Thursday, 7 January 2010

Let’s abolish the national debt.

Note dated 28th Feb 2010. I've put the arguments below in more succinct form here.

When Gordon Brown announced in October 2009 that he intended reducing the national debt by £16bn via the sale of public assets, my response was to point out that ten times that much could easily be wiped off this debt just by getting the Bank of England to shred the gilts in its possession.

“Not Very Gay Gordon” has obviously been reading this blog, because he has gone quite on the £16bn asset sale.

Anyway, this is an even better idea: let’s abolish the national debt! Here’s how.

First as regards the portion of the national debt held by foreigners, the UK holds about $200bn of US national debt. So we sell that and pay off the foreign holders of UK national debt.

As regards the rest, we just print the necessary amount of money and buy back the debt, or “quantitatively ease” it, if you want jargon.

Those who found themselves in possession of cash instead of gilts would NOT for the most part run out and spend it. Why were these people holding gilts? Because they wanted to save: they regarded said gilts as part of their stock of savings. Likewise, they would regard the cash that replaced their gilts as savings. Their initial response would be to dump the cash in a bank deposit account. Then some of the cash would tend to boost the price of other assets: housing, shares, etc.

Also, banks would find themselves in possession of additional funds which theoretically they could lend, and that would have a reflationary effect. But banks just aren’t lending very much at the moment: they have surplus funds sitting doing very little with central banks.

At any rate, the above wheeze would boost demand to some extent. If the boost was just sufficient to bring us back to full employment and no more, there would be absolutely no reason to worry about the somewhat expanded money supply.

On the other hand, if it looked as though demand was being boosted too much and causing inflation, then government would have to raise interest rates and raise taxes to pay for said interest payments.

But hang on. In order to effect the above interest rate rise, the “government – central bank machine” has to bid funds away from the private sector: that’s HOW it effects the interest rate rises that it announces from time to time. Does the latter not amount, at least to some extent, to re-creating the national debt? The answer is “not really” – and for the following reasons.

Note that PURPOSE of the above “bidding away from the private sector” is NOT to fund government spending. The PURPOSE is to effect a deflationary stance, i.e. raise interest rates and taxes. That is, the PURPOSE is simply to confiscate money from the private sector and shred it. Obviously the capital sum “borrowed” will have to be paid back, though that could be after a number of years by which time inflation will have eroded its value.

To summarise, two forms of shredding take place here. 1, government grabs more tax with which to pay the above interest, and 2, the value of the above capital sum is eroded.

“Government – central bank machines” can print money. They can equally well do the opposite: shred it.

This might appear to involve some sort of cost or loss of real wealth for the private sector. That is debatable. All that happens is that government confiscates money which were it to be spent would cause excess inflation. That is, it confiscates money which the private sector could not effectively spend if it wanted to. So in what sense is this money a form of wealth?

Finally, it should be said that ideas of the type set out here were first set out by Abba Lerner. And as Keynes said to James Meade in 1943: “Lerner's argument is impeccable, but heaven help anyone who tries (to) put it across to the plain man at this stage of the evolution of our ideas."

Those interested in these ideas should Google “Modern Monetary Theory” and “Abba Lerner”.

The above national debt abolition plan would not work quite as smoothly as set out above. There are a number of problems and potential hitches, but they are minor hitches and are surmountable.


  1. Economics Student11 January 2010 at 09:39

    Hi Ralph

    Very interesting post. I have a couple of questions.

    As regards to buying back internal debt through QE. How would that work? Would the BoE simply print the money needed and "hand it over" to the treasury so that they can buy back the gilts? I thought the way the BoE funds the treasury IS by buying gilts (or by lending against them).

    Also further down you mention that if rates had to be raised to contain inflation then the government would have to raise taxes to pay said higher interest payments. However, your argument starts with abolishing national debt so which interest payments are you reffering to?

    Kind Regards

  2. Economics student:

    First, my post is a bit of an “extremist kite flying” exercise. I like doing this, because it often gives one an angle on how ideas work in more conventional circumstances. Aircraft manufacturers do exactly the same: do deliberately silly things with new aircraft (with ultra experienced pilots at the controls) during test flights, to see what happens.

    Re your question “Would the BoE simply print the money needed...”, my answer is yes, it could be done that way. (Though for a variety of reasons the £200bn or so of new money that the UK printed in 2009 was done in a more roundabout way than this).

    Re your suggestion “hand it over to the Treasury”. There is no need to do this. The BoE could just enter the market and buy up gilts: exactly what it did in 2009 (but on a smaller scale than I am suggesting).

    Re your last para, you make a good point. My only way out of this is to engage in what you might call a semantic quibble (though it’s a bit more than a quibble, I think). The phrase “government borrowing” normally refers to people loaning money to government with a view to government spending same. Indeed, the word “borrow” normally means “taking possession of someone else’s money with a view to spending same, and eventually repaying same”.

    However, the “borrowing” referred to in your last para is not really of this nature. The objective, and to some extent the actual effect, is simply to confiscate funds from the private sector. I.e. I do not envisage government actually spending the sums borrowed, as in the conventional use of the word borrow.

    I am submitting a paper in the next few days which deals with this point in more detail to an online journal: They claim to reject or publish papers within a few weeks, so look out there, if you are interested.

  3. Duh – I made a mistake: the above “abolish the national debt” argument is stronger than I thought. Here’s why.

    I assumed that the entire debt owned by UK nationals was quantitatively eased and that this would leave too much money sloshing around, which in turn would require the central bank to raise interest rates and attract some of such money back (which effectively would be “national debt” of a sort).

    However there is better way: repay owners of national debt with money SOME OF WHICH is printed and SOME OF WHICH is collected via tax. The former has a reflationary effect and the latter a deflationary effect. Get the proportions right, and there’d be no deflationary or reflationary effect.

    The only thing left would be book keeping entries at the central bank corresponding to the increased monetary base. It is traditional to classify these book keeping entries (or “gilts in the hands of the Bank of England”) as national debt. But this is a nonsense. This is not debt in any normal meaning of the word.

    Hope I’ve got that right at last.


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