The Tory Party conference is coming up, so expect to hear lots about how they literally saved the country from becoming like Greece, tackling the deficit head on and paying down Britain’s debt. The reality’s a little different though. Mercifully, and despite their better efforts, the deficit has remained high, as the government’s cuts have been offset by higher welfare spending and lower tax take. The high deficit seems to be supporting the economy just enough to allow a weak recovery at the moment. The national debt however, continues to grow.
All the main parties want us to fear government debt and play on our wish for our children to have a better life by constantly talking about the burden we are placing on future generations. To a large extent, this scaremongering has worked. Most people hate austerity, but accept “there is no alternative”. We must get the deficit down.
But should we be thinking about government debt as placing a burden on our children? How will we pay it back? For an alternative viewpoint, the following is an extract from a book called the “Seven Deadly Innocent Frauds of Economic Policy” by Warren Mosler. Everyone can and should read this book for free here. I’ve replaced some words to make it fit for the UK i.e $s to £s or the Fed to the Bank of England.
“Next, you need to know what a U.K. government bond (gilt) actually is. A U.K. government bond is nothing more than a savings account at the Bank of England (BoE). When you buy a gilt, you send your pounds to the Bank of England and then some time in the future, they send the pounds back plus interest. The same holds true for any savings account at any bank. You send the bank pounds and you get them back plus interest. Let’s say that your bank decides to buy £2,000 worth of gilts. To pay for those gilts, the BoE reduces the number of pounds that your bank has in its current (reserve) account at the BoE by £2,000 and adds £2,000 to your bank’s savings account at the BoE. (I’m calling the gilts “savings
accounts,” which is all they are.)
In other words, when the U.K. government does what’s called “borrowing money,” all it does is move funds from current accounts at the BoE to savings accounts (gilts) at the BoE. In fact, the entire £1.4 trillion national debt is nothing more than the economy’s total holdings of savings accounts at the BoE.
And what happens when the gilts come due, and that “debt” has to be paid back? Yes, you guessed it, the BoE merely shifts the sterling balances from the savings accounts (gilts) at the BoE to the appropriate current accounts at the BoE (reserve accounts). Nor is this anything new. It’s been done exactly like this for a very long time, and no one seems to understand how simple it is and that it never will be a problem.”
So rather than a burden, a more realistic way to think of the national debt is as the financial savings of the private sector. It’s not something we should be overly concerned about. Over the last few years, the private sector has been demanding to save (lend money to the government) as it has not been able to find profitable investments in the real economy. It wanted risk-free assets, and nothing is more risk free than putting money into a savings account at the BoE. This huge demand for risk free savings has keep the price of those savings high (and the interest rate low). So when the government boasts about keeping interest rates low, this has been a prize for failure rather than anything to be proud of. In a strongly recovering economy, the demand for risk free savings (gilts) will fall, so interest rates will rise. This will be a good thing as it will mean we should see more investing in the real economy.
When we hear politicians talk about the economy, up is down, left is right and black is white. The truth is often the complete opposite of perceived wisdom, so read Mosler’s book and have your mind blown.