Could Britain really need another IMF bailout?

The Financial Times has revived memories of 1976, when Britain turned to the International Monetary Fund for financial support. But the circumstances today are fundamentally different, and understanding why tells us something very important about government debt, money and the supposed threat of national bankruptcy.

In this video, I explain what the IMF actually does, why countries sometimes need its help, and why foreign currency debt is crucial to understanding an IMF crisis.

I look back at what happened to Britain in 1976, when sterling was under pressure, foreign currency reserves mattered, and the international monetary system was still adjusting to the collapse of Bretton Woods.

Then I explain why today’s position is different. UK government debt is overwhelmingly denominated in sterling. The UK government creates sterling. A government that owes debt in its own currency faces fundamentally different constraints from a country struggling to obtain dollars to meet foreign currency debts.

That does not mean Britain has no economic problems. High interest rates, inflation, weak investment and struggling public services all matter. But they are not the same thing as government insolvency.

So why revive the spectre of an IMF bailout? And does talk of a financial crisis risk becoming another argument for austerity?

That is what this video is about.

Why should money earn interest simply because somebody owns it? We usually treat interest as a natural and inevitable part of the economy, but in this Understanding Economics video, I question whether that assumption is justified.

Commercial banks do not need to collect deposits before making loans. When a bank lends, it creates new money through its accounting records. The process of creating that money itself costs very little, so why are interest rates often so high, even after allowing for the fact that lending does involve administration and the risk that borrowers will not repay?

That question is especially appropriate when much lending is now virtually risk-free. Interest should not be confused with an investment return. Investment involves taking a genuine risk in the hope of making a profit. Interest, by contrast, is a payment for allowing somebody else to use money for a period of time.

I argue that we should separate the different costs currently bundled together as interest. Borrowers could instead see a basic charge for using money, an administrative charge and a separate premium reflecting the genuine credit risk involved.

This matters because interest rates have significant economic consequences. Higher rates redistribute income towards people who own financial wealth while increasing mortgages, rents and borrowing costs. They can also discourage productive investment and spending on priorities such as the green transition.

I am not arguing that interest should be abolished. I am arguing that the basic interest rate on low-risk money should be close to zero in real terms, while genuine costs and risks should be identified and charged transparently.

Understanding what we are actually paying for would make borrowing clearer, improve competition and help us understand who gains and who loses from the interest rates that shape our economy.

Neoliberalism promised us prosperity, security and freedom through markets. Increasingly, it is delivering insecurity instead. So what does it have left to offer? Fear. And that is it.

We are told to fear government debt. We are told to fear the bond markets. We are told governments must maintain “fiscal credibility”, even when doing so means higher taxes, weaker public services, lower living standards and fewer jobs.

Martin Wolf’s recent arguments in the Financial Times provide an example of this thinking. But the issue is much bigger than one commentator. It is about an economic ideology that treats satisfying financial markets as more important than meeting human need.

The argument rests in part on the household analogy: the claim that governments must finance themselves in much the same way as households do. But a currency-issuing government is not a household. That misunderstanding produces profoundly damaging economic policies.

In this video, I argue that neoliberalism increasingly relies upon fear because its promise of prosperity is failing. When insecurity is already widespread, however, threatening people with more insecurity eventually stops working.

We need another objective for politics: freedom from fear.

That means economic security, decent housing, worthwhile work, healthcare, security in old age and protection from climate change.

Can we build an economics that puts those things before appeasing financial markets? That is the question.