I’ve already taken a pop at Richie today over QE and now I’m going to have a go at Chris, which is an all the more worrying prospect, intellectually speaking.
1. Richard Murphy is basically right to say that this means that government debt is lower than official figures show, if we consider the government and Bank of England as a single entity. What’s happening is that government borrowing is being financed not by debt sales to the private sector but by an increase in base money. This is entirely consistent with the government budget constraint (pdf). Warren Buffett was quite correct to say that you cannot have a debt crisis if the authorities can print their own money.
I think the collorary to this is that if actual government debt is lower than the official figures then the price level is about to become much higher than it is now. QE is backed by a credible commitment to unwind it to reduce the amount of base money circulating. Taking the Bank and Government as one does not lead us to the situation described above where some debt does not exist. We have a situation where some debt exists in the odd form of a credible promise that at a future date someone will be being burning money.
Evidence for this abounds. The price level is not significantly above where it should be if the Bank of England had fanatically maintain an inflation rate of 2%. According to some rough calculations, since 1997 the price level is about 20% higher than a 2% level rule would suggest. Since QE was initiated in 2009 it is somewhat above even than high trend, but that was the point of QE, there is very little evidence that investors view QE as bound to be inflationary due to it being later monetised.
That low inflation isn’t consistent with a large scale monetisation of Government debt unless there is significant slack in the economy such that nominal increases mostly show up as increased real activity. I think there is room for more monetary expansion, and a little credible commitment to recklessness may be useful at the moment, but I know Chris holds that this is unlikely.
If markets are pricing in a monetisation of UK debt (and subsequent change in price level) they are pricing in only a very modest erosion of the Bank of England’s holdings. Chris can argue that we don’t need to consider Gilts held by the Bank of England under QE as real liabilities, but he needs to take that up with the markets, not me, it is they who are predicting much lower inflation for the UK ahead.
We’ll never sell those gilts back. The IFS says we have £280bn of new gilts to sell over the next three years to fund the deficit. There is not a hope we’ll add £350 billion of resale of gilts on top of that. The only likelihood is in fact of more QE: over that period there is no way the market can absorb £280 billion of new debt.
From Richie via Tim.
If the UK can issue safe assets in the form of Government debt (which judging by our interest rate we can), then we categorically will be able to sell it. There is a global shortage of safe assets as this graph illustrates and large global demand for them.
Asians save lots, but don’t have robust enough state or financial institutions to produce safe assets. That is, they want to be able to transfer consumption from now into the future but lack an infrastructure capable of delivering this at prices which are satisfactory.
The UK can issue lots of debt so long as people believe it will pay it back in full in a currency still worth more or less how much they expect. There is no danger of not finding buyers so long as those conditions hold, and they look like they will for the foreseeable future.
The same is true of nearly all developed economies with their own currency. Look at the US, belching out debt and facing record low interest rates and a market hungry, begging, ravenous for more (via Delong).
This strengthens Richie’s case for larger budget deficits but weakens his case for unwinding QE by monetising the debt. I do not know how he can hold both opinions simultaneously.
From Richie (via Chris):
When Henry Ford built his car plant he realised that unless the product he made was cheap enough for the workers to buy then there was no point in building it: there was no market to supply. This was the basis of Fordism.
Nope. The main element of Fordism is mass production of standardised products and scientific management of that process. The high wages were added later and not for the reasons Richie gives.
The high wages typically associated with Fordism were efficiency wages, wages paid to ensure people continued to work hard even though they were being managed intensively and told exactly how to do a boring repetitive job by annoying people with clipboards. Always with the clipboards.
After introducing the production line Ford was annoyed that his very profitable company was suffering because of high labour turnover and worried because this high turnover was damaging productivity. He was not worried that his potential market was not big enough.
The US economy was the richest country in the world, growing strongly and still attracting lots of migrants, his market was secure and he was always bloodymindedly sure that meant the US would need cars, lots of cars.
He decided to do the sensible thing and offer more money to his workers. That this enabled his workers to afford to buy one of his cars was incidental to the logic behind the move, although it made for good propaganda.
He didn’t do this to increase the size of his market, but because people tend to work harder for more money. Don’t take it from me though, a lowly blogger, try Larry Summers and Daniel Raff:
Ford’s decision to increase wages dramatically is most plausibly portrayed as the consequence of labor problems of the kind stressed by efficiency wage theorists. The structure of the five-dollar day program is consistent with the predictions of efficiency wage theories. There is vivid evidence that the five-dollar day resulted in substantial queues for Ford jobs. Finally, significant increases in productivity and profits at Ford accompanied the introduction of the five-dollar day.
Moral of the story: don’t go valorising old capitalisms.