Cobden Centre Annual Lecture 2010 – honest money and the national debt

Last night, yours truly, along with a number of other Cobden Centre supporters and assorted free marketeers, listened to Toby Baxendale talk about a radical proposal to sort out the UK national debt. He talked about a good many other things, but the centrepiece of his talk was how, as part of a key reform, we could slash the debt burden and save future generations from the crippling expense of the current debt.

What interested me, beyond the core of Toby’s talk, was the reaction from the audience. A number of people I spoke to – their conversations are off-the-record so I will not name them – told me they were skeptical about Toby’s reasoning on the national debt point, although they accepted that, at face value, there may be a vital point they were missing. I must say that I am not entirely convinced myself but that may because I have not understood the point and need to do a bit more thinking and reading. In particular, there is a worry that the Cobden Centre might appear, unless we thrash these issues out clearly, to be pitching some sort of “magic bullet” solution. And I am sure that Toby does not regard there being anything magical about honest money.

One simple issue that arises from any plan to wipe out a lot of debt is the law. In debt restructurings, for example, one point that bankers have to deal with is the seniority of debt holders. The UK’s national debt is held by a variety of different people, foreign and domestic; it is held by a variety of institutions. Any plan to adjust debt, or cut it, has to take into account the kind of people who hold it and any contractural issues that may arise. It may sound nick-picky but it is the sort of detail that is actually very important in resolving debt issues at the corporate level, for example.

I was mightily impressed by the few words of Steven Baker in reference to his maiden speech on the issue in the House of Commons. It almost seems too good to be true that we have a sitting MP who actually understands, and wants to spread understanding of, these issues. (The fact that Steven has actually had a serious job as an engineer is also a refreshing change). For far too long, the free market position has suffered from a lack of articulate defenders in parliament (there have been honourable exceptions, such as the late Nicholas Budgen or Jock Bruce-Gardyne). Simply conveying the message that states make a mess of money is a key argument to make. It would be good for other MPs and commentators in the mainstream media to be more acquainted with the Austrian school. There are already signs that this might be stirring: consider this article on banking by Dominic Lawson, who seems to have inherited his father’s grasp of good economics.

1 Comment

  • Tom, thank you for coming last night and your kind words here.

    There is no magic bullet.

    Sometimes under your nose is the most obvious answer to your problems. I stand on the shoulders of great thinkers who have pointed out the way before. If you realise that “your” cash in the bank is legally not yours and that it is a mere IOU from the bank, then you can see that if these are replaced with physical cash gifted by the government, as it can print it for next to nothing and creating no new liability, as you are well aware, then the bank suddenly has no current liabilities. If it has no current liabilities, its net worth has risen by the amount the current liabilities have fallen by. This new net worth of the banking system caused by the costless gift of cash , or paper token money, means that the banks have a substantial increase in their net worth. I say, place the bank shareholders back in the same position as they were before the reform and use the loan assets, via placing them in a special purpose vehicle, to pay down the national debt. No national debt required to be paid by the state = not paying £40bn a year in interest service costs which means a potential for a 28.5% income tax. Go out and celebrate and spread the word! It is rare that a momentous suggestion that sits under our very noses can well be even thought of or even suggested. I am doing this now. It is academically robust.

    People find this difficult to grasp because they cannot see any pain right? Thus the temptation to suggest it as a “magic bullet” solution that is not robust.

    Well, I will give you some pain!!

    It is quite possible banks will want to change storage fees to cash safe keeping. Pain!

    It is quite possible that those £380 bn of accounts that are called so confusingly “instant access savings accounts” but should be called demand deposits, would not want to all sit in safe deposits, and will seek to get a interest rate return. This is good as it will mean this money will search for investment opportunities in good business and lead to good business having more access to more loans than before bidding up prices in their capital goods industries. This will be at the expense of sub optimal entrepreneurs, or bad business people who should really have remained of some one else’s PAYE rather than going it alone as an entrepreneur / businessman. These people lived formally on the welfare state of cheap subsidised credit created by the loose money environment (paid for by silly fools like you and me unwittingly via the monetisation of the debt and via our taxations system!). This process for me is called a correction and it will be painful for some.

    Your practical points;

    What about the contractual situation of bond holders?
    Novate the contracts over to the new SPV, have the government sit behind the SPV until all debts are discharged?

    Your thoughts would of course be appreciated.

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