Thursday, 15 October 2015

Reader's Letter Of The Day

From CityAM:

Cameron constantly refers to "Paying down our deficit".

How do you pay down a deficit? You reduce a deficit and pay down* a debt.

@CJCHowarth


* In this country you "pay off a debt", but hey, his point stands.

42 comments:

Random said...

Pay down nongovernment savings.
Deficits and bank lending generate private sector savings.

Mark Wadsworth said...

R, grow up, seriously.

You and many others (and yes, that includes people who should know better like Martin Wolf from the FT) keep spouting "Government debt = private savings" but it is nonsense.

Fact: that government debt has to be repaid by somebody and that is future taxpayers. Even if the principal is never paid off, the interest has to be paid.

They could just divide £1 trillion government debt by the number of people under forty (about £25,000 each) and turn that back into personal debt to be collected via their PAYE codes in future, just like student debt. So everybody under 40 has to pay an extra £2,000 a year for the next few decades until it is paid off. or maybe just £1,000 a year to pay the interest.

Where's your private saving then? We see clearly it is a transfer from young to old, from future to present etc.

(Which is not to say that government spending is always a bad thing, some is good, some is neutral and some is bad. How it is funded it a separate topic. The spending has to stand and fall on its own merits).

Random said...

The interest payments are spent and generate tax and savings just like any other spending.
As to your second point, that is an incredibly stupid idea on so many levels. But I'm glad that you see "paying down the debt" is the same as forcing private debt and forcing savings run down. Which is why it is a bad idea.
The current Tory government is doing a lite version of that. I remember them saying "we can't afford" tax credits and now you people are being fucked and told it is for our own benefit!
As to private saving, it should be offset at all times. Rent seeking should be combatted. However these are two separate things. Trying to reduce rent seeking by crashing the economy is like cutting your foot off because fleas are living on it.
I would quit issuing Gilts and reintroduce National Savings, that way foreigners and corporations will not benefit.

Bayard said...

"Cameron constantly refers to "Paying down our deficit"."

Once again I have to ask myself, is he lying or deluded? If he is lying, he is deliberately confusing the debt with the deficit, so that we will make the same confusion, so that when he says that his government is reducing the deficit, we think he is saying it is reducing the debt. If he is deluded, he just doesn't know what the phrase "pay down" means to most people.

Kj said...

The interest payments are spent and generate tax and savings just like any other spending.

Ok, so privately collected rents isn't a problem either by those standards. They get spent, generate tax and savings.

Random said...

I want to end Gilts. They are just corporate welfare, over half of which goes to foreigners. The government can end interest payments just like it can end payments to the disabled. Nothing magical. WTF is up with all the moralising?

"Fact: that government debt has to be repaid by somebody and that is future taxpayers. Even if the principal is never paid off, the interest has to be paid.

They could just divide £1 trillion government debt by the number of people under forty (about £25,000 each) and turn that back into personal debt to be collected via their PAYE codes in future, just like student debt. So everybody under 40 has to pay an extra £2,000 a year for the next few decades until it is paid off. or maybe just £1,000 a year to pay the interest."
The fact is deficits generate non government sector savings to the penny. That is an accounting identity.
But glad to know where your sympathies lie and your hatred of young people - forcing debt on us.
The Tories are doing as you suggest - running up a "housing bubble" to pay down the "debt." That is the essence of Homeownerism. But I suppose if it wasn't a housing bubble you would be fine with it.
And what the hell is moral, or adult about that?
Well guess what, I will end interest payments.
What you don't seem to get is this is *current government policy.*
The doublethink is amazing. We have to do the opposite of this - raise nongovernment savings, by running higher
Humans like to save and hoard money irrationality. Deal with it.
Don't run up credit bubbles.

Random said...

Kj, putting words in my mouth.
But they aren't a problem in terms of "govt solvency."

Random said...

I'm sorry you guys but if you support "balanced budgets" you need a credit (housing) bubble or recession.
Guess which one the voters choose.
You have fallen into Osbourne's trap.
Deficits, Homeownerism or permenant depression.
Eurozone countries have choice only of b or c, deficits is "not allowed" ;)

Kj said...

Humans like to save and hoard money irrationality.

Fekking humans, messing up the economy trying to plan for themselves. If only there was a market way of signaling the amount of savings needed by the economy. We could call them interest rates for example.

Random said...

I'm afraid that's delusional nonsense.
Interest rates are set by the Central Bank. "Market signalling" is hilarious. I am guessing you think Stalin's diktats are "market signalling."

Kj said...

Who says a Central bank has to set interest rates?

Kj said...

Kj, putting words in my mouth.
But they aren't a problem in terms of "govt solvency."


It's not putting words in your mouth either. I said: "privately collected rents isn't a problem either by those standards. They get spent, generate tax and savings."
The issue is whether interest payments paid by future taxpayers to fund deficit spending in the present, is a problem. You seem to believe that who gets the spending power isn't really am problem, as long as it gets spent. If that is so, why should we be advocating LVT? It doesn't matter who or for what spending power is awarded to, as long as it gets spent? This is where being one-track macro-minded goes wrong. If real consumption ability is moved from the future to the present, that's wrong. Doesn't have to be a balanced budget at any and all time, but just ignoring the link between money and real economic resources is a bit crazy methinks.

Random said...

The "natural" rate of interest is zero. Banks try to lend out excess reserves in the interbank market and bid down to zero.
Investment generates its own saving (loans create deposits.)
Issuance of Gilts or Interest on Reserves (support rate) are used to raise rates above the "natural rate" - zero.
I cannot discuss it in detail but I suggest you read this blog in its entirety:
http://bilbo.economicoutlook.net/blog/?p=4656
You're not a loanable funds believer or a "natural rate" believer because then I can't help you.

Random said...

It doesn't matter if the spending is literally on horse manure. That money goes into the economy where it is spent and spent again - increasing the flow of activity and making everybody more wealthy.

The philosophy is very simple. Government uses the resources it needs for the required public good first (roads, education, law, health, etc.) and run anything that is a natural monopoly or near one. Then the private sector is allowed to work with what is left. And finally anything the private sector can't or won't use is deployed by the state for the 'nice to have' public good (the Job Guarantee.)
That is how you get full employment, price stability and maximum output.
It is all about the real resources, both in maximising their usage and in ensuring a fair distribution.
Consider the two issues *separately*

Random said...

"If real consumption ability is moved from the future to the present, that's wrong."
Time travel dosen't exist.
What you can stop doing though is using up renewable resources.

Random said...

I will add, where you live (Norway) runs regular "budget surpluses" because of its trade surpluses.
Norway injects money via the external sector.
But the Norwegian govt prints money and buys forex, that is off budget and not included in budget deficit/surplus.
This blog explains:
http://bilbo.economicoutlook.net/blog/?p=2418

Contact YPP said...

R, to heck with all this monetary crap.

Imagine a system where 'the government' is just a mutually owned service provider, a glorified landlord if you will. Every citizen gets given one share in it at age 18, along with the right to vote, and each share is cancelled when you die, just like the right to vote. These shares cannot be bought or sold, just like the right to vote.

Now contrast that with Tesco.

If you are a shareholder and employee in Tesco who also shops there, you want Tesco to pay low wages and charge high prices (to boost your dividends) but you also want them to pay high wages (to boost your wages) and you want them to charge low prices (to cut your food bill).

At no stage do you say "I would like Tesco to run deficits to boost my savings". What you want is the optimum mix between unearned income, earned income and cheap food.

As a part-owner and also customer of 'the government' (and possibly an employee thereof), why would you think any different?

Bayard said...

Contact YPP, arguing with an MMTer about economics is like arguing with a born-again Christian about God. You will never change their mind because they've seen the light.

Mark Wadsworth said...

B, that was me, I logged on as Contact YPP by mistake.

And it is not just MMTers who suffer from these delusions that
a) govt deficits must be A Good Thing because govt debt = private saving and
b) private saving = always and in all circumstances a Very Good Thing Indeed and must be encouraged, subsidised and enforced at all costs.

Dinero said...

I agree with Mark -
Government debt is not equivalent to credit created in the private economy. When a person has credit with another individual it gives that person access to economic resources in the future. As government debt is extinguished by taxing the private sector it is not a net asset of the private sector over the completed lifetime of the debt. Government debt is differed taxation.

Mark Wadsworth said...

Din, another good point. Govt debt is deferred taxation. it cannot possibly be a net asset of the private sector. But then again, private debt is not a net asset of the private sector either. Debt is simply never a real asset. How can it be? Houses, cars, education, smart phones, washing machines, these are real assets.

Random said...

"And it is not just MMTers who suffer from these delusions that
a) govt deficits must be A Good Thing because govt debt = private saving and
b) private saving = always and in all circumstances a Very Good Thing Indeed and must be encouraged, subsidised and enforced at all costs."
I disagree. I think you are mixing up two issues. I have no problem with people saving earned income, I disagree with saving unearned income.

Random said...

It is a net financial asset.
"Govt debt is deferred taxation. it cannot possibly be a net asset of the private sector."
Right. OK. It is tax credits not yet used to pay taxes.

Dinero said...

Houses, cars, education, smart phones, washing machines, are real assets
that borrowers are making a commitment to produce in the future and so private sector debt contracts do qualify for the term saving for the future.

Bayard said...

"I disagree with saving unearned income."

There cannot be any difference, economically, between saving earned income and saving unearned income. It's all just savings. It's like trying to differentiate between rainwater and distilled water from a bottle: once they've been poured into a glass they are the same thing, they act in the same way. You can be against earning "unearned" income, but not against saving it. It is impossible to tell from someone's savings alone how they were earned, you have to know something about the saver himself.

Mike W said...

Dear Jesuits,

Don't understand the attack on MMT and Ramdom above,

I FEEL that a balanced budget is a goal( if you have near full employment)but, don't argue with me or Random.
Look at the last 20 minutes of this link ( after his Minsky Model)and tell us what Steve Keen doesn't understand about merits of MMT and Richard Koo.


MMT and LVT, there will still be tax and therefore there will still be harmful and less harmful taxation.

Mike W said...

http://www.debtdeflation.com/blogs/2015/10/15/edinburgh-university-talk-financial-instability-endogenous-money-government-budgets/

Sorry, here is the link

Mark Wadsworth said...

MW, I am not attacking MMT. The basic observation of MMT is quite correct.

What we ended up tailing about (which has nothing to do with the post) was whether govt deficits/debts in themselves increase wealth.

Answer = no they don't.

Random said...

They increase net financial assets. That is not the same as (collective) real wealth. I completely agree.
However I do think on an individual level, having more NFA (money) gives you greater command over goods and services.
"Deficits" is an accounting abstraction.
I would say (good) government spending can generate wealth.
My point is the deficit is a *red herring*
Deficit, surplus, balanced budget is not a goal.
The goal is maximising capacity utilisation and real wealth.
The question is then - should we allow saving of (earned) income? Your thoughts please.

Random said...

OK, put it this way. Stock bubble has popped and there is a recession. Everyone saves more and a recession hits.
TOPLINE GOVT SPENDING generates wealth (qualified that it is good use of resources that would otherwise be wasted.)
Whether this spending leads to a "deficit" or not (if there is no saving or paying down debt the money is spent and respent and all comes back to the govt as tax, simple maths progression), is entirely irrelevant.
The point is people are not spending, leading to underutilized resources. Govt then spends and people save the money. So what? This does not increase real wealth. It is entirety irrelevant.
It is the real resources used that wouldn't have been.
Do you kind of understand this?

DBC Reed said...

@R
Finally, I get your point.You are right.

Bayard said...

"TOPLINE GOVT SPENDING generates wealth"

How can it? The government only has two sources of income, taxation, which removes wealth from the economy and borrowing, which is deferred taxation. All government money comes from someone else. The government does not add value, so how can it generate wealth? That wealth has to be created first before the government can borrow it or tax it.
The way I see it is that the government is like a pump which moves water around that would otherwise be stagnant, but it doesn't actually generate any extra water.

Mark Wadsworth said...

B, hang about, Lord Copper:

"The government does not add value,"

To the extent we pool some of our money to pay for core functions of the state/public goods like roads, police, refuse collection etc, "the government" adds enormous value.

But there is a fairly short and defined list of public goods. Above and beyond that, the calculation best more and more marginal (i.e. borderline public goods/merit goods like education, or redistributing wealth to increase social cohesion/reduce crime) and once you reach the level where extra government activity/spending destroys value (long, long list) then you might as well not bother.

Mark Wadsworth said...

best = gets

Derek said...

Bayard wrote; "The government only has two sources of income, taxation, which removes wealth from the economy and borrowing, which is deferred taxation".

There's a third, rent, which it gets via the Crown Estates, and a fourth, seignorage, which it should use but doesn't (as far as I know).

Derek said...

And a fifth, fees, fines, and lottery profits.

Derek said...

None of them remove wealth from the economy. They just remove money. It's the government spending that removes the wealth.

Random said...

It's the government spending that uses up real resources. Whether this is good or bad depends on the spending.
Bayard and Derek,
"Printing" and "borrowing" are the same thing. There is no difference between the Bank of England creating an electronic entity and the Treasury creating an electronic entity.
How it works is this - the government spends the money. This generates tax and an amount of saving.

Random said...

"The government only has two sources of income, taxation, which removes wealth from the economy and borrowing, which is deferred taxation".
http://www.3spoken.co.uk/2013/06/the-bank-of-england-balance-sheet-five.html?m=1
That's not really how it works. HM Treasury has a cash buffer and at the start of the day the government has some " printed money " in its account. The spending goes round in a loop back to the government.
Govt spending is *batched*

Random said...

"All government money comes from someone else. "
If at the start of the day, from HM Treasury's Cash Buffer.
From spending the money. Government spends on a buffer and then refills it. Govt spending creates the tax and borrowing that "make up" the spending. The "spending money we don't have" brigade don't seem to realise it has disappeared.

Random said...

"and a fourth, seignorage, which it should use but doesn't (as far as I know)."
Here.
http://www.3spoken.co.uk/2013/06/the-bank-of-england-balance-sheet-five.html?m=1
The Cash Buffers and...
APF is "seigniorage." There is no difference between issuing and reissuing a Gilt. The Gilts purchased by QE are eliminated on the Consolidated Accounts.

Random said...

Government spends from its cash buffer. It gets some of it back as taxes. The rest it gets back when it issues bonds for reserves.

Spending only increases reserves in the commercial sector temporarily on an intra-day basis because the debt management office is constantly shuffling them back by issuing Gilts to refill the buffer.

So spending causes an increase in Gilt holdings - but only because of the institutional framework that is in place. You have a small amount of reserves that just bounces around the place as a buffer. What you really spend is Gilts.

This is just basic Treasury operations that you do with ANY financial institutions. Similarly in commercial banks they make loans and then backfill the funding by issuing bonds and shares or accepting deposits. But you know what your cash buffer has to target because loans take *weeks* to complete and in aggregate you know roughly how many will complete on average and therefore you can project your funding requirement really quite accurately for weeks in advance.

It's the same with government.

Ultimately all this talk is a lot of hot air.

The entire conclusion put forward follows from the premise that the bond markets can decide things.

However if it is clear to the markets that the government believes it ultimately controls the Bank of England and the understanding is that the Bank of England will prevent yields from rising, then they will not rise.

Any bond that drops below par can be purchased by the Bank of England and cancelled. That means that the private sector gets less back than it paid out for the bond.

And that is a tax. Show me a financial person that will voluntarily queue up to pay a tax and I'll show you a unicorn.

So it matters not what the bond market thinks. It matters whether the government decides to voluntarily tie its hands.

The control function that stops you spending as much as you want is the bank stopping your cheque. Nobody will stop a government cheque because they have neither the authority, nor the bottle to do so.

The government always has money in the account to spend and the cheques will not bounce. So it can always buy anything in Sterling.

That really is the end of the matter chaps. I am tired of repeating the same things over and over again.