Britain – a Self Harming Economy
By Martin Odoni
We, by which I mean the Western world and further, have gone through over five years of the worst financial crisis since before World War II, so we are told. The crisis has been cynically blamed on widescale ‘over-spending’ on welfare, accusations of public sector self-indulgence that I and many others have debunked elsewhere. In truth, the damage was done by ridiculous risk-taking in the financial services sector, chiefly in the United States of America, but by no means limited to there.
But irrespective of whose fault it is that the financial crisis happened, the simple fact is that it is still here, and one of the consequences for the UK was that the last Labour Government, headed up by Gordon Brown, chose to hand the banks a series of enormous bail-outs of public money to prevent the whole financial system collapsing. This more or less quadrupled the National Debt owed by the British Public Sector in the blinking of an eye. The exact debt the country owes depends very much on which calculation, and indeed which definition, you use. By the kindest calculation i.e. the one that leaves out all private sector debts, including ones that have public sector overlaps, the country owes roughly £1.4 trillion. By other, more realistic calculations, it is somewhere between £5 trillion and £6 trillion.
Since the present Coalition Government came to power, it has been in the grip of what seems a frenzied obsession with paying down the National Debt as the only way it can think of to end the crisis. To do this, it thinks it would need to dismantle the structural Deficit i.e. put a complete stop to the amount it has to borrow each year to meet its spending commitments.
This is not quite the case though. While there is no doubt that the National Debt is too high – it damages the country’s credit rating and also can put an unhappy strain on international relations – it is certainly not the out-of-control runaway locomotive that the Government seems convinced it is. Indeed, it’s not exactly a problem. It contains an absurdity, for sure, and one day it might well evolve into a real problem, should economies in certain other countries collapse, but as things stand, it really is not a big deal at all.
The National Public Sector Debt is largely just the sum total credit belonging to non-Government agencies (which we shall call ‘the creditors’, although a lot of them are exporters instead) in deposit accounts within the Bank Of England.
What happens is that, when the UK Government purchases goods or services from a foreign country, it sets up a deposit account (yes, just like the sort of deposit account you get in a regular High Street Bank) within the Bank Of England in the creditor’s name, and credits that account for the full cost of the goods purchased. Whilst the money is in the deposit account, it can’t be used for purchasing anything (again, just like in a normal High Street Bank deposit account), but it receives a high rate of interest. This account is sometimes called a ‘Gilt’, a ‘Bond’, or a ‘Security’.
Now, when the deposit account ‘matures’ i.e. reaches the date when it needs to be paid back, all the Government has to do is to transfer the whole sum into a current account in the creditor’s name, again within the Bank Of England. (Yes, yet again it works in exactly the same way as a current account on the High Street; low interest rates, if any, but the sums can now be used for making payments.) Then the Government simply has to forward credit notes for the total to the creditor. That credit note will allow the creditor to claim any British goods available for sale up to that total, without having to pay any money for them.
Once that total is off the creditor’s deposit account and into the current account, the debt is officially paid off. That’s all that most of the National Debt really is, just a combined total of credit notes that haven’t been printed yet, because the respective deposits haven’t matured. As soon as one of these credit notes is printed, its sum is no longer part of the Public Sector Debt.
And that’s it. That’s all that happens.
This is happening with trade deal after trade deal every single day. But new deals are also being struck every single day, which is one of the reasons why the Debt never seems to go down.
And the most important point, before anyone asks, is this; no, the credit notes cannot be cashed in by the creditors. The creditors cannot demand money in their place, or that they be paid off in gold, or some-such; the pound-sterling is not signed up to the gold-standard, it is a non-convertible currency.
The upshot of this is that the British Government doesn’t have to send its creditors any actual money. All it has to do is just give a guarantee to let the creditors claim British-owned sales goods to the value of the amount owed – in other words, it has to give them the credit notes. What the creditor chooses to do with a credit note once received is really up to him. He can leave it in limbo, he can use it to open another deposit account within the Bank Of England to increase the interest further, he can genuinely use it to claim sales goods (in the unlikely event that he can find any available on the British market worth having), or he can even trade it to someone else. But those are pretty much the only options the creditor will have. There is near enough nothing that he can do to get the money itself.
There is a point of bad honour in this, in that the UK has effectively taken vast quantities of goods from countless trading partners without really paying for them (“What else is new?” cries most of the Commonwealth). But looked at in purely practical terms, there is no real need, as things presently stand, for the UK to pay off the National Debt at all. The creditors would have known the risks when they sold their goods to the UK (and indeed to other countries) in the first place – that they were never going to receive any actual money for the goods, only credit to their agreed value that they could eventually purchase British-owned market goods with in return. Such a trade is merely an exchange-in-waiting. From the moment the value of the sum is transferred to a Bank Of England current account, the creditor can use it to make purchases on the British market, therefore he has received the ‘purchasing power’ the deal entitles him to as though the credit were real money, so the debt is classed as ‘paid off’.
Even if the creditors find there is never anything on the British market that they wish to buy, there is every possibility that at least some of them will continue trading with the UK, depending mainly on which country he is from. For instance, countries that are ‘export-driven’ (see below), such as China, are more or less compelled to keep selling to the UK – and yes, even more so to the USA – even though there is seldom anything they can do with the credits they receive. This is because if they do not keep exporting, their own economies will collapse; they will only have their own markets to sell to (and maybe a few countries with much smaller markets of their own), but if they have little or no internal demand because of inadequate pay-rates among the general population, which is usually the case, most of their goods will go unsold, and the industries will have to stop retailing or producing, causing surges in unemployment. This is why the Chinese Government currently holds an ever-growing mountain of over $2 trillion at the US Federal Reserve, and hardly ever uses any of it – because it needs to keep exporting to the US to keep its heavy-manufacturing base turning over, but can hardly ever find anything it can use from the US markets to take back in return.
Because Britain has little native manufacturing industry, it has to keep importing, as it would struggle to meet its population’s own needs if imports stopped. (This is quite different from the position of the USA, which still has a large native industrial base that can ‘kick in’ very quickly if necessary.) So for the sake of trading relationships, it would be best for the UK if it can get the Debt down quite substantially in real terms – say by going back to manufacturing goods again that creditors would actually want to buy – especially in case circumstances in exporting countries were to change. Say the Chinese economy didcollapse, then the British would have to look elsewhere for many of the imports it needs. Not all prospective trading partners will be ‘export-driven’ in the same way as China, in which case the bad real-terms record of the UK as a trading partner would come back to haunt the negotiations – the new prospective exporter might say, “You people never produce anything that I would want to buy, so what use are your credit notes going to be to me? Pay me in dollars or euros, or something!” But one way or another, this has almost nothing to do with the methods the Coalition Government are trying to employ to reduce the Debt anyway.
The Public Sector Debt is not really a crisis after all, and it’s not even an issue to any great extent, at least not yet, and it won’t be until a major export partner collapses. But the problem is that nobody in Parliament seems to be aware of how the National Debt really works, of how little pressure there really is to pay it off, or of how simply (and automatically) it is paid. All they do is see the huge numbers involved, nearly have a heart attack, and respond by taking a hatchet to necessary services in order to cut costs. In-so-doing, they cause economic slowdowns that reduce tax yields and so make the borrowing requirement grow even bigger.
The Government’s whole approach is quite pointless, and it has caused much needless suffering for many people, to no achievable end. We are still lumbered with a crisis that is in large part a phantom, even though its effects are very real.
That the crisis is ongoing after half a decade is a testament, not to national self-indulgence, but to national self-harm.