Functionally, this would be the same as ‘ordinary’ govt deficit spending on the same goods and services, and likewise add to GDP and add to the economy’s savings of net financial assets, to the pence.

U.K. Plans ‘Growth Bonds’ to Tap Into Savings, Independent Says

June 6 (Bloomberg) — U.K. Chancellor of the Exchequer George Osborne hopes to persuade households to invest billions of pounds of savings in new government “growth bonds,” the Independent reported, citing unidentified people with knowledge of the matter.

Tax breaks would be offered and cash raised would be invested in projects such as toll roads, green energy and housebuilding, the newspaper said.

The government might lessen risks for small investors by underwriting a proportion of any potential losses, the Independent said.

A “senior government source” told the newspaper cash-rich households have nowhere secure to put their money and be guaranteed good returns because interest rates are low; growth bonds would provide them with an investment opportunity and boost the economy at the same time.

56 Responses

  1. Warren:

    This is a vertical transaction?

    I don’t see any deficit spending taking place. Please explain how NFA is created with this scheme?

      1. @SteveK9,

        Depends on who’s paying, I think. If it’s a govt budget item, yes, but if (or where) cash flows result from the underlying asset (e.g., a toll road), no addition to NFAs.

        Sort of like the contrast between UST and municipal debt service here in the ‘States.

    1. @pebird,

      Not sure I have them all, but it seems that:

      -Planned expenditures (e.g., as opposed to rollover of maturing debt)

      -Tax incentives

      -Partial govt guarantee

      Would help narrow the output gap, widen deficit at the margin, and helping satisfy perceived demand for savings/financial assets.

      Still plenty of ways for neoliberal thinking to screw this up though, just as Japan has for two+ decades.

      1. @SteveK9, Steve, this is basic to MMT. If you have to ask this question after the number of comments I’ve seen you post here, I have to wonder just what exactly you are doing here?

      2. @SteveK9,

        The growth bond = Asset swap b/w govt and investor. Then the Govt has its account marked up and spends into the economy, which is the add of NFA.

      3. @MamMoTh, @Harold. I’m sorry if my presence offends you (could people refrain from personal attacks and name-calling here?), but I don’t think so. As explained in Warren’s 7 deadly …’ if a person buys a government bond, then that moves their money from a ‘checking’ to a ‘savings’ account. There is no net financial asset gain, except for the government interest payments.

      4. @SteveK9, But, if the government removes reserves by selling a bond, and then spends the same amount of money, no financial assets have been added?

      5. so i’m doing the new bond thing in the UK, and you are ‘the economy’ and a contractor.
        I contract with you to sweep the roads.
        I pay you 1 million as agreed and at the same time you buy 1 million of the new bonds.

        So at the end of the day I have clean roads and you have 1 million of new bonds which are new net financial assets for you.

      6. @SteveK9, Steve, you saw fit to attack me yesterday for my criticism of Krugman, even though it had nothing to do with you. You are a hypocrite for whining about well-deserved criticism aimed at you.

        Your presence doesn’t offend me, but you remind me of the tedious person in every lecture hall who keeps interrupting to ask questions that he thinks are insightful but are actually basic and covered in the assigned readings.

      1. @WARREN MOSLER,
        Absolutely true but some readers may not see the word “net”.

        At the end of the day the economy still has the same amount of cash (which was spend on projects) and also new bonds as the increase in net financial assets. The “delta” – the amount of money equal to the value of bonds has been pushed through the productive economy thus increasing aggregate demand in that period. The usual spending multipliers are in work.

      2. @WARREN MOSLER, But the public has provided the (say) £1 million out of their net savings. I thought these were bonds with funds raised from the private sector, not bonds funded from government deficit savings.

      3. public provides $1 million to buy bonds, then the govt. spends that one million and the public has that too.
        so they have their original million back plus $1 million in bonds

      4. @pebird, I see that. I thought that NFA could only come from deficit spending. This seems kind of like the Eurozone process. I have to think about it. Thanks.

  2. Looks a bit like Larry Summers recently, saying the US should borrow now for all kind of projects (infrastructure etc) because the rates are so low.
    They all come to the same MMT conclusion, that the public deficit has to go up. They ‘just’ call it differently. As you mentioned before ‘they will never stoop that deep’.

  3. If private sector increases savings so the public sector can increase that much more in spending, isn’t it a nominal net wash at the aggregate?

    Yes more than likely investing in infrastructure probably has a better ROI than buy an iPad, so it’s not a net wash in terms of real wealth, but still, why increase private savings desires that much more just so the government can “be excused” to exercise fiscal policy? That seems rather silly and useless and only helps to perpetuate the belief that our bonds and tax dollars “pay for” things.

    1. @Mario,

      well it is true that those increased private savings don’t take away from the net wealth of the private sector, but it does dampen demand that much more until bond maturity, which is the opposite objective of increasing fiscal policy in the first place.

      And of course that 1% of interest does add to the private sector income!! 😉

      1. @WARREN MOSLER,

        true and good point, however now there is an argument (albeit false) that can be made that all the growth generated from these “growth bonds” is THANKS to all those “savers” who are good citizens and deserve our respect, etc., etc. And we all know that the bulk of those bonds will be financed by the wealthy and powerful, grandma, joe, and little timmy in college aren’t going to be the bulk of those bond holders.

        The “logical” framing of these growth bonds is just a few degrees away from saying cash heavy private corporations are “building” your new roads, infrastructure, “growth,”, etc.

        I agree that the end nominal effect is the same but now we have a whole new philosophical and rhetorical element being introduced to the public. One more level of hoodwinking imho. Why not just come out and say it like it is? I think we all know the reason why. As the Austrians like to remind us, truly there are no free lunches.

      2. @Mario,

        get ready to drive down I-80 or I-40 and see big signs that say “Wells Fargo Helped Build this Great American Highway” or “Boeing Supports Global Internet Systems for all people”, etc., etc.

        Free advertising and more Orwellian language manipulations!!! Woot woot!!!

    2. @Mario,

      Mario wrote:
      ******************************
      but still, why increase private savings desires that much more just so the government can “be excused” to exercise fiscal policy?
      ********************************

      The sectoral balance concept only holds in a
      static economy. The economy must either grows or shrinks if the sectors do not balance.

      The govt has little influence over private savings desires. If the private sector decides to operate at a surplus and the govt does not run a deficit the economy will shrink. The private sector may respond to the economic shrinkage by reducing their surplus or they may increase their efforts to run a surplus.

      As things stand now, there are huge amounts of debt in the private sector in both US and UK. That debt makes it likely that any perception of economic contraction will produce a pro-cyclical response from the private sector.

      1. @jim,

        The govt has little influence over private savings desires.

        when the govt. offers a tax deduction to buy “growth bonds” that is stimulating savings desires.

  4. The “growth bond” idea is just politics.

    There is a clamour in the UK (as in mainland Europe) for someone to “do something” about growth. The growth bonds will enable Osborne to say he is doing something about growth. They come to the same thing as bog standard government borrowing.

    If this turns out to be a poor summer weather-wise, everyone will complain about the weather, and doubtless Osborne will issue “good weather bonds”.

    1. @Ralph Musgrave,

      Exactly.

      Warren’s statement is a little bit incomplete, and adherence to strict compliance with MMT rhetoric could be what caused all the confusion.

      “Ordinary” deficit spending means issuing “ordinary” bonds to “finance” the deficit spending. It doesn’t mean simple deficit spending in the MMT sense, where no borrowing is necessary.

      The only difference is the marketing-inspired naming of the bonds. The next step is not to count “growth bonds” in the calculation of the “national debt”, and then we’re free to pursue better policy. “War bonds” had great success, and though I don’t know (it was before my time) I have to think the name had something to do with that success.

  5. This is actually a great idea if it is done in such a way to increase spending. As much as MMT describes the situation, it will be more than a 100,000 years before people can understand its thinking, because of the habitual thinking that people have about debt and government spending (Read The Power of Habit: Why We Do What We Do in Life and Business by Charles Duhigg). Not even very bright open minded people such as Krugman etc. can accept it. They are stuck in habitual thinking. You can talk about stocks and flows etc, but the word debt will keep on coming back to their minds. No one wants to be in debt, the habit of thinking is that it has to be repaid is ingrained. At the same time MMT army has to get out of the habit of thinking that if we just keep explaining this in clear terms people will accept it (other than just the few of us who take the time to realize we have been stuck in habitual thinking that makes no sense).

    So what we need is to rephrase debt. Be it Growth Bonds, or War Bonds or Sick Monkey Bonds Assistance Bonds take your pick.

    What are your thoughts?

    1. @Sidchem,

      I do agree that although the growth bonds idea is a bit of a political trick, it could be worthwhile if it allows politicians and their constituents to get over their spending fears and adopt a more optimistic and pro-active attitude toward government spending and public investment.

      1. @Dan Kervick, It may be a trick, but you can’t go into a room full of fat people and tell them you found a solution to their weight problem is to just eat less and expect results. The common person is stuck with the habitual thinking of debt is bad, just like the fat person is stuck with the thinking they need to eat all the time. Breaking habits is difficult (like reading Warren’s blog everyday!)

    2. @Sidchem, “Debt” is a four letter word and perhaps attractive for that reason. Personally, I prefer “obligation,” as in “you’ve done me a favor and I’m obliged to repay it.” Obligation is a self-defined relationship, rather than one that’s imposed. Which may account for why the instinct-driven, whose behavior is mainly reactive to external prompts, don’t really understand what an obligation involves. That one’s sense of equilibrium calls for repayment perhaps doesn’t occur to people who don’t perceive themselves as being in or out of balance.

    3. @Sidchem,

      I think that word ‘debt’ is inappropriate. MMT argument for it goes like this: “whenever someone buys something they go into debt” therefore, whenever goverment purchases something it goes into debt.

      Actually there is another way to buy: if seller was indebted to you, you could just buy using existing credits.

      I think it makes sense to think that tax oblications indebt the private sector to the government, so the government can spend out of credits that it has. This “tax debt” is actually infinitely large since time is eternal, and so is governments ability to spend.

  6. To add one more note. Warren’s statement “The funds to pay taxes and buy government securities come from government spending.” is correct but nobody will believe it. But they will believe that “Investing in American through Freedom Bonds will make us safe and secure.”

    1. @Sidchem,

      “The funds to pay taxes and buy government securities come from government spending.”

      Actually, a light bulb went off in my head when I first grasped the meaning of this statement.

      Another one I like is that “Taxes should always be low enough to sustain full employment.”

      How about “Tax Cut Bonds”?

  7. Case One: Government sells bonds to public which promise a certain future yield. At the same time the government spends money on public works. No explicit connection is drawn between these two activities.

    Case Two: Government sells bonds to the public which promise a certain future yield. At the same time the government spends money on public works. The government claims that the revenues from the bond sales are being used to finance the spending on public works and that the bond yields flow in some unspecified way from the public value that is created by the spending.

    Case Three: Government sells bonds to the public which promise a certain future yield. At the same time the government spends money on public works. The government claims that the revenues from the bond sales are being used to finance the spending. The spending creates value, some of which is then taxed back from the public in the form of tolls, user fees, etc. The government claims the bond yields are financed by these fees.

    The difference is mainly politics. However, the public is probably losing out if it accepts the tolls and user fees. The additional government obligations in the form of growth bond payments will either be offset with new taxes or they won’t. If they are, the taxes are likely to be more widely distributed and progressive than the user fees will be. If there are no new taxes, the cost might be passed on to some in the form of slightly higher prices, or in a redistribution of purchasing power.

    The whole modern system of government bonds strikes me as a system in which the portion of the country that can afford to invest monetary surpluses in investment vehicles is permitted to buy stock in the body politic, and to profit from the productive labor of everyone – including those people who work, but do not earn enough to buy bonds.

    I would prefer a system in which the it is central bank that sells the bonds (provides savings accounts for affluent depositors), while the legislature simply spends and taxes, and permits itself the option of spending more than it taxes without issuing any debt instruments. In some way, the underlying cash flows probably don’t change much. But the system would be more transparent, and would give the public a clearer understanding of its options, where the money is coming from and where it is going.

    1. @Dan Kervick,

      I would prefer a system in which the it is central bank that sells the bonds (provides savings accounts for affluent depositors), while the legislature simply spends and taxes, and permits itself the option of spending more than it taxes without issuing any debt instruments. In some way, the underlying cash flows probably don’t change much. But the system would be more transparent, and would give the public a clearer understanding of its options, where the money is coming from and where it is going.

      agreed and well stated all around. Seems to me the only difference in cash flows would be the bond interest paid to Primary Dealers on debt issuance for treasury spending.

  8. “cash-rich households have nowhere secure to put their money”

    Gold.

    Gold has been secure for 10,000 years.

  9. Off-topic. I am very interested in what is going on in China (as I’m sure others are), partly as a potential alternative, in some ways not all (before anyone jumps down my throat), to the prevailing neo-liberal capitalism that holds sway today. Here is an article in the Guardian discussing the difference in China’s response to the GFC as opposed to Europe or the US.

    China’s economic stimulus offers Europe a lesson

    Chinese state action from the onset of the global crisis countered any investment decline. In the EU, it’s a case of too little, too late

    http://www.guardian.co.uk/commentisfree/2012/may/30/europe-china-economic-stimulus

    This comment by was, I thought, priceless:

    frontalcortexes
    30 May 2012 2:21PM

    Oh Dear ! The Chinese appear to be using Modern Monetary Theory. That will never do for our know-nothing Neo-Liberal dogmatists who prefer to cling to their dogma than find out what the theory is really all about. Usually they start screaming hyper-inflation like frightened children at the first mention of MMT not even aware that this is caused by an abrupt reduction of goods and services but the same amount of money in an economy still chasing those items. Reparation demands Weimar Republic. Inadequate black management of confiscated white owned farms Zimbabwe. How remarkable that the Chinese government tightened under-writing standards at the first sign of their property market over-heating. Here the Neo-Liberal simpletons would be calling for more de-regulation of the financial and real-estate sectors!

    1. >@SteveK9,
      While China does have fiat money and is not afraid to use it, they too have a corrupt political system that prevents fair distribution. As a consequence they are running into equally difficult problems in different areas: http://www.nakedcapitalism.com/2012/06/wisconsin-recap-thanks-to-obama-american-left-lies-in-smoldering-wreckage.html

      Ironically, a solution frequently bandied about on this site for our problems would work equally in China: simply give everyone some sum of money in equal proportion to their reported income. Those with debt could pay off debt, those without could consume creating demand to re-float economic activity. I think Warren has proposed several versions of this and Pettis proposes it in the above link on China.

  10. When an impossibly obtuse system becomes unwieldy … add to the confusion? This may work as a hack for now, but it does little or nothing to improve situational awareness of the policy staff or the electorate.

    I have a stopgap feeling about this.
    That’ll fix it! http://thereifixedit.failblog.org/

    When UK’s population is 2x larger, what will the kids of these great thinkers be prepared to come up with? Based on this approach, and these examples?

    No wonder Omar Khayyám gave up & took to drinking. Rumor has it that he was into boats too, and dreamed of retreating to an island. 🙂

  11. actually, Rube Goldberg comes to mind;
    the cartoonist best known for creating enormously complex machines to accomplish trivial tasks
    (Rodger Mitchell mentioned him in a different post, but made me think of the UK)

      1. @Sleeper,

        “Perhaps the most interesting thing from my point of view though was his bold use of blank space.”

        For some reason, that’s reminiscent of political discourse.

  12. href=”#comment-192316″>@Adam (ak), This sounds like a creative way to get spending up. Think it would work here?

    1. just another case of reverse causation. in japan, like the US, tsy secs just shift balances from reserve accounts to securities accounts, both at the central bank

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