Steve
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Post by Steve on Sept 18, 2024 18:01:12 GMT
Surely it depends on who is buying those government gilts and what money they are using. If the Bank of England is buying them from money it has just made up (as in 2016) then the money supply increases - and inflation results
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Post by equivocal on Sept 18, 2024 18:13:13 GMT
Surely it depends on who is buying those government gilts and what money they are using. If the Bank of England is buying them from money it has just made up (as in 2016) then the money supply increases - and inflation results Yes, as discussed earlier in the thread, if the BoE creates money in the form of central bank reserves, then the money supply increases.
Outside that type of operation, central bank reserves remain unchanged (see above) and there should be no change to the money supply if there is an increase in gilts to fund deficit spending. (all subject to how gilts might be used/recognised??)
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Steve
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Post by Steve on Sept 18, 2024 18:25:03 GMT
But then there is the Fiat money effect
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Post by equivocal on Sept 18, 2024 18:36:22 GMT
But then there is the Fiat money effect I am not familiar with the term - could you expand, please.
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Steve
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Post by Steve on Sept 18, 2024 21:18:05 GMT
I used the wrong term, apologies. I meant when banks advance loans etc levered off the money they have as deposits or other securities (eg gilts). Since the latter is (usually) a multiple of the former it adds to the money supply. (Fiat money is money not backed by gold etc. www.investopedia.com/terms/f/fiatmoney.asp )
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Post by brownlow on Sept 19, 2024 7:50:30 GMT
Pro Boards doesn't do post numbers
Indeed, hence I say govt should target a modest deficit in normal times. Not permanent pandemic levels. If a doctor tells you you're salt deficient, she doesn't mean you should eat a sackful every day.
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Post by brownlow on Sept 19, 2024 8:13:19 GMT
You're not missing anything obvious. The monetary and banking system is layer upon layer of obfuscation - and not by accident. Non-bank financial institutions buying bonds swap regular £s for interest-bearing £s, i.e. bonds (regular £s are zero interest treasury bonds). The bonds aren't counted in broad money aggregates since they're ostensibly savings vehicles which take regular £s out of circulation until maturity, offsetting the £s govt has spent in. That might have been true back in the day, but financial institutions by now use the bonds as money, in preference to regular £s, as easily as you or I buy stuff on Amazon. Not sure what you mean by the foreign investors part. Are you saying that, in fact, gilts should be included as part of the money supply and that, in reality, there is no transfer from private sector to the public sector when new gilts (to finance deficit spending) are issued in the domestic market? If that were the case (no net transfer), then how can deficit spending balance the reduction in money supply caused by the trade deficit without the issue of gilts to foreign investors?
I presume I've misinterpreted your reply?
EDIT: As you were, if gilts are considered as equivalent to central bank reserves, which I guess they can if used by financial institutions to settle liabilities, then I can see how deficit spending could balance trade deficits and 'nominally' increase the money supply.
Is that the theory?
I'd say it doesn't matter whether the bonds are counted as money. Net private sector financial assets increase as a result of govt deficit spending, as is clear in sectoral balances. The payees - households and firms - get plain old £s in their accounts. For every £ a payee gets, a bank's reserve account at the central bank is marked up by a £. For the financial institutions, it's just an asset swap - a rebalance in their portfolios of reserves/bonds/plain old £s, depending whether they're banks and what the central bank's up to. Otherwise, no amount of deficit spending would be inflationary. Or stimulative. Perhaps I should, strictly, have said "net private sector financial assets" increase, but jargon like that makes a confusing topic incomprehensible. I'm trying to illustrate, to those who aren't familiar with sectoral balances, the corollary - a govt surplus causes net private financial assets to decrease.
The less the govt is in debt, the more everyone else is. If we want growth, the govt should target a deficit at a non-accelerating rate of inflation.
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Steve
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Post by Steve on Sept 19, 2024 8:22:45 GMT
Pro Boards doesn't do post numbers Indeed, hence I say govt should target a modest deficit in normal times. Not permanent pandemic levels. If a doctor tells you you're salt deficient, she doesn't mean you should eat a sackful every day.
I think we agree. Any deficit should normally be below the GDP growth so the debt:GDP ratio declines in normal times allowing for the occasional emergency
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Post by equivocal on Sept 19, 2024 8:34:00 GMT
I'd say it doesn't matter whether the bonds are counted as money. Net private sector financial assets increase as a result of govt deficit spending, as is clear in sectoral balances. The payees - households and firms - get plain old £s in their accounts. For every £ a payee gets, a bank's reserve account at the central bank is marked up by a £. For the financial institutions, it's just an asset swap - a rebalance in their portfolios of reserves/bonds/plain old £s, depending whether they're banks and what the central bank's up to. Otherwise, no amount of deficit spending would be inflationary. Or stimulative. Perhaps I should, strictly, have said "net private sector financial assets" increase, but jargon like that makes a confusing topic incomprehensible. I'm trying to illustrate, to those who aren't familiar with sectoral balances, the corollary - a govt surplus causes net private financial assets to decrease. The less the govt is in debt, the more everyone else is. If we want growth, the govt should target a deficit at a non-accelerating rate of inflation.
Thanks. I thought there may be some new money supply theory floating about that had passed me by.
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Post by brownlow on Sept 19, 2024 13:47:51 GMT
Indeed, hence I say govt should target a modest deficit in normal times. Not permanent pandemic levels. If a doctor tells you you're salt deficient, she doesn't mean you should eat a sackful every day.
I think we agree. Any deficit should normally be below the GDP growth so the debt:GDP ratio declines in normal times allowing for the occasional emergency Kinda. I'd say the constraint is inflation. Keep spending beyond potential GDP, and you get inflation rather than growth. Before that point, if you keep reducing the deficit to below GDP growth, GDP growth will keep reducing (since govt spending is a component of GDP) and you'll always be lagging potential GDP. It's a balancing act.
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