A government has plenty of alternatives in dealing with its debt, but most are not palatable for financial speculators
Richard Murphy is an economic justice campaigner. Professor of Accounting at Sheffield University Management School., and Chartered Accountant, and Co-founder of the Green New Deal, as well as blogging at Funding the Future.
Cross-posted from Richard Murphy’s blog
The Telegraph says in an email this morning that:
Andy Burnham’s Commons debut as Prime Minister yesterday was overshadowed by a market rout that sent borrowing costs to their highest in decades.
This, of course, is not true. The rise in interest rates was seen around the world and had nothing to do with the arrival of Andy Burnham at the Despatch Box, but the Telegraph will not miss an opportunity to be stupid whenever one is offered, and duly delivered misinformation in a way that has become all its own.
More worrying was the Financial Times’ reaction to yesterday’s rising government bond interest rates around the world, which I see as a sign of a forthcoming financial meltdown. They have published an editorial on this issue today under the headline:
Governments should heed the bond market’s warning
What do they mean? This paragraph summarises their argument:
Governments should resist the temptation for shortcuts. The most sustainable way to reduce the risk of market ructions is to listen to the signals coming from bond investors, not to ignore or suppress them. That means tackling rising welfare and pension costs head-on and resisting giveaways or tax cuts without credible funding plans. Avoiding political pain today will not make the problem disappear, it only stores up instability in bond markets that could force more painful economic choices tomorrow.
Elsewhere, they noted:
Efforts to hold down rates punish savers, complicate the job of central bankers and, crucially, drown out vital price signals and undermine trust in public debt. Whatever tools they use, finance ministries risk fighting wasteful and losing battles with globally interconnected capital markets.
What, then, is their desire? A number can be very clearly identified.
Firstly, they want central banks to be given free rein to raise interest rates as they see fit to fight the inflation that will be created as a consequence of Donald Trump’s war, an energy crisis, drought, El Niño and financial speculation based upon all these things. That is despite the fact that raising interest rates can have no impact whatsoever on inflation arising for these reasons, because that inflation does not reflect excessive demand in an economy, but external price shocks that no one in any one economy can address through interest rate adjustment or any other mechanism. Economic illiteracy is, then, at the heart of the FT’s desire.
Second, their reference to “vital price signals” makes it clear that the FT still believes markets should set government policy, and that democratic governments’ interest in serving their electorates must come second. Autocracy, then, is a key element within FT thinking.
Third, the interests of those with wealth must, according to the FT, come first. They say savers must not be punished, while suggesting that what they describe as rising welfare and pension costs must be tackled head-on. The message is clear. The economy must be organised in the interests of those whom it has already benefited the most, and the interests of those who have suffered the consequences of markets unfairly allocating rewards – as they always do – must be ignored.
Fourth, the FT issues a veiled threat as self-appointed spokesperson for the bond vigilantes. The message is that the markets must not be bucked, and that governments must not interfere or the worst might happen. They choose not to spell out precisely what they mean, other than by suggesting that bond market instability will be created as a result, with the consequence that what they ‘call painful political choices’ will be imposed. These, they imply, will fall on those least able to afford the resulting financial turmoil, whatever politicians might, in the FT’s opinion, foolishly desire.
I quote the FT at length for one very good reason. The analysis it offers is profoundly repugnant, and its own words must be used to show how clearly this is the case.
It is rare that we see a statement as bold as this, making it so clear that those with wealth think that the cost of the economic failure that they themselves are creating as a consequence of the political programmes they support and the erroneous economic beliefs that they hold must be borne by those who have no role in creating the situation we are now facing, and for whom the relative pain will undoubtedly be greatest.
What might be done about this? That is a right question to ask at this moment. A number of obvious answers occurred to me, all of which could be readily enacted.
Firstly, the Bank of England could be told to stop its quantitative tightening programme, which is deliberately designed to fuel this crisis.
Secondly, the government could declare what it already says exists, and call the current economic situation a cost-of-living crisis, and so intervene in Bank of England policy, ordering it to cut rather than increase interest rates at this point in time.
Thirdly, the government could, if it wished, reduce the number of bonds it sells into financial markets when it appears they do not want to buy them. It could do this by cancelling current bond auctions and funding itself through the Bank of England instead. Rationing the supply of new bonds would immediately affect their price and send shockwaves through the market.
Fourthly, the government could suspend its so-called full funding rule. There is no reason why this exists. It is convention alone that requires that the government appear to clear its overdraft with the Bank of England every day by issuing either bonds or Treasury bills, but there is no requirement upon it to do so, and it is time for this nonsense to end.
Fifthly, the government could announce the introduction of tiered interest rate payments on central bank reserve accounts, with the quite deliberate intention of reducing the funding available to commercial banks to dominate London bond markets, whilst making it clear, if they retain their view that books must be balanced (which is another erroneous economic assumption) that they are doing so to protect the interests of the most vulnerable in society.
Sixthly, the government could announce an inquiry into introducing a financial services tax that might include what is called Spahn taxation, which I explain in the linked glossary entry. This is a tax deliberately designed to tackle financial speculation by making it more expensive to undertake.
Seventh, the government could indicate its intention to increase tax rates on unearned income, which the FT policy is deliberately promoting, and on the monopoly profits of banks, which again the FT is seeking to support.
I make all these points for one good reason: to pretend that there is nothing that the government can do in the face of an assault of this sort on the well-being of large numbers of people in the UK so that bankers and the wealthy might benefit should not go without an adequate response, and such a response does exist.
The question is, will this government have the courage to stand up to bankers now when we all know full well that sometime soon they will be coming begging for bailouts as the financial crisis, which the Financial Times is interpreting as one of government funding, but which is actually one of failing neoliberalism, reaches the point where a crash becomes inevitable?
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