The responses to last week's Fun Online Poll were as follows:
Would it make any big difference if the UK gilts held by the Bank of England were cancelled?
No (the correct answer) - 53 votes
Yes (the wrong answer) - 23 votes
So well done, seventy per cent of you. The other thirty per cent ought to stop reading and believing what other people think and read up on some basic bookkeeping.
If you want to understand any productive business (cars, films, dentistry, plumbing, whatever) then there are thousands of things you need to know about or have experience in, and I doubt that anybody knows everything about any of them. Banking, on the other hand, is a pure paper exercise, you start with blank pieces of paper and write numbers on them. You are allowed to write as many positive numbers as you like, provided somewhere is prepared to accept the corresponding negative, and provided you are prepared to accept your original bit of paper going round in a circle and ending up as a negative number on the other side of your balance sheet.
Money is not a thing in itself, it is a unit of measurement, and without there being somebody somewhere who wants to borrow money* (i.e. is prepared to be in debt) then 'money' cannot come into existence. If you take all the financial assets (including the cash in your pocket) and all the financial liabilities, it always nets off to precisely nothing.
* Even in a system where the only legal tender is gold coins, 'money' cannot exist until somebody wants to borrow a gold coin and somebody else is prepared to lend him it. In that split second, a new financial asset and a new financial liability have been created out of nowhere (the number of actual gold coins in existence stays exactly the same).
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Yesterday, James Higham asked which would be the best place to build new runways in the south east of England (assuming that this is necessary or desirable, let's skip that debate).
So that's this week's Fun Online Poll.
Vote here or use the widget in the sidebar.
Tuesday, 30 October 2012
Fun Online Polls: QE and airport expansion
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9 comments:
"Money is not a thing in itself, it is a unit of measurement... I've put that to economists and bankers over the years - most don't get it. (Ditto 'financial advisers' - an even lower percentage get it...)
I voted "no", but it depends on what you mean by "make a difference". I have more than one bank account for different areas of my finances. All the money in them is my money, so, as far as my total cash wealth is concerned, it wouldn't "make a difference" if I put all the money in one account. However, it would make it much harder for me to keep track of my finances, so in that sense, it would "make a difference".
L, ta for back up.
B, agreed, hence and why I asked would it make a BIG difference. No doubt there would be some subtle marginal change to something-or-other somewhere, even if only the psychological thing, i.e. the assumption that the UK govt intends to borrow short rather than long.
Good description of money. Problem we have when talking to people is that everyone thinks money is wealth (stuff) But its just an idea.
What staggers me is so do money reform people let alone banks.
Worse still many Georgists do too. Clearly they have not read George.
Here's a good experiment to get them into a Matrix wall bouncer next time:
Take a paper note, the commodity in the note used as a token of money, its credit.
Its no longer a commodity(wealth) while being used to buy things with.
But if you use it instead to wipe your arse or light a fag, its no longer money but a commodity.
But they will insist with anger it can be both wealth and money at the same time. Which of course in this universe in impossible.
argument over at Tim's blog about cancelling the gilts that the BoE has bought. The penny still has not dropped for most people. The potential inflation is already out there because the gilts have been redeemed early. The real question is how much harm this has caused, but people still insist that those gilts must not be cancelled.
RS, exactly. Money is not wealth, it is a unit of measurement of the real wealth that you can claim (whether with moral or economic justification or not) from others.
G, ah, I'm bored with the Faux Lib's over at Tim's. And I'm bored with the Socialists who claim that the interest which the BoE is entitled to receive from the DMO is money which can be spent on public services.
'money' cannot exist until somebody wants to borrow a gold coin and somebody else is prepared to lend him it
Isn't 'money' a mental construct of assigning values?
When you ask "Would it make any big difference if the UK gilts held by the Bank of England were cancelled?"
I am unsure what you are actually asking. Isn't a gilt a tradable defered claim issued for a loan? Interest is paid until the time the claim is settled.
If so, then are you saying that the BoE repudiates the claim?
Doesn't the claim remain on a private investors book? It is only 'cancelled' on one side, the BoE?
WC2:
"Isn't a gilt a tradable defered claim issued for a loan? Interest is paid until the time the claim is settled."
Yes. Don't make it so complicated. The "gilt" is the IOU.
"If so, then are you saying that the BoE repudiates the claim? Doesn't the claim remain on a private investors book? It is only 'cancelled' on one side, the BoE?"
Jesus no. The gilts are issued by the DMO (part of the government). Once the BoE (part of the government) has bought back the gilts, the legal position is thus:
Borrower: the DMO, part of the government
Creditor/lender: the BoE, part of the government
That bit is a nullity.
As a separate issue, the BoE buys back gilts by printing more electronic IOUs, these are very real debts to private entities* which can't just be cancelled.
* Arguably, the banks are now part of the government as well, let's ignore that for now.
Thank you. I think we agree that there is a debt here that does not go away.
By using the Gilt as a mechanism to borrow from yourself then if the Gilts are cancelled:
1 Any issuance of a Gilt can no longer be considered 'gilt edged'.
2 The liability created to buy the gilts is then directly exposed by the consolidation.
My (rather simplistic) understanding of this is:
| |
--- ---
| | | |
A B C D
A is 'created' money to buy the gilt.
B is the BoE Gilt bought
C is the DMO Gilt sold
D is HMG borrowing
Cancelling B & C
|
---
| |
A D
Using the same net off to zero, this also disappears! No Debt.
So it would seem HMG does not need to borrow using this mechanism, it can just spend. No need for taxes to extinguish the debt either!
Would doing this be noticed?
Is something missing? Is there a difference between CB money and Credit Money (created through HMG spending)?
Why does the BoE use a separate ltd company to buy gilts which it loans (created) money to make the purchase?
I realise this is all pretty basic and very simplified, but the question is 'why are they doing this way?' if, as you ask, it's no big deal if they didn't?
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