Again at the level of generalities, Paul says that the Left must challenge the logic behind Sunak's argument that,
“we have to stabilise debt at 100% of GDP, by either cutting £43 billion from regular public spending — 2% of GDP — or raising the equivalent in tax. The rationale for the argument, boosted as usual by the neoliberals at the Institute for Fiscal Studies, is that a debt/GDP ratio of 100% risks Britain being engulfed by rising interest payments, as the global cost of borrowing rises.”
Quite true. There is nothing magical about a figure of 100% in relation to the ratio of debt to GDP. Moreover, experience indicates that the most effective means of dealing with such a situation is via economic growth, and such growth will be curtailed if aggregate demand is reduced by increasing taxes, or cutting government spending. But, in fact, this is something of a red herring, because its unlikely, in this Budget, that Sunak will introduce any net increase in taxes, or cuts in spending. He may increase some taxes and reduce others, and some marginal revenue spending may be reduced, whilst capital spending is likely to be increased.
But, it is the logic that Paul wants to address, and its here, again, when we get to the specifics that his problems arise. He tells us,
“a country with its own currency cannot go bust. Its central bank can create money — as the Bank of England has done in 2020/21 — with the explicit aim of keeping the interest paid on government debt low.”
Now, it pains me to say it, but, coming from someone who is supposed to have some grounding in Marxist economic theory, this is simply economically illiterate. What does it mean to go bankrupt? It is that your assets are no longer able to cover your liabilities. Can this occur for a country? Yes, of course it can. The idea that this is changed by the fact that a country can print endless bits of coloured paper is nonsensical. It is a manifestation of commodity fetishism as money illusion. What it shows is that Paul has no understanding of the Marxist categories of value or money, and the rest of his statement shows that he has no understanding of interest rates either.
The coloured bits of paper known as banknotes are not money, as Paul and the proponents of the Magic Money Tree believe, but are nothing more than tokens representing money. They are simply I.O.U's giving the owner of such tokens a claim on a given amount of value or social labour-time. There is no inherent value contained within these bits of paper. Quite the contrary. Unlike the money commodity they represent, they are worthless. As Marx puts it,
"How many reams of paper cut into fragments can circulate as money? In this form the question is absurd. Worthless tokens become tokens of value only when they represent gold within the process of circulation, and they can represent it only to the amount of gold which would circulate as coin, an amount which depends on the value of gold if the exchange-value of the commodities and the velocity of their metamorphoses are given...
The number of pieces of paper is thus determined by the quantity of gold currency which they represent in circulation, and as they are tokens of value only in so far as they take the place of gold currency, their value is simply determined by their quantity. Whereas, therefore, the quantity of gold in circulation depends on the prices of commodities, the value of the paper in circulation, on the other hand, depends solely on its own quantity....
Gold circulates because it has value, whereas paper has value because it circulates. If the exchange-value of commodities is given, the quantity of gold in circulation depends on its value, whereas the value of paper tokens depends on the number of tokens in circulation. The amount of gold in circulation increases or decreases with the rise or fall of commodity-prices, whereas commodity-prices seem to rise or fall with the changing amount of paper in circulation."
It doesn't in any way change the material fact of whether you, as a country, have in your possession that value in assets (in other words commodities) to back up those claims. If you simply print more of these worthless tokens, without increasing the value of assets to back them up, then each token itself becomes more and more devalued until, eventually, none of your creditors will accept them. They will demand payment in some other form, such as gold, or else they will start to take over your other hard assets, in the same way that the bailiffs come to take possession of your furniture, when you fail to pay your debts. When Greece faced a debt crisis after 2015, it was even proposed that it should sell some of its islands, for example. In the 19th century, when Egypt failed to cover its debts, its creditors took possession of the Suez Canal.
Paul has simply accepted as good coin – excuse the pun – the nonsense purveyed by the proponents of Modern Monetary Theory, which also has no understanding of what money is, and confuses it with the money tokens and credit created by banks and central banks. It is the same idea that was put forward by John Law, and by the Pereire Brothers that simply leads to an inflation of the currency, the creation of asset price bubbles, and financial collapse that usually then has an impact on the real economy, as a credit crunch is unleashed, and the circulation of liquidity itself becomes strangled. Indeed, the process of printing money tokens that Paul describes is precisely what led to the inflation of asset price bubbles throughout the 1990's, along with the associated bursting of those bubbles, the last of which happened in 2008.
Money is the universal equivalent form of value, and so banks, including central banks, cannot “create” money to any greater degree than the equivalent it represents in the economy. It only exists as money to the extent that it is this universal equivalent, in other words the indirect measure of the amount of value of commodities (including services) in circulation. If more of this “money” is produced – in other words more tokens as notes and coins, or credit – than that, then either the velocity of circulation (the number of times any unit of currency functions in the process of circulation) of these money tokens must slow down, or else the value of each token is itself reduced. In other words, the currency unit, as indirect measure of value (exchange value), is itself then depreciated, so that everything it measures appears as a larger quantity – inflation. Its like measuring a 100 yard field in feet, rather than yards. The fact that it then comes out as 300 feet rather than 100 yards, doesn't change the actual length of the field, its simply an indication of the lower value of the measuring stick.
Does this mean that all prices are equally inflated? In practice, no, because, once put into circulation, there is no control over where all of this liquidity goes. The more it washes into particular areas, the more prices in that sphere are increased, and vice versa. And, that is what has been seen in the last thirty years, because central banks have deliberately funnelled all of the additional liquidity into the purchase of speculative assets. They have done that, because the ruling class now owns all their wealth in the form of these assets (fictitious capital), rather than in the form of real capital. They have continually sought to prevent that paper wealth suffering the kind of severe depreciation that occurred in 1987, 2000 and 2008.
Central banks printed money tokens to use to buy up existing sovereign and corporate bonds; they provided cheap liquidity to commercial banks, whilst encouraging them to also buy these existing sovereign and corporate bonds, as well as encouraging lending to finance property speculation. In turn, this enabled an inflation of other assets such as shares, and property, and indeed anything else whose future price could be gambled upon, including completely artificial objects of such speculation such as Bitcoin. This deliberate inflation of speculative asset prices, also acted, thereby, to encourage liquidity from general circulation to follow in behind it, as anyone with money saw the potential to obtain large speculative capital gains from rising financial and property markets. All of that was done even at the expense of the real economy, whose growth creates the conditions under which the rise in those asset prices is again threatened as a result of rising wages and interest rates.
It is also that, which created the illusion that this money printing by central banks acted to reduce interest rates, whereas all it did was to reduce yields on these particular revenue producing assets, as a result of the actual revenue produced by them being constrained, whilst the prices of the assets themselves were driven to higher and higher levels, resulting, now, in the absurdity of negative yields on many of these financial assets. This has nothing to do with the actual rate of interest in the real economy. A look at the inability of many smaller firms to obtain loans, the need for them to borrow against credit cards, or from peer-to-peer lenders is an illustration of that. A look at the 1,000% p.a. plus interest rates paid by consumers on non-negotiated overdrafts, let alone the rates paid to payday lenders is an indication of this disparity.
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