The Fight for the NHS/MMT economics

[PaulMB]

This seems to imply that money creation is a free lunch but it isn't, even under MMT.
Sterling money creation, whether or not it's spent in the UK or on imports, has an inflationary impact which requires higher taxation to negate under the MMT framework. So it is paid for by those who are taxed. Not paid for as in the literal transfer of tax monies from taxpayer to govt to the seller of imports (which exponents of MMT don't like to describe the monetary flows as) but in the causal link between higher spending and higher taxation required to control the resulting inflation at full employment levels.

I would add that it would also create a constant state deficit, to be necessarily filled by increased taxation and/or state borrowing, which would steadily increase the National Debt. This, in turn, would increase the cost of servicing the ND, both because it is larger and because the value of Sterling would decrease vis-a-vis other currencies in the international competition for state (and other) bonds.

 

[PaulMB]

In fact it would undermine confidence in the solidity of Sterling and thus require higher interest rates to sell Sterling bonds on the domestic and international markets (which are really one and the same market).

 

[ks.234]

I would add that it would also create a constant state deficit, to be necessarily filled by increased taxation and/or state borrowing, which would steadily increase the National Debt. This, in turn, would increase the cost of servicing the ND, both because it is larger and because the value of Sterling would decrease vis-a-vis other currencies in the international competition for state (and other) bonds.

Yes, there would be a state deficit, but no, it would not have to be serviced by tax or borrowing. The ND has been with us for over 300 years without any need to pay it off, the only people to try were Clinton and Blair and shifted money supply from the government sector to the private sector with predictable results in 2008. The National debt was William III’s war debt that was bought by a group of speculators who formed the Bank of England, the “Debt” was then sold on to private investors. The debt is a private asset, there is no function reason for it to also be a public debt.

If you look at the link from @wulbert about you will see that even the arch monetarist Jacob Rees Moog agrees that “the years when government pays back debt are few and far between” and borrowing is just “the government borrowing from itself”

 

[laughingboy]

I would add that it would also create a constant state deficit, to be necessarily filled by increased taxation and/or state borrowing, which would steadily increase the National Debt. This, in turn, would increase the cost of servicing the ND, both because it is larger and because the value of Sterling would decrease vis-a-vis other currencies in the international competition for state (and other) bonds.

You may have noticed that all economies run a near-constant state deficit. Can you explain why? Because MMT can.

 

[ks.234]

In fact it would undermine confidence in the solidity of Sterling and thus require higher interest rates to sell Sterling bonds on the domestic and international markets (which are really one and the same market).

Sorry, but No. Take a look at the blog posted by @laughingboy above

 

[laughingboy]

Interesting piece by John S. Warren, regarding this interview with J. Rees-Mogg on Sky News, via Twitter...“Total borrowing, excluding the Quantitative Easing [QE] of £875Bn which is owed by the Government to the Government, if you net that off, we are under 60% of GDP. I think it is a perfectly sustainable level”...Rees-Mogg has suddenly embraced a monetary idea his Government has long simply ignored, because it does not fit the ‘household budget’ convention on which the Conservatives have relied to spook the public on debt, and that reliably returns Conservative Governments to office in a haze of confidence in the financial probity of a Party that actually possesses a highly chequered history in real debt management."

It's amazing the flexibility of thought that arrives at the mind of Rees-Mogg when his political goals require it. In this case, Truss is proposing to abolish the independence of the Bank of England. The way to expose the shaky foundations of BoE independence is to discuss QE.

The BoE governor, Andrew Bailey, has been worried about the impression that the bank was not acting as independent of government since at least June 2020, when following coronavirus it looked like QE was used a direct support for government spending. The fact that the BoE holds so much of the government 'debt' is a fatal flaw for the bank. Independent Central Bank, my eye. He has subsequently talked about 'unwinding' QE, but that ain't gonna happen. So, he may have shot his own goose.

 

[Sue Pertwee-Tyr]

I would add that it would also create a constant state deficit, to be necessarily filled by increased taxation and/or state borrowing, which would steadily increase the National Debt.

Can you unpick your choice of the term 'necessarily' in the sentence above a bit? What undesirable stuff happens if the state deficit isn't 'filled', for example? Where have the funds originally come from to 'fill' the deficit? If you think of finances as a balance sheet, a deficit in one column is somebody else's surplus. If it is thought desirable to hold a surplus, does it not follow that it is necessary for somebody else to hold a deficit? But beyond that, why would it be desirable to hold a surplus if you control the money supply anyway?

 

[ks.234]

It's amazing the flexibility of thought that arrives at the mind of Rees-Mogg when his political goals require it. In this case, Truss is proposing to abolish the independence of the Bank of England. The way to expose the shaky foundations of BoE independence is to discuss QE.

Its governor, Andrew Bailey, has been worried about the impression that the bank was not acting as independent of government since at least June 2020, when following coronavirus it looked like QE was used a direct support for government spending. The fact that the BoE holds so much of the government 'debt' is a fatal flaw for the bank. Independent Central Bank, my eye. He has subsequently talked about 'unwinding' QE, but that ain't gonna happen. So, he make have shot his own goose.

For all this talk of “independence”, the BoE is only independent when it comes to setting interest rates. QE was authorised by central government

 

[PaulMB]

Can you unpick your choice of the term 'necessarily' in the sentence above a bit? What undesirable stuff happens if the state deficit isn't 'filled', for example? Where have the funds originally come from to 'fill' the deficit? If you think of finances as a balance sheet, a deficit in one column is somebody else's surplus. If it is thought desirable to hold a surplus, does it not follow that it is necessary for somebody else to hold a deficit? But beyond that, why would it be desirable to hold a surplus if you control the money supply anyway?

In a nutshell, if a state has a deficit each year it means it has spent, or is spending, more than it has collected in taxes. The desperate option is to print or "create" more currency. But this devalues the existing currency, both domestically and internationally. The normal course is that each year the deficit is paid by borrowing, by issuing state bonds. People, banks, financial institutions buy a bond and receive interest. In practice they are lending money to the state. But since interest, the rate of which is set by the market, has to be paid on bonds otherwise nobody would buy them, and paying this interest is a cost to the state. So a steadily increasing Public Debt is an increasing cost to the state and takes resources away from other avenues of public spending like improving infrastructure, providing education and health care.
I don't understand your equation that if one side of a balance sheet has a deficit the other side must have a surplus so it is all OK. But perhaps I am missing something.

 

[PaulMB]

For all this talk of “independence”, the BoE is only independent when it comes to setting interest rates. QE was authorised by central government

The BoE cannot set the interest rates it likes on the bonds it issues. If the interest rate is too low nobody will buy their bonds. Why should an individual or, say, a pension fund buy UK state bonds at 1% if they can buy US bonds at 3%? So it is the market, domestic and international, in practice the same thing, that sets the interest on state bonds. If there were any doubts about the solidity of Sterling, which would be caused by the state "creating" more money to compensate for a defecit, the value of existing bonds in Sterling would fall dramatically, thus producing a de facto dramatic rise in their interest rates, and new bond issues would require a similarly high interest rate to entice people and institutions to buy them.
QE was a Europe-wide decision taken before Brexit. Remember that economically the UK is not an island.

 

[Sue Pertwee-Tyr]

In a nutshell, if a state has a deficit each year it means it has spent, or is spending, more than it has collected in taxes. The desperate option is to print or "create" more currency. But this devalues the existing currency, both domestically and internationally. The normal course is that each year the deficit is paid by borrowing, by issuing state bonds.
<snip>
I don't understand your equation that if one side of a balance sheet has a deficit the other side must have a surplus so it is all OK. But perhaps I am missing something.

It's not 'my' equation, if anything it's yours. I've snipped a bit of the preceding paragraph, but you're essentially saying exactly the same thing. One man's deficit (borrowing) is another mans asset (loan). If there's no deficit, no 'requirement' for borrowing, then the other person doesn't have an asset of a debt owed to them by a third party.

 

[PaulMB]

It's not 'my' equation, if anything it's yours. I've snipped a bit of the preceding paragraph, but you're essentially saying exactly the same thing. One man's deficit (borrowing) is another mans asset (loan). If there's no deficit, no 'requirement' for borrowing, then the other person doesn't have an asset of a debt owed to them by a third party.

This is getting a bit too philosophical for me. Your words were: "a deficit in one column is somebody else's surplus." If you buy a state bond you get a bit of paper (actually you don't) that says something like "You have lent the state £10,000, it will be returned in 10 years' time, and in the meantime you will receive 3%, £300 a year in interest." This bond is your "asset." But is it your "surplus"? I have no idea. Incidentally, if the state starts "creating" lots more money your bond will be worth much less, in real terms, in 10 years' time. And if you try and sell it on the bond market before that, you may find that the going rate is not £10,000 but £5,000, so for the buyer the interest rate will be not 3% but 6%.

 

[Sue Pertwee-Tyr]

This is getting a bit too philosophical for me. Your words were: "a deficit in one column is somebody else's surplus." If you buy a state bond you get a bit of paper (actually you don't) that says something like "You have lent the state £10,000, it will be returned in 10 years' time, and in the meantime you will receive 3%, £300 a year in interest." This bond is your "asset." But is it your "surplus"?

Perhaps I'm being loose with the terminology and therefore confusing you (I don't know), but in these terms I don't think there's much meaningful distinction between the terms 'asset' and 'surplus'.

 

[PaulMB]

Perhaps I'm being loose with the terminology and therefore confusing you (I don't know), but in these terms I don't think there's much meaningful distinction between the terms 'asset' and 'surplus'.

I'm afraid I cannot answer. What I do know is that surplus is generally used as the opposite of deficit. Next year, for instance, the State of Ruritania may gather more in taxes than what it spends in castle maintenance and buying crossbows for its army. In that case it would have a "surplus" and might not have to issue new bonds for a while. Some of its existing bonds would reach maturity and be paid off with the surplus, so Ruritania's National Debt would become smaller.

 

[ks.234]

I'm afraid I cannot answer. What I do know is that surplus is generally used as the opposite of deficit. Next year, for instance, the State of Ruritania may gather more in taxes than what it spends in castle maintenance and buying crossbows for its army. In that case it would have a "surplus" and might not have to issue new bonds for a while. Some of its existing bonds would reach maturity and be paid off with the surplus, so Ruritania's National Debt would become smaller.

Try this
http://bilbo.economicoutlook.net/blog/?p=43015

 

[Sue Pertwee-Tyr]

I'm afraid I cannot answer. What I do know is that surplus is generally used as the opposite of deficit. Next year, for instance, the State of Ruritania may gather more in taxes than what it spends in castle maintenance and buying crossbows for its army. In that case it would have a "surplus" and might not have to issue new bonds for a while. Some of its existing bonds would reach maturity and be paid off with the surplus, so Ruritania's National Debt would become smaller.

So in that case, the 'surplus' is an asset, a net positive value to the notional ledger. Money in the bank, as opposed to an overdraft, if we must use the domestic analogy. Hence why I think any distinction between the terms is a bit of an irrelevance.

 

[ks.234]

So in that case, the 'surplus' is an asset, a net positive value to the notional ledger. Money in the bank, as opposed to an overdraft, if we must use the domestic analogy. Hence why I think any distinction between the terms is a bit of an irrelevance.

Put simply, the government defict, is our surplus. Reduce the deficit and you, ultimately, reduced the money in our pocket.

 

[ks.234]

I'm afraid I cannot answer. What I do know is that surplus is generally used as the opposite of deficit. Next year, for instance, the State of Ruritania may gather more in taxes than what it spends in castle maintenance and buying crossbows for its army. In that case it would have a "surplus" and might not have to issue new bonds for a while. Some of its existing bonds would reach maturity and be paid off with the surplus, so Ruritania's National Debt would become smaller.

Don’t know about Ruritania, but the UK does not need an income in order to spend on crossbows or anything else. Neither is borrowing required to fund spending. Even Jacob Rees Mogg has admitted that bond issuance is nothing more than the central bank borrowing from itself.

 

[PaulMB]

So in that case, the 'surplus' is an asset, a net positive value to the notional ledger. Money in the bank, as opposed to an overdraft, if we must use the domestic analogy. Hence why I think any distinction between the terms is a bit of an irrelevance.

To remain in Ruritania, if the King decides to use an annual surplus to pay off some of his debts, he does not have a new asset but simply less debts. If he uses the surplus to build a new castle, he then has the castle as a new asset. In the accounts of a state you might have a deficit one year and a surplus the next. You can have a deficit without losing any assets. And you can have a surplus and use it to raise pensions, thus not creating an asset. But I don't want to go on quibbling over terminology. If you want to visualise economics in a certain way, please do so. But bear in mind that there are many ways, and there is no one right way (as some keep hammering away like the mantra of a new-age religious cult). It is useful to read about what happened in the past. "Monetarism" is not an evil spell beloved of Tories for their own profit. It is one of many, intertwining currents in economic thinking that have existed under governments of all political colours. Different theories and philosophies have existed for hundreds of years, as have taxes and national debts. But history tells us that they all essentially rest on fundamental economic mechanisms that cannot be escaped.

 

[PaulMB]

Don’t know about Ruritania, but the UK does not need an income in order to spend on crossbows or anything else. Neither is borrowing required to fund spending. Even Jacob Rees Mogg has admitted that bond issuance is nothing more than the central bank borrowing from itself.

Well you have your fantasy-economy so why can't I have Ruritania?