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Post by equivocal on Sept 20, 2024 13:25:38 GMT
But they are also created in the process of deficit spending.
Again:
The govt, whether in surplus or deficit, spends by instructing its central bank to credit the payees' bank's reserve account, so that bank can credit the payee's account and clear her transactions without depleting its reserves.
Taxation is that in reverse.
If the govt runs a deficit, i.e. spends more than it taxes, it creates additional reserves in the banking system as well as additional £s in payees' accounts. Bond sales drain the additional reserves in the banking system, but not the £s in payees' accounts.
But the additional CB reserves created are simply replacing the CB reserves removed when the gilts are purchased. Similarly the additional pounds in the payee accounts are simply replacing the pounds spent by the domestic gilt purchasers.
Normally, if I pay you £10 and your bank is not the same bank as my bank, there will be a movement in my bank's CB reserve account to your CB reserve account, but there is no net movement in CB reserves. When gilts are purchased, central bank reserves fall then when price for those gilts is spent into the economy the reserves are restored - no new net CB reserves are created and the net effect on money supply is zero.
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Post by brownlow on Sept 20, 2024 14:34:51 GMT
But they are also created in the process of deficit spending.
Again:
The govt, whether in surplus or deficit, spends by instructing its central bank to credit the payees' bank's reserve account, so that bank can credit the payee's account and clear her transactions without depleting its reserves.
Taxation is that in reverse.
If the govt runs a deficit, i.e. spends more than it taxes, it creates additional reserves in the banking system as well as additional £s in payees' accounts. Bond sales drain the additional reserves in the banking system, but not the £s in payees' accounts.
But the additional CB reserves created are simply replacing the CB reserves removed when the gilts are purchased. Similarly the additional pounds in the payee accounts are simply replacing the pounds spent by the domestic gilt purchasers.
Normally, if I pay you £10 and your bank is not the same bank as my bank, there will be a movement in my bank's CB reserve account to your CB reserve account, but there is no net movement in CB reserves. When gilts are purchased, central bank reserves fall then when price for those gilts is spent into the economy the reserves are restored - no new net CB reserves are created and the net effect on money supply is zero.
Well, kinda. The CB reserves created by deficit spending are drained by bond sales. Regardless of the order of operations, no net change in the quantity of reserves in the banking system subsequent to defict spending/bond sales, as you seem to agree. Yet payees are still up by the amount govt has spent in excess of tax revenues. "Domestic guilt purchasers" (or foreign, for that matter) can only buy govt bonds with central bank reserves. If you rock up to the DMO with a bag of cash or gold, they will not sell you a bond. They'll tell you to go through a financial institution with a CB reserve account so that they can debit it. And there are always enough reserves in the banking system to buy all the bonds issued, precisely because deficit spending increases the quantity of reserves in the banking system to match subsequent bond issuance. If increases in broad money (the £s households and firms have in bank accounts) were offset by decreases in base money (CB reserves), then deficit spending would be, if anything, deflationary. |
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Post by equivocal on Sept 20, 2024 15:01:27 GMT
But the additional CB reserves created are simply replacing the CB reserves removed when the gilts are purchased. Similarly the additional pounds in the payee accounts are simply replacing the pounds spent by the domestic gilt purchasers.
Normally, if I pay you £10 and your bank is not the same bank as my bank, there will be a movement in my bank's CB reserve account to your CB reserve account, but there is no net movement in CB reserves. When gilts are purchased, central bank reserves fall then when price for those gilts is spent into the economy the reserves are restored - no new net CB reserves are created and the net effect on money supply is zero.
Well, kinda. The CB reserves created by deficit spending are drained by bond sales. Regardless of the order of operations, no net change in the quantity of reserves in the banking system subsequent to defict spending/bond sales, as you seem to agree. Yet payees are still up by the amount govt has spent in excess of tax revenues. "Domestic guilt purchasers" (or foreign, for that matter) can only buy govt bonds with central bank reserves. If you rock up to the DMO with a bag of cash or gold, they will not sell you a bond. They'll tell you to go through a financial institution with a CB reserve account so that they can debit it. And there are always enough reserves in the banking system to buy all the bonds issued, precisely because deficit spending increases the quantity of reserves in the banking system to match subsequent bond issuance. If increases in broad money (the £s households and firms have in bank accounts) were offset by decreases in base money (CB reserves), then deficit spending would be, if anything, deflationary. Exactly. Buying gilts reduce central bank reserves and spending the proceeds (deficit spending financed through gilt issuance) increases them The two net to zero. Deficit spending financed by gilts should only result in inflation if it causes an increase in demand not matched by supply - all else being equal.
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Post by brownlow on Sept 20, 2024 15:06:17 GMT
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Post by equivocal on Sept 20, 2024 15:17:42 GMT
There is no issue that the money supply increases when deficit spending financed through the central bank and not through bebt issuance (selling gilts) to the private sector
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Post by brownlow on Sept 20, 2024 16:02:37 GMT
There is no issue that the money supply increases when deficit spending financed through the central bank and not through bebt issuance (selling gilts) to the private sector
Not sure what you mean there. If you dispute that " The UK Govt creates new money and purchasing power when it undertakes expenditure, rather than spending being financed by taxation from, or debt issuance to, the private sector." then you are at issue with the findings of the study, surely? |
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Post by equivocal on Sept 20, 2024 16:30:53 GMT
There is no issue that the money supply increases when deficit spending financed through the central bank and not through bebt issuance (selling gilts) to the private sector
Not sure what you mean there. If you dispute that " The UK Govt creates new money and purchasing power when it undertakes expenditure, rather than spending being financed by taxation from, or debt issuance to, the private sector." then you are at issue with the findings of the study, surely? No. Deficit spending by government facilitated by a line of credit from the central bank unquestionably increases the money supply. Deficit spending facilitated by the sale of gilts does not.
Does government borrowing create new money?
In most cases the process of government borrowing does not create any new money. While most individuals and businesses accept bank deposits in payment, the UK government does not; they require that the purchasers of new bonds ‘settle’ the transaction by transferring central bank reserves (see The Three Types of Money) into a government-owned account at the Bank of England. This means that new money is not created in the process of government borrowing.
For example, let’s say a pension fund holds an account at MegaBank, and wishes to buy £1 million in government bonds. The fund asks MegaBank, which is one of the Gilt-Edged Market Makers (a bank authorized to deal directly with the government in the purchase of new bonds), to buy £1 million of new government bonds. MegaBank decreases the pension fund’s account by £1 million and then purchases the bonds on behalf of the pension fund. To settle its transaction with the government, it transfers £1 million of reserves to the government’s account at the Bank of England. The balance of MegaBank’s account at the Bank of England will drop by £1 million. The government now has £1 million of central bank reserves in its account at the Bank of England, which can be used to make payments. It has borrowed the money without any additional deposits being created.
To spend the money it could now transfer the reserves to Regal Bank where an NHS hospital holds an account. Regal bank would then receive £1 million of central bank reserves, and could increase the account balance of the hospital by £1 million.
So through a rather convoluted process, £1 million of bank-created bank deposits have been taken from pension fund contributors and passed to an NHS hospital. No additional money has been created; only pre-existing deposits have been moved from one place to another. Because the majority of government borrowing is done in this way it does not constitute a monetary stimulus to the economy.
link - Not from acad emia per se, but it saves me explaining again.
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Post by dappy on Sept 20, 2024 16:46:49 GMT
It’s the quantitive easing process that takes some getting your head around.
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Post by brownlow on Sept 20, 2024 18:51:41 GMT
Not sure what you mean there. If you dispute that " The UK Govt creates new money and purchasing power when it undertakes expenditure, rather than spending being financed by taxation from, or debt issuance to, the private sector." then you are at issue with the findings of the study, surely? No. Deficit spending by government facilitated by a line of credit from the central bank unquestionably increases the money supply. Deficit spending facilitated by the sale of gilts does not.
Does government borrowing create new money?
In most cases the process of government borrowing does not create any new money. While most individuals and businesses accept bank deposits in payment, the UK government does not; they require that the purchasers of new bonds ‘settle’ the transaction by transferring central bank reserves (see The Three Types of Money) into a government-owned account at the Bank of England. This means that new money is not created in the process of government borrowing.
For example, let’s say a pension fund holds an account at MegaBank, and wishes to buy £1 million in government bonds. The fund asks MegaBank, which is one of the Gilt-Edged Market Makers (a bank authorized to deal directly with the government in the purchase of new bonds), to buy £1 million of new government bonds. MegaBank decreases the pension fund’s account by £1 million and then purchases the bonds on behalf of the pension fund. To settle its transaction with the government, it transfers £1 million of reserves to the government’s account at the Bank of England. The balance of MegaBank’s account at the Bank of England will drop by £1 million. The government now has £1 million of central bank reserves in its account at the Bank of England, which can be used to make payments. It has borrowed the money without any additional deposits being created.
To spend the money it could now transfer the reserves to Regal Bank where an NHS hospital holds an account. Regal bank would then receive £1 million of central bank reserves, and could increase the account balance of the hospital by £1 million.
So through a rather convoluted process, £1 million of bank-created bank deposits have been taken from pension fund contributors and passed to an NHS hospital. No additional money has been created; only pre-existing deposits have been moved from one place to another. Because the majority of government borrowing is done in this way it does not constitute a monetary stimulus to the economy.
link - Not from acad emia per se, but it saves me explaining again.
Then we're in violent agreement. That's very much what I've been saying.
"Deficit spending by government facilitated by a line of credit from the central bank unquestionably increases the money supply. Deficit spending facilitated by the sale of gilts does not."BINGO. ALL government spending, whether government is in deficit or surplus, proceeds from a line of credit from the central bank. As I said. Net - "deficit" - spending by government therefore certainly increases the money supply. As I said. So-called "borrowing" i.e. bond issuance matching the government's deficit is a synthetic add-on which merely rebalances the portfolio of bonds/reserves/regular £s among financial institutions in order to facilitate monetary policy, i.e. interest rate tinkering by central banks. As I said. My claim was that "For a money economy to grow, there must be a source of additional money (otherwise you have deflation) and the only legal sources are net ("deficit") govt spending and commercial bank credit licensed by govt" Not so-called govt "borrowing", which is misleading misnomer and hasn't really "funded" government spending since the gold standard. |
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Steve
Hero Protagonist
Posts: 3,433
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Post by Steve on Sept 20, 2024 19:03:19 GMT
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Post by equivocal on Sept 20, 2024 19:23:11 GMT
No. Deficit spending by government facilitated by a line of credit from the central bank unquestionably increases the money supply. Deficit spending facilitated by the sale of gilts does not.
Does government borrowing create new money?
In most cases the process of government borrowing does not create any new money. While most individuals and businesses accept bank deposits in payment, the UK government does not; they require that the purchasers of new bonds ‘settle’ the transaction by transferring central bank reserves (see The Three Types of Money) into a government-owned account at the Bank of England. This means that new money is not created in the process of government borrowing.
For example, let’s say a pension fund holds an account at MegaBank, and wishes to buy £1 million in government bonds. The fund asks MegaBank, which is one of the Gilt-Edged Market Makers (a bank authorized to deal directly with the government in the purchase of new bonds), to buy £1 million of new government bonds. MegaBank decreases the pension fund’s account by £1 million and then purchases the bonds on behalf of the pension fund. To settle its transaction with the government, it transfers £1 million of reserves to the government’s account at the Bank of England. The balance of MegaBank’s account at the Bank of England will drop by £1 million. The government now has £1 million of central bank reserves in its account at the Bank of England, which can be used to make payments. It has borrowed the money without any additional deposits being created.
To spend the money it could now transfer the reserves to Regal Bank where an NHS hospital holds an account. Regal bank would then receive £1 million of central bank reserves, and could increase the account balance of the hospital by £1 million.
So through a rather convoluted process, £1 million of bank-created bank deposits have been taken from pension fund contributors and passed to an NHS hospital. No additional money has been created; only pre-existing deposits have been moved from one place to another. Because the majority of government borrowing is done in this way it does not constitute a monetary stimulus to the economy.
link - Not from acad emia per se, but it saves me explaining again.
Then we're in violent agreement. That's very much what I've been saying.
"Deficit spending by government facilitated by a line of credit from the central bank unquestionably increases the money supply. Deficit spending facilitated by the sale of gilts does not."BINGO. ALL government spending, whether government is in deficit or surplus, proceeds from a line of credit from the central bank. As I said. Net - "deficit" - spending by government therefore certainly increases the money supply. As I said. So-called "borrowing" i.e. bond issuance matching the government's deficit is a synthetic add-on which merely rebalances the portfolio of bonds/reserves/regular £s among financial institutions in order to facilitate monetary policy, i.e. interest rate tinkering by central banks. As I said. My claim was that "For a money economy to grow, there must be a source of additional money (otherwise you have deflation) and the only legal sources are net ("deficit") govt spending and commercial bank credit licensed by govt" Not so-called govt "borrowing", which is misleading misnomer and hasn't really "funded" government spending since the gold standard. If we are agreed on the statement I've emboldened above, I think there must be a nomenclature based misunderstanding. The only explanation I can come up with is that your net-deficit is different from the deficit as recorded in the government's accounts. If your net-deficit is the movement in net amount due from government to the central bank (the counter entry for which being the amount of increase in credit to CB reserves), then we agree. This, of course, is a form of QE and suffers with the difficulty in the central bank signalling interest rates. |
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Post by brownlow on Sept 22, 2024 12:14:30 GMT
Then we're in violent agreement. That's very much what I've been saying.
"Deficit spending by government facilitated by a line of credit from the central bank unquestionably increases the money supply. Deficit spending facilitated by the sale of gilts does not."BINGO. ALL government spending, whether government is in deficit or surplus, proceeds from a line of credit from the central bank. As I said. Net - "deficit" - spending by government therefore certainly increases the money supply. As I said. So-called "borrowing" i.e. bond issuance matching the government's deficit is a synthetic add-on which merely rebalances the portfolio of bonds/reserves/regular £s among financial institutions in order to facilitate monetary policy, i.e. interest rate tinkering by central banks. As I said. My claim was that "For a money economy to grow, there must be a source of additional money (otherwise you have deflation) and the only legal sources are net ("deficit") govt spending and commercial bank credit licensed by govt" Not so-called govt "borrowing", which is misleading misnomer and hasn't really "funded" government spending since the gold standard. If we are agreed on the statement I've emboldened above, I think there must be a nomenclature based misunderstanding. The only explanation I can come up with is that your net-deficit is different from the deficit as recorded in the government's accounts. If your net-deficit is the movement in net amount due from government to the central bank (the counter entry for which being the amount of increase in credit to CB reserves), then we agree. This, of course, is a form of QE and suffers with the difficulty in the central bank signalling interest rates. I suspect the confusion is over whether, in practice, "deficit spending facilitated by the sale of gilts" is even a thing. As the UCL study I cited shows, all govt spending (whether govt is in surplus or deficit) is now facilitated by intraday central bank credit, while bond sales serve other purposes. The example you cited is of bond sales, i.e. asset swaps but no additional net financial assets created, as I said. For there to be a £million of govt bonds for sale, the govt will have (or will imminently) run a £million deficit. That deficit spending creates a £million in payees' accounts and a £million of reserves in the banking system. It's that last step which many econ texts miss, as the authors still think customer deposits are banks' assets, and reserves are some retained fraction thereof. Customer deposits are banks' liabilites for which the balancing assets are banks' reserve deposits at the central bank. The reserves removed by bond sales, per your example, offset the reserves created by deficit spending (which actually the purpose of bond sales in a fiat money system), while the payees still have additional broad money in their accounts. Here's a step-by-step showing the double entries:
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Post by equivocal on Sept 22, 2024 12:32:30 GMT
If we are agreed on the statement I've emboldened above, I think there must be a nomenclature based misunderstanding. The only explanation I can come up with is that your net-deficit is different from the deficit as recorded in the government's accounts. If your net-deficit is the movement in net amount due from government to the central bank (the counter entry for which being the amount of increase in credit to CB reserves), then we agree. This, of course, is a form of QE and suffers with the difficulty in the central bank signalling interest rates. I suspect the confusion is over whether, in practice, "deficit spending facilitated by the sale of gilts" is even a thing. As the UCL study shows, all govt spending (whether govt is in surplus or deficit) is now facilitated by intraday central bank credit, while bond sales serve other purposes. The example you cited is of bond sales, i.e. asset swaps but no additional net financial assets created, as I said. For there to be a £million of govt bonds for sale, the govt will have (or will imminently) run a £million deficit. That deficit spending creates a £million in payees' accounts and a £million of reserves in the banking system. It's that last step which many econ texts miss, as the authors still think customer deposits are banks' assets, and reserves are some retained fraction thereof. Cutomer deposits are banks' liabilites for which the balancing assets are banks' reserve deposits at the central bank. The reserves removed by bond sales, per your example, offset the reserves created by deficit spending (which actually the purpose of bond sales in a fiat money system), while the payees still have additional money in their accounts. Here's a step-by-step showing the double entries:
I am familiar with the double entries involved, thank you.
If you prefer to consider deficit spending as creating 'new money' which is removed through new gilt issues, it is a matter of perspective. The fact is, it is not the way the DMO operates, it schedules its gilt auctions to fund redemptions and expected government deficits. (ref, the recent articles suggesting an additional £13bn headroom.). Moreover, while the CB can step in to fund any under subscription of auctions or set floors in the short term, bond auctions being consistently under subscribed would inevitably result in a reduction in the value of sterling, increased interest rates and inflation - unless the same is happening in other advanced economies.
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Steve
Hero Protagonist
Posts: 3,433
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Post by Steve on Sept 22, 2024 14:13:02 GMT
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Post by Zany on Sept 22, 2024 18:47:26 GMT
Hi you all.
My wife says the BofE have found £10Bn to help the government. She can't remember details and I can't find anything.
Can you shed any light on this?
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