I was asked recently to comment on this statement made to my correspondent in response to the suggestion that a country with its own currency can never go bankrupt:
A country can default on its debts though or be so heavily in debt that its only hope is to print lots of money (like we do) to stay afloat, until that currency is destroyed and so the overbearing debt is hyperinflated away and a new currency is eventually born in its place after the collapse phase. Technically not "bankruptcy" as such, but still much the same effect. Also by unlimited money printing this could also lead to the collapse of the bond market which finances our deficits. If we can't do that, we are pretty much screwed.
There are so many falsehoods in here that it is hard to know where to start debunking.
First, let's be clear we're not printing lots of money to stay afloat. It is true that the Bank of England has created £435 billion of new money using quantitative easing since 2009. Despite this UK broad money supply (M4, as it is called) has fallen since then. To say that printing money is creating excess money supply is just wrong as a result.
To say that's we're heavily in debt is also wrong. I refer to the evidence here. The Bank of England would say we owe 89 per cent of GDP in national debt at present. This, however, ignores the fact that the Bank of England actually owns one quarter of that debt. The true figure for national debt actually owing to third parties (which is what matters) is, then, 67 per cent of GDP, which is historically an incredibly low rate.
Nor is inflation a concern. Inflation is running at just over two per cent now. There is not a hint (barring adjustments caused by Brexit) of more to come. To talk of hyperinflation is absurd.
The suggestion that money printing by our government is, then, a threat to our economy is absurd. In fact, to the contrary, money creation by our government has been essential when the private sector has refused to create enough cash, which is what has been happening in the UK due to net saving by business and the overseas sector and (until recently) households. It is only government money keeping our economy going. This should not, of course, by surprising to anyone: if banks do not do the job of money creation then it is inevitable government must. And do not be confused on this issue by the fact that we now have a personal debt crisis; whilst this might imply banks are over extending credit in some areas (and they are) this is happening whilst other sectors are simultaneously sitting on a glut of savings. It's the mix of debt that we have that is causing the crisis.
So, to summarise, the implication in this comment that the UK is heading for the rocks because the Bank of England has created new money is straightforward hyperbole without any economic foundation in fact. It can be dismissed as evidence free comment of no value at all.
Now let's turn to the bond markets. Money printing is done by denying the bond markets the product they want. That is because QE, which creates money, simultaneously takes bonds out of circulation. It does not flood the market with new bonds. Instead it reduces the supply of bonds because the new money created is either used to repurchase bonds already in existence or it could (if we do Brexit and so leave EU law behind) avoid the need for the issuance of bonds altogether with the Bank of England then lending money direct to the Treasury instead.
To the extent that money printing repurchased all bonds it would, I agree, then destroy the bond markets in UK government debt, which is a product which savers are desperately keen to buy. But this would not be because the market had been flooded with debt for which there was no buyer, as the comment made implies, but would instead be because there would be no bonds left to sell. Those wanting bonds would then be forced to look elsewhere for a safe place for savings, but they would not be able to find that in sterling. That is precisely why I think the government will keep bonds in issue at a net interest yield of around zero per cent, as now. It makes sense to keep the market hungry, but that is exactly what money creation, by rationing bond supply, does. As a result money printing supports rather than undermines bond markets, which are very healthy at present. Once again the comment made is wholly without an evidence base.
So is there anything else that money creation threatens? What it does threaten is price stability. That's because too much money in circulation can undoubtedly deliver inflation. But that can and must be addressed by taxing sufficiently, especially if near full employment. If that is done the risk is averted.
And in that case of all these things are taken into account let's then be clear that the exchange rate cannot be imperilled by money printing. In fact, again the exact opposite is likely to be true because money printing will boost the economy towards full employment, will encourage investment and will boost productivity, all of which improve the exchange rate. So once more the prediction made is wrong.
I emphasise the conditions I note. Money printing must be used wisely. But when it is there is a bonus to any economy using it. The UK has gained. But I stress, if the money printed was used as an investment fund to create jobs in every constituency in the country it could do better still. But what cannot ever be said is that the comment made to my correspondent is correct, because it is just pure economic nonsense.
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“…when the private sector refused to create enough cash…”
Besides forgery, how exactly does the private sector “create cash”?
Are you referring to bank created credit, and/or external sector earnings?
Bank created credit is money
And the difference between cash and money is now so small as to be economically insignificant
But not in terms of tracking and perhaps stopping spending. If I’ve got cash money (formerly gold or silver, back in the day, not notes or coins as we have it now) in my pocket, assuming I can locate sellers I can spend it where and as I please in anonymity. Money in digital form though can be isolated and transfer of it blocked, if not yet in practice, in theory. Hence we have the War on Cash, it’s enabling for the authorities (as well as cheaper for the banks) as in an all-digital environment they should be able to isolate and block specific individual trading. Be a bit of a horror show, that, unable to live from the land and blocked from trading too.
I worry that the conflation of terms such as cash, credit, money, currency, wealth…etc. can lead to confusion, especially among those for whom this world of money creation is unfamiliar (and I don’t exclude myself).
Personally, I would hesitate to use the term ‘cash’, when what is meant was credit.
The danger is that the popular narrative which insists that all wealth (money, cash, etc) is created by the private sector, and that the Government has no money of its own – therefore depending on taxpayers for funding – is unfortunately *reinforced* by using terms such as “private sector cash creation’.
IMO, “money creation by our government has been essential when the private sector has refused to create enough *credi*t…” would have been more precise, and I think more helpful to those who are trying to get a handle on the intricacies of UK currency creation.
Just my 2p’s worth!
I think it’s a fair point
Sorry about the errant asterisk! Feel free to edit.
All these things have happened before, Richard. May I refer you to this:
https://www.bloomberg.com/news/articles/2017-08-08/the-bank-of-england-1914-war-loans-and-a-patriotic-cover-up
That may get a blog….
Hi Richard, Do you agree that another way to look at QE is just an asset swap?
In this case one can argue that no new money is created via QE which also explains why M4 does not increase.
When investors buys bonds they swap cash for bonds but still think that they have the money – it is just invested in bonds (which are included in M4). When the BoE buys back the bonds investors get their cash back but total money cash + investments is the same. No new money is created. Money is only created when government spends.
My view is that QE did not solve anything (except help with liquidity but a debt crisis is different to a liquidity crisis) and only fiscal policy can help which I think it what you are saying as well. The monetarists just cannot accept that Keynes was right.
Charles
In a sense you have to be right precisely because that’s what the BoE said QE was meant to do. It was, according to them, all about changing the risk profile of asset holding institutions to supposedly increase their appetite for risk by reducing the yield on gilts by forcing up their price and so reducing their yield and also reducing their supply. Asset swapping was all it was supposed to do.
I am not quite sure all gilts are in M4 http://www.bankofengland.co.uk/statistics/Pages/iadb/notesiadb/m4.aspx but foir the purposes of UK MFIs (which is key here) your comment is likely to be right since their holdings will be in shorter term paper which is in M4.
In that broad sense you are right then: QE could not, on this basis, increase M4. It could be argued though that it prevented it falling by more than it did, I think, by providing liquidity support, which I agree is something different.
The point you make clear is that the BoE merely shuffled the pack by changing liquidity profiles. Peoiple’s QE would have increased M4 and fuelled growth.
Thanks
This article ( https://medium.com/@ClaireConnelly/what-if-every-government-paid-off-its-national-debt-fc3267829fe5 ) has described national debt in a way I have not read before, are they correct in your opinion?
“In the US, the National Debt is the sum-total of all US dollars ever issued by the Federal Government, from the nation’s founding up until this very moment, that have never been taxed away by the Federal Government.
The national debt is actually the government’s savings account”
If seems to make sense to me but not sure on its accuracy,
It’s a fair description
What it does not do is allow for the nuance of money creation and the use of funds but in itself it’s correct
This is very like the pitch that Arnold Nesbitt gave to Lord North in the early 1770’s. It was a pity we lost the American Colonies as a result. They might have been quite profitable.
“67 per cent of GDP, which is historically an incredibly low rate.”
Not if you compare it with historical levels which ALSO exclude debt owed to the Bank of England as your 67% does.
It’s a nice try at a bit of linguistic chicanery and will certainly fool most on here, but not those who know what they are talking about.
So tell me, excepting WW1, which we learned about today, what the earlier levels of BoE holding were? With sources and precise values please. I would be pleased to know.
If you can’t supply precisely please send your apology instead.
I have written on this and do not have time to repeat it.
I am not your ‘google’.
My point is correct and you are wrong.
I will now stop wasting my time on here.
I can’t find the evidence but I have asked the Bank of England
I suspect you have none
I have checked the BoE balance sheet
As far as I can see there are wholly immaterial holdings by the Issues Department pre 2009
Would I be correct in thinking that if bonds didn’t exist it is likely to be more difficult for the UK to run a balance of payments deficit? And as we import 40% of our food we start off at a disadvantage…
I am not sure how or why
My thinking was that in return for our imports, foreigners would need to invest in the UK somehow so in the absence of bonds they’d be encouraged even more than now to invest in PFI, Hinkley Point, property, buying British companies and so on. Or even to lend to us in their own (suppliers’) currency. I probably shouldn’t have referred to difficulty – more the idea that it is probably preferable to have a sale of bonds than a progression of sales of the ‘family silver’.
They could just hold sterling deposits
This kind of discussion is always framed the same way – there isn’t enough money – because it’s so hard to imagine that money is made up out of nothing . That is why it’s so easy to fool people into believing that there isn’t enough . Notice the people who say there isn’t enough have more than enough .
Thank you and fair enough, but that is where the UK is potentially vulnerable.
And also why the rule of law is essential to Britain’s existance.
I am not at all sure I follow your logic
Oh dear…. Will write on Progressive Pulse to give further info on my doubts…
“It is true that the Bank of England has created £435 billion of new money using quantitative easing since 2009. Despite this UK broad money supply (M4, as it is called) has fallen since then. ” — And where did the money go then?
As Charles Adams noted recently, it reshuffled the assets of the finance sector
just happen to be “talking” to someone about this on a thread here
(my contribution began Yesterday at 12:35)
7 August at 23:41
“Duncan. Austerity is not a choice. It’s an inevitable consequence of running out of money and depending on others to lend to you instead. Tag Greece, Italy, Spain, Portugal, Finland, Ireland,”
12:35
“the only reason any of those countries need someone else to lend to them is that they are not in control of their own currency, we have borrowed 400 billion of our own money, interest free and we can do so because we control our own currency”
https://www.facebook.com/john.dutton.75470/posts/919329594899239?comment_id=919548601544005
would love any input as it’s going in circles.
We can’t get away from _needing_ investors, inflation and a bit of international trade (coffee)