Yves here. Richard Murphy provides a brief explanation of the options open to the UK to retire its national debt and what the consequences of exercising these options would be. The same analysis applies to the US. Even if Kier Starmer finally resigns, expect another neoliberal spinster to take his place, the leadership battle provides another opportunity to push this destructive economic idea.
I wish I had a pound for every time I hear a property owner (usually someone discussing a pension fund but you can easily get the same answer from someone exposed to housing) defending some ridiculous policy response on the basis that it will “help their pension”. I wish it, because if I had it, I’d probably have enough to reverse the whole plan.
It can’t be said often enough (please everyone, tell your friends as often as they’ll bear it): All pensions are residual claims for future success. Damage to the present, such as:
* by degrading the input base in areas such as transport, electricity or the supply and distribution of potable water
* neglecting health and social services
*by teaching about education
* by tolerating unemployment, especially youth unemployment
… it lowers the base for prosperity in the present which means a lower base to use in the future. These are not possible, theoretical problems that may arise in the future; are happening today. They represent legitimate areas where state intervention is completely justified.
I am not a disinterested party here. I have long exposure to both financial assets and real estate. These are judged by my fund managers to be the worst asset classes for long-term investment – I have limited (almost zero) influence over their investment strategies. I fully expect these assets to be written down and result in the benefits promised to me when I retire. Not exactly a prospect that excites me, especially since I have limited options to reduce my exposure. But the alternative to the current approach – followed by every government and big bank out there – is to write off inflation as the piece points to Great Depression II.
By Richard Murphy, Associate Professor of Accounting Practice at Sheffield University Management School and director of Tax Research LLP. Originally published on Funding the Future
There was a lot of anger, and sometimes angry responses on LinkedIn to my suggestion in a recent video about the level of national debt in the UK were misplaced because the UK could never be bothered. That was because, in fact, the UK government could always generate the very good money needed to pay off the UK national debt whenever it wanted to.
Those responses made me think that the commenters clearly didn’t understand the consequences of the debt settlement they are committed to, or what that settlement might mean if it happened.
Objections
To explain this, let me summarize those arguments first. Those who seem to shout the loudest suggest that:
- The UK could not pay off the national debt as I suggest.
- Otherwise, if that were to happen, the country would be flooded with cash which would result in hyperinflation.
- Third, they are convinced that this debt, and the interest paid on it, endangers the well-being of our country, without being able to explain why. They want it to be reduced, although it is not yet clear what method they want for this purpose.
So, let me look at the available ways to reduce government debt. Actually, there are only two.
Methods
First, the government can pay off the debt in the way I have suggested.
The machine, in fact, is the same as reducing the value, so we know that it works. The government creates new money, or reserves, at the Bank of England and uses that facility to buy current government debt at market rates.
In accounting terms, as shown by the UK government’s Whole of Government Accounts, this effectively cancels the debt in question. Instead, there are central bank reserve account balances created to facilitate these repurchases, which would be held by UK banks and other financial institutions that previously owned this debt and will now hold deposits with the Bank of England. In essence, we would still have debt, but its nature would have changed from long-term bonds to short-term deposits.
Second, the government can pay off the debt by using a perpetual surplus. In other words, the government will pay more taxes than it spends, taking into account both current and investment costs, and use the surplus to make a full payment of the so-called debt, but which is money deposited in the government that acts as a bank.
You can play around with these themes, but really, these are the options available.
Estimating: Debt Recovery
The first of these options is entirely possible. Everything that happens is a change of material. Government bonds are being replaced by balances with the Bank of England held by banks and other financial institutions.
This is the undeniable result of this method. After all, if the debt is paid with the newly created sterling, people will have to deposit the money they get, because the government will pay the bonds they buy electronically through the Bank of England and its central bank account center, and the only safe place where any bank or other financial institution can deposit these funds in question is back to the Bank of England, the only people who doubt whether they will return the money.
In other words, all this ‘refunding’ is doing is changing the profile of government debt from a long-term, fixed interest, guaranteed repayment and cost base to a very short-term, highly liquid (but essentially non-payable, as far as the financial sector as a whole is concerned) basis on which the interest rate to be paid by the Bank of England will be determined.
Given that, in this case, there will be no long-term interest rates that the Bank wants to influence, the reason for it to pay interest on many balances in that situation will disappear, and the Japanese method will appear, where most of those balances of the central bank account will not be paid interest, greatly reducing the price level of the cost of government debt, which will achieve the purpose of those government interest rates, which may achieve the purpose of those government interest rates of debt. it.
On the other hand, a small problem can be that, as a result:
- Banks would lack the bonds needed to use the overnight repo market in the City of London, which would have the devastating effect of undermining the credibility of the UK banking system and significantly increasing risks to the private sector.
- Pension funds will not have the assets needed to support the long-term income guarantees they provide to their beneficiaries in retirement.
- Life insurance companies will lack the capital required to support their debt financing needs.
- Governments abroad and those outside the UK wishing to save in sterling will lack the necessary means to hold the good as a reserve asset, putting the UK’s terms of trade at risk.
Therefore, the UK debt can be repaid in this way, and its interest costs can be significantly reduced, but the result will be that the financial services sector of the UK will be effectively destroyed because it could not provide the services that currently make it available, while the financial risks in the private sector will increase significantly.
Would anyone like to do that? No, they wouldn’t. But to think this shows how much the UK government is, at the moment, providing funding to that sector. The payment of interest on this debt is, in fact, a subsidy to the financial services industry, and that is a very good reason why it should be taxed very heavily. Thinking exercises are not a waste of time in that case.
Running Government Residues
Looking at the second alternative to debt reduction, the use of sustained and long-term government surpluses would be necessary to achieve this goal. That could be more disastrous than paying off the debt.
This would require the government to take more money out of the economy through taxes than it takes in through spending each year, which means that the government will act as a constant supporter of the local economy. Income, growth, investment, and the size of the UK economy will all decrease every year under this policy.
That would be an inevitable consequence of successfully imposing such a policy on the economy. In addition, all the effects of reducing the availability of UK debt, noted earlier, will be available again, with the effect being spread over a longer period of time, but still causing the same long-term effect.
Therefore, bailing out government debt would be a very damaging exercise for the UK economy, the UK financial sector, UK income and UK financial security. There is really no other conclusion to be drawn regarding any such plan, which means that the only question that needs to be asked as a result is why anyone would want to put this idea forward as economic policy:
- What are they trying to achieve?
- Why are they trying to achieve it?
- Why do they think it’s the only meaningful outcome that is desired?
- Have they thought through what they are proposing?
I can’t answer these questions because I can’t imagine why anyone would want to promote something as damaging as reducing the UK’s so-called national debt, but it seems that some want to do so, and I’d like to know what they really think.
