Robert Peston’s barmy ideas on government debt.

 

Robert Peston published an article on 25th November 2020 entitled “Spending Review: How the UK's Covid-19 debts may turn out very expensive.” The article is complete nonsense, which raises the question as to how he ever came to be the BBC’s business editor or ITV’s political editor.

Dozens if not hundreds of other people on social media and elsewhere have taken the p*ss out of this article. Anyway, my “p*ss taking” efforts, for what they are worth, are as follows.
 
His first nonsensical claim is that the large government debt accumulated as a result of Covid “…represents by implication the fastest transfer of wealth and power to China and Asia in our lifetimes.” Well that might be true if China had bought up large amounts of that debt. Unfortunately the reality is that Chinese holdings of US Treasuries have remained roughly constant for the last ten years: i.e. since long before Covid.


 

The UK’s debt/GDP ratio.

Next, he points to the fact that the UK’s debt/GDP ratio will rise to above 100% which apparently is a problem because “Outside of world wars, this is a uniquely large and fast rise in public sector debt.”

Now hang on. The ratio for the UK rose to well over DOUBLE that 100% figure in 1945.But the years after 1945 were “outside of world wars”!!!!

Of course that high debt was CAUSED BY WWII, but that record debt fell only very slowly in the decades after 1945: falling  to  about 50% a full fifty years later: in 1995.

Now what’s the big difference between a high debt during peace time which was originally caused by a war and in contrast, which was caused by a virus?  Unfortunately (you’ll be amazed to learn) Peston doesn’t explain what the big difference is.

 

What if interest rates rise?

Next, Peston sets out a lot of complicated stuff about “gearing” and government bonds which contains several mistakes, most of which I’ll ignore. For example, he says “The point is that interest rates will have to increase at some point.” He doesn’t explain why. The reality is that if demand stays relatively muted, then there’s no earthly reason to raise interest rates!

But shortly after that, he gets nearer the truth when he says interest rates COULD RISE. To be exact, he says “…..a modest rise in activity could lead to inflationary pressures…”.  Notice the word “could”. If (and that’s a big “if”) inflationary pressures did get uppity, some sort of countervailing deflationary measure would be needed. That could be tax increases or it could be an interest rate increase (as I’ve explained at least ten times on this blog over the years).

But neither of those measures (tax increases or an interest rate rise) would constitute a cost for the population as a whole (as I explained here almost ten years ago). I’ve explained at least ten times on this blog over the years – forgive the repetition). Reason is that the sole purpose of the tax increase or interest rate rise (as indeed Peston very much implies himself) would be to hold demand down to the “full employment” or “economy at capacity” level.

So if no standard of living sacrifice for the UK population is required in order to cut the debt in what sense is there a “cost” there for the UK population? Peston doesn’t explain.

 

Politics.

That however is not to say there are absolutely no conceivable problems involved in cutting the debt. The point is that there are no strictly ECONOMIC OR TECHNICAL problems. In contrast, there is a possible POLITICAL problem: the problem is that, as explained above, cutting the debt involves a rise in tax or a rise in interest rates (which to repeat, do not cause a significant decline in real living standards). But that is not necessarily how the population would see it.

That is, there could be big political objections, even riots in response to significant tax rises, even where those tax rises have no effect on living standards.

So what’s the best thing to do about the latter possible political problem? Well I suggest the best solution is very definitely NOT TO implement DEFICIENT demand NOW so as to ameliorate a problem which may or may not arise in a few years time. I suggest the best solution is to minimise unemployment right now, and then deal with any possible political problems that arise if an when they arise.

Plus, excess unemployment NOW is just as likely to cause riots as tax  rises in a few years time.