Corbynomics: A Dystopia

setmefree2

Governments borrowing money doesn't create new money. When banks "borrow" money (i.e. take deposits), it does effectively create money because the depositor expects to be able to get the money back at any time, but the bank assumes that most won't actually do this and lends out most of the money to other people. (If everyone did actually ask for their money back at once, the illusion of the extra money created by this process would collapse, and the bank would go bust.)

In contrast when governments borrow money, the loan isn't repayable on demand, it has a fixed maturity and the money is only repaid at the end of that period (plus interest at defined points during the period). So holders of government debt don't have money they can spend (they can turn it into money they can spend but only by finding someone else to buy it).

So government debt doesn't create inflation in itself. If they printed money, then they'd be devaluing the money of everyone who had saved or invested so it's better for governments to borrow money and use taxes to repay it.

CLAPTON

setmefree2 wrote: »

Governments borrowing money doesn't create new money. When banks "borrow" money (i.e. take deposits), it does effectively create money because the depositor expects to be able to get the money back at any time, but the bank assumes that most won't actually do this and lends out most of the money to other people. (If everyone did actually ask for their money back at once, the illusion of the extra money created by this process would collapse, and the bank would go bust.)

In contrast when governments borrow money, the loan isn't repayable on demand, it has a fixed maturity and the money is only repaid at the end of that period (plus interest at defined points during the period). So holders of government debt don't have money they can spend (they can turn it into money they can spend but only by finding someone else to buy it).

So government debt doesn't create inflation in itself. If they printed money, then they'd be devaluing the money of everyone who had saved or invested so it's better for governments to borrow money and use taxes to repay it.

when the government buy its bond or indeed any debt, it releases money to the 'owner' : the owners pay that money into the banking system which allows them to borrow more

the net effect of the government buying bonds etc is to increase the money supply

it is widely believed that EU has practiced QE

setmefree2

CLAPTON wrote: »

it is widely believed that EU has practiced QE

Of course. Traditional QE not People's QE.

Good explanation here

If Quantitative Easing (QE), why not helicopter money? We know helicopter money is much more effective at stimulating demand. Helicopter money is a form of what economists call money financed fiscal stimulus (MFFS). In their current formulation independent central banks (ICB) rule out MFFS, because the institution that can do the stimulus (the government) is not allowed to cooperate on this with the institution that creates money (the ICB).So why is it taboo?

One reason why it is taboo among central banks is that they want an asset that they can later sell when the economy recovers. QE gives them that asset, but helicopter money does not. The nightmare (as ever with ICBs) is not the current position of deficient demand, but a potential future of excess inflation that they are unable to control.

Here it is perhaps easiest to talk about monetary policy as putting money into the system when inflation is too low or taking it out when inflation is too high. QE creates money when interest rates are at their Zero Lower Bound (ZLB), but that money can be taken out of the system later if need be by selling the assets that QE buys. Helicopter money also puts money into the system at the ZLB, in a much more effective way than QE, but it cannot be put into reverse by central banks alone. The central bank cannot demand we pay helicopter money back.

If the government cooperates, this is no problem. The government just ‘recapitalises’ the central bank, by either raising taxes or selling more of its own debt. Economists call this ‘fiscal backing’ for the central bank. In either case, the government is taking money out of the system on the central bank’s behalf. So the nightmare that makes helicopter money taboo is that the government refuses to do this.

What kind of government would this be? Inflation is rising, and the institution tasked with bringing it back under control makes a request that can be satisfied fairly painlessly by the government issuing some more debt. A government that refuses to do this is saying very publicly that it no longer cares about high inflation: it prefers an environment of low interest rates and high inflation and it is prepared to cripple its central bank to achieve this.

Now imagine a government with these preferences, and now put it in a world where the ICB does not need recapitalising and is selling assets and raising interest rates to do its job. Are we really meant to believe that such a government would ignore its preferences and let the central bank get on with it? Of course it would not - it would take away the central bank’s independence by forcing it to stop raising interest rates.

In other words, a government that would refuse to recapitalise an ICB is also a government that would have no hesitation in ending central bank independence. Holding assets is no protection for an ICB against this government of its nightmares.

The reason we have independent central banks is not to stop us becoming like Zimbabwe. It is to stop governments taking small risks with inflation for short term political gain. Like the occasion I was told that the Chancellor (at the time) knew full well that interest rates needed to rise now to reduce inflation, but there was no way that would happen until after the party conference. But this kind of government is not the kind that would deliberately sabotage its own central bank by refusing a request for recapitalisation.

CLAPTON

setmefree2 wrote: »

Of course. Traditional QE not People's QE.

Good explanation here

so its clearly possible for government to print money to invest

my question is how effective would it be and what would be the consequences

setmefree2

CLAPTON wrote: »

so its clearly possible for government to print money to invest

I don't believe governments should be allowed to print money to finance their spending even if it's for investing. Gordon Brown couldn't even be trusted to keep to his own golden rule on borrowing (The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending.) And now here we are with £900 billion worth of public debt since. Imagine what he would have done to the economy if he could have printed money?

I believe in an independent central bank. I believe that governments should borrow money for their spending and pay that borrowing back from taxes. I don't believe that governments can be trusted to do the right thing - they are politicians they will always try to buy votes.

I believe that the reason that we are in such a mess with tax credits is because Gordon Brown was trying to buy votes.

setmefree2

CLAPTON wrote: »

my question is how effective would it be and what would be the consequences

I refer back to my post quoting Robert Peston re consequences

If markets believe the BoE is no longer exercising judicious restraint in its creation of new money, and is instead the de-facto vehicle for funding politically popular projects, sterling would weaken and inflation rise.

Even if we are not talking about Weimar Germany, there is little doubt that investors would conclude that the risk of investing in sterling and the UK had grown.

The cost of finance would rise along with inflation, with the perverse result that Corbyn’s aim of boosting infrastructure investment would be harder to achieve. As Peston concludes, the people’s QE only makes sense if you disregard significant macro-risks and believe that a state investment bank would make viable investments overlooked by the private sector.

As ex-BoE economist Tony Yates puts it, less temperately: “Any attempt to hijack the printing presses for general deficit financing… will wreck monetary policy”. That’s because “the next time the government fancies winning an election by promising grand public works schemes, it will be expected that the BoE will print money to finance that” – leading to an inflationary spiral. “Corbyn’s QE is the first step along the road to undermining the social usefulness of money.”

CLAPTON

setmefree2 wrote: »

I don't believe governments should be allowed to print money to finance their spending even if it's for investing. Gordon Brown couldn't even be trusted to keep to his own golden rule on borrowing (The Golden Rule states that over the economic cycle, the Government will borrow only to invest and not to fund current spending.) And now we are were we are with £900 worth of public debt since. Imagine what he would have done to the economy if he could have printed money?

I believe in an independent central bank. I believe that governments should borrow money for their spending and pay that borrowing back from taxes. I don't believe that governments can be trusted to do the right thing - they are politicians they will always try to buy votes.

I believe that the reason that we are in such a mess with tax credits is because Gordon Brown was trying to buy votes.

with the greatest respect, I wasn't really trying to explore your political views (even though I agree with many) but trying to take a dispassionate view of Corbyn's print to invest.

and I must say, given the current useless people running the BoE, I do not share the view that an 'independent' bank is an unmitigated good thing.

martinsurrey

CLAPTON wrote: »

so its clearly possible for government to print money to invest

my question is how effective would it be and what would be the consequences

your question is far to broad

the first step would be for the government to strip the BOE of its independence (as the government currently cant print money, only the BOE can).

the result of that is complex enough that you could get a PHD by estimating the economic effects.

setmefree2

CLAPTON wrote: »

with the greatest respect, I wasn't really trying to explore your political views (even though I agree with many) but trying to take a dispassionate view of Corbyn's print to invest.

and I must say, given the current useless people running the BoE, I do not share the view that an 'independent' bank is an unmitigated good thing.

Then we will have to disagree because you will never persuade me that an ICB isn't sacrosanct.

Generali

setmefree2 wrote: »

Then we will have to disagree because you will never persuade me that an ICB isn't sacrosanct.

Given the Baker Boom, the incomes and bank reserves policies of the Wilson/Callaghan government and the Lawson boom I think it's fair to say that the only organisation that has been shown to be less capable of running monetary policy than the BoE in the UK is the Government.