Bolitics The New Condem Government

[snowychap]

That the lates 'buzz' thing from party HQ, is it?

or what ever todays buzz word from party HQ is )

Indeed you did write that earlier.

I wonder whether the wording of my post could well have had something to do with the wording of your post?

It would appear that this was rather lost on you.

one can't help but think of this

Black Adder: No that's I think! What do you think?Try to have a thought of your own, Baldrick, thinking is so important. What do you think?

Baldrick: I think thinking is so important my Lord.

I'm hoping that this is an effort at some kind of comic irony. Please let it be so.

Edit: superfluous letters.

[tonyh29]

it would appear being" lost " is catching

[snowychap]

it would appear being" lost " is catching

Would it? Who's catching it from whom?

It might pay to be careful about overplaying the (generously given) get out card.

[tonyh29]

It might pay to be careful about overplaying the (generously given) get out card.

Thanks , I was merely showing how not all Tories are callous by giving it to you but seriously i don't set a limit so you can have many more , i've a feeling you may need them

[snowychap]

It might pay to be careful about overplaying the (generously given) get out card.

Thanks , I was merely showing how not all Tories are callous by giving it to you ...

Your try, there, doesn't really work - does it, tonyh29?

[peterms]

The entire premise is wrong.

A household deficit is bad.

A government deficit is not.

How shameful that not only our national debate, but the pronouncements of our elected leaders, don't understand this simple point.

That's not the case. Neither household debt, nor Government debt is necessarily bad, but then neither is it necessarily "good".

A mortgage is not a "bad" thing - borrow money and use it to provide the essential of shelter, warmth and protection. The same could be argued, less convincingly about a car loan - borrow to provide a means of mobility. Down the scale further, borrow to buy a TV or a sofa - these are things which offer little real advantage.

If you cannot pay your heating bills, because you are spending money on repaying loans for TVs, sofas, fancy cars, expensive restaurant bills, concerts and football then you've got a problem.

The same applies, in a way, nationally - borrowing to fund infrastructure is not bad. borrowing in bad times and paying back in good times is not bad.....as long as over the whole cycle the thing balances out. If you borrow more than you can ever repay, you have a problem and it is most definitely bad. You either have to sell off assets - a one time only thing, and you no longer own or control things as you'd like. Privatising state assets doesn't often turn out well in the long run. Nor does foreign ownership of a country's infrastructure.

And if you don't sell off assets, then your borrowing costs rise further, your currency becomes devalued, inflation runs rife.

No one will keep lending you money. There comes a point where you hit the buffers. No more loans, no more bailing out. trashed econonmy, trashed lives.

Governments are not like households. It is extremely concerning that Obama seems not to realise this, and also that he is perpetuating the fallacy by specifically comparing the two.

The government surplus or deficit is the balancing factor of what the private sector does (net of imports/exports). This is why policies which call for governments to be in surplus regardless of what the private sector is doing are utterly misguided.

Secondly, economic growth needs credit in order to happen (as in your example of infrastructure). This can come from government deficits, or it can come from private borrowing. If the government runs a deficit to fund these things, it creates money to do it. If banks fund it, they create money to do so. In both cases money is created, out of nothing. It is not the case (though it is commonly believed) that people borrow money which another party has saved up - the funds are just created as they are needed. It's not like borrowing ten quid from a mate, who actually has that money and gives it to you instead of being able to spend it.

We have a problem if a government creates money at a rate which far outstrips the productive capacity of the economy, because that can create difficult levels of inflation. We have a problem if banks create too much money, because that causes massive private debt which is not backed by real assets - the problem we have been living through.

We have a further problem if, at times of spare capacity, a government fails to create credit by running a deficit in order to mop us that spare capacity. That's what is happening now. Instead of taking counter-cyclical action to tackle unemployment and stagnating demand, both the UK and US governments seem to be fixated on doing the exact opposite, reducing the deficit because of some wrong-headed and fundamentally nonsensical comparison between what a household would do and what a government should do.

If people like Obama and Osborne don't understand this, that is scary. If they do understand it and are doing it anyway, that's even scarier. In both cases, that they perpetuate wrong and misleading ideas about how the economy works, is a disservice to the people they are supposed to represent.

The trashed economy and trashed lives are coming from this failure to take action to stimulate growth and use the spare capacity in the economy productively, instead letting them continue in unemployment. Taking more demand out of the economy, making things even worse, to "repay" a deficit because of some homespun nonsense about how governments and households are really the same, is criminal.

[blandy]

Governments are not like households. It is extremely concerning that Obama seems not to realise this

I think we know that Obama, Osbourne, Cable, and the rest of them know that a Gov't and a household are not the same thing.

Secondly, economic growth needs credit in order to happen ...If the government runs a deficit to fund these things, it creates money to do it. If banks fund it, they create money to do so. In both cases money is created, out of nothing....We have a problem if a government creates money at a rate which far outstrips the productive capacity of the economy..

Indeed we do, and this is one of the reasons why "just borrowing more" (and QE) are NOT the solution to the problems. This is part of the reason why it is essential to reduce the level of borrowing. Money has been created at a rate that is not supportable. Credit/borrowing is at a level that is not supportable. The borrowing is/was not even being used for investment, it was in some cases being used to just keep people spending, but was ending up abroad, at BMW, Seat, Apple, EoN and a gazillion other overseas industries that benefited. the UK is not, in the economic sense, an Island. Just printing more money is not the solution. It doesn't work for the levels of problem the world has.

Aren't Obama and Osborne proposing different pathss, anyway? Obama wanted to further increase US debt (borrowing) but the tea potties are scaring the bejaysus out of the republicans, so they are opposing it, and that's why they can't reach agreement?

And politicians need to explain to an electorate, not all of whom would have a clue about Keynesian theory and that. While Gov'ts and households are not the same, they are not as different as some people would make out. There are universal rules, even if they are not universally accepted.

If you keep printing money, the value of that money goes down. If you just keep borrowing money, the cost of both new and existing borrowing rises. Borrowing alone is not the solution.

[LondonLax]

Secondly, economic growth needs credit in order to happen (as in your example of infrastructure). This can come from government deficits, or it can come from private borrowing. If the government runs a deficit to fund these things, it creates money to do it. If banks fund it, they create money to do so. In both cases money is created, out of nothing. It is not the case (though it is commonly believed) that people borrow money which another party has saved up - the funds are just created as they are needed. It's not like borrowing ten quid from a mate, who actually has that money and gives it to you instead of being able to spend it.

Governments who control reserve currency can create money out of nothing (with the resulting inflation) but private banks can't. That's a bit of an internet myth and a misunderstanding of how the fractional reserve system works.

They are lending on future earnings but not creating any currency. If you are going to call that 'creating money' then you have to say people are 'destroying money' when they withdraw cash from a bank and take away it's potential to earn.

[snowychap]

If you are going to call that 'creating money' then you have to say people are 'destroying money' when they withdraw cash from a bank and take away it's potential to earn.

It depends what they do with it, doesn't it?

[LondonLax]

If you are going to call that 'creating money' then you have to say people are 'destroying money' when they withdraw cash from a bank and take away it's potential to earn.

It depends what they do with it, doesn't it?

Well if they put it back into a bank the bank can use its lending potential multiple times over but whilst its outside the bank that money and all its lending potential are dead to the banking system.

[veloman]

Keynesian Theory ! How dare you mention this discredited approach to macroeconomics. Everone knows this just doesnt work; Mrs Thatcher told us and the Eton boy has reinforced it.

We need to cut back on the lazy Public Sector, sack some teachers, close SureStart Centres (as mentioned earlier). This will solve the debt crisis in this country. Then we must bring in private sector expertise into the Public Sector; that'll bring 'em to heel.

We could bring the highly qualified bankers in and other 'Captains of Industry' who have made this country the manufacturing powerhouse that it is today.

Oh wait a minute ......

[snowychap]

Well if they put it back into a bank the bank can use its lending potential multiple times over but whilst its outside the bank that money and all its lending potential are dead to the banking system.

I'm not quite sure what point you are arguing.

You admonished Peter for suggesting that FRB creates money and yet you've rather explained it in that way above, haven't you?

[LondonLax]

Well if they put it back into a bank the bank can use its lending potential multiple times over but whilst its outside the bank that money and all its lending potential are dead to the banking system.

I'm not quite sure what point you are arguing.

You admonished Peter for suggesting that FRB creates money and yet you've rather explained it in that way above, haven't you?

No, it isn't actually creating anything, just moving the money around, lending against future earnings.

The only organisation that can actually 'create' money is the reserve bank of a country.

[VILLAFC2000]

As the bankers caused this Global recession should they not be the ones who get crushed...?

Instead of everyone else...!

That is all

[snowychap]

No, it isn't actually creating anything, just moving the money around, lending against future earnings.

The only organisation that can actually 'create' money is the reserve bank of a country.

It sounds like you are talking only about M0 when you use the term 'money'?

[peterms]

Governments are not like households. It is extremely concerning that Obama seems not to realise this

I think we know that Obama, Osbourne, Cable, and the rest of them know that a Gov't and a household are not the same thing.

Have you read Obama's speech? He specifically compares government debt with a credit card; he creates a false analogy based on an utterly false premise. Either he doesn't realise this is false, or else he is deliberately misleading people. I find both possibilities unacceptable, as it happens.

Secondly, economic growth needs credit in order to happen ...If the government runs a deficit to fund these things, it creates money to do it. If banks fund it, they create money to do so. In both cases money is created, out of nothing....We have a problem if a government creates money at a rate which far outstrips the productive capacity of the economy..

Indeed we do, and this is one of the reasons why "just borrowing more" (and QE) are NOT the solution to the problems. This is part of the reason why it is essential to reduce the level of borrowing. Money has been created at a rate that is not supportable. Credit/borrowing is at a level that is not supportable. The borrowing is/was not even being used for investment, it was in some cases being used to just keep people spending, but was ending up abroad, at BMW, Seat, Apple, EoN and a gazillion other overseas industries that benefited. the UK is not, in the economic sense, an Island. Just printing more money is not the solution. It doesn't work for the levels of problem the world has.

Of course credit to households was being used not for investment but just to keep people spending. The alternative would have been that people lived within their means, and that would have meant far less profit for the lenders.

Think of it in marketing terms. They needed either more borrowing from existing customers, or new customers. Or both, preferably. So they extended lending by weakening controls and risk measures (expecting to pass on to the government, ie us, the cost of the risk they took). And they are expanding into Asia as a new market.

This extension of credit was not supportable by the people who took it on, as could reasonably have been foreseen by the lenders at the time.

But government spending is not the same.

As for the deficit, because households and forms are massively indebted, they are trying to repay debt, or in macroeconomic terms, they are net saving. If households net save, there will be a government deficit; it's an accounting issue. You can't have both the private sector and the public sector in surplus unless you have a balance of payments like Norway, which is highly exceptional. And yet governments speak to us as though it were possible to "pay down the deficit" regardless of what households do. Stupid, wrong, and utterly misleading.

Aren't Obama and Osborne proposing different pathss, anyway? Obama wanted to further increase US debt (borrowing) but the tea potties are scaring the bejaysus out of the republicans, so they are opposing it, and that's why they can't reach agreement?

And politicians need to explain to an electorate, not all of whom would have a clue about Keynesian theory and that. While Gov'ts and households are not the same, they are not as different as some people would make out. There are universal rules, even if they are not universally accepted.

If you keep printing money, the value of that money goes down. If you just keep borrowing money, the cost of both new and existing borrowing rises. Borrowing alone is not the solution.

Governments and households are entirely different. Households don't issue currency, and they can't make and enforce tax demands.

Government spending funded by money creation is not inflationary in itself, though you have stated several times that it is. It is inflationary only if there is no spare capacity in the economy. At the moment, there is plenty of spare capacity. Creating demand by issuing money to pay for things like training and infrastructure is the way to create growth, not the path to Weimar collapse. Just like it has been for many, many years.

[peterms]

Secondly, economic growth needs credit in order to happen (as in your example of infrastructure). This can come from government deficits, or it can come from private borrowing. If the government runs a deficit to fund these things, it creates money to do it. If banks fund it, they create money to do so. In both cases money is created, out of nothing. It is not the case (though it is commonly believed) that people borrow money which another party has saved up - the funds are just created as they are needed. It's not like borrowing ten quid from a mate, who actually has that money and gives it to you instead of being able to spend it.

Governments who control reserve currency can create money out of nothing (with the resulting inflation) but private banks can't. That's a bit of an internet myth and a misunderstanding of how the fractional reserve system works.

They are lending on future earnings but not creating any currency. If you are going to call that 'creating money' then you have to say people are 'destroying money' when they withdraw cash from a bank and take away it's potential to earn.

When you say "they are lending on future earnings", you refer to what they take as security for the loan.

Try removing the word "on" from that phrase. If they weren't creating money, it would still make sense, because it would describe what they are lending. But it doesn't make sense, does it? They are lending something which doesn't exist? They are lending the assumption of future wealth creation, if current assumptions hold and that wealth is actually created?

No. They are creating money, at the point of lending it. By lending money (or creating credit, to be more precise) they are adding to the money supply, not redistributing real assets which actually exist. That's the whole point of banking, isn't it? Create new money as credit, matched by a debt; forego nothing in order to make the loan (unlike your mate lending you a tenner), sit back and receive both the money you have created out of nothing and at virtually no cost, and also rack up the interest (which might have been defensible had you actually foregone something, but as it is, what exactly is the argument for charging interest?)

[peterms]

They are lending on future earnings but not creating any currency. If you are going to call that 'creating money' then you have to say people are 'destroying money' when they withdraw cash from a bank and take away it's potential to earn.

People who see banking in the way I have described use the term "money destruction" to refer to the repayment of the debt, rather than the withdrawal of cash. The repayment extinguishes both the credit and debit; the cash withdrawal simply alters the form in which the debt is held from a credit to physical notes and coins. It doesn't add to the amount of money in circulation - it's the making of the loan which does that.

And since this act of repaying debt reduces the amount of money (credit) in circulation, while creating new loans (credit) increases it, that's obviously correct.

[peterms]

Well if they put it back into a bank the bank can use its lending potential multiple times over but whilst its outside the bank that money and all its lending potential are dead to the banking system.

I'm not quite sure what point you are arguing.

You admonished Peter for suggesting that FRB creates money and yet you've rather explained it in that way above, haven't you?

No, it isn't actually creating anything, just moving the money around, lending against future earnings.

The only organisation that can actually 'create' money is the reserve bank of a country.

No, it's not just moving money around. Future earnings don't actually exist, do they? They are hoped to exist at some point in the future, but they don't exist. They are not what is loaned, they are simply the security for what is loaned.

What is loaned is newly created credit, created out of, literally, nothing; ie an addition to the money supply.

Curiously the monetarists would foam at the mouth at the very idea of governments creating money, but the banking system didn't seem to arouse the same degree of wailing and gnashing of teeth.

[leviramsey]

Government spending funded by money creation is not inflationary in itself, though you have stated several times that it is. It is inflationary only if there is no spare capacity in the economy. At the moment, there is plenty of spare capacity. Creating demand by issuing money to pay for things like training and infrastructure is the way to create growth, not the path to Weimar collapse. Just like it has been for many, many years.

There's some truth in there but things are not followed to their conclusion.

There is no necessary reason that monetary debasement (it used to be known by a nine-letter word that starts with "i" and ends with "n", but a generally unpleasant period of fairly recent human history saw the definition of that word change to "a general increase in prices" and then to "a general increase in prices as measured by a process that is completely opaque and computed by people who are beyond reproach, so don't you dare question them") causes price inflation. If one trillion dollars in $20 bills is delivered to Bill Gates and he basically decides to put it in a hole in the ground, no change in prices can be reasonably expected. Further if the initial use of monetary debasement is to drive down the cost of capital (basically, using it to drive down interest rates), bearing in mind that as markets become more efficient profit converges to the risk-adjusted cost of capital, debasement can be reasonably expected to result in price deflation (until such time as the increase in production increases the price of other inputs to that production). The quantity theory of money (as espoused by Fisher on the left and Friedman on the right), while generally holding fairly well over longer terms, is more or less total bullshit in the shorter terms.

It's important to recognize the fundamental truth which Peter alludes to: what is currently classed as sovereign debt (for sovereigns with the power to create their own money) is not debt but sovereign equity.

Dollars are best defined as shares of stock in the US Government. Pounds sterling are best defined as shares of stock in HM Government. (Question: what exactly are Euros best defined as? Answers on a postcard...)

It is true that the shares do not directly convey any voting control in the relevant enterprise (as far as I know, one's votes for their MP are not weighed by one's net worth; that said, virtually anyone with enough shares can guarantee themselves a vote), nor do they have any dividend rights. In this sense, they're kind of like the publicly traded shares of News Corporation (whose aggregate voting power is so dwarfed by the class of shares held by a Mr. Murdoch that they basically don't have any voting power) or of Google (which also reserves voting control of the firm to a cadre of insiders). The shares are still redeemable for concrete benefits at the issuer's pleasure, as with all equity instruments.

What then is a Gilt or a Treasury Bond? It's ultimately nothing more than a restricted share of stock: it has a "not valid until" date.

Thus it's sheer nonsense (as I'm sure Peter has mentioned a few times) to speak of the US or UK being unable to repay its respective "debt". If the US Government has contracted to deliver 30 tons of gold on September the First, it has incurred a debt (because it's possible for the USG to want to meet the obligation but not be able to fulfill it). If HM Government has contracted to provide a reasonable standard of medical care (assuming a sufficiently rigid definition of "reasonable standard") it has incurred a debt. If HM Government has contracted to deliver 100 billion pounds to some other entity, it can only fail to deliver if it explicitly chooses to (because if it wants to deliver those funds but all other options are unavailable, it reserves the right to create those funds).

(Aside: it is somewhat curious that what is considered to be the debt of HM Government isn't really debt while what is actually debt (HM Government's [possibly implicit] promises to provide its subjects with a reasonable standard of healthcare, a reasonable pension in their old age, the odd bundle of some Euros to Brussels (I presume that UK financial obligations to the EU can only be satisfied through Euros), etc.) is conversely not considered to be such)