I am quite happy to put it on record that I have major reservations about accepting China as a major partner with the UK. I could start with their human rights record, their distaste for democracy (which is undiminished) and their treatment of Tibet. I could continue with the fact that they still at least notionally adhere to a communist agenda that I find unattractive. And then I could mention their economic weaknesses. None of these say to me I would not trade with China; that is very hard in the modern world. But they are enough to make me think that relying on them as the source of funding for UK infrastructure is just, to be candid, very unwise.
Especially when, if there are no other alternatives available (and I do not accept that is true, by the way) that infrastructure could be funded by People's Quantitative Easing.
I juts thought I should mention it, just in case anyone had forgotten it.
PS I am thinking of producing a comprehensive guide to People's Quantitative Easing. Would there be any demand for it?
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A comprehensive guide to PQE would go down very well thank you.
Demand? Oh yes please…
A guide would be a reference point for all, public, politicians, economists alike.
But may I just suggest that to convey the message of pqe effectively may require “an idiots” version as well as the one that you may be happy with, as I am afraid it would be easy to baffle and therefore loose the interest of most, leaving them vunerable to other influences.
But never the less a guide would be most welcome thankyou.
I was rather thinking of the plain English one
Oh yes,that would be even better. Haha…..
The state’s cost of money is zero.
Osbourne is just giving free money to China.
Traitor.
Given we are where we are, and not starting from zero, is the following not plausible?
– PQE is used to fund significant public expenditure.
– Doubts about how much PQE will be used causes an increase in the rate at which the UK can borrow ( existing debt *will* be rolled over – I don’t think even RM would suggest the entire national debt is monetised )
– This increase in debt repayments more than offsets the benefits of creating money rather than using Chinese money.
I have no clue what you are saying in that, to be honest
Then I’ll try again.
Bob is saying that as PQE can create money at zero cost, then that is a better option than paying China a return on their investment.
I’m suggesting that whilst this may be true in theory, in practice the results might be different.
If PQE is used to any large extent, it may cause uncertainty in markets, leading to the rate we have to pay on the national debt to rise – I am assuming you would accept we would still roll over existing national debt as normal.
You could then find that the increase in debt interest payments on the national debt exceeds any saving you make by using PQE rather than tapping up the Chinese.
Why would it cause uncertainties in markets?
Is economic growth widely despised?
“Why would it cause uncertainties in markets?”
Logically? No reason whatsoever.
In the real world? Having discussed this with someone who is involved in gilt trading their line of reasoning is essentially the ‘slippery slope’ argument – if you use a little PQE, then you’ll be tempted to use a lot of PQE. No one is sure what the long term results of this will be, so the risk is raised.
You may disagree with their conclusion, but it is surely a perfectly plausible outcome?
I do not think it plausible at all
If it works they will be convinced
It will work
“Having discussed this with someone who is involved in gilt trading ”
I think this maybe a case of there’s nothing in it for them.
Soot on
I must remember to say it
why is it a taboo for a democratically elected government to create fiat money as a sovereign whilst private banks can create as much credit money as demand requires? Do you think the banking system creates money responsibly, so doesnt fund asset bubbles? Government and banks are the only means of creating new money.Goverment can be kicked out if they cock up.
Good questions
I think you know the answers
Half of Gilts are issued to overseas entity.
Analysis here (please read all of it with open mind):
http://www.3spoken.co.uk/2015/09/gilt-issues-considered-harmful.html?m=1
Yes please, a comprehensive guide wouold be very welcome. I have tried to explain it to others but my memory fails me on important points.
I have now become an avid follower of your blog and have recommended it to several of my friends in the hope that they too will at least take a look and get the information straight from the source.
Keep on blogging and sharing those links, and thank you for the tremdous work you are doing.
Thanks
Yes please Richard would be very informative
Some economists would argue that if countries like China want to sell us more stuff that we buy from them we should just let them. After all, they say, it’s better to have a surplus in the exchange of real goods and services than a surplus in another country’s IOUs. I accept that up to a point.
But beyond that point there are strategic interests which means that we don’t want to become too reliant on our overseas suppliers, in case they don’t want to, or can’t, supply any longer. At least not on terms we might find acceptable.
So how would we balance our trade? If we wanted to! In the absence of government intervention in the forex markets, trade will always balance. The countries exporting more find their currencies in higher demand and so become more valuable. This makes their exports more expensive and so the volume of their exports decreases. Conversely with the importing countries.
So the observable fact that there is a permanent imbalance, on a worldwide scale, indicates that there is significant government intervention everywhere in those forex markets. The UK runs a significant trade deficit of some 5% of GDP. It does that by selling gilts on the international markets, the demand for which forces up the pound and makes UK exports more expensive than they should be according to the workings of the free market. Selling gilts overseas is an example of such government intervention.
So, notwithstanding any arguments about the cost of energy in the UK, the higher exchange rate means that it is less economic to produce, say, steel in the UK than it need be. Consequently we see steel plants close down as we’ve just seen happen in Redcar. We could bulldoze the steelworks and build houses there instead using the proceeds of deficit spending by gilts. But, suppose we were to need steel at some time in the future, and we couldn’t just buy it in?
The solution is obvious. Stop selling gilts, save on the interest bill, and let the pound find its own level. UK residents can be allowed a National Savings account. Those who say that Britain is “living beyond its means” have to accept that artificially inflating the pound’s value, over and above what it should be is what they really mean. If government needs some spending money to temporarily replace the loss of revenue from gilts it should just create it, by PQE, until a new equilibrium based on more balanced trade is reached.
Once the external deficit is balanced, the internal deficit will reduce as less money leaves the economy and there is less need for deficit spending by government to replace that lost money. Any deficit spending can then be used to grow the economy rather than just maintain the status quo as it does now.
Correction. The first sentence should read “…..sell us more stuff than we sell to them…..”
yes please
Yes please: I am sure that the people’s economics education initiative that I and a few others who met on this website are pursuing as a result of your inspiration would be most grateful!
OK….
Darren “In the real world? Having discussed this with someone who is involved in gilt trading their line of reasoning is essentially the ‘slippery slope’ argument — if you use a little PQE, then you’ll be tempted to use a lot of PQE. No one is sure what the long term results of this will be, so the risk is raised.”
This is an argument for getting pension funds and other private institutions to invest in the National Investment Bank as well – preferably agreed before it is created.
An easily understood, plain English, guide to PQE is a great idea so yes please.
But, as you may well have in mind, I believe it would be a good idea to test it with members of the general public, ie those the guide would be seeking to influence, prior to unleashing it on the world.
Quite how those people could be identified is somewhat beyond my experience or imagination, particularly at this time of day!
I do have a deeply annoying editor available for such testing….
You wrote a comprehensive account of Green QE back in March
http://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/
Have you changed your mind on any details since then?
I would guess that a lot of what has changed is that the increased attention means you have had to defend PQE against a lot of media articles, so your defence is spread across numerous blogs from over the summer, and it would be handy to have all of that information together in one place.
I have one suggestion. I have enjoyed reading your defence against people who say that you are going far too far, but I have not come across any substantial defence from you against those who say you are going nowhere near far enough. Your £50bn a year for a few years seems quite modest in comparison to Bill Mitchell’s OMF for everything with no government borrowing at all. I’d appreciate if you could explain in your guide in a bit more detail what you think would happen if we went this way and why you believe it would be taking PQE too far, with reference to the reasons that Mitchell and other MMTers put for why OMF/PQE is the optimum way to fund everything and why you disagree with these reasons.
All noted, and your reasoning is right
I could do better than I did in March but need time to pull it together
I agree with almost everything you say. However, a country that still has growth of around 6 or 7% is hardly weak.
As to your comments about communism, I prefer the true core beliefs of the communist manifesto as written by Marx and Engels, not the top down, authoritarian version that inflicted Russia. I din’t regard that as true communism. And though they don’t have democracy to speak of, despite any protests to the contrary, it is safe to say that modern day China is much more capitalist than communist, albeit with a Keynesian, more distributive system.
Richard, I suggested a “Corbynomics for Dummies” a few weeks ago, and it still seems an urgent requirement for people like me, who think they understand what it means, but struggle to explain it to other people. I have friends,some Labour, one LibDem (clinging on desperately, because of the electoral reform issue), who are so stuck in the household budget analogy, that it is impossible to budge them. They are not ideologically opposed to the idea – that would require a different approach I believe.
As well as plain English, an alternative analagy would be very useful. I often hear people using the comparison of the 30 year mortgage for house buying, as a more appropriate metaphor for justifying debt incurred for investment and security, and that seems to speak to my doubting friends.
They also need to understand that money is created by bank lending. Many people I know are very computer-literate and can relate to the idea that accounts are simply digital, and no real money or collateral is required to create money. Sadly I lack authority in this area, and get written off as deluded or eccentric, so a clearly written, plain English explanation would be invaluable. And some illustrations (not graphs) for visual learners!
You may be setting me a target I can’t reach
Helen, there are a group of Murphyistas us working on this – A people’s economics educational project.
Murphyistas? That’s slightly scary…..at least for Tim Worstall
Wonder whether a paradigm for PQE could be electrical?
It is probably a bit simplistic but that is the hook to promote greater understanding.
The Treasury and the BoE provide the power for the generators of the electricity of the economy – the banks.
As the economy is still so slow (and the electricity so limited) we need more than just the generators that now exist. The new generator is the National Investment Bank which would give more electrical power for the economy and be an additional generator to be a back up when the other power generators fail (as we know they did in 2008/9).
Possible – good I hope – questions would be
Does the Treasury power the private banks?
Does the Treasury power the NIB?
If, as I think, the answer is basically yes to both of those then we should all be in a better powered world…
Could this be an analogy that could be built on?
I’ll muse on that
And by the way might a deficit electricity analogy work too?
We have a continental electricity connection which. I understand, is generally not in our favour. Do the lights go out?
No
So practically it is secure.
But are we going bust as a result?
The suppliers are very happy to supply – indeed so happy that they are agreeeing to build the next power station..
“PS I am thinking of producing a comprehensive guide to People’s Quantitative Easing. Would there be any demand for it?”
Yes please! A separate go-to link would be great. Its otherwise quite time consuming to click about blog posts to collect information.