Project Fear By Numbers
With less than six months to go until the referendum, Scots are turning more of their attention to the debate. Until now it’s largely been the province of politics nerds such as ourselves, but with the vote beginning to loom on the horizon normal people are starting to study the issues more closely.
So we thought it’d be useful to put up a handy reference guide to the core strategy of the No campaign, illuminatingly dubbed “Project Fear” by its own staff. Lacking any positive case for a No vote as Britain suffers through austerity with no end in sight, “Better Together” has by its own admission dedicated itself to terrorising the people of Scotland into sticking with the Union:
The relentless bombardment of scare stories is so frenetic it can seem overwhelming, but it’s a lot more manageable when you realise that almost everything the No camp says is a variation on one of just 12 basic themes.
So we’ve compiled a catalogue/manual of every fearbomb in their armoury, and alongside each one is the truth that defuses it. Don’t have nightmares.
“The politics of fear can only work so long as people are prepared to be afraid.” (Iain Macwhirter, the Sunday Herald, 30 March 2014.)
FEARBOMB 1: YOU WON’T BE ABLE TO USE THE POUND!
The No campaign has put a huge amount of effort into telling Scots they won’t be able to use the pound, with George Osborne and Ed Balls uniting to insist that whichever one of them is Chancellor after the 2015 UK election would refuse to enter a currency union with an independent Scotland. We’ve collected just a few of their unequivocal assertions on the subject here.
Unfortunately that bluff collapsed in spectacular fashion at the weekend, but in reality it was already nonsense. While Scotland has numerous ostensibly viable alternative options to a Sterling union, the pragmatic reality is that neither Scotland nor the rUK could afford NOT to enter into one.
The rUK can’t because the resulting leap in its debt ratio (because it would have all of the current UK’s debt, but loaded onto an economy that had become 10% smaller overnight) would cast it into a spiral of downgraded credit ratings, higher balance of payments deficits and increased borrowing costs.
Scotland can’t because the rUK is Scotland’s biggest trading partner, and if the rUK’s economy went down the toilet it would drag Scotland’s with it – something which would be made worse for both countries by the hundreds of millions of pounds lost to businesses in transaction charges if they had to change currencies every time they traded across the border.
As every sane analyst agrees, in the event of a Yes vote common sense would prevail.
– Scotland’s alternative currency options
– the effect on the rUK of refusing a Sterling union
A large part of the reason the No camp focus on the supposed loss of Sterling is that they’re convinced that ordinary Scots live in a constant state of panic that Scotland might adopt the Euro.
(Even though the Euro has defied every right-wing newspaper’s insistence, repeated most weeks since 2007, that it was about to collapse at any moment. Despite the incredible pressure of having to cope with economies as wildly divergent as Germany and Greece, the single currency has not only survived but held its value.)
In fact there’s little evidence of such a pathological aversion. Labour, the Liberal Democrats and the SNP have all advocated membership of the Euro at various points in relatively recent history (the Lib Dem 2010 general election manifesto stated “We believe that it is in Britain’s long-term interest to be part of the euro”), but have subsequently changed their positions in response to events.
In any event, however, not only could an independent Scotland not be forced into joining the Euro – every member state, old or new, that’s not already part of the single currency has a default opt-out, over and above the explicit opt-out previously given to the UK – it wouldn’t even be allowed to.
An independent Scotland will use the pound.
– Why Scotland can’t be forced into the Euro
– Why Scotland WON’T be forced into the Euro
– Why Scotland couldn’t, in fact, join the Euro even if it wanted to
Stay tuned for Fearbomb 2!
The basis for the little Green (or was it blue) book? 🙂
I look forward to the WingsOverScotland BLUFF t-Shirt listing all the Project Fear threats and a big X put through every one of them 😉
NOTICE to tsunami waves of scare stories:
Scotland has learned how to surf.
Instead of drowning (street) is rising high over those waves.
REV—–Alistair Darling offering in Guardian
Darling said: “I do not know what the other political parties would do. I think it is almost certain that the political parties would make it clear in their manifesto that they DO NOT WANT Scotland in a currency union.”
bfh—that quote is a shocker
link to theguardian.com
Good stuff, Stu.
The very public crumbling of the currency threat has marked a crucial point in the campaign. To those ‘in the know’, it was always an empty threat, but it did appear to carry some weight. The demolition of that argument is important not just in and of itself, though, it’s that it has taken the credibility of the entire No machine along with it.
There’s 12! It just seems they’ve morphed into one big one. Anyway today’s FUBAR seems to be Bill Munro Director of Barrhead Travel making a complete Ratner of himself telling staff porkies about indyref I don’t have the tools to upload a copy of the fateful memo he send to staff. Hopefully someone else can upload it. I promise it’s a belter wriiten by a zoomer. 🙂
I think that come the referendum date,Scots should be the best educated population on the planet when it comes to currency.There is no excuse not to be and education on these matters takes away the fear mongering. How can they fear the Euro anyway when they use it for a few weeks every year when they entrust their holiday cash to it?
Darling said: “I do not know what the other political parties would do. I think it is almost certain that the political parties would make it clear in their manifesto that they DO NOT WANT Scotland in a currency union.” Flipper’s been trying to stir up trouble in England for months now or at the very least, spread the blame after the YES win. Its quite a big Uturn from his “currency union is logical but needs political union” thingee a few months ago.
Travel agent in afraid of borders and currency exchange shocker.I don’t really know but,will they lose money alright when flights from Scottish airports cuts the need for the spending of extra cash getting to Manchester or other English airports,esp overnight stays en route to said airports?
Here is the as yet unconfirmed and not denied Barrhead Travel e-mail:
link to facebook.com
In the comments Brian Cleland says
“Quick bit of investigative digging gave up some interesting info. The supposedly impartial report by Robert ‘Bob’ Lyddon was produced by The Bruges Group, a Tory quango who’s honorary president was Thatcher.”
No doubt more info will come to light over the next few hours. The Rev has said on twitter that he will use the information today – stand by for a Wings investigative piece later this afternoon.
@sneddon.
Courtesy of Albalha on the other thread.
Twitter on Barrhead Travel memo.
link to twitter.com
A clear sighted article on the potential of a truly independent scotland
The labour politicians in Scotland should hang their heads in shame for supporting the Westminster policies that have evidently failed
Great article; great series.
Let’s face it, this is what a proper and free press should be doing: analysing what both side of the fence are saying and holding up lies as lies. But, instead of multi-million pounds newspapers and TV news companies, it falls to a bloke in his bedroom in Bath to do it right. Bravo, Rev.
link to maltinpr.com is the thing that Munro’s is using to tell their employees to vote NO. Its very hard vote NO hitting but see if you can spot any reference to just how bad no currency union would be for England’s economic future. Hint, the author Bob Lydonn is a modern language graduate from Cambridge. How do you become a “leading international banking expert” with modern language degree is another question that says a lot about just how much of an “international” disaster the banks are, unless you actually work for one in the City.
Baffled by Barrhead Travels stance…..they are as the name suggests a company that specialises in sending people to foreign lands many of whom don’t use Sterling.
Always amazes me that these Captains of Industry can be so unnerved and spooked by effectively the prospect of a few new forms to fill in.
I know we’ve smashed our fundraising target but there’s 19 hours left on the clock and we’re £740 away from £90,000! (I know there’s more from direct supporters but I like round numbers)
Just think of the cost of black ink used if we need to print anything with Alistair Darlings face on it!
Local Authorities telling folk how they would prefer they vote
Employers telling their employees how they would prefer they vote
State Controlled Media spreading lies and misinformation
This is NOT some far off foreign land being reported on the teatime news..this is SCOTLAND
Indeed, the one major score I had against the repetition of unionist propaganda on currency referenced the two superbly informative links you added on the end of this article. There are few things better in this world than information from someone who really knows their onions (or other veg of your choice for metaphor) to batter half truth into the ground.
Couldn’t really comment on the old git from Barrhead Travel. Perhaps he’s still living in 1940?
The rUK can’t because the resulting leap in its debt ratio (because it would have all of the current UK’s debt, but loaded onto an economy that had become 10% smaller overnight) would cast it into a spiral of downgraded credit ratings, higher balance of payments deficits and increased borrowing costs.
I do not agree with this, though I accept it is the natural outcome of spiraling debt, if you accept the narrative we have been sold.
The UK debt is not a problem now and it will not be a problem in the future. Not in the real world. The idea that sovereign debt is important is a neoliberal version of project fear designed to further their wider agenda.
In the period following WW2 the UK had debt of some 265% of GDP: and that was one of the most successful periods for the UK economy we have ever seen. UK debt is currently about 90% of GDP (though that is probably an underestimate) Its position is worse than that of many countries who are treated as basket cases on the international markets. For example in 2011 eurostat reported that in 2010
Fourteen Member States had government debt ratios higher than 60% of GDP in 2010: Greece (144.9%), Italy (118.4%), Belgium (96.2%), Ireland (94.9%), Portugal (93.3%), Germany (83.2%), France (82.3%), Hungary (81.3%), the United Kingdom (79.9%), Austria (71.8%), Malta (69.0%), the
Netherlands (62.9%), Cyprus (61.5%) and Spain (61.0%).
Look at that list and ask yourself why debt matters. To be sure Greece tops the list and then comes Italy, which has also attracted attention on this basis: but the next most indebted is Belgium – you hear a lot of concern about Belgium’s economy? Interestingly Germany also had higher debt than the UK but I never heard it was a basket case – did you?
Perhaps it was because the debts were not growing in those countries – ie they had no deficit? Well no: Germany does not feature in the list of countries with the lowest deficits either
In 2010 the largest government deficits in percentage of GDP were recorded in Ireland (-31.3%), Greece (-10.6%),
the United Kingdom (-10.3%), Portugal (-9.8%), Spain (-9.3%), Latvia (-8.3%), Poland (-7.8%), Slovakia
(-7.7%), France (-7.1%), Lithuania (-7.0%) and Romania (-6.9%). The lowest deficits were recorded in
Luxembourg (-1.1%), Finland (-2.5%) and Denmark (-2.6%). Estonia and Sweden (both 0.2%) registered a
slight government surplus in 2010. In all, 21 Member States recorded an improvement in their government balance
relative to GDP in 2010 compared with 2009, five a worsening and one remained unchanged.
The question of sovereign debt does not arise if you have a sovereign currency and your debt is denominated in that currency: because in that situation you cannot default. You can always pay your debt. There is no question about it at all.
Those countries without a sovereign currency can certainly default and that is why the eurozone is in trouble. Doesn’t explain why Belgium is not seen in the same way as Greece if we follow the conventional story but that is by the by.
It is probably true that uk credit ratings would suffer: but that is because ratings agencies have their own agenda. They don’t affect much at all in the real world as the example of Japan demonstrates in spades. Their credit rating has been through the floor for years. Their debt is accepted everywhere at low rates despite that.
Nor would uk balance of payments suffer because, if the markets chose to increase the interest rate on UK debt the solution is to print more money: that produces inflation to some extent, but the upside of that is that exports are then cheaper, on the conventional story. Course there is some evidence that the conventional story is wrong and this is because the government has already printed money and inflation is falling: that is too big a problem with the narrative we are told to begin to address here, but my point is that the only definite effect of CU is transaction costs.
The rUK can definitely choose not to enter such a union if it so wishes. It cannot reasonably do so if it is to maintain the fiction of monetary constraint which justifies austerity and as was discussed on another thread the detailed analysis of endogenous money from the BoE is interesting in the circumstances
I am all for debunking unionist myths: but what we say has to be true and not just plausible. I am not convinced that the case you make is true
The Euro has varied against the GBP between 1.57 Euro and 1.12 over the last 10 years. It is now sitting at its average of 1.2 over the last 180 days, so on scale of disaster, it is doing OK. UK without Scotland, I would guess will struggle to maintain 1.20 Euros.
@Bill Munro. You are Gerald Ratner, and I claim my five pounds.
On second thoughts, you’d better hang on to it, you may be needing it if you lose as much business as the online brigade are promising! Oh what a tangled web we weave…
😉
Excellent article and a great idea for a series of posts.
The rUK debt problem is significant and real. You cannot compare to the post WW2 period and/or other countries, especially Japan.
“Around 70% of Japanese government bonds are purchased by the Bank of Japan, and much of the remainder is purchased by Japanese banks and trust funds, which largely insulates the prices and yields of such bonds from the effects of the global bond market and reduces their sensitivity to credit rating changes”
link to en.wikipedia.org
Japanese institutions are starting to reduce their holdings of Japanese bonds and to buy equities instead. It is hard to see a way out of the mess that Japan is in.
Anyone wishing to research more into Japan’s economic woes could look at the writings of Kyle Bass. Bass correctly predicted both the mortgage backed security debacle and the European sovereign debt crisis (even getting the order of countries correct) several years before they unfolded.
Japan does show the importance of an aging population that is against foreign immigration (like populist UK thinking). It has thus far been “saved” by having low private debt (unlike the UK) and having low foreign ownership of its bonds (unlike the UK).
Excellent article and a great idea for a series of posts.
The rUK debt problem is significant and real. You cannot compare to the post WW2 period and/or other countries, especially Japan.
“Around 70% of Japanese government bonds are purchased by the Bank of Japan, and much of the remainder is purchased by Japanese banks and trust funds, which largely insulates the prices and yields of such bonds from the effects of the global bond market and reduces their sensitivity to credit rating changes”
link to en.wikipedia.org
Japanese institutions are starting to reduce their holdings of Japanese bonds and to buy equities instead. It is hard to see a way out of the mess that Japan is in.
Anyone wishing to research more into Japan’s economic woes could look at the writings of Kyle Bass. Bass correctly predicted both the mortgage backed security debacle and the European sovereign debt crisis (even getting the order of countries correct) several years before they unfolded.
Japan does show the importance of an aging population that is against foreign immigration (like populist UK thinking). It has thus far been “saved” by having low private debt (unlike the UK) and having low foreign ownership of its bonds (unlike the UK).
I doubt this is written at all, Munro, this is the propagandist view, which omits many things in order to make their claims more believable. Tories spin, written all over it. He has simply changed the wording where his name appears.
Since 1999, the mighty British Pounds Sterling has dropped in value against the Euro by about 20%.
@Rev Stu
Every sane analyst? How exactly have you determined their sanity? Are Post Keynesian analysts insane? They’ve made a hell of a lot of accurate forecasts for a bunch of lunatics.
Here’s a professor of economics:
link to bilbo.economicoutlook.net
I suppose he’s insane though.
@Fiona
I’d go further: interest rates on sovereign government bonds can only rise if the government allows them to, no matter what the rating agencies do. As you say, Japan is the perfect example. Nations with currency sovereignty don’t need to issue bonds in the first place.
@Murray MCallum
Of course you can compare different nations, as long as you account for those differences where they exist. Japan, along with the US and UK, and others, is a nation with currency sovereignty. Their central bank buys government bonds, as does the US central bank and the Bank of England, via different mechanisms. The amounts bought vary over time. Where is the problem of a comparison?
The UK after WW2 ran far higher debt to GDP than it does now, and it did so despite the constraints of the Bretton Woods system, specifically the Gold Exchange Standard. That debt, even within the context of constraints which no longer exist, did not wreck the UK economy. Where is the problem of a comparison?
Another apparently insane analyst:
link to 3spoken.co.uk
[…] Wings Over Scotland – Project Fear By The Numbers […]
FlimFlamMan
I don’t believe you should compare the level of debt between countries without understanding who owns the debt. You cannot compare value and percentages on their own.
The ownership of debt is as important as its level. The owners of debt determine what it is worth, its risk and therefore the interest payable by the issuer.
Japan, for me, is a sovereign pyramid scheme. The government issues debt and it is bought by other branches of government and Japanese pension schemes.
The losers will be Japanese citizens whose pensions may be rendered worthless when the tipping point is reached – when Japanese institutions can no longer justify buying them and/or holding them.
This is why Japanese citizens have high private savings. They do not trust their government to look after them in their old age.
They are absolutely correct.
@ Murray McCallum
We have been hearing about the imminent demise of Japan for two decades or thereabouts. Hasn’t happened yet
Fiona
That is correct and is down to Japan basically buying its own IOUs.
When the current cohort of elderly Japanese citizens with high private savings die, they will be replaced by a younger population with reduced savings and poorer job prospects.
These younger Japanese citizens will rely more on the state to support them (all else unchanged) in their old age.
It will be interesting to see how the Japanese government funds this and what the reaction of Japanese citizens will be when they realise their pensions are worth a fraction of what they thought.
The UK, of course, has high debt (both public and private) and low savings and is therefore ahead of Japan in this respect.
Murray McCallum
Why would Japanese people’s pensions be worth a fraction of what they expected?
Currently, the Japanese like to save a lot, relative to other nations. This is partly because Japanese state pension and unemployment benefits are poor compared to other countries.
So the household sector net saves, and if the domestic business and external sectors are not sufficient to balance that net saving desire – they’re not – the government has to run a deficit. It sells bonds. Not all to the household sector, since their saving isn’t purely in gov. bonds.
In future the Japanese people, due to demographic changes or whatever, may not want to save as much. In that case the Japanese government will not need to run deficits as large as it does now.
There is no funding problem. It’s not that the government will no longer have buyers for bonds it needs to sell; it’s the other way round. Reduced saving desire by the Japanese people will reduce the need for government deficits in the first place.
The value of pensions, Japanese quality of life in general, does and will depend on the capacity of the Japanese economy to met people’s needs for real goods and services.
To the extent that deficits increase the capacity of the economy they increase that quality of life, and as Japanese desires to save rise and fall the deficits will rise and fall. If money that was being saved by households is spent into the economy instead, the government can spend less, reducing the deficit.
Why would Japanese people’s pensions be worth a fraction of what they expected?
Because their pension schemes hold a disproportionate amount of Japanese bonds. I believe these bonds to be overvalued and potentially worthless in the worst case scenario.
The steps currently being taken by the Japanese government make the already bad situation worse by increasing the likelihood of an interest rate rise and modest inflation. higher interest rates and inflation make fixed interest bonds less attractive.
I have some sympathy with the Japanese government as they try to escape from a dire and unsustainable situation many decades in the making.
link to ft.com
My experience of the Japanese banking and investment sector is that it is riddled with over valuation. This is not necessarily down to corruption, but a traditional way of doing business.
The traditional way of doing business means carrying an “asset” in your accounts, e.g. a loan or investment, where the recipient is actually bankrupt.
The Japanese finance sector acts very aggressively to anyone challenging their traditional approach of “hiding” from bad financial news. The concept of “honour” blinds many Japanese executives to economic reality.
This is my view on Japan’s economy and banking in particular. We can all have different ones.
I would be surprised (and alarmed) at any future Scottish Finance Minister suggesting we should run our economy along the lines of Japan.
Well as you say, Murray McCallum, we can all take our own view of what the Japanese experience tells us. The fact remains that disaster has been foretold very regularly for about two decades and it hasn’t happened. Most disciplines would be concerned when their predictions fail to materialise and would re-examine their models and theories: but not economists. For them, whenever the real world does not conform to their ideas they sack the real world
Murray McCallum
I see I’ve missed one of your replies. Appologies. I’ll combine my responses.
Who owns the debt really doesn’t matter. If the government issues the currency in which the debt is denominated then there is zero default risk; the government can never run out of something which it and only it can create.
The interest payable is set at the point of sale, and different countries have different systems. Once the bond has been sold that rate doesn’t change; it’s fixed for as long as that particular bond exists. That’s why the price, value, of bonds on the secondary market varies; their value depends on the combination of interest rate payable and people’s inflation expectations.
So that leaves value.
Japan is a sovereign nation; those bonds are denominated in a currency, the Yen, which only the Japanese government can issue. So they can never be forced to default on them. For them to lose significant value Japan would have to experience prolonged high inflation.
Can the bonds cause inflation?
If people sell them and spend the money into the economy that might result in inflation, if the economy couldn’t respond by increasing output.
But you say that 70% of those bonds are held by the central bank, so people selling can only account for 30%. And for them to be sold someone else has to buy them. Maybe the central bank, thereby increasing the amount of cash in the economy?
Well, 30% of bonds might be enough to stoke inflation. I think the Japanese government would be pretty happy with this; they’ve been in and out of deflation for about twenty years now, trying desperately to crate some inflation.
Let’s assume they get more than they want though. People are spending more than the economy can absorb. Inflation leads to lower bond values and everyone’s savings are worth less! Except, in this scenario, people have sold their bonds to the central bank anyway, and are spending the money.
Maybe only some people sold bonds. Well, in that case the inflationary push is smaller, but lets assume it’s still too much. So now some people really are seeing their pension savings shrink in real terms. Too much spending in the economy is pretty easy to counter: raise tax levels. Take that excess money out of the economy.
On this we’re in agreement, although the problem is with low state pension and other benefit provision, not dodgy bonds.
Japan no doubt has problems; show me a country that doesn’t. It’s not a Ponzi scheme though. It issues debt in its own currency and can therefore never run out of the finance to service that debt.
“If the government issues the currency in which the debt is denominated then there is zero default risk; the government can never run out of something which it and only it can create.”
Ha, ha, ha. You’re winding me up now!
link to en.wikipedia.org
Japan has basically failed to plan for its future. The mistakes were made decades ago.
Demography – 1/3rd of Japanese citizens are over 60 (1/4 over 65). The sale of adult nappies in Japan exceeds those for babies. It is one of the most xenophobic countries in the world and has basically barred foreign immigration.
China – a deteriorating political relationship with China (historically 20% of Japanese exports went there) threatens Japan’s ability to grow out of trouble.
Inflation – The BoJ’s efforts to devalue the Yen (to improve exports) has/will raise inflation which will change behaviour, e.g Japanese Institutions will become (for the first time ever) net sellers of JGBs. The whole system fundamentally relies on the exact opposite behaviour.
Non Yen asset purchases – Japanese individuals and companies appear to be increasing their appetite for foreign asset purchases in their desire to reduce their Yen holdings.
Like most sovereign debt defaults / crises / whatever you wish to call them, it will happen overnight and go from being “safe” to “junk” in a few days. Someone will lose lots of money – not the central bankers in the BoJ – but the people left holding JGBs in their savings plans.
“Someone will lose lots of money – not the central bankers in the BoJ – but the people left holding JGBs in their savings plans.”
Just to be clear, this will include savings and deposits in bank accounts where the bank had substantial JGB holdings within its capital base.
Such banks will be unable to return customers the full value of their deposits.
Fiona, notwithstanding that the UK is not being honest with the amount of debt, for example thousands of billions of pounds of debt which are off balance sheet, it still has to pay to service the debt (About 43 Billion pa) and that’s with the BOE not charging interest on 1/4 of the debt it owns.
As an example that is about the same as the defence budget.
If Scotland was not in a currency zone with the rUK then the balance of payments will take a 40 billion pa hit, this would unsettle the markets and they would probably have to pay even more in interest. This is probably what was behind the leak on Friday regarding the Currency Union. Or do you think it was a coincidence that the leak came a couple of hours after it was reported that the UK had reported its 2nd worst UK Balance of payments deficit in history?
No, I’m not. If you issue your own currency, and issue debt in that same currency there is absolutely no mechanism by which you can be forced to default. if you think there is, can you describe it?
You might choose to default anyway, but you’d have to be insane or planning to hurt some other party. Either way there are negative consequences. The only example I can think of is Russia in 1998. They were forced into default because they had issued debt in foreign currency, but also defaulted on their Rouble denominated debt.
How many of those had their own currency and issued debt in their own currency? I’m not saying countries can’t default, I’m saying countries with their own currency cannot be forced into default on debt denominated in that same currency.
That seems to be a universal human trait. Have you seen the latest IPCC report?
Yes, they have a relatively old population. They haven’t exactly barred immigration, but yes, Japan is unusually xenophobic.
If anything, as their population ages further japan will need to retain more of its economic output for the benefit of pensioners, not export it abroad. So loss of sales to China is not a problem.
More ominously, yes, the increasingly militaristic tone from Japan is worrying. A war would undoubtedly threaten the Japanese society and economy with catastrophe. That’s nothing to do with the bonds though, is it? War would be terrible even if Japan had no debt.
They’ve been trying to stoke inflation for twenty years without success. If they were to succeed now that may or may not be a bad thing, but it would be deliberate policy. It would again have nothing to do with bonds.
So demand for bonds might drop. In which case the Japanese government might not need to issue as many bonds. Again, no problem to be seen.
Except you’ve not described any mechanism by which this can happen. You’ve pointed out some characteristics of the Japanese economy/society, most of which I agree with.
The Japanese government doesn’t need to sell bonds for its own needs. The bond sales do not finance the deficit, how can they when they are denominated in the exact same currency that the Japanese government has a monopoly on issuing?. The deficit and associated bond sales finance Japanese saving desire. If that desire reduces then the deficit will reduce.
The government can never run out of something which it and only it creates
Do you really mean printing currency to service debt
Do you mean because a country can print it’s own money it can never default
Cause all it needs to do it print more money when ever it feels like it too pay off its debts
?
FlimFlamMan
You can’t state a principle of “zero default risk” while also accepting the historical fact of said defaults (for whatever reason the default occurred).
“The Japanese government doesn’t need to sell bonds for its own needs. The bond sales do not finance the deficit, ..”
link to bloomberg.com
“Revenue from bond sales will pay for 43 percent of next year’s budget, down from 46.3 percent this year, according to draft budget documents obtained yesterday by Bloomberg News from a government official.”
I’ve set out the conditions for JGB default/crisis – the tipping point when behaviour switches from perceiving JGBs as “risk free” to carrying risk (which they obviously do).
There will be an acceleration of JGB holders (Japanese banks, pension schemes and investment institutions) trying to sell them.
Who exactly will buy them? Maybe Gordon Brown if he was still UK Chancellor? Maybe the BoJ will buy them all? Quantitative easing on an infinite time basis! Wow!
The Yen will become worthless outside of Japan – why accept/hold a currency that is effectively being printed in billions every day. What will Japanese citizens make of this? They may take delight in this Japanese circular printing press process and wonder why all the rich guys are buying foreign assets and investments.
If the BoJ finally gets to the point of having some modicum of respect for their job and refuse to buy JGBs, who exactly will buy future issues? As noted, these debt sales fund almost half of Japan’s budget.
The Japanese government will have to finance its budget through other means than issuing debt. These measures (tax and spending cuts) are likely to undo much of their efforts to promote growth and inflation.
While I have a lot of sympathy with the Japanese government, the only escape route I see for them is for their key ally (the USA) to prop them up as a counter measure in the region to China.
But we are getting into the realms of political economy. I’m more interested in the maths.
I do agree with you that every country is different. I also agree that countries can strategically default on their debt (a high risk strategy). My main point is that Japan is an extreme case – the sheer level of debt, xenophobia, demography, and a culture of not questioning.
It seems to me the UK (and Europe) is desperately trying to avoid becoming the next Japan. But that’s just my view. I do not hold myself out as having the correct view.
Murray
So I was on the right track
Might not totally understand it all but have to say I have found an interest in something now that I would like to learn about
So could you answer a couple of yes no question
UK had to promise to hounor 100% all debit because markets were getting jittery
UK had to go black or white on currency to calm the market
Markets didn’t quite get calm when AS said fine I don’t get the assets I don’t get. the debt
Get the feeling there is a much bigger game being played here with very high stakes
sandra
The term ‘printing money’ tends to be used as a negative, despite the fact that that is how money is created; either physically printed/minted or created by increasing values in spreadsheets.
When a government that has its own currency issues debt all it does is swap an interest bearing financial asset – the bond – for one that pays no interest – cash or reserves. Paying off that debt simply reverses the process.
You can think of it as ‘printing money’, but given that government bonds and cash are barely distinguishable in liquidity, they can both be considered ‘money’.
There’s nothing to fear in either process.
There is fear in printing money to service ongoing government expenditure with no end in sight (the case of Japan).
There is less fear in a government using that method to tackle the short term impact of a financial crisis. Only the right wing nut jobs seem content to let people starve until markets recover.
Sandra
“UK had to promise to hounor 100% all debit because markets were getting jittery”
UK had to go black or white on currency to calm the market”
The UK honouring debt announcement is, at face value, a statement of existing fact – it’s their name that is printed on the bonds anyway. No change there.
The “high stakes” rest with the Westminster government. Their strategy is crumbling. If their own ministers don’t believe it (no Sterling zone) why should market traders?
As the referendum approaches and the likelihood of a ‘Yes’ result increases, I suspect we will see the UK government starting to talk about a Sterling zone “on the right terms” or something that gets them out of their hole.
They will basically go back to what Mark Carney spoke about a few weeks ago, i.e. a properly structured, agreed and mutually beneficial currency arrangement.
It seems common sense to me. The bigger question is how long to sign up to it for.
Ok
Nothing to worry about…..absolutely no need to worry that despite the interest rate on debt having gone up from 1·6 to 2·X and despite what happened to Greece which was where there leanders lost faith and the interest rate when from a couple of % to something like 180%
So since we have no problem with printing money it won’t be a problem if it goes back to 15% I believe that was the amount of interest Thatcher played
And despite the fact that UK personal credit card spending is still rising
And despite the fact that even before we start getting hit with interest hikes we have food banks
Are you really saying there is absolutely nothing to worry about?
Murray
I can see I wasn’t entirely clear, so I’ll go over it one more time:
A government which issues its own currency cannot ever be forced to default on debt denominated in that same currency.
Those governments – this is the bit I didn’t state clearly – really do face zero default risk. They may choose to default anyway, which poses some non-zero risk for bond buyers, but again the only example I can think of in recent decades is Russia 1998.
What if bond buyers stop buying? Then the government can stop issuing bonds. The gold standard and gold exchange standard are long gone; governments which issue their own currency don’t need to issue bonds at all. Their primary function in modern monetary systems is as a reserve drain, allowing the central bank to meet its overnight inter-bank lending rate. Without bond sales the CB can meet that target by paying a return on reserves themselves.
You’ve set out conditions, but there’s no mechanism within them that can lead to the results you claim. The Yen, like all currencies, will become worthless, or worth less at least, if overall spending exceeds the capacity of the economy. This is true whether it is government spending or private, and whether or not the government issues bonds.
I agree that the UK and Europe are trying to avoid Japan’s problems in recent decades – though with unemployment at around 4%, some of those problems are worse than others. The big problem Japan has had is deflation, and the EU is doing a terrible job at avoiding that. Overall Eurozone inflation came in at I think 0.7% in the latest figures, with some countries now in outright deflation.
Starting to talk about a sterling zone why do they need it?
Starting to see articles talking about negative affect on sterling if we leave especially as yes is looking stronger and stronger
Statement of existing fact ~then why did it have to be restated
why make the statement of already known fact if not to serve a purpose or need ?
sandra
No, I’m not saying there is nothing to worry about. I’m saying government debt is nothing to worry about, provided that government has its own currency and issues debt, if any, in that currency.
Now these are entirely different animals. Private sector debt is potentially very much something to worry about, since those private debtors have to service and pay off debt out of their income. They clearly don’t have their own currency, I sure don’t. So if we lose income we can default, lose cars, houses etc.
Economies, and more importantly lives, can be wrecked by excessive private debt. It was at the heart of the 2008 crash.
Food banks are a symptom of the crash, and of the government’s failure to protect people’s livelihoods. Most people anyway; they chose instead to support the financial sector, where rampant fraud stoked the excess private debt that was key to the crash.
Don’t imagine for a moment that my comments about currencies or government deficits mean I support the actions of the UK or other governments. I don’t. They have failed in their only purpose; to protect their citizens, all of them.
Murray
There is fear of ‘money printing’, yes, but it is misplaced. The thing to fear, to avoid, is excess spending, however that spending comes about. Spending based on ‘money printing’ can be sustained indefinitely, provided that spending does not exceed the capacity of the economy to produce real goods and services.
FlimflamMan
I also agree that deflation is a problem to be avoided. Basically, more drawn out pain over a period of time than inflation.
I don’t see government debt in a well managed economy a problem at all. I don’t agree the UK spending priorities, e.g. I do not want any spending on nuclear weapons, funding wars overseas, or tax cuts for the wealthiest.
I do think Japan is reaching a stage where it may no longer have the luxury of having its citizens and institutions happily hold the bulk of their savings in JGBs.
I think a USA financial bailout is the likely outcome for Japan. They are an extraordinary people though, so you never know.
FlimFlamMan
I can see the argument. Would you see the Gilts held by the BoE as debt that can simply be “written off”?
Although this debt is fiscally neutral (there is no interest payment between the BoE and the Treasury), it can not be written off.
Well, it can be written off – but that would be a default.
Your technical argument is that the governor of an independent Central Bank would go along with buying its own sovereign bonds for evermore. I’d like to see their job description.
The Central Bank would also cease to be a credible lender of last resort – their Bank’s reserves are potentially full of worthless bits of paper.
I am not talking about the UK here. More of an extreme case.
Seems there are still delays, is the Rev. still under attack?
Murray
Full agreement from me on deflation; it is far more damaging than then even what passes for ‘high’ inflation. Debt deflation, where fixed nominal obligations can no longer be serviced from falling income is an absolute killer. A literal killer.
Full agreement on spending priorities as well.
Nukes: no.
Imperial wars: no.
Living wage: yes.
Real full employment (not the garbage announced by Osborne): yes
And so on. Given some of the things I support, my position on a currency union or government deficits, I can forgive people for assuming I’m a Tory or a unionist or both. I’m neither; I’d like a drop of Anarcho-Syndicalism given a choice.
Murray
Yes, a write off would be a default, depending how it’s structured, but I don’t advocate writing off in the case of UK debt, because it’s not necessary. It’s denominated in sterling so it can always be serviced and then paid off. The Euro is a different matter; any meaningful fix will involve more write offs, but most important is private debt.
If I were in charge I wouldn’t have the CB buy debt if the private sector didn’t want it, I wouldn’t even give the private sector the option; I just wouldn’t issue any more debt. Let excess reserves remain in the system and force the overnight rate down to zero. The risk free rate of return ought to be zero.
Government bonds are mostly welfare for the financial sector; they don’t need it. Of course they are also used by citizens, in large part for retirement income. I’d fix that loss by setting the state pension at the living wage.
This doesn’t affect the CBs function as a LOLR; the value of the currency largely depends on the state of the economy, not on the mechanism used to hit the inter-bank target rate. The excess reserves don’t enter the economy anyway, which is wht the excess reserves created by QE haven’t stoked inflation, contrary to what numerous mainstream commentators were saying before QE began.
And no, that doesn’t mean I support QE. At best it does nothing, and at worst it boosts asset prices by switching people’s portfolio preferences – from bonds to stocks, or commodities. The first benefits nobody and the second only benefits the wealthy, and the officers and upper management of the companies whose stocks rise, whose bonuses are based on stock price. Which leads me to the insanity of companies borrowing to buy back stock, but that’s a tangent. Boosted commodity prices are an obvious problem too; food riots?.
In this extreme hypothetical where I’m running things I’d also gut the financial sector, and retail banks would be either run or regulated as public utilities. So with a much smaller banking sector banned from speculative casino banking the LOLR role wouldn’t be needed as much anyway. No bailouts for failed speculation.
FlimflamMan
You make some very interesting points, many of which I agree. I am reading up on Anarcho-syndicalism – a bit of a step for me, but I like some of the concepts.
Thanks for a very interesting conversation.
Yes, Anarcho-Syndicalism is a bit of an “aah, if only” thing; it needs support from pretty much the whole population. It’s an aspirational goal, as the politicians like to say. And in the space, the huge gaping space, between that and what we have now there’s plenty of scope for improvement of lower but still important levels.
Thanks to you too, I’m always up for a good conversation such as this.