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’.
Before it’s too late.