As England enters a second lockdown, we should be under no illusions about the economic cost. More jobs will be lost. More people will fall into arrears on their rent. More businesses will fail. More people will become homeless. More children will become hungry.
As in March, the pain will be distributed extremely unequally. While some people will lose jobs and houses, others will lose holidays and gym memberships.
At this time, people need to be provided with clear explanations of what is happening in the economy. They need to know what the worst possible future outcomes are, and how they can be avoided. At the moment however, people are not getting these clear explanations. Instead, two conflicting, almost diametrically opposed narratives have emerged.
On the one hand, many politicians and commentators have become increasingly panic stricken about the scale of government debt, which is rising at £1 billion per day – calling it “unsustainable”, and “out of control”. The UK chancellor, Rishi Sunak, has taken to Twitter to reassure us that he will bring the debt down to protect younger generations.
Alongside this, “Modern Monetary Theory” (MMT) has been rapidly growing in popularity. Spearheaded by American economist Stephanie Kelton, and increasingly popular on both sides of the Atlantic, this set of ideas, and its growing group of followers, strongly advocates for significantly higher levels of government spending and debt, financed by newly created money, in order to support the economy.
In the face of these completely opposite ways of viewing our current economic crisis, how are ordinary people to understand what is really happening?
How did we get here?
Both these ways of viewing the economy have been born from the same radical change that has occurred in the management of western economies since 2008: the move towards permanently higher levels of government debt, funded by central bank-printed money.
Before 2008, Rishi Sunak’s Twitter explanation of government finances would have been correct. The government funded its expenditure entirely from taxation and borrowing. Since 2008, however, the mechanics have changed significantly. Whilst it is still technically true that governments fund their spending from taxing and borrowing, increasingly large amounts of that borrowing have been borrowed from… itself.
This “Quantitative Easing” (QE) was a new trick in the West (although it had been trialled already for over a decade in Japan previously), and was intended as a temporary, emergency measure to help stimulate the economy. However, it ended up not being temporary, as the persistent failure of the economy to recover in the way anticipated led the Bank of England to repeatedly increase these loans and, subsequently, to extend the length of the loans once they reached maturity.
The end result was that, at the beginning of this year, the Bank of England owned over 30% of the UK’s national debt – an impressive £445 billion. Near identical schemes were introduced in Europe and America. In response to the COVID crisis, the Bank of England turned the taps on once more, adding another £300 billion to these loans. A further £150 billion was added last week, bringing the total amount of money “owed” by the UK government to the Bank of England up to £895 billion. That is equivalent to £32,000 per household.