Let’s abolish the national debt.

Note dated 28th Feb 2010. I've put the arguments below in more succinct form here.



When Gordon Brown announced in October 2009 that he intended reducing the national debt by £16bn via the sale of public assets, my response was to point out that ten times that much could easily be wiped off this debt just by getting the Bank of England to shred the gilts in its possession.

“Not Very Gay Gordon” has obviously been reading this blog, because he has gone quite on the £16bn asset sale.

Anyway, this is an even better idea: let’s abolish the national debt! Here’s how.

First as regards the portion of the national debt held by foreigners, the UK holds about $200bn of US national debt. So we sell that and pay off the foreign holders of UK national debt.

As regards the rest, we just print the necessary amount of money and buy back the debt, or “quantitatively ease” it, if you want jargon.

Those who found themselves in possession of cash instead of gilts would NOT for the most part run out and spend it. Why were these people holding gilts? Because they wanted to save: they regarded said gilts as part of their stock of savings. Likewise, they would regard the cash that replaced their gilts as savings. Their initial response would be to dump the cash in a bank deposit account. Then some of the cash would tend to boost the price of other assets: housing, shares, etc.

Also, banks would find themselves in possession of additional funds which theoretically they could lend, and that would have a reflationary effect. But banks just aren’t lending very much at the moment: they have surplus funds sitting doing very little with central banks.

At any rate, the above wheeze would boost demand to some extent. If the boost was just sufficient to bring us back to full employment and no more, there would be absolutely no reason to worry about the somewhat expanded money supply.

On the other hand, if it looked as though demand was being boosted too much and causing inflation, then government would have to raise interest rates and raise taxes to pay for said interest payments.

But hang on. In order to effect the above interest rate rise, the “government – central bank machine” has to bid funds away from the private sector: that’s HOW it effects the interest rate rises that it announces from time to time. Does the latter not amount, at least to some extent, to re-creating the national debt? The answer is “not really” – and for the following reasons.

Note that PURPOSE of the above “bidding away from the private sector” is NOT to fund government spending. The PURPOSE is to effect a deflationary stance, i.e. raise interest rates and taxes. That is, the PURPOSE is simply to confiscate money from the private sector and shred it. Obviously the capital sum “borrowed” will have to be paid back, though that could be after a number of years by which time inflation will have eroded its value.

To summarise, two forms of shredding take place here. 1, government grabs more tax with which to pay the above interest, and 2, the value of the above capital sum is eroded.

“Government – central bank machines” can print money. They can equally well do the opposite: shred it.

This might appear to involve some sort of cost or loss of real wealth for the private sector. That is debatable. All that happens is that government confiscates money which were it to be spent would cause excess inflation. That is, it confiscates money which the private sector could not effectively spend if it wanted to. So in what sense is this money a form of wealth?

Finally, it should be said that ideas of the type set out here were first set out by Abba Lerner. And as Keynes said to James Meade in 1943: “Lerner's argument is impeccable, but heaven help anyone who tries (to) put it across to the plain man at this stage of the evolution of our ideas."

Those interested in these ideas should Google “Modern Monetary Theory” and “Abba Lerner”.

The above national debt abolition plan would not work quite as smoothly as set out above. There are a number of problems and potential hitches, but they are minor hitches and are surmountable.