Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday, 25 June 2020

Did the UK really almost go bankrupt?

I normally publish posts in the first half of the week, but two separate attempts were overtaken by events, and they will have to wait for another day. I finally wrote something for the Guardian on the Governor’s interview that led to nonsense headlines about the UK almost going bankrupt. The piece explains why they are nonsense, but I should note here that the headlines are classic mediamacro, appealing to the idea that governments are like households.

Frances Coppola makes the same point a different way. You could describe what happened in March this year as a short term liquidity problem. There is no suggestion the UK is insolvent. And the thing about countries with their own currencies is that they never have a liquidity problem because they create money. She also notes that no headlines talked about the fragility of our commercial banks around the same time. You would think, after the GFC, that would be the big news. Here is a quote from Frances’s blog:
“I found the interviewers' constant focus on government financing a serious distraction from what was an important story about the Bank's vital responsibility for ensuring the smooth operation of financial markets. When financial markets melt down as they did in 2008, the whole world suffers. Central banks saw the same thing happening again in March 2020, and acted to stop it. And their action was extremely effective. It seemed to me that this was the story Bailey really wanted to tell, but the interviewers were intent on pushing him towards the issue of monetary financing and the Bank's independence.”
This episode was not, as some have suggested, an example of fiscal dominance. To make that clear, I give an example of what fiscal dominance would be in the article, where the Bank is forced to monetise borrowing against its better judgement. Dealing with market disorder in a pandemic is not that. But, rather more controversially, I do suggest that fear of fiscal dominance may make central bank governors not that objective when discussing fiscal policy.

So why does the media hype up some short run disorder in markets to be something it isn’t? Perhaps it all goes back to mediamacro’s view that government deficits are bad, whatever the causes. (I stress here that not every journalist thinks like mediamacro.) We have seen huge increases in these deficits as a result of the pandemic, which some in the media have written up with horror rather than as only to be expected. So maybe the media is looking for the markets to validate their view. I would be interested in what media folk think about why his interview was written up the way it was.

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