Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Aug 24, 2024 10:58:16 GMT
Greece was only rescued because it was part of the Euro club and even then it was made to pay a high price for its years of spending more than it was earning. The death spiral mechanism is still very true. When the markets realised Greece was never going to reform its ways, its credit rating fell.. As a result no one would loan it even more money at preferential interest rates, anything but. And it needed those further loans to pay the interest on previous loans. It could easily happen here except we are not in the EU or Euro Club so we'd have to go to the IMF who would be very very strict about cutting government spending before getting their cheque book out.
IOW a central bank can impose a price floor on bonds denominated the currency it adminsters, so govt spending isn't ultimately dependent on the whims of bond traders. As I said. Monetary sovereigns like the UK are, therefore, not like Greece. I'll let a Nobel Laureate economist explain it:
"Every country running significant budget deficits – as nearly all were in the aftermath of the financial crisis – was deemed at imminent risk of becoming another Greece unless it immediately began cutting spending and raising taxes. Concerns that imposing such austerity in already depressed economies would deepen their depression and delay recovery were airily dismissed; fiscal probity, we were assured, would inspire business-boosting confidence, and all would be well.
But that was five years ago, and the fever has long since broken. Greece is now seen as it should have been seen from the beginning – as a unique case, with few lessons for the rest of us. It is impossible for countries such as the US and the UK, which borrow in their own currencies, to experience Greek-style crises, because they cannot run out of money – they can always print more. Even within the eurozone, borrowing costs plunged once the European Central Bank began to do its job and protect its clients against self-fulfilling panics by standing ready to buy government bonds if necessary."www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion
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Sure, it's possible to devalue your own currency with too much unproductive spending; but it's also possible with too little productive spending. Our problem is, if anything, the latter. Politicians blaming our chronic underinvestment on the whims of bond traders are dishonest and irresponsible.
(btw, no one borrows their own currency from the IMF, and the UK govt "borrows" exclusively in sterling. Any sterling the IMF has, it got from the UK govt.)
Well yes a central bank can impose bond limits - but it can't impose that anyone has to buy them. And if it can't then you get left with two options: live within what you can raise in taxes or print money. Now sometiems printing money is the right option. It was in in the 2008 crisis and it was in the response to the 2016 refernedum but it has adverse consequences too and isn't something that can be done too often or too deeply. That's a Zimbabwe approach. Keynesian approaches have limits, even Keynes said that. Reeves has inherited a problem, one the Tories tried to hide and in effect liead about. When the OBR are saying forecast borrowing is already being broken then just saying we will borrow or print more or both are reckless approaches. OBR's August warning |
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Post by brownlow on Aug 24, 2024 12:00:20 GMT
IOW a central bank can impose a price floor on bonds denominated the currency it adminsters, so govt spending isn't ultimately dependent on the whims of bond traders. As I said. Monetary sovereigns like the UK are, therefore, not like Greece. I'll let a Nobel Laureate economist explain it:
"Every country running significant budget deficits – as nearly all were in the aftermath of the financial crisis – was deemed at imminent risk of becoming another Greece unless it immediately began cutting spending and raising taxes. Concerns that imposing such austerity in already depressed economies would deepen their depression and delay recovery were airily dismissed; fiscal probity, we were assured, would inspire business-boosting confidence, and all would be well.
But that was five years ago, and the fever has long since broken. Greece is now seen as it should have been seen from the beginning – as a unique case, with few lessons for the rest of us. It is impossible for countries such as the US and the UK, which borrow in their own currencies, to experience Greek-style crises, because they cannot run out of money – they can always print more. Even within the eurozone, borrowing costs plunged once the European Central Bank began to do its job and protect its clients against self-fulfilling panics by standing ready to buy government bonds if necessary."www.theguardian.com/business/ng-interactive/2015/apr/29/the-austerity-delusion
* * * * * * *
Sure, it's possible to devalue your own currency with too much unproductive spending; but it's also possible with too little productive spending. Our problem is, if anything, the latter. Politicians blaming our chronic underinvestment on the whims of bond traders are dishonest and irresponsible.
(btw, no one borrows their own currency from the IMF, and the UK govt "borrows" exclusively in sterling. Any sterling the IMF has, it got from the UK govt.)
Well yes a central bank can impose bond limits - but it can't impose that anyone has to buy them. And if it can't then you get left with two options: live within what you can raise in taxes or print money. Now sometiems printing money is the right option. It was in in the 2008 crisis and it was in the response to the 2016 refernedum but it has adverse consequences too and isn't something that can be done too often or too deeply. That's a Zimbabwe approach. Keynesian approaches have limits, even Keynes said that. Reeves has inherited a problem, one the Tories tried to hide and in effect liead about. When the OBR are saying forecast borrowing is already being broken then just saying we will borrow or print more or both are reckless approaches. OBR's August warningWell no, because they impose a price floor by standing ready to buy bonds at the price floor, which they can do without limit. Printing huge quantities is for emergencies, otherwise you trash your currency. But some net ("deficit") public spending is necessary in normal times unless you have a big trade surplus. If you're running a trade deficit, balancing the budget pushes the private sector (households and corporate) into a net debt position and slows growth. Absent a big trade surplus, a govt deficit is like oil in a car. You always need some and sometimes you need a lot. When you need a lot, the oil itself isn't the problem. Stop putting it in, and the engine will seize. |
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Aug 24, 2024 12:08:09 GMT
Buying bonds at the floor is printing money
I think we largely agree. A small deficit is OK but we disagree on how small is OK and whether what we have now can be made bigger
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Post by brownlow on Aug 24, 2024 13:55:51 GMT
Buying bonds at the floor is printing money I think we largely agree. A small deficit is OK but we disagree on how small is OK and whether what we have now can be made bigger If it's money printing, it's a form of money printing which Greece can't do. I think the limit is Potential GDP : "the value of the output that the economy would have produced if labor and capital were employed at their maximum sustainable rates—that is, rates that are consistent with steady growth and stable inflation".
Not the whims of bond traders. Potential GDP is a physical constraint in the real economy (of production, consumption and employment), which we have been lagging because of artificial financial constraints. Hence nearly two decades of the lowest growth since the industrial revolution. |
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Aug 24, 2024 14:11:15 GMT
What 'artificial financial constraints'
It's just reality that we can't borrow with no limit nor can we print money with no limit and not suffer huge adverse circumstances.
The way to sustainably increase GDP is to have private industry thrive in a way that is not exploitative. It's a hard nut to crack but having sensible money and stable low interest rates is a big part of making that happen.
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Post by brownlow on Aug 24, 2024 14:41:01 GMT
The artificial financial constraint is the idea that we must balance the budget like a household or bond traders will pull the plug (which is demonstrably untrue). No one's saying we can print unlimited quantities of money without consequence.
All money is "printed" in the sense that it originates either from govt-licensed bank credit, or from direct net spending by govt itself (anything else is illegal). We're trying to establish what the limits are.
TBC, that central banks can impose a price floor on bonds because they can buy them without limit doesn't mean they have to buy limitless quantities. It means bond holders will not, then, sell bonds for less, so bond traders can't, then, bid prices down (i.e. yields up). Generally, the commitment alone is enough - as it was even in the case of Greece.
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Aug 24, 2024 15:01:23 GMT
I've not said we must balance the budget. I've said we likely can't unbalance it further.
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Post by brownlow on Aug 24, 2024 15:13:33 GMT
OK, then why not? So far, you've said it's because bond traders will turn us into Greece, which I think we've established isn't true.
Our debt-to-GDP ratio is only at historical average (even including that which the govt "owes" to itself via QE), and nearly the lowest among G7 countries, which are mostly doing better than we are.
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Aug 24, 2024 15:29:02 GMT
OK, then why not? So far, you've said it's because bond traders will turn us into Greece, which I think we've established isn't true. Our debt-to-GDP ratio is only at historical average (even including that which the govt "owes" to itself via QE), and nearly the lowest among G7 countries, which are mostly doing better than we are. How do you figure that? Our debt to GDP ratio was 28% in 2000, now it's 97.6%. The Greece crisis was triggered when theirs hit 110% and they had the ECB to back them out of the abyss. tradingeconomics.com/united-kingdom/government-debt-to-gdptradingeconomics.com/greece/government-debt-to-gdp |
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Post by brownlow on Aug 24, 2024 16:08:01 GMT
Because history didn't start in 2000, and the long-run UK historical average debt/GDP ratio is ~100% (it was 250% when the NHS was created), as it is now among G7 countries, nearly all higher than ours, without triggering Greek-style sovereign debt crises
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Post by brownlow on Aug 24, 2024 18:05:43 GMT
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Post by Zany on Aug 24, 2024 18:29:39 GMT
OK, then why not? So far, you've said it's because bond traders will turn us into Greece, which I think we've established isn't true. Our debt-to-GDP ratio is only at historical average (even including that which the govt "owes" to itself via QE), and nearly the lowest among G7 countries, which are mostly doing better than we are. How do you figure that? Our debt to GDP ratio was 28% in 2000, now it's 97.6%. The Greece crisis was triggered when theirs hit 110% and they had the ECB to back them out of the abyss. tradingeconomics.com/united-kingdom/government-debt-to-gdptradingeconomics.com/greece/government-debt-to-gdpWe've already established our economy is not like Greece. Also debt to GDP at the end of ww2 was 252%. We did not implode. |
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Aug 24, 2024 21:25:16 GMT
OK then our debt to GDP is at massive peacetime levels. Our debt is over 5 times what it was in 2007
After WW2 we had Marshall Aid and still had to keep going to the IMF for bailouts. Anyone that likes our social policies really doesn't want to have to go to the IMF again because they'll demand we cut them.
And yes Greece is different. It had and has the EU and Euro clubs to help it. We don't have either.
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Post by Zany on Aug 25, 2024 7:57:53 GMT
OK then our debt to GDP is at massive peacetime levels. Our debt is over 5 times what it was in 2007 After WW2 we had Marshall Aid and still had to keep going to the IMF for bailouts. Anyone that likes our social policies really doesn't want to have to go to the IMF again because they'll demand we cut them. And yes Greece is different. It had and has the EU and Euro clubs to help it. We don't have either. The classic all or nothing analogy. I'm hoping we don't need to borrow 252% of our GDP to get the economy moving.  But I do think it would help if the health service was back up to speed and the number of people either off work or on reduced work shrunk. That we did build our own renewable energy production and on a scale that made electricity cheap and helped our economy. I agree borrowing/spending your way out of recession has not got a great reputation, but some things can be done. |
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Aug 25, 2024 10:29:38 GMT
Worth remembering how interest rates climbed big time the last time a government announced plans to spend even more money it wasn't going to be able to take in We have run out of ability to fund more wishlists from increasing borrowing or printing  |
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