The Richard Murphy Budget

'Ee's actually calling it "the" alternative budget which is cocky, no?

A basic problem with the Richard Murphy - Spud to those who know him well - political economy project is that he knows no economics. We thus gain a lot of politics based upon basic ignorance. This is nothing that a brief perusal of a basic textbook wouldn’t solve for him but as he likes to retail he walked out of his first year undergraduate classes because it was so obviously wrong. Everything since has been made up in his own head which is why it so often - not always, he’s sometimes able to use the word “and” correctly - fails when confronted with reality.

A useful example being his treatment of savings in his “the” alternative budget:

First, most UK savings do not support productive investment

Most of the wealth held in the UK is saved in ways that add almost no real value to the economy.

It is placed in second-hand shares.

It is placed in second-hand properties.

Or it sits in bank deposits that banks do not need to make loans, because all bank lending is undertaken using newly created funds.

So, think about that second hand bit for a moment - shares first.

So, you’re 20, going to start saving for your pension. You stick £200 a month into an ISA - say - and buy a FTSE100 ETF. OK. Now wait 45 years. Time for your pension to start paying out. All along you’ve bought only second hand shares. You’ve got a dividend income from all those shares you’ve bought over the years now. You’ve been a good boy and all dividends paid to you have also been reinvested. Cool. You now do not have to shop for your meat in the cat food aisle.

Spud is then assuming that you live off your dividends. Or if you’d invested in bonds off your interest - off the income from your investments at least.

Which is not how it works at all - for a start if you did that then when you die you’d have this vast pile of your lifetime savings sitting there. Life would have been better if you’d been able to consume some of that money - some of the capital - along the way. So, that’s not what we do.

Instead, we eat the capital in our pensions savings as we age. Sometimes formally - when we buy an annuity - and sometimes informally but we do. And that ability to eat our capital depends upon being able to sell those by now 50 year old second hand pieces of paper to someone. For some value or other.

The people we sell our by now third hand pieces of paper to are the 20 year olds just starting out on that Great Life Adventure of saving for their drooling years.

From the pensions point of view the existence of the stock market is to allow us to sell our savings as encapsulated in those second hand pieces of paper. And that’s it.

Now, sure, a deep and liquid market in those pieces of paper increases the value of those companies, making it easier to attract new capital if a company should wish to. Further, it’s worth making new companies to then sell into that market the higher share prices are. So, if we stop people investing their pensions in second hand pieces of paper then other people will invest less in the creation of real assets. But that “new capital, new assets” thing is, from the pensions point of view, entirely secondary.

And there is also this about his solution:

From 6 April next year, 25% of all contributions into pension arrangements must be invested in financial instruments that can be directly shown to create either new jobs or new social opportunities within the UK.

This government will issue appropriate bonds for this purpose, and it is expected that pension funds will be major subscribers to them. The financial sector will, of course, be able to offer alternative investments — but only if they meet a strict, legally defined social-purpose test, or taxonomy.

So, as we reduce the amount of buying of second hand pieces of paper from old savers by young shavers we will be reducing the market price of shares and thus the incentives to make investments in new assets to then sell. Well done.

And switching all of this to bonds doesn’t change the base problem at all. Because when the by then old holders of those bonds want their pensions they still have to be able to sell the bonds in order not to get their meat ration from the cat food aisle. It’s still necessary for someone to step up and buy the old bonds. Or, if you prefer, the bonds are fully repaid which sucks the capital out of investment and into consumption in exactly the same way.

So the plan is to cock the entire pension system to no benefit at all - all driven by the ignorance of the Sage of Ely. He just doesn’t get that the markets in secondary investments exist so that pensions work.

Then there’s that bank deposit - and by implication cash savings - idea as well. Again he’s simply not getting the most basic points.

Lloyds pays £19 billion a year in interest to depositors. That’s 19 billion reasons banks do require deposits. The reason they do? Sure, banks create credit when they lend, they lend before they gain the funding for the lending they’re making. But they must attract the deposits for that day’s lending by 4.30 that afternoon. If they cannot then they’re bust - this is how Northern Rock went bust. They did not have sufficient deposits to cover the loans they’d made. So, they were bust - a bank’s books must balance, d’ye see?

Cash savings are not dead money - they’re the deposits that finance the banks’ loan books.

Tossery built upon ignorance. Richard Murphy - that Sage of Ely - is one of the few people in the country able to proffer up budget ideas even worse than the ones we’re going to get from Rachel this week.