It’s the deficit, stupid

Conservative Business Minister Michael Fallon, responding to Ed Miliband’s speech at today’s rally:

“By turning up at a rally that opposes every single spending cut that’s necessary to deal with our debts, Ed Miliband has shown that he’s still in favour of more spending, more borrowing and even greater debt. That’s what got us into this mess in the first place.”


Oh.  My.  God.  These people just do not miss an opportunity to illustrate their stupidity.

Public debt, when issued by a monetary sovereign like the UK, is COMPLETELY different to private debt, and it was the latter that “got us into this mess in the first place”, not the former.  And, irony of ironies, deficit spending (= public spending in excess of tax revenue) is, I believe, the solution to our private debt crisis.  That’s right – the SOLUTION.  Allow me to explain in more detail via a ludicrously contrived Q&A…

So, “deficit spending” is part of the solution, huh.  How so?

Well, because spending in excess of tax receipts adds NET financial assets to the private sector.

What do you mean by “net financial assets”?

Put simply, this means extra purchasing power in the hands of private sector individuals and firms, without a corresponding increase in their debt.

That’s disconcertingly vague – could you clarify what you mean, please?

Certainly.  Here comes the science bit…  When an individual or firm borrows from a bank, they gain purchasing power in the form of a demand deposit (= an “asset”).  At the same time, however, they enter into a binding contract to repay this money (= a “liability”), which creates a concurrent drain on their purchasing power.  Thus, private creation of money necessarily creates assets and liabilities that balance = no net increase in assets.   By contrast, when an individual or firm receives money from government (whose account sits OUTSIDE the commercial banking system), their assets increase (as does the bank’s, whose reserves are credited), but there is no corresponding liability.  Thus, net financial assets have been created.

And this is good, is it?

Hell, yes.  If net assets are created, it enables the private sector to (i) pay for goods and services without having to borrow insanely and/or (ii) deleverage (thereby repairing balance sheets) and/or (iii) save for a rainy day.  Thus, the importance of deficit spending during a recession becomes clear.

What do you mean by “deleverage”?

It’s a fancy way of saying “pay down debt”.

Wouldn’t it have been simpler just to say that then?

Yes, it would.  Please accept my apologies.

But won’t deficit spending add to the national debt?

In the short-term, yes.  In the medium to long term, we can expect a reduction in the debt as the economy stabilises, employment picks up and tax revenues increase.  Either way, the issue is moot, however, since debt issued by a monetary sovereign (= a government that issues its own floating currency) is nothing more than an accounting entry, the interest on which can ALWAYS be paid at the push of a button.  It thus represents a risk-free asset to the private sector.  People stressing over the national debt need look no further than Japan, which, despite running continuous deficits for 20 years and racking up debt of over 200% GDP, has not collapsed.  On the contrary, it has retained high levels of employment, and – most importantly – has NOT experienced inflation.  Neoliberal fears about the debt are therefore without foundation.  

So, if I get this straight: the logical corollary of what you’re saying is that the goal of “deficit reduction” should not be an end in itself?

That’s spot on.  A deficit is neither inherently good, nor bad – it all depends on the extant economic conditions.  If the economy is in the shit (as at present), as evidenced by high unemployment and general misery, then the government SHOULD run a deficit, to keep the economy float.  If the economy is humming, as evidenced by low unemployment, then a deficit is likely to be necessary only to the extent that the private sector will wish to save at least some of its income, regardless of the state of the broader economy.  Thus, over an extended period, we should expect to see swings from small to large deficits, with a deficit being the norm.

Thanks, that was a REALLY USEFUL exposition.  So, why do you think the Conservative Business  Minister thinks otherwise?

Because he’s VERY stupid.

That’s a tad unkind – would you care to rephrase?

Fine.  I’d say it’s because he doesn’t understand how modern monetary economies operate, and is unwilling to let go of neoliberal assumptions that have become so rooted, it would take a pneumatic drill to excise them.

That’s still a little mean.

I don’t give a shit.  His stupidity is WRECKING LIVES.

Fair point.  Here endeth the contrived Q&A.


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