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THE CHANCELLOR says that there will be a day of reckoning — sooner or later the debt must be reduced and the money borrowed paid back, that there will be a price to pay. There is indeed a price that has to be paid, but it’s not the price the chancellor has in mind.
There is always a cost when a vast amount of national wealth has either been destroyed or not materialised, as is the case with the pandemic and the lockdown. It is a price that the working class is paying now and will continue to do after the pandemic has been conquered as the wealth creators replace the wealth that has been lost.
The idea that such pain can be offloaded onto the money-wealthy millionaires through a wealth tax is a fantasy. A wealth tax merely distributes wealth, it does not create it.
What the chancellor is talking about is paying another price on top; paying the money lenders their unearned premium.
On the face of it, paying back one’s debts seems fair and very British — like paying back a household debt and living within one’s means, a moral imperative. But government finances are not the same as those of a household where income and expenditure is a two-dimensional, zero-sum product.
Finance and banking have always been regarded by workers as mysterious, with a whiff of magic. Engels writing about the Paris Commune in The Civil War in France noted “the holy awe” with which workers perceived financial institutions, seeing their operations as alien, unfathomable, complex and as something they couldn’t possibly hope to comprehend.
He noted how the Communards stood “respectfully outside the gates of the Bank of France” fearing to set foot into the building, like a sinner fearing retribution lest he treads on sacred ground. This attitude, this inferiority complex, continues to this day.
In truth, there is no mystery, just mystification; no complexity, just obfuscation.
On a day-to-day basis, government borrows money by selling bonds. The lender hands over “money” to the government and in return he receives a promissory piece of paper, a bond, that is as secure and as convertible as paper currency — so much so, it’s referred to as gilt-edged.
It has been likened to A lending a tenner to B, who in return hands over a ten-pound note. For this privilege, the lender receives interest for a number of years after which the bond matures and the government pays back the face value of the bond, ie the money it “borrowed” in the first place.
As Marx put it: “The state creditors actually give nothing away, for the sum lent is transformed into public bonds, easily negotiable, which go on functioning in their hands just as so much hard cash would.”
The process, however, has a more subtle connotation; it establishes the primacy of private finance and in the process, syphons off public money into private coffers.
Another source of deficit financing comes from the Bank of England, Britain’s central bank.
The government has an account with the Bank of England which enables it to provide the government with “cash” facilities to plug the gap between its income and expenditure.
The Bank of England does this by creating money, a process known as quantitative easing. It does this in two ways: crediting the government’s account with a deposit or buying government bonds on the open market. Both methods involve creating new money.
The process of crediting the government’s account is much like a commercial bank giving a loan to a customer — providing a loan does not involve the commercial bank handing the customer a wad of cash to put in his pocket.
What it does is credit the customer’s account with a deposit. By doing so, new money is created. The same applies to the Bank of England — however, it is frowned upon when it does it, while for a commercial bank, it’s a run-of-the-mill commercial activity.
As an alternative to crediting the government’s own account, the central bank can buy government bonds in the open market. This by itself does not provide the government with extra funds — that can only happen if, at the same time, the government sells bonds.
We thus have the absurd situation of one public body buying bonds and another public body selling bonds in the same marketplace. And when the Bank of England sells the bonds back in pursuit of the mantra of “paying off the debt” it does so at a loss to itself — but a gain to the market.
But there is no need for it to sell the bonds it holds; it can write them off instead. By doing so, it relieves the government of the burden of having to service them, as well as having to pay their face value on maturity.
In truth, the purpose of the Bank of England selling government bonds is nothing to do with paying back the debt, but all to do with reinforcing the role of the private sector in running the economy.
The fundamental question that will face the working class as we come out of the pandemic and begin the process of rebuilding the country is not who pays the price but who is in charge of the economy: the people through their democratically elected government, or the market.
Concentrating on who pays the price could easily become a diversion from confronting the central question: will the government be allowed to abandon its enhanced role in the economy, control that it has acquired by sheer necessity, and hand it back to the private sector — or will the working class demand the Bank of England be taken back under public control and the debt it holds, which now stands at over 30 per cent, be written off?
But writing off government debt, known as monetary financing, is frowned upon by central banks, fearing that it would lead to runaway inflation on the grounds that pumping money into the economy will increase demand.
But that is not true in every case. The risk of runaway inflation is real but it can be avoided if government spending is strategically directed towards the wealth-creating sector to ensure that supply of goods matches the increase in demand.
The problem isn’t money creation as such but the use made of it. If it is used to fund new productive investments, inflation will be averted. However, if it is left to the market, it is more likely to be spent on speculative activities, as was the case following the financial crisis of 2008.
Fawzi Ibrahim is author of Capitalism vs Planet Earth: an irreconcilable conflict.
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