So, to kick off, I would like to comment on the amazing measures being taken by many governments to try and cope with the impact of the Covid-19 epidemic. Emmanuel Macron, the French president, has promised to do whatever is needed to prevent the economy from collapsing - including providing massive amounts of support to businesses to avoid them laying workers off, even if those workers are unable to come in to work.
But last night, the UK Chancellor, Rishi Sunak, announced a,particularly generous scheme to help business survive the epidemic.
Specifically, a new Coronavirus Job Retention Scheme will be set up to help pay people’s wages. Employers will be able to contact HMRC for a grant to cover most of the wages of their workforce who remain on payroll but are temporarily not working during the coronavirus outbreak. Any employer in the country- small or large, charitable or non-profit will be eligible for the scheme.
The Chancellor’s workers’ support package means:
- UK workers of any employer who is placed on the Coronavirus Job Retention Scheme can keep their job, with the government paying up to 80% of a worker’s wages, up to a total of £2,500 per worker each month. These will be backdated to 1st March and will be initially open for 3 months, to be extended if necessary.
Many people have welcomed the measure, although there have been complaints that while it will be very good for businesses and people with jobs, it does very little for people who are self employed. If they no longer have work (and that is very likely for many people like builders and decorators, for example), they may have to rely on benefits. The government says that "the standard rate in Universal credit and Tax Credits will be increased by £20 a week for one year from April 6th, meaning claimants will be up to £1040 better off." But that will not prevent real hardship.
OK. This is all wonderful. But the next question is - how much is it going to cost, and how is the government going to pay for it.
I was listening to the BBC's Today program on Radio 4 this morning, and they had an interview with Paul Johnson, who is the director of the Insitute for Fiscal Studies (around 9 minutes into the program, if you want to listen). He said that it was very difficult to say precisely how much the scheme would cost, because it depends on how many businesses make use of the scheme. But basically, for each 1% of the work force made inactive, it would cost £1 billion to cover the initial 3 months of the goverment's scheme. If 20% of jobs were lost, it would cost £20 billion over three months. Extended over a year, it would cost more than the entire working age welfare system, or the cost of the nation's school system. But it seems to me, that the layoffs could easily reach 50% or more.
Where would those colossal sums come from? Paul Johnson was clear - the government would simply borrow the money, and there is clearly no way that the current administration would increase taxation. And who would provide the money? Well, of course, that question was not asked. But readers of my blog will know that when governments need to borrow money, they go to the financial markets, who generally seem to be able to produce as much money as a government could possibly want.
Specifically, the UK government's Debt Management Office work with a specific set of GEMMs (Gilt-Edge Market Makers), who buy up the government's offerings.
You can find the full list here. It includes essentially 16 well known commercial banks
- Banco Santander SA (London Branch),
- Barclays Bank plc
- BNP Paribas (London Branch)
- Citigroup Global Markets Limited
- Deutsche Bank AG (London Branch)
- Goldman Sachs International Bank
- HSBC Bank PLC†
- JP Morgan Securities PLC
- Lloyds Bank Corporate Markets plc
- Merrill Lynch International
- Morgan Stanley & Co. International plc
- NatWest Markets plc†
- Nomura International plc
- Royal Bank of Canada Europe Limited
- The Toronto-Dominion Bank (London Branch)*
- UBS AG (London Branch)
- Winterflood Securities Limited†*
- Jefferies International Limited*
- BGC Brokers L.P.
- Dowgate
- GFI Securities Limited
- ICAP Securities Limited
- Tullett Prebon Gilts
And where do the banks get their money from to buy up government debt? Do they use the savings that their customers have deposited with them? Well, sorry to disillusion you. No, banks don't need to have the money they use to purchase government bonds - they can just create the money out of thin air - as revealed by the Bank of England back in 2014. They do this when they make loans to people to buy houses, but they can also create money out of thin air to purchase government debt. And this is a particularly good deal for them, because firstly, government debt is about as safe an investment as you can imagine - a nation cannot easily go bankrupt, because they can always raise money by increasing taxes. Second, the banks don't even keep those gilts and bonds, because once they have bought them, they can sell them on to the secondary markets. Brilliant!
So, here's the deal. Rishi Sunik announces a scheme where the government commits to paying up to £2500 for every employee in the country if the employer doesn't have work for them to do because of the coronavirus epidemic. And to pay for it, they will go to the 16 GEMMs (commercial banks) who can create the money out of thin air for them. As a result, UK taxpayers, who already effectively owed nearly £1.8 trillion at the end of February 2020, will owe even more.
Last year, the interest payments on Public Sector debt made by UK taxpayers to the Private Sector and the Rest of the World, totalled over £55 billion (£55,037,000,000 to be precise). That brought the total over ten years (2010-19) to a very impressive £559 million. You can find all the details on the UK government's own website here. And the same website allows you to produce this graph of all the amounts forked out by UK tax payers since records started in 1946.
So, those interest payments are already a wonderful system that allow rich people (including bankers) to become even richer for doing no work. But with the UK government's latest radical rescue plan for dealing with the Coronavirus epidemic, those interest payments could go through the roof.
You might ask why on earth do governments borrow money from commercial banks, and end up paying hundreds of billions in interest charges. Well, you may be aware of the fact that the European Union's Lisbon Treaty specifically prevents governments from borrowing from Central Banks. They are effectively obliged to go and borrow from the commercial banking system. I wonder who came up with that wonderful scheme?
But the fact is that the European Central Bank, under the leadership of Mario Draghi (the ex-European head of Goldman-Sachs), has been doing a lot of money creation themselves in recent years. Starting in 2014, the ECB started a massive program of buying up assets from the financial markets using a range of different schemes. You can see from the ECB's own website that at the end of February 2020, the total value of those asset purchases had reached a very impressive €2,732 billion, as shown in this figure.
How do Central Banks get away with printing all this money? Any first year economics student could probably tell you that if you increase the amount of money in circulation, you will get serious problems of inflation. In fact, causing a bit of inflation is supposedly the reason why Draghi did this - since one of the ECB's main tasks is to maintain inflation at around 2%. And in that, you could say that he didn't do very well, because currently, Eurozone inflation is only about 1.4%.
Why did pumping all that money into the economy only produce 1.4% inflation? The answer is actually simple. It's because that money was not pumped into the general economy, as it would be if the money was given to citizens as a Basic Income, or if it was used to finance useful things like tackling climate change. No, the money was pumped into the financial markets, boosting the stock markets and making a lot of rich people even richer. I'm sure Draghi is very popular with such people.
But what all this "quantitative easing" by the ECB has proved once and for all is that it isn't just commercial banks like the ones in the GEMM club that have the exclusive right to create money. Central Banks can do it too. The only restriction is that, because of the restrictions of the Lisbon treaty, only commercial banks can provide money to governments.
However, that was true until the UK left the EU. Now, the restrictions of the Lisbon Treaty don't apply, and the UK is thus free to do what ever it wants with its Central Bank.
And so, the final point I want to make is this. When the UK chancellor decides, as he did last night, to do whatever it takes to get through the Coronavirus epidemic, there is actually no need for him to finance this by borrowing money created out of thin air by commercial banks. Indeed, the UK's Debt Management Office should be prevented from borrowing any more more from commercial Banks, and the Bank of England should fund all the expenditure directly.
If that were to happen, then there could ultimately be a very positive side to the whole Coronavirus epidemic. If the Bank of England really could just print the money for fixing the crisis, there would be nothing to stop it doing the same thing for doing other things.
For a start, it could simply create out of thin air the £1.8 trillion needed to buy back all the bonds and gilts that are out there. At that point, the UK government would not need to pay any interest charges at all, saving around £55 billion a year.
Hey, how about Boris Johnson touring the UK in a Bus with a banner along the side that says "We send £250 million a week to private investors. Let's fund the NHS instead?" Or "Let's save the planet instead". Or "Give everyone a Basic Income instead".
A final point. As a UK passport holder who has lived for 37 years in France, I was devasted by the decision to leave the EU, especially when you realise that 53% of population wanted to remain. Every one of the 126 polls taken since the beginning of 2018 gave a clear advantage for Remain. I've just downloaded the full data set from the WhatTheUKThinks website. The average percentage for remain over the entire period of over two years has been 52.75%, which gives a lead of 5.5% lead over the people who wanted out. What a traversty of justice!
But there may perhaps be one positive outcome of Brexit. Changing the European Union by rewriting the Lisbon Treaty to end the rule preventing governments from getting money from their Central Banks will certainly be a tough one. But in the UK, things could be much much easier. The Coronovirus crisis coupled with the UK government's decision to tear up the rule book mean that there is a real opportunity to start a revolution!
UK citizens! Don't let your government pay for the crisis with borrowing from commercial banks. Get the Bank of England to print the money.
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