Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Oct 10, 2024 18:40:06 GMT
Only if you constrain the money supply and if you do that with a profligate government then true productive activities are strangled. OK, what spending is "profligate"? Adequately funding healthcare, education and infrastructure? Demonstrably not. . . . When those aims are ill defined then very much not demonstrably not. We already have a significant number of medicines we do not fund on the NHS yet I've no doubt some would say we should as part of adequately funding it. Some might also say we should zero tuition fees and have even more go to university as part of adequately dunding education. Infrastructure? Well not hard to find those whose definition of adequate would include HS2, 3 and 4. A deficit greater than GDP growth either fuels excessive inflation or hurts the private sector. And as neither of those is good so that over a term should be the limit and then live within our means with what money that gives the government. |
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Post by brownlow on Oct 10, 2024 19:48:40 GMT
"Those aims" aren't "ill defined". Public funding of healthcare, education and infrastructure are well defined and have proven long run positive effects on GDP growth, as well as the immediate addition to GDP (the G in GDP = C + G + I + (x-M).
What do you mean by "A deficit greater than GDP growth"?
what you're saying is "ill defined".
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Post by Zany on Oct 10, 2024 20:12:25 GMT
brownlow I copied your last post to my son, here's his synopsis. Is it close. Ok so the only bit I think I can understand is that most government debt is bonds and that the way that works for everyone is essentially that bond buyers are investors in government, hence "debt" is the wrong term Company Inc. buys bonds from the government because they need an asset that will go up in value over time Government sells the bond because they need cash now to make the tangible improvements to the country (i.e. infrastructure) to make economic growth possible (I bet that ruined your son's evening..)
BIB still sounds like the govt runs out of money and borrows in order to spend etc. That isn't what happens. As the UCL study states,
"We find, first, that the UK Government 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."
IOW, the £ is a fiat currency. The UK Government creates £s in the process of spending. It can never run out of £s.
As Alan Greenspan (a fiscal conservative Fed Chairman) once said, "a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit."
While the govt creates all the £s it spends, it doesn't create all the £s we spend. The govt also licenses banks to lend £s into existence, which is where most of the £s we spend come from. Tax payers, however, cannot create £s, and couldn't ultimately fund govt spending with bank credit.
As the papers I've cited explain, the govt taxes and "borrows" for other reasons, having to do with maintaining private sector demand for £s - the value of the currency - and controlling interest rates (draining excess reserves created in the process of deficit spending). However, the banking system now operates with permanent excess reserves and the BoE maintains base rate by paying interest on reserves (basically paying banks not to lend at below that rate). The full funding rule is now redundant, though govt bonds are still necessary as safe collateral for the private financial system.
Getting there. Bond holders are almost never repaid with 'the tax take'. That would entail govt running a surplus, which would actually deplete private sector savings. The bonds are nearly always rolled over (see again the Fed paper). Govt "borrowing" is not like any other sort of borrowing. If you or I borrow from someone else in the private sector, we deplete their savings. If we borrow from a bank, we incur debt, not savings. Govt "borrowing" creates private sector savings (see again sectoral balances) in direct proportion to govt debt.
Thanks Brownlow, I've forwarded on. My sons reply Right so government "borrowing" is essentially it creating money over and above the country's worth (asset and productivity) so essentially it doesn't need paying. I guess the risk of "borrowing" too much is the idea that you might overinflate how much cash is in the country vs how much the country is perceived to be worth. I understand now why the BoE pays interest on monies it holds for the banks. Essentially if BoE pays interest at a certain rate, banks have to lend at more than that rate, otherwise they are better off accumulating interest from BoE on their reserves. That's why no bank lends at less than base, not because they "borrow" the money from BoE The bonds thing is not financially beneficial for the govt, it's simply a means to keep safe money in the economy so people can operate business with less risk (and thus anyone actually does it) and so keep the wheels of the economy moving |
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Oct 10, 2024 20:53:51 GMT
"Those aims" aren't "ill defined". Public funding of healthcare, education and infrastructure are well defined and have proven long run positive effects on GDP growth, as well as the immediate addition to GDP (the G in GDP = C + G + I + (x-M).
What do you mean by "A deficit greater than GDP growth"?
what you're saying is "ill defined".
Moving the goalposts much brownlow. You said ' Adequately funding healthcare, education and infrastructure' and now you want to pretend you never used the word. And what I said is very well defined. If GDP growth is say 2% you can't have a deficit of higher than 2% of spend. Otherwise the Debt:GDP ratio climbs |
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Oct 11, 2024 9:12:29 GMT
Mixed news on GDP today doesn't give any great hopes www.bbc.co.uk/news/articles/c89l52pwwllo The UK returned to growth in August but the "broader picture" is one of a "slowing" economy in recent months, the official statistics body has said.
A bounce back in construction and strong month for accountancy, manufacturers and retail businesses helped boost the economy by 0.2%, after it failed to grow in the previous two months. |
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Post by equivocal on Oct 11, 2024 9:26:07 GMT
I understand now why the BoE pays interest on monies it holds for the banks. Essentially if BoE pays interest at a certain rate, banks have to lend at more than that rate, otherwise they are better off accumulating interest from BoE on their reserves. That's why no bank lends at less than base, not because they "borrow" the money from BoE You will be aware that I don’t think the perspective preferred by brownlow and the authors at UCL is particularly helpful. Not least because it relies on there being excess central bank reserves and by this time next year we will be at the preferred minimum reserve level, i.e. there will be no excess reserves. If I could just take the point above. When banks lend money they do not reduce their reserves at the central bank (have less on reserve or borrow from the BoE), they actually manufacture/print/create new money under licence from the government. When the banks lend, they create a credit in the borrower’s current account and a debit in the borrower’s loan account. The reserves at the central bank remain untouched so, in the sense suggested in your reply, interest rates charged by the banks are unaffected by the rate paid on reserves. The banks’ capacity to manufacture/print/create money is limited by various ratios of its quality assets and its central bank reserves. While the BoE argues that paying interest on reserves is the most efficient way of ‘signalling’ interest rates and ensures liquidity in the banking system, it is a fact that other central banks around the world tier interest payment on reserves and only pay base rate on ‘excess’ reserves with lower or no interest paid on mandatory minimum reserves required to maintain liquidity. I wouldn’t be surprised to see a government mandated change to the system in the forthcoming budget. Certainly, it is unfair for the government to be funding losses on the sale of gilts by the BoE when the banks have already been rewarded in increased interest payments which balances the losses now coming through on the redemption or sale to the market of gilts through quantitative tightening. |
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Post by brownlow on Oct 13, 2024 0:06:55 GMT
(I bet that ruined your son's evening..)
BIB still sounds like the govt runs out of money and borrows in order to spend etc. That isn't what happens. As the UCL study states,
"We find, first, that the UK Government 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."
IOW, the £ is a fiat currency. The UK Government creates £s in the process of spending. It can never run out of £s.
As Alan Greenspan (a fiscal conservative Fed Chairman) once said, "a government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit."
While the govt creates all the £s it spends, it doesn't create all the £s we spend. The govt also licenses banks to lend £s into existence, which is where most of the £s we spend come from. Tax payers, however, cannot create £s, and couldn't ultimately fund govt spending with bank credit.
As the papers I've cited explain, the govt taxes and "borrows" for other reasons, having to do with maintaining private sector demand for £s - the value of the currency - and controlling interest rates (draining excess reserves created in the process of deficit spending). However, the banking system now operates with permanent excess reserves and the BoE maintains base rate by paying interest on reserves (basically paying banks not to lend at below that rate). The full funding rule is now redundant, though govt bonds are still necessary as safe collateral for the private financial system.
Getting there. Bond holders are almost never repaid with 'the tax take'. That would entail govt running a surplus, which would actually deplete private sector savings. The bonds are nearly always rolled over (see again the Fed paper). Govt "borrowing" is not like any other sort of borrowing. If you or I borrow from someone else in the private sector, we deplete their savings. If we borrow from a bank, we incur debt, not savings. Govt "borrowing" creates private sector savings (see again sectoral balances) in direct proportion to govt debt.
Thanks Brownlow, I've forwarded on. My sons reply Right so government "borrowing" is essentially it creating money over and above the country's worth (asset and productivity) so essentially it doesn't need paying. I guess the risk of "borrowing" too much is the idea that you might overinflate how much cash is in the country vs how much the country is perceived to be worth. I'd qualify that by saying it's govt deficit spending that creates private finacial assets. "Borrowing" is an additional procedure which changes the composition of private sector financial assets - basically cash into savings (mostly bonds held by financial institutions which use them as money in preference to cash). I have to say again that it doesn't mean the govt can just spend without limit. No one says that.
Yep, though that could be misinterpreted as thinking banks lend out reserves. Lending doesn't deplete a bank's reserves, but the borrower's spending does. Say the BoE is paying 4% interest on reserves. If Bank A lends at 3%, the borrower buys (say) a house from a Bank B customer, the transaction is settled when reserves are transferred from Bank A's reserve balance to bank B's. Bank A would be left with a risky asset paying 3% interest when it could have sat on a safe asset paying 4%.
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Post by brownlow on Oct 13, 2024 0:10:04 GMT
"Those aims" aren't "ill defined". Public funding of healthcare, education and infrastructure are well defined and have proven long run positive effects on GDP growth, as well as the immediate addition to GDP (the G in GDP = C + G + I + (x-M).
What do you mean by "A deficit greater than GDP growth"?
what you're saying is "ill defined".
Moving the goalposts much brownlow. You said ' Adequately funding healthcare, education and infrastructure' and now you want to pretend you never used the word. And what I said is very well defined. If GDP growth is say 2% you can't have a deficit of higher than 2% of spend. Otherwise the Debt:GDP ratio climbs Then it isn't well understood by me (which could be my fault). I can't tell what you mean by "a deficit of higher than 2% of spend" |
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Post by brownlow on Oct 13, 2024 0:21:09 GMT
I understand now why the BoE pays interest on monies it holds for the banks. Essentially if BoE pays interest at a certain rate, banks have to lend at more than that rate, otherwise they are better off accumulating interest from BoE on their reserves. That's why no bank lends at less than base, not because they "borrow" the money from BoE You will be aware that I don’t think the perspective preferred by brownlow and the authors at UCL is particularly helpful. Not least because it relies on there being excess central bank reserves and by this time next year we will be at the preferred minimum reserve level, i.e. there will be no excess reserves.(...) While the BoE argues that paying interest on reserves is the most efficient way of ‘signalling’ interest rates and ensures liquidity in the banking system, it is a fact that other central banks around the world tier interest payment on reserves and only pay base rate on ‘excess’ reserves with lower or no interest paid on mandatory minimum reserves required to maintain liquidity. I wouldn’t be surprised to see a government mandated change to the system in the forthcoming budget. Certainly, it is unfair for the government to be funding losses on the sale of gilts by the BoE when the banks have already been rewarded in increased interest payments which balances the losses now coming through on the redemption or sale to the market of gilts through quantitative tightening. That's interesting, but I don't see that it makes much difference to the UCL findings, which confirmed what had been an open secret since long before excess reserve liquidiity.
I very much agree about tiered reserves. Rachel Reeves can and should put her foot down. |
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Post by equivocal on Oct 13, 2024 8:32:00 GMT
You will be aware that I don’t think the perspective preferred by brownlow and the authors at UCL is particularly helpful. Not least because it relies on there being excess central bank reserves and by this time next year we will be at the preferred minimum reserve level, i.e. there will be no excess reserves.(...) While the BoE argues that paying interest on reserves is the most efficient way of ‘signalling’ interest rates and ensures liquidity in the banking system, it is a fact that other central banks around the world tier interest payment on reserves and only pay base rate on ‘excess’ reserves with lower or no interest paid on mandatory minimum reserves required to maintain liquidity. I wouldn’t be surprised to see a government mandated change to the system in the forthcoming budget. Certainly, it is unfair for the government to be funding losses on the sale of gilts by the BoE when the banks have already been rewarded in increased interest payments which balances the losses now coming through on the redemption or sale to the market of gilts through quantitative tightening. That's interesting, but I don't see that it makes much difference to the UCL findings, which confirmed what had been an open secret since long before excess reserve liquidiity.
I very much agree about tiered reserves. Rachel Reeves can and should put her foot down. I don't see it as particularly controversial; the paper goes into some detail explaining how and why gilts drain excess liquidity in times of 'minimum' reserves and claims that as there are excess reserves gilts can be viewed as a safe store rather than financing government 'net' spending.
As I've said, if one wishes to look at government spending as creating money followed by that money being drained through taxation and gilt issues as a safe store, that's fine. However, it's not the way the Treasury, the BoE or the DMO look at it. I think the paper understates the power of the money markets and suggests QE is always available with no adverse effects - I don't believe that's true unless the rest of the world is similarly engaged.
None of that is meant to suggest the state should be confused with a household, but I don't find the perspective helpful. Still, we appear to agree on most of the important issues.
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Steve
Hero Protagonist
Posts: 3,698
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Post by Steve on Oct 13, 2024 9:44:26 GMT
Moving the goalposts much brownlow. You said ' Adequately funding healthcare, education and infrastructure' and now you want to pretend you never used the word. And what I said is very well defined. If GDP growth is say 2% you can't have a deficit of higher than 2% of spend. Otherwise the Debt:GDP ratio climbs Then it isn't well understood by me (which could be my fault). I can't tell what you mean by "a deficit of higher than 2% of spend" To be fair it was ambiguous by me. |
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Post by brownlow on Oct 14, 2024 15:27:43 GMT
That's interesting, but I don't see that it makes much difference to the UCL findings, which confirmed what had been an open secret since long before excess reserve liquidiity.
I very much agree about tiered reserves. Rachel Reeves can and should put her foot down. I don't see it as particularly controversial; the paper goes into some detail explaining how and why gilts drain excess liquidity in times of 'minimum' reserves and claims that as there are excess reserves gilts can be viewed as a safe store rather than financing government 'net' spending.
As I've said, if one wishes to look at government spending as creating money followed by that money being drained through taxation and gilt issues as a safe store, that's fine. However, it's not the way the Treasury, the BoE or the DMO look at it. I think the paper understates the power of the money markets and suggests QE is always available with no adverse effects - I don't believe that's true unless the rest of the world is similarly engaged.
None of that is meant to suggest the state should be confused with a household, but I don't find the perspective helpful. Still, we appear to agree on most of the important issues.
I'd say it is very controversial, since it's so at odds with what the public is led to believe - for example, the basis on which austerity was sold to them. Draining excess reserves and running out of money are completely different things. It'd be hard to justify 335,000 excess deaths, and a decade+ of lost growth on the need to drain reserves from the banking system (if ppl even knew what that meant). Especially when that procedure was already redundant. The implications of the actual spending and revenue mechanisms are profound. Far from 'borrowing' private savings, govt deficit spending is the only source (absent a trade surplus) of net private sector savings. Tax payers' money isn't really a thing. All transactions, tax liabilities and bond purchases are ultimately settled with central bank reserve transfers or deletions, and central bank reserves are only created ex nihilo by prior or current net govt spending. As sectoral balances show, absent a trade surplus, tax payers couldn't ultimately fund govt spending with bank credit.
"The power of the money markets" is an artefact of govt's own rule, and nothing to do with obtaining money. Excess reserve liquidity arises for the same reason govt cannot run out of it its own currency.
If someone has to be in debt - and someone does have to be in debt - should it be an immortal entity which issues its own currency and can roll over its debts in perpetuity, or households and firms, which cannot?
I do agree that implementing some other system, especially unilaterally, would be difficult, perhaps prohibitively so. Dunno, Japan's been doing yield curve control for 30 years.
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Post by equivocal on Oct 14, 2024 16:26:59 GMT
I don't see it as particularly controversial; the paper goes into some detail explaining how and why gilts drain excess liquidity in times of 'minimum' reserves and claims that as there are excess reserves gilts can be viewed as a safe store rather than financing government 'net' spending.
As I've said, if one wishes to look at government spending as creating money followed by that money being drained through taxation and gilt issues as a safe store, that's fine. However, it's not the way the Treasury, the BoE or the DMO look at it. I think the paper understates the power of the money markets and suggests QE is always available with no adverse effects - I don't believe that's true unless the rest of the world is similarly engaged.
None of that is meant to suggest the state should be confused with a household, but I don't find the perspective helpful. Still, we appear to agree on most of the important issues.
I'd say it is very controversial, since it's so at odds with what the public is led to believe - for example, the basis on which austerity was sold to them. Draining excess reserves and running out of money are completely different things. It'd be hard to justify 335,000 excess deaths, and a decade+ of lost growth on the need to drain reserves from the banking system (if ppl even knew what that meant). Especially when that procedure was already redundant. The implications of the actual spending and revenue mechanisms are profound. Far from 'borrowing' private savings, govt deficit spending is the only source (absent a trade surplus) of net private sector savings. Tax payers' money isn't really a thing. All transactions, tax liabilities and bond purchases are ultimately settled with central bank reserve transfers or deletions, and central bank reserves are only created ex nihilo by prior or current net govt spending. As sectoral balances show, absent a trade surplus, tax payers couldn't ultimately fund govt spending with bank credit.
"The power of the money markets" is an artefact of govt's own rule, and nothing to do with obtaining money. Excess reserve liquidity arises for the same reason govt cannot run out of it its own currency.
If someone has to be in debt - and someone does have to be in debt - should it be an immortal entity which issues its own currency and can roll over its debts in perpetuity, or households and firms, which cannot?
I do agree that implementing some other system, especially unilaterally, would be difficult, perhaps prohibitively so. Dunno, Japan's been doing yield curve control for 30 years.
I think you misunderstand me. The it was considering gilts as only a safe store of money. The paper points out that gilts may be viewed in that way because we were carrying an excess of central bank reserves.
I don't disagree with anything you say about the effect of austerity (particularly investment related) on growth and concomitant social problems. I absolutely agree that the government debt will never be repaid and that the household analogy is nonsense.
Put another way, I didn't and don't find the paper helpful because there is no point in looking at the country's financing as a quasi MMT set up when the sysytem is, as you say, not run that way because of political choice, and that political choice is the same in most advanced western economies.
I don't think there is much we can learn from Japan in promoting growth. On the other hand, it might be useful to look at the system it employed to 'retire' part of its national debt and stop enriching commercial banks at the expense of robust investment in the UK's economy.
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Post by montegriffo on Oct 14, 2024 19:42:34 GMT
I think you misunderstand me.
I don't think there's a single concept in this whole thread that I've understood. May as well be in Greek. |
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Post by Orac on Oct 16, 2024 14:39:11 GMT
I don't think there's a single concept in this whole thread that I've understood. May as well be in Greek. That's not an accident. It has taken years of careful and tedious work to turn economics into an area of the occult |
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