Maxxed out?

Laura Kuenssberg said yesterday:

“This is the credit card, the national mortgage, everything absolutely maxxed out. Enormous levels of the country basically being in the red.”

This is obviously the most abject drivel. (Hint: how many credit card companies will pay you to borrow when you are at your credit limit?) What interests me, though, is: how can any sentient being utter something so stupid?

Some of you will blame dishonesty and partisanship. But I suspect some more interesting, and insidious, errors are at work.

One is something I’ve complained about before. The BBC is insufficiently aware of emergence – the fact that many social phenomena are the product of human action but not deliberate design.

The public finances are one such phenomenon. It’s true that government borrowing has hit a record high this year. But so too has something else – the household savings ratio. Isn’t it a remarkable coincidence that two records have been broken at exactly the same time?

No, because they are the counterparts of each other. Every pound borrowed must equal a pound lent, so government borrowing is by definition the counterpart to private sector net saving. The lockdown, plus the health risks of going out and the uncertainty about our personal finances, has caused private sector net saving to soar. The counterpart to this is that government borrowing has also soared.

This is why I say government borrowing is emergent. It is an unintended result of countless private sector decisions. Which is why interest rates are so low: the same rise in private sector savings that causes government borrowing to rise also causes interest rates to fall.

If you have a bias against emergence – as the BBC has – you’ll not be alive to this. Instead, Ms Kuenssberg seems to regard government borrowing as the result of government agency, in the same way that an individual has control over her personal borrowing – hence her talk of credit cards. But this is not the case.

This error is compounded by others. 

One is the failure to see that some opinions are more important than others. The opinion that matters about government borrowing isn’t Ms Kuenssberg’s or mine or yours. It is that of the people lending to the government, of gilt investors. And not only are these willing to lend at sharply negative real rates, but also they expect rates to remain negative for years. This fact alone tells us the “credit card” is not maxed out. Unless you are providing strong reasons why clever people with skin in the game are mistaken, your opinion is irrelevant waffle.

A further error is a lack of historic perspective. David Cameron claimed that “our nation’s credit card” was maxed out back in November 2008. Public sector net debt was then £672.2bn. It’s now £2076.8bn (much of which is owed to the Bank of England.) Mr Cameron was, therefore, plain wrong – by a factor of at least three. Anybody with a sense of perspective would ask: if he was so egregiously wrong then, why should the claim be right now? I fear that the obsession with 24-hour news cycles – and with over-dramatising stories - might have distracted Ms Kuenssberg from such a perspective.

Perhaps, though, there’s something else. It’s the valorization of talk over evidence. Ordinarily, somebody claiming that the nation’s credit card was maxed out would ask: what evidence do we have for this claim? In terms of objective fact there is of course none, zero, zip, diddly squat. In terms of talk, however, I suspect there is plenty in the circles in which Ms Kuenssberg moves, as many MPs (perhaps not all of them Tories) and political journalists have imbibed and recycled Cameron’s untruth. If so, Ms Kuenssberg has fallen into the common error of groupthink: as Robert Frank has shown, our views are often influenced by our peers. Ms Kuenssberg’s error is an egregious one, but perhaps not an isolated one.

Whether it is or no, the fact is that it is a costly error. An ONS report this week has found that the public is ill-informed about basic economics – a finding which corroborates other evidence of their lack of knowledge of social facts. As our dominant broadcaster, the BBC must be partly responsible for this ignorance. And I suspect the responsibility is not so much Ms Kuenssberg’s alone as it is the result of biases which are shared by many political journalists.

Comments

[Simon Cohen]

Interesting to see which deciles of the population that aggregate saving largely represents.

I suppose Government spending is a dependent variable as you say and is pushed around by the savings desire.

But it's important to say that saving is a leakage from the endogenous system that forces Government to spend.

The problem we have is that since Thatcher Government has used bank debt to replace its spending. So many cannot save at all.

The aggregate figure hides this.

[Boyo]

A question if you don’t mind: why is a pound saved by the public a pound loaned by the government? Doesn’t the government borrow on international markets rather than from just the British public? Can’t banks lend multiples of what is saved to the government? Answers much appreciated.

[Boyo]

*....”a pound borrowed by the government”.

[derangedlemur]

@Boyo - I think the causality works the other way round. Domestic savers save primarily within the UK economy, so all their savings are used to create UK government debt. It would appear from the internet that both the UK and US have a bit over a quarter of their debt owed to foreign investors. I don't know at what level that becomes unsustainable (if ever).

[rsm]

@ Boyo: savings is backed out of the model used to calculate GDP. I doubt it's measured, or that measures of deposits match the official calculation of savings. Savings has to be what it is, to make the model consistent. It's a fudge factor.

In reality, savings rates are higher than gilt rates because banks buy gilts, then use them in rehypothecated repo and collateral transformation to multiply financial instrument values many-fold. Investors get much more than one pound for each pound the government borrows, because the private sector creates bank money at will. Investor returns are thus uncorrelated with government borrowing.

[Ralph Musgrave]

It's not just the BBC that's clueless. There's more of the same sort of nonsense from Robert Peston, the ITV political commentator here:

https://www.itv.com/news/2020-11-25/spending-review-how-the-uks-covid-19-debts-may-turn-out-very-expensive

[D]

@Boyo the article just says private sector, but it is basically UK private sector because to save a pound the government must either spend less or tax more. Most spending goes to UK private sector, and most tax comes from uk private sector...

[Lee]

Create the money in the bank accounts of those who need it now. Thats not borrowing.
Just the most effective way to save the economy.

[Soleus]

Neither Outlook nor Messenger will allow me to forward this link. I thought you'd like to know this. Some suggestion of an abusive message!

[Shb]

Isn’t a lot of the newly issued debt held directly by the Bank of England? This may not mean that any borrowing limits have been reached but changes a little the comparison with private savings

[Dipper]

Surely the bigger lie here is that unrestrained and unfocussed state expenditure is a route to a prosperous society?

If the government can just create work and money wherever it sees fit, what is the point of working? Why would you bother learning a trade or entering a profession, if at the end of that road the government just hands out money to whomever wants it?

What kind of society will we end up with if individual effort is declared to be pointless and the only source of wealth comes from making a case to government that you deserve it?

[ltr]

Johnson and Starmer are plotting defense spending, while I would prefer spending to keep us healthy:

November 28, 2020

Coronavirus

UK

Cases   ( 1,605,172)
Deaths   ( 58,030)

Deaths per million   ( 853)

Germany

Cases   ( 1,033,002)
Deaths   ( 16,255)

Deaths per million   ( 194)

[Dr Zoltan Jorovic]

@Dipper
Don't confuse wealth with income. Wealth by and large comes from ownership of assets. This would be true regardless of how jobs were remunerated.
The second point is that work is much more than a source of income, or should be. The fact there are so many bullshit jobs (as Dave Graeber describes) which people only do because they have no other option, is a failing of how our society operates and not something we should be happy about.
We could replace income from doing with income for being - and then do things because we want to, or they fulfil us, or they help society and others (and are sustainable, and help restore the environment to health). This could attract additional compensation, or not, depending on how many wanted to do it, and how valuable to society it was. This could lead to jobs being valued for what they offer both the person who does them, and society, unlike now. It might not work, but it must be worth a try.
A fair society would provide everyone with basic accommodation, food, and healthcare - plus the opportunity to do useful work. One way is to have a basic income and a job guarantee. There are other ways. But we need to get beyond the wild inequality and wage slavery where some work long hours at shit jobs for a pittance, while others are paid vast sums for jobs they love, doing things that destroy the environment. Meantime a small group live on captured assets, siphoning off the profits generated by others labour to make their wealth ever greater. At the cost of all our futures.

[Jay]

Methinks you've been too charitable to Ms Kuenssberg, and overlook the simpler explanation that if she's onboard with the idealogical ride, she's happy to uncritically push the government line, economic illiteracy or not.

This is tragically the current state of mainstream political journalism. Journos typically recruited from the same ruling class are content to function as a channel for their "sources", not to analyse or critique them.

So I agree with you about groupthink, but derived from a class basis rather than too much time spent in the Westminster lobby.

Chomsky and Marr's part of a longer interview nails it in 3 minutes. https://www.youtube.com/watch?v=lLcpcytUnWU

[ltr]

Yes, it matters:

November 29, 2020

Coronavirus

UK

Cases   ( 1,617,327)
Deaths   ( 58,245)

Deaths per million   ( 856)

Germany

Cases   ( 1,052,749)
Deaths   ( 16,496)

Deaths per million   ( 197)

[D]

@dipper

"What kind of society will we end up with if individual effort is declared to be pointless and the only source of wealth comes from making a case to government that you deserve it"

Who is suggesting we do that?

Chris isn't and he's a self identified marxist. Corbyn and McDonnel weren't. Starmer isn't. Blair and Brown didn't. Not even the most left of my left wing pals are....

[JohnM]

Paying-off debt is also ‘saving’.
Paying-off credit cards/loans also means less interest is paid on those.
In the USA the money given by the govt to consumers to spend, mainly got used to lower the consumers debt!

[Nanikore]

I don't think economists are too clued up when it comes to the historical consequences of high debt ratios. (It is not all about the ZIRB.) So they shouldn't get too cocky. Nobody is seriously suggesting that the government should not go into debt in the situation we are in. However, the issue of debt sustainability is a more subtle one, that cannot be understood with Model. At the moment, central banks, especially the Fed, but also BOJ and ECB directly and indirectly underwrite debt by ours and other central banks any sign of a pound collapse and they open their swap lines - as they did with the Brexit result and the Covid outbreak. But major changes in geopolitical situations and foreign policy in the future can throw all of this into doubt. Countries with sustained international accounts deficits that are not hegemonic powers, eg Britain, have to be a little more vigilant than some others.

[ltr]

Still matters:

November 30, 2020

Coronavirus

UK

Cases   ( 1,629,657)
Deaths   ( 58,448)

Deaths per million   ( 859)

Germany

Cases   ( 1,068,980)
Deaths   ( 16,830)

Deaths per million   ( 201)

[Jams O'Donnell]

Basically, the money system is just a con trick, or maybe a faith-based religion. It works as long as everyone believes that it works. But a pound coin is just a bit of practically worthless metal, just as a five pond note is just a bit of plasticised paper. No-one could ever march into a bank and redeem them for the equivalent in gold, and in a time of famine your bit of gold would not feed you. The monetary system could be revamped to work in any conceivable way, as long as everyone had faith in that system. But as long as we (or at least the money manipulators) maintain this system, that's the one we are stuck with.

[ltr]

December 1, 2020

Fiscal policy during and after the coronavirus pandemic

This post was partly inspired by this recent seminar, but also by this * excellent paper from The Resolution Foundation. Apologies for the length, but there is a lot to cover.

This post is in five parts. The first looks at how our understanding of fiscal policy has evolved over the last decade or so. It is an essential background to how fiscal policy should be employed during the pandemic. The second looks at fiscal policy support during the pandemic. The third looks at what could be quite a short period between when the pandemic is effectively over as a result of mass vaccination, and when the economy has fully recovered. The fourth asks whether, once the economic recovery is complete, we should attempt to gradually reduce the debt to GDP ratio. Finally I look at the Chancellor's recent actions and how they are reported by the media....

Simon Wren-Lewis

[Blissex]

«Basically, the money system is just a con trick, or maybe a faith-based religion. It works as long as everyone believes that it works. But a pound coin is just a bit of practically worthless metal, just as a five pond note is just a bit of plasticised paper.»

It is not quite like that: "chartalist" money systems have been largely "ledger" money (what David Graeber called "temple money") systems, that is money is an accounting entity, not a physical entity. The *currency* is physical as coin or paper, but such currency is not "money", it is just a way to represent and update entries in the ledger.

When someone's bank pay out £10 pounds from his bank account, and the someone gives you the £10 to pay for something, and then you pay in the £10 into your bank account, the currency involved (the £10 banknote) is just a way to update the ledgers.

What people therefore need to have faith in is not the money, but the ledgers, and that's why bank failures are so dangerous.

[ltr]

I am grateful to the health authorities for the approval of general use of a coronavirus vaccine in a few days. This is fine, fine news.

Thank you to the government.

[ltr]

I am grateful to the government for the vaccine to come:

December 2, 2020

Coronavirus

UK

Cases   ( 1,659,256)
Deaths   ( 59,699)

Deaths per million   ( 877)

Germany

Cases   ( 1,096,346)
Deaths   ( 17,611)

Deaths per million   ( 210)

[ltr]

America has had 2,000 deaths a day these last 2 days and around 150,000 cases daily for many days now. What a tragedy, doubly so for not using the British vaccine finding and beginning mass administration in a few days. The public health system in America has utterly failed.

[ltr]

December 2, 2020

Coronavirus

US

Cases   ( 14,313,941)
Deaths   ( 279,865)

India

Cases   ( 9,533,471)
Deaths   ( 138,657)

France

Cases   ( 2,244,635)
Deaths   ( 53,816)

UK

Cases   ( 1,659,256)
Deaths   ( 59,699)

Mexico

Cases   ( 1,122,362)
Deaths   ( 106,765)

Germany

Cases   ( 1,105,832)
Deaths   ( 17,812)

Canada

Cases   ( 389,775)
Deaths   ( 12,325)

China

Cases   ( 86,551)
Deaths   ( 4,634)

[ltr]

December 2, 2020

Coronavirus   (Deaths per million)

UK   ( 877)
US   ( 843)
France   ( 824)
Mexico   ( 824)

Canada   ( 325)
Germany   ( 212)
India   ( 100)
China   ( 3)

Notice the ratios of deaths to coronavirus cases are 9.5%, 3.6% and 2.4% for Mexico, the United Kingdom and France respectively.