From The Metro:
When a central bank starts quantitative easing it prints a set amount of money, which the government then uses to pay off debts and buy company shares and bonds.
Notwithstanding that it usually ends in tears when government start buying up companies, I am having one of those "Am I mad or are they?" moments.
To recap, a bank note = a non-interest bearing government security.
Apart from the interest bit, they are interchangeable. You could waltz into the Bank Of England* with a suitcase full of coins and notes** and buy government bonds. And when they mature, you waltz back in again and ask to have them redeemed in cash, so you swap one bit of paper with a big number on it for lots of bits of paper with smaller numbers on them.
It really is very simple. If the government uses coins and notes to pay off debts it has not reduced its debts by one red cent. It has merely swapped bits of paper. The underlying position is the same.
Alternatively, the government could print money and hand it out to citizens for free. That might lead to inflation (thus reducing the value of savings, propping up nominal house prices and reducing real value of debts, which seems to be the government's main aim at the moment) but it still increases government borrowing, which we taxpayers will have to pay back in future.
It's all pushing pieces of string, that are no longer attached to anything anyway. This is 'emperor's new clothes' stuff, it really is.
* Or wherever it is that they sell them.
** Assuming you aren't immediately arrested for money laundering and have your money confiscated.
What have we wrought in the UK?
3 hours ago
16 comments:
Not quite mad, but a little mistaken IMHO. Cash operates as full and final payment of obligations. You can't redeem it for anything.
Therefore if the government prints money and uses it to buy securities, those securities disappear along with the obligation they represented. The fact that there is now more cash in the system simply reduces the ration demanded for real goods (i.e. inflation). Wealth has been transferred from existing holders of cash to the government.
I think you are analysing it as if it was a scrip dividend, in which case the company in question has not decreased it's liability to shareholders. That's mistaken because those equity shares can be "redeemed" for dividends / liquidation value / secondary market.
"reduces the ration"
I meant "increases" and "ratio". Duh!
As in there is more cash fighting over the same real wealth
NVM, "you can't redeem it for anything"
Oh yes you can. Imagine you have £10,000 in coins and notes and a £10,000 income tax bill falling due on 31 January. You extinguish your liability by handing back to the government those coins and notes.
I had a gut feeling that what the governent is doing is wrong, as is natural, and I think you have confirmed it. But for confirmation I await the English translation!
Mark, good point but seeing as tax is (for now) at less than 100% then the government doesn't simply get all those new notes returned to it.
But FWIW I'd be keen to read any further efforts you make in unpicking this whole idea.
NVM, OK, as a thought experiment, think this through to the ultimate conclusion.
The govt could print £500 billion of notes and give everybody and every business a full tax rebate for last year; and for this year everybody uses this money to pay this year's tax bills.
Then every penny of govt spending in the next year must mean the govt is running up additional debts, because for one year all we taxpayers are doing is giving them back bits of paper that they originally gave us.
Ultimately it comes back to the basic equation that "bank notes = non-interest bearing government borrowing".
I really could not give a rats arse what this government does with money - on their track record whatever it is it'll make things far worse.
Overall all I want them to do is CUT INCOME TAXES AND TAXES ON EMPLOYMENT AND PRIVATE BUSINESS NOW and let me work out how to survive their cock up using my money myself.
L, that's a good plan as well.
How about on 31 Jan instead of paying your tax to the IR pay it to your bank instead? Cut out the middleman and help yourself and the bank at the same time. Send the IR the bank credit slip telling them what you've done and why.
Mark,
Re your answer to NVM, the additional debt is already being realised via the bailouts to the banks, so why not send it to the banks via ourselves? The borrowing is already equivalent to the tax receipts so therefore...
I know you will argue that it works out the same but if you or I were to receive a cheque for, say, £2000 only usable towards rent or mortgage then we know it will still have to be paid back via taxes postponed.
It will however allow a certain amount of (spin!) 'confidence to return to the consumer' and possibly absorb some of the crash effect i.e. give a breathing space, in which time we could (and the sensible ones will) save a similar amount in anticipation of tax increases to compensate.
I know this is deferred taxation but surely this will also be a stimulus?
In the interim, banks will have to be forced into providing facilities or be let to go bust.
I've been there in business and it is only because of the (****** ****** ** **** ***** banks! Barstewards!) lessons I learned that I had to accept limitations or go bust. Then I understood the meaning of insolvency.
No, before anyone asks, I have never been declared bankrupt.
There is a project ongoing that keeps the same people doing the same thing again and again, it is time to stop and say: no, you had your chance and you blew it, you are having no more chances, or as it was more succinctly put to
me on my first management post: 'don't fuck up'.
Why do we not demand the same from our bankers?
And before anyone comes in and states: who else is going to get us out of this? Just remember the graveyards are full of indispensable people.
STB.
STB
Well, yes. In other words rather than each of us giving the banks £20k via the agency of the government as a middle man just cut our taxes by £20k each. We would use this money to pay off debts or to spend or to invest. If we pay off debt, the bank improves its balance sheet. If we spend it businesses prosper and money flows through the banks creating credit on the way. If we invest it businesses get more risk capital and can grow and attract more customers to create profist and wealth and more money flows through the banks....anyway you get the picture.
Trouble is this would make a mockery of Browns sole policy of tax'n spend. It's all labour has left after abandoning Cl4.4 so tey are totally unlikely to acknowledge their failure and act. The question is is Cameroon Osbourne any better?
As you may have seen i am advocating a tax strike on 31 Jan. We should pay our taxes but pay it to our bank direct and send the banking credit slip to the IR.
STB, L, those are great interesting thought experiments, but it all leads me to the same conclusion "writing numbers on bits of paper and shuffling them round the system" achieves at best nothing, and at worst (to be fair) doesn't cause much damage.
Whether it's £2k or £20k, the prudent will just stick it in the bank (who don't dare lend it out, achieves nothing in the short term) the feckless will splurge it (so that will dissipate quickly) and those who are up to their necks in Nequity won't be helped much either (but it will shave the losses that banks make when they foreclose by £2k or £20k).
Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.
In a Liquidity Trap although Saving (S) is abnormally high investment (I) is next to 0.
Hence, the Keynesian paradigm I = S is not verified.
The purpose of Quantitative Easing being to lower the yield on long-term savings and increase liquidity it doesn't create $1 of investment.
In a Liquidity Trap the last thing the Market needs is liquidity.
Quantitative Easing does diminish the yield on long-term US Treasury debt but lowers marginally, if at all, the asked yield on long-term savings.
Those purchases maintain the demand for long-term asset in an unstable equilibrium.
When this desequilibrium resolves the Market turns chaotic.
This and other issues are explored in my tract:
A Specific Application of Employment, Interest and Money
Plea for a New World Economic Order
Abstract:
This tract makes a critical analysis of credit based, free market economy, Capitalism, and proves that its dysfunctions are the result of the existence of credit.
It shows that income / wealth disparity, cause and consequence of credit and of the level of long-term interest-rates, is the first order hidden variable, possibly the only one, of economic development.
It solves most of the puzzles of macro economy: among which Unemployment, Business Cycles, Under Development, Trade Deficits, International Division of Labour, Stagflation, Greenspan Conundrum, Deflation and Keynes' Liquidity Trap...
It shows that no fiscal or monetary policy, including the barbaric Quantitative Easing will get us out of depression.
A Credit Free, Free Market Economy will correct all of those dysfunctions.
The alternative would be, on the long run, to wait for the physical destruction (through war or rust) of most of our productive assets. It will be at a cost none of us can afford to pay.
In This Age of Turbulence People Want an Exit Strategy Out of Credit,
An Adventure in a New World Economic Order.
A Specific Application of Employment, Interest and Money
Press release of my open letter to Chairman Ben S. Bernanke:
Sorry, Chairman Ben S. Bernanke, But Quantitative Easing Won't Work.
Yours Sincerely,
Shalom P. Hamou AKA 'MC Shalom'
Chief Economist - Master Conductor
1776 - Annuit Cœptis.
MW 19.57. I know I know, but at least some of us would be better off by the shuffling happening through us. Me with extra investment in my business, you with extra savings, others with reduced debt. And, if taxes are cut permanently, and government spending is curtailed in line then wealth creation will take place and we will all be better off. There is no substitute for letting people keep their own money. They - in the main - know how best to spend it.
L, "if taxes are cut permanently, and government spending is curtailed in line"
It is in fact that simple. But you'll struggle to find a political party outside UKIP that comes anywhere near that sort of thing. And to be fair, even UKIP are only half as radical as you or I.
As you are probably all aware, these perfectly reasonable solutions would not be implemented because:
1) It reduces government control over spending if they let private citizens do it themselves
2) It doesn't help the flagrant theft of wealth from the productive (who don't vote Labour) to stuff the pockets of the unproductive (who will).
Economics doesn't come into it.
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