The editor of City AM tries to be clever and fails:
Speaking of which, in theory the Bank of England will eventually sell back to the markets the £350bn or so in gilts it will own as a result of quantitative easing (QE). Yet I doubt this quantitative tightening (QT) will ever happen. The UK will still be borrowing too much for years to come.
QE in the UK was (by and large) simply swapping long term government debts (gilts) into short term government debts (commercial banks deposits with, i.e. loans to, the Bank of England). Whether they will ever reverse this we do not know, but it is nothing dramatic and it would not be 'tightening' (apart from the marginal upward push on interest rates).
A more honest and preferable option would be for the authorities to admit that the £350bn has been permanently monetised and for the Treasury to cancel all of the gilts owned by the Bank - ...
Correct. The idea that one department of HM Treasury owes another department of HM Treasury £350 billion is an accounting fiction. We might as well cancel them and recognise the commercial banks' loans to the BoE as government debt instead, i.e. reflect reality.
... in other words, admit that the Bank has permanently created more money, and used that to pay off government debt.
Aaargh! To the extent that the BoE "created more money" it has already used it to pay off government debt, because when a borrower buys back his own debt he is repaying it. The money has been spent on buying on back debt and the commercial banks have lent it back to the BoE (i.e. the government). And money issued or created by a government is debt, and clearly, if you borrow money to repay debts, you are running to stand still.
Do taxpayers really need to be paying interest to the Bank on the gilts that it holds?
Jesus H Christ. The "taxpayer" is not paying interest to the Bank, another department of the treasury (the Debt Management Office) is. It is an accounting fition which nets off to precisely nil. The interest which the taxpayer is paying is on the actual outstanding debt held by/owed to non-government bodies, which includes of course the interest on the deposits which the commercial banks have at the BoE (i.e. where the proceeds of the QE debt sales were deposited).
A cancellation would cut the UK’s debt to GDP ratio from 63 per cent to 41 per cent, and slash the interest bill on gilts from £50bn to £32bn per year.
Bollocks. By all means, let's cancel the gilts held by the BoE, they are meaningless, but in exchange, we have to recognise the deposits with the BoE instead. The overall impact on reported (or actual) UK government debt would be minimal - remember of course, that coins and notes issued by the BoE also count as liabilities.
Then right at the end, he goes back to common sense again, nearly, and contradicts what he said before:
The Bank holds these gilts on behalf of the Treasury, so the Treasury is paying interest to itself (and regardless of definitional niceties, the fact is that the state is borrowing from itself).
Agreed, those gilts are indeed an irrelevance, they are just waste paper. But what he misses is that the Treasury is not only paying interest to itself, it is receiving interest from its self, it is a zero-sum game.
About That Closet
4 hours ago
28 comments:
> simply swapping long term government debts (gilts) into short term government debts
This does increase the risk from interest rate rises.
> it is a zero-sum game.
Well very slight net negative (administration costs of the "payments").
/pedant
SB, yes, QE has cut our current interest bill quite significantly, but there's a risk that we'll end up paying more in future.
And yes, it is very much a negative sum game for the taxpayer because the commercial banks and gilt holders creamed off extra profits of a percent or two (maybe this wiped out the interest savings, it is hard to tell).
Did you submit this fisking to CityAM?
L, I emailed it to him. I doubt he will understand it, he's the sort of person who only understands what he wants to understand.
MW, you probably need to send him a graphic to show how it works...
L, I don't think you can argue with somebody who asks, rhetorically:
"Do taxpayers really need to be paying interest to the Bank on the gilts that it holds?"
and then a few sentences later says:
"The Bank holds these gilts on behalf of the Treasury, so the Treasury is paying interest to itself"
So he can't even make up his mind who is paying interest, let alone whether interest is actually being paid (which it isn't).
Having plotted a graphic, for curiosity, what it does do is clearly show the 'con' trick of gilts and money and gummmint (i.e. ultimately taxpayer) debt. The winners are the commercial banks who get money for old rope, and the entitlement seekers in the state, that is politicians and bureaucrats.
L, I have a new theory of money, namely that it does not actually exist. Actually, we have a barter economy and "money" is merely a unit of measurement.
i.e. inches and feet are units of measurement of length or height; they are not in themselves length or height.
So the government can borrow or owe as much money as it wants, this does not matter, what is important is that taxpayers are in future going to have to give up a large part of their output and potential consumption, and the government's beneficiaries are going to have extra consumption opportunities in exchange for doing nothing.
Actually that's a very old theory of money - it's what I've always thought, well once I grew up that is - (week last Tuesday?). Rothbard said:-
"No one prints dollars on the purely free market because there are, in fact, no dollars; there are only commodities, such as wheat, cars, and gold."
See here:- http://www.mises.org/daily/6003/Contra-Bernanke-on-the-Gold-Standard
Money represents debt. People accept money in lieu of goods and services, expecting that they will be able to obtain said goods and services later using the newly obtained money.
Where accepted money exists, someone, somewhere is owing someone else. In the general, people holding cash are owed (they did work/gave up assets and haven't received anything 'real' in return yet). What exchange rate you get between the virtual and the physical is another matter.
When someone takes out a loan, they're actually loaning themselves money (they have both the asset - the cash - and the liability to the 'lender'). The lender's role is to maintain trust in the money created by making sure the borrower creates/does something worth what he borrowed, and gets a cut for so doing.
That's what I see as the real framework anyway, whether our current setup actually reflects that, I have no idea.
F, excellent summary, that's exactly how it works. Unfortunately, that's not how people think it works, because they are either liars or stupid, but hey.
Fraggle. That almost exactly what I read somewhere else - mises.org? - and it's true. Mind you the politicians/entitlement seekers don't want to hear it...
So, what would need to happen for you (Mark) to believe that money does exist?
J, can you convince me that feet and inches exist? Nope. You cannot have "an inch", you can only have an inch of wood or an inch of metal or an inch of cloth, you cannot just have "an inch" without saying of what.
Similarly, having £1 actually means that somebody somewhere else is due to give you £1's worth of goods and services in exchange at a time of your choosing.
L, I just constructed that from my own understanding. I avoid mises.org whenever possible! I find it a testament to what can happen when a small mistake becomes an axiom.
Ta, both.
MW - I have been told that if you give me an inch I'll take a mile...
Money is just a form of inter-temporal barter.
@MW As you know,I entirely disagree with the notion that QE does n't exist or has no noticeable effect. If somebody (admittedly a prat)like Osborne says QE is the 'last resort of desparate governments' and then does it himself then has to fight off accusations of printing money (his own accusations come back to bite him on the arse),it is a sign that the bank is doing something unorthodox right enough.I cannot see why the bank is undermining its whole fiction of banks only lending customers' money, never ever making it up out of then air which they claim with pride over QE if they are not up to something.
The real question is not is the government creating credit but can't its creation of credit be improved i.e. by not funneling it towards the arsehole banks.There are numerous imaginative methods including the National Dividend precursor of and much superior tothe Citizen's Income,discounted prices etc.Alternatively the Guv can pay for infrastructure with unsupported cheques the way the commercial banks supply "loans".i
L, yeah but of what.
SB, agreed.
DBC: "The real question is not is the government creating credit but can't its creation of credit be improved i.e. by not funneling it towards the arsehole banks."
Yes, but first you would have to improve the arsehole government.
Credit can only be improved by cutting transfer taxes (and thus increasing the utility of money (which is the 1st form of credit)).
SB, another good point.
@MW The same criticism could be levelled at the Land Tax:we don't want the government monoposing all that rent value ; it should be dispersed around the-always-more-wonderful private sector.
Reformers like Gesell made a point of paralleling land nationalisation (compensated in his case) with nationalising money creation.
@DBCR
The whole point is you pay the LVT to the crown*.
Who then pay it back to citizens as an equal dividend.
The government (local + national) then charges each citizen and equal amount.
Hopefully in this way it should put pressure on the government to be good value and the right size.
*i.e. Not the government.
@ SB
Most LVT schemes do not have the proceeds being transferred to the citizens as a dividend:at Tsingtao the money was collected by a government, which was basically the German Imperial Navy: the Snowden scheme in 1931 was meant just to collect the money for the Gov to spend.
All UK taxes are paid nominally to Her Majesty('s Revenue Collection ).
Well yes. If the LVT is not paid out as a CD and is instead directed by bureaucrats then it will not have a beneficial effect on the economy.
DBC and Sarton: 100% return of dividend, then a reverse poll tax voted on anually, both by national and local government, a very attractive plan. One thought though, the argument that infrastructure, or any local improvement, would pay for itself with LVT, would be nonsensical. Think of the Jubilee Line, which is frequently used as the example of private land rent gain based on public spending. Where would the incentives be for local gov. to spend anything when the only revvenue they would reap would be having to ask the public for paying for the capital costs, again and again, with a poll tax on everyone.
SB, as the purists say, with LVT there would still be beneficial effects if the tax were collected and the proceeds thrown into the North Sea. For a start housing would be cheap, inflation would be a thing of the past, the bankers wouldn't be able to enrich themselves and only way to earn money would be to, er, earn it.
Kj:
"Where would the incentives be for local gov. to spend anything when the only revenue they would reap would be having to ask the public for paying for the capital costs, again and again, with a poll tax on everyone."
Unlikely scenario. Local gov is supposed to do what is best for people and/or what people tell them to do. If people want policing, they get it, that boosts land values etc. Some of the LVT pays the policemen, the net profit on the exercise goes into the pot. I doubt very much that even the most ardent Home-Owner-Ist would want the local police to be shut down in order to reduce LVT bills.
So with e.g. Jubilee Line, it is still in the interests of everybody else in the whole country to build it, because the exercise shows a net profit so everybody else in the country ends up a bit richer, even if landowners in the small Jubilee Line area do not benefit at all.
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