The Lord Mayor of the City of London is visiting the Isle of Man today to learn more about the Island as an international business and finance centre.
Alderman David Wootton will be given briefings on various sectors of the Island's economy, and will also deliver the Chief Minister's International Lecture.
I bet they've tidied things up to keep the boss happy. That's what always happens when the Group CEO drops in.
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If its just a branch office, then why the need for exchange of information and all that malarky?
Because banks and the City of London will not cooperate with the government in Westminster
Richard
I agree with everythig you are saying. But why dont you comment directly on debt? As I see it two things are obvious. I’ll try the argument in two ways-
1.
The Coalition and other western governments are beseeching us to believe that There Is No Alternative to what standard macroeconomic theory would regard as the polices of the madhouse – radical fiscal tightening in the teeth of a recession. George Osborne’s 2010 Budget announced fiscal tightening of £113bn over the next five years. This was madness and we can all now see the results of this policy.
But There Is An Alternative. Sitting in a wholly publicly owned subsidiary of the Bank Of England called the Asset Purchase Facility (APF) is over a third of the UK government public debt. That debt can be cancelled, monetised, retired or whatever other term you want to use in the blink of an eye. The interesting question is why isn’t this option being considered.
How did it come about that the government now owns a third of its debt you might ask. The money used by the government to buy its own debt was created through Quantitative Easing; a process that so much inaccuracy is written about still that it is worth reviewing again how it works.
QE in the UK works through the Bank of England creating money electronically. Just as the 1844 Bank Charter Act doesn’t forbid and therefore allows private banks to widen the money supply (up to the liquidity ratio set by UK financial regulators) through credit creation, the Bank is allowed to credit its reserves with as much money as it likes. Since 2009 the Bank has created over £200 billion in this way. Plenty more is planned – £75 billion more as a starter over the next 4 months.
So over the next few months the Bank will lend this newly created £75 billion to a Special Purpose Vehicle – a wholly government owned PLC- called the Asset Purchase Facility.
The APF then buys, through auctions, outstanding government gilts worth £75 billion from private banks, pension funds and other institutional investors. The banks and other recipients make huge profits from the sales and get £75 billion credited on their central bank reserves. The APF takes ownership of £75 billion of government gilts. So far so good -no money created or destroyed anywhere. All that has happened is that banks have swapped £75 billion of Government debt that they own for £75 billion of reserve credits.
The interesting thing that has happened though is that the APF will own another £75 billion of outstanding government debt that used to be owned by private sector investors. What is intriguing is that this offers a chance to destroy government debt with no inflationary risk or build up of debts anywhere.
This is because there are really only two possible futures for the debt sitting in the APF.
In future 1 the wholly owned by the government APF just retires the government debts it has bought up by communicating that they no longer exists. Job done. There is no further inflation or loss of investor confidence. No impacts on the money supply anywhere, past those hypothecated by the initial QE which the Bank says will be non inflationary and is necessary to ensure the UK money supply widens at a rate sufficient to prevent the economy collapsing further.
This would be the honest thing to do. The £200 billion of gilts in the AFP will have to be monetised anyway, just on practical grounds.
The only way not to monetise the debt is for the APF to opt for future 2 – to sell the gilts it is sitting on back into the private sector at some point in the future and then cancel the cash it receives for selling them. This would nullify the £200 billion lent to it from the Bank of England initially to buy the gilts in the first place.
With the Bank sitting on £200 billion (and some estimating this will rise over the next few years to half the total government debt or £500 billion) it just simply will not be possible to sell this at any time before the gilts mature and expire naturally. How on earth could the government fund its future normal gilt issues when the Bank was simultaneously dumping an additional £200 or potentially £500 billion worth of gilts from the APF onto the market?
The APF certainly won’t be able to dump its stock of bought up gilts whilst the UK government is still running a deficit (forecast to be at least 2016 and likely to be a lot, lot further into the future than that given this estimate was made last year when the economy was still predicted to actually grow). Much of the gilts, for example 5 year maturities, bought will have expired before then anyway.
So if it can’t happen whilst the UK government will still need to borrow can it happen in a hypothetical future when the deficit is paid off (if it ever is)? No, it certainly can’t happen when the economy has recovered. At the point when the economy has recovered the private banks will be creating enough lending to allow the money supply to widen at its normal rate. Sucking an additional £200-500 billion of liquidity out on the market at this point will cause a massive crash.
Until then we are left with a ridiculous situation where the Tories are moaning about the huge and “unaffordable” government credit card bills. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired. To add to the hilarity the Treasury, through a wholly government owned agency called the Debt Management Office pays interest on the £200 billion in the APF to the wholly government owned APF. This money is just building up and will eventually (as all profits for the Bank are) be returned to the taxpayer. You couldn’t make this up.
So what do the Bank indicate they are going to do and why? The Bank of course emphasises again and again that it is not being forced to create money in order to cover the gap between the government’s tax income and its spending commitments. Very sensible of the Bank to emphasise this as if this was what was happening, it would be a violation of Article 123 of the Treaty on the Functioning of the European Union. Rather, the Bank promises us it will choose future 2 for us – that it is undertaking quantitative easing in order to meet the inflation target (e.g. not to undershoot it) and will sell the government debt back to the private sector once the economy recovers, thus unwinding the original increase in the money supply.
Is this the future you want – where the Bank sells debt back to the private sector at some point in the future, causing excess inflation, and then simply rips up any cash it receives in order to demonstrate a point of principle?
It’s not as if anyone would advocate doing this type of QE to allow above trend government spending routinely. BUT if as we are being told QE has been undertaken only in the extremis of a liquidity trap in order to ensure growth and that the money supply doesn’t grow so slowly that the economy stalls shouldn’t the QE process, as it has already happened, be used to some advantage – clearing government debt by “magic” and thereby allowing fiscal loosening to stimulate demand?
and 2.
Don’t fall for the idea that future tax revenue are required to pay-off government debt. In fact, it is a myth that taxes “pay” for any government spending.
When an economy is at ‘full capacity’, (i.e. very low unemployment and all resources in the economy being used productively), a government may wish to spend say £20Bn on something everyone agrees is needed – it could be repaying govt debt, defending the country, building hospitals, whatever. When it spends this money it inevitably causes inflation – this is because you have more spending chasing the same amount of goods and services. The amount of goods and services does not change because the economy is already at full capacity.
To enable the government to spend without causing an inflationary spiral, the government taxes by an equal amount to prevent the private sector spending by the same amount – so overall the spending (public and private) remains roughly constant, so no inflationary spiral.
So the extra tax is to prevent an inflationary spiral when the economy is at full capacity – it is not required to “finance” govt spending. This is why government economics is nothing like household economics.
When an economy is the position ours is in with excess capacity, spending by government is permissible without taxation as it doesn’t cause inflation.
Given that our economy has not been at full capacity for over 30 years (hence the high unemployment), the government does not need to increase taxes or cut spending elsewhere to “pay” the interest on govt debt or to “pay” for anything.
The big question is why does the government issue bonds at all and pay interest to private investors? Why doesn’t the government just create the money at the mint or Bank of England – this won’t be inflationary as there is spare capacity.
The closest answer I can find from trawling what Central Banks, sophisticated monetarists, most Keynesians’ and all MMT people say is that when governments issue bonds someone has to surrender money to the government. If it wasn’t for the bond that money would probably have gone into the banking system instead. This is called a ‘reserve drain’ and was clearly necessary when we had the Gold Standard/Bretton Woods or some other type of Fixed Exchange Mechanism.
The argument given is that debt is a better way to stimulate the economy. Supposedly there is a problem with a liquidity trap in the banking system. By issuing bonds the government can take money away from the banking system and make sure that is being spent.
However, it’s pretty obvious now though that for countries with their own floating currency, deleveraging banks and with economies working at way, way below spare capacity that you can use QE to clear government debt at will without any inflationary effects.
This is obviously in the UK since there is £275 billion sitting in the Asset Purchase Facility. This money was bought using reserve crediting in 2010/11 and the result of the purchases was deflationary – M4 last year after £200 billion of QE had hit stall speed with growth at only 2% (more than 5% growth is needed to prevent the economy contracting).
So we are left with a ridiculous situation where the Tories are moaning about the huge and “unaffordable” government credit card bills. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired. To add to the hilarity the Treasury, through a wholly government owned agency called the Debt Management Office pays interest on the £200 billion in the APF to the wholly government owned APF. This money is just building up and will eventually (as all profits for the Bank are) be returned to the taxpayer. You couldn’t make this up.
So clearly in economic circumstances such as now you clearly can print money directly, buy outstanding government debt and retire it with no inflationary consequences.
Nevertheless Governments are continuing to use an explanation built up at a time of Bretton Woods with full employment, fixed exchange rates and no deleveraging to explain why they don’t use the QE to clear down debts.
What is looking more and more likely though is that it will be obvious in a few years time to everyone that you can QE government debts away with no inflationary consequences during a period of bank delveraging. What happens then will be very, very interesting. If I was the banks I would be very worried.
If you buy into either of these arguments you need to read more MMT…
There are only two ways to create money in the UK economy:-
1) The normal process of credit creation carried out by banks – banks lending out more money that they charge interest on. Apart from minting coins or printing notes this usually creates over 95% of the money (called M4) in the economy.
2) QE – The Bbank of England crediting its reserves with money and then using the credits to buy assets or outstanding government debt from banks.
Since 2008 banks have largely shut down credit creation. M4 which normally grows at over 5% per year is only growing at 2% per year. Expansion of below 5% pa means the economy contracts. This is by and large, as in all recessions after a financial crash, why the world and UK economies are in such a mess.
The line that our Government (and now several others) are giving us is that There Is No Alternative to austerity and cuts. They are justifying massive tax rises and catastrophic cuts in public spending because they say excess government debt, built up due to the massive worldwide recession in 2008 and the cost of bank bail outs, must be paid down.
This is obviously false as Governments can use QE to buy up government debt from the banks that are holding it and retire it. This is happened to a massive degree already in the UK with over a third (over £275 billion) of the UK’s government debt is currently sitting in the wholly publicly owned Asset Purchase Facility.
But what about inflation? Wont retiring government debt in this way cause inflation? No- if there was inflation it would happen when the Bank of England bought the government debt up from the banks. This is the moment reserve credits are released and there is an increase in bank liquidity. We have done £275 billion of QE (equivalent to about 20% of UK GDP) since 2009 and M4 has contracted and we are at risk of deflation rather than inflation. Quite simply no matter what we say to them banks don’t want to lend enough to get the economy growing.
So it is perfectly safe to retire government debt when banks aren’t creating enough credit in the economy. If this is a natural phenomena because the banks don’t want to lend (they are deleveraging) it is safe to retire government debt. As long as the money supply is kept at around 5% all is well – the economy neither contracts too quickly causing inflation or collapses causing a depression.
It is also perfectly safe at a happier time in the economic cycle. Say in 5 years time when the economy is expanding, banks are lending too much. At this point we would want to use QE to expand the money supply as we would want to restrict bank lending to ensure we never get another crunch like 2008. When eventually we need to increase the capital adequacy levels in banks (to make them safe) we will need some mechanism to ensure the money supply is kept expanding at the needed rate (5%) we will need to use QE to retire government debt.
The most depressing thing about this is that the current Government is misleading people so badly about how the money supply and economy work. The analogy of a National economy and household one is – the only word I can think of is evil. This is an action of people who represent their corporate funders and want to mislead you to prevent you questioning in who’s interest they are acting.
Thanks for this – I may turn it into a blog later
please do- the level of dishonesty about this is staggering.
United we stand …
“THE role played by the Isle of Man in supporting the creation of jobs and growth in the United Kingdom economy has been praised by the Lord Mayor of the City of London.
Paying his first visit to the Island, Alderman David Wootton spoke of its importance as a provider of liquidity to the wider British economy, especially through its growing involvement with business in the north west of England and through the City itself. …”
“[Alderman Wootton] said the Island and the City had a ‘longstanding and much valued partnership’.
He said: ‘We share the same values’ — and the same commitment to the very highest standards of corporate governance — with the UK and the Isle of Man being two of only eight on the OECD white list.’— and the same commitment to the very highest standards of corporate governance — with the UK and the Isle of Man being two of only eight on the OECD white list.’
The Lord Mayor believed the partnership between the Isle of Man and the City would be crucial in helping to create wealth and economic well-being. For the UK and the City he shared Chief Minister Allan Bell’s vision for the Isle of Man of maintaining a prosperous and caring society based on fairness, opportunity for all, social cohesion and quality of life.
Alderman Wootton concluded:
‘We are both small in size — but punch well above our weight in the global economy. We can be justly proud of the standards and governance we demand. And we are also well placed and well able to meet the challenges of the future — and play our part in creating jobs and growth.’”
“Commenting on the Lord Mayor’s visit, the Chief Minister said:
‘The City of London is hugely important for the Isle of Man and we have been working hard to build the Island’s profile and relationships there. This visit is part of our growing friendship with the City … ‘ ”
http://www.gov.im/lib/news/cso/citymayorhighlig.xml
Alderman Wootton seems very adept at blurring, when it suits him, the (huge) distinction between the City of London and the UK – or indeed between the City of London (Corporation) and London as a whole.
How easily news is deformed. The IOM radio station 3FM headlines today “Mayor of London comments on first Island visit”.
http://www.three.fm/news/isle-of-man-news/mayor-of-london-comments-on-first-island-visit-4837/
Comments are not enabled there, so I have emailed them to point out that the Mayor of London is Boris Johnson – who did not visit the Isle of Man – and suggesting they make a correction. I added for good measure that David Wootten represents neither London nor the UK.
3FM headline now reads “Lord Mayor of the city of London comments …”.