Moneyweek - British interest rates & debt....are we all doomed?

2sides2everystory

Macca37 wrote: »

I would like to thank everyone for their contributions to the thread. It has certainly sparked a good deal of debate! I think the most important thing I will take away from it is that Money Week are probably exaggerating the risk of economic catastrophe befalling the UK at least in the short to medium term.

I did feel it was very Daily Mail/Express in its delivery style and I appreciate the comments from various people alerting me to the fact that this indeed is their forte.

:-)

I am no fan of MoneyWeek but to appreciate the comments about their style from various people alerting you to the fact that this is indeed their forte will not have actually made you any wiser, will it? You still don't know whether there is something to what they say.


I see you started the thread yesterday and as far as most are concerned it has already been kicked into touch now with many whistle-blowups and no-one allowing any advantage to be played to keep a decent question rolling.

However, I have seen reference to the same Moneyweek message for I believe two whole months now from a number of different sources so the message is not recent and indeed it will have influenced other stories. If you follow the Economist then you will have seen a picture of Cyprus sinking on the cover a couple of issues back and questions asked whether the bail-in is some kind of EU template for governments generally contemplating the Day before Tomorrow so the fears expressed and the cynicism are not limited to the parts of the media that naysayers love to knock.

What you need is someone you can trust who can summarise these stories and properly advise you whether indeed there is a risk the end of the world is nigh. I fancy Stephanie Flanders as one such person but I am not sure she frequents MSE ... some of MSE's homegrown subsitutes don't quite have the same allure :rotfl:


PS Saving Fish ... I think your thought experiment might have been tried before with Lloyd's of London and 'Equitas'. But ultimately it had to be constantly tweaked and finally big corporates just took it over in bigger style than they ever did before using terms like "run-off" to describe the bits with a nasty taste and and "outsourced" to describe the only way they wanted further involvement for a fee naturally! Who ultimately paid for the foul ups? Not them for sure!

Thrugelmir

Glen_Clark wrote: »

Deflation?
I don't think so.

The UK's asset bubble is similar to Japan's. Loose credit lending based on ever increasing asset prices. Once the banks imploded. Asset prices fell. Servicing an ever aging population has proved costly as well.

UK has the worst debt position in Western Europe. There's no magic tree despite what people might believe.

Montmorencymon

JohnRo wrote: »

I think that's a fallacy, much like the fallacy that governments own and control central banks. If we had a nationalised banking system you might have a point, but we don't. The other question if that's true, is why are we charging ourselves interest?

Everything I've read indicates private banks create money out of thin air when new credit is created, it isn't lent, it is invented via a keyboard as debt. Those banks then trouser the interest charges as profit as and when that debt is repaid and the capital then disappears whence it came.

Unless I have it all wrong, ultimately, all interest is owed to the private banks who created the money in the first place.

Central banks act as little more than a backstop to protect the private banking system and their profits, at current and future public expense. Their mandate of protecting financial stability simply means doing whatever it costs to keep the government and banking system they rely on going, but everything I've read shows that simply isn't possible indefinitely.

I partly agree with you. As you know, the BoE was nationalised in 1946, and so the sort of people in the USA who claim that the problem there is that the Fed is a privately owned entity, might wonder why the system here is much the same.

The answer probably partly lies in your "Central banks act as little more than a backstop to protect the private banking system and their profits, at current and future public expense."


Talking of nationalised banking systems, I thought it might have been a nice opportunity, now that Lloyds has been forced to divest part of itself, instead of selling to another bank, to reform TSB as an independent, state-owned entity, that could set an example, and (with the backing of the state) make the loans to small and medium-sized businesses that the private banks are signally failing to do. Of course we need some fiscal stimulus as well, and not the self-defeating "austerity" foisted on to us by egregious politicians, supported by other clueless politicians.



One thing people could do might be to support Positive Money's campaign for reform of the monetary system.

pqrdef

Montmorencymon wrote: »

Talking of nationalised banking systems, I thought it might have been a nice opportunity, now that Lloyds has been forced to divest part of itself, instead of selling to another bank, to reform TSB as an independent, state-owned entity, that could set an example, and (with the backing of the state) make the loans to small and medium-sized businesses that the private banks are signally failing to do.

Of course the new owner is a mutual. In so far as it doesn't have a share price to obsess about and is altogether Vince Cable's kind of thing, the opportunity still exists.

JohnRo

Montmorencymon wrote: »

I partly agree with you. As you know, the BoE was nationalised in 1946

If only, it was effectively reprivatised in 1977, it is argued BOEN control the BOE and they don't have to report anything to anyone.

Montmorencymon

Thrugelmir wrote: »

The UK's asset bubble is similar to Japan's. Loose credit lending based on ever increasing asset prices. Once the banks imploded. Asset prices fell. Servicing an ever aging population has proved costly as well.

UK has the worst debt position in Western Europe. There's no magic tree despite what people might believe.

Isn't there? Where do you think the £375 billion for QE came from?
The Bank of England created it, in effect, because it can.

The effect was (among other things) to increase the central bank reserves for the commercial banks massively, so they could, in theory, increase their lending massively (because they can also create money by creating deposits in the accounts of people who borrow from them), with little fear of liquidity issues.

But the problem is that they are not doing this. So the magic money tree was used, but the money didn't end up in the real economy: that is the problem in a nutshell.

Professor Richard Werner:

Extract:

As Martin Wolf has pointed out, it is created by profit-oriented companies, the banks, when they do what is commonly referred to as “lending money”. But they don’t lend existing money. Instead, they newly invent the money that they lend, by pretending that the borrowers have deposited it and thus crediting their accounts without transferring any money there, by simply inputting the desired number. Since people do not know about this, and would have trouble distinguishing the fictitious deposits from actual deposits, this bank credit money is accepted for payments. This is how the bulk of the money supply is invented into existence. While we have this peculiar monetary system, it is high time for leaders to realise that they need to kick-start the bank credit money supply, and can do so immediately by stopping the issuance of government bonds and instead funding the public sector borrowing requirement by having the Treasury enter into loan contracts with the money creators – the banks. That would constitute true quantitative easing of the kind I called for in Japan in the 1990s, and it would create a full-blown recovery within six months."

end of extract.

Professor Werner again:

Extract:

BOX: Why I Proposed the Concept of ‘Quantitative Easing’ in the 1990s
By Richard A. Werner
For my media campaign to get the Bank of Japan to abandon its doomed policy of focusing on interest
rate reductions—begun in 1991–and to encourage it to increase total credit creation in the system I
decided to use a new expression that would avoid the too-technical term ‘credit creation’ (at the time
hardly used in Japanese). I was looking for an expression that suggested monetary stimulation, and at the
same time made clear at the outset that I was not talking about interest rate reductions, but an increase
in the quantity of money circulating. Yet I did not want this policy to get confused with the monetarist
prescription to boost the monetary aggregates M0, M1, M3, M4 or the like – all of which I thought would
also be doomed (indeed, M0 consists of bank reserves and in the event became the focus of the Bank of
Japan and to some extent also the Bank of England; yet ballooning M0 in Japan did nothing to boost
broad money supply or bank credit, as I had warned).
Hence I chose a combination of the standard expression for ‘expansionary monetary policy’ (which
the Japanese refer to as ‘monetary easing’ or only ‘easing’) and the word ‘quantitative’. Thus my original
definition of ‘quantitative easing’ was an expansion in broad credit creation, which can be achieved in
a variety of ways – I published a major article on this new policy, with ‘quantitative easing’ in the title, in
Japan’s main financial daily newspaper, the Nikkei, on 2 September 1995. I assumed that this expression
would instantly make it clear that I was not talking about reserve or traditional money supply expansion
– why use a new expression for an old policy?
Having argued for much of the 1990s that my arguments were wrong, and claiming repeatedly that
‘quantitative easing’ could not work, the Bank of Japan started the second decade of recession by announcing that it was, after all, now going to attempt a policy named ‘quantitative easing’ (retrospectively
dating the beginning of the policy to March 2001). But actually all it did was to boost bank reserves. Reserve expansion is a standard monetarist policy and required no new label. And sure enough, as I had
warned in the early 1990s, it did not do the economy any good.

Summarising more of his points from memory: In a recession, Monetary stimulus without fiscal stimulus (more or less what we have now) won't work. Fiscal stimulus without monetary stimulus won't work (there isn't enough money in the real economy). You have to do both at one, but it's essential that the money gets into the real economy, and is only used for productive investment.

"Helicopter money" (after Ben Bernanke), would also help to some degree (probably in the form of a citizen's basic income), as would directed lending, perhaps though a publicly-owned bank. As if on cue, the newly divested TSB has come on to the market. Let it be nationalised (and not bought by the Co-Op), and then used to supply government-backed loans for productive investment.

A combination of all these measures is probably needed, and probably others. What is certain not to work is a continuation of the futile and destructive austerity misery.

It depends on your point of view of course. If you want to roll back the welfare state, like the Bullingdon bullies, then austerity is perfect.

And if you want to help the banking sector (regardless of the effect on the rest of the economy), then to Mervyn King, a decent enough chap in many ways, but in effect the chief shop steward of the Union of Bank Bosses and Allied Business supremos, the present version of QE is perfect.

Thrugelmir

Montmorencymon wrote: »

Isn't there? Where do you think the £375 billion for QE came from?
The Bank of England created it, in effect, because it can.

The effect was (among other things) to increase the central bank reserves for the commercial banks massively, so they could, in theory, increase their lending massively (because they can also create money by creating deposits in the accounts of people who borrow from them), with little fear of liquidity issues.

The primary purpose of QE was indeed liquidity. But not to lend. Wholesale money markets have contracted since the events of 2007. Banks are deglobalising. Mortgage lending has some £300 - £400 billion to contract by yet. May take some years but its the way its heading.

Lehmans was the trigger for the great unwinding. As the multi layering of bank transactions continues to unfold. At the peak 52% of all European bank activity was intra bank i.e. not with third parties. Like the game of pass the parcel. Someone is going to be left with nothing. As asset prices follow suit.

VT82

I agree with all the stuff about fractional reserve banking, but as someone who works for a financial institution, and is sick of hearing about how banks can print/create/conjure money for lending out, I couldn't let this go:

sabretoothtigger wrote: »

If Bank A has £10 capital, it loans out £100 to Joe1
Joe1 puts his money into bank B and they loan out £1000 to Joe2
Joe2 puts his money into bank C and they loan out £10000 to Joe3

Joe3 spends his 10,000 based off £10 of original capital. Seems to be they have created money, main thing is what happens next.
Is it a bad debt or returned with profits because 10k can easily double the original capital just on 1 weeks interest

Not that it really adds anything to the argument, but i don't want people reading this (not that anyone will really have persevered this far into the thread who couldn't spot it for themself) and believing it at face value.

The sequence is (my bolds obv.):

If Bank A has £10 capital, it borrows £90 and loans out £100 to Joe1
Joe1 puts his money into bank B and they combine it with £800 of other deposits and £100 of their capital and loan out £1000 to Joe2
etc.

The intention of what was said might be right, but people would read it and think banks magic money 'at the stroke of a keyboard'. Balance sheets balance. If you think they don't, you're probably missing some kind of write-off on the (negative) asset, or an amount owed to reserves on the liabilities side.

In the example of a starting amount of £10, and a minimum capital requirement of 10% (as per the example suggested), the maximum 'money in circulation' that could be created under fractional reserve banking is only £100 anyway, so the £10,000 is so misleading.

JohnRo

VT82 wrote: »

The intention of what was said might be right, but people would read it and think banks magic money 'at the stroke of a keyboard'.

That is exactly what they do. They create credit from thin air which is the same thing as printing money, it would be called counterfeiting if someone without government sanction did the same.

VT82 wrote: »

Balance sheets balance.

Of course they do, the entire problem is that commercial banks have unfathomable liabilities that aren't even on the damned balance sheet. What they tell everyone they're doing and what's actually happening down at the casino are not the same thing or we wouldn't have half the problems we do.

Securitisation, derivatives, swaps etc. it's all an insane jumbled mess that no one anywhere properly understands and because it's off the balance sheet no one has a hope in hell of unravelling it.

A vast shadow banking monstrosity has been allowed to develop by ineffectual government and regulators, draw your own conclusions about why that is.