Friday, 9 November 2018

Richard Murphy tries to claim government debt is essential.

That’s in a recent (and fairly short) article of his entitled “Why governments need to issue bonds despite modern monetary theory”.

His first reason, or perhaps I should say “blunder” is the idea that “people need safe places to save.” Well of course!! But if there’s no debt, and the state (i.e. government and central bank) just issue enough base money to keep the economy ticking over, then people can get “safe savings” in the form of zero interest yielding base money!

His second reason is that “those with pensions need locked in and guaranteed income streams.” Nonsense!

The reality is that the “income streams” for pension schemes do not need to take the form of interest from government debt, or indeed interest from anywhere else: the biggest pension scheme in the UK is the STATE PENSION SCHEME, and same goes for many other countries. That UK scheme has no income from government debt or any other form of interest yielding investment: money for today’s pensioners is supplied by people who are in work and who make contributions to that state pension scheme. Their employers also contribute.

That sort of pension scheme is known as “pay as you go”, and in addition to the latter state scheme, there are PRIVATE pay as you go schemes.

Murphy’s third reason is that “the banking sector has, post 2008, needed government bonds as a mechanism to secure overnight deposits.”

Well frankly I’m baffled. If Murphy is referring to “deposits” by normal retail depositors, why does a bank need a stock of government bonds before it can accept £X from someone who walks thru its door wanting to deposit that £X? Darned if I know.

Secondly, why has that bizarre need for government bonds suddenly appeared since 2008? Do you know? I don’t.

Alternatively, Murphy may be referring to “deposits” in the sense of “overnight loans from the Bank of England or other commercial banks”. But banks since QE have been awash with reserves (aka base money). They JUST HAVE NOT needed to go running to the BoE for reserves recently.

There’s a big demand for public debt.

Next, Murphy says there is a big demand for government debt. I bet there is!

What with the fall in interest rates over the last twenty years or so, people and institutions with cash to spare will be itching for government to issue bonds paying marginally above the going rate of interest for totally safe investments. But remember it’s taxpayers who fund interest payments made by governments.

Why on Earth should money be confiscated from taxpayers, many of whom earn less than the national average wage, just to fund interest payments to people with piles of cash under their metaphorical mattresses?

Government debt can fund public spending?

In his final paragraph, Murphy argues that government debt can fund public services. Well true: it can. But the fact that A, B or C are methods of funding something is not in itself an argument for doing the funding  via A, B or C, rather than via D, E or F.

Milton Friedman and Warren Mosler (founder of MMT) have argued that government debt makes no sense. So it looks like Murphy needs to go away and look at their reasons before making over-simple statements like “government debt can fund public spending”.

The pros and cons of government debt are actually quite complicated. That’s not “complicated” in the sense that you need to be particularly clever to understand the relevant issues: it’s “complicated” in the sense that you need to spend a few hours or days reading up the subject in order to get a grip on it.

I actually published a paper on this subject recently entitled “The arguments for a permanent zero interest rate”. I’ll tidy that up a bit over the next few weeks and submit it to a journal.

And finally, for another take on Murphy’s article, see this article on the Mike Norman site entitled “Richard Murphy — Why governments need to issue bonds despite modern monetary theory.”

No comments:

Post a Comment

Post a comment.