Labour Is Right To Borrow and Spend More

The Tories, who have found their own magic money tree, from which they want to fund hundreds of billions of Pounds worth of additional spending, as well as hundreds of billions of Pounds of tax cuts for the rich, are criticising Labour for its own plans to borrow and spend money to repair the shattered fabric of Britain caused by a decade of Tory austerity. Their claims that Labour plans to spend £1.2 trillion, have even be ridiculed by sections of the Tory media. But, the reality is that, even if Labour did intend to spend that kind of money, providing Britain with the kind of 21st century infrastructure, healthcare, education and other basic requirements for a modern economy, it would be perfectly sensible to do so, given that it would be borrowing at negative real rates of interest. In other words, it would be being paid by lenders to borrow their money! 

That might seem absurd, but it is the reality across much of the globe. Around the globe, $15 trillion of bonds have negative yields, even in nominal terms. This amounts to around 25% of all bonds. That arises, because, in the secondary bond markets, where speculators buy existing bonds from each other, they are buying bonds at prices higher than their face value. In other words, suppose the government issues a $100 10 year bond that pays a coupon (interest) of $2 p.a. Over the ten years, it pays out $20 in interest, as well as paying back the original $100. So, $120 in total. But, because demand for bonds has been increased so much due to speculation, itself encouraged by central banks, via their policies of QE, speculators are currently prepared to pay, say, $130 for such a bond. That means that, at the end of ten years, even allowing for the $20 of interest, they would be $10 worse off than they started out! They have received negative interest. 

Why do lenders do this. For one thing, some of those lenders are central banks who have bought these bonds, as part of their programme of QE. Central banks now own a significant proportion of the bonds that have been issued. In addition, as part of QE, LTRO etc., central banks lent money to commercial banks at zero rates of interest, or near to it, and encouraged those commercial banks themselves to buy up bonds, so as to inflate their prices. They have done this, because the top 0.01% hold nearly all their wealth in the form of fictitious capital, that is shares, bonds and their derivatives. Every time there is a crash in these financial markets, it means that the paper wealth of that top 0.01% takes a big hit, and it is from that wealth that they get their power and influence. In fact, because in the 1980's and 90's, the rate and mass of profit globally had been rising sharply, there was already a large increase in the amount of loanable money-capital relative to demand for it, which caused interest rates to fall, and which was the initial cause of the sharp rise in these asset prices to begin with. 

The other reason that lenders, therefore, have lent money at negative rates of interest is that they have become more concerned at being able to make capital gains from asset price inflation, than they have about the interest they get on their investment. For example, suppose you bought the bond in the example above for $120, as against its face value of $100. After 10 years, you have had the same $20 of interest, so that your real rate of interest is zero. However, if at some point after you have bought the bond, you think you can sell it on yourself, you might think that you can do so at a much higher price. If, in fact, you sell it for, say, $140, you will have actually made $20 in capital gains. This same phenomenon can be seen in the property market, where speculators have bought property and even left it vacant, thereby producing no rent for them. They do so, because they are only interested in the possibility of the price of the property escalating. 

But, in addition to these nominal negative yields, there is a much greater amount of debt that has real negative yields. In other words, the interest you get paid is less than the fall in the value of the capital due to inflation. In other words, take a 1 year bond, with a face value of £100. It pays a coupon of £1, i.e. a yield of 1%. If inflation is 2% p.a., in reality, this £1 will actually only have a current value of £0.98, but, more significantly, the £100 you get back at the end of the year will only be equal to £98 today. So, in real terms, you will be £2.02 worse off for having loaned your money out. This current value of the bond, adjusted for inflation, is called its net present value. Now suppose, instead of a one year bond, we consider a 30 year bond, which is the kind of duration a Labour government might want to issue, to cover long-term financing for building hospitals, schools, roads and so on. Currently, the yield on UK 30 year bonds is around 1.7%. So, supposing the government were going to actually borrow £1 trillion for such investment. 

Over 30 years, it would pay out £1 trillion x 1.7% in interest, p.a. for 30 years = £510 billion. Certainly a lot of money. However, if we assume 2% p.a. inflation, then the net present value of the £1 trillion is £552 billion. That means the NPV is £480 billion less than the face value. But, for the same reason, the £510 billion of interest payments will have been diminishing in real value each year too. The inflation adjusted value of the £510 billion is approximately £378 billion. In other words, the real current value of the total interest paid is approximately £100 billion less than the capital loss. It means, in real terms, the lender has paid the government £100 billion to borrow this £1 trillion over thirty years! So, why on Earth would any sensible government not take advantage of the fact that it can borrow at negative real rates of interest to finance much needed investment in the economy? 

Of course, the argument is that, if the government came to borrow this money, the very fact of the additional borrowing would cause the rate of interest it has to pay to rise. Andrew Neill recently pointed to a statement from the world's biggest Bond Fund, PIMCO, where Ed Balls brother works, to the effect that, if such large scale borrowing were undertaken, it would steer clear of UK debt. But, the fact is that there are no shortages of other potential buyers of this debt. That is why there is that $15 trillion of negative yielding debt already. There is around $60 trillion of debt globally, and if real yields are taken into consideration, a large part of it pays negative real yields. Italy, whose credit worthiness is much worse than Britain's has just seen high demand for its latest issue of 30 year bonds, for instance. Moreover, Britain can currently borrow for ten years, at just 0.74%, so that it could spread its borrowing requirements over a period, by issuing a series of 10 year bonds over the next few years. 

And, that is assuming that inflation remains at around the 2% target set for the Bank of England. Over a thirty year period that seems highly unlikely. Even in the last decade, we have seen inflation rise to around 5%. The current low levels of inflation are an anomaly, as are the low rates of interest. In part they have the same cause. QE has drained liquidity out of the real economy, so as to channel it into financial and property speculation. The low levels of general inflation are the corollary of the hyper-inflation of asset prices, just as the low yields on those assets, arising from the soaring prices of those assets, sees its corollary in the dearth of available loanable funds for the real economy, for small and medium sized business. If all of that liquidity pumped into the system by central banks had been directed towards the real economy, and real investment, then economic growth would have been much higher, employment growth would have been much stronger, and general inflation would have risen.  Indeed, that is another reason why its necessary for the government to step in and direct their money towards the real economy, and away from dangerous financial and property speculation that creates destablising asset price bubbles that burst.

The Tories have wanted to paint this picture about out of control Labour spending and borrowing, because they want it to play into the narrative they have used for the last decade that the crisis of 2008 was in some way a fault of Labour profligacy. But, of course that claim is nonsense. The reality is that under Thatcher and Major's 18 years in government, there were only 2 years in which they ran a budget surplus, whereas in the 11 years of Labour under Blair and Brown, there were four years in which there was a budget surplus. Up to the financial crisis of 2008, the average deficit to GDP ratio under Blair and Brown was half that under Thatcher and Major. The main reason for UK government debt having risen was not Labour profligacy but was the global financial crisis itself, which led Blair and Brown to bail out the banks and financial system to the tune of £2 trillion, which makes even the proposed £1 trillion of spending and borrowing to finance real investment in the economy look like a bargain. 

The Tories try to blame the 2008 financial crisis on Labour, despite the fact it started in the US, but the real culprit for that crisis is actually Thatcher and Reagan, back in the 1980's, who deregulated financial markets, and encouraged everyone to borrow and spend on an unprecedented scale. It was that which started the blowing up of sequential bubbles in financial and property markets, and it was the actions of conservative governments, and conservatively minded central banks who ensured that those bubbles were continually reflated every time they burst that caused the financial crisis of 2008. Indeed, they have done exactly the same thing following 2008 to reflate those bubbles, which means they have paved he way for an even bigger, even more devastating financial crash to come. 

The Tories point to this spending and borrowing by Labour, but the fact is that, even after 2008, Labour's policies had started to bring about economic recovery. In the last quarter that Labour can be accountable for, GDP rose in Britain by 1%, or around 4% p.a. The Tories have failed to match that in all the time they have been in government. 

But, even in terms of their argument over borrowing, and interest rates, the Tories lie.  The yield on UK Ten Year Gilts was falling at the time Labour left office, and was even then at historically low levels, even before QE, sent those yields lower. 

The Tories say that Labour's plans would add around £43,000 to household debt, but that is minor compared to the increase in household debt that the Tories policies have created since the 1980's. Take the major form of debt that many households incur, that of mortgage debt. At the end of the 1970's, the average house price was around £15,000, whereas today it is around £300,000, though there are wide regional variations. So, in say 1979, when the Tories came in, you might have needed to put down £3,000 deposit, and borrow £12,000 to buy a house. Today, if you can raise the minimum 5% deposit, that still leaves you needing to borrow around £285,000 to buy the average house. Even allowing for inflation over that period, that is a massive increase in the amount of debt that households need to undertake. Even one Tory MP was moved to comment, some time ago, that if other prices had risen by the same amount as house prices, you would be paying around £35 for a frozen chicken! 

Yet, the Tories are happy for people to have to take on this astronomical amount of debt to buy a basic requirement of life. Indeed, their policies have done everything possible to inflate house prices further, such as via their Help To Buy scam. They have also been happy for people to take on much greater amounts of debt in the form of Student Loans to pay for University Tuition, and so on, and their low wage policy to subsidise cheap skate employers has led to millions of people having to resort to payday lenders, charging interest at rates up to 4000% p.a., just to get to the end of the month. 

Set against all that borrowing that the Tories have brought about, even were it true that Labour's plans amount to an extra £43,000 of debt per household, it would be money well spent to get the hospitals, doctors, schools, roads, broadband, old folks homes and so on that we need for a civilised existence, and which the Tories once again have destroyed over the last ten years with their insane, economically illiterate, policy of austerity, whose main purpose was to ensue that the asset prices of their rich friends were once again reflated. 

Once again, we find what we find with every Tory government, which is that they fail to do the necessary repairs on the fabric of the building. Like a Rachmanite private landlord, they want to take in the rent, but allow the accommodation to rot, and when they do repairs, as with Grenfell, they want it done on the cheap, even if it puts lives at risk. Like every other Tory government they do that so that they can sell off the family silver to their friends. Like every other Tory government they leave the country in a mess that a Labour government then has to come in and clean up after them.