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Nice little blog spot from Phil Burton-Cartledge
http://averypublicsociologist.blogspot.com/2022/08/inflation-and-political-paralysis.html
Raising interest rates is an interesting plan to combat inflation that is not spending related.
It's not the perfect tool, but as the BoE / UK Government can neither conjure up workers in the Far East, stop China's Covid lockdowns, nor suddenly produce billions of barrels of oil, they don't have any ability to affect the supply side of the equation.
Raising interest rates will reduce demand, which is one way of balancing the current supply / demand miss match.
As mentioned above, if they didn't raise interest rates the pound would fall further relative to the Euro / $ and given we're all chasing the same barrels of oil from the Middle East - that would just make things even more expensive as our £ would buy less oil.
There is no magic bullet out of this situation until demand and supply balance out. It's a global problem, made worse by Brexit, but fundamentally out of the UK's hands.
It’s not the perfect tool, but as the BoE / UK Government can neither conjure up workers in the Far East, stop China’s Covid lockdowns, nor suddenly produce billions of barrels of oil, they don’t have any ability to affect the supply side of the equation.
Raising interest rates will reduce demand, which is one way of balancing the current supply / demand miss match.
Then the system is broken - the government should recognise this - and offer solutions. It's not a suprise that lack of investment in our own shores was going to produce massive problems for the economy, environment and society.
Punishing spending power of the least well off with a COLC is not good policy.
As mentioned above, if they didn’t raise interest rates the pound would fall further relative to the Euro / $ and given we’re all chasing the same barrels of oil from the Middle East – that would just make things even more expensive as our £ would buy less oil.
The government can partly fix what consumers pay for energy.
Why is the free-market solution always more free-market?
There is no magic bullet out of this situation until demand and supply balance out. It’s a global problem, made worse by Brexit, but fundamentally out of the UK’s hands.
I've just outlined a direction - you find the deficits in the UKs infrastructure and services and the government spends the money putting that to work. In the meantime you take the utilities into government ownership - I mean Octopus wants 1 Billion (they won't repay it) from the government to run Bulb!!
Spend the money – but spend it on the things that fix the holes in public services and infrastructure.
This. This. This.
The government can partly fix what consumers pay for energy.
While I agree with the sentiment, can it?
e.g. in the cases of BP and Shell a significant amount of those profits are made in Algeria and Nigeria. Is it then morally right to apply a windfall tax on those profits? Shouldn't that be upto those countries to apply a windfall tax on their own natural resources before the companies bring the money back to the UK?
Could you be more out of touch? Do you seriously think all the poor live in social housing? This isn’t the 1980s, there is no social housing left. Even if they do, they still have to pay bills, put food on the table etc.
Try reading the point I was responding to.
Then the system is broken – the government should recognise this – and offer solutions.
Well the only solution, in this scenario, is to be self sufficient in gas (or energy). If you're not and have to buy gas on an open market, then you are dependent on that market.
It's not something a single government can fix - becoming 100% energy self sufficient is going to take decades and cost 10s of billions.
NB France, who has a massive nuclear power station network, is currently dependent on the UK as they have about 50% offline rectifying problems. So even after that huge investment, they end up having to buy leccy from their neighbours at the worst possible time....
I mean Octopus wants 1 Billion (they won’t repay it) from the government to run Bulb!!
And if HMG doesn't agree to that, HMG will spend billions honoring contracts to supply energy below market cost. It costs HMG the same either way. They've already spent over £1bn doing exactly that up to date.
Why is the free-market solution always more free-market?
Because we're not energy self sufficient so you either buy energy on the market or stop using energy - there isn't another choice!
Well we could invade the ME and try and steal oil - that would be a 3rd option....
Because we’re not energy self sufficient so you either buy energy on the market or stop using energy – there isn’t another choice!
Interesting that all the discussion defaults to where to find energy.
Very little discussion about reducing our need for energy - and even less policy and investment aimed at reduction of energy....
Yes, but that's precisely what the UK hasn't been doing. Investment in the UK is low, and has been for a long, long time, and investment is a big deal as the UK has rubbish productivity, and this isl inked to investment and matters. This hasn't been helped after the crash of 2008, after which the UK economy seemed tp start to enter a zombie state (more poor performance). You've then been 'blessed' with austerity, so more poor investment, further lagging in productivity. All these things add up to make the UK a bad place to invest for the long term, more stagnation, then you get a weakening pound, and stuff from abroad costs more and inflation is harder to manage.
All in all you've had a decade plus of bad financial planning by the government.
I don't think fiddling around with a few tax cuts will help stimulate the economy either. It's beyond that sort of minor fiddling around
Interesting that all the discussion defaults to where to find energy.
Because that is the current issue.
I have mentioned several times that we can just stop using energy and the problem goes away.....
EDIT - that's not actually true, as energy is used to make pretty much everything we buy and the shortage is global (not just UK), even if we switched off the gas network tomorrow, everything we import will still cost more due to the rise in energy costs in it's manufacture and transport.
NB 2: Our gas network is currently supply Europe as we have excess LNG capacity at our ports so are pumping all our spare LNG across the UK (from Wales to France / Netherlands) as they are short on gas. So switching it off would impact Europe as well - it's all very interconnected!
Yes, but that’s precisely what the UK hasn’t been doing. Investment in the UK is low, and has been for a long, long time, and investment is a big deal as the UK has rubbish productivity, and this isl inked to investment and matters. This hasn’t been helped after the crash of 2008, after which the UK economy seemed tp start to enter a zombie state (more poor performance). You’ve then been ‘blessed’ with austerity, so more poor investment, further lagging in productivity. All these things add up to make the UK a bad place to invest for the long term, more stagnation, then you get a weakening pound, and stuff from abroad costs more and inflation is harder to manage.
You forgot to add Brexit - another reason not in invest in UK PLC when you can invest in somewhere interested in trading with other countries.
I don’t think fiddling around with a few tax cuts will help stimulate the economy either. It’s beyond that sort of minor fiddling around
Pissing in the wind, but the Tory candidates are not trying to solve any problems for UK PLC they are only trying to get elected, which means appealing to a very small demographic who are probably receptive to Tax cuts regardless of how many Teachers and Nurses we get rid of to pay for the tax cuts.
Spend the money – but spend it on the things that fix the holes in public services and infrastructure.
Yes - but private money won't necessarily follow - depends on the return AND the speed of that return. These are long-term and for the benefit of all - private investment doesn't usually prioritise those.
The UK is like an old stately home. The original family still live there, but the statues in the garden are crumbling, the grass is straggly and overgrown, weeds everywhere. They've been forced to rent bits out to weddings and conferences for decades now - they put up with the spew and noise so they can hang on to the old pile. But now the actual building is crumbling. The pipes leak and the ceilings sag. Pretty soon they won't be able to rent bits out either. There's no money to do the repairs because all the revenue has funded the unsustainable lifestyle up until now.
MMT is not the answer - at least not on its own:
MMT assumes that the capacity of the economy can supply all of the necessities - not true of the UK.
MMT has nothing to offer against externally-driven inflation like the current energy crisis - if you can't afford the fuel to move stuff, that stuff might as well not exist.
MMT cannot deal with a world where the bad guys control most of the raw material and resources needed for that country's economy.
It feels very much to me that the situation we had pre-Brexit was pretty damned good. We had control over our currency, yet were part of a bloc with some clout and had a veto within that bloc. Halcyon days!
The BoE had to move to increase rates to curb inflation - they can't levy taxes to control it as MMT would suggest - the current government would have to do that and are obsessed with promising tax breaks. Even if they did raise taxes, they would raise them in areas that would suit their traditional support - so 75% of us would see no benefit or worse.
Despite the pound being a fiat currency it IS worth something. Be it dollars, euros, barrels of crude, cubic metres of gas, whatever. The UK doesn't have enough of those real things to fight off global economic realities without being part of a bigger bloc.
Raising interest rates will reduce demand, which is one way of balancing the current supply / demand miss match.
It's been a while since I studied Economics but (and apologies if answered somewhere - I haven't trawled through all 3 pages of this thread) I understood that changing IR's would a) encourage people to save money, b) make it more expensive to borrow and reduce demand for consumables - but if we are looking at the main drivers here - fuel/energy and food - people don't have a choice in purchasing these. They need to eat and they need to get to work.
Whacking rates up may make GBP a slightly more attractive investment/ raise the currency value v EUR/USD - But is it really going to achieve anything significant other than pushing those already on a financial knife edge over the precipice?
At least we don't add any further costs to our "basket of goods" by having frictionless trade with our biggest trading partner, I guess.
Governor of the bank of england pretty much explicitly said that companies were taking advantage of the current climate to price aggressively - i.e. put their prices up and blame "inflation".
They're raising interest rates to take money away from the population so we can afford to buy less - so companies will be less likely to "aggressively" rip us off.
This will bring real inflation down.
The answer is wholescale global economic reform - capitalism is broken, and is breaking the planet. But we won't do that, we've no appetite to do it and as a result we don't make it as a species.
So the actual answer is - buy less crap, ride your bike more.
(and apologies if answered somewhere – I haven’t trawled through all 3 pages of this thread
Answers to all your Qs can be found above...
Yes – but private money won’t necessarily follow – depends on the return AND the speed of that return. These are long-term and for the benefit of all – private investment doesn’t usually prioritise those.
It will.
Government deficits produce private sector surplus.
It will.
Not in proper long-term infrastructure if they think the whole place is in terminal decline*.
*Actually we all know it is in terminal decline, but the pace of it is what will deter private investment. As well as better returns being available elsewhere.
MMT is not the answer – at least not on its own:
MMT assumes that the capacity of the economy can supply all of the necessities – not true of the UK.
Again, like lots of people you misunderstand MMT.
MMT is descriptive. It's a description of how things currently work. For several decades now.
MMT doesn't assume anything - MMT merely points out that you should identify the resources and labour force to operate your project. If they're not available that is your limit and you should look elsewhere to put your money.
Why is it critics of MMT don't understand MMT at all?
The BoE had to move to increase rates to curb inflation – they can’t levy taxes to control it as MMT would suggest – the current government would have to do that and are obsessed with promising tax breaks. Even if they did raise taxes, they would raise them in areas that would suit their traditional support – so 75% of us would see no benefit or worse.
Again MMT is a description of the monetary system - says if too much money is in circulation from government spending. Taxation removes money and lowers inflation.
We don't have inflation caused by TOO MUCH MONEY.
MMT has nothing to offer against externally-driven inflation like the current energy crisis – if you can’t afford the fuel to move stuff, that stuff might as well not exist.
Correct, but if you use MMT prescriptively - to identify economic problems in society you put something in place before it creates a problem. That hasn't been done.
MMT doesn't correct anything - government policy does, operated within the framework of MMT when it comes to spending.
Energy issues are a product of short-term thinking where could have used government spending 10 years ago to support.
The original Green New Deal was set up in 2007.
Spending, and political will.
Don't forget the argument coming from government for the last 20+ years or more is that we can't afford it. That's what MMT corrects.
Because we’re not energy self sufficient so you either buy energy on the market or stop using energy – there isn’t another choice!
Well we could invade the ME and try and steal oil – that would be a 3rd option….
But you could support people's bills?
And I'm guessing if HMG was the monopoly supplier of retail energy it could negotiate a better price for start. Or at least lower the cap and pay the difference itself like France.
Why is it critics of MMT don’t understand MMT at all?
Dogma, ideology, an inability to consider new ideas.. Take your pick.
We don’t have inflation caused by TOO MUCH MONEY.
Quite the opposite in fact. The increase in energy and fuel bills is going to do the BoE's job for them in sucking cash out of the rest of the economy and that in itself is going to cause the recession they desperately seem to want. All the interest rate rise is going to do is turbo-charge that inevitable process while filling the pockets of bankers and speculators. As usual people at the top will get richer off the backs of everyone else. Daylight robbery, plain and simple.
https://twitter.com/RichardJMurphy/status/1555190460712452099?s=20&t=NDncgRfLKB9N85pgdq-J1w
Hopefully good news for us savers. Rates on savings have been abysmal for 10 years or so.
Savings so last century 🙂
They can't make money out of savings as opposed to revolving debt.
Well we could invade the ME and try and steal oil – that would be a 3rd option….
probably cheaper to just pay everyone's energy bills...
Because we’re not energy self sufficient so you either buy energy on the market or stop using energy – there isn’t another choice!
Well we could invade the ME and try and steal oil – that would be a 3rd option….
But you could support people’s bills?
And I’m guessing if HMG was the monopoly supplier of retail energy it could negotiate a better price for start. Or at least lower the cap and pay the difference itself like France.
Yes, we could subsidise bills, but we just store up more debt for the future, so it's not free. But again, right now our potential new leaders are concerned about getting elected and only care what Tory party members think - hence tax cuts.
And I’m guessing if HMG was the monopoly supplier of retail energy it could negotiate a better price for start.
Highly unlikely, they're competing against the whole planet! Someone else will just buy it at the asking price.
probably cheaper to just pay everyone’s energy bills…
It will temporarily relieve one half of the problem - the increased cost of energy. The other part - the fact that everything we import uses energy in its production / transportation and hence has gone up in price, would be unaffected.
Plus just paying everyone's bills is just buy now, pay later - we just have more collective debt to deal with down the line.
It also might cause the value of the £ to fall, if the debt markets thought Uk PLC was running too high a budget deficit, which would in turn make everything even more expensive.
But you could support people’s bills?
Whilst I'm not pro austerity and the "living within our means" mantra of the Cameron/Osborne era. I can't see how a third wave of debt can be a good thing (2008 bail outs, covid, and now this) can be be sustainable. At some point we're either going to have to recover, or be utterly shafted.
Shaking the magic money tree a few times for some infrastructure projects (renewables, railways, the good stuff), that's one thing. Government borrowing to "give" people (well, ultimately the energy co's) money, that's another. It's a short term sticking plaster keeping money in our pockets, crossing your fingers that recovery is just around the corner.
Daylight robbery, plain and simple.
Conversely, inflation wipes out the value of those balance sheets. And the governments income* through taxation should track with inflation, which means the BoE issuing less of those bonds to cover the shortfall?
*yea yea yea, MMT, etc.
yea yea yea, MMT, etc.
Basically this.
And Jeremy Corbyn would have won the next election.
And the EU is a sinister conspiracy to provide modern day slavery.
I'm now on message. Nothing more to consider.
@ tthew
"Sorry, I know this part of the thread is old now, but Manchester Guardian quoted yesterday that only 0.2% of Shell and BP shares are owned by pensions investors, so you can’t really claim that’s a benefit of high fuel inflation."
thats direct ownership, most share ownership will be indrect via ETF's index funds and pension funds..
Yes, we could subsidise bills, but we just store up more debt for the future, so it’s not free.
Government debt is not an issue, and barely ever gets paid back.
It's not a debt as such when you're a currency issuer.
Government debt is just a rolling amount of money spent into the economy.
It's simply how modern economies with central banks work.
Nothing scary.
Shaking the magic money tree a few times for some infrastructure projects (renewables, railways, the good stuff), that’s one thing. Government borrowing to “give” people (well, ultimately the energy co’s) money, that’s another. It’s a short term sticking plaster keeping money in our pockets, crossing your fingers that recovery is just around the corner.
Government always spends with new money creation. Has done for decades.
It's the opposite to what you think here. Government spending, on the correct things is very much long term.
Too many people don't understand the difference between Q/E and MMT. But simply carry on conflating.
Government's don't really borrow and more to the point don't need to borrow. The spending comes first irrespective.
They are currency issuers.
The UK is buying electricity from Norway, and if you don't pay the current rate, we will sell it to someone else. It's not all roses locally in Southern Norway as the grid is so connected that household in Southern Norway are also needing to pay spot despite the fact that we are producing a massive excess of wind and hydro.
This isn't popular and isn't sustainable - a lot of people aren't happy subsidising the UK. Especially as power rates in North Norway, not connected to the UK, are about 100 times lower
Basically this.
And Jeremy Corbyn would have won the next election.
And the EU is a sinister conspiracy to provide modern day slavery.
I’m now on message. Nothing more to consider.
I assume this response is because you can't articulate anything else of merit?
This isn’t popular and isn’t sustainable – a lot of people aren’t happy subsidising the UK.
this isn't on message. I thought Norway did everything right that the UK didnt?
And the governments income* through taxation should track with inflation, which means the BoE issuing less of those bonds to cover the shortfall?
In what fantasy economic world do govt tax receipts go up in a stagflationary recession? In real terms tax receipts are going to go through the floor, requiring a lot more borrowing/QE to prop up a collapsing economy.
Meanwhile bank profits will soar and that money will end up in the pockets of millionaires in the city in the form of fat bonuses to be spunked on champagne, sports cars and prostitutes, whilst people at the other end of the spectrum freeze in winter and have to beg for food from food banks to feed their kids.
I assume this response is because you can’t articulate anything else of merit?
Yes, that's it. Totally.
It’s the opposite to what you think here. Government spending, on the correct things is very much long term.
That's the opposite of what was said, subsidizing energy bills isn't "the correct things" (infrastructure).
In what fantasy economic world do govt tax receipts go up in a stagflationary recession?
More than one in which you have stagnation/recession and no inflation? At the very least inflation encourages people/companies to spend their cash reserves or borrow money as it's driving the NPV of projects down.
Government debt is not an issue, and barely ever gets paid back.
It’s not a debt as such when you’re a currency issuer.
Government debt is just a rolling amount of money spent into the economy.
It’s simply how modern economies with central banks work.
Nothing scary.
You say that, but every month the BoE goes to the markets, cap in hand, to sell guilts, to pay for our deficit. The interest rate they achieve (or whether anyone buys them at all) depends on the market's perception of the fiscal probity of HMG / BoE.
So you can't just run up endless debt saying it doesn't matter, you have to at least look like it does matter.
Plenty of countries end up defaulting on their debt and it never ends well (except for the very rich).
At the very least inflation encourages people/companies to spend their cash reserves or borrow money as it’s driving the NPV of projects down
I'm far from an expert, but I can't see this being anything close to a universal truth in business particularly if there are shareholders to keep happy.
We are no longer in a short-term issue it's now a mid-term concern.
I’m far from an expert, but I can’t see this being anything close to a universal truth in business particularly if there are shareholders to keep happy.
We are no longer in a short-term issue it’s now a mid-term concern.
I think some of the problem is we're well outside the envelope that most rules/theories would claim to apply to.
If base rates were 5%, inflation was 2.5%, employment was 95%, supply and demand were balanced, then you could read an economics textbook and say "If this then that". But we're so far off normal that there isn't a simple answer to any of this anymore. Inflation being this much higher than interest rates isn't "normal".
People can jump up and down shouting MMT until they're blue in the face but:
Plenty of countries end up defaulting on their debt and it never ends well (except for the very rich).
Case in point, Thatcher. She might have ideologically loved the free market, austere government, etc. But at the same time the country was near bankrupt, subsidizing coal (c.f. calls to subsidize energy now), and having to go cap in hand to the IMF. It suited her ideology to close mines and end free milk, but it was as much circumstantial as it was a choice.
But at the same time the country was near bankrupt
Care to explain what this actually means? How does a country go bankrupt?
Care to explain what this actually means? How does a country go bankrupt?
You can't but that doesn't mean that teetering on the edge unable to borrow money from the markets is some sort of goal.
https://en.wikipedia.org/wiki/Crisis_in_Venezuela
You can’t but that doesn’t mean that teetering on the edge
???
How can a country 'teeter on the edge' of bankruptcy if it can't go bankrupt? Countries which issue currency and then borrow from markets in that currency can by definition never go bankrupt. The government has never failed to repay it's gilts. That's because by definition those bonds are guaranteed, which is why there's always a market for them. The alternative is the private sector allowing their savings to degrade from inflation, and no sensible company or individual would do that.
https://en.wikipedia.org/wiki/Crisis_in_Venezuela/blockquote >"Venezuela didn't pay coupons on its dollar eurobonds, causing a cross-default on other dollar bonds."
Can you spot the difference here with the UK which issues bonds in sterling?
Countries which issue currency and then borrow from markets in that currency can by definition never go bankrupt.
There may of course come a point where the markets are only willing to lend in a hard currency (ie someone else’s).
Then the argument changes.
And significant inflation has caused this with other countries and massive borrowing tends to be inflationary.
That’s because by definition those bonds are guaranteed, which is why there’s always a market for them.
And the market set's the price of them.
What happens if you go to the market and can't sell them for the usual 2%, and instead they want 20%?
Those saying that current inflation is not caused by money supply is forgetting the amount of money printde during Covid.
Money supply needs to match economonic growth. Print more and it's inflationary. Lots more was printed than the economy was needed and ended up as withdrawals from tje economy (in the economic sense).
As Covid ended some of the money went back into circulation but as supply failed to meet demand prices rose. Curent inflation is the result of printing money for Covid, the Covid inpact on supply, climatic change related drought and geopoloitical factors.
Restricting money supply by rasing interest rates will reduce inflation. But tightening to the poit where there is insufficient money in circulation to sustain the current level of economic activity wiil result in a recession.
There's no point making money available if there is limited supply - and that is the current situation. There aren't enough cars being made, houses built or holidays to book, util there are printing money will just drive inflation.
I think the BoE is about a year behind the xurve along with all the other central banks but they are heading in the right direction. They have been slow but might be able to stop before rates get really painful. If tbey hadn't raised now rates would have had to be higher in the future
What happens if you go to the market and can’t sell them for the usual 2%, and instead they want 20%?
The same as what happened after 2008. The govt buys back the bonds via Q/E to lower bond yields. It uses it's position as a currency issuer to manipulate the market to ensure that its bonds are always saleable.
The same as what happened after 2008. The govt buys back the bonds via Q/E to lower bond yields. It uses it’s position as a currency issuer to manipulate the market to ensure that its bonds are always saleable.
Which if the banks balance sheets hadn't been so poor would lead to inflation.
Edukator
Free MemberThose saying that current inflation is not caused by money supply is forgetting the amount of money printde during Covid.
It’s a funny one, almost globally this happened, including the ecb for all the EU nations. There wasn’t really any more money in the system, it was supporting the structure. It’s one of those weird scenarios where everyone says there’s no magic money tree, but as a once in a lifetime global event, I think they ran out of ideas on how to keep going.
FWIW the B of E could have raised them more steeply last time, maybe reducing the long-term effect. Now they're catching up. Either way, it was going to have an effect - that's the whole point!
You can't blame them for inflation though.
You can’t blame them for inflation though.
But the Conservatives and the right wing press surely will blame all of this on the BoE.
This is the way.
Truss is already muttering incoherently about re-examining the banks mandate.
Well if the UK economy was more diversified, that would make it more resilient. eg a stronger industrial, energy and agricultural sector. It's too reliant on the service sector and (city of) London.
+1 or 2 % last time would've been harsh, but would've put much more pressure on spending to reduce short-term inflation. Like I say, interest rates are all they can do!
The energy situation is a disaster waiting to happen - loads of schemes canned or objected to in the last 20yrs...
Could end up with the govt compulsory purchasing all N Sea oil/gas this winter + paying a fortune for it!
Letting the BofE set interest rates is better than govt - less interference.
Energy issues are a product of short-term thinking where could have used government spending 10 years ago to support.
This. This. This.
And not just a lack of UK government spending, but actively preventing other governments from investing in UK onshore renewables for us. Loopy. And we have two candidates to be the next Tory leader and PM trying to out compete each other as regards who’ll put even more blocks in the way of installing more onshore renewables RIGHT NOW, even while the energy crisis is raw and immediate.
The government has never failed to repay it’s gilts.
Always a first time - and then what?
Which if the banks balance sheets hadn’t been so poor would lead to inflation.
It led to huge inflation, but only in non essentials. The stock market surged, classic cars, whisky and art increased at previously unheard of levels. It effectively drove the crypto boom.
I feel we are in for a tough 12 months. With inflation soaring, there has hardly been talk about mortgage repayments in the news, its been all energy and petrol costs.
With pay rises nowhere near inflation, people are going to be reigning in their spending which will only hit the retailers that have already been hit badly by Covid.
Always a first time – and then what
Lol. A technical impossibility.
They're the currency issuer.
It's impossible for the UK government to not make its payment commitments.
Always a first time – and then what?
I really think you need to learn how the fiat money system works. The only way the govt could not repay the bonds it issues is if it stopped creating money, or suddenly stopped using sterling as its currency. You’re worrying about something that will never happen.
You’re worrying about something that will never happen.
I'm not "worrying", just responding to the statement:
"The government has never failed to repay it’s gilts."
And this idea we can always print more, that's fine within the UK but if we're buying from elsewhere at some point folk could decide that Sterling isn't a 'worth' what we think - a bit like how it's depreciated against the Dollar recently (pushing up the cost of oil by 10% for example) - then what?
And this idea we can always print more, that’s fine within the UK but if we’re buying from elsewhere at some point folk could decide that Sterling isn’t a ‘worth’ what we think – a bit like how it’s depreciated against the Dollar recently (pushing up the cost of oil by 10% for example) – then what?
The USA operates the same system as the UK in terms of monetary operations for deficit spending. As do lots of economies.
Yes they are a much larger economy and the dollar is the reserve currency but the USA makes payments to the public sector with exactly the same methodology.
Fiat currencies are subject to all sorts of global forces it's impossible to extrapolate one element and say that's responsible the £/$.
The self imposed financial crash caused the biggest drop in £/$ that has never really recovered.
If you want to blame anyone for the £/$ blame the private sector and the shitty short term speculation that goes on.
Oh really?
Low wages not driving inflation then?
mortgage repayments
The elephant in the room.
And with all those newly mortgaged-up-to-the-hilt wannabees from the last two years of artificially turbo-charged housing market out there?
Suffice it to say, my former employer (conveyancing services), is paying a lot of attention to its Repo (repossession) subsidiary at the moment. Making sure it has sufficient capacity to cope with increased levels of work.
Fiat currencies are subject to all sorts of global forces it’s impossible to extrapolate one element and say that’s responsible the £/$.
I didn't.
Still feels like you're avoiding the risk, and IMO there is one - that there's a run on Sterling that the Govt is unable to 'manage' and causes huge economic & social impact.
"In the early post-war years, inflation was growing at an alarming rate, but the government simply printed more currency to pay debts."
https://en.wikipedia.org/wiki/Weimar_Republic#Hyperinflation
Still feels like you’re avoiding the risk, and IMO there is one – that there’s a run on Sterling that the Govt is unable to ‘manage’ and causes huge economic & social impact.
“In the early post-war years, inflation was growing at an alarming rate, but the government simply printed more currency to pay debts.”
Honestly if I had a fiver for everyone that cites the Weimar Republic ...
One more time - the DEBT for the Weimar Republic was denominated largely in a foreign currency.
We are a Sovereign country. Our 'DEBT' is not denominated in a foreign currency.
I don't want to be rude but you're simply not informed. Most people that don't understand MMT cite hyperinflation / Weimar / Zimbabwe - those examples are all dismantled. They had baulked economies due to production / labour issues - this causes the Hyperinflation and then the governments try to 'print' their way out of trouble. You can't do that. MMT goes on to say you can't do that without inflation.
Still feels like you’re avoiding the risk, and IMO there is one – that there’s a run on Sterling that the Govt is unable to ‘manage’ and causes huge economic & social impact.
The risk for national catastrophe is already here and not by the mechanisms you are citing.
Still feels like you’re avoiding the risk, and IMO there is one – that there’s a run on Sterling that the Govt is unable to ‘manage’ and causes huge economic & social impact.
Well then you're looking at a global recession, caused by interlocking asset driven expansion and the will to dump quickly - and the USA is not outside that risk.
So if it happens the UK won't be alone in my opinion. So not sure where all the people fleeing assets will go to.
Let's face it the asset class have a had a good run. And still do.
if you create more of a thing (be it oil, gold, or money) without increasing the demand for it (as quantitative easing does), you reduce the value of that thing, compared to other assets. issuing more currency reduces the value of the existing currency in circulation, creating inflation. Sometimes (like during 2008) the inflation is desirable to reduce deflationary pressures. Other times (like now, when there's already 13% inflation coming) it is undesirable.
You can't magic value into existance. whether you pay for government services through taxation or by creating more currency, the people pay for it - either by losing a percentage of their income (and whatever else you want to tax), or by their income and savings being worth less than last year.
most people don't want their income to be worth less and less year on year due to inflation, so they will demand more pay from their employers to keep standards of living up. This drives the costs of goodds up, which then drives more inflation, which then drives more wage demands etc etc. In not too long you're into a hyperinflationary cycle. In addition to that, appetite for the bonds will drop through the floor, leading to the govermnent paying very high interest rates on their debt, which they print more cash to cover, leading to.. more inflation.
goverments being able to quantitatively ease in the long term instead of tax is a myth. No country has ever done it successfully.
you create more of a thing (be it oil, gold, or money) without increasing the demand for it (as quantitative easing does), you reduce the value of that thing, compared to other assets. issuing more currency reduces the value of the existing currency in circulation, creating inflation. Sometimes (like during 2008) the inflation is desirable to reduce deflationary pressures. Other times (like now, when there’s already 13% inflation coming) it is undesirable.
You can’t magic value into existance. whether you pay for government services through taxation or by creating more currency, the people pay for it – either by losing a percentage of their income (and whatever else you want to tax), or by their income and savings being worth less than last year.
You're talking nonsense.
Issuing more currency as per government spending does not reduce the value. We operate a Fiat system and the currency is not backed by anything (apart from the BoE's guarantee to pay.)
Government money is issued (every day - the same system for the last 40 years +) to pay for public services. The money is backed by the BoE ability to pay. Taxation takes money out of circulation and is not used for spending.
You - like many others are conflating Q/E, and the regular function of governments spending money in a modern economy with central banks.
Inflation has been at 2% for years.
goverments being able to quantitatively ease in the long term instead of tax is a myth. No country has ever done it successfully.
Q/E is simply buying back the bonds that have been issued by the government in the first place. it's a swap of one asset to another. Money already spent into the economy by the government.
This chap (Richard Tye) and colleagues authored (for University study) the BoE/Treasury spending system in the UK:
https://twitter.com/widespreadhaze/status/1556501044925980672?s=20&t=ZMuu0F46AMRl2THchvnr-Q
https://twitter.com/widespreadhaze/status/1556501337600413698?s=20&t=ZMuu0F46AMRl2THchvnr-Q
Q/E is not needed for government spending to take place. It's not part of regular operations.
Here is the full paper:
https://gimms.org.uk/2021/02/21/an-accounting-model-of-the-uk-exchequer/
goverments being able to quantitatively ease in the long term instead of tax is a myth. No country has ever done it successfully.
It was done successfully during the covid pandemic. People got paid and the economy stayed alive.
The fact that Governments stopped supporting economies is exactly why we are where we are because the private sector isn't growing.
to inflation, so they will demand more pay from their employers to keep standards of living up. This drives the costs of goodds up, which then drives more inflation, which then drives more wage demands etc etc. In not too long you’re into a hyperinflationary cycle. In addition to that, appetite for the bonds will drop through the floor, leading to the govermnent paying very high interest rates on their debt, which they print more cash to cover, leading to.. more inflation.
... Other than the current inflation we have is a product of supply shocks. Real wages are suppressed.
Here's a chart showing monetary supply growth v inflation:
https://twitter.com/DEhnts/status/1556202723757793280?s=20&t=ex01GHxyeYxvr8elYND1oA
And here is energy v inflation:
https://twitter.com/MusicalChairs14/status/1556205408590901248?s=20&t=ex01GHxyeYxvr8elYND1oA
you create more of a thing (be it oil, gold, or money) without increasing the demand for it (as quantitative easing does), you reduce the value of that thing
Nice bit of mansplainy a-level economics101 there. What rone said above. What you describe is an economic system which was abandoned in the 70s. The only things that are finite in an economy are real physical resources and labour. Money is simply a promise from the government to repay its debts, and has no inherent value so comparing it to oil or gold is silly. No one is suggesting we keep creating money to pay debts without the resources and labour to back it up. If a govt doesn't issue debt then the economy will deflate and eventually collapse. And if a govt doesn't pay its debts then the economy deflates and eventually collapses. See the connection? Why would any govt collapse its own economy?
Honestly if I had a fiver for everyone that cites the Weimar Republic …
One more time – the DEBT for the Weimar Republic was denominated largely in a foreign currency.
We operate a Fiat system and the currency is not backed by anything (apart from the BoE’s guarantee to pay.)
Rone - both your comments.
The UK relies on the 'value' of Sterling to buy it's imports, in other currencies - why is this any different to Germany's war reparation debt?
This is a genuine question.
I did do the Weimar Republic at O-Level, but it was +40 years ago...
Issuing more currency as per government spending does not reduce the value. We operate a Fiat system and the currency is not backed by anything (apart from the BoE’s guarantee to pay.)
correct, its not backed by anything, its valued simply by the market. in an extreme case, if the goverment simply produced an extra, say, £100,000 per individual, and mailed everyone a cheque, what do you think would happen? assets, as priced in GBP would immediately climb in value, effectively devaluing the money you have in your bank account.
Government money is issued (every day – the same system for the last 40 years +) to pay for public services. The money is backed by the BoE ability to pay. Taxation takes money out of circulation and is not used for spending.
how is it "issued"? they sell bonds which is effectively the goverment getting a loan. Thats all fine, but no money is being created, instead some pension fund or similar is putting its money there as a very low-risk, low-reward store of value.
Taxation takes money out of circulation and is not used for spending.
any evidence of this? taxation does not take money out of circulation, it is entirely used for spending and the gap is met by issuing bonds. The goverment does not issue bonds to cover all spending. Trying to claim otherwise is like claiming that tesco doesn't use customer money to buy pallets of beans, because their corporate debt rises slowley over time.
Q/E is simply buying back the bonds that have been issued by the government in the first place. it’s a swap of one asset to another. Money already spent into the economy by the government.
most (maybe all, I'm not sure) QE was buying bonds that hadn't already been spent - it was buying bonds that the goverment was issuing that day (rather than buying bonds from other institutional investors). Once the goverment had that cash (which would otherwise have come from a pension fund), they can spend it, bau. what QE achieved was forcing the investors to buy other things (like investing in company bonds) which increased the flow of cash in the economy.
Q/E is not needed for government spending to take place. It’s not part of regular operations.
Here is the full paper:
https://gimms.org.uk/2021/02/21/an-accounting-model-of-the-uk-exchequer/
MMT is a fringe theory. It might be what you believe, but it is not how most people believe the economy works and shouldn't be proported as fact, as you are doing. further reading for interested parties -> https://en.wikipedia.org/wiki/Modern_Monetary_Theory -
A 2019 survey of leading economists by the University of Chicago Booth's Initiative on Global Markets showed a unanimous rejection of assertions attributed by the survey to Modern Monetary Theory
It was done successfully during the covid pandemic. People got paid and the economy stayed alive.
this does not count as long term.
No one is suggesting we keep creating money to pay debts without the resources and labour to back it up. If a govt doesn’t issue debt then the economy will deflate and eventually collapse. And if a govt doesn’t pay its debts then the economy deflates and eventually collapses. See the connection? Why would any govt collapse its own economy?
thats exactly what MMT suggests, and exactly what quantitative easing does if used excessively. It is the government (or the bank of england) creating money to pay for (future) debts without the resources or labour to back it up.
It might be what you believe, but it is not how most people believe the economy works and shouldn’t be proported as fact
It's not a question of belief, it's how the economy actually works. The 'T' bit is the concept of using that mechanism in a different way than is currently exercised to deliver a sustainable economy of full employment and to eradicate poverty. That's not what we're talking about though, all we're currently discussing is the mechanics of how the currency issuer (ie the govt) creates money and what impact that has on inflation. The economy has been run like this for decades and it hasn't resulted in hyperinflation. Comparing what happened in the past under a very different economic system to what is happening now is plainly silly.
It’s not a question of belief, it’s how the economy actually works
its a theory. The main opposing theory is Keynesian, which is the theory used to manage nearly all modern economies, and is supported by the vast majority of economists around the world. You might believe in MMT, thats fine, but it should not be purported as fact in the same way that creationism should not be purported as fact.
hat’s not what we’re talking about though, all we’re currently discussing is the mechanics of how the currency issuer (ie the govt) creates money and what impact that has on inflation. The economy has been run like this for decades and it hasn’t resulted in hyperinflation.
outside of quantitative easing (2007+) - I'm not aware of any instance of the goverment or the bank of england issuing money. They borrow money by issuing bonds, which is a different thing - that is a net-zero transation, like getting a loan
The main opposing theory is Keynesian
Keynesian economics died in the 70s alongside the gold standard and dollar-pegged currencies. Again what you are describing is a system which doesn't exist any more.
Anyway, back on topic, the core issue here is that we are in an economic crisis where millions of households are not going to be able to pay their bills for the necessities of life - housing, energy and fuel, and food. We had exactly the same crisis when covid hit, and the govt created hundreds of billions of pounds to prevent the economy collapsing by way of propping up homes and businesses. Yet now we're told that's not possible and we have to accept the rise in fuel and energy bills because 'the market'. The result will be the same, a deflating and collapsing economy. Inflation is not the danger here, it's the opposite.
I wish I understood half this conversation. I'm not dim but I just don't follow if people are really struggling mostly due to inflation driven by external pressures why you would then make it a good deal worse by raising rates and then making mortgages more expensive.
it's going to be horrible when people drop off their fixes. I'm sure those who are that bit older and we're able to ride the equity wave will be able to sit smugly tutting about how people shouldn't have overextended. however, if you wanted a home, its what you had to do.
I’m sure those who are that bit older and we’re able to ride the equity wave will be able to sit smugly tutting about how people shouldn’t have overextended
until the tenants in their BTL portfolio start defaulting...
why you would then make it a good deal worse by raising rates and then making mortgages more expensive.
Because the wealth of the top 10% must be protected at all costs. The danger of that though is what happens when the 90% wake up and realise they're being ripped off?