In April 2014 I wrote: Stand by for the next UK crash! ETA 2016
I didn’t use my crystal ball which has never proved very reliable, in any case, when it comes to forecasting football scores or racing results. The reasoning was based on the rate of fall in the financial position of the UK private domestic sector. It was obvious, then, that serious private sector debt problems would start to arise in mid to late 2015 if government policies carried on as they were.
Two recent articles by Owen Jones in the Guardian and Nigel Morris in the Independent bear this out. Government policies have indeed been carried on as they were.
There is a very real danger of an economic crash as Owen Jones argues although he doesn’t have quite the right explanation. It’s really not much to do with the need for increased industrial productivity. The productivity of UK and European industry is higher than it has ever been. Yet the economic problems are worse than they have been since the 30’s. Clearly Owen Jones, much as we might admire his political stance, is barking up the wrong tree.
Simply, if the UK wants to run a 5% of GDP deficit in its Current Account Balance of Payments, someone has to fund that by borrowing. Usually it is government which has assumed that role but increasingly the burden is being shifted onto the Private Domestic sector.
It may work in the short term but soon the private sector will be increasingly unable to raise the necessary loans especially if there is a fear of higher interest rates, and a general credit crunch in the economy. The words ‘credit crunch’ started to become a cliche of all 2008 financial commentary just prior to the GFC. We are starting to hear them again on a more regular basis.
It’s not looking good!
The graphical basis of my concern. A modified screen shot from Neil Wilson’s blog “3poken”.
“Simply, if the UK wants to run a 5% of GDP deficit in its Current Account Balance of Payments, someone has to fund that by borrowing.”
As quite a few enlightened economists are now saying, money does not have to be created as debt — well, not in the usual meaning of the word, anyway. Money can easily be created out of nothing by a government-owned central bank, such as the Bank of England, and gifted free of interest and free of debt to the government to supplement its budget and wipe out what would otherwise have been a deficit. provided the extra money so spent into the real economy doesn’t cause the economy to ‘hit its straps’ as it were, inflation will not result.
Adair Turner, and there are others, is advocating “QE for the people”.
See the following:
@ Peter J. Morgan December 23, 2015 at 11:35 pm
Australia’s response to the 2008 GFC by Rudd/Gillard was in effect ‘QE for the people’
Bill Mitchell describes it as Overt Monetary Financing.
Australian govt. funds were allocated directly to major projects like building new/renovating school facilities (BER); to add insulation to homes throughout Australia; and the issuance of ‘stimulus’ cheques for $900 to each citizen.
It worked brilliantly – the money went to where it was needed most; it impacted locally and immediately in every area of Australia.
The banks/financiers and LNP led the charge to ridicule/discredit the programs, as they did not get to be ‘middlemen’ to lend out the funds for profit.
It was very effective in countering the impact of the GFC on Australia, so much so that the current neoliberal LNP govt. conveniently are able to overlook the fact that the GFC even happened in Aust. when they criticise the ALP’s past financial management credentials (deficit legacy).
I suggest that the US would have recovered more quickly from the GFC if the US QE spending was routed directly to local infrastructure maintenance/investment instead of via banks for commercial lending.
The US has spent trillions, yet still have rundown schools/universities, highways, bridges etc, a flat economy, collapsed industry and citizens who failed to receive any social/financial benefit – while the top 1% wallowed in QE money to increase transnational corporate profits – often by investing funds in more profitable manufacturing offshore.
“As quite a few enlightened economists are now saying, money does not have to be created as debt ”
I’m not sure what you mean by “now saying” ! They’ve always said that!
Neither would I agree with the term “enlightened” – but I’ll let that go!
The concept of debt free money started when coins contained their own value in terms of their metal content. That made sense. The value of the metal offset the liability of the coin’s value.
Then paper money was backed by gold reserves on a strict 1:1 basis. So whereas govt bonds were counted as debt, paper money wasn’t counted because the value of gold reserves offset the liability of the issued notes. That still made sense.
Later paper money started to be backed by less gold than was strictly required and govts just assumed that no-one would really notice so they still called it debt-free. That made some sense because govts didn’t want to draw attention to an inconvenient fact!
We’ve now arrived at the situation where money is issued with no gold or anything else to back it up. So the argument is that because no-one ever asks to be repaid it isn’t really debt. But issued bonds are debt. In other words an issued govt IOU which is called cash isn’t a debt but an issued bond which may have zero or even a negative interest is a debt! This makes no sense at all. We should reject this nonsense.
In the USA someone “forgot” to include coins in their definition of the National debt. So, in principle, all they need to do is issue 18 trillion dollar coins (you might want to Google that term) and hey presto! No National Debt. They could make a couple extra and have 2 trillion surplus on this basis. They could just be plastic tiddlywinks with the right signature on them and if the powers-that-be say they are worth a trillion then that’s what they are worth. If any of them were stolen they could just be canceled so would present no security risk.
This really makes no sense to any rational person but that’s the way it is in the USA. Theoretically. But, of course, the powers-that-be there know better than to draw attention to the problem by actually making these ‘coins’ !
“Simply, if the UK wants to run a 5% of GDP deficit in its Current Account Balance of Payments, someone has to fund that by borrowing…”
Is not the UK a sovereign currency issuing government?
Is the UK borrowing foreign funds to run that 5% deficit?
MMT says a sovereign currency issuing govt. can always create/spend its own money – it doesn’t have to ‘fund’ spending by borrowing.
I am unfamiliar with UK national finance, but have been learning much about MMT.
Is there some detail I am missing – what is different here?
You are quite right to raise the question of whether the Govt can borrow back its own IOUs. It can’t really. All it can do is swap an old IOU (usually cash) for a new one. (Usually bonds)
However, the term “Govt borrowing” is widely used. So in an MMT context that has to mean “issuing new liabilities”. It doesn’t matter if those new liabilities are sold (ie gilts exchanged for cash) to the private sector or sold to the central bank (some would call it printing money!) It’s all the same. All borrowing – if we are allowed to use that term.
The problem with not counting the money base as a debt or a liability is that it leads to anomalies. For example, in the USA someone “forgot” to include the issuing of coins in the National debt. So according to the rules of mainstream economics the Govt can get around their debt ceiling by issuing trillion dollar coins (you might want to Google that). This makes no sense at all. So from a sectoral balance POV in MMT all liabilities are counted as debt.
So if, for example, the Govt defict was 5% of GDP , and the private sector was in surplus to the extent of 2% of GDP then the overseas sector would have to be in surplus to the extent of 3% of GDP. This is the same as the external deficit being 3%
So Govt Deficit = Savings of PS + External Deficit.
I doubt this very much. The small number of lefties who suggested in 2012/13 that UK recovery would never come with Osborne’s fiscal regime were used to discredit all those who were against austerity. Osbourne will probably u-turn.
I’d just make two points about this:
From 2010 – 2012 the mistake many on the left made was to take George Osborne at his word about “restoring the budget to surplus”. That of course didn’t happen.
But, even so, the sectoral balances at the time were healthier than they now are. I’ve added a graph to the post show this. So it’s probably already too late for George Osborne to change course. He’d have to force the pound down, somehow, to reduce the CAD, and then totally and publicly reverse his spending and taxation policies to stand a chance of success. I’d say that was highly unlikely.
“He’d have to force the pound down, somehow, to reduce the CAD, ”
New Sectoral Balances have came out – ROW saving less.
Yep. That could be good news or it could be a sign that aggregate demand is falling in the UK economy and it’s not just import sales which are reduced. A sign of worse to come maybe? We’ll have to see how it all turns out!
I have just looked up your article from April 2014 where you said “Even the Chinese have recently fallen prey to the idea that cheap credit can permanently boost their economic growth. They will be in just as much trouble as anyone soon, unless they realise what’s been driving their incredible growth in recent years and act now, before it is too late.”
Well done. You got that part right. Are you going to be as right on the rest of it?