That is because all money is now, as a matter of fact, created out of thin air when banks lend money, inclduing when (as will be legal again after Brexit) the Bank of England lends directly to the Treasury.
The Bank of England creates base money. The banks, as banks, do not create money. The banking system as a whole creates wide money, or as we might call it, credit. These are vital distinctions that even a Senior Lecturer should manage to grasp.
There is then no technically reason why all government debt could not be cancelled (as this QE debt has, in effect, been) in this way.
QE hasn’t cancelled the debt. As with the Federal Reserve later this year they will stop rolling it over–although the BoE might vary the timescale– at some point.
But this this then leads me to state the other obvious fact: government debt is just another form of governmement created money. It’s convertible into cash, as QE proves.
Well, yes, obviously, I can take a Treasury and go and get cash for it. As I can with some gold, some euros and my used flip flops. So?
First, if we are to have some inflation (and we generally agree two to three per cent is good) then we need more money. And government debt is money. It is, in effect, the promise to pay that underpins the economy. So inflation says we need more of that debt each year. If we don’t get it then the economy is starved of cash and that causes economic stress, at the very least.
Jeebus, not even getting this right. It’s this distinction between base and broad money again. One way of describing that being the velocity of circulation of money.
You know, MV=PQ all over again?
Sure, we want to have expanding M0 as the economy expands, quite right that the restaurant serving 100 covers needs more crockery than the one serving 50. And we also want to have more M4, or credit, or wide money, as the economy expands too. But there’s a relationship between the two, M0 and M4, usefully called V.
Government debt is not, for example, M0. The cash created under QE is. See the difference? Desiring a larger money supply means not creating more government debt, it requires creating more M0. Or, of course, V can change which is why we did QE, to compensate for the manner in which V plummeted.
He’s just not getting even the basics, is he?
So inflation demands more government debt. It’s the best deal for a growing economy that there is. That’s why governments have to create it.
He’s making the leap between more M0 and more Treasuries. They’re just not the same thing.
Third, banks need this debt. When most people put money in the bank they assume it is safe. That is because the government guarantees the deposits most individuals make in banks so that if the bank fails the depositor will get their money back. That is the only reason most of us trust a bank. But this does not apply to businesses depositing millions of pounds in their bank accounts overnight, as happens every night in the UK. Those businesses have no such guarantee. If the bank fails on them, as Lehman did in 2008, then they might well go down with it. So they don’t deposit the cash. They enter into contracts with banks. The banks sell them government bonds in the evening, which the despoitor then own, and which cannot fail because the UK government (unlike banks) can’t fail, and which the bank agrees to buy back in the morning at a slightly higher price, with the increase representing the interest due. If there were no government bonds to fulfil this role then the banking market would grind to a halt.
He’s entirely forgotten about the overnight and interbank markets, hasn’t he?
Fifth, interest paid on government debt is a good thing. As already noted, it underpins private pensions for a start. And a lot of the most stable savings funds. I’m not saying this is a perfectly equitable redistribution of wealth, because it is not. But I am also saying it is not income lost to the economy.
No interest paid is money lost to the economy you idiot.
So we need debt, and because of inflation, growth and growing numbers of pensioners we need more of it. How much more? Notional national debt is now about £1.8 trillion and after QE it is around £1.4 trillion. Assume inflation of between 2% and 3% and how much extra debt do we need a year? Anything between £30 billion and something in excess of £50 billion would seem to be the answer. It’s not a precise science: there will be swings and roundabouts.
You see? He’s confusing M0 with Treasuries.
But the point is that this new dent is vital: it has to happen or the economy is harmed. And this sum excludes debt issued for specific purposes, like an infrastructure fund. Issue less than this and the economy will be in trouble. That’s a simple fact and explains why the Tory obsession with a balanced budget is so dangerous.
Dear God. And this man teaches economics in a British university? OK, well, Islington Tech perhaps but really….we need £30 to £50 billion more a year of Treasuries in order to finance the economy? Just to let you in on a little secret. In 2005 M0 for the UK was around £40 billion, £45 billion. Yes, we want that number to grow, gently, along with the size of the economy, the crockery argument. As long as, you know, V doesn’t change too much.
He’s entirely and totally at sea here.
Which brings me to the final fallacy that needs tio be addressed, which is that one day the debt will have to be repaid. No it won’t. That’s because this debt is money. That makes it unlike all other debt which is denominated in money. They’re simply not the same thing. Debt denominated in money has to be repaid. Debt that is money is only repaid if we want to destroy money. And why would we want to do that? Is anyone seriously suggesting that we can live in a moneyless society in future? I seriously doubt it. And in that case national debt does not have to be repaid, ever, which is exactly what history tells us.
Government debt is a good thing. The danger is inherent in the myth that it isn’t.
What’s even better is that as we reverse QE by not rolling it over we will in fact not be reducing the amount of government debt at all but we will be destroying M0, money. That will be the very point of doing it.
Can I get a job teaching grievance studies somewhere? Sure, I know nothing at all about it but that doesn’t seem to be a current day barrier, does it?