This post is part of the A to Z 2020 Challenge. I have decided to theme the posts around personal and societal responses to the Covid 19 crisis, including my resumption of Blogging!
Where is the money going to come from to get started again?
Individuals, businesses and governments are all moving from the “How can we possibly afford to stop working?” to “How can we possibly afford to start working again?”. Here in the UK, at the daily Press Briefing given by the representatives of government flanked by special health advisors, the awkward questions asked by the press are now including, amongst those on the competency of the UK government to manage the amount of testing required and the supply of personal protection equipment, new and urgent questions on how the government may be starting to envisage how we will restart the economy. There Is some suggestion that the government does not trust us with transparency in this matter for fear we will think its all over and rush back to normal life too soon. Or perhaps they just haven’t got a clue yet…
Largest amongst the issues to be faced is the question of where the money is going to come from and although I am writing from a UK perspective, many of the points will apply across the world. Before I begin, I know I am a day in late posting this challenge piece but in my defense, I only found out about this on the first day of it – those at A to Z 2020 Challenge HQ recently asked the question “Are you a pre-planner or a ‘pantser’?” Necessarily this year I am a seat of the pants writer which at least means that I can react to current circumstances and indeed make them my theme for the challenge. The subject of Money and how we shall find enough to exit the crisis is a big one and needed a lot of research – I have tried to boil it down but there will be links to articles if you want to go deeper.
War Debt
Many governments and others are referring to the struggle to contain Covid 19 as a “War” because it helps to conjure the spirit that is needed from everyone to “defeat” the tiny, invisible, senseless thing which is a virus. Economists are now starting to talk about the cost of the crisis to our economies, in terms of productivity lost, unemployment created and of course the borrowing which will be necessary to get things started, so my question is, if all the countries in the world are facing the same situation, then who is going to lend money to who in order to fix things.
One precedent is what has happened in actual wars – the World Wars for example. Britain had to borrow a lot of money, mainly from the US or in the case of the Second World War, the US and in a smaller amount, Canada. In 1945 alone, the UK borrowed 4.33 billion dollars and 1.93 billion dollars from Canada the following year. Suffice to say that the total repaid amounted to twice that which was lent and the final repayment was as recent as 2006. We may have a “special relationship” with America, but it does not come cheap. Furthermore, that war helped cement the Dollar as the world’s leading currency and saw US influence consolidated around the world – facts which are still pertinent in the crisis of today. Whilst Britain floundered under the weight of debt and the need to rebuild its shattered economy after the war, America, increasingly obsessed with fighting the spread of Communism, made satellites of the “frontline” countries using the Marshall Plan to rebuild European countries equally shattered economies in exchange for hosting military bases.
There is another way of raising money to fight wars which may become significant in solving our present crisis, the issuing of the enchantingly titled “Gilt Edged Security Bonds” – so-called because the certificates have a gilt edge to them. This is a way of borrowing money from private investors, individuals, pension companies and the like. Invented by the British as early as 1694 when King William III borrowed 1.2 million to fund a war with France, gilts are low yielding in terms of interest paid but they are very safe hence their attraction to pension funds. King William could not raise the money for his war from taxes and neither will governments following the Covid 19 crisis since the money they will be dispersing to help businesses and individuals, needs to be spent on producing and consuming, there would be no point in just taking it back as tax. There is a really good chart of all the ways governments can raise money here, at Positive Money – an organization for monetary reform – more of them later.
What do we know about the UK Exit Strategy?
The UK Chancellor of the Exchequer, Riki Sunak unveiled a plan for £330 Billion which he described as an intervention in the economy “on a scale unimaginable a few weeks ago”. This is indeed true since the Tory party have predicated their policies on Austerity, beating up the Labour Party for years for their level of the national debt – before running up even higher levels themselves (which they predictably kept quiet about). Austerity is the central plank of neo-Liberalism which will be the subject of my next post – a sort of part II to this one. But meantime, the £330bn is actually government-backed loans – however, the loans will actually be issued by the banks. If the loans are defaulted on, the government will, then, and only then, have to shell out – so not quite as magnanimous as it first appears. There will be further offers of support from the government and some will require the government to borrow, either from the markets or by issuing gilts and of course, the Bank of England can always print money, “quantitative easing”, as they did after the 2008 financial crisis.
The Big Choice
The scale of the current crisis in financial terms makes the 2008 financial crisis look small by comparison – we are talking levels of borrowing nearer to that of the war, and our government(s) might be tempted to assert that all this has undone the savings from years of austerity and that we must tighten our belts once again, for the long haul. This is not the only choice and so tomorrow I will look at why austerity is an ideological position and what other choices there are…