How The Government’s Super-Platinum Credit Card Works
Neil Wilson

Governments don’t have unlimited credit. I thought we’d all accepted this, but it seems that — like Descartes when he’s not actually thinking about clear and distinct mathematical ideas — it doesn’t seem real when it isn’t before us. If a government borrows from its own citizens, they having earned the right to consume through their productive activity, then — in return for consuming later — their purchasing power is handed to the government for an interest payment. International investors do exactly the same thing. Government has a right to credit itself with any amount of money it likes, but this isn’t credit unless it facilitates purchasing. Play around and debase the currency and you quickly get to the point where you aren’t obtaining any purchasing power — and “credit” — at all: see Venezuela and Zimbabwe. Neil Wilson tells us he is “Not an economist”, and it shows. To say “repay itself” is, as the great Hobbes would say, to use words without meaning. If I pick apples they’re mine. If I lend them to you for interest repayment — post your crunching — means you obtaining apples and turning them over to me. If citizens build McLaren cars and turn over the purchasing power to allow F15 jets to be bought, the state taxes all citizens to repay the gilt interest and capital sum. But the specific McLaren car builder/gilt investor is benefited thousands of times more by that process than they are hurt by the taxes levied to pay the debt interest. It’s the unwillingness to slow down and think this through that really gets on my pectorals.

What puts the “fiat” in fiat currency is not the right to spend before tax. A fiat currency is one that involves a declaration that it is legal tender in a territory by the central bank of that territory. So long as the price of goods in the territory isn’t controlled — and you need violence to cause people (kulaks, whatever) to continue to produce below real prices, then the fact that it’s “fiat” is neither here nor there. Prices find their level, and the declaration that pounds sterling are legal tender doesn’t amount to much if a loaf can legally be sold for £12,000. So “fiat” always — unless we’re talking Weimar — involves real restrictions. The supply has to expand at the rate of expansion of goods in the economy, real interest rates have to be managed to control consumption, and so on. Once the currency is fully convertible these real world restrictions become even more pressing. If the currency isn’t fully convertible it is hugely damaging to economic growth and trade.

Credit cards. Credit card lending takes place in a macroeconomic environment. Interest rates will be raised if lending runs ahead of the productive capacity of the economy, or if it seems reckless and that borrowers will default in a way that causes systemic risk. Government faces the same restrictions in “getting its gilts away”, as anyone at the Debt Management Office will tell you. Countries can be judged not to be good risks — see Argentina’s ability to borrow dollars. Any country that recognises that it can’t borrow for real — in an open process — can choose to break Basle and other rules and have its central bank just credit its account, in which case say hello to a non-convertible currency which isn’t quoted by market makers, can’t be used to settle trades and is worth markedly less every day at supper than it was at breakfast.

Unlimited Spending. Piffle. See unlimited credit (above).

“Repays itself”. Incoherent. A government can roll over debt by agreeing a new term and interest rate. Failing that it has to levy taxes and hand over purchasing power from the generality of taxpayers to the specific people who hold the debt.

The Best Cashback Deal in Existence. Yet more babble. If the government borrows money to build a school it taxes the company and the workers. But it would tax that company and those workers regardless of who their customer was. The fact that they recoup some of what they handed over is smoke and mirrors. The net cost is still a massive fraction, and a slice of the economic action is always the government’s prerogative. Buying on credit means increased taxes on those companies and workers to allow for the handing over of purchasing power to the gilt holders — a small subset of the population — who ponied up, delayed gratification, and bought the gilts. If you start to discuss contingent circumstances — the present situation and QE — then you avoid what’s inherently and always true about debt-fuelled consumption and nail your colours to an entirely different mast. The government declared that all QE gilts would be sold back into the market, the cash would be cancelled and taxes would be levied to compensate the Bank of England should they have made a loss on the exercise. The Bank understands that the world’s full of workers and widgets, even if the internet is awash with people who don’t understand this.

“And so on until all the initial government spend turns entirely into cashback.” Crass beyond all endurance. If this debt-financed pump priming resulted in tax revenues equal to the initial debt — if this was a law of nature — which government wouldn’t do it all the time? If it’s said to be true right now don’t the massive piles of debt suggest otherwise?

I can’t go on with this. It’s a waste of my life considering this junk. All of the concessions made at the end of the piece concerning what government can and can’t do with borrowed money involve reversing all the ludicrous hyperbolic claims made at the start. Who could be bothered?

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