My explanation in the previous post that government spending in excess of taxation actually creates money doesn’t address the issue that most occupies Reeves: the level of government debt.
Reeves and Starmer find the level of government debt terrifying, so much so that they’re willing to risk the premature deaths of 4,000 pensioners—according to the Labour Party’s own research—to reduce it. So, government debt must be huge, right? And the main threat to economic stability? And it must also dwarf private debt, since Reeves didn’t even comment on the level of private debt?
As it happens, the truth is the opposite of these conjectures. Yes, the UK currently has a government debt ratio of 101%. But while government debt is higher than GDP, it is substantially smaller than private debt, which is currently equivalent to 142% of GDP. This is actually an improvement on the situation before the Global Financial Crisis (GFC), when private debt peaked at more than 4 times the level of public debt.
Private debt wasn’t always bigger than government debt, however. The growth in private debt only began with the election of Thatcher: before then, private debt was roughly constant at about 50% of GDP.
But shortly after Thatcher came to power—and deregulated the financial sector to make the economy “more efficient” —private debt quadrupled, from under 50% to over 180% of GDP.
The growth of debt ended in the GFC—which Neoclassical economists completely failed to see coming, as The Queen once famously pointed out—and government debt only rose in its aftermath. This was largely as a means to prevent the crisis turning into a full-blown Depression, as happened in the 1930s. For one thing, government spending in excess of tax revenues gave workers unemployment benefits that kept them from the breadline, and they in turn gave businesses a cash flow that kept them from bankruptcy.
In fact, private debt, and not government debt, is the cause of financial crises. Private debt, and not government debt, is the main threat to economic stability. Government debt actually helps stabilise the economy, and Reeves’ attempts to reduce it will lead to less, rather than more, economic stability.
But Reeves doesn’t realise this, because the mainstream economics she learnt in her PPE and Master’s degrees completely ignores private debt, while wrongly obsessing about government debt—as I illustrated in my first post.
As someone who did warn that the Global Financial Crisis was coming, it’s extremely galling to see that Neoclassical economics is still taken seriously today, let alone that it’s being used by a once social-democratic party to set government policy.
We need a scientific revolution in economics. But I’ve given up on it happening inside economics departments at Universities. That’s one reason why I invented Ravel: so that people outside Universities could work out for themselves how the monetary system actually works.
I used to think that the modelling side of Ravel—its capacity to show how the monetary system worked—would only be of interest to academics and students of economics. But the fact that mainstream economics is now being employed by the Labour Party to undermine social welfare—in the false belief that it will improve the economy—means that Labour Party members need to learn what Ravel can teach them, if they are to save Labour from social and economic policies that will ultimately lead to the Party’s destruction.
I’ll use Ravel to explain why government debt is not a problem in the next post in this series. Ravel is available at https://www.patreon.com/Ravelation/.
Private debt IS a problem. However, ignoring your own insight that money is created by equal debits and credits that sum to zero wed to the new concept of Monetary Gifting strategically integrated into the economic process is THE bigger problem because it misses the the resolving nature of every historical paradigm change.