Reader's Letter Of The Day

From The Evening Standard (19 Feb 2014, page 47):

We were delighted by Danny Dorling's endorsement of a land value tax.

The Holy Grail of high wages/low house prices can be achieved by collecting taxes from the rental value of land instead of from earnings and output. Our calculations show that replacing council tax, VAT and National Insurance with a fiscally neutral Land Value Tax would leave most young couples £10,000 a year better off.

As well as reversing the rising tide of wealth inequality, such a measure would dampen the boom-bust cycle and lead to more efficient use of existing buildings.

Land Value Tax was supported by figures as diverse as Marx, Churchill and Milton Friedman. Now that corporations can shift profits between jurisdictions at the touch of a button it has ore relevance that ever as land cannot be hidden abroad.

Mark Wadsworth, Young People's Party.

Reader's Letter Of The Day

From the FT:

Sir,

Dennis Leech (Letters, February 22) attacks a piece of conventional wisdom, namely that bigger deficits lead to more debt. However, his argument is simply that the rise in debt will be smaller than the rise in gross domestic product, hence the debt to GDP ratio falls.

There is actually a far more fundamental weakness in the idea that deficits necessarily lead to more debt. This is that, as pointed out by J.M. Keynes in a letter to F.D. Roosevelt in 1933, the country can expand the deficit any amount it likes without any extra debt whatever, and simply by printing money.(1) Milton Friedman made the same point. And as for the idea that money-printing leads to inflation, those two great minds, fantastic as it might seem, thought of that [as] one.(2)

In practice, the latter is what we have done with quantitative easing.(3) The only nonsensical element remaining from QE is to continue counting debt in the hands of the central bank as debt. Those gilts might as well be torn up.(4)

Ralph Musgrave, Durham, UK

1) Printing money, i.e. bank notes, has ultimately the same effect as borrowing money. Bank notes are just non-interest bearing, low denomination government bearer securities. It would make little difference, in the grander scheme, whether the government gave somebody a suitcase with £1 million in bank notes in it, or whether the government issued him with a gilt with a face value of £1 million at a market interest rate.

2) I think there was a typo in the version as published.

3) QE is not actually printing money, it is just converting long term debt ("gilts") to short term debt ("deposits by commercial banks at the Bank of England"). The inflationary impact thereof is largely because this pushes down average interest rates (in the short term at least); the UK government was paying (say) 2.5% interest on the bonds it bought back and is only paying 0.5% on the deposits. So the people who have sold their higher yielding gilts and now hold low-yielding "cash" are looking round for something else to invest in (which leads to asset and commodity price bubbles).

4) "If you don't agree with any of it, why is this your reader's letter of the day?" you might ask. Well, firstly because Ralph is a blogging friend, and secondly because of the last two sentences - it's so nice to see them in print.

Remember: the deposits which the Bank of England has taken from the commercial banks are real debts*, and those have replaced the old debts (the gilts) - it's like you paying off your credit card debt by taking out a second mortgage on your house - so the old debts, the gilts themselves, the bits of paper, now merely serve as a record that one department of HM Treasury (the Debt Management Office) owes a different department (the Bank of England) money. But you cannot owe yourself money, can you?

* Merrily glossing over the fact that the Bank of England now owes a lot of these to nationalised banks, i.e. RBS or Lloyds could withdraw the deposits and use them to repay the soft loans which HM Treasury/the Bank of England gave them as part of the bank bail out of a couple of years ago etc.