I ask the question HOW? but get no answers!

I ask the question HOW? but get no answers! Has all economic theory gone mad?

Can someone out there assist?

I ask the question how? but I get no answers! Why is this? Maybe because all our so-called experts, government officials, self-promoting luminaries, and economic commentators simply do not know; but they are too embarrassed to admit it!

Call me a cynic perhaps, but after 30 years plus experience, working in the financial services industry with some well-known international institutions in the UK and overseas, one really does have to ask.

Consider the following scenario:
Covid-19 has caused governments to spend millions in supporting their individual economies. Recent research has shown that the UK is on target for at least a £350bn budget deficit during this current financial year. Apparently, the current deficit is in the region of 17% of UK GDP. The US is also on target for a massive deficit of $3.1trn for their fiscal and calendar year 2020. Much of this debt has come through the deployment of “Quantitive Easing.” This is supposedly the new “dressed-up” sophisticated term now used, which is simply the old adage for the function of: “printing money” by the Central Banks. This was a topic to which I referred in an earlier blog as inflationary; given the economics of the seventies and eighties, and the works of Milton Freidman, the former well-known economist. Consequently, this year alone, the Central Banks of America, Japan, Britain and EU countries have issued in total “new debt” amounting to the huge sum of just under £4trn. I would say that this figure is somewhat concerning, given someone has to repay this.

What adds to the concern is that the UK’s output and productivity is down, due to the current virus and resultant businesses closing, which in tandem with quantitive easing, results in the combined effect of inflicting greater inflationary pressure on the economy through “too much money chasing too few goods!” Again, a reference to: pre 2020 “current revisionist” economic theory. A further topic for debate!

However, as stated above; sooner or later this debt will have to be paid back, and my question is how? Well here is something to which we can again all look forward, bearing in mind what the previous Conservative Government of Cameron and Osbourne put us through in their austerity programme. That programme was aimed at paying back the thirteen years plus of prolific spending under the Blair “New” Labour Government. Incidentally; to my mind it was not so much “New Labour”; but more of “new labour, old flavour!” But that too is for another discussion.

So the question still remains, and that is: how will this debt be re-paid? Higher taxes on income and goods and services etc? Possibly, but where is the consumer income and appetite to pay for this? And taxes, but on what and whose income given those whom have been furloughed, or simply made redundant during the current crisis? Goods and services? What goods and services? We now have less output and productivity given lockdown and the closure of businesses; as a result, less goods and services at the point of sale. This is not made easier by the fact that with less expendable income in consumers’ pockets, and higher priced products at the retail end supported by probable increases in VAT etc., much less revenue will actually come into the Exchequer, when compared to pre-Covid-19 times.

Oh dear! but wait a minute, I have an idea; what about a new UK Government Bond issued on the Domestic and International Capital Debt Markets? I am not sure what the exact Moody’s Credit Rating is currently for the UK; nevertheless, whatever it is, this approach raises further questions which are: will investors have enough confidence to proceed, what will be the overall sum of the bond given the enormous size of the debt to be re-paid, and what will be the period of issuance?

Well, no doubt taxes will increase. But given that the new economic tool now in vogue is quantitive easing, why not just simply print more money again, in order to pay off the previously printed money that was thrown in to the economy to pay for the current “Covid-19” inspired debt crisis? That is what we are doing now! Imitation I was told is the greatest form of flattery, so why not simply continue as we are?

Given I cannot obtain an answer to any of these questions, I am assuming therefore that the latter might just be a possible answer; that is, to create more debt, in order to re-pay the previous debt. A sort of “rob Peter to pay Paul” approach.

As for a possible shortage of goods and services in the shops for consumers to buy; well, I suppose we can always import more in spite of our yawning trade gap with counter-parties! Given a “No Free Trade Agreement” appears to be looming with the EU as Brexit now actually happens, how will the UK manage all of the above challenges without a feasible and manageable solution’….and above all, a workable solution?

A further question, given the above. Do the funds injected into the economy through quantitive easing truly have to be re-paid? Well of course they do, as with any debt! Do they I ask? Is this quantitive easing not just a simple internal series “book keeping entries”, which are internal to the Treasury and The Central Bank? Look at how previous Latin American Debt of the seventies, and recent Third World Debt was “written off.” To external lenders who are part of any global syndicated loan arrangement, or Eurobond issue as two examples (there are other Capital Debt instruments of course) this debt write-off would be a real issue given the views of investors, bank shareholders, and depositors, to name just a few party to such Capital Market arrangements. But Central Banks fall under a different category. Some may be independent of the Government and Treasury as The Bank of England is; but they still work closely with, and are allied to the government of the day. Given Central Banks have no commercial shareholders and depositors as such, writing off “printed money debt” as I am calling this phenomenon, should not be an issue. Why? Because as I alluded earlier, this activity is simply a combination of internal book-keeping entries; and are internal to and between the ledgers of The Treasury, The Central Bank, and the government of the day. Is that not the case?

Suddenly it appears that the key principles of economic theory which I leaned at University and during my many professional years in the City of London and beyond, now have to be re-considered and re-learnt! Do they? I am not sure they do; after all, these are all fundamental and basic economic issues. However, I am prepared to be told otherwise; given that when I do enquire and ask these same questions nowadays – bearing in mind what I was taught – no clear answers are forthcoming! So, perhaps there is someone out there who can actually assist? If there is, how refreshing! Please email me at: elioth@thepaymentsbusiness.com

Eliot Charles Heilpern 18th October 2020
Membership Director; The Payments Business

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