In that case, first note that the ‘Treasury view’ that the primary object of government is to balance the books does still, very clearly, persist.
Nope. That’s not even what the Treasury View is. Rather, that any borrowing to spend by government has a 100% crowding out effect. Sure, the Treasury View is incorrect but it’s still not what Snippa claims it is. It’s saying that there’s no point to deficit spending, not that balance is inherently desirable.
So, we are back to the mantra that the job is the government is to keep the bond markets happy.
Well, if you want to borrow from said bond markets it seems like a fairly sensible idea.
Second, we now have quantitative easing. £635 billion government bonds are now owned by the government. They will never be reissued to the market, as the Bank of England has now tacitly admitted. This is then new money, created without the involvement of the markets. We now know we can do that.
Third, we know inflation does not occur as a result if we are not at full employment. We currently have 10 million unemployed people.
Ah, no. Depends what you mean by “full employment” really. One useful definition being the rate at which inflation doesn’t start to rise. Nairu that is. Which is a bit circular but that’s the meaning we should have here. And what Nairu is depends upon the structure of the labour market being considered. Back in the 1980s it might have been 5 or 7%. More recently it has been perhaps 3 or 2%. What it will be in the future depends on what the labour market structure is going to be. See the work of Richard Layard on this.
And when we do get to Nairu then those QE bonds are going to be reissued to the market, aren’t they?
Fifth, we know as a result that the power of bond traders is broken, whether that be on rates, or deficits, or any other issue: since we now know that we are not in any way dependent upon them because if at any point they get uppity the government can simply begin another quantitative easing programme, the chance of a sovereign debt crisis is zero. And that is most especially true when every government is in the same situation.
The definition of uppity being used here is “No, I’d rather not buy that, thank you”.
Sixth, we know there is a massive demand for sovereign debt – including that of the UK. That is despite exceptionally low interest rates. There is not the slightest sign that there is any change in this situation, but if stock markets fell (as is likely) that demand would only increase.
Not really, no. Look up a bit. You’ll see that the Bank of England owns £635 billion of that government debt. You know, debt that the market doesn’t want and won’t take at current prices? If this were not so then why has the BoE bought it?
And sixth, explain that the government is not constrained by a lack of money, because it can make all that is required and that none of inflation, a sovereign debt crisis or a crash will happen.
Would you prefer our green and pleasant land to become Venezuela or Zimbabwe, Comrade?
But balanced budgets, tax increases and cuts are the surest way to economic and social disaster that can be imagined, and would repeat the 1930s all over again.
And that’s where Spud really falls over. For in the UK – the US experience was different – the 1930s were rather good in macroeconomic terms. Spending was cut, taxes rose, the deficit turned into a surplus. At the same time the country came off the gold standard, the exchange rate dropped 25%. The depression, such as it was in the UK, was over in 18 months or so.
Expansionary austerity works, d’ye see? It is possible to have an overall expansionary policy stance even while having a contractionary fiscal one – it’s just necessary to have monetary policy being very expansionary so as to produce that overall balance.
Those who don’t know their history can’t repeat it, can they?