DBC Reed left this comment on Fun Online Polls: VAT and AAA:
One small thing, as Columbo says when nearing the door: You say that the Guv can "merrily print sterling bank notes or their electronic equivalent", but recently you were claiming that electronic credit creation by quantitative easing would take money out of the system. Or is this a case for Edgar Lustgarten who used to say in his (not) vintage TV show: "But this is where he made his fatal mistake!" BTW never received the e-mail you said you'd send after the previous 15 round thud and blunderfest.
*sigh*
Fact: If and when the holder of gilts with a face value of £1 million turns up at the Debt Management Office on the redemption date, the DMO can merrily hand him a suitcase containing £1 million's worth of freshly printed £50 notes. This is swapping like-for-like (bank notes are just small denomination, non-interest bearing government debts - but in principle no different to gilts).
Fact: When a government borrows money (whether by issuing gilts for cash, or by the Bank of England accepting deposits from commercial banks), it takes money out of the system; and when it spends money, it puts it back into the system. So "borrowing to spend" is just churning it around in ever decreasing circles.
Fact: When a government swaps gilts for electronic balances (aka QE), this has little or no impact. It's swapping like-for-like.
Fact: A government could, if it wished, start paying all its bills and salaries by handing out freshly printed bank notes. This is not like-for-like. This is swapping paper in exchange for goods and services. But all those bank notes add to the overall national debt (bank notes in circulation are shown as liabilities in the Bank of England's balance sheet - if you can be bothered looking it up - because the physical bank note in somebody else's hand is considered as an asset), so what the government is doing is diluting the value of existing gilts, electronic balances and bank notes.
Fact: I sent that email to both email addresses I have for you, if they didn't arrive, then send me an email and I'll ping it to you again.
*/sigh*
Nothing
4 hours ago
21 comments:
I don't know why we're getting a big production number of this not exactly crowd-pleasing wrangle;I include my own performance ,in my self-deprecating way.
How exactly does a government issue electronic credit if its not by quantitative easing?You need to be telling the Debt Management Office and the Treasury as they are wasting their time with QE.Not me.
DBC, I do it for sport, the same as explaining LVT to the Home-Owner-Ists.
"You need to be telling the Debt Management Office and the Treasury [that] they are wasting their time with QE. Not me."
True. But they're hardly likely to admit it, are they, having successfully pulled the wool over everybody else's eyes?
Banknotes may be down in the BoE accounts as liabilities, but in practical terms they are not. I suspect the reason they are shown as such is because in the old days you could turn up at Threadneedle Street and demand your pounds worth of gold or silver. So a pound note meant someone somewhere had a call on the gold in the bank.
Whereas nowadays you can turn up with your tenners, but you won't get anything of value for them. They may be govt 'debt' but that 'debt' can only be repaid in the same notes you wish to exchange. You can't get assets for them, as of right. You can buy something from the govt if they wish to sell it to you, but if they don't want to play ball you are stuck with your notes. Thats not a debt in my book.
So any govt who decides to print cash (actually or electronically) to pay its bills will soon run into inflation, because every note printed means another call on the assets within the economy, without any increase in the number of those assets.
What do you think happened in Zimbabwe?
@Sobers
Wait a minute,we have n't got an answer to the question : How does the government issue credit if not by quantitative easing? OR
Why the hell are they doing it,if its not to bump up credit in circulation?
NB Poor old Melvyn King still has n't got it: he was saying only yesterday,"The additional money created by the asset programme will continue to boost the economy for some time".
It can only be his complete inexperience.
The explanation of pound notes being liabilities because people could redeem them in gold or silver sounds about right.
But as Hitler noticed with Schacht's monetary policies, they don't become inflationary while there's still unemployment or spare capacity.
Sobers: "nowadays you can turn up with your tenners, but you won't get anything of value for them."
A financial asset is merely the opposite of a financial liability - so you can use these notes to extinguish a personal liability to the government, i.e. use them to pay your tax bill.
DCB: "Why the hell are they doing it,if its not to bump up credit in circulation?"
They are doing it to disguise "massive government borrowing" as "an economic stimulus". I covered that here. And they did it most successfully so far, I hasten to add.
"Poor old Melvyn King still hasn't got it: he was saying only yesterday,"The additional money created by the asset programme will continue to boost the economy for some time"."
Indeed he was - but he was lying - they weren't buying 'assets' in the traditional sense (like cars or factories or machinery or paintings - and heck knows what the point of doing this would be), they were buying government gilts, which are financial 'assets' from the point of view of the owner/seller; and financial 'liabilities' from the point of view of the government i.e. the taxpayer.
And the question remains : How does the Guv issue electronic credit if not by quantitative easing?
Think of money as a commodity. It makes it so much easier. A commodity that is universally acceptable as a medium of exchange and store of value and is durable and divisible.
Why don't we just call it gold, for example.
Oh hang on. We've been there and it didn't work did it. Well, yes it did, but it made governments behave. So they scrapped it.
Scrap legal tender laws, that is the monopoly of money laws. I am sure Mr W and I (he has the brains, I have the ideal building and the fury) will be happy to issue Markolas, making a nice little earner off the seignurage and undertaking to settle any promisory note we issue for its equivalent in gold at the exchange price on the day you turn up.
And I am also sure that we'd be happy to lend to Gordon Brown, with appropriate security on the UK nation, but only in Markolas. WE are certainly not going to deal in any of those dodgy and devalued little ££££, are we Mr W?
DBC: "How does the Guv issue electronic credit if not by quantitative easing?"
You may as well ask, "how does the government issue bonds?" - it does so by taking cash and giving people bits of paper. QE is just swapping bits of paper for electronic balances.
L, don't tempt me :)
I'm sorry, maybe I'm too thick for all this financial chicanery, but it sounds like rubbish to me.
The UK govt issues £1bn of gilts, and someone buys them. Lets assume that they are all bought by people from the UK, and the govt spends the money raised in the UK. The total amount of money in the UK economy is the same. What was in gilt holders pockets is now paying for nurses wages and is in their pockets. The gilt holders cannot 'spend' their gilts on 'stuff' unless they sell them, thereby taking money off someone else.
If however the govt print pounds and pays the nurses that way, they have increased the amount of money in circulation. Same amount of goods divided by more money = lower value for each pound.
Obviously the amount of money sloshing around can be affected by a) foreigners buying gilts and bringing more money in from abroad, and b) the govt spending some of the raised money abroad, thereby losing it from the UK.
I repeat my question, what do you think happened in Zimbabwe?
And currently, electronic balances have no backing.
S, the main part of your comment is all pretty accurate.
As to your final question "what do you think happened in Zimbabwe?", what happened is exactly what you think happened.
They were physically printing stupedous amounts of bank notes and giving them to government employees, welfare claimants etc. This of course does not add to the wealth of a country, and with currency controls just leads to hyper-inflation - prices were rising by the hour, not just by the month or year.
So it is to some extent a question of degree - there's no harm in a government smoothing out peaks and troughs by running a surplus in good years and a deficit in bad years but printing money (whether in the physical or electronic form) in all but the short term is pointless.
JH, of course electronic balances have backing - they have exactly the same backing as any normal bank deposit or any normal bank note or coin.
The fact that governments occasionally declare all existing notes and coins null and void; or simply default on their debts; or that there is sometimes a run on a bank just illustrates the point - none of them are completely guaranteed.
Even gold isn't guaranteed - just imagine that some giant meteorite made of gold hit the earth's atmosphere and disintegrated, showering us all in little nuggets - what happens to the value of existing gold then?
What do you think of OTC derivatives?
Mervyn King is lying.So Mark Wadsworth tells us.He 's lying about doing something which is actually harmful to his reputation:claiming to run the electronic presses so putting himself in the way of Zimbabwe comparisons.Not very plausible I'm afraid.
JH, if people want to gamble with their own money, then no harm done.
DBC, your Mervyn K just presided over the second half of the biggest house price and credit bubble ever, with nary a whimper.
He merrily dumped the RPI target for the CPI target when it suited the most Home-Owner-Ist government of all time, and he is now merrily muttering about reckless government borrowing as he's realised the Tories will probably win the next GE.
All in exchange for a six figure salary and a bumper pension, and you're holding him up as a pillar of probity? Please don't you turn up at my blog slagging off bankers generally without the courage to slag off the biggest banker of them all!
This may not be the time to bring this up but The Guardian has just printed my (pruned) letter denouncing the Homeownerist consensus.It would n't be a bad idea if we tried to get the term Homeownerism into circulation.The Observer printed a much better letter on the subject some time ago,so the resistance is n't insuperable,possibly.
As to the other business,my present feeling is that the accounting conventions of listing banks notes and customers' accounts as liabilities date back to the Gold Standard."I promise to pay the bearer Ten pounds''is now meaningless for the same reason that customers accounts are no longer such a liabilty because customers ca n't turn up during a run and demand sovereigns.The banks can just dish out cheques. Which they do.Happy days!
DBC, nice one, I have posted.
"The banks can just dish out cheques"
So what? It's all 'money'. Even if we used a gold standard, it's still just money - gold is only worth so much because it's rare - as I said before, if a giant solid gold meteorite hit our atmospehere and disinigrated, showering us all with little nuggets, what would happen to the value of gold?
That cheque is only worth something if somebody else is prepared to accept it as being money (which by and large, they are).
If there's a run on the bank, my bank, any bank, I know what I want more. Gold not paper. I reckon a few sovs will get you further than a piece of paper saying you have millions in a bank, if the balloon goes up banking wise.
Monetary heresy alert.Douglas Carswell ,a Conservative MP is going on about fractional reserve banking in the most alarming way on his blog for 9.ii.10.Things are coming to a pretty pass when Tories are taking such a cavalier attitude.Seriously though somebody this far off message might be a good mark for LVT propaganda.
S, you are perfectly free to buy gold if you so wish.
DBC, can you post a link please?
www.talkcarswell.com
The Cobden Club or whatever he's quoting sounds interesting,given that speech about land taxation by Cobden that Jock Coates is always quoting .
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