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Sunday, 13 February 2011

British Nationalist Economics: Important Questions Answered

Nationalist Economics: Important Questions Answered

Andrew Moffat, lead European Parliamentary researcher to British National Party MEPs Nick Griffin and Andrew Brons, answers a number of important questions which arose in the comments section of this website after his last article “Economics — The Dismal Science” appeared.
By Andrew Moffat— My previous article, the primary purpose of which was to explain how the government debt markets operated, raised significant interest.
It is not possible, alas, to reply to all the comments and queries that appeared. A number, however, were of sufficient merit to prompt a follow-up article.
Q1: The article assumes there has always been and always will be government debt. Surely it is a basic fact that wherever possible a government or indeed an ordinary person should live within their means and avoid debt?
A: Essentially, this is correct. A successful government, however, whose tax base is secure, whose credit is favourable and whose prospects are based upon a fundamentally sound economy will be in a position to afford an element of sensible gearing, i.e. debt. This is akin to the private individual, who borrows to improve his homestead.
The difficulty relates to the question of the sound level of prudent debt and this has risen from approximately 30 percent of Gross Domestic Product (GDP) at the turn of the century, to around 65 percent last Autumn.
Were interest rates to rise significantly, perhaps to combat inflation, then an increased element of the tax base would be required to service the interest.
In the past, government debt has risen above 200 percent of GDP. This occurred, for the most part, in the aftermath of the war against the rebellious American colonists, immediately followed by the Napoleonic Wars. Again, in WW2, the national debt rose substantially.
It should also be borne in mind, however, that private debt was lower in those days, long before the existence of credit cards, mass mortgages and sophisticated bond markets.
High government debt crowds out private investment and undermines the economy. The aim of a successful administration is to target neutrality during the economic cycle: thus, during recession, when the tax-take diminishes, government spending will rise and the government will borrow. The reverse occurs when the economy booms.
There is another interesting consideration: when debt was successfully being paid down a decade ago, pension funds worried that they could not find sufficient long term secure investments to generate income for their pensioners/investors.
A certain level of government debt, which need not be large, does provide security for pension funds.
Q2: QE (Quantitative Easing) is described as the process of "creating" money. Surely the money "created" should be based on some tangible asset, the obvious example being gold? If creating money was the answer, you would continue printing money. The problem with this is that you end up requiring a barrow load of money to pay for the weekly groceries.
A: Governments can and do create money. To that extent, they differ from individuals. Money is an equivalent of a ticket of exchange.
Simplistically, if total production is 100 units and there are 100 tickets, then one unit will theoretically exchange for one ticket of production.
If production collapses, then those tickets of exchange will diminish in value and more will be required to absorb the remaining units.
Say, however, production doubles: in this scenario, if ticket circulation remains unchanged, then its value will rise and more units will be exchangeable for each ticket in circulation.
At this point, to reflect rising production, the number of tickets in circulation should also rise. This will avoid both deflation and inflation.
Whilst simplistic, similar considerations apply to money within an economy. To avoid both inflation and deflation it is necessary to ensure that money in circulation is calculated to reflect the production of goods and services and the annual growth thereof.
If money is created without any regard for production, then inflation will result – as is the case in Zimbabwe. Inflation transfers wealth from the prudent to the imprudent.
The gold standard maintains advantages in terms of price stability but there are drawbacks in terms of volatility and inflexibility. The topic of the gold standard and its pros and cons deserves a separate article.
Q3: Quantitative economics is likened to nationalist economics. Why is this?
A:  QE was introduced during the recent economic crisis.
In the run-up to the crisis, many banks borrowed monies from the international markets to finance their lending, which was well in excess of their depository base.
When interest rates rose, these banks found they were unable to meet their obligations and found no market for their newly created debt instruments, i.e. packages of loans to retail customers. This is what happened to Northern Rock.
Other banks, such as RBS, Lloyds and Barclays found it necessary to re-finance their balance sheets to prevent insolvency, with state aid provided in the case of RBS and Lloyds.
The result was a collapse in lending, massive de-leveraging as banks sought to repay their loans, and recession. Bloated asset prices, on which loans were secured, collapsed.
The backdrop is a little more complicated than this but the above presents a broad-brush description.
The government, via the Bank of England, therefore commenced QE, the process of injecting newly created electronic money, interest free and debt free. This was for the most part employed to purchase debt, i.e. gilt-edged stock and similar instruments from the money markets, creating demand for such debt and, hence, maintaining downward pressure on interest rates.
Many nationalists have complained that new money is created in the form of interest bearing loans and refer to the term ‘fractional reserve banking’.
In the instance of QE, new money has been created by the state, via the Bank of England, to lubricate the economy, reduce interest rates – to stimulate business – and obviate recession.
It is what a nationalist government would do, i.e. it would create new money in regulated circumstances, via Crown authority and so as not to create inflation. This holds many potential advantages.
In my earlier article, I made the simple point that no one has yet explained why, if this process of QE can operate in recession, then why cannot it also operate in a period of expansion?  This is a topic which must be explored.
Q4: Who owns the Bank of England?
A:   The Bank of England is owned by the government and, therefore, the citizens of the UK.