Ever since austerity programmes began they have been justified by a number of rather bizarre economic arguments.
The first of these was that government borrowing would squeeze out private investment. There is no evidence that this is happened. Instead, it appears that big business is choosing to sit on enormous piles of cash which he could invest, but chooses not to use.
The second was that as government borrowing increased so would the interest charges that had be paid on it, so increasing the cost of debt to the point where the government would collapse under the burden of its debt obligations. In 2010 George Osborne was all too anxious to draw comparison between the UK's situation and that of Greece. This too has now been proved to be ludicrous despite the fact that the coalition government has now borrowed more since coming to office than the last Labour government did in 13 years on office. As the FT said yesterday:
Ten-year yields on core government bonds, which move inversely with prices, have edged lower in 2014 — defying a near-universal start-of-the-year consensus that the only way was up.
This, incidentally, is true across a number of major countries, and not just the UK. The fact in that case is that there has been no crisis of confidence. Instead people are actively seeking to buy government debt.
In that case the question to be asked is why we are not exploiting this now to raise the funds to invest in the way this country so desperately needs? It's economically absurd not to do so.
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a naive question perhaps? is the money the government is borrowing actually companies’ or people’s savings or is it money created by the banking system-or a combination of both?
It is savings
Not pure money creation
Bar £375 billion of QE funds
Since the money used to buy our own government bonds is created from nothing at interest by the private banks, why aren’t we instead using money created from nothing at no interest by our own central bank to buy our own bonds, thus cutting out these expensive and irrelevant middle-men?
EU law forbids it
Though QE got round that
One wonders how something so clearly antisocial comes to be law and why we’d want to obey it? When did that go to the people, I wonder? What would happen the UK if we breached this part of the agreement, one designed clearly to favour only the banksters against the commmunal interest? Can this be the reason Cameron wants us out of the EU, so that we can lawfully create and spend money (nearly) directly into the economy, solving many of our financial problems which are entirely artificial anyway? When was this passed, can you recall? I’m thinking Maastricht but can’t remember exactly… I believe we were able to create money directly into the economy before then – are Bradburys or their equivalent outlawed too by the same measure, do you know?
Maastricht
1992
Bill I can’t imagine that the City would want what you suggest and I would also imagine they played a hand in advising the Govt. It is easy to think of the EU as a country but, of course, it’s not and decisions have to be worked out. The Commission possibly does resemble a govt. to an extent in its actions.
What you suggest sounds good to me.
The money used to buy government bonds is *never* created by banks. That is the wrong sort of money.
Government bond purchases *delete* bank money and move bank reserves back into the central bank buffer used by HM Treasury. (And government spending forces the creation of bank money, moving the reserves to the banks in the first place).
You can only buy government bonds with central bank money.
You really need to get over the hang up about private bank money. They are creating it on licence from the central bank, pegged as it is to the central bank liabilities. Therefore it is the central bank that is essentially creating the money anyway.
It is a simple outsourcing operation – like Sita being contracted to empty the bins.
“You can only buy government bonds with central bank money.” I’m sure I speak for all of us when I say “Huh?” Whom do you mean when you say “You” in that statement? I think we might be posting at cross-purposes.
“It’s economically absurd not to do so.”
It’s economically absurd to issue Government Gilts. Why pay companies to save, when they are already hoarding due to lack of profitable investment opportunities?
The issue with private pensions could be solved simply by offering a government annuity – aka a top up on the state pension.
Neil-I assume you are coming from a Modern Money Theory perspective here. Most MMT’ers are appallingly bad at explaining themselves because they assume their frame of reference is obvious!
MMT sees the selling and purchasing of bonds as an interest rate control mechanism if I’ve got it right.
MMT DOESN’T see private banks as money creators (!) yet when banks create loans new money enters the economy-so banks do create “money things” but not the unit of account.
Neil -you’ll need to clarify these concepts if you are not just going to get a “huh” from most of the readers of this blog!
i’m also confused. i got the following from prosperityuk.com (which goes to great lengths to explain why commercial banks DO create money), which quotes a text book used as part of the Institute of Bankers Stage II syllabus:
” The Creation of Credit
The growth of banking as a system for taking care of money was soon supplemented by a more profitable activity. The early goldsmiths had noticed that only a very small proportion, about 8 per cent, of the funds of each depositor was in use regularly, being drawn out and paid in as funds were used or received. The proportion left on permanent deposit was about 92 per cent of the average depositor’s funds. It seemed sensible to lend some of this money to people anxious to borrow for industrial and commercial reasons.
However, in lending out these surplus funds the banks took a more sophisticated view of the unused balances than merely to regard them as funds available for lending. Consider a deposit of £100, of which only £8 is likely to be required to meet the customer’s needs, and the balance of £92 is available. The banks did not regard this as £92 available to lend to customers, but as the cash ratio for loans to a much greater sum. Of what sum is £92 eight per cent? The answer is:
£92 ÷ 8 x 100 = £1150
In theory the bank could lend a customer £1150. The customer has borrowed the money to spend, so let us pretend that in the eighteenth century he bought a herd of cattle for £1150. The vendor of the cattle would not know that the money was a pure invention, and would pay the cheque for £1150 into his account, but the statistical probability was that he would only then ask for 8 per cent of it, i.e. £92—the exact sum which the bank has available. We therefore see that ‘loans make deposits’ and also make profits for the bank. If the rate of interest was 10 per cent, and the loan was for one year, the interest earned would be £115, more than the original deposit which made the loan possible. The whole process is usually called the creation of credit or the *CREATION OF MONEY*.”
if anyone has any info or links explaining how that isn’t creating money, i’d be grateful to see them.
The confusion happens because the word “money” gets thrown around without defining which type you are talking about as its a pretty vague term. “Anything can be money, trick is getting the other person to accept it” (Hyman Minsky)
MMT says that banks create an IOU for state currency (or as Chris Cook puts it a facsimile of treasure credit)that is treated as “money”
The state creates reserves (so called high powered money) notes and coins. HTH
As regards Bonds yes if a central bank is targetting a positive interest rate it would use bonds to do so(at least before QE which is merely an extension of old style Open Market Operations, currently using Interest On Excess Reserves to do it)
thanks… i reckon i’m part way to understanding it!
quite a few of the better comments on the blog come from people who reference MMT a lot so i might pop down the local library see if they’ve got any books on it.
the quicker this issue is addressed the less dogs they’ll be barking up the wrong tree, and hopefully a few more up the right ones.
gratefulpleb,
You might find this recent ‘MMT Basics’ article by Randy Wray worth a look…
http://www.economonitor.com/lrwray/2014/06/24/modern-money-theory-the-basics/?utm_source=feedly&utm_reader=feedly&utm_medium=rss&utm_campaign=modern-money-theory-the-basics
Also Warren Mosler’s ‘Seven Deadly Innocent Frauds of Economic Policy’ is a great intro…
http://moslereconomics.com/wp-content/powerpoints/7DIF.pdf
Note that none of these people are lightweights. Mosler’s book foreword is by noted economist Prof. James Galbraith, son of the great JK Galbraith.