I thought this from an FT email this morning quite amazing:
Treasury gives debt pledge on Scotland: The UK Treasury will on Monday assume full responsibility for Britain's £1.2tn debt stock in the event of Scottish independence, in an attempt to head off market jitters ahead of September's referendum. Danny Alexander, Treasury chief secretary, fears gilt investors could start demanding a risk premium in the coming months on the grounds that some UK debt could be transferred to a newly-independent Scotland with no credit history.
First, the UK has not got £1.2trn of debt. About £375bn of it is owned by the Bank of England and you cannot owe yourself money.
Second, given that this was, no doubt, to be the subject of major negotiations with a new Scottish government, this statement is the most massive exercise in shooting one's self in the foot: Scotland now starts from the position that the debt is England's problem.
Good work Danny, although whether that comment is viewed ironically or not depends entirely on one's viewpoint.
Whatever that viewpoint perhaps the biggest question is how a man with such negotiating skill ended up in government. Perhaps my previous post helps explain.
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I would have thought ‘no credit history’ is a positive thing these days!
Danny Alexander is, essentially, a Tory. He seems to embody their ideology with not the slightest hint of the Liberal radical traditions. He’s also inept and lacking in basic communication skills – a prerequisite for becoming an MP thses days!
I hope that this figure of £1.2tr gets into the public imagination (although it’s rather difficult to get one’s head round it). It should make people realise that this level of debt cannot be repaid by the usual means. Either a large proportion has to be written off or else Greg Philo’s wealth tax has to be deployed.
As someone asked on this blog a few weeks ago: to whom is all this debt owed anyway? I think we should be told.
and where did they get it from to lend? It surely can’t be people’s savings. My uneducated opinion is that is partially money created by fractional reserve banking i.e. money created by key stroke.
This will be big in the independence debate. Previously the “no” side’s argument has been the dubious assertion that Scotland will have to take on a full part of the debt but have no right to any UK assets. This will mean the withdrawal of a major threat and they can’t replace it by saying that no debt means no assets because they have already threatened that anyway.
Don’t be surprised if you see a climbdown though. Labour, particularly Scottish Labour, will throw an absolute fit.
Surely taking on an obligation such as this on behalf of the United Kingdom Government requires parliamentary approval.
Is this £1.2 trillion all owed by the government? If not, why should the taxpayer assume responsibility for it?
And Scotland doesn’t have to go into debt! It can simply borrow from its own central bank and tax the money back out of circulation. Either that or set up a state bank on the model of the Bank of North Dakota.
The notion that a government has to borrow from pension funds, insurance companies and banks in order to run its finances was always crazy. As are most of the myths that just “printing” money will cause massive inflation.
Ah, according to the runes he is MP For Inverness, Nairn, Badenoch and Strathspey. Is there just a remote possibility that he has a personal interest, like retaining his seat? Although he is not so much a Wolf of Badenoch, more of a meerkat.
“First, the UK has not got £1.2trn of debt. About £375bn of it is owned by the Bank of England and you cannot owe yourself money.”
This statement is wholly incorrect. Firstly, the government *does* have 1.2trn of debt. It has issued that amount of debt into the market and it was initially bought by private hands.
Secondly, debt owned by the BoE is not written off. It is purchased via QE, which aims to increase the money supply whilst bringing down long term interest rates. It can’t simply be written off as Richard Murphy implies. The BoE itself has a balance sheet where it holds assets (government debt) against liabilities (the cash from QE it has created). If that wasn’t the case the BoE could essentially create assets at will.
To unwind QE there are only two options. The first is to reverse the process, by taking money out of circulation (electronically) by selling the bonds it owns. The other is to replace the bonds owned as they mature with new purchases, but ultimately the debt is still there, with the asset value of that debt being eroded by inflation etc – a cost to the BoE.
“And Scotland doesn’t have to go into debt! It can simply borrow from its own central bank and tax the money back out of circulation”
“The notion that a government has to borrow from pension funds, insurance companies and banks in order to run its finances was always crazy. As are most of the myths that just “printing” money will cause massive inflation.”
If Scotland runs a budget deficit it has to borrow money from somewhere. Traditionally this has been the open market – predominantly pension funds.
A country can’t borrow from the central bank without one or both of the following being true: Either the central bank must have reserves or it must be printing money.
The former case is viable (for example Norway, Singapore etc) long term. The latter is not. Printing money in the scale needed to finance budget deficits, especially in small countries tends to drmatically increase the money supply, increase inflation and therefore increase the yields investors would want to hold assets in that country. It also tends to dramatically weaken the currency. Current QE has been somewhat of a special case as there is an explicit gaurantee that the QE will be stopped and eventually reversed (time limiting the increased money supply) and that thanks to the credit crunch the money supply was dramatically falling, so QE counteracted that fall.
Ultimately, you simply can’t just print money without some serious negative effects – either high to hyper-inflation or a collapse in confidence in the currency. People simply won’t lend, invest or do business in a country/currency if they feel that their assets will be eroded faster than any potential returns. You only have to look at Zimbabwe, or more recently and less dramatically Argentina as examples.
The BoE does create assets at will
It’s called money
There is no reason to unwind QE
There is no reason for the debt to be repaid
Debts can be written off and have been
And the Treasury and BoE could do a swap to cancel this
I am quite emphatically right
Richard,
Lets assume you are right. The BoE can create assets at will in the form of money, QE never needs to be unwound and those bonds bought via QE can be swapped for cash to cancel debt (by printing more money at the BoE, I assume).
What would happen here in such a case?
Minting new money doesn’t create wealth or growth. All it does is increase the nominal money supply. This process tends to devalue a currency and spark inflation.
For example, if the BoE decided to print enough money to give everyone 1m, we wouldn’t all suddenly be rich. All that would happen is that the pound would be worth significantly less.
Technically you could use all this newly minted money to pay back government debt. This isn’t a new idea though – it’s just an extreme version of inflating away debt. It would also come at severe cost to the economy. Inflation would fly higher, and people would get dramatically poorer in real terms (again, look at Zimbabwe, Argentina and Venezuala for a range of recent real world examples). Likewise any new borrowing would come at far higher interest rates (which would also explode higher), compounding the problem as either the debt repayments would be much higher or once again the BoE would have to print money. The end result would be a viscious circle of ever higher inflation, hard assets becoming the only assets worth holding (Zim house prices and even cars went *much* higher in real USD terms as they became the only assets available to preserve value, for example) and a weakening currency.
That’s before you take into account the damage done to pensioners, inward investment into the economy and a host of other negative effects.
You are essentially advocating printing money, and I can’t find a single instance where that has made an economy richer – and plenty where it has made it’s people poorer and even ended in economic collapse.
QE alleviates some of those concerns precisely because those bonds CANNOT be cancelled and eventually it has to be unwound and those bonds repaid. This process can be over a long time, but it prevents a government simply reverting to the easiest way of balancing the books and printing money.
As you say – debts can indeed be written off, or governments can not repay them but again doing that isn’t without consequence. Simply put, default tends to come at great economic cost, especially in large economies. If you run a primary deficit you still need to find money from somewhere. Post a default that isn’t easy to do without paying much higher rates. Once again, pensioners would be wiped out if the government defaulted given they are by far the largest bondholders. It simply isn’t realistic to suggest that it is easy and painless to default – again evidenced in many recent real world examples (Russia, Argentina etc).
As such, if you think a combination of printing money and/or defaulting on debt is a solution for the UK’s debt problems, or a way of financing increased spending, you would be quite emphatically wrong.
I am saying nothing need happen on QE if that’s what is considered appropriate
The BoE owns an asset. It can keep it, and when it is redeemed (if it is) replace it
Or it can cancel it since the vast majority is gilts
And if it wants – and desirably since we need inflation – it can slowly print money
But to say QE needs unwinding is wrong. It doesn’t. And that it is owned by HMG is clear; they get the income back that they pay on it
And you can’t default on what you we yourself
So respectfully, stop talking complete twaddle that is a million miles from the truth
Zimbabwe offers a poor example – the inflation their was largely due to food shortages created by land being appropriated by inexperienced farmers creating an agricultural disaster.
@ Simon
Whilst it is true that food prices were pushed up initially due to food shortages as a result of land appropriation, that was only the first step. The central bank starting printing money to increase people’s nominal wages, and very quickly hyperinflation ensued. The US dollar quickly became the de facto currency of trade and any profits from companies in Zim dollars had to be quickly converted to USD or used to buy hard assets such as houses (and even cars). That sent house prices skyrocketing, believe it or not. Eventually the Zim dollar became so devalued that the ink and paper to print the note were worth more than the value of the note, and people simply resorted to paying in “bricks” of assorted notes, ignoring face value, and using them as firelighters etc. You had to carry a few kilos of notes around to pay for lunch before the whole system collapsed.
Interestingly, the notes are now worth a lot more for a complete set in perfect condition – as collectors items.
@ Richard Murphy
“The BoE owns an asset. It can keep it, and when it is redeemed (if it is) replace it”
Yes, this is what I said. When it comes to replacing the debt though, that debt is still issued by the treasury, and still exists.
“Or it can cancel it since the vast majority is gilts”
No it simply can’t, without reducing the money supply.
“And if it wants — and desirably since we need inflation — it can slowly print money”
This risks losing control of the money supply, given that the BoE can only control M1 and M2, not M3 and M4. Besides, we already have some inflation, and high inflation is the biggest driver of lowering real wages and living standards – hurting the poor the most. How much inflation is acceptable?
“But to say QE needs unwinding is wrong. It doesn’t. And that it is owned by HMG is clear; they get the income back that they pay on it”
No – the BoE retain the income from bond coupons, issued by the Treasury. That income is used to make good any losses arising from capital losses/erosion of captial via inflation.
“And you can’t default on what you we yourself”
No you can’t, but at no point does the government owe itself money. The treasury owes the BoE money. Should the treasury default, the BoE would be bankrupt and would be forced to default down the chain to retail banks, who would likely default to their customers.
Likewise, you cannot selectively default. If the Treasury defaults to the BoE, the credit of HMG would be affected in general. The biggest losers would be pension funds – and the cost of any future debt financing would rise.
“So respectfully, stop talking complete twaddle that is a million miles from the truth”
I could respectfully ask the same of you.
have you read what you wrote and realised just how absurd and self-contradictory it is?
“Ultimately, you simply can’t just print money without some serious negative effects — either high to hyper-inflation or a collapse in confidence in the currency. People simply won’t lend, invest or do business in a country/currency if they feel that their assets will be eroded faster than any potential returns. You only have to look at Zimbabwe, or more recently and less dramatically Argentina as examples.”
Cobblers! Money is created by the private banks all the time out of thin air! They create money with only a fraction of the money they create backing those loans, and what is mainly used to back those loans? Other IOUs, that’s what.
If the government creates £100 billion and spends it on building bridges, hospitals and schools, the currency cam be effectively backed by those assets! Instead of commodities like gold or silver backing the currency, or debt as it is today, the currency could be backed by real assets instead.
There are two ways this could be done! Either the government could create a national infrastructure bank and lend the money, but instead of the interest going into shareholder pockets, the money could be redistributed into the economy.
Running government services could become very much cheaper as there is no bond holders to repay interest to and no need to borrow. Tax could be cut right back as the government would have little need to tax except to remove excess money from circulation.
As for QE, why does the government have to hang on to bonds when the liability to the bond holder has been extinguished? The government has bought the bond with money created on a computer screen. The debt has been paid, therefore, no debt! If the government has swapped £375 billion of cash for £375 billion of bonds, there is no more money put into the economy than there was previously. The government is hanging onto bonds it has already paid out for! It could rip them up and take away £375 billion of national debt with it! In truth, it effectively has done. The government knows they are unlikely to be able to resell those bonds. There is no need to anyway, no extra spending power has been created.
“For example, if the BoE decided to print enough money to give everyone 1m, we wouldn’t all suddenly be rich. All that would happen is that the pound would be worth significantly less.”
…or if there is enough goods and services created to absorb this new money, there will be no inflation and the economy will get what it needs most, money circulating to create jobs ans stimulate business.
“Technically you could use all this newly minted money to pay back government debt. This isn’t a new idea though — it’s just an extreme version of inflating away debt.”
So if you created £1 trillion to buy £1 trillion of debt, you have not created extra money…you have simply swapped £1 trillion of IOUs for £1 trillion of cash. No extra money has entered the economy. Bondholders will not be getting any more money than they had before.
The only way a government creating money can cause high inflation is if there are not enough goods and services to absorb the new money or if there is no way of draining excess liquidity out of the system. Used wisely, money creation is far less inflationary as there is no need to keep the money supply continually expanding in order to pay the forever compounding interest of loans.
Money creation should be the prerogative of governments, bot banks!
“QE alleviates some of those concerns precisely because those bonds CANNOT be cancelled and eventually it has to be unwound and those bonds repaid. This process can be over a long time, but it prevents a government simply reverting to the easiest way of balancing the books and printing money.”
Just a thought! The government sells gilts to pension funds, insurance companies and banks. The government borrows far more through gilts than in can ever raise in taxation, so how does the government pay its debts?
It effectively doesn’t! It is only really the interest that is paid on the national debt by the government. The rest of it is simply rolled over and re-financed! The national debt is never paid off…indeed it can’t be!
You say the government must repay those bonds, yet when has there ever been a time when the bonds comprising the national debt were ever repaid?
And, as you know, banks lend out far more than what they hold in assets! In the UK, a bank has NO limits on how many times it can lend the same collateral. They could, in theory, lend at 1000:1 and be perfectly within the law.
So let’s stop pretending all liabilities have to be fully covered, shall we?
@ Steveo!
“Cobblers! Money is created by the private banks all the time out of thin air!”
This is nonsense I’m afraid. A bank can lend you money it itself does not have. It then has a hole in it’s balance sheet which it then is obliged to fill, by borrowing form other sources, usually short term.
I see plenty of people make this “money from thin air” argument and what they are really talking about is credit, assuming credit and money are the one and the same. Money is a store of value and a medium of exchange. Money is an asset and has some intrinsic value. Credit is a form of deferred payment, and has no intrinsic value on it’s own (some of the value of the asset borrowed is paid to the bank, but the value of the underlying asset itself is unchanged).
Which is unfortunately why the rest of your and Richard Murphy’s arguments fall apart – money cannot be created out of thin air, short of printing it directly, and as I have said, money printing devalues the currency and causes inflation then hyperinflation.
Following the various arguments you make through, if money printing really was that easy, and there were no serious ill affects, why doesn’t everyone do it? By your logic, we could have infinite spending on infrastructure, benefits, no government debt and we could even do away with taxation! We wouldn’t even have to work!
It sounds lovely, and it also is in reality patently ridiculous. Please re-read my posts above as to why printing money is not a solution and QE is not the same as printing money, and nor does it wipe out government debt.
“Money creation should be the prerogative of governments, bot banks!”
Money supply can simply never be wholly controlled by governments more than it already is, through a combination of the Treasury and BoE, unless the government controls all assets, labour and means of production. I suppose an extreme form of communism could, but as long as I am able to own any form of asset, I can exchange it with you for any other asset (i’ll give you a sheep for a goat) or lend it to you creating some credit (i’ll lend you my sheep for a year but I want it back, with a chicken as interest). Money is just the medium of exchange and store of value we use to make it simpler.
“It effectively doesn’t! It is only really the interest that is paid on the national debt by the government. The rest of it is simply rolled over and re-financed! The national debt is never paid off…indeed it can’t be!”
This is in part true. No government will ever pay off all of it’s debts – mainly because government bonds form a major part of pension fund investments. Some debt can actually be a benefit to society. The opposite case is more dangerous though. When a government gets too heavily into debt, the interest payments can start to swamp all other spending. Eventually it gets so bad that most tax revenues are used to pay interest, and the country becomes less likely to repay the capital borrowed….which in turn causes rates to rise more. This is the beginning of a debt spiral, and leads to either an explicit default (government directly defaults on it’s debt) or a technical default (government inflates away it’s debt at a very high rate – sometimes by printing money). It can be averted by keeping the debt to manageable levels as a % of GDP.
The debt still needs to be repaid though. Either kind of default is hugely painful for an economy. Pensioners lose out either directly as their savings are wiped out or inflated away, the government can’t raise new debt, the currency dramatically weakens, inward investment dies etc.
“And, as you know, banks lend out far more than what they hold in assets! In the UK, a bank has NO limits on how many times it can lend the same collateral. They could, in theory, lend at 1000:1 and be perfectly within the law.”
This is incorrect. Banks can lend out more than they have in assets, but then have to borrow to make their balance sheets whole again. If not, they would be bankrupt. Banks are in the business of maturity transformation – they borrow short term money at a lower rate and lend it out for longer at a higher rate. Their are also strict limits in place as to how much capital they have to hold against a loan (it works out to about 10% of the total loan), and many loans are asset-backed (mortgages the best example).
@ Richard Murphy
Please enlighten me as to how what I wrote is “absurd and contradictory”.
I am afraid the only absurdity is your belief that you can print money without consequence and your mistaken belief that QE is the same as printing money – evidenced by this idea of “Green QE”. As I say to SteveO above, the extension of this idea is that you could simply print money and use that to create all the assets you want, eliminate debt and lower taxes to zero. Simply nonsense, as the money you printed to do that would quickly become worthless.
Tyler
Your arguments on money are so wrong – and so obviously wrong – that I think you need to go away and do a lot of reading about money before wasting any more time for anyone here
Richard
In fact, let me give you the thought example often used when describing money, inflation and credit.
Imagine a small isolated island, where they use 1000 rare sea shells from a now extinct creature as currency (fixing the money supply). Shells are exchanged for goods and services as usual. People also extend credit as loans, when they lend shells to others or do barter transactions (lending livestock and getting it back later with some added payment).
In a year of good harvest, when crops are plentiful, you can get more food for your shell (deflation). In a poor harvest year, it costs more shells for the same amount (inflation).
Now let’s say a foreigner happens on the island, for the first time. With him he carries another 1000 of these rare shells. Suddenly the money supply of the island has doubled! Does this make the islanders any richer though? The amount of assets (livestock, houses etc) on the island hasn’t changed, but the amount of money available has. The end result is that the value of those shells has decreased in comparison to the their purchasing power, causing some inflation.
Next, a huge Tsunami hits the island, wiping out most of the farms, livestock and housing. It also deposits huge amounts of these previously rare shells on the island amongst the debris – there are 20,000 now. Again, are the islanders and richer? By any argument they are not – they are much poorer. They have plenty of otherwise useless shells, but those won’t buy you anything when it comes to what remains of the housing or livestock. The currency has been dramatically devalued and hyperinflation of assets is the result.
In this example, the foreigner is the equivalent of QE. He can use those shells on the island, and temporarily there is more money available. When he leaves though, he could take those shells with him, or other assets in kind, reversing the process.
The Tsunami is pure money printing. There is suddenly a surfeit of currency which has little intrinsic value, and the percieved value, based essentially on trust, is gone. Now people start chasing after hard assets of any kind as a store of value, rather than the now worthless currency.
This is a simple and heavily simplified example I know, but it does rather nicely illustrate the main points.
@ Richard
“Tyler Your arguments on money are so wrong — and so obviously wrong — that I think you need to go away and do a lot of reading about money before wasting any more time for anyone here Richard”
Really? Resorting to simply ignoring my points, followed by ad hom attacks suggests you don’t really have a answer for them. Which is hardly surprsing, given what you are suggesting.
Please go and read Ann Pettifor’s book on money
She has answered these issues
@ Richard Murphy
I have read Pettifor’s 2006 (I think?) book on the coming financial crisis, and quite a few of her other papers besides. They are essentially a mix of political polemic and fantasy economics. What she says seems to be taken seriously only by the hard left, given her propensity to ignore any downsides to her ideas, and indeed often how the evidenced reality of them shows them to be unworkable, but on the face of them very palatable.
Unfortunately (for her I guess), very few apart from the hard left take those ideas seriously. Not least because she makes such basic errors, like confusing money and credit.
Let me ask you another question. If it really was as easy as you and Ann Pettifor say, and you could cancel debt via QE and print money without any adverse consequence, why hasn’t it been done, either by the current govrnment or the previous one, or indeed by any major government around the world? Surely, if it was that simple to wipe out debt, lower taxes and build infrastructure out of “money created out of thin air” it would be a huge votewinner, and that government would be in power forever?
Unfortunately, back in the real world this process has been tried on a few rare occasions, and every time it has ended in economic and social disaster and fiscal ruin.
Read the new one ‘Just Money’
And why hasn’t it been done? Because it suits the banking elite that it should not be done
Just as the gold standard once suited the banking elite etc., etc., etc.
“his is nonsense I’m afraid. A bank can lend you money it itself does not have. It then has a hole in it’s balance sheet which it then is obliged to fill, by borrowing form other sources, usually short term.
I see plenty of people make this “money from thin air” argument and what they are really talking about is credit, assuming credit and money are the one and the same. Money is a store of value and a medium of exchange. Money is an asset and has some intrinsic value. Credit is a form of deferred payment, and has no intrinsic value on it’s own (some of the value of the asset borrowed is paid to the bank, but the value of the underlying asset itself is unchanged).”
Firstly, 97 percent of or money supply is created by banks making loans. Only 3 percent of it is base money, or notes and coins, which incidentally, is created effectively debt free, minus nominal costs of printing notes and minting coins. Therefore, bank loans are quite clearly money. In a debt based system, debt is money! What would happen if we paid off all our debt? We would have no money supply!
Secondly, if all bank loans and all credit is covered, then why did we have to bail out the banks? Because the banking system allows banks to create more loans than funds they have in reserve, that’s why. If everyone asked for their funds back from the bank at the same time (as with Northern Rock) the bank would quite quickly fold. Yes, cheques and such have to be cleared if the money from a loan is deposited into another bank, but banks has many payments incoming as well as money outgoing, and most of these payments are “netted out”. Any banks that do not have the funds available to clear cheques (why, if you say they are covered?) can do overnight sweeps moving the money to high interest accounts or lending on thee interbank market!
Banks do create money out of thin air by creating a deposit account for the borrower and simply writing the amount of the loan into that account, only it is not really a loan! It is not a loan of existing money the bank has on deposit – it is brand new money the bank has created on its books through double entry book keeping, declaring it an asset and a liability at the same time. This can legally be used as money! Of course, this action expands the money supply by more than the bank has in actual physical deposits. This is backed by little more than government debt, so in fact, debt is being partially covered by more debt! The ruse works so long as no-one demands all their money back from the bank at the same time. It is merely a confidence trick and a Ponzi scheme!
“Which is unfortunately why the rest of your and Richard Murphy’s arguments fall apart — money cannot be created out of thin air, short of printing it directly, and as I have said, money printing devalues the currency and causes inflation then hyperinflation.”
QE is money printing, but apparently that is OK because it benefits the banks! Of course, QE is just an asset swap, cash for bonds. Of course printing money without limit will undoubtedly cause massive inflation, but you know very well that is not what I am advocating. The banks were saved by the government spending hundreds of billions of pounds! Why should a government borrow when it simply does not have to? The reasons not everybody does it is because of pure politics. Zimbabwe’s currency was devalued disastrously when it bought US dollars to pay off its debts. The speculators moved in charging exorbitant prices for dollars and destroying the value of the currency. Argentina deliberately defaulted on its clearly unfair debts, negotiated their debt down on the secondary debt market and are now a thriving economy. That’s probably what Zimbabwe should have done.
As long as there is enough goods and services to soak up the circulating medium, inflation should never occur. Taxation need only be used to tax out excess liquidity in the economy. Prices could become more stable as their is no need for the debt to continually expand both to pay off the ever compounding debt and to continually go into debt to provide a circulating medium of exchange. The money supply can grow and contract more naturally with supply and demand. As said before, the money supply can be effectively backed by whatever it is spent on, like bridges, schools, roads and hospitals.
“Money supply can simply never be wholly controlled by governments more than it already is, through a combination of the Treasury and BoE, unless the government controls all assets, labour and means of production. I suppose an extreme form of communism could, but as long as I am able to own any form of asset, I can exchange it with you for any other asset (i’ll give you a sheep for a goat) or lend it to you creating some credit (i’ll lend you my sheep for a year but I want it back, with a chicken as interest). Money is just the medium of exchange and store of value we use to make it simpler.”
Complete rubbish! Why does the government have to own all means of production and control all assets simply to provide a circulating medium of exchange? Medieval England with the tally sticks didn’t! The King put out tally sticks as receipts for goods and services rendered. They were used to pay taxes and provided a debt free money system with pretty much no inflation! The early American colonists in Pennsylvania created money debt free and took out excess liquidity by lending it to farmers and charging 5% interest on it! Canada simply borrowed from its own central bank, as did Australia. None of those countries government’s had to own the means of production or all assets. Canada has a tiny national debt when it borrowed from its own central bank. It has ballooned many times higher since starting to borrow from the private sector.
“Please re-read my posts above as to why printing money is not a solution and QE is not the same as printing money, and nor does it wipe out government debt.”
QE is an asset swap! It is basically money created from thin air, or “printed” if you like in order to buy bonds back from pension funds, insurance companies and chiefly, banks. The BoE have bought their own gilts back with the intention of selling them again in order to retrieve the money it used to buy those gilts! But this is an asset swap! The money exchanged matches the amount of the value of the gilts, hence no extra money and no inflation. The government has bought the bond from the holder at face value, so in effect, the government’s debt to the bond holder has been extinguished! The government now own these bonds, indeed it receives interest payments from those some bonds. The government can rip up those bonds and cancel the debt that goes with them! If I go to a shop and buy a chocolate bar and buy buy it at face value, I have extinguished my debt with the shopkeeper as I have paid the exact amount for the chocolate bar…I am not required to hold it as a liability! The government is the effective owner of those bonds and could just dispose of them and take £375 billion in debt with them.
“This is incorrect. Banks can lend out more than they have in assets, but then have to borrow to make their balance sheets whole again. If not, they would be bankrupt. Banks are in the business of maturity transformation — they borrow short term money at a lower rate and lend it out for longer at a higher rate. Their are also strict limits in place as to how much capital they have to hold against a loan (it works out to about 10% of the total loan), and many loans are asset-backed (mortgages the best example).”
Wrong again! If banks borrowed to make their balance sheets whole, then they would have two loans to pay back rather than one! In the US, the “fractional reserve rate is typically 8 to 10%. In the UK, there is NO fractional reserve requirement and has not been one since around 1980. Yes, UK banks have to have a reserve asset ratio, but this is quite separate from the liquidity ratio, or fractional reserve. Again, the UK fractional reserve is effectively zero…in fact, banks can lend without reserves and simply acquire the necessary reserves later!
“When a government gets too heavily into debt, the interest payments can start to swamp all other spending. Eventually it gets so bad that most tax revenues are used to pay interest, and the country becomes less likely to repay the capital borrowed….which in turn causes rates to rise more. This is the beginning of a debt spiral, and leads to either an explicit default (government directly defaults on it’s debt) or a technical default (government inflates away it’s debt at a very high rate — sometimes by printing money). It can be averted by keeping the debt to manageable levels as a % of GDP.”
That is not necessarily true either. In fact, during a prolonged recession, cutting spending or curbing borrowing is the worst thing you can do! It shows a complete ignorance of how debt works! If the economy is already in recession, then cutting off the very thing it needs most, money, will simply make matters worse! The more you cut back, the less money available as jobs go and businesses fold. GDP starts to shrink and when that happens, you have less money with which to pay previous debts. You either keep cutting to pay for the shortfall, taking you eventually back to square one, or you have to borrow to make up the shortfall, making the debt worse!
After World War II, the new Labour government of the day kept the same level of borrowing used in wartime. Borrowing ran at a unprecedented 250% of GDP, effectively meaning we borrowed 2 and a half times more than the country earned in GDP! Did we get hyperinflation? Did the country crumble under the weight of such a huge debt? No! The government built literally millions of council homes, provided free university education for all, created the NHS and the welfare state. This spending led to what is one of the biggest economic booms in our history and inflation never got out of control. Rather than being a bad thing, high government spending on productivity can only be a good thing! You only have to look at Ireland, Greece, Spain and Portugal to see the apparent “virtues” of austerity, where cutting spending and selling off everything not nailed down has simply made a bad situation catastrophic.
“The debt still needs to be repaid though.”
Again…..the national debt is never repaid! It is simply rolled over and refinanced!
You get it
The last line says it all
@ Richard Murphy
“Read the new one ‘Just Money'”
I will, but I suspect it will be the same regurgitated nonsense.
“And why hasn’t it been done? Because it suits the banking elite that it should not be done”
Now we are into the realms of conspiracy theory. There isn’t some shadowy baking elite pulling all the strings of every global leader – not least because high inflation tends to help the asset rich, not the poor. You expect the banks to be quite happy with the high inflation printing money would cause.
The fact is, printing money (outside QE) has been tried several times to a greater or lesser extent, and has been an unmitigated disaster every time. Look through all the cases of hyperinflation globally and the majority have printing money as a common factor.
Debating with those not willing to appraise themselves of facts – as you are clearly not willing to do – is pointless
@ SteveO
“In the UK, there is NO fractional reserve requirement”
This is for cash ONLY, and you are technically correct here. Unfortunately, in terms of lending, the bank’s Tier 1 capital is what matters under Basel 3. This heavily limits the fractional reserve system.
http://en.wikipedia.org/wiki/Basel_III#Capital_requirements
“Therefore, bank loans are quite clearly money.”
Riddle me this. if you take out a loan, are you any richer?
I’d hope you would agree you are not. Money in your pocket or bank account is an asset. A loan is a liability, with which you purchase or exchange for an asset. It is not in itself “money”.
“Of course, this action expands the money supply by more than the bank has in actual physical deposits. This is backed by little more than government debt, so in fact, debt is being partially covered by more debt! The ruse works so long as no-one demands all their money back from the bank at the same time. It is merely a confidence trick and a Ponzi scheme!”
Yes, the money supply increases past the banks physical deposits. The bank then goes to the money markets, central banks etc to fill that shortfall. Those bank loans are backed to a small amount by other liquid assets, including government debt, but mostly by physical assets. If that government debt suddenly defaulted, the bank is in serious trouble….
It’s not a ponzi scheme. If evryone sold their houses for example, they could pay back all the debt. If everyone asked for their money the same time, a bank run, banks would only collapse because those phyisical assets can’t be liquidated fast enough, and the bank loses the ability to borrow short term to cover the money it has loaned out.
“Of course printing money without limit will undoubtedly cause massive inflation, but you know very well that is not what I am advocating.”
What are you advocating then?
“The banks were saved by the government spending hundreds of billions of pounds!”
No, billions were loaned for short periods, but this has been mostly repaid. According to the Treasury the government lost about 10bn on bank bailouts.
“Zimbabwe’s currency was devalued disastrously when it bought US dollars to pay off its debts. The speculators moved in charging exorbitant prices for dollars and destroying the value of the currency.”
No, it was when the economy started to collpase because of land exproriation, followed by money printing. Zim had extremely low debt before the collapse, and the currency devalued onshore, not because of speculators (it was almost impossible to trade USDZWD).
“Argentina deliberately defaulted on its clearly unfair debts, negotiated their debt down on the secondary debt market and are now a thriving economy.”
Argentina is a basket case economy, and the government is expropriating assets to try and pay its bills and lying about true inflation. The Argie Peso devalued 40% last year officially, and much more than than in the black market – which is the only place you can get hard currency.
“Why does the government have to own all means of production and control all assets simply to provide a circulating medium of exchange?”
Because if it doesn’t, the populace can circumvent it, creating their own for of “money” supply again.
“QE is an asset swap!”
I won’t reprint your entire comment for sake of brevity, but you are *so close* to understanding it now…you swap cash for assets, and you can do it back again. Either way you don’t extuiguish the debt. To extuinguish the debt you have to print new money….which we (I hope) would agree is inflationary. Which also shows why QE is not “printing money” in the sense Richard Murphy makes it out to be.
“That is not necessarily true either. In fact, during a prolonged recession, cutting spending or curbing borrowing is the worst thing you can do!”
This is a long and convoluted topic, with no entirely correct answer. For low debt countries what you say can easily be true, as investors are unconcerned about getting their money back and welcome more growth – no risk of a debt spiral. High debt/spending countries might have the rug pulled from beneath them when investors stop funding them, so are forced to cut spending – which tends to be extremely large to run up such a debt. Sometimes the accumulation of debt and it’s interest outstrips growth, and that is basically the end for an economy without cuts to spending or similar internal devaluation.
There are many examples for both the success (NZ, Canada, Ireland, UK) of austerity, it’s failure (Greece, Spain, Portugal) and the failure of high Keynesian spending (France). It’s certainly not a clear cut argument either way – which is why I guess so many argue about the merits. I do feel the left tend to argue agaist cuts to spending more to protect their ideological estate and power base rather than because of a true understanding of how Keynesianism was supposed to work.
“Again…..the national debt is never repaid! It is simply rolled over and refinanced!”
Mostly, but there is a limit to how far you take it. You still need investors to roll over that debt and buy the new bonds. Once interest payments exceed tax revenues the country is bankrupt, and usually far before then. If investors think that the chance of getting their money back is too low they simply pull out – sending rates higher still. So it’s only a simple case of rolling the debt over if people are happy you will still pay it off.
@ Richard Murphy
“Debating with those not willing to appraise themselves of facts — as you are clearly not willing to do — is pointless”
Facts as defined by who? You? Via Ann Pettifor?
If what you were saying was factual and beyond doubt, it would surely have been easy to answer the question I posed? Even with a simple example of where it has worked? Instead you come up with some banker conspiracy twaddle, and are unable to explain why *every* time money printing has been tried in real life it has been an unmitigated disaster.
So, I’ll politely ask again for an answer to the question:
Why, if it is easy to “print money”, and there are no serious downsides, do governments not do it more frequently? Surely it would be beneficial for any nation to have no debt, unlimited infrastructure spending and low taxes?
If you can’t answer that without resorting to unevidenced conspiracy theories, please answer why every time a government has resorted to pure money printing, economic and fiscal disaster has ensued?
We have printed £375 bn
The US has been doing $85bn a month
There has been no disaster
Read Paul Krugman
This is the whole point: QE is NOT money printing.
In QE you swap one asset (bonds) for another (money). No new assets are created. Unwinding QE reverses the process.
To tear up the bonds *whilst still leaving money in the economy (which is what you would need for your plan to work)* you would need to outright print more money – not QE.
Which is why the QE done by the BoE, FED etc has NOT led to runaway inflation – because they aren’t printing money, just swapping it for other assets with the aim of increasing liquidity at the monetary base and lowering long term interest rates – the aim being to encourage lending.
Printing money as you suggest is NOT what has been done. As such, QE CANNOT be used to pay off debt, build infrastructure etc.
And I do regularly read Krugman. Here’s a nice article:
http://krugman.blogs.nytimes.com/2012/04/20/plutocrats-and-printing-presses/
I quote:
“What’s wrong with the idea that running the printing presses is a giveaway to plutocrats? Let me count the ways.”
“Quantitative easing isn’t being imposed on an unwitting populace by financiers and rentiers; it’s being undertaken, to the extent that it is, over howls of protest from the financial industry.”
“The naive (or deliberately misleading) version of Fed policy is the claim that Ben Bernanke is “giving money” to the banks.”
“Furthermore, Fed efforts to do this probably tend on average to hurt, not help, bankers. Banks are largely in the business of borrowing short and lending long; anything that compresses the spread between short rates and long rates is likely to be bad for their profits. And the things the Fed is trying to do are in fact largely about compressing that spread, either by persuading investors that it will keep short rates at zero for a longer time or by going out and buying long-term assets. These are actions you would expect to make bankers angry, not happy – and that’s what has actually happened.”
I can assure you, QE is printing money
I think you are now wasting my time and other readers’ time
Thank you for your contributions
” Scotland now starts from the position that the debt is England’s problem.”
Wasn’t it always? The UK’s debt is just that, the UK’s: any “debt” Scotland would have was a result of UK government decisions, not those of Scotland. This isn’t the treasury “shooting themselves in the foot,” this is basic acknowledgement that a government cannot be held responsible for debts it never incurred, surely?
@colonial 69
No, gilts are issued in the name of the Treasury. They are, and always have been legally responsible for it in full. This news, in essence, is no news.
Mr Alexander got the job after David Laws had to step down. Something to do with paying his boyfriend rent at the expense of the taxpayer for years apparently.
Where are many examples for both the success (NZ, Canada, Ireland, UK)”
I’m sorry…..you’re seriously saying austerity has been a success in Ireland? Is that why a record number of young people have left the country in search of work? I’m afraid I am now having a hard time taking you seriously!
““In the UK, there is NO fractional reserve requirement”
This is for cash ONLY, and you are technically correct here. Unfortunately, in terms of lending, the bank’s Tier 1 capital is what matters under Basel 3. This heavily limits the fractional reserve system.
http://en.wikipedia.org/wiki/Basel_III#Capital_requirements
No – that is capital adequacy requirements, the amount of capital it has to keep on its books…around 8 percent! This is totally different to the so-called “fractional reserve”. In the UK, there is no limit as to how many times the same collateral can be recycled and hasn’t been since 1980.
“Riddle me this. if you take out a loan, are you any richer?”
Well. it’s money I did not have before (which is why I would take out the loan in the first place. I can take it to shops and buy things with it that I could not before because it is a source of money, so I’m hardly going to feel poorer, am I? Loans are 97% of our money supply! Of course its money!
“Yes, the money supply increases past the banks physical deposits. The bank then goes to the money markets, central banks etc to fill that shortfall.”
No….people do not go and draw om their deposits ALL AT THE SAME YIME! If they did, the banks would quickly become insolvent as they only cover a small proportion of that debt! Instead of avoiding the point for the umpteenth time, please tell me why the banks crashed if these loans were covered!
“It’s not a ponzi scheme. If evryone sold their houses for example, they could pay back all the debt. If everyone asked for their money the same time, a bank run, banks would only collapse because those phyisical assets can’t be liquidated fast enough, and the bank loses the ability to borrow short term to cover the money it has loaned out.”
The bank gets assets for which it never put any physical assets such as notes and coins but simply numbers it wrote into a ledger? Nice work if you can get it!! I think you will find, in a declining market, the banks would have to sell many of those houses at a loss and would be unable to plug the hole in its balance sheet!
““QE is an asset swap!”
I won’t reprint your entire comment for sake of brevity, but you are *so close* to understanding it now…you swap cash for assets, and you can do it back again. Either way you don’t extuiguish the debt. To extuinguish the debt you have to print new money….which we (I hope) would agree is inflationary. Which also shows why QE is not “printing money” in the sense Richard Murphy makes it out to be.”
It IS money printing! The money is not lent….it is created, either as physical cash or on a computer keyboard. The BoE have bought these assets at face value! They have not borrowed them! The bank has swapped bonds for cash! If the BoE WERE to use the £375 billion in bonds to get back the £375 billion in cash, it is a like for like swap and has not added any extra cash to the money supply! The BoE have exchanged the same amount of money as the bonds are worth! Where does the inflation com from?
“High debt/spending countries might have the rug pulled from beneath them when investors stop funding them, so are forced to cut spending — which tends to be extremely large to run up such a debt. Sometimes the accumulation of debt and it’s interest outstrips growth, and that is basically the end for an economy without cuts to spending or similar internal devaluation.”
Rubbish! After WWII we had one of the highest debts in history. We experienced unparralelled growth!
“Zim had extremely low debt before the collapse, and the currency devalued onshore, not because of speculators (it was almost impossible to trade USDZWD)
Erm……no it didn’t! The sole reason Zimbabwe printed money in the first place was to pay off its debt to the IMF!
“Argentina is a basket case economy, and the government is expropriating assets to try and pay its bills and lying about true inflation.”
No – Argentina was quite rightly making a stand against greedy bastards who had bought pieces of Argentina’s debt on the secondary debt market for pennies on the dollar, then tried to make claims of 100 cents on the dollar. The Argentinians quite rightly told them to take a long walk off a short pier! Argentina paid off all its debt and, despite some (exaggerated by the media) inflation problems, their economy is doing pretty well…far better than ours, in fact!
“Mostly, but there is a limit to how far you take it. You still need investors to roll over that debt and buy the new bonds. Once interest payments exceed tax revenues the country is bankrupt, and usually far before then. If investors think that the chance of getting their money back is too low they simply pull out — sending rates higher still. So it’s only a simple case of rolling the debt over if people are happy you will still pay it off.”
But the more you invest in productive activity – creating jobs, spending on housing, infrastructure and transport, the more tax revenue you have to pay those debts! A point you seem to be at pains to miss!
“I do feel the left tend to argue agaist cuts to spending more to protect their ideological estate and power base rather than because of a true understanding of how Keynesianism was supposed to work.”
Please explain how Keynesianism was supposed to work then….I’m all ears! Perhaps you could explain why there was a catastrophic crash in the financial system in 2008 when those loans were apparently covered!
“Which is why the QE done by the BoE, FED etc has NOT led to runaway inflation — because they aren’t printing money”
““What’s wrong with the idea that running the printing presses is a giveaway to plutocrats? Let me count the ways.”
Ahem……!! 😀