Saturday, June 17, 2017

Laurie Macfarlane: There is a magic money tree – don’t let politicians tell you otherwise

Tom put me onto this site. This is a good article about government debt and why it's not such a big issue that right wing politicians make it out to be if governments can issue their own currency as they do in Britain and the US.

Last night Theresa May responded to a nurse’s concerns over pay in the NHS by saying “there is no magic money tree” to provide “everything that people want”. Other Conservative politicians have used the same line to attack Labour’s plans to increase public spending.

It’s an old trope. The argument goes like this: the UK has lived beyond its means for too long. The national debt now stands at an eye watering £1.7 trillion, meaning that we have saddled future generations with unsustainable debt and interest payments. We simply can’t go on spending money that we don’t have. Money doesn’t grow on trees – duh!

But despite its ominous reputation, the national debt is not all that it seems. The national debt is simply the sum total of all the government’s IOUs – the promises it has made to pay money back in future, plus an agreed amount of interest. Unlike a household, the UK government has its own central bank and its own sovereign currency. This means that the government borrows and spends in a currency that it controls. Here’s where things get interesting.


Since 2009 the Bank of England has purchased £453 billion of government debt from the private sector through a process called ‘quantitative easing’ (QE). Put simply, QE is the technical name for what happens when a central bank creates new electronic money and uses it to purchase assets from financial institutions.

Yes, that’s right – newly created money. Alas, the magic money tree does exist!

As a result, over a quarter of the total national debt is now owed to the Bank of England. But hold on, who owns the Bank of England? Well, the UK government does.
To put it another way, the UK government owes £453 billion to itself. This raises the obvious question of whether it really exists at all. As Jim Leaviss, a bond investor for M&G Investments recently remarked to the Financial Times: “Is there any difference in it being in a musty old drawer in the Bank of England, or saying it doesn’t really exist?”


Schofield said...

Here's Richard Murphy's argument for turning "the musty old drawer's" location into a distant memory:-

andy blatchford said...

Murphy never gets it. All it changes is the type of 'debt' held, it just changes to reserves instead of gilts and in the age of Interest on Reserves what is the difference?

AFAICS all Murphy is doing is explicitly guaranteeing 'debt'.

Neil Wilson said...

The way to get rid of the QE overhang is to uplift the BEAPPF to the Bank of England via merger - which eliminates the BEAPPF.

The Bank of England then does an equity expand against its 'Other Assets' asset and then pays the whole of the QE Gilt fund over to HM Treasury as a in specie special dividend. HM Treasury then writes out the Gilts permanently.

We don't need to issue anything to fund the investment the country needs. We just buy the construction resources as required and alter the taxation thermostat. If people want to sit with money in their pension schemes, that's their fault. Private pension schemes should be for private asset investment - not subsidised with government funds.

andy blatchford said...

"Private pension schemes should be for first private asset investment"

Wouldn't that though just funnel those funds into property if Govt isn't offsetting with some safe saving financial assets? Looking at how mine works with age they switch more into safer assets eg property & Sov bond, money market funds. They are pretty clear about their business model. Getting rid of that bung would just make the property market even worse?