If QE Was Withdrawn....

grey_gym_sock

dktreesea wrote: »

if at some later point, interest rates go up, any future borrowing may not have a real interest rate of zero.

you have a point there. public borrowing is likely to have a real cost when we get back to a more normal monetary policy.

Surely we should be trying to wean ourself off this ever increasing debt burden?

firstly, most of the deficits of the last few years are balanced out by QE. if or when it's admitted that it would be ridiculous for the BoE to sell off all the gilts it's bought under QE, and they can instead be cancelled, then the increase in debt over these years will be much smaller. and not particularly high for these economic conditions.

that will still leave us with a significant structural budget deficit. the question is when to do something about it. the problem with doing much about it now is that we're in a depression, and cutting public spending tends to deepen it.

with a bit of decent economic growth, there are a lot more options. the tax take would naturally rise, and benefit claims would fall, and it would also be a safer time to make cuts.

We seem to have this ever increasing demand for electricity without any more capacity coming online. That seems to me to be a recipe for above inflation increases in price in the coming years. How are we going to avoid that if we don't build more capacity?

mainly, by using electricity more efficiently, so we need less of it. a lot of things have been designed assuming that cheap energy is available. assumptions need to be changed.

i'm not saying some investment isn't needed, too, but there are limits to that route.

fair points about railways and broadband. (though i remember downloading CD images over dialup ... you don't know how lucky you are )

pqrdef

dktreesea wrote: »

And it may well turn out, if the pound goes on falling, that, by the time we come to pay the money back, it's worth barely anything compared to when we borrowed the money.

But now we have index-linked gilts, which have to be paid back in real money. And for good reason, because the only way to protect so-called "funded" pensions against the threat of inflation is to give the money to the government in return for bits of paper, which are the government's promise to pay the pensions in real money when the time comes.

You can think of it as disguised taxation. It has to be disguised, because the rich are forever bleating about their taxes, but love stuffing their pension pots with all the money they can't spend.

Certainly, it's a way of taking a slice off current production and distributing it to some of those who've retired and are no longer producing. Which has to be done, because the retired can't live off what they produced in their own working lives - most of that no longer exists, having already been consumed.

Of course they like to think they converted their work into "money" and "saved" it. But money isn't a commodity and you can't store it. You can't even stuff a mattress with it - the stuff you're stuffing into the mattress is only wads of IOUs.

The only thing you can do with money is spend it or lend it. Put it in the bank, you're only lending it to the bank. Then we find the banks have ginormous balance sheets - of course they have, it's our rainy-day money they're looking after for us. And the national debt is our money that we've asked the State to look after for us, because the State is the bestest and safest place.

An economy without debt would be one where people live for today and to hell with tomorrow. This isn't actually a good way to approach the future. A high level of "debt" represents a lot of people planning and preparing and making arrangements for the future - mutually beneficial arrangements.

It's all perfectly sustainable, so long as it's sustained. The State can keep rolling over the national debt so long as each generation wants to make at least as much provision for the future as the last one. Starting from an historic low base, you wouldn't think that would be a problem.

When it fails is when lifestyle expectations outstrip reality and you get a generation of greedy grasping people who don't want to share their production with any pensioners - not understanding that their own retirements depend on the next generation, because their pension pots, no matter how fat they are numerically, will only ever be worth what the next generation will allow them to have.

pqrdef

dktreesea wrote: »

We seem to have this ever increasing demand for electricity without any more capacity coming online. That seems to me to be a recipe for above inflation increases in price in the coming years. How are we going to avoid that if we don't build more capacity?

Power stations don't make energy, they only convert it. We fell in love with mains electricity as a way of distributing coal. But the world has moved on since then, and that model may have had its day. Gas is a big improvement on coal, and the grid is two-way now - surplus electricity anywhere can be sold into the grid and used by other local consumers. It may make more sense to distribute gas, use it directly wherever possible, and generate electricity on a smaller scale and closer to the point of use (on those cloudy windless days).

dktreesea

It's true that we don't actually have to do anything about our structural budget deficit, nor our ever growing debt burden. We can keep selling gilts to the rest of the world, and when that fails, indulge in a bit of quantitative easing by using the the BofE to buy back issued gilts or buying some new ones. We own our currency; we can print as much of it as we like.

But there's a cost to this way of governing. We have very few natural resources. The pound has depreciated quite a lot against currencies of countries rich in natural resources in the last few years. That affects our ability to import natural resources, if were were of a mind to manufacture anything.

The depreciation of the pound is the one thing that is going to ruin our standard of living and make us all a lot poorer than even now, let alone a few years ago. Maybe that's not such a bad thing. Does the UK, which doesn't produce very much and has become the welfare capital of the world, deserve to have a high standard of living?

But to think all this is happening under the watch of a party that is meant to be good at managing money makes me sick. If not the conservatives, then who?

sabretoothtigger

All politics is rebased to the left so the right is barely center. I think they are increasing the deficit and thats the hard line .

by the time we come to pay the money back, it's worth barely anything compared

Problem is we need to renew our debt. We could profit if in theory we were ever going to reduce borrowing to zero.

If a working guy with a mortgage can go from productive to the next month bankrupt and homeless then the gov which is far less secure and not productive is even worse a scenario.

The mortgage is sensible risk because its being run down continually and the working guy is productive, our parliament struggles with that idea that we have to repay as soon as possible. And gov leaches and wastes large amounts of money so on both counts its a worse scenario if rates do move up.

I think thats the example of Greece, if they could handle a reduced budget they'd survive even with past stupid policies - that was the bond holders liability. However they cant handle lower spending, that seems the real problem more then debt its productivity, QE doesnt help that

dktreesea

pqrdef wrote: »

But now we have index-linked gilts, which have to be paid back in real money. And for good reason, because the only way to protect so-called "funded" pensions against the threat of inflation is to give the money to the government in return for bits of paper, which are the government's promise to pay the pensions in real money when the time comes.

You can think of it as disguised taxation. It has to be disguised, because the rich are forever bleating about their taxes, but love stuffing their pension pots with all the money they can't spend.

Certainly, it's a way of taking a slice off current production and distributing it to some of those who've retired and are no longer producing. Which has to be done, because the retired can't live off what they produced in their own working lives - most of that no longer exists, having already been consumed.

Of course they like to think they converted their work into "money" and "saved" it. But money isn't a commodity and you can't store it. You can't even stuff a mattress with it - the stuff you're stuffing into the mattress is only wads of IOUs.

The only thing you can do with money is spend it or lend it. Put it in the bank, you're only lending it to the bank. Then we find the banks have ginormous balance sheets - of course they have, it's our rainy-day money they're looking after for us. And the national debt is our money that we've asked the State to look after for us, because the State is the bestest and safest place.

An economy without debt would be one where people live for today and to hell with tomorrow. This isn't actually a good way to approach the future. A high level of "debt" represents a lot of people planning and preparing and making arrangements for the future - mutually beneficial arrangements.

It's all perfectly sustainable, so long as it's sustained. The State can keep rolling over the national debt so long as each generation wants to make at least as much provision for the future as the last one. Starting from an historic low base, you wouldn't think that would be a problem.

When it fails is when lifestyle expectations outstrip reality and you get a generation of greedy grasping people who don't want to share their production with any pensioners - not understanding that their own retirements depend on the next generation, because their pension pots, no matter how fat they are numerically, will only ever be worth what the next generation will allow them to have.

So as long as we keep growing our national debt, selling bonds to the rest of the world whilever they continue to want them at a negative real rate of return, or even selling inflation indexed gilts, on the basis that this really doesn't matter either since we won't ever have to repay them, we don't need to worry about the national debt?

Indeed, even if the rest of the world didn't want to lend to us, we can just continue to use QE and "sell" the bonds to ourselves, creating some lovely jubbly "money for free" so we can keep overspending....forever....?

I can certainly see this scenario unfolding. We're right in the midst of it just now.

While I agree that, having got some money, all you can do with it is spend it or lend it, surely first you have to do something to generate that money? Either create it from thin air (QE!) or generate it by exchanging something of value for money?

Plus, even if we can grow our debt forever, this strategy is not without consequences. Surely following the current strategy (of growing the debt by another £500 billion in the next 5 years,a ccording to the government's won figures) will keep pushing the value of the pound down against other currencies, making us all a lot poorer, should we wish to convert our British based assets into something that we have to source from the rest of the world?

dktreesea

sabretoothtigger wrote: »

All politics is rebased to the left so the right is barely center. I think they are increasing the deficit and thats the hard line .

Problem is we need to renew our debt. We could profit if in theory we were ever going to reduce borrowing to zero.

If a working guy with a mortgage can go from productive to the next month bankrupt and homeless then the gov which is far less secure and not productive is even worse a scenario.

The mortgage is sensible risk because its being run down continually and the working guy is productive, our parliament struggles with that idea that we have to repay as soon as possible. And gov leaches and wastes large amounts of money so on both counts its a worse scenario if rates do move up.

I think thats the example of Greece, if they could handle a reduced budget they'd survive even with past stupid policies - that was the bond holders liability. However they cant handle lower spending, that seems the real problem more then debt its productivity, QE doesnt help that

But do we really need to be concerned about renewing our debt? The scenario Prqdef describes pretty much sums up the current strategy of the government - to let the debt grow and grow, on the basis that really there's no such thing as an unsustainable level. The government would never go bankrupt. It would just QE its way out of trouble.

Say a bond comes up for repayment, say, to the Chinese, and they want the money rather than accepting another gilt in exchange fort the current one. The government sells the new gilt to the BofE instead, using the QE'd money to repay the Chinese.

The government in fact is far more secure than the man in the street who can't pay his mortgage, because they have an alternative to bankruptcy since they own their own printing presses.

Even if interest rates move up, it doesn't stop the government from QE-ing new funds into existence, loaned back to them by the BofE, (i.e. form over substance, because that's just us lending to ourselves) at whatever "rate" the government thinks is politically expedient, knowing the fact that they will never repay the money anyway.

Having QE as an option avoids the need to lower spending. Nor does it incentivise prudent management of available funds by the government. The problem for Greece is they don't control their currency, so can't printy printy their way out of the hole they are in.

grey_gym_sock

in the short term, QE makes the huge budget deficit affordable. if we weren't in an economic depression, QE would cause very high inflation. so QE can't be a permanent solution - unless the depression is permanent.

the depression is the big problem, not QE, and not the deficit. the deficit is something that will need to be fixed after we get out of the depression.

paying off debt as quickly as possible can be a great strategy for households, but it's madness for countries, especially when they're already in a depression. it needs to be a process of more gradual adjustment.

pqrdef

dktreesea wrote: »

Indeed, even if the rest of the world didn't want to lend to us, we can just continue to use QE and "sell" the bonds to ourselves, creating some lovely jubbly "money for free" so we can keep overspending....forever....?

It's the concept of overspending that I'm querying. I see no virtue in a balaned budget where spending equates to taxation and there's no borrowing. We need the government to take our surplus money off our hands (or we only go and pay silly prices for houses) and it's better if they take it by borrowing, so we know they'll return it. The government should be encouraging us to buy even more gilts than it actually needs to sell, simply on the principle that it can make better use of the money than we do. We just blow it all on crap and then complain about the state of the economy and mutter about lack of investment.

dktreesea

grey_gym_sock wrote: »

in the short term, QE makes the huge budget deficit affordable. if we weren't in an economic depression, QE would cause very high inflation. so QE can't be a permanent solution - unless the depression is permanent.

the depression is the big problem, not QE, and not the deficit. the deficit is something that will need to be fixed after we get out of the depression.

paying off debt as quickly as possible can be a great strategy for households, but it's madness for countries, especially when they're already in a depression. it needs to be a process of more gradual adjustment.

QE is already causing high inflation, due to the massive depreciation of the pound since the beginning of the recession. And because we have price rather than wage inflation, people's real incomes are dropping like a stone. Once Universal Credit comes in, those self employed people who can currently afford to work for next to nothing, because they are fully subsidised by the state, (approx 700,000 of the self employed receive working tax credits) will presumably start to charge market prices or close down and become unemployed instead. That could drive up costs a lot.