Latest January 24th 2012

NOVEMBER 11th 2010
Britain's Trillion Pound Horror Story is the title of the programme I have just had to sit through on Channel 4 TV. The gems of truth in it were hidden in so much misunderstanding it is hard to know where to begin when commenting. Best place to start is the elephant in the room, the mistake on which the whole premise of the programme rests, that only people have money and governments have none. Of course the reverse is the case. People may have title deeds to property, they have ownership of goods, they may have skills and energy they can sell. But all money is the property of the state that issues it. At any given moment a coin or a banknote can be deemed valueless, provided due warning is given, by the state that issued it. Circumstances throughout the global economy can affect the value of its exchange rate. Clearly the level of the 'National Debt' (see below) does not affect it, seeing that this debt exceeds the imagination of even the makers of this programme. It is astronomical.

This situation developed out of one which the makers of this programme are now pretending to live in, whereby the value of coins was related to the value of their metal content in the societies of the era. The programme makers were very happy to live in the modern economic system until their disreputable activities, connived at by governments, blew it apart. Now they have become film makers to earn a crust. That does not mean we should take them seriously. They wheeled on Geoffrey Howe and Norman Lamont, neither of whom a have a clue, to agree with their curious theories. Howe was responsible for destroying qujite a lot of UK manufacturing when in office, Lamont responsible for wating everyone's time defending a pound that needed devaluing after being pegged at a fatuous level of exchange by the idiotic Lawson, a man who thrives on denials of many varieties. Kelvin MacKenzie by his own admission has never had a job that contributes to wealth but he has never contributed to understanding and that is what makes him such a waste of space.

Nevertheless there are gems of truth in this programme concerning bureaucracy and the churn of tax collected from people to whom it is subsequently returned. Unfortunately the idea that principles applicable to Hong Kong, which is where they think the answer lies, are applicable to paying off the UK national debt, are fairly wide of the mark.

The effects of  'creative accounting' in local and national government was covered in my State Of The Art written in the 1980s, covering the Physical, Biological, Philosophical, Political and Economic position and where it was going. This made it clear that linking the manipulation of the money supply only to an inflation target would be appropriaate only if circumstances warrented it. Discpline was needed but dogma could be disastrous. Students of religion may note the same elephant trap. Then money supply must match the liquidity needs of the economy, and inflation can be an indicator that there is a supply of money that exceeds the current requirements; but there are two measures other than what is known as the National Debt which have to be considered and not confused.

The annual budget balance (difference between state expenditure on behalf of its citizens and tax collected)
The annual balance of international trade (difference between goods and services sold abroad and bought from abroad.
The annual balance of payments (which includes the balance of trade and adds the balance of investment and the trade in currency per se)

Now for some defininitions of the National Debt

Definitions of national debt on the Web:

It is, as the reader will see, very important to understand the definition I have depicted in bold type above. Since the makers of the film I have just watched did not go into any details as to whom our national debt is owed, the programme was essential meaningless, but then Channel four likes to air all sorts of entertainement including 'documentaries' in which 'scientists' proved  that NASA's Apollo programme never got to the moon. [Not that I have it in for Channel 4, they do great stuff too and eventually did a program on Apollo that redeemed them]

The hard truth is this: All modern developed nations have to issue enough currency to satisfy the liquidity requirements of every transaction that is not refused by the inability of the payer to furnish the payment. The ability of the payer to pay is dependent on his credit position in the currency at issue. That credit position is decide by banks unless the payer holds liquid assets to be used in the purchase. Banks may take a charge on the payers assets as security.  All UK government expenditure results at the end of the day in the purchase of goods and services in the private sector as we have no nationalised industries, the question therefore is how much of this is the cause of foreign unbalanced debt. It is also true that we have many institutions and public services that are the recipients of state expenditure, so before we add up what is returned in tax we have to consider how much in the way of salaries paid by the government to state employees is spent on imported goods and services and trips and purchases abroad.

All this has to be carefully analysed before we can begin to see whether we, in the UK, are in a worse position than other major economies. I have to say that we are, because we are competing with countries all of which have one or more immense advantages over us and, in most cases, few of the very particular problems we have. Historical assets have turned to liabilities in some cases and without North Sea Oil and gas we would have been looking into the abyss years ago. None of this means that the crude pretense that it is the last Labour Government that put our children in debt to the whole of the rest of the world is in any way correct. On the contrary, Gordon Brown took the only chance he had on the only game in town to try and repair the long neglected infrastructure left by well-meaning but confused or negligent predecessors. Some things went wrong.

Qunantitatve Easing was ridiculed in this programme as the equivalent of printing money with no assets to back it up. This is misleading. The money had already been 'printed' in the name of assets valued by the market. The market was corrupt and crashed. The assets could not all be sold at once even though they existed. The economy was starved of liquidity. Quantitative easing restored it. Losses were sustained, inflation was therefore not caused as a result..

The 'cuts' that the present coalition are carrying out have no relevance to the national debt other than being a small step in the right direction, The reform of the benefits system is essential and if Labour had been in power they would have had to do something almost exactly the same. It does mean that anyone will be forced to do a job they cannot, nor, if there are no jobs for people to do, will they lose unemployment benefit. As for the National Debt, it is up to the rest of the world to decide how it affects the value of the pound, and it is up to us as a nation how to use the liquidity that our national economy allows in order to keep our place in the world, its trade and its management systems. There are one or two points made in this film about bureaucracy and taxes which are to some extent applicable but most of it is wind and piss. We are very short of minerals and energy resources other than coal in this country so we are going to have to use our brains and ability to work together with the advantage of historic institutional experience.

Andrew Sentance seems to be the only member of the MPC who gets what to do next, which is to keep interest rates low for a long time BUT NOT THIS LOW!
Up to 1% now please and hold it there for a guranteed 6 months and as that approaches maybe guarantee another 6 months.

JANUARY 16th 2011
It is helpful to be reminded to be careful using language and not to confuse 'debt' with 'deficit'. Continual deficits add to the debt, and it is to stop the deficit that the present government is making cuts, so as to convince the players in the global economy (including of course the IMF working for stability, as well as independent organisations and individuals working for themselves) that buying UK Government bonds is still a safe deal. It is the trend and the forward view that matters now. But if too many top economies all make cuts the growth on which employment depends, all are impoverished. Meantime here is a useful page written back in 2004

JANUARY 20th 2011
In connection with the last entry, this little essay by John Stepek, editor of, muddles up debt and deficit in a piece written to clarify the distinction, rendering it meaningless. It is hardly surprising the public and politicians are confused!

JANUARY 24th 2012
Here we are a whole year on and the news today is:

Government debt has risen to a record £1 trillion from £883bn a year ago.

The figure was reached after monthly borrowing fell by £2.2bn in December to £13.7bn, official figures show.

 I recommend we cease concentrating on the actual amount and look at how we could, can or cannot reverse its growth, if we need to. I am of the opinion that we do need to but only because its growth indicates a flawn in our management system which is being covered up and paid for in ways which are damaging in the long term if we wish our country, as part of a European civilization, to survive in such a way as to contribute positively to an acceptable planetary future. We are not handling or realising very well the phenomenon called 'globalisation'. We could do a lot better on the EU level. That means recognising the big mistakes that have been made in EU management (which we in the UK are hugely to blame for) and putting them right. We need to re-establish growth and the only way this can be done is by some very well coordinated 'qualitative easing'. Failing proper political control, the market cowboys will roam the range and a lotta people will get hurt or find their own solutions. That in no way absolves each nation from playing an equitable part in the economic group it belongs to.

Note: Japan is on its own economically. It has met the challenge but has just posted its first trade deficit in 20 years, due to its own internal troubles, the rise of China as a competitor and the recession in Europe. But it will hold on OK. Japan has not imported many immigrants who do not speak Japanese or share the national ethos and culture. It has taken on 'western' CEOs sometimes and one of these recently rocked the boat with an outcome that was possibly not harmful either. If the UK is going to rally its economy to reduce the trade deficit it needs to unite and inspire its citizens. At the moment we can't even deport those have declared in favour of our destruction and cost us financially in unproductive state expenditure of many varieties.