public debt

Savings are NEVER needed for investment

Published by Anonymous (not verified) on Thu, 07/12/2017 - 10:48pm in

With acknowledgement to PublicDomainPictures. 

With acknowledgement to PublicDomainPictures. 

Yesterday I spoke to a group of important economists about my book The Production of Money - but omitted to make one important point. So am making it here. 

Savings are not needed for investment. Ever. There is absolutely no need for example, for the Chancellor to rattle the tax collection box, or cut government spending - to build up savings, before the government is able to invest. No need whatsoever. 

To understand why, think of your own investments. When you (and I am assuming you are not a Saudi princess) set out to buy a new home that costs say £500,000 - you do not have that money in your bank account. You may have some savings for a deposit - a downpayment on your commitment to pay. But you do not have £450,000 in your bank. All you have is a contract. A Promise To Pay. That promise - its called money - may deliver a new roof over your head, somewhere secure to live, and perhaps a place to expand your family. 

Its the same when you travel to a white goods store to buy a washing machine. All you have is your credit card. If you're a regular gal (or guy) there is no money for the machine in your credit card account. All you have is a card which effectively says: the bank thinks that ........(insert name here) will uphold a Promise To Pay.  You hand over your card, the seller of the washing machine stamps and acknowledges it, and then - she hands it back to you. You have not engaged in barter. You have not handed over any money. 

Instead you have handed over your Promise to Pay. And that is what we call 'money'. 

Its a wonderful thing. It gives you purchasing power (that is, if your bank trusts your Promise To Pay). And it gives the white goods store a sale. That helps the store make a profit, and probably helps the store or washing machine factory to employ a new member of staff. 

Of course the important thing is that you, the buyer must have income. And for most of us, that means having a job - because employment generates income. Not just for you, but also for the Chancellor (in the form of tax revenues). 

The Chancellor of course, has the biggest credit card of all. Not only is he backed by British employees - but he is virtually guaranteed income from 31 million taxpayers. And so his 'credit card' - gives him enormous powers of expenditure. Powers to purchase infrastructure, like flood defences against climate change, but infrastructure that is both social and capital investment. But investing the Chancellor is helping to create jobs (many in the private sector) which, hey presto - provides him with even more (tax) income from construction workers, nurses and teachers. 

That is the magic of the Magic Money Tree. 


The deficit & the IFS: a black hole between a rock and a hard place?

Published by Anonymous (not verified) on Tue, 31/10/2017 - 9:53am in


UK, public debt

Image with acknowledgement to Google Search

Image with acknowledgement to Google Search

Anyone familiar with the austerity obsession of EU leaders will know that the boundary between fiscal virtue and profligate sin lies at minus 3%.  A budget balance below the ominous minus 3 sends the offending government to the fiscal headmasters of the European Commission, who enforce the dreaded “excessive deficit procedure”.  Demonstrably absurd, dysfunctional and a major explanation of the long delayed and tepid recovery of the euro zone (see our report), the 3% austerity solution is too lenient by half for the Institute for Fiscal Studies (literally, numbers in charts below).

In its latest true-to-form report, “Between a rock and a hard place”, the IFS discovers to its horror that the Tory Chancellor badly missed his borrowing target and is unlikely to balance the central government’s budget.  Apparently gobsmacked by the report, the Guardian reproduced many of the IFS charts, sounding the alarm of a “new budget black hole”, its default moniker for a fiscal deficit (a singularly misleading cosmological metaphor as a trip to the NASA website shows).

An inspection of British government statistics suggests that for all the fiscal high crimes and misdemeanours over the last seven years, the Tory Chancellor is not “between a rock and a hard place” with government finances.  The chart below shows annualized borrowing over twenty years by month (ie., the moving sum of twelve months borrowing).

After an almost continuous monthly decline over the last three years, public borrowing, both for the central government and all governments (Maastricht measure), has fallen to about the level just prior to the Great Financial Crisis of 2008.  Adjusting for inflation over those twenty years annual borrowing would show a substantial reduction compared to 2007-2008.

Annualized Public Sector Borrowing, Sept 1997 - Sept 2017, billions

 Office for National Statistics  

Notes: Annualized borrowing is borrowing for the twelve months including the current month.  The Maastricht measure includes local government. 
Source: Office for National Statistics

The second chart, the budget balance as share of GDP, reinforces the conclusion that the Chancellor rests not between a rock and a hard place, but in a considerably softer location (fiscally speaking).  At the end of this September the annual equivalent fiscal deficit as a portion of GDP fell to less than 2%, its lowest level since the last quarter of 2002.  It may not matter for very long, but the British general government deficit (Maastricht measure) is well below the 3% requirement, and lower than for almost half of the other 27 EU member governments.

Mr Hammond’s fiscal transgressions derive from the same source as the IFS’s balanced budget fantasies.  The transgression against sound fiscal policy, commonsense and the welfare of the population arises because he and his predecessor George Osborne sought and seek to do what the IFS urges and the Guardian seems to endorse, to balance the fiscal books.

Quarterly Public Sector Borrowing, 1998Q1 – 2017Q3, billions

 Office for National Statistics.    

Notes: Annualized borrowing is borrowing for the twelve months including the current month.  The Maastricht measure includes local government.  GDP for 2017Q3 estimated as the previous quarter plus a nominal increase of 0.3%.
Source: Office for National Statistics.  

The roughly continuous and extremely slow decline in public borrowing is the by-product of an ideological project consciously planned and implemented by Conservative politicians since May 2010.  This project was and is to shrink the public sector, and, in doing so, destroy the welfare state. 

Complimentary ideological is the propaganda from the Institute for Fiscal Studies.  Without explaining why a balanced budget is either necessary or desirable, the IFS provides apparently independent endorsement of public sector downsizing.  While the IFS report mentions tax increases as an “option” for achieving the unnecessary and reactionary goal of a balanced budget, the language used betrays an ideological preference for expenditure cuts (see “Policy Options for the Budget”).  Expenditures are stigmatized as “giveaways” and tax increases as “takeaways”.  The specific policy suggestions call for further cuts (see discussion of working age benefits).

While the Daily Mail may ignore or excuse the deficits of Conservative governments, not so for the neoliberals of the right and centre.  These fiscal reactionaries play a long game and organizations such as the IFS are key utensils in that game.  Consistently preaching the necessity of balanced budgets lays the basis for political attack on a future Labour government.  The inevitable IFS attacks on a Labour Chancellor for unsound fiscal policy would seem all the more credible and non-ideological after critiquing Mr Hammond for the same sins.

Indeed, this last summer in the run-up to the general election the IFS deputy director heaped ridicule on the Labour Manifesto, accusing it of “pretending that everything can be paid for”.  Most of the Guardian economics writers have little patience with the balanced budget mythology.  In contrast, those who edit and write the news section faithfully transmit the propaganda generated by the Institute for Fiscal Studies in its reports and policy briefings, enhancing that ideology with emotive phases such as “black holes”.

Herein lies a lesson for progressives.  Conservative Chancellors have not met the targets they set for deficit reduction.  It is quite possible that they never intended to meet them.  As long as the Treasury failed to achieve its targets, it could argue for continued austerity – further destruction of the public sector.

The lesson is that no progressive, especially no progressive politician, should ever criticize Tory Chancellors for failing to meet budget targets.  Doing so is a de facto acceptance that the target should have been achieved.  That is endorsement of the core lie of the austerity doctrine.


The collapse of social democracy

Published by Anonymous (not verified) on Fri, 18/08/2017 - 3:40am in


Acknowledgements to wikimedia.

Dear readers. The article below was written in April, 2017, and submitted to Spain's socialist party (PSOE) for publication. It remains relevant to wider debates about the collapse of social democracy, and so I am re-posting it here. 

The collapse (or Pasokification) of social democracy in Europe and the United States is tragic, but was not inevitable. The exhaustion of PSOE and Spanish social democracy was particularly tragic given the critical role played by the party during the transition from Francoism, and given its history of governing with popular support for longer than any other Spanish political party. 

But the most tragic dimension of the demise of social democracy across Europe is that it has led directly to the crumbling of democracy. Disillusionment with democracy is fuelled by the belief that social democratic politicians could not, and would not protect populations from the catastrophic impact of market forces after the 2007-9 financial crises. The political class appeared unwilling to restrain or tackle (through regulation) the sustained rise, and then implosion, of excessive private debt-creation by bankers and financiers, which in turn was used for reckless property speculation. Second, after the economic slump caused by the financial crisis, they failed to tackle the massive rise in Spanish unemployment. Instead politicians focussed relentlessly on trying to ‘balance the budget’. The focus on public, not private debt, hurt those innocent of causing the crisis, because in a vain attempt to fix the budget, politicians worsened the already falling living standards of their own supporters.

But even before the crisis, social democratic politicians had already been weakened. By gradually relinquishing public authority over private markets in finance, labour and trade, and by handing power over these markets to private authority, social democratic politicians had hollowed out their own role in the economy. By agreeing to relinquish the support of a publicly-backed Spanish central bank, and to depend instead on an unaccountable European Central Bank, Spanish politicians gave away a great power. They weakened their own authority and influence. No wonder they were powerless to protect society from the relentless and devastating impact of market forces during and after the period of the Great Financial Crisis. By contrast, British and American politicians could call on their central banks for support.

Private authority had naturally moved into the power vacuum created by the Eurozone, and seized control. Today, it is private authority that governs financial markets in Spain and across Europe, not public authority.

Zapatero, deficit targets, and why Government budgets are not like household budgets.

It is now widely accepted that José Luis Rodríguez Zapatero, PSOE’s leader in 2010, committed a form of ‘hara kiri’ when, with youth unemployment at a staggering 40%, he agreed to a budget deficit target of 6%, froze pensions and other benefits, raised the retirement age, cut civil-service pay, imposed austerity on regional governments and made collective bargaining ‘more flexible’.

Perhaps the most disastrous error was the decision to adopt a German-style ‘golden rule’ designed to embed policy on budget deficits into the constitution. In other words, policy would become like concrete – unchangeable and immoveable. This decision reflects a deeply flawed understanding of how economies work. Contrary to the ‘ordo-liberalism’ of reactionary politicians like Wolfgang Schauble, economies are ‘moving feasts’. They rise and fall, expand and contract, depending on a range of factors. Economic policy therefore cannot be fixed in concrete. It cannot be made law. It must be possible for government policy to respond to the ebb and flow of the wider economy. When the economy heats up, and inflation threatens, action to cool the economy must be taken. When the economy slumps, and unemployment and deflation threatens, policy must respond to prevent prolonged economic failure.

The ‘golden rule’ embedded austerity and with it continuing and high levels of unemployment into the Spanish economy. Unsurprisingly it led to a crushing defeat for PSOE in 2011.

Government debt is not like household debt

Mr. Zapatero was not alone. Across Europe and even in the US, there is unanimity amongst social democrats, policy-makers and mainstream economists that ‘austerity’ or fiscal consolidation is the answer to a rise in public debt caused by private economic failure. But ‘austerity’ at a time of crisis is a particularly deformed ideology, spouted by financial interests, concerned that there will not be enough money to support the private sector if it is ‘crowded out’ by the public sector.

It is an ideology based on the microeconomics of the household. Most of today’s economists are trained mainly as ‘microeconomists’ – with an intense focus on the firm, households and individuals. They use microeconomic reasoning to arrive at macroeconomic conclusions for the whole economy. But common sense dictates that governments are not like households. Unlike households, governments collect income from taxpayers – by law. Unlike households, and thanks to the backing of taxpayers, governments can easily raise finance by borrowing from both domestic investors, but also international investors. Government debt, including Spanish debt, is a scarce and valued asset or collateral, and is in great demand by millions of investors around the world. The reason is that all democratic governments are backed by taxpayers – and so repayment of public debt is much more assured than the repayment of private debts.

Public debt is like a see-saw

To understand how and why government debt rises or falls, it helps to visualise a playground see-saw. When the private sector slumps, and tax revenues fall, government debt, like a see-saw, rises. Why? Because private sector failure leads to a collapse in tax revenues, and in a democratic economy, to a rise in welfare benefits. When the private sector recovers, unemployment and welfare benefits fall, and tax revenues rise. Then, government debt, like a see-saw, falls too.

So the answer to a rise in public debt at a time of private sector failure, is not to worsen conditions by cutting public sector spending and investment. Instead it is vital for government to borrow and spend to revive employment and economic activity, which in turn will raise tax revenues, and also revive the weakened private sector.

The way forward: realize the power of public authority

 For social democratic politicians to regain power and the support of their electorates requires a total rejection of the deregulatory economic policies that led to the Great Financial Crisis. Above all, social democrats must end their obeisance to financial markets, and must once again actively and publicly commit to subordinate financial markets to the public authority of Spain’s regulatory democracy.

To do this, social democrats must regain and realize the potential power of public authority backed by taxpayers. Private financial markets are excessively dependent on public institutions such as central banks and governments for massive bailouts, QE, low borrowing costs, and ongoing taxpayer-backed guarantees against market failure. Recognising this private sector dependence on the public realm, social democrats should demand reciprocity: stringent terms and conditions applied in exchange for public sector largesse. Since the crisis, the private finance sector has not only benefitted from public sector bailouts and private debt subsidies, it has effectively looted government treasuries and totally abandoned so-called ‘free market’ theory. Bankers, private equity firms and other financiers have got away ‘scot-free’, and returned to their old, dangerously reckless speculative ways – this time backed by taxpayers. Most remain ‘too big to fail’ and ‘too big to jail’.  

Politicians continue to allow bankers to threaten the global economy with another grave financial crisis, even though today all global banks are effectively nationalised banks. Without the largesse of $500bn of QE every quarter (from the ECB, the Bank of England and the Bank of Japan) plus historically low borrowing costs, backed by government guarantees – they would be bankrupt. These are not private sector banks, battling so-called free market forces. Yet even with generous public backing, the private banking sector still fails to lend to firms active in the real Spanish economy at sustainable rates of interest.

Such one-sided generosity must end. It is time for Spanish bankers to be made to prioritise the interests of the Spanish economy, or be faced with the loss of the publicly-backed support gained via the Spanish Treasury, the ECB and other public institutions.

Second, all private bankers rely on taxpayer-backed institutions like the judicial and criminal justice systems, for the enforcement of contracts. Is it not time to insist that these taxpayer-funded institutions cannot be used for the enforcement of contracts, unless private bankers play their part in restoring the health of the Spanish economy?

Much can be done to challenge the apparent overwhelming dominance of the private finance sector. But first, Spanish social democrats must recognise and reinstate the power of a regulatory democracy. They must publicly elevate the interests of their own electorates above the interests of the private finance sector. They must pledge to restore public authority over private markets in money, labour and trade.

Only by so doing, will it be possible to regain public confidence, and with it political power.