Lower for longer – money printing, low interest rates and helicopter drops

The UK has moved on from creating new money to buy government bonds, but it’s still mighty fashionable elsewhere. Sweden has just announced a new programme. Japan lives by it. The Euro area is pumping out new Euros like there’s no tomorrow. Interest rates remain close to zero in the USA, UK, Euroland, Switzerland, Sweden,  and Japan. At the Bank of England the Chief  Economist muses about some future need to create money, impose negative interest rates, and drop the cash so it can be spent. In China the authorities still have scope to cut their interest rates and relax rules on bank credit to stimulate their economy. The economic world is summed up in the phrase lower for longer about interest rates.

Risk averse savers see this as a nightmare world, where they can get practically no return on their deposits. Other savers have made good money out of rising share and bond prices, as the official money created has been pumped into markets and pushed asset prices up. Borrowers have been benefitting from the low rates, with many able to borrow or refinance at low rates of interest for long time periods. The main winners have been most advanced country governments, able to spend and borrow large sums at very low rates of interest.

So how does this all end? Does it end? Is it just the new normal? Crisis low rates imposed in 2009 have been in place ever since in most cases.  If the west is now more like Japan after her excessive boom and bust at the end of the 1980s, we can look forward to more of the same. Japan has had low interest rates and intermittent programmes of money creation for 25 years.

My problem with all this monetary experimentation in the Euro area, Japan and elsewhere is that it does not directly resolve the underlying problem. The main reason rates are low and these overseas economies are weak is the state of the commercial banking system. All the time the banks are weak or are made to be extra cautious by the regulators, there will be insufficient credit growth through the normal channels. If companies cannot borrow enough to expand, if individuals cannot borrow enough to buy new cars, homes and other  major purchases, if the corporate sector is forced to run a surplus by prudent banks  the economies do not grow. Too much credit is a bad thing. Too little credit makes it difficult to grow, stifles enterprise and stops people accumulating assets for the future. The UK banks are now in stronger shape and more capable of financing the recovery. The pity is they were not sorted out immediately after the crisis, and a bigger pity that Labour’s regulators allowed the mega mergers which created RBS and Lloyds HBOS in the first place. Now it’s the turn of other parts of the world to get their banking systems into recovery shape.


  1. Lifelogic
    October 31, 2015


    But the restrictions on the banks, the daft slotting rules, their high margins, high fees, the short terms …. that the bank are demanding are still deterring much sound investment & borrowing.

    The failure of the government to sort out RBS quickly after its collapse caused very business huge damage, RBS treated many perfectly sound businesses quite appallingly even while under government ownership.

    The lack of competition in banking is still allowing the banks to get away with this. Still best to cut out these rip off middle men wherever possible I find. Fortunately the peer to peer lending expansion is having some positive effects.

  2. Dame Rita Webb
    October 31, 2015

    Too little credit eh you could have fooled me! Just have a listen to adverts on the radio for car loans for people with impaired credit histories. While on the whole personal debt in the UK was £1.447 trillion at the end of August 2015. This is up from £1.414 trillion at the end of August 2014, an extra £635 per UK adult.

    If the banks are “recovering” because of ZIRP there must be a black swan somewhere amongst the pension funds and insurance companies, especially amongst the former. Prior to 2007/8 quite a few of these ran with a deficit and they must now be severely pressured if they keep having to meet their liabilities with an increased cost for a diminished income stream.

    Anyone who believes things are on the mend with this government deserves what is coming to them.

    1. Iain Gill
      October 31, 2015

      We have sub prime mortgages too


      of course the regulators will act all surprised when it all goes pop

  3. Lifelogic
    October 31, 2015

    I read that a man on £16k-a-year benefits has blamed the Government for not encouraging him to work. He is quite right. It is surely immoral and indeed often highly damaging for the government to run this system, encouraging sloth & fecklessness as it does. How will people ever learn to work? Why does Osborne do it? Why is he making it even worse with the proposed tax and benefit changes?

    Hardly on the side of hard working families as they claim are they?

  4. Excalibur
    October 31, 2015

    Off topic, JR. Can you tell us why a private jet, paid for by the British government, was provided for Shaker Aamer ?

    1. Dame Rita Webb
      October 31, 2015

      Or better still why we are paying compen, at the levels mentioned in the papers, to someone born in the country we are not allowed to mention here , travelling on a Belgian passport, incarcerated by the Americans after doing charity work in Afghanistan?

  5. Antisthenes
    October 31, 2015

    Perhaps this constant injection of counterfeit money can do what Gordon Brown said he had done but had not. Put an end to boom and bust. It appears we are into a bust period and have been since 2009 but are being spared the worst effects of it by QE and low interest rates. This date varies country by country as you point out but there is now a pattern that shows that we are now all in it together. Certainly there are variations as some are showing growth and others are down turning. The average though has to be decline. The constant threat is that what growth there is can be very easily be reversed.

    This monetary experiment will have consequences that are yet to manifest themselves and who is to say that they will not be good ones. Except conventional wisdom says that counterfeit money is evil and we have criminalised it for the individual as history has told us that it undermines the economy dangerously. Yet governments the law makers do not believe this law applies to them. How the mighty have fallen or caused devastation in one form or another because they believe they are above the law. Will it be any different on this occasion just because governments believe they have found the way to turn alchemy into a proper science and are able to conjure money out of thin air without actually having to earn it. Well my common sense tells me that individual budgetary requirements that require a budget to generally balance does not just apply to individuals but to governments as well. Over borrowing is unsustainable and doing so despite the left believing otherwise leads to ruin. Add to that the magic money trees then surely eventually that is going to lead to a ruin that does not bear contemplating.

    1. Edward2
      November 1, 2015

      I agree with your every word Antihistenes.

      There is a huge difference between the control and adjustment of the money supply and this magic money creation.
      But the latter is ideal for lefty politicians wishing to promise ever more goodies to a socially reliant electorate.

      1. petermartin2001
        November 7, 2015

        There is a huge difference between the control and adjustment of the money supply and this magic money creation.

        Is there? Care to explain what it might be?

        1. Edward2
          November 7, 2015

          Yes one is the supply of money cash coins into an economy to meet the neesd of an expandedd economony.
          The other is creation of money not supported by any actual wealth created
          False money.
          Zimbabwe money
          Magic tree money.
          Leading to disaster for a currency.
          You cannot make me and others rich by starting up your magic printing press.
          I think you alrwady know the difference Peter.

          1. petermartin2001
            November 8, 2015

            I know it doesn’t suit your political world view but there isn’t any real difference between the ££ that are created and spent by government into a healthy economy and those that are spent and created into a less than healthy economy – whatever the cause of the malaise. High levels of recession or high levels of inflation.

            The mechanism is exactly the same, nothwithstanding the recent use of QE by some countries, whether there’s too few ££ or too many ££.

            There is a tendency to think that wealth just creates money on the political right. That can’t be true if you think about it.

            On the other hand, you might think that I would put it the other way around. That’s not quite the case. I would say that increased wealth and production, or the potential of increased wealth and production, justifies the creation of extra aggregate demand to purchase that production.

  6. David Murfin
    October 31, 2015

    The really important thing is that someone with a good idea but without the money to develop it, should be able to borrow enough from a reliable source so that the new idea contributes to the common good, even if some risk must be taken to get it to work.

  7. alan jutson
    October 31, 2015

    The problem surely is the lack of everyones trust in sound money and the organisations which are supposed to be responsible for such.

    Whilst Banks over lend, and Governments over borrow and/or devalue ,the goal posts are constantly being moved.

    The correction (which surely must happen) no matter how large or small, will always be painful.
    Sadly those who caused all the problems will feel less pain, those who didn’t will.

  8. Tad Davison
    October 31, 2015

    Interesting. They print money that is used primarily to recapitalise the banks, but the banks still don’t lend to businesses for them to expand, which has an inevitable knock-on effect on growth. And RT’s Max Keiser keeps reminding us of the giant Ponzi scheme whereby banks lend to each other, and create e-money out of fresh air.

    The question was put to Ben Bernanke recently, that it might have been just as well to give all that printed money to the people instead of the banks because it would have done more good, and not created zombie-like sclerotic (my word) institutions.

    So can anyone tell us definitively how much hard cash is now in circulation, and how much of the above e-money has been generated in recent times since transactions effectively became electronic?

    Oh, and little bit of inflation might not go amiss.

    Tad Davison


  9. Mike Stallard
    October 31, 2015

    You have not mentioned the £1.5 TRILLION debt. This massive amount, growing rapidly and virtually unchecked, must have a vast effect on the economy.
    I am not sure exactly what – except for the fact that its interest alone must be prohibitive. The cost of this debt was, in 2014, 84£ billion while the Education budget was almost the same at £93 billion. Poor old defence was right down there in the £30 billions. So much for our contribution to the immigrant crisis in Syria.
    And, apart from some words and promises (the autumn statement…) no real effort seems to be made to tackle this growing menace at all.
    It seems to me that interest rates have to be kept down to avoid the £84 billion repayments spiralling out of control.

  10. Mark
    October 31, 2015

    The UK has too much credit lent to the wrong things. That is why the banks are fragile. When we have governments that have run up massive borrowing in order to finance welfare and projects with negative returns, and households who have exhausted their normal borrowing capacity by over-paying and over-borrowing for homes, and assets that are over-inflated because of these distortions there is no real borrowing capacity left. Businesses remain very reluctant to borrow from banks, fearing that as the banking and asset problems unwind they will be the ones finding their loans called in (as they were during the last banking crisis) – they do not trust banks.

    It is very shocking to see (Tabc 1.2, BoE Bankstats) the distribution of domestic lending in the UK: £17bn to agriculture, £37bn to manufacturing, £13bn to utilities, £35bn to construction, £42bn to wholesale/retail…. yet nearly £1,300bn on property and over £1,500bn to government (and yet more “off balance sheet” via PFI schemes, and guarantees like Hinkley Point and the banking sector itself).

    Our banks will only be in strong shape when they can withstand the impact of the unwinding of asset bubbles. Unfortunately, too little has been done to make that possible so far. It requires mortgage holders to pay off sufficient of their mortgages (taking advantage of low interest rates) so that as property prices fall they are not too heavily or too long in negative equity, with the value of bank collateral insufficient to support their borrowing. It requires government to stop wasting money on negative value projects such as HS2, Hinkley Point, etc., and eliminate deficit spending. It requires the Bank of England to work out how to unwind its QE balances.

    THe risk of another banking crisis in the UK hasn’t gone away.

  11. agricola
    October 31, 2015

    If as you suggest the printing of money is a worldwide phenomena then there is not much point in individuals having savings accounts or for that matter pensions. The return will be zilch , if not minus zilch by the time that you get it.

    Maybe the survival tactic should be the acquisition of assets. Preferably assets that are in finite supply, such as selected vintage motor cars, aircraft, wine, art, and antiques. Rare metals might be worth looking at too. Shares in very selected industries, high tech medical should have potential. This is not my area of expertise so my comments are instinctive. For sure , money is not going to be worth the paper it is printed on, long term.

  12. Ian wragg
    October 31, 2015

    I fear it will end badly for us. We are destroying our industrial base as government policy. We are about to experience power cuts like some banana republic and we have sold off the country.
    We pensioners are paying for government profligacy through ZIRP.
    When the population teaches 70 million, most on benefits. Who will pay

    Zimbabwe here we come.

  13. formula57
    October 31, 2015

    If the problem is and has been “insufficient credit growth through the normal channels” what has prevented governments creating some abnormal channels?

    In agreement with your view, during 2009 the now defunct Willem Buiter blog quoted Dr. André Lara Resende, a well-known Brazilian economist that included: –

    “In an economy paralyzed by the excess of debt – as it is the case of Japan since the early nineties and as it is now the case of the US – neither monetary policy nor fiscal policy can reactivate the economy. A large proportion of the income generated by the increase in public spending is saved by the private sector in order to diminish its debt. The virtuous circle of the Keynesian expenditure multiplier is thus interrupted.”


    “The experience of 1929 taught us that to stick to orthodoxy and to refuse to deploy public resources to avoid the collapse of an insolvent economy is an error no to be repeated. Unfortunately, as known since Keynes, monetary policy is incapable of stimulating the economy in these circumstances. It could have avoided its collapse, as learned from subsequent studies by Milton Friedman and Anna Schwartz. Yet the decision to use monetary policy to keep alive an economy drowning in debt turns also fiscal policy incapable of stimulating the economy, as noted by Irving Fisher. As long as excessive debt is not digested, both monetary and fiscal policies are inefficient. There is not much of an alternative. Either to let the economy collapse, in order to reduce debts, and then use fiscal policy to revive it, or inundate the insolvent economy with public credit, to avoid the collapse, and lose the ability of fiscal policy to pull it out of a prolonged lethargy. Either a horrible end or an endless horror.”

    Gordon Brown’s way of “saving the world” selected the “endless horror” option. The excessive debt sits still on bank balance sheets (not yet classified as irrecoverable) and that alas includes banks here as well as abroad.

  14. JJE
    October 31, 2015

    It didn’t exactly help in the UK when the Chancellor in his Budget imposed punitive taxation rates on the startup challenger banks that are trying to fill the gap left by the traditional lenders. That was a very foolish knee jerk response to the need to remove the bank levy from HSBC to try to keep them in this country and find the money somewhere else.

    An example of the damage wrought by the Government’s inability to control spending and a Chancellor too busy with the political tactics and without a clear strategy.

  15. Denis Cooper
    October 31, 2015

    Surely in general the problem is not too little credit overall, but too much of the available credit having been, and still being, used to fund consumption rather than for purposes which would increase production capacity?

    1. petermartin2001
      November 1, 2015


      But what is the point of producing something if it isn’t ‘consumed’ ? If we build a new railway, for example, the point is to provide train transport to people and goods. There’s no point building the track otherwise.

      Is lack of productive capability really the bottle neck in the economy? What kind of production capacity would you say is in short supply?

      1. Edward2
        November 1, 2015

        That is fairly obvious Peter.
        In the case of the railway line it creates economic activity as people and goods can travel further afield.
        New markets are created and with it new jobs and prosperity.
        Stimulating growth and consumption.
        Did you not study the industrial revolution in the UK driven by the rise of our canals roads railways and shipping.
        Plus steam power and then later our electric and gas power systems.
        We need more assets for our money invested and less handouts.

        1. petermartin2001
          November 1, 2015

          Building the railway is an asset. People and goods travelling further is consumption.

          There’s no point building a bridge or an airport if there’s no demand for that bridge or airport. So there has to be consumption to justify having the asset in the first place.

          Every business needs paying customers. I dare say there are quite a number of expensive restaurants, which are productive assets to their owners, in Wokingham. That’s because there’s a demand to go to and consume the products of those restaurants. There will be proportionately fewer expensive restaurants in Middlesbrough.

          So does Middlesborough need more capital spending on extra restaurants to bring itself up to the standards of Wokingham?

          1. Edward2
            November 1, 2015

            Chicken and egg.

          2. APL
            November 2, 2015

            petermartin2001: “There’s no point building a bridge or an airport if there’s no demand for that bridge or airport. ”

            Huh, why do I think of HS2?

          3. Edward2
            November 2, 2015

            I remember a quote from Steven Spielberg’s film, Close Encounters of the Third Kind

            Build it and they will come.

  16. Michael Walzer
    October 31, 2015

    Oh, JR, how much I sympathise with you! The U.K. took the long winding road some years ago, the other parts of the world are only starting to sort themselves out. How tough must it be for you to see them so slow to follow your good advices.

  17. Denis Cooper
    October 31, 2015

    Off-topic, JR, I wonder whether you or one of your colleagues could put down a question to the Foreign Minister, asking whether the UK’s membership of the European Economic Area, EEA, is any way dependent upon the UK’s membership of the European Union, EU?

    And if so, what adjustments might have to be made to the existing EEA treaty:


    in the event that the UK wished to leave the EU but remain in the EEA?

    1. APL
      November 2, 2015

      Denis Cooper: “asking whether the UK’s membership of the European Economic Area, EEA, is any way dependent upon the UK’s membership of the European Union, EU?”

      This of course is contrary to the agreed Tory party narrative that, the Norway option is a bad idea. Mr Redwood is promoting the idea that the ‘Norway option” is somehow a worse alternative than the UK currently has, so naturally, the question won’t be asked.

      Reply I have not said the Norway option is worse than what we now have! I do say we can do much better than the Norway option, as I want out of free movement and the EU contributions they make.

  18. Kenneth
    October 31, 2015

    With all this fiat confetti around the world, why is the price of gold so low?

    1. Dame Rita Webb
      October 31, 2015

      Do a bit of googling for articles by Jim Rickards. He is probably the sanest writer offering an explanation on the subject.

    2. petermartin2001
      November 1, 2015

      The price of gold is probably still a little higher than it should be on the basis of historical trends and production costs. When the US, the UK and others announced plans for QE in the aftermath of the 2008 GFC there was a tendency to think, by those who perhaps weren’t that capable of thinking logically, that an increased number of dollars would lead to hyperinflation. Big mistake!

      Consequently, terms like you’ve just used “fiat confetti” etc were commonplace and there was a mad scramble to purchase gold which caused a classic bubble in the price. Those who were smart enough to sell at the peak would have done well but those who were less than smart lost a lot of money.

      It makes no sense at all to buy gold when inflation is very low. Even if it were very high I’d suggest tins of beans and corned beef might be a better alternative! If civilisation does come to an end you might need a gun too!

      1. Gary
        November 1, 2015

        Hyperinflation is being stored up as potential energy in the bond markets. QE is budding up bond and inflating related asset prices, and driving yields to zero and below. If you, like most sane economists(maybe not many of those) think all bull markets end, then when this one cracks it will be like a dam bursting and we will be knee deep in funny money that no one wants. They will call that hyperinflation. The banks know it and that is why they are driving rates below zero and simultaneously the govt is borrowing to prop up the mortgage bond market wit first time buyer handouts. The prudent saver is paying for the lot.

        The banks are panicking, and there is no way out. There is no free lunch.

  19. petermartin2001
    October 31, 2015

    The main reason rates are low and these overseas economies are weak is the state of the commercial banking system.

    Is it? Interest rates are set at whatever Government chooses them to be in both the short term (by setting the overnight rate) and longer term by issuing more bonds to increase rates or buying them back via the central bank (QE) to reduce them.

    The accepted theory for the last 30 years or so has been that interest rates are reduced to stimulate the economy. Then raised to slow it down. The snag has been that rates have been reduced more often than they have been raised. ie The economy has needed more stimulation than slowing down as accumulated private debt has built up. That can only be fixed temporarily by creating yet more private debt . We end up interest rates at close to zero and a mountain of debt which has accumulated in the private sector.

    That debt has created a huge asset bubble in property prices which will have to burst sooner or later. However the Government would like it to be later, much later, which is why there is so much concern about what might happen if they are even raised as high as 1% . Who would have ever thought it possible just twenty years ago that interest rates would be this low and still the economy be moribund?

    The key to breaking out of this impasse is to get away from the idea that an economy in which the banks are lending freely is a healthy economy. Sure, at the time this seems to be the case but, inevitably the banks become wary of lending into the asset price bubble they have helped create, they stop lending and the economy turns sour. We hear the phrase “credit crunch”! It’s the stop-start nature of private bank lending that causes all the trouble.

    So what’s the way forward? For a start the government need to regulate lending to minimise the stop -go nature of it and minimise the boom -bust nature of the business cycle. Governments need to look at what their deficit means in terms of all the money flows in the economy. Government cannot simply decide that its own deficit is bad thing and ignore the external deficit in trade for example. Both these deficits are closely related.

    We also need to look at the relationship between interest rates and inflation. Capitalism works best when there is an element of use-it-or-lose-it about money. There are profits for those who are prepared to take some risk with their money but nothing or even a slight loss for those who aren’t. That means letting inflation run a little higher to perhaps 3-4% and at the same time keeping interest rates down to lower than the rate of inflation.

    That’s not going to be a popular policy with those who have lost of spare cash so it probably won’t happen, but, nevertheless that’s what needs to happen to avoid the “Japanese Syndrome” of one “lost decade” after another.

    1. Edward2
      November 1, 2015

      But interest rates are only near zero for Governments.
      For borrowers they are still high.
      Try a car loan or a credit card loan or a loan for a small business and see the correct true rate.

      I love your lets have 3 or 4% inflation idea.
      Its like an addict saying just one or two drinks I can handle it.
      Still reduces the value of your spending power and savings by nearly half in a decade.
      Ruinous and dangerous as a deliberate policy.

      1. petermartin2001
        November 1, 2015

        Why is 2% better than 0% inflation? It’s not me just saying that, it’s George Osborne too. He’s committed himself to meeting that 2% target. And it is a target – not an upper limit.

        So if 2% is better than 0%, why would 3% be worse?

        1. Edward2
          November 1, 2015

          I do not agree at all with the recent change of policy by Mr Osborne.
          I am someone who has lived through an era of inflation and seen the destructive and divisive effects it has on society.
          The upper target could be a max of 2% but I would prefer the aim to be zero.
          Inflation is like a drug which cannot be easily controlled and if allowed to go unchecked will destroy a society.

  20. Gary
    October 31, 2015

    How does this all end ? In utter collapse. Read history, start with John Law’s money printing machinations in France that led to the Revolution.

    35 year bond bull erodes capital , sucks the life out of the economy and pins the market into a zirp corner as the central bank frantically tries to slope the yield curve upwards to float the borrow short , lend long banks. The people financing this crooked policy in the end are the honest people who work and save and try to be self reliant and not burden the state. This is a crime, and MPs are complicit, most being completely ignorant, but ignorance is no excuse in law. Natural justice will win in the end, as it always does.

  21. Bert Young
    October 31, 2015

    The economic system of the developed countries has always favoured borrowing ; of course the Banking system is the root cause of this . Apart from the shareholders investment , the money lent and at work within the system does not belong to the Banks – they are merely the custodians of the deposits . In the past depositors were reasonably satisfied that their money was safe with the Banks and were rewarded with a small percentage return ; this is not the state of play today ; Banks are not safe , there is little or no “return”and the Banks are not staffed with the calibre of people they used to have . Furthermore , Banking activity has become blurred at the edges with the mixture of across the counter and merchanting activities .

    Perhaps the root cause of the malaise is the ill-conceived notion of the Central Banks to prop up the borrowing activity with the creation of money using the maxim of stimulation . I have always considered this judgement to be wrong ; stimulation as a motive is justifiable providing it is supported by real assets ; those countries rich in natural resources have some basis for their decision , but , those without a credible support are irresponsible and should restrain from doing so .

    In this country private debt has reached an astronomical level and shows little sign of abating . People are being encouraged to spend spend spend well beyond any rationale of income . It has to stop equally as much as our objective to get rid of our deficit . Rules and discipline must go hand in glove together with an equal degree of determination to bring things into line . The World is not a fairyland .

    1. Gary
      November 1, 2015

      When you deposit money with the banks you hand over ownership, not just custodianship , of the money to the banks. You then become a creditor to the bank and probably the last in line behind bond and stock owners with the bank. Not only does the banks incur no cost creating money with loans out of thin air, they also take ownership of that money as deposits.

      reply Depositors rank well above shareholders. depositors are also guaranteed up to a specified amount

    October 31, 2015

    “…creating new money to buy government bonds…..Sweden has just announced a new programme. ” Mr Osborne very recently in Parliament highlighted Sweden as doing the very opposite as a justification of his own self-acclaimed prudent policies. Also Canada as running a continuous budget surplus. Mr Trudeau has just been elected in Canada and intends to reverse this and have a budget-deficit to enable infrastructure building.
    # (Also to disengage the Royal Canadian Air Force from bombing Syria.)
    Mr Osborne, seems very much alone in his financial plan. He is all for bombing indistinguishable dots on the ground in Syria too. His character is becoming alike Harry Lime in “The Third Man ” …historically running clear our of time.

  23. Vanessa
    October 31, 2015

    It takes a very special government to punish the people who have done the right thing and saved so they will not be a burden on the State and reward those who have been irresponsible and borrowed too much by charging them negligible interest rates.

    The same goes for governments who cannot rein in their spending and who cannot pay their debts. This will all end in an horrendous crash of the economies around the world, including Britain.

    1. Peter Turner
      October 31, 2015

      Vanessa, your logic about savers getting the dirty end of the stick is quite true. This does not seem to be recognised by many – politicians included.

      1. Mark
        October 31, 2015

        Many politicians seem to think that the pensions “triple lock” is an over-generous concession to pensioners, when it is scant recompense for the negative real returns on annuity assets for those who save. ZIRP has acted as a 50%+ income tax before HMRC even get to have their fingers in the pie.

        Many seem to think that property can be a pension substitute, while ignoring the risk of concentrating wealth in one asset class: in real terms house prices could easily fall by more than half, and property incomes likewise, when the market corrects.

    2. petermartin2001
      November 1, 2015

      Vanessa and Peter,

      You’re both making the point that savers have ” done the right thing “? I presume you mean you’ve saved money rather than real things that you might need in the future?

      I’ve no problem with your saving any money but you should realise that all those who call for the government to minimise its debt do have a problem. It is a matter of simple accounting that liabilities always have to equal assets. So, if you accumulate monetary assets someone, and that has to be government, has to assume the monetary liabilities to match. They do have to match – penny for penny.

      Many people on this blog are concerned about the interest the government pays out on its liabilities. That means they are concerned that they are paying you too much.

      But, as you say, you aren’t being paid much at all! But, I’d just make the point that you don’t want government to completely repay its debts because then no-one would have any assets.

      1. Edward2
        November 1, 2015

        Are you really trying to claim that if a State runs a surplus we citizens would be poor and have no assets?
        Like to explain how your theory didn’t affect Saudi Arabia and many other oil rich nations for the last 60 years?
        And how the USA post war (until they recently took up your idea) grew and became the wealthiest people on Earth?
        And how modern day China is succeeding?
        All with huge Govt surpluses.

        1. petermartin2001
          November 1, 2015


          If you see my reply to Vanessa below you’ll see the basic idea which is very simple.

          The game of Monopoly is a closed system so the parallel would only, strictly speaking, be valid for a country which exactly balances its external transactions. If there a lot of money coming into the game from other games, like there is with the exporting countries of China and Saudi Arabia for example, then it is quite possible that the banker/govt will end up in surplus rather than be in debt.

          1. petermartin2001
            November 1, 2015

            PS I might just add that this would only be true if the different games used the same currency. If a different currency was coming into the game, say US dollars were coming into China, the Chinese banker/govt can only store those dollars as an asset. It has to create, and hand out new Renminbi or Yuan to keep its own players happy so still ends up in debt in its own currency.

          2. Edward2
            November 1, 2015

            You fail to directly answer any of my points Peter.

          3. petermartin2001
            November 3, 2015


            I’ll try another way then.

            1) The USA has not run “huge Govt surpluses” Google Images { USA deficits} for verification.
            2) Saudi Arabia has huge oil reserves. Naturally it has a huge surplus of US $. It is not typical
            3) China has a National Debt of 65% of GDP according to nationaldebtclocks.org
            4) If the State had no national debt the £ would cease to exist as a currency. There would still be assets (the farms, factories etc would not disappear) but there would be no ££.

          4. Edward2
            November 3, 2015

            It is a total nonsense to say the pound would not exist if the State had no debts.

          5. petermartin2001
            November 3, 2015

            “It is a total nonsense to say the pound would not exist if the State had no debts.”

            Is it? Suppose Greece wanted to have its own currency once more. It decides to leave all euro obligations to the EU and ECB and start again with a clean sheet. It now has no debts but it has no currency either.

            So it prints 100 million New Drachma and spends them into its economy. Imposes taxes in ND and collects back 80 million ND in the first year. Its deficit is 20 million.

            In the second year it issues another 100 million. It collects back 90 million. It deficit for this year is 10 million.

            What’s the national debt now in ND? What (asuming that no ND are used outside Greece) are the ND assets of the Greek people? Can the National Debt ever be zero? What would it mean if it were?

          6. Edward2
            November 4, 2015

            As usual you fail to directly answer preferring to create a made up story about an hypothetical situation.
            You said the pound would cease to exist as a currency if the State had no national debt.
            This a total nonsense and is disproved by economic history on multiple occasions.
            Examples like all the oil rich nations which prove you wrong were said by you to be “not typical”

          7. petermartin2001
            November 5, 2015

            They aren’t tycompical but they still have National debts.
            Norway has 30% of GDP
            Saudi Arabia has 19% of GDP

            Theoretically a country could have no National Debt if it was on a gold standard and counted its gold reserves as assets. Or if it used another country’s currency. It could then of course have net positive assets in that currency.

        2. Edward2
          November 6, 2015

          Oh, its “if it was on a Gold Standard” now
          How many nations are on a gold stanard in 2015?
          More changed argument.

          1. petermartin2001
            November 6, 2015

            No not at all. The point about using gold reserves to offset any notional National Debt is just to illustrate how fiat currencies have to work. Someone, in the absence of any gold reserves, has to hold the debt for others to have the assets in that currency.

            Just like gold reserves can be used to offset debts, so can other assets too. It all depends on how we choose to do the accounting.

            What are the real assets of a country like the UK? OK there are some coal, oil and gas reserves but I would argue that the real assets are the productive capabilities of the people. So to maximise our real wealth we have to maximise that productive capacity.

            That seems obvious, but at the moment we have been distracted by arguments about notional debts which aren’t at all the problem they are claimed to be.

          2. Edward2
            November 7, 2015

            So not property buildings institutions skills industry and the values of all the shares in plc’s value of all the businesses values of all the land art jewels vehicles ships trains etc etc
            Really Peter come on.
            Debt is not an asset nor an advantage.

      2. Vanessa
        November 1, 2015

        Peter – just because I have saved does not mean I don’t spend. What planet do you live on?

        1. petermartin2001
          November 1, 2015


          Of course we all spend and save to a greater or lesser extent in different proportions.

          But say we are playing a game of Monopoly and the banker (who’s really assuming the role of the government) has handed out £1000 to each of three players at the start. So he’s £3000 in debt. The players are £3000 in credit. After several rounds each player might have £2000 so he’s now £6000 in debt.

          So each player will think he’s accumulated or saved £1000 from his/her transactions. Their savings are £3000 which also equals the deficit of the banker/govt over this period.

          1. Vanessa
            November 1, 2015

            They just print money !!!!! simple!

          2. petermartin2001
            November 2, 2015


            ALL money is printed or it’s just an entry on a computer spreadsheet. It’s been like that since gold sovereigns were recalled.

            I might prefer to swap my paper money for gold coins too but I doubt that’s going to be an option any time soon. We’ll just have to get over it, won’t we?

          3. Edward2
            November 4, 2015

            But it relates to actual wealth created in a nation.

            Money is just a store of value, pieces of paper that we have confidence in as mediums of exchange.
            If Governments exceed that, the confidence is shattered and the currency fails.

            You can print and create money all you like, but you will eventually just be printing worthless bits of paper that no one wants.

          4. petermartin2001
            November 5, 2015

            “But it relates to actual wealth created in a nation.”

            Yes it does but money isn’t the same as wealth. And wealth isn’t the same as money.

            If there were no money there would still be the real wealth in the factories and the farms etc but the system would malfunction. There’d be a barter economy. If there was too much money there would potentially be high inflation if it was all spent at once. But if it was saved it wouldn’t matter.

            So the trick for government is to ensure the system works as efficiently as possible by fine tuning the spending of everyone in the economy to enable it to function to its maximum potential. Spending has to be optimised in other words.

            Everyone but the currency issuer is constrained by how much they can earn or borrow. The currency issuer doesn’t have that constraint so needs to exercise that extra power carefully.

        2. Edward2
          November 1, 2015

          Peter believes the State can just create billions of magic money.
          So the traditional route of banks using savers deposits to lend to others and paying interest to savers then charging the lenders interest so making a profit for the bank is very old fashioned.

          As you say Vanessa, you can save and be a consumer and be an investor all at the same time.

          Presumably provided the State balances our assets and liabilities “to the penny” then via this theory, we can just create hundreds of billions of magic money electronically sufficient to make poverty a thing of the past.
          Maybe we could all be millionaires via this cunning plan.

          1. petermartin2001
            November 2, 2015


            Your argument is that we should not have a small stimulus to improve the health of the economy, because a large stimulus could create too much inflation and a huge stimulus would cause hyperinflation.

            So you wouldn’t take the correct dosage of pills for medical condition on the basis that an overdose would kill you?

          2. Edward2
            November 2, 2015

            Again you fail to address the points I made.

            We currently have a stimulus of £750 billion a year just how much more of a stimulus do you want?

            You think more Government, more public spending and more borrowing will bring success.
            I think this is exactly what is stopping success.

          3. petermartin2001
            November 2, 2015

            We don’t have a stimulus of £750 billion! That’s nonsense.

            The difference between taxation revenue and government spending in Q1 of 2015 was ~ £23 billion. ~£25 was lost to the economy to pay the net import bill so that is a net loss to the economy of £2 billion. That’s a drag on the economy not a stimulus. That’s growing and is going to lead to a crash in the economy if government persists with its policy of cutting the deficit.

          4. Edward2
            November 2, 2015

            Government spending is around £750 billion a year and the deficit has been around £100 billion but thankfully is now being reduced by this Government.

            Still you do not say how much more extra spending you want as a stmulus nor where this additional money is coming from.
            More taxes or more borrowing?
            Which is it?

          5. Edward2
            November 2, 2015

            I note you talk in terms of quarters Peter.
            £23 billion per quarter times 4 equals quarters eqyal an annual deficit of ££92 billions.

            As I said a deficit of around £100 billion per year.

          6. Edward2
            November 2, 2015

            I’m stunned you dont believe every single pound spent by the State is not a direct stimulus to the economy Peter.

            If every additional pound introduced is, as you claim, a stimulus then why is the first £750 billion not a stimulus?

          7. petermartin2001
            November 4, 2015

            We have to consider the net position.

            All spending is a stimulus inc Govt spending.
            All taxation is drag (for want of a better antonym)

            Exports are a stimulus
            Imports are a drag.

            So if we want to net stimulate the economy we need more spending. (lower interest rates, inc Govt spending)
            Or more exports, less imports. (reduce the pounds value)

            Lowering interest rates aren’t possible right now though.

          8. Edward2
            November 5, 2015

            I note lower taxation is not mentioned by you in your list of stimulae.

          9. petermartin2001
            November 5, 2015

            Taxes are a drag as stated. So lower taxes would be a stimulus. Agreed.

  24. waramess
    October 31, 2015

    Hmmmm, too much bank credit makes for unsustainable growth and too little credit leads to too little growth?

    Surely Fractional Reserve Banking leads to unsustainable growth and out of control government spending leads to too little growth.

    Since bank creation of money through credit facilities is of course sustainable until eventually the assets that underlie the credit are unable to generate a return sufficient to service the debt.

    Perhaps therefore we might point the finger at the inability of assets to generate an increase in income fast enough to keep pace with the sustainability of increasing bank credit and, in this respect we then point another finger at the consumer for not being willing to pay a higher price…and so on and so forth.

    No matter how you look at the problem it is not a monetary one and the monetary solutions that have been applied have clearly not done the trick either in Europe or in USA or Japan.

    The Central Banks would love you to believe it is a monetary issue and they are in control but when they have their feet held to the fire they are at great pains to protest their limitations.

    The problem in USA, Europe, Japan and the UK is one of excessive government spending and they insist on making the problem worse by even more excessive spending in the name of monetarist policies.

    The certainty is that zero interest rates bring their own risks as Janet Yellen is finding out and a collapse in asset values will not make for a healthy banking system; nor will an economy with a banking system devoid of savers

  25. zorra
    October 31, 2015

    Grow, Johnny grow, grow (ter)
    Johnny Redwood

    with apologies to Charles Edward Anderson Berry

  26. Iain Gill
    October 31, 2015

    You are correct John, this article about the US also applies to the UK and is also part of the same picture


  27. stred
    November 1, 2015

    Lloyds bank share price has slipped back since Gideon offered to sell HMGs holding off at a discount next year. Gordon may have been advising.

  28. sm
    November 1, 2015

    Increase banks loss bearing capital & reserves, reduce leverage.
    Quarantine dividends for a 10 year deferred period in a reserve account which will rank below depositors in security etc.

    Then Government should create money direct- no borrowing. Contract build infrastructure assets. Housing, bridges, tunnels, electrified smart roads, any import reducing or export increasing potentials. More border controls in and out.
    It can then tax the money it created if we have too much inflation.

    Why drive an economy on debt? why not more share capital? why favour debt interest with tax breaks?

  29. Jon
    November 2, 2015

    Cash is not wholly without risk as it can loose value against inflation.

    Anyone who wants to retain value against inflation needs to accept a broader mix of investments as cash will loose value against inflation periodically.

    It’s not a bad thing always, it’s part of the economic cycle. We meddle with it at our peril, not great when it’s the turn of a particular asset class to flounder but it marks the turn of another asset class to become positive.

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