Saturday, March 27, 2010

National Debt - is it curtains for the UK?

There is a debate over on Liberal Conspiracy on financial matters. Sunder Katwala kicks it off by arguing that though the LibLabCon consensus is that public expenditure must be cut, the public themselves are not keen on cuts, and maybe we are not actually staring national bankruptcy in the face, and we should not get hysterical over the state of public finances.

My answer - I wouldn't start from here, but given the situation, we should plan to bring debt down, in a controlled way, over the medium or long term.

Debt financing is wrong. It is unethical, committing future generations to pay for our present demands. Everyone has been doing it though: This list of countries by National Debt shows the UK about midway on the OECD list, and midway/worse on the general list. (adjust the list by clicking the box at the top).
 In terms of external (foreign) debt,  we do far worse, being fifth from bottom of the list in terms of percentage of GDP. This means that we are more in hock to foreign banks.

The interesting thing is that the vast majority owed  by all countries is not to one another, but by countries to private banks.

The root of all of this debt lies in the fact that money is created by lending at interest. The money supply is doubling every 10 years or so. Doubling growth is exponential, and therefore unsustainable. The solution to the debt problem is to issue at least a fraction of the money (I would suggest 50%, varying with circumstances) on the authority of institutions acting on behalf of the ultimate source of power (i.e. we the people). Such issues should be only for investment into physical processes designed to benefit the nation in the long term, the principle candidate in 2010 being the Green New Deal.

This suggestion is certain to produce hysterical comments about hyperinflation, but hyperinflation is caused by ill-considered short term printing of money, usually in conditions of civil disruption or civil war. There is no intrinsic reason that private corporations should have a monopoly on the creation of money.


David Cox said...

There is no reason in theory why central banks can’t create money, use it then collect it back. Unfortunately the experiences of the Weimer Republic and images of people needin g a wheel-barrow full of zillion mark notes to buy a loaf of bread are so engrained in the financial sectors collective psyche, this route is totally taboo. There is another way, creating a complimentary currency like the Swiss Wir. A ‘green guinea’ to fund eco-Keynesism (GP Green New Deal/ LD Green Road to Recovery); as a complimentary currency it could have its own interest rate, exchange controls etc. It could have a sunset clause, making it worthless in a certain number of years.

DocRichard said...

David, you are not wrong. The knee-jerk reaction of Weimar/wheelbarrows precludes most rational debate about money creation. The chatterati are at the stork/mulberrry bush stage of comprehension on the question. And the Left identify any discussion as a recrudescence of right-wing anti-semitism which tainted so much of earlier criticism of the bank's monopoly on money creation, so that they are in the delicious position of supporting the right of the corporations' monopoly on money creation.

TheWorgl story of depreciating money to tackle a depression I find very encouraging.