“We need deficits because people want to buy gilts” – Richard Murphy

Richard Murphy published an interesting  article “On budget surpluses and the economic illiteracy of the Fiscal Charter”  yesterday in which he made several important points such as “we need deficits because people want to buy gilts” and “if the government runs a surplus someone else has to run a deficit”.

Absolutely right and well said, Richard! I hope everyone who’s even the slightest bit worried about our deficit and so-called “national debt” reads this very important piece of what will be ‘news’ to them. Maybe John McDonnell has finally seen the light? There’s nothing wrong with a a change of mind when new evidence and new arguments compel that. Intelligent people change their views all the time as more information becomes avaialble.

The question to be resolved, and I must admit I’m not totally clear on the answer, is if we should sell gilts. Is the fact that people want to buy them a good enough reason to sell them? Why can’t we just allow people to put their money on deposit. Offer the a fixed interest rate, say 2%, and tell them “That’s it. Take it or leave it”.

Some would say 2% was way too high. We should pay 0%. So what will happen then? If we discourage people saving, deliberately creating enough inflation to make 0% , or even 2% very unattractive, we’ll theoretically have no deficits at all.

Because Government Deficit = Savings of the Non-Government

Is that what people really want? Is George Osborne aware that what he needs to do to achieve his surplus is create more inflation and stop selling gilts?

9 responses to ““We need deficits because people want to buy gilts” – Richard Murphy

  1. If the only reason we are lumbered with a dysfunctional unsustainable monetary/banking/financial system is because people [pension funds] want to buy gilts then the sooner we dump it the better. With a debt-free sovereign money system commercial bank capital reserves can be hiked up allowing slack for private investors and pension funds to move into the corporate bond market to replace bank funding. This will allow banks to focus on SME and private lending and at the same time obviate any need for obscene salaries and bonuses. Oh! … and credit card rates need to be capped! There …simple! … that’s it all fixed.

    • The system has its problems but that’s because its generally misunderstood rather than because it is “dysfunctional”. There’s no problem anyone buying up gilts (or any form of government debt) providing we understand that the govt debt is an asset of the owner. So we just need to not lie awake at night worrying about anyone having too many assets!

      Sure, government can print cash rather than sell gilts. But in both cases the government has to assume a liability for either the cash or the bonds it has issued. Cash has 0% interest attached. Bonds have typically a couple of % interest. So it could be argued that just printing cash is a better option. But just as you or I would expect to receive some interest on any money deposited in a bank so the holders of govt debt would wish to receive some too. There’s pros and cons if saying they can’t have any.

  2. I’m no expert, but isn’t the demand for gilts not a personal one, but a structural one due to the requirement that pension funds hold low risk assets? Of course that can change, but it’s quite a significant change.

    • Pension funds would be one buyer of gilts. Banks would be another. In normal limes gilts pay out more interest than holding cash in their BoE reserve accounts.

      The big exporters to the UK hold gilts. If they earn money selling us stuff and want to save it rather than spend it, they then buy gilts.

  3. Pension funds is a bit of a scam really. Cut the middleman out and have the State Pension at the Living Wage.
    You can’t transport bread 30 years in the future. You can’t save up for pensions (collectively, not individually.)

    • We can provide for future pensions only in the sense that we do everything possible to ensure the future economy will be as efficient and as healthy as possible. That means making sure our young people are both well educated and have a decent job when they either finish their formal education or to run in parallel with their continued education.

      Just putting govt IOUs aside, as you say, may work for you or I, but it won’t work for everyone and it won’t work if govt does that.

  4. Of course pension funds are a scam – the whole idea of private pensions has been to provide the City with an opportunity to salami slice those assets through “management” fees and asset churning. Much better, as you say, to have a decent state pension, and then to top that up with low cost group schemes.

    But you’re also reaching into an interesting area, which is why we save. It’s a form of insurance, of course. If we had income security (as well as health and home security) then much saving wouldn’t be necessary …

  5. Peter, what is your view on a “tap” system of bond issuance? I believe Bill Mitchell mentioned it but I can’t find the blog post.

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