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Murphy’s mad skillz as an analyst

As most people know, issuing bonds creates a liability for the government. Assuming the bonds have a redemption or repayment date on them (and all UK government bonds do at present) they have to be repaid at some time.

Bonds used to pay for nationalised industries in the 1940s were repayable in 30 years. The fact that they were immediately replaced by new bonds, meaning no effective repayment took place, is ignored for accounting and by MPs who claim debt is a burden on their grandchildren.

So, err, that the bonds have not been repaid means that they’re not a burden on the grandchildren?

And yes, that is what Murphy is claiming.

But it gets better:

Accounting, properly done would, however, recognise something that the debt fetishist MPs do not, which is that in this case the debt is used to buy an asset. That asset would be the water companies, whose fair values would have been determined to be £45bn to £50bn.

In other words, debt would have been issued, but only because an asset would have been bought. So, the actual net worth of the government would not have changed as a result of nationalisation. The debt repayable in a generation’s time would be represented by something of value.

Claiming in that case that the national debt has gone up and so the government can do nothing about the water industry – which is fundamental to not just our well-being but to our survival – is absurd. That is putting accounting before need, and that should never happen.

It is, however, what the UK’s Office for National Statistics, which is responsible for preparing the UK’s national debt data, would probably do. I can say that because since 2013 they have included the borrowings of Railtrack in UK national debt, but ignored all its assets when doing so.

The result is that because Railtrack is nationalised and owns the rails on which all the UK’s trains operate because that network is too important to be in private ownership UK national debt is claimed to have increased by £28bn at present but the track is treated as worthless.

That, of course, is not true. But that’s how the ONS accounts for this.

Well, no, it’s not. Then national debt is the debt owed. As in corporate accounts, we have a line stating “this is the debt”. In such corporate accounts we also have lines which say assets, then net assets and so on.

So do we in government accounts. They’re in the Whole of Govermnent accounts.

The Sage of Ely, who would plan our entire lives for us, has such mad analysis skillz that he doesn’t even know where assets are accounted for.

Well done that man, vry well done.

19 thoughts on “Murphy’s mad skillz as an analyst”

  1. There’s also the issue that an asset only remains an asset if you keep spending money on it to maintain it. If the railway network is not maintained it would rapidly become useless (though ironically it might be worth more as just land without a railway on it). But things like the electric grid, and the water/sewage systems would literally be worthless if they aren’t repaired constantly, and renewed and expanded over time. So the tax payer would be on the hook for all that expenditure as well.

  2. @ Jim
    I should explain that there is a difference between an asset which is a useful physical item, such as a house, a machine, a railway track … and a financial “asset” which is only an “asset” if the discounted value of future cash flows is positive. My house is a valuable asset regardless of whatever price an estate agent chooses to attribute to it and its value remains the same whether the price is £10 or £1,000 or £1m.
    Yes, if failure to maintain part of the financial “asset” causes future cash inflows to cease the “asset” becomes worth only its site value, but water/sewage “assets” do not come into this category. OfWat sets prices based on the accounting “value” of the equity and debt of the water companies so neglecting maintenance would have no (immediate) impact upon the profitability of water companies and very little on their charges to consumers (the latter *should* be reduced by the reduction in maintenance costs). Fortunately, since OfWat limits the company’s profits which are calculated after maintenance costs there is no disincentive to spend money on maintenance: this is likely to change after nationalisation.

  3. “so neglecting maintenance would have no (immediate) impact upon the profitability of water companies and very little on their charges to consumers ”

    You try charging consumers for water that doesn’t come out of the taps, or comes out brown, or for sewage that doesn’t disappear down the drains. I don’t think you’ll get much revenue. One of the main reasons that water was privatised in the first place was that the government of the day didn’t fancy paying for all the investment in the physical infrastructure that was needed. Any business that neglects its physical working assets may make short term extra profit but will soon have a pile of scrap worth very little.

  4. @ Jim
    Now that you mention it I can remember water coming out of the bath taps brown (peat, I hasten to add) when I was a child. We didn’t have any choice about paying for it: the water board was owned by a consortium of local authorities.
    Of course it isn’t the same for private companies which would have to sue to get paid but it would take a fairly long time for things to get that bad after the £billions that the privatised water companies have spent on improving the water supply and sewage, so the failure to maintain would have no *immediate* impact.

  5. “The fact that they were immediately replaced by new bonds, meaning no effective repayment took place,”

    if the bond holders are getting repaid, even if from funds obtained by issuing fresh bonds, then it is being repaid. Don’t repay your debts and nobody ever lends to you again, even if you are the Courageous State.

  6. So let me get this straight. Nationalising water companies by issuing gilts to 100% of value is sound practice, when, from what I can tell, it is the over-reliance on debt which has landed the water companies in the soup in the first place. How does that work, then?

  7. Clearly very familiar with the current situation in Russia or previous attempts to do this in Venezuela, Equatorial Guinea and Zimbabwe (among a long line of others) – he has no discernible skills and very little knowledge. Perfect for U.K. higher education!

  8. “As most people know …”: very droll. Most people don’t even know that when they deposit money in a bank they are lending it their money.

    “the water companies, whose fair values would have been determined …”: I wonder who he has in mind as the person who would determine those “fair values” and what method he would use.

  9. If he doesn’t understand how corporate accounts work, maybe he coudl get an accountant to explain it to him.

  10. A short article by Ralph Musgrave which I think is relevant here so I’m going to quote the whole thing:

    You can’t build a bridge in 2019 using steel produced in 2029.

    It’s very unusual for Simon Wren-Lewis to make a mistake, which is why I have followed his blog for several years. Plus I am going to nominate him for a gong (whether he likes it or not).

    However in his para starting “The argument that…” he falls for the popular myth that if something is funded via debt, future generations have to pay, in that they have to repay the debt. That idea doesn’t just break the laws of economics: it breaks the laws of physics. To illustrate, if a bridge is built in 2019, the blood sweat and tears needed to build the bridge and the steel and concrete used in its construction absolutely have to be sacrified in 2019 or earlier. That is, it is not physically possible to build a bridge in 2019 using steel produced in 2029. Doing the latter involves time travel.

    The only exception to the above comes where something is funded with money loaned by a foreign country (as pointed out by Richard Musgrave (no relation) in the American Economic Review in 1939. But since every country faces the same problem as to how to fund green forms of energy production, the above “foreign country” point is of little relevance.

    Also Nick Rowe claims to have a complicated method of avoiding the above “physical impossibility” point. I’ve never been much impressed by that, and for reasons explained in articles on this blog a year or two ago. To find them, Google something like “Ralphonomics” “Nick Rowe” “time travel”.

  11. Dennis, Pointing Out The Obvious

    If he doesn’t understand how corporate accounts work, maybe he could get an accountant to explain it to him.

    That would require a very patient accountant who possesses lots of paper and a very large box of crayons.

  12. “However in his para starting “The argument that…” he falls for the popular myth that if something is funded via debt, future generations have to pay, in that they have to repay the debt. That idea doesn’t just break the laws of economics: it breaks the laws of physics. ”

    OK, I’m sure I’m going to just love this explanation. If debt doesn’t shift the financing into the future then why do people use debt?

    I think I can see what’s happpening here. Which is that of course the assets, labour etc, must exist now to build the bridge. Therefore the bridge consumes current assets. So, in that sense, repayment can’t happen let alone is necessary.

    But the builders of the bridge now do not own those assets being consumed in building the bridge. They’ve got to borrow them (through equity, cash, debt, whatever) from those who do. And if debt is being used then the future owners of the asset – and thus, likely, the future users of it – do have to repay that debt.

    And if something is tax financed then sure, future taxpayers do have to repay the debt. Because the assets were owned by this group of epolpe over here, then borrowed to build the bridge. And the deal was that future taxpayers would pay, over time, the costs of those assets that were used to build the bridge.

    This stikes me as being very like this idea that the creation of a loan creates a deposit therefore deposits don’t finance loans. One of these things that’s true in a very limited set of meanings. But which is then used to apply to a very much wider set – where it’s not true.

    Goiven that the ideas come frmo the same folk the logical failure doesn;t surprise greatly either.

  13. Is the bridge conundrum not just a case that when borrowing to build a bridge today you are agreeing to provide (for free) the same amount of resources to someone else in the future? To look at in terms of pure resource, a bridge contains X tonnes of concrete and steel, and Y hours of labour. Forget money, imagine someone lends you all that resource today, as much concrete and steel as you need, and workers to build it. Now you have a bridge today, great. But then in 10 years time (or whenever the debt is due) you have to somehow come up with X tonnes of concrete and steel and Y hours of labour, all of which has to be given for free to someone else. You are a lot poorer, because doing that means a lot of work, that you don’t get paid for. Or you have to pay someone else to provide those resources, which makes you poorer as well.

    The problem is that these broad brush concepts only look at the aggregate, not the individuals. You could say that if the UK state borrows money today from its citizens, then the UK as a whole doesn’t ‘owe’ anything. It all nets off. But of course it rather matters to the people holding the debt.

  14. Sounds sort of right to me Jim. But I am not sure about ‘provide (for free)’
    It’s an example of opportunity cost as the economist call it.
    If you want a bridge now then somehow the resources have to be found, which means some other project doesn’t have those resources. So at sometime in the future you will need to find the resources for that other project.

  15. You can’t sell me the same bridge twice.

    djc makes the point correctly that resources have to be diverted from elsewhere.

    Think World War II here. Factories that were producing planes and tanks were no longer available to produce cars and refrigerators. The people who lived at that time were the ones making the sacrifice of real resources.

    Now fast-forward to the 1950s. Were the people living then making a sacrifice of real resources again because of the presence of those government bonds?

    Of course not.

  16. “Were the people living then making a sacrifice of real resources again because of the presence of those government bonds?”

    In aggregate? No. In specific? Sure. Government tried to run budget surpluses to pay the bonds off. Meaning some had to pay high taxes – reduce their consumption of real resources – in order to pay the bonds off.

    Distributional issues do matter after all.

  17. Government tried to run budget surpluses to pay the bonds off.

    This ignores the monetary offset. A couple of quotes from articles by Scott Sumner:

    For the 247th time, the fiscal multiplier is roughly zero

    Keynesian economists have never been able to accept my assertion that the fiscal multiplier is roughly zero because the Fed steers the (nominal) economy. There’s a mental block on their part (or on my part from their perspective) that prevents us from seeing eye to eye on the issue, even if we agree on the need for monetary stimulus.

    Everyone seems to agree that the fiscal multiplier is zero when we aren’t at the zero bound. The issue being debated is whether this is also true when rates are near zero. I say yes, most Keynesians say no. See if you think the Fed continues to steer the nominal economy at the zero bound:


    Monetary offset: Why is it so difficult to understand?

    In this post I’m going to ask for your advice. I’d like to know why the public, and even the more sophisticated pundits, have so much trouble understanding monetary offset.

    Of course the biggest mistake has to do with monetary offset. If fiscal policy becomes more expansionary, central banks will simply offset it.


    Scott’s article above is when the Fed was counteracting a stimulative fiscal policy, but the idea is the same, i.e., a central bank will run a monetary stimulus to offset a government attempting to run a budget surplus, thereby rendering fiscal policy ineffective.

    (The extra dollars that monetary stimulus leaves in the hands of the people means that they can pay those higher taxes on the bonds without forcing them to reduce consumption.)

  18. Yes, super. Which is exactly the thing I complain about. Scott – who I know and correspond with – is talking about the macroeconomic effects of fiscal and monetary policy. Cool, what’s the effect on GDP of a change in fiscal or monetary policy?

    This has absolutely fuck all to do with the ditributional effects of who hsa to pay the taxes to pay off the bonds for the bridge we built a decade back. As I keep saying you’re taking something that is true in one specific and detailed sense and then applying it wildly to the whole economy.

  19. Dear All,
    Think about Pensions. One forgoes consumption in the present to create an asset that will provide one with an income in future. This is the fundamental basis of all capitalism, starting with the neolithic farmer putting aside some of the corn from one harvest to sow to create the next harvest.
    Murphy does not believe in this, hence his grubbing around for grants from fake charities to provide him with an income in his sixties while I spend a chunk of my time considering to which genuine charity I should give some of the surplus (over living costs) from my pension.
    In normal nationalisation the state seizes an asset (i.e. consumes capital) now and *promises* to repay the owners in the future out of surplus cash flow from the asset plus taxes, so this compares to a lump sum purchase of a guaranteed annuity (i.e. one that does not end when one dies) – but for most Water companies the capital spend was (and is) so high that there is negative or nowhere near enough cash flow to cover the interest so the capital will never get repaid except out of the taxes paid by our grandchildren. The unwillingness of local authorities to spend enough money to maintain and upgrade sewers and reservoirs was the reason for privatising Water and getting private sector investors to subscribe and invest Billions of pounds to catch up on years of neglect.
    The Water companies have paid £Nbillion in dividends since 1989 – how much would the government have paid in interest on index-linked gilts to provide the same cash injection as that provided by the flotation in the following 34 years?
    The financial case is overwhelming but, to me, the top reason for privatisation is that private companies cannot, with impunity, poison their customers like the South-west water authority nor spread dysentry like the Metropolitan Water Board

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