Monday, March 02, 2009

Plato on the national debt

Fraser Nelson is angry with the government for sneakily taking on too much debt:

Gordon "two books" Brown has just started a new series of national debt excluding the banks. Purpose: to conceal from the taxpayer what he's done. He rejects the ONS definition of national debt, but won't give us a new one. Just his own make-believe set which excludes every penny sent down this vortex of the imploding banking sector.

Plato might disagree. But we can come back to him later.

First, for reference, the Office for National Statistics publishes figures on the national debt – or rather, ‘public sector net debt’ – both including and excluding the effects on the public finances of the state’s exposure to the bits of the banking system it’s propping up.


This graph from the ONS is, annoyingly, mis-labelled: the pink dots are the figures excluding financial sector intervention, the blue line includes it.

It shows how debt excluding intervention has recently climbed quite steeply, while debt including intervention has a couple of huge leaps: the nationalisation of Northern Rock and the Bradford & Bingley loan book. Last week, the ONS announced that it would include the balance sheets of RBS and Lloyds/HBOS as part of the public finances, dating back to their bailouts last October. This means the blue line (but not the pink dots) will be revised sharply upwards.

So, the ONS counts the liabilities held by these state-dominated banks as part of ‘public sector net debt’. As far as proper accounting conventions go, I defer to official expertise in a heartbeat. But ‘public sector net debt’ is not quite the same sort of thing as what we ordinarily think of as debt.

For most of us, debt is money that you have to pay back – the result of having borrowed in the past.

But the liabilities taken in to public sector net debt are something else. They are amounts of money that the state would, in theory, have to pay in the event of: all the nationalised/bailed-out banks going bust; all of their borrowers defaulting on all of their debts; all the prices of all the properties on which such mortgages are secured dropping to zero; and all the assets of those banks – from deposits in savings accounts to the little chains with the pens on the end – becoming utterly worthless.

It’s an apocalyptic worst-case scenario, and it will not come to pass. Some of these banks’ debts will turn bad and some assets will be duff, but nobody knows how much. And in the meantime, the decent assets are still turning a profit: investments will earn returns and the majority of mortgage-holders will keep making their payments. To us.

Indeed, accounting convention means that a whole lot of capital assets held by the banks don’t get counted against the liabilities in these figures. Fair enough, if that’s the way these things are done, but these assets are still worth a tremendous amount of money.

The recent announcement that RBS and Lloyds would be classified as in the public sector said:

The ONS decision is based on a judgement that government has the ability to control the respective banks’ general corporate policy through the conditions associated with the agreements signed relating to recapitalisation.

That’s all. It’s not saying the government now actually owes all this money, let alone that it’s been “sent down this vortex of the imploding banking sector” – sorry, Fraser.

How much money?

an indicative analysis suggests that the addition to Public Sector Net Debt is likely to be in the range between £1 trillion and £1.5 trillion … roughly equivalent to between 70 per cent and 100 per cent of GDP.

How did the markets react to this more than doubling of public ‘debt’? Did the pound plummet? Were government gilts suddenly viewed as riskier? No: the markets shrugged it off.

And that’s where Plato comes in.

There’s a principle in philosophy sometimes called the causal criterion of reality. One modern formulation goes: “To be real is to have causal powers” (Samuel Alexander), but the earliest known occurrence is in Plato’s Sophist: “everything which possesses any power of any kind, either to produce a change in anything of any nature or to be affected even in the least degree by the slightest cause… has real existence”. More casually: if something is of literally no consequence, it may as well not be there.

Public debt – real debt, as you and I understand it, money that we owe and definitely have to pay – is not good for government credibility. When it shoots up, the government loses the respect of the money markets. But, despite the surge in ‘public sector net debt’ (including financial sector interventions), the markets aren’t that spooked.

Certainly, public debt in the ordinary sense is rising strongly as well, and this has an effect on the markets: it’s real debt and it has real effects. But the liabilities on the balance sheet coming from the financial interventions haven’t had the same sort of effect: those figures lack the causal powers of debt and so do not exist as real debt. Perhaps, in the future, some of it will be converted into real public debt – but this remains to be seen. And don’t forget those uncounted assets on the other side.

Just imagine that the sums involved in the bank bailouts had actually been ordinary public borrowing: the pound would now be at parity with the Zimbabwean dollar.

But the Brownophobes needn’t fret: there’ll be plenty of real debt in the years to come for them to fulminate against. And the new asset protection scheme, while it will turn a government profit at first as the banks pay participation fees, seems likely to end up costing us… something. Although, given the role of confidence in markets, that fact that it’s there means it’s less likely to be needed.

We should be worried about the economy. We should be concerned about the public finances. It’s still not a cert that the banks are out of the woods, which should trouble us. But if we want to know how much we actually owe, look at the ‘excluding financial intervention’ figures. The astronomical numbers that include the interventions represent only possibility – and the most extreme, theoretical possibility at that.

1 comment:

Paul said...

Tom

I think this is a lucid and excellently researched post. I will certainly link to it and quote it in a post I have in mind, where I actually go further than you do here and suggest that in fact the whole of the national debt can be considered 'unreal' in Platonic terms, because the money supply is essentially a figment of the imagination, and has been at the very leat since the gold standard was abandoned, and as suchis simply a reflection of the institutional strength of the varous entitities that make upo the capitalist facade. In govenrment, only John McFall recognises this.