An Investment Analyst responds to the Greens

An Investment Analyst using the twitter handle James (Type for Victory) has a twitter thread up responding to the seductive fantasy economics currently promoted by the Green party leadership.

"MMT" refers to the "Magic Money Tree" idea that governments can somehow magically create wealth by telling banks to do so and that increased government spending can fund itself by bringing unused resources into play.

Here is James's thread:

  

"Right, let's crack the MMT free lunch and "well ackchually" stuff. How do gilt markets actually work, why do we need them, and what are the implications of Polanski's policy?

Gilts

1. Treasury spending creates new bank reserves at the BoE. Without gilt issuance to drain them, the banking system ends up with a permanent surplus.

2. A structural surplus pushes overnight rates to zero unless the BoE pays interest on reserves. So you either sell gilts or remunerate reserves. There isn’t a third option if you want a functioning money market.

3. Gilts aren’t optional. They provide duration and collateral, and they anchor the entire sterling yield curve that mortgages, corporate borrowing, pensions and infrastructure finance rely on. Abolish gilts and you simply replace them with interest-bearing BoE liabilities.

4. Government can choose how much to borrow, but not the price. To “set” gilt yields you would need monetary financing and the abandonment of the inflation target. Markets would respond with higher long rates, not lower.

5. The UK is especially exposed: external deficits, persistent inflation, a large foreign investor base and a financial system built around long-dated sterling assets. We are not Japan.

6. The ultimate trade off is inflation. If you just issue more money, it creates inflation expectations. The currency falls - and as net importers, we are heavily exposed. Consumers face higher costs without commensurate pay rises.

On Polanski’s points themselves:

1. The idea that “democracy” should override gilt markets misunderstands what markets are doing. They aren’t making moral judgements, they’re pricing inflation and institutional risk. If investors see weaker fiscal discipline or blurred lines between Treasury and BoE, they demand a higher yield. That feeds straight through into mortgages, business borrowing and public-sector financing. It isn’t a veto – it’s a cost.

2. Saying “just issue more debt to invest” assumes the marginal pound delivers returns above the marginal cost of capital. If gilt yields rise because credibility slips, the hurdle rate rises with it. At some point the government ends up funding low-return projects with high-cost borrowing, and the maths breaks.

3. Claiming markets “can’t stop governments borrowing” ignores the rollover problem. The UK refinances huge volumes every year. If long yields drift to 6–7%, debt service expands mechanically, even if you don’t borrow a penny more. That squeezes out exactly the public services and investment programmes he says he wants to protect.

4. Suggesting we can simply stop paying interest on reserves is a hidden tax on the banking system. Banks respond by lowering deposit rates, widening lending spreads or cutting credit availability. You save the Treasury some money but households and firms pay the bill instead. And without remunerated reserves, the BoE loses precise control of overnight rates unless it goes back to large, frequent market operations.

5. Treating gilts as a political inconvenience ignores the fact the entire sterling yield curve depends on them. Undermine the credibility of gilt issuance and you raise the cost of mortgages, commercial property finance, council borrowing, infrastructure funding and pension liabilities. It hits the real economy long before it hits “the rich”.

The claimed benefits – cheaper funding, larger investment, more fiscal room – only hold if inflation expectations, the currency and the yield curve remain stable. Undermine that stability, and the programme backfires quickly: higher borrowing costs, weaker investment, pressure on public services and a loss of monetary credibility.

The risk isn’t that “markets stop democracy”. It’s that bad macroeconomics makes everything more expensive for the very people he says he wants to help.

The issue with MMT is that it's an extremely convoluted way of explaining stuff without really changing the end result.

Does govt financing work like a household? No. I'd liken it to a business instead, but you end up at broadly similar constraints with far fewer steps.

The UK’s problem is simple: we don’t generate enough productive output to pay for what we consume. We run persistent trade deficits and rely on foreign capital to fund them, which leaves us exposed to currency swings, higher borrowing costs and external shocks.

That’s why talk of shrinking the City or squeezing high-value sectors is so reckless. Someone has to earn the foreign currency that pays for our energy, food, manufactured goods and technology. In Britain, that work is done by a shrinkong group of exporters: advanced manufacturing, aerospace, pharmaceuticals, higher education and the City. Weaken them and you weaken the currency and raise import costs for everyone else.

Pushing the economy further towards domestic, non-tradable services and a swelling public sector is dangerous. Domestic services don’t earn foreign currency; the public sector doesn’t export. If they grow faster than the tradable sector, the export base becomes too narrow to support our consumption and we become even more dependent on volatile capital inflows.

The only durable solution is higher productivity. More output per worker means lower unit costs, better wages and stronger competitiveness abroad. It also strengthens the tax base without raising taxes.

To get there we need to cut input costs and clear bottlenecks: planning reform, simpler taxes, predictable rules, and investment in nuclear, freight rail, ports, logistics, fibre and 5G. And we need a modern, efficient state - digitisation, automation, and estates that don’t consume ever more labour and funding.

That’s the kind of public investment that raises productivity and widens the export base. It makes it easier to produce, innovate and sell abroad.

The alternative – higher taxes on productive sectors, more public hiring and greater reliance on non-tradable services – shrinks the part of the economy that pays for our imports while expanding the parts that depend on it. Over time that erodes the currency, raises living costs and forces deeper cuts or higher taxes just to stand still.

A credible economic strategy has to make the UK a better place to produce and export. Everything else is redistribution without growth – and redistribution doesn’t last when the productive base keeps shrinking.

“What about borrowing to invest?”

Borrowing to invest is, in principle, good. But there are a few questions you need to ask: what’s the cost of capital (CC)? What tangible thing are you getting? And what’s the return on investment (ROI)?

Cost of capital: your borrowing rate matters. If rates are extremely low (Japan), you can borrow more as repayments are low. As rates rise, you can’t do that. So it becomes crucial that the debt is financing real stuff you get to keep if you have to turn off the taps for a while.

Tangible stuff: the big issue is definition drift. When politicians say “investment”, they often lump together two completely different things:

Capex - building/buying an asset

Opex - raising headcount or expanding day-to-day services

One is capital formation; the other is current spending. Blurring them is how you drift into structural deficits.

Real investment means you end up with something you own - a physical or digital asset, new infrastructure, an upgraded estate, technology that reduces long-run costs. You can fund that with debt because the asset lasts longer than the liability. Think power stations, port upgrades, freight corridors, modernised courts and prisons. Nuclear gets a bonus because once built, its operating costs are trivially low compared with alternatives.

The temptation is obvious: raising taxes hurts; cutting spending hurts. Stuffing opex into the “investment” column looks painless in the short term, but it’s devastating in the long term because it crowds out the tangible stuff. Bridges, ports and rail upgrades don’t sound as emotionally satisfying as “2,000 more nurses for the NHS”, but one is an asset and the other is simply a larger payroll.

Hiring more staff, expanding welfare, etc, may have some positive spillovers, but they create an ongoing liability without a matching rise in tax base. That steadily widens the fiscal mismatch.

Return on investment: An investment needs to pay for itself in some way. It either reduces long-term costs (digitisation, automation, modern estates), lowers input costs across the whole economy (nuclear, ports, freight, fibre), or generates direct revenues.

So what would REAL "investing in our NHS" look like? A new hospital wing that cuts headcount need through automation. A modern IT system that ends duplicated admin. A CT scanner that clears bottlenecks. Even onsite staff accommodation, if it improves retention/productivity decades. That’s investment. “More nurses” or "higher wages" is opex, whether you think that'll boost productivity or not. Companies don't get to pass wage rises through their capex line for good reason.

A simple test: if next year you cut the capital budget to zero and the thing still functions, it’s real investment.

If it collapses, you weren’t investing – you were hiding recurring spending in the capital line.. The power station keeps generating, a port retains its physical capacity, the new rail line is still there. Next year's money would have just built *another* line/plant, etc. (ignoring depr/amort for ease of explanation)

Feast & famine in capex is a disaster, don't get me wrong, and not something I'm advocating. But the principle is that you've not dressed opex up.

Should also emphasise that opex *can* be a net positive. In business terms, hiring a new salesperson costing £100k who drives £300k operating profit is a great 'investment' but it's still opex. There's a whole different argument on which bits actually drive growth, though (see the growing problem in the last post about the build-up of inward-looking services squeezing out exports.)

As for Keynes - Keynesianism is borrowing to build productive capital during downturns, and running surpluses (or very small deficits) in good years to offset it. It’s not endlessly expanding services and disguising permanent opex as “investment”. That’s just how you turn a cyclical deficit into a structural one.

Btw, yields on govt debt usually aren't about credit risk (default / not paying back). Far more driven by currency and inflation expectations.

Ie if you think inflation will be 5% then you need 7% nominal to get a 2% real."