If we had UK monetary reform tomorrow then the nation would still owe over £1 trillion pounds to its gilt holders and the government would still have commitments to spending programs and interest payments which together exceed tax revenues by approximately £120 billion pounds per year. Post reform the government could immediately stop further borrowing, but the existing obligations would remain.
If there is no more government borrowing, then the annual spending deficit must be covered by a combination of:
(a) adjusting public expenditure
(b) adjusting tax revenue from the population
(c) issuing publicly and spending into circulation new debt-free money
If (c) is done much above the growth of the real productive economy then it is effectively a tax on all prior money owners and a potential cause of unacceptable price inflation. Hence it is pragmatically, morally and politically not possible in the short term simply to print enough money to buy back a substantial portion of the gilts. Recognizing this we might ask if, post reform, there is any other plausible method by which a significant chunk of the national debt might be paid off in the shorter term. Could we accelerate the transition period?
The reader might remember this thought provoking story about circular debt obligations in a small town:
In a similar way, one possibility is for the government to buy back some gilts with newly issued money on the understanding that the gilt sellers (typically pension funds wanting steady and secure income) then use this money to buy newly issued corporate bonds, let us suppose from secure FTSIE 100 AAA-rated companies. These companies then use this money to pay down their bank debts. The banks then use it to pay down their Conversion Liabilities to the central bank (as explained in The Positive Money Proposal), and the money disappears from circulation.
The net result of this temporary money-go-round is ‘at a stroke’ to reduce the national debt, to reduce corporate debt to the commercial banks, and to reduce the Conversion Liability debt of the commercial banks to the central bank, all without inflating the money supply.
This basic and admittedly loosely formulated scheme could and should no doubt be refined in various ways. For example, the new corporate bonds could be pooled into an investment trust that would provide pension funds with a more secure income stream than that provided by individual corporate bonds. Also perhaps in some circumstances the corporations might prefer to issue new shares (a ‘rights issue’) in exchange for the new money, giving the pension funds equity participation instead of bonds. I have not researched precise figures but at first glance there seems to be scope for this and similar schemes to total hundreds of billions of pounds. At this stage I put forward the idea for criticism and discussion.
Government debt is perceived now as the safest type of debt in which to invest, hence its predominance in pension funds. But governments don’t directly produce wealth, and in reality government debt is only as good as the underpinning economy from which the government raises taxes. In a post-transition world without national debt this relationship will be more evident. The above reduction of circular debts links more directly wealth producers to wealth consumers by eliminating the government ‘middle man’, as well as by avoiding elements of the banking system.