Can government afford debts? Try credit creation

“All money is debt” says Ann Pettifor in an interesting talk with Paul Mason and Molly Scott-Cato, economists all, on XRTV. And yes the XR is the XR we know – and mostly love. I have to say I think Gail Bradbrook, even if she may not consider this her core skill, does a much better job than most journalists.

Ann Pettifor is right that all money is debt – something she disagreed about with ex Green MEP, Molly Scott-Cato. It was towards the end of the programme so there was not sufficient time to resolve the issue. But I think that Molly Scott-Cato is thinking that money is debt when it is issued by banks as a loan and probably doesn’t consider it as debt when issued by a government. It is true that government not only creates money by decree but also owns a bank that creates it and so can destroy and write it off too. Even so, if we are to believe what is written on every single UK banknote, the Chief Cashier of the Bank of England “promises to pay” so it must also be a debt – perhaps better thought of as an IOU, because government will willingly accept it back in payment of taxes.

That means something else; if we have a fiver in our pockets we’re in credit with the government, because they will accept that paper note as a payment. So, in our pockets, we have an asset and the government has a liability.

In fact Richard Werner, has long referred to the process as “credit creation”, which sounds much better- see, for example, this letter from 2009:

Government is creating credit for us – rather than debt for itself. That is just as honest and frankly for most, a rather less worrying side of the ledger to concentrate on.

So when I look at this recent half excellent, half terrible article in the FT Can governments afford the debts they are piling up to stabilise economies?” it shows a cartoon picture of a sturdy – if split – tree called ‘debt’. On one side it is a magic money tree and on the other it is barely holding up great bags (of money, I presume). But this tree could equally be called ‘credit’. On the one side people could actually be harvesting the money that would be their ‘credit’ to pay tax in due course, and on the other side those bags of money would actually be people’s investments or assets.

And the answer to the question posed in the FT title?

First, a currency-issuing government never needs to borrow its own currency. Second, it can always determine the interest rate on bonds it chooses to sell. Third, government bonds help to shore up the private sector’s finances.

The answer comes from the first article which is written by Professor Stephanie Kelton. If you get the opportunity to read the entire piece do – although I suggest you stop at the follow up article claiming the government cannot afford debts as, remarkably for a financial newspaper, it actually would appear to contain errors of fact. It is penned by somebody who has written on the history of interest, which might go with a general aversion to government ‘debt’ – so I rather doubt whether he’s keen on Stephanie Kelton’s statement that “Bonds are a gift to investors, not a sign of dependency on them.“….

Comments

  1. Charles Adams -

    Thanks Peter, these are some of my favorite topics! I agree all money is debt. Money derives it value from being a debt. Money that is not debt would have no value.

    There is one more issue. Foreign exchange and exchange rates. A question for any sovereign nation is their interdependency on other countries that have different currencies.

    For me, good fiscal policy means reducing this dependency. For example by investing in energy (and food) self-sufficiency, health and knowledge (education and skills) so you reduce your dependency on imported energy, food and skills whose costs are determined by the whims of the foreign exchange markets.

    The counter-intuitive message (for the debt phobes) is that if you make the right investments in your domestic economy, i.e. spend, you are more likely to have a stronger economy and a stronger currency, investors will want to buy your bonds even at lower interest rates etc etc. The sad thing is that we could have should have been investing in 2010-19.

    Although we all obsess about money, it is far more about what we do and what gets done.

    1. Peter May -

      Although all money is debt, I do think most people are, as you say, ‘debt phobes’. That’s why I think adopting ‘credit creation’ is much less frightening!
      Foreign exchange is a whole new area. If I recall forex conducts 25 times as many transactions as international trade actually requires. So that is another area where, as you suggest, speculation rules. I presume there must be people somewhere sitting on a supply of frequently traded currencies, so on the 25th trade they can actually pay something rather than presumably somehow make money on a speculative transaction. I’d love to know how they work – because they won’t be getting much interest on anything not actually be used.

      So I agree endeavour to become as self sufficient as poss. But ever since the industrial revolution we have usually imported more food than we produced so that is always going to be a particular UK weakness. unless we cover most of East Anglia with glasshouses. That is why we are so stupid to get out of the EU – it offers much more resilience purely because of geography – rather than getting everything from everywhere. I already hear that garlic may be short – because it largely comes from China! The evil spirits are going to have a heyday – well, come to think of it already are…
      But I don’t agree with XR who say it’s stupid to import £400m worth of beer and also export £400m worth of beer. Beer is not all the same and variety is interesting. And if you do import £400m worth of beer you might as well export the same amount otherwise the ship/ lorry will be empty one way which is not great for the climate.
      I suggest we should be more nationally self-sufficient but certainly not isolationist.

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