erroneously define “net saving” as (S-I) it obscures these causal relationships.
    As Keynes taught us long ago, involuntary unemployment is the result of a lack of private investment.
    Accounting is the language of economics so it’s pretty important to get the accounting right if you’re going to understand how the monetary system and the economy operate. I expect Vince Cable (as a post-Keynesian economist) would conclude that this lack of clarity in the use of national accounting terms and the netting out of investment from the definition of “net saving” leads to erroneous understandings and inappropriate conclusions about how the economy operates!

  • @ JoeB

    Keynesianism has:

    C + S + T + M = C + I + G + X

    If everything is in equilibrium we could have:
    C = C
    S = I
    T = G
    M = X

    Therefore the total Savings in an economy can equal the total amount spent on Investment (but it is would be usual which is why when the economy is in equilibrium
    S + T + M = I + G + X
    is true).

  • Peter Martin 13th Oct '17 - 12:11pm

    @ JoeB

    Consider the sources of spending in a closed economy ( this means we can just ignore imports and exports to simplify things a little). Household Consumption (C), Private Investment (I), and Government spending (G). Together they equal total aggregate demand and national income (GDP):

    GDP = C + I + G

    The uses of GDP (National Income) in a closed economy are, Consumption (C), Saving (S) and Taxes (T). So from that perspective:

    GDP = C + S + T

    In other words:

    C + I + G = GDP = C + S + T

    Re-arranging that a bit:

    (G – T) = (S – I)

    Which you can interpret to mean that in an accounting sense the budget deficit (G – T) equals the private sector surplus (S – I).

    So the question is if it is correct to refer to (S-I) as net savings? I would claim it was OK. But we can stick to the term PS surplus if you prefer. There is always a difficulty in deciding whether some kind of spending is an investment or consumption. For example is the money spent on the computer I am writing this comment on consumption or investment? I run a business and several years ago I bought it as a capital item. My accountant then depreciated the cost over three years so and after that it was officially worthless. But I’m still obviously using it! If I’d bought it outside the business it would have been classed as consumption.

    Another way of looking at the problem is to consider what happens when a country in a closed economy starts up a new currency. It issues by spending, say, 100 million ‘crowns’. It gets back say 80 million in taxes. So its deficit is 20 million crowns. What has happened to those 20 million? The population has hung on to them and they are in piggy banks, safes, wallets etc. The next year it issues/spend another amount. It gets some of it back in tax. So its a trivial exercise to calculate each deficit and subsequent accumulated debt.

    Is it OK to just say that this 20 million is the private sector net savings which exactly equals the Govt deficit? Or is it best to stick to the term private sector surplus?

    I really don’t mind what we call it. And that’s all you are pulling me up on. Just a choice of name.

  • Peter Martin,

    accounting identities are a just that, they do not establish causation or direction of travel and without that they are meaningless. Saying that Assets less liabilities = Equity Capital or opening capital plus net income less capital withdrawn = closing capital is simply a statement of double-entry bookkeeping. It tells you nothing about why – just that the balance sheet balances.

    If my liabilities are greater than my assets, I am interested in determining why this is the case. Is it because, I have spent too much and not invested in income producing assets? Borrowed too much for revenue expenditure or withdrawn too much capital from the enterprise. This is the kind of insight that sectoral balance analysis allows us to garner.

    When you say “If people in the UK want to save their money, which takes it out of circulation, then again that has to be replenished by deficit spending.” The basis of your argument is (G – T) = (S – I). You can just as easily say (as Keynes did), if households in the UK want to save their money, which takes it out of circulation, then it has to be invested by firms. If firms are under-investing then the state must step in, when necessary, to make up the shortfall in aggregate demand. This is the basis of Keynesian economic theory.
    Government deficits clearly can be reduced by cutting spending or raising taxes in a growing economy and that is precisely what has happened since around 2012. This reduces the net financial assets/savings that can be acquired by the private sector.
    The source of weakness in the UK economy is under-investment in the Corporate Sector not under-consumption by households.

  • Michael BG,

    For Savings net of borrowings (S) less investment (I) to equal Net savings (defined in national accounts as net disposable income less final consumption expenditure), then (I) would need to be equal to zero.

  • Neil Sandison 13th Oct '17 - 2:08pm

    We shouldnt be reliant on magic money trees ,or the loose change the chancellor finds down the back of the sofa to buy some short term election sticking plasters .
    We do need to invest in capital assets like our infrastructure , affordable housing stock ,viable electricity and water networks to enhance our green energy strategy and the ability to fast track the new employment oppertunities coming from the digital economy So we do need to seperate ourselves from the borrowing or nationalise it at any price Labour party or the Tory its only the service,financial and banking sectors that really matters and Uncle Sam in the shape of Trump will bail us out of the mess that has been self inflicted.
    Ours should be a policy of strategic intervention when required and with an end game of a sustainable economy as an outcome. Governments do not create jobs or income only confident communities that believe in themselves and are prepared to invest in their own future .The state is there to enable ,not to control the methods of productivity and wealth creation which generates the taxes that provide the services we will all come to rely on at some time in our lives.

  • Those are good points, Neil. It is important to remember that the bulk of investment spending is undertaken by the private sector and not the state. Corporate investment was comparatively weak before the financial crisis and has declined precipitously since then.

    Distributions of corporate profits in the form of dividends and share buybacks are now running at circa 70% compared with around 10% in 1970. There are a number of factors driving these changes. Shareholder activisim/pressure for higher returns in the form of cash distributions to generate capital gains and increased risk aversion to capital investments on the part of senior management since the financial crisis (the quiet life hypothesis).

    Government investment in infrastructure is an essential underpinning of the economy, but the impact of finacialisation of the real economy driving inflated house prices and financial asset prices will need to be addressed, if we are to tackle UK productivity weakness and international competitiveness effectively.

  • Peter Martin 13th Oct '17 - 3:29pm


    You’re right. The sectoral balances aren’t able to definitively say which is cause and which is effect. We can all have our opinions on that as you obviously do when you say “the source of weakness in the UK economy is under-investment in the Corporate Sector not under-consumption by households.”

    My opinion is that the Corporate Sector aren’t generally stupid. They would invest more if there were more profits to be made. If there were more demand then there would be more potential for profits. So the two aren’t necessarily unrelated.

    The sectoral balances, whichever is the cause and whichever is the effect, should alert us to the importance of the external deficits. At one time the Balance of Payments figures were a regular feature of the news. Hardly anyone bothers about them now. They are just left to the whim of the market. So if you’re bothered about the deficits and the level of borrowing in the economy generally why not show a bit more concern about them?

    When the pound falls maybe Vince could start to point out how that can help reduce UK debt generally, instead of using it as a criticism of those who have voted to Leave the EU.

  • Peter Martin 13th Oct '17 - 3:45pm

    @ Neil Sandison,

    “….wealth creation which generates the taxes that provide the services we will all come to rely on at some time in our lives.”

    Methinks you haven’t been following the finer points made on this thread of how the economy actually works! You haven’t understood where money comes from. Govts create it when they spend. They destroy it when they collect it in taxation.

    Money is just like a shopping voucher except it’s a tax voucher. Just like Tesco’s put theirs in the shredder when you use it to pay for your cornflakes, the Govt puts theirs in the shredder when you use it to pay your taxes.

  • Peter Martin,

    accounting relationships/ratios at any particular point in time don’t tell you much by themselves. Their primary usefullness is in analysing trends over time, movements in the composition of different sectors of the economy and in comparative analysis with other nation’s economies. It is the interpretation of these trends, sectoral balance movements and international comparisons that drives economic policy development, rebalanceing initiatives and structural changes.

    In terms of cause and effect, I think it is best to think of the economy as a continuous loop in which goods and services are being constantly demanded and supplied both domestically and internationally, money created and destroyed, earnings and personal credit consumed, savings invested, borrowings made and capital goods created. Each of these economic activities has an impact on the others and reinforces or undermines each other in a feedback loop. When one or more important element of the cycle does not appear to be functioning efficiently. we have to look at where it may be possible to intervene with some effect in the cycle to restore an semblance of equilibrium.

  • Peter Martin 13th Oct '17 - 6:26pm

    @ JoeB,

    “accounting relationships/ratios at any particular point in time don’t tell you much by themselves.”

    Mainstream economists often say this kind of thing. They are usually careful to avoid saying that they don’t tell you anything. So what do they tell us? Incidentally the graphs in this link are more up to date that the headings might show.


    In the UK they tell us that the foreign balance in the 2nd quarter of this year was 5.17%
    This meant that someone in the UK had to do the borrowing to support this. This was almost equally shared between the private sector and government. This is not a healthy state of affairs. The Government should be doing more of the borrowing or it should be pushing the exchange rate even lower. The private sector can’t exist in a state of deficit for any length of time. The sectoral balances are worse than before the GFC. But then the problem was with America. Fortunately for us the US figures now look much better but that may not last under Trump.

    But there’s a slump coming, caused by too much private debt not too much public debt. You might think that’s “not much” but serious analysts like Jan Hatzius at Goldman Sachs would disagree.


  • Peter,

    its the trends and the International comparatives that provide for interpretation of the data. A foreign balance in the 2nd quarter of this year of 5.17% tells you nothing useful until you compare it with previous performance and other economies. If it has been like that for several decades without adverse consequences you might say as you did earlier “At one time the Balance of Payments figures were a regular feature of the news. Hardly anyone bothers about them now. They are just left to the whim of the market.”

    However, when the trade gap is steadily widening and deteriorating relative to other comparable economies that is just cause for concern. Similarly, consumer debt has been financing a significant proportion of consumption for several decades. It is only when the proportion of household debt relative to past periods and comparable economies builds to a potentially unsustainable level that it gives cause for concern. As it did in 2005-2006 when Vince Cable was calling attention to the dangers.

    The fundamental issues for the UK are the reducing share of wage income in the economy, stalled productivity, declining international competitiveness and growing wealth inequality exacerbated by a dysfunctional housing market that absorbs a wholly disproportionate share of invested capital.

    Piketty’s analysis has traced this to capital accumulations over several decades that draw an ever-increasing share of surplus value from the economy in the form of economic rents and interest payments . Government deficit funding is constrained by resource and inflation limits when unemployment falls to relatively low levels and fiscal policy alone cannot deal with these structural issues. They have to be tackled at the root with fundamental reform.of the tax, welfare and credit systems.

  • Peter Martin 13th Oct '17 - 9:30pm


    No-one is saying that the sectoral balances are all there is to it. They don’t say anything directly about wealth inequality. They don’t say anything directly about productivity. The sectoral balances don’t say anything about the need for tax reform. Or the welfare and credit systems. Or the need for higher productivity. Are you implying I did?

    But they do say something about our obsession with Govt debt. This is a major problem that spills over to cause lots of other problems too. It’s led to the GFC which in turn has led to our low productivity economy. We wouldn’t have had Brexit had we not had the GFC. It’s even worse in the EU. They’ve stupidly tried to decree that Govts shouldn’t have debts and deficits above an arbitrarily low level.

    Did you notice any patterns in the first graph on the 3spoken website? The foreign balance is nearly always in surplus. This means we have trade deficit. It’s just turning things around to make the graphing simpler.

    But did you also notice that when the govt balance goes positive the private balance is negative? That happened in the late 80’s when we had a credit boom. And then we had the bust in the early 90’s.

    It happened again when we had the dotcom boom around the time of the millenium. Then there was a bust in 00’s. To be quickly followed by a housing boom which sent the PS negative around 2007/2008. Then we had the GFC and another bust after that.

    So having the PS (the yellow) in deficit is always a sign that something bad is going to happen. The yellow is very much in deficit right now. Ergo something bad is going to happen! You’ll be pleased to be able to blame in on Brexit, no doubt, but you’ll know as well as I do that it was always going to happen anyway.

    Govt surpluses, or even small deficits, aren’t good things if there is money leaving the economy. There’ll be a crash and the Govt deficit will shoot up again just like it always has before.

  • Peter Martin,

    I would agree that sectoral balance analysis is a useful starting point for assessing what is happening in the economy, but think you have to dig deeper to determine why these trends are occurring than simply saying that if the private sector chooses to save than government must run a deficit, even if it is an accounting identity truism.

    In Keynesian economic theory, ex-post Savings always equal ex-post investment (Investment here includes increases in inventories). This is in contrast to classical theory that asserts savings only equals investment when the economy is in equilibrium.

    If Savings (S) equal investment (I) then S-I = 0. If S-I = O and S-I = Government spending (G) – Taxation (T) then G-T = 0 i.e. a balanced budget over the business cycle.

    Under Keynesian theory, the state should act counter-cyclically to smooth the troughs and peaks in demand over the cycle i.e. run a deficit when necessary and a surplus when the economy is overheats.

    In grouping households and firms together as the private sector and netting investment from savings the changes in the economy can become obscured.

    The question arises is credit fuelled demand sustainable, even when the unemployment rate dips below circa 5% and if it is not, should it be sustained by deficit spending even if this pushes inflation over target. Is this not in fact overheating in the economy generated by excess credit creation?

    I think the ELR program advocated by MMT economists is a good compromise solution to that question coupled with more a more flexible range of inflation targets.

  • Peter Martin 14th Oct '17 - 1:03pm

    @ JoeB,

    If Savings (S) equal investment (I) then S-I = 0. If S-I = O and S-I = Government spending (G) – Taxation (T) then G-T = 0 i.e. a balanced budget over the business cycle.

    There are two “ifs” in your statement. I would add another. If (M-X) or imports – exports = 0 over the business cycle too.

    So that’s three “ifs” ! Maybe you could remind anyone who trots out that Keynes advocated this. The one I’ve added hasn’t been anywhere near zero for decades now. We’d have to manipulate our currency downwards to achieve it and that wouldn’t be very popular with all those on this blog who always bemoan any fall in the £’s exchange rate.

  • Peter Martin,

    I am only repeating the equations you have stated in your comment above:

    “Consider the sources of spending in a closed economy ( this means we can just ignore imports and exports to simplify things a little). Household Consumption (C), Private Investment (I), and Government spending (G). Together they equal total aggregate demand and national income (GDP):

    (G – T) = (S – I)

    Which you can interpret to mean that in an accounting sense the budget deficit (G – T) equals the private sector surplus (S – I).”

    As regards (M-X), the balance of payments accounting system has two major accounts: the current account and the capital account. The current account mainly measures trade in goods and services. The capital account mainly measures trade in assets. A trade deficit refers only to the current account balance.

    Balance of payments accounting is done with a double-entry system of debits and credits. Each transaction involves both a debit and a credit.

    Put simply, if you buy something from a foreigner, you must pay him—a debit is entered. Then the foreigner must somehow spend or save your payment—a credit is entered. When all credits and debits are added up, the entire accounting system must balance: The current account balance plus the capital account balance must sum to zero. Hence, a current account (trade) deficit implies a capital account surplus.

    Foreigners take the earnings they receive from our spending (minus the goods and services they buy from us) and invest that sum in the U.K.

    Sometimes the twin deficits—budget and trade—move in the same direction. When a government issues a lot of debt and there aren’t enough domestic savers to buy it up, a budget deficit will contribute to a trade deficit. That’s simply because the foreign purchase of bonds is recorded in the capital account.

    After governments issue too much debt, they can often harm the economy by inflating the money supply to reduce debt levels or raising tax rates to cover debt service costs. However, these problems stem from the budget deficit and the accumulated debt—not who finances the debt. In this way, a trade deficit can be a symptom of fiscal problems, but the trade deficit isn’t the problem per se. It’s the budget deficit that’s the problem.

    Bottom line – Savings (domestic and external) still equals investment (domestic and foreign) in the Keynesian theoretical model.

  • Peter Martin 14th Oct '17 - 8:20pm

    @ JoeB,

    The equations that I used were for a closed economy. That’s OK, to keep it simple, when we were discussing what (S-I) meant, but if we are discussing what happens in the real UK economy we have to have open it up again. We have to put imports and exports back in.

    Later you say “but the trade deficit isn’t the problem per se. It’s the budget deficit that’s the problem.”

    You’ve previously correctly pointed out that the sectoral balance identities can’t be used to ascribe cause and effect. But here you seem to be saying that it’s the budget deficit which causes the trade deficit. I know that’s the standard mainstream neolib line.

    But maybe it’s the other way around? If we did whatever it took to balance trade. Maybe used tariffs and a bit of exchange rate manipulation then the government deficit would, as a matter of identity, have to equal the private sector surplus (S-I) which would make it a good deal lower than it now is.

    Or, to put it another way, if money wasn’t leaving the economy to pay our import bill the government wouldn’t have to deficit spend to replace it.

  • Peter Martin,

    I don’t think you can ascribe any cause and effect relationship between the macroeconomic accounting identity that relates the difference between national savings and investment and the fiscal deficit to the current account deficit.

    The trade deficit may or may not be a problem if the external sectors surpluses are being returned for reinvestment in productive assets in the UK. This cycle could increase UK output.

    Where however the external surplus is primarily invested in government borrowings to finance current deficit spending this will not add to the stock of productive assets, unless it is financing economic infrastructure spending. This kind of cycle may not be so beneficial in the long term for UK output and productivity.

  • @ JoeB

    Does not Keynesian theory see cause and effect?

    If the equilibrium is

    C + L(eakages) = C + J (injections)

    80 + 20 = 80 + 20

    If injections are increased to 25 does not Keynesian theory expect Leakages to increase to 25

    Ending up with:

    100 + 25 = 100 + 25

    Therefore your conclusion is wrong according to Keynesian theory. If the injection increase had been Government Spending in this example it was beneficial because the total economy increased by 25. In this example it does not matter what the divisions are between S, T ,M or between I, G, X.

    The starting positions could have been
    S = 5, T = 5 M = 10,
    I = 5 G = 7 X = 8

    And could end up as:
    S = 5, T = 5 M = 15
    I = 5, G =12 X = 8

  • Peter Martin 15th Oct '17 - 9:39am

    @ JoeB, @ Michael BG @ George (and anyone else who is still following this!)

    There are two sensible ways of looking at the problem of Deficits:

    1) The Traditional Keynesian View
    Accept that deficits do matter quite a lot. Also accept that Government Budget Deficits, and External Trade Deficits are closely related. But, don’t worry about which way around the causality is. Tackle the problem from both ends. Do whatever it takes to keep balanced trade. Control your exchange rate. Don’t let other countries dump cheap products on your market.
    Control your budget deficit so that inflation doesn’t become excessive, but do what you can to keep the economy growing and avoid high levels of unemployment. According to the rules of sectoral balances this has to work. The budget deficit will be much more in balance over the business cycle. Any deficits will be much smaller and only be due to the desire of the local population to net save. Or run a Private Sector surplus if you prefer.

    2) The MMT view
    Consider that if a country like Germany wants to send us lots of real stuff like cars, machinery etc and is happy to just accept our IOUs then we just go ahead and let them get on with it. We are getting a better deal than them. They are swapping more for less. As you pointed out earlier the capital flows have to automatically balance with the current flows. We let the currency float. We end up with trade deficit due to the desire of the net exporters like Germany, Denmark, China and others to be , er, net exporters!

    We also end up with a budget deficit. We don’t have any problem financing that because of the capital flows into the country. Then we just have to control Govt spending and taxation levels to make sure we don’t get too much inflation but we do have a growing economy with as close to full employment as possible. We think about a Job Guarantee for the others.

    So take your pick. Either are better options than what we are doing at the moment. We have to much private borrowing which is essentially to fund the external deficit and keep the Govt’s deficit low. We create asset bubbles in the property market which sooner or later burst, causing crashes and sending the Govts deficit into double figures. We then try to cure that by depressing the economy. Raising VAT to 20% etc.

    All this isn’t difficult to understand. It’s not even at all political. It just needs a little lateral thought.

  • Peter Martin,

    the budget deficit is the difference between government spending and taxation and is financed by borrowing domestically and internationally. The trade deficit is the difference between exports and imports and is financed by International capital flows and/or central bank reserves. It doesn’t necessarily follow that if you have a current account deficit you must have a trade deficit or vice a versa.

    The big debtor economies that have the largest trade surplus also run big fiscal deficits. Germany ran a budget deficit for 40 years until 2015 building a debt to GDP of 80%. Japan has been running fiscal deficits for decades developing a debt to GDP ratio of 220%. So too has China with a debt to GDP ratio of 45%.

    This shows that fiscal deficits and trade deficits do not necessarily move in the same direction. You can run a fiscal deficit whether you are exporting more goods and services than you import or vice versa.

    Debtor countries need to deficit spend to maintain an acceptable level of full employment just as creditor countries like the US and UK do.

    Keynesian economic theory makes an implicit assumption that savings are reinvested or money is created to fund real capital (i.e. newly created capital goods and inventories) and this reinvestment maintains equilibrium in the economy. In fact the majority of borrowing and investment in the UK is in non-produced assets that require no labour to create i.e. land and intellectual property rights/patents. This type of investment in non-produced capital does not create employment; it drains economic rents from the surplus created in the economy by workers and entrepreneurs.

    Therein lies our problem. German savings are made available to small and medium sized family companies to finance expansion of industry and commerce. In the UK we sell houses to each other at ever inflated land prices and rack-up rents to the point where it is not practical to set aside any significant amount of disposable income, after rent or mortgage payments. . Hence, consumption becomes reliant on access to ever greater levels of private debt until the next recession, debt write-downs deflate the debt pile and after a short-interval we start all over again.

  • Peter Martin 15th Oct '17 - 7:58pm


    “You can run a fiscal deficit whether you are exporting more goods and services than you import or vice versa.”

    That’s true. But..

    Govt Deficit = Private Sector Surplus (Net Savings?) + Current Account Deficit (Trade)
    Govt Deficit = Private Sector Surplus (Net Savings?) – Current Account Surplus (Trade)

    So if we have an economy which the private sector are moderately thrifty and save about 2% of GDP and there is a current account deficit of 3% the Government deficit will be 5% of GDP. The Private sector would also have to be net borrowers to the tune of 3% of GDP for the Govt to have a balanced budget.

    But change that 3% current account deficit into a 3% surplus and the Private Sector can still be savers and the Govt can also run a 1% surplus.

    So it’s not impossible for a Govt to balance its budget and for the economy to be a net importer but it is much more difficult. Someone has to do the borrowing to pay for those imports.

  • Peter Martin,

    I would not put too much faith in the accuracy of the national accounting balances. We seem to have lost £490 billion of net foreign assets (about 25% of GDP) overnight according to the ONS http://www.telegraph.co.uk/business/2017/10/15/britains-missing-billions-revised-figures-reveal-uk-490bn-poorer/. The direction of travel is telling though. With Foreign direct investment plummeting this will put further downward pressure on sterling.

  • Peter Martin 16th Oct '17 - 11:19am

    Maybe they haven’t looked down the back of the sofa? Or someone in the BoE has entered into a correspondence with a Nigerian exile who needs help in getting the family money out of the country 🙂

    But more seriously, these are foreign reserves, which like gold reserves, don’t figure in the sectoral balances!

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