Home > Terrible Tories > Is being in debt good or bad?

Is being in debt good or bad?

Is being in debt good or bad? 

Well, it depends who you owe the money to. 

If you owe money to a loan shark at massive interest rates, who’ll come round and ransack your house if you don’t pay up, it’s bad.  If you owe money to a building society and can afford to keep up with the repayments, then you might get a much nice place to live a lot of your life than you would if you didn’t owe money.

And so too with countries.  If you’re a developing county whose debt has been bought out by one of the vulture funds whose rights Christopher Chope is so keen to protect, then your chances of making life better for your citizens is pretty limited.  

If you’ve got a reasonable lender who acknowledges that the repayments can only be made sustainable in the longer term if you’ve also got enough cash to invest in basic services and infrastructure for your citizens, then it’s a bit better.

Sadly, when it comes to Britain’s national debt, few people seem to get that nuanced.  Debt’s bad, and that’s all there is to it.

Or is it?

Here’s who the UK owed money to in September 2009 (source):

By and large, as you can see, we own our own debt.

And while George Osborne drones on about the necessity of getting the deficit down as quickly as possible as the sina qua non of the UK’s economic future (well, until today’s NI flip flop), it’s worth listening to what someone who actually understands the flow of money between public and private has to say (h/t Giles Wilkes):

It is never obvious whether Osborne actually believes what he is saying or it is just politics and he believes his target audience views government finances like a household.

For a prospective Chancellor he has a very poor image in the City because quite frankly a lot of people think he is an idiot.

The old cash value of interest payments is trotted out with monotonous regularity. Why not use percentage of GDP or percentage of central government expenditure? No scare value in that I suspect. Why not say to the target audience I would like your private pension or annuity provider to have less money?

It really is the same thing as internal UK debt interest payments are just a transfer payment to the insurance companies and pension funds.

In fact we can go further: the deficit is the net financial assets supplied by the government to the non-government sector in any given accounting period. The national debt is just the cumulative stock of the these net financial asset flows: it is public wealth.

None of the press coverage ever seems to recognise this dual asset/liability relationship. None of the press coverage ever seems to talk about reducing the deficit in terms of reducing the income of the private sector, or in terms of squeezing liquidity from the private sector, or in terms of destroying the financial assets of the private sector, or in terms of frustrating the saving preferences of the private sector.

The cash in my wallet, that’s a government liability too–won’t someone think of the children and destroy it?

[Indeed] if the government runs a surplus, it drains more monetary base as taxes than it injects as spending. As a consequence, the system is short of high-powered money. Only the government can create it, so no amount of shifting around in the banking sector can relieve the pressure.

And as Giles himself says:

All we get is a shifting balance between private and public assets and debts, in the absence of a massive international imbalance. Which means we can always afford to resolve either private or public indebtedness with a political solution, if we are brave enough.

But why exactly is 75% of GDP in public debts, owned by the private sector and paying just 4-5% interest, a problem – when the private sector needs such instruments?

That is a question Conservatives bury under the term ‘burdening our children with debts’.  It is just as much ‘providing our pensioners with assets’.

Discuss. 

Before it’s too late.

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Categories: Terrible Tories
  1. Barney Stannard
    March 29, 2010 at 12:55 pm

    Just a reflex intuition but couldn’t our pensioners own other assets e.g. German/US/French government bonds? Wouldn’t that prima facie be better for the domestic economy?

    P.S. not going to dispute that Osborne is an idiot.

  2. March 29, 2010 at 1:43 pm

    Yes, A pretty reasonable intuition to start with, Barney, and one I’d like to explore if the comments get going on this. My question in response would be why pension providers etc don’t do this already (and why other countries’ similar organisations don’t hold our gilts to a greater extent than they do) if it’s so straightforward.

    I’ve no great knowledge of the area but it does look at first sight as though this area of finance is actually a lot less international than we’d expect, and is perhaps tied to pension fund manager conservatism on (and the need for monitoring of these investments, which are after all supposed to be the most risk free.

    While I’d be interested to see what others have to say on this specfically, my main point is really just that there is such a poor understanding/willingness to be open about what debt really is, and such a tendency to equate national debt with the notion of household debt, that it may hamper political solutions for the development of proper economic investment i.e, as Paul Cockshott said, the deficit has become more important as a political driver/election winner than the arguably much more important balance of trade.

  3. March 29, 2010 at 2:45 pm

    I dunno, didn’t the Ontario teachers’ pension fund just buy the national lottery? Seems there’s plenty of international buying and selling going on, just perhaps less when it comes to the gilts of other national governments.

    To pick up on one point, everything seems to hinge on the last paragraph of the first blockquote:

    [Indeed] if the government runs a surplus, it drains more monetary base as taxes than it injects as spending. As a consequence, the system is short of high-powered money. Only the government can create it, so no amount of shifting around in the banking sector can relieve the pressure.

    Yes, if the government runs a surplus, it’s taking money out of the economy and that money is essentially dead money (because if you reinvest it as spending, well it’s not a surplus anymore).

    But the shortage of high-powered money would force inflation down. Giles said something interesting over at LibCon:

    Inflation disorders commerce, and transfers wealth from the saver to the debtor, something that must have appalled any right-thinking Victorian. More pragmatically, it raises the cost of capital, which ultimately hurts us all.

    But an overly fond adherence to the solidity of currency has cost society dear in the past, and threatens to again. In the 1930s, it was the countries that left gold first that recovered first. The really stubborn ones like France had worse Depressions. With the ascendance of Keynes, more people began to understand that what matters in economics is how much is produced and consumed, and not just how much ‘gold of a given fineness’ a unit of currency can get you.

    The dividing line between ‘overly fond adherence’ and just regular adherence is not between the economically literate and the man-in-the-street, likely to be convinced by an argument equating the expenses of the State to the expenses of a household.

    The Institute of Directors, and no doubt Standard and Poor, are all in favour of the debt-slashing measures which Osborne has been droning on about. Richard Lambert over at the CBI has been singing the same tune as Osborne too, with his letter a few weeks ago to Alistair Darling demanding that the budget be balanced by 2016.

    These are not economic illiterates, these are people who see the (slight) difference between the Tories, who want 20% of the deficit to be repaid through taxes, and Labour, who want 33% to be repaid through taxes, with the remainder of each figure being recouped through direct cuts to services. Like the banks, they’re quite happy to suck on the State teat – note than none of them are pressing for a recall of the money spent on the banking system.

    But they still want to have their cake and eat it, to keep inflation down for the next few years and continue the transfer of wealth from public hands (a large proportion of it directly from workers, who are taxpayers) to private hands through the strategic use of deficit reduction, by forcing the State out of the last remaining social provisions which redistribute wealth.

  4. paulinlancs
    March 29, 2010 at 3:21 pm

    Yes, it’s a very good point about the use of deficit reduction (and the myth that it is necessary) as a tool to ‘force out’ social provision/the remainder of the Keynesian ‘settlement’ in the name of prudent financial management.

    To what extent this is a conscious manouevre by people like the Institute of Directors, or conversely to what extent they are genuinely sold (like Osborne?) on the virtues of deficit reduction is difficult to ascertain – perhaps it’s a bit of both. In any event, it’s the material policy that counts.

    As we move towards a possible Tory government and a recreation of the policies of the early/mid 1980s, though, I’m struck by the clarity around this area of some of the neo-liberal rhetoric coming from the Tory ‘thinking’ right (e.g. John Redwood), and how close it is to the stuff of the 1980s:

    “We will not cut taxation unless we can cut spending. We will not cut the spending unless we can completely reshape the welfare state. We will not be able to reshape the welfare state unless we can complete a reform of the trade union movement”(Sir John Hoskyns, 1985).

  5. March 29, 2010 at 6:16 pm

    @Dave – What Giles says on inflation is interesting although there’s a couple of things I think should be added to it. The extent to which inflation disrupts commerce depends on the development of the economy, a developed economy like the UK would be more disrupted by inflation than a developing economy since we buy far more big ticket items (cars mainly) and thus need stable savings and/or credit.

    It should also be added that the disruption is not really a problem until it reaches levels of around 10% (different studies put different figures on it).

    @Barney – Private sector pensioners (at least the middle class ones) already get this choice. You can generally decide what funds your pension pot is invested in and so can pick and choose exactly what you invest in.

  6. March 29, 2010 at 7:49 pm

    Andreas, did you read Paul Cockshott’s article on this blog about using inflation as a means to re-tool the manufacturing arm of the economy?

  7. March 29, 2010 at 9:39 pm

    Dave – Do you mean the “Alistair Darling’s Elephant in the Room” one? Just re read it in a bit more detail and agree wholeheartedly.

  8. Barney Stannard
    March 29, 2010 at 10:52 pm

    Paul: I’m guessing the bias towards domestic assets is a product of information asymmetries. I suppose one could argue that were the supply of new government bonds to decrease then UK savers would have to put more of their money into assets about which they knew less, thus lowering the average yield. But this would be more than outweighed by the decrease in debt repayments in terms of the net effect on the overall economy. (I have no figures or model, and I can’t be bothered to dig one out but I can’t believe it isn’t true).

    Dave: inflation as an economic tool is so leftfield as to be untrue. Which is not to say it doesn’t work, but on the basis that almost the entire economic profession is against it (beyond allowing a little inflation, 4-5%) I’d say we’re best off ruling it out.

    More generally this is an interesting page from Stephanie Flanders regarding tax rises versus spending cuts.

    http://www.bbc.co.uk/blogs/thereporters/stephanieflanders/2010/03/taking_the_defecit_seriously.html

  9. March 30, 2010 at 1:04 pm

    @Barney – Not as leftfield as you might think, Olivier Blanchard at the IMF recently put forward a suggestion of raising the target to 4%, although a large number of finance ministers were not so keen on the idea.

    Also I don’t think as much of the economic profession is against it as you might think, there’s virtually no emiprical evidence of the benefits of lower inflation.

  10. Barney Stannard
    March 30, 2010 at 1:32 pm

    Cheers Andreas. I did actually say in my post 4-5%. I’m also aware of Blanchard’s work. As I was aware that people can invest in foreign assets. But I thought what was being advocated was slightly more leftfield – using inflation as a tool for significant reshaping of the economy. As for inflation generally I’m happy to say I’m no expert.

  11. freethinkingeconomist
    March 30, 2010 at 4:13 pm

    On Barney’s first point: our pensioners need sterling assets, because they have sterling liabilities (nursing care denom in sterling, housing, etc). You might say “what is to prevent them taking a trading position in Bunds and then swapping to sterling later” but you end up with a big risk, that is best covered by having sterling assets hedged.

    I agree that ruling out LT inflation is a good idea. But relaxing about it ST is also a good idea.

    I think this point Paul is making with this post is extremely important. Right wingers seem to only ever see the debt side. The most important number in debt arguments is zero; that is how much the world owed Mars.

  12. March 30, 2010 at 7:34 pm

    Barney, apologies if I was patronising. I think Paul Cockshott’s post is open to a fair bit of interpretation, personally I think that tampering with things like inflation would need to be done slowly and carefully. I think we’re generally in agreement.

    Giles – I agree completely with Paul(in Lancs) original point you do need to consider debt from both sides and that often payments on debt are simply transfer payments to savers and pensioners. There’s still a couple of things that make me uncomfortable about it. First is the political question of where the transfer payments are going, I’m reasonably happy with the redistribution from old to young but less so if it means redistributing from poor to rich. The second is that debt payments don’t really take into account the circumstances of the payer, they just have to be paid. This inflexibility makes me wonder how suited it debt is as a means of providing social security.

  13. March 30, 2010 at 7:45 pm

    Barney Stannard :
    Just a reflex intuition but couldn’t our pensioners own other assets e.g. German/US/French government bonds? Wouldn’t that prima facie be better for the domestic economy?
    P.S. not going to dispute that Osborne is an idiot.

    Only really a viable option if Britain ran a trade surplus.

  14. March 30, 2010 at 7:50 pm

    Andreas Paterson :
    Barney, apologies if I was patronising. I think Paul Cockshott’s post is open to a fair bit of interpretation, personally I think that tampering with things like inflation would need to be done slowly and carefully. I think we’re generally in agreement.

    I am not an advocate of inflation, it is just that inflation is one way, and historically a common way, of reducing the burden of debt in an economy. I tend to favour a general debt amnesty with only a couple of very specific exceptions.

  15. March 31, 2010 at 10:04 am

    Seem to have my comment mixed up with various other peoples’ in the OP. All good though.

  16. Barney Stannard
    March 31, 2010 at 1:36 pm

    Andreas: quite alright. I think we probably are.

    Paul Cockshott: true of course, but I didn’t mean to call for a capital account deficit, I merely intended to raise the thought that in the event of a marginal reduction in domestic government debt pensioners could purchase (subject to the information and currency risks) foreign gov. bonds. Presumably the investment income would act to bring the current account into balance (over a suitable period of time). But this really isn’t my area.

  17. vimothy
    March 31, 2010 at 1:38 pm

    My comment runs “In fact we can go further: the deficit is the net financial assets supplied by the government to the non-government sector in any given accounting period….Only the government can create it, so no amount of shifting around in the banking sector can relieve the pressure.”

    BTW, it is also worth noting that interest payments to the private sector are taxable income.

  18. Mares
    May 24, 2010 at 8:08 pm

    We need a Debt Amnesty.

    We have to join Power 9 (www.power9m.org) ,if we want our Debt Amnesty.We have nothing to lose and much to win.

    Tell friends and family,if we are united in this movement we will obtain our debt amnesty.

  1. March 30, 2010 at 4:58 pm
  2. June 15, 2010 at 2:17 pm
  3. August 10, 2011 at 10:34 am
  4. October 27, 2011 at 10:50 am
  5. November 13, 2011 at 9:06 pm
  6. February 24, 2013 at 12:40 am
  7. February 25, 2013 at 7:10 pm
  8. October 4, 2013 at 10:05 pm

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