How silly of me not to realise we could simply create £75 billion to sort out our problems. Now we are told we can, maybe we should ask what we should do with the new money?
It seems such a pity just to go on buying government bonds with it. After all, taxpayers have £199 billion of them in the Bank already. They are not a lot of fun, and do not seem to do a lot of good. Once you have got some, having more does not add a lot.
We could, for example, give every man, woman and child in the country £1250 each to spend as they like. They could use it to pay off the credit card debt, or meet the tax bills on their petrol. It would help with the Council Tax and the VAT. As the main problem over the last year has been the drop in consumer spending, this would offer a way of boosting it. Funny how the authorities never want the punters to have any of the new money.
Or we could use the £75 billion to recapitalise the state owned banks. They could write off their losses for that, and have a load of new capital to lend. That too could do a lot to promote recovery.
We could decide to spend it on a big capital programme. It would buy plenty of roads, railway capacity, energy supply and broadband access. We could all be given free shares in the projects and companies established with the money.
Or the government could just use the money to pay its bills direct, instead of going through the mechanics of buying in old government loans, and then issuing new ones to pay for the excess of spending over income.
Come to think of it, why don’t we always pay for public expenditure like that? Why do we go through the painful process of demanding tax revenue from people, when you could just print some more tenners? Is there a snag the MPC haven’t spotted yet? Why pause at £275 billion?
The Bank will have a nice tidy income from the gilts it buys in. The government could simply cancel all the bonds the Bank owns, to get its interest bill down. Come to think of it, why stop at just £275 billion for doing that? The more you buy in and cancel , the less interest you have to pay.That would monetise the lot, and should prevent the deflation the Bank must fear.
Why do so many spoil sports and jeremiahs write in to this site to say this is a bad idea? Does the Bank think there are any limits to electronic money?
We are owed a proper explanation from the Bank of why they think printing money when inflation is already 5.2% is a good idea. Just telling us yet again that inflation will fall and that we are in the midst of the worst crisis ever is not a sufficient argument for actions that savers will fear.
Maybe the Bank does worry that the banking problems remain acute. If so, the right approach is to seek actions to create strong banks out of the weak banks that currently spook the system. We need honest money.
In the UK there is no substitute for sorting out RBS.
October 7, 2011
My first thought was why don’t they simply pay off government borrowing, then there wouldn’t be any interest to pay, so tax could be reduced.
Didn’t Mugabe do something like this, and the Weimar republic?
October 7, 2011
They can’t do this because it isn’t “real” money.
October 7, 2011
Neither is Sterling………
October 7, 2011
The BoE with QE is making Ponzi look like an amateur.
October 7, 2011
That new money is more debt. More debt to solve a debt problem. In this system all official money is debt. In this system the only way to extinguish debt is through growth, and that is more scare than hens’ teeth. Onerous debt crushes growth. Certainly a catch-22.
At the risk of harping on it, the only currency that is not created as a debt, and so the only currency that can extinguish debt, is gold. To do this it will require a much higher price. Whether it is legal or illegal tender, gold will become more expensive. Imo.
October 7, 2011
Personally, I would welcome that scenario.
zorro
October 7, 2011
Gary – gold strikes me as bonkers too.
October 7, 2011
100 years of misinformation by the media and education system in favor of fiat paper will do that, electro.
Gold has been seen as bonkers by some for 5000 years and it is still with us. Look at the price. Somebody takes it seriously.
October 7, 2011
No. The only answer is for the Government to stop spending money that it is borrowing.
This can be done with determination. We need to cut back hard on the number of employees, to cut back hard on the number of hand-outs and to cut back hard on non essentials like trains, the EU, military procurement, the wasteful NHS, the Welfare State.
Government has got to realise this matters.
October 8, 2011
Whatever is best for the country, Mike. I’ll always support that.
Gold can form bubbles too if there is too much heat and not enough substance.
October 7, 2011
Gary ,
The Govt does not have to issue bonds to the market to raise new money and therefore create debt . What are the banks which buy the bonds buying them with ? In this scenario who is really creating the new money ?
The Govt could just print the money without incurring debt .
You may be right that overall it might be better if the currency was backed by something other than the rule of law .
October 7, 2011
Just as the Banks filled up with worthless pieces of paper called Mortgages at the insistence of the US government, so now Banks all over the world are filling up with useless pieces of paper called Government Bonds.
When these worthless pieces of paper are suddenly seen for what they actually are, the Banks will be totally unable to repay the people who have lent them the money. Like me.
Hello Zimbabwe!
October 8, 2011
Zep Mike ,
China is running ten to the dozen trying to offload the US treasuary bill’s it has received in payment before everyone realises the emporer isn’t wearing any clothes .
Guess we have to look at what they are buying to find out what is really worth something long term .
October 7, 2011
It would be flippent to say:
The electronic money will run out when the power generators are switched off due to too higher carbon footprint, that the windmills will stop working, because we will have run out of hot air.
You could also say:
Why not simply pay for everyone to get drunk, so we can forget all about it.
The problem John, is that most politicians are debt junkies, like any other addict they need a regular fix, and are in denial.
They do not see a problem at all with spending more than they earn, they borrow and steal money from everyone else, just to get a quick fix, using all sorts of excuses, promising to make good, to change tomorrow, but they never do.
The end result, usually a slow painful death, after putting everyone else through absolute misery.
Some addicts change, turn their life around and are then able to resume a more normal life, but first they have to recognise they have a problem, before they can go onto the next stage, and take steps to mend their ways.
They have to go through rehabilitation, to be taken out of the environment where the peer group that led them into the addiction in the first place, would constantly ply them with more and more temptation (the EU).
In short they go through re-education, they learn how to be self sufficient without the need for a constant fix, they are taught to reprioritise their lives, and with the correct help and support they can survive, but there is always a weakness that is ready to strike if they are not strong, just that one more final fix, for old times sake.
For years Politicians have been fed the drug that things will always get better (remember that song), that growth will always happen (no boom and bust), that we can all consume more and more (trade deficit), and that promises can be made with the use of presents (unlimited benefits, public sector jobs) being bought on a State credit card, which will be paid for automaically by ever higher earnings (tax take from the private sector). and when that runs out, they then resort to borrowing from the loan sharks at the back door (PFI contracts and extended borrowings).
Group meetings are held where they surround themselves with people who are in the same position, who all act in the same way, the effect supported with group denial, those who are brave enough to speak out are told to mind their own business, so confident are they that they are right.
Our problem John is politiians who are in denial, until they see the light, or are forced to see the light (public pressure) we are all in a dark place.
I have made this suggestion before, but I will make it again:
The simple solution is for Governments to never be able to spend more than the total tax take in the previous year. If sensible, no government should spend any more than 80- 90% of that tax take, so that some money is built up in reserve to account for poor performance years.
Failure of any government leader to keep to the plan, and keep the country in surplus should be jail, simple.
If you base your calculations on a known tax take (last years figures) rather than pie in the sky hopes and dreams, your chances of balancing the books are very much greater.
ITS SO BLOODY SIMPLE, millions of us do it every year.
October 7, 2011
“The simple solution is for Governments to never be able to spend more than the total tax take in the previous year.”
“Millions of us do it every year”.
Well you might be old and rich enough for this to be the case, and perhaps there are indeed millions of people like you.
Meanwhile, the majority of people have mortgages. And many young people also have student loans. Most people do not balance accounts in the way you say. Most people have long-term debt, which hopefully they can afford to pay off.
October 7, 2011
For a while we had to get by on credit cards. We hated it. We’re on good money but it wasn’t keeping up with price increases (inflation was greater than stated throughout Labour years)
A relative (on benefits) had the cheek to suggest we cut the credit cards up. Our response (both of us working) was to say “What ? And have a standard of living that’s lower than yours ?” and it would have been.
A good credit rating and a bit of equity is all that some of us have. The rest is eaten up in tax and inflation.
October 7, 2011
E Kevin
Please do not start me on the Benefits system, where some people get more for not working (and choosing not to work) than those who are in work, and who at the same time pay for them to have the luxury of that choice.
Yes benefits should be available as a safety net, but absolutely not a long term way of life, unless you have a real medical problem, where you cannot work.
October 7, 2011
I’m just trying to explain why not all people who ran up credit card debts were being greedy.
Lorry drivers on £25k per year really could be better off on benefits and their lack of spending power would have been humiliating. Credit cards, in fact, were the honorable resort.
Low inflation – caused by low priced Chinese goods – was only part of the story.
October 8, 2011
As long as there’s 2.5 million more people than jobs, welfare will be a way of life for 2.5 million people; whether you like it or not.
To many people criticise the welfare system but no one has any idea what to replace it with.
October 7, 2011
wab
No not rich, just worked hard.
Yes had a mortgage, included the repayments in my living expenses calculations, you are surely not suggesting that this should be excluded from the calculation are you !
Now I see it all under threat after a lifetime of working, and yes I have been made redundant in the past, three times in fact, once during my engineering apprenticeship, so I know what the effect of that is like.
I am now of an age where I am not in a position to replace capital, unlike those of a working age who have a better opportunity to do so.
So yes, I am angry.
Forgive me but I was under the impression that the majority of people in the UK do not have mortgages, I thought there were more savers than borrowers.
October 7, 2011
Alan, you may well be angry and with good cause. I have passed that stage on hearing that 12 banks and building societies have been downgraded and am frightened as well as being livid at the way we are being treated. MK and Osborne have made it quite clear they couldn’t give stuff about savers and pensioners – a declaration that so far as they are concerned we might as well not exist.
Like you, I suspect, had a good working life between 1958 and 2004 (that’s over 50 years in harness), paid out enormous sums of money in tax and NIC, lived to the full but without running up debt other than a mortgage, saved cautiously and prepared myself and family for a comfortable, not wealthy, comfortable retirement. Now I see it all being stripped away by the idiots running this counry and the knowledge that they couldn’t give a stuff about makes me incandescent with rage. Must see the doc about my blood pressure or I might do as MK and Osborne appear to want and fall of my perch. They’s love that – think of the inheritance tax take if we all did just that…..
October 7, 2011
“The simple solution is for Governments to never be able to spend more than the total tax take in the previous year.”
I assume you have factored in general elections and politicians’ known propensity for straight dealing?
October 8, 2011
Forthurst
Jail is the stick, and yes I really mean it.
Sound money and defence of the realm should be first priorities.
October 7, 2011
Good post.
Why were there empty seats at the Tory Party Conference? Who ran the fringe meetings? Who actually attended?
It has been estimated that it must have cost some £1,000 per person to attend and join in properly. So who paid?
Are you yourself a paid up member of the Conservative party? I’m not. Did you go? I didn’t.
So where is the Conservative money coming from?
I suggest that it comes from industry/business/charities who want things like, say, property development, railway contracts, lots of foreign aid (for the NGOs who love to lobby and use their money to get lots more), expensive new pieces of military hardware, big computer schemes……..
This would account for the fact that government is spending what it has not got. It would also account for the way that both Labour (TU support) and the Conservatives are fast drifting away from the likes of you and me.
He who pays the piper…….
Reply: the majority of attendees at the Conservative conferecne were lobbyists, corporate reps and media, paid for by their companies and public sector institutions. The members/MPs paid their own bills. Each one of us had to pay an attendance fee to go.
October 8, 2011
Sounds depressing J.R.
Summarises Westminster and Washington ; corporate interests pressuring for public money .
October 8, 2011
Mike
No I am not a member of any political Party, did not go, would not want to go, although I did view some of the speeches on TV of all of the conferences.
October 10, 2011
Would also need to remove the control of money creation (ability to create money for loans based on a signed loan contract) from the fractional reserve banks.
The treasury would then directly control the money supply by changes in tax/spend, the government could then decide how? Either that or we need someway of pricing interest/money supply in line with economy genuine needs.
October 7, 2011
The DT reports this morning: ‘The Bank of England governor says this is the biggest financial crisis since at least the 1930s “if not ever”‘, this presumably said as justification for the QE. Is he right, or is this OTT?
Reply: OTT
October 7, 2011
Thank you. In which case I would say it is fatuously OTT.
October 8, 2011
Nevertheless it is different from all depressions before it .
J.R. , how about Osborne telling Huhne that no more money can be spent on importing gas and electricity and it is up to him to decide how Industry and Consumer will not be starved and the lights be kept bright ?
Everyone else is leaving it up to the DECC minister who seems to take the CC bit a lot more seriously than the DE bit .
Isn’t it time the Chancellor got involved ?
As you kn0w these people cannot contemplate living within their means as they have never had to do so before . They just don’t have it within them to stick to a budget .
The gift of shale gas and undergroung gasified coal is the salvation of the Govt . Are you really going to commit an LBW , score an own goal ?
If they embrace it it means they don’t have to make the tough decisions and can virtually guarantee success , or failure , at the next election .
It can’t be that difficult can it ?
October 7, 2011
Just another episode in the story of the collapse of fiat currencies. Every single one that has ever existed has collapsed when gold or silver no longer backs it.
The only question is when will everyone realise what’s happening and dump sterling?
October 7, 2011
I did it four years ago, as Crash Gordon might have said (though not about this subject)…’it was the right thing to do’
zorro
October 7, 2011
@ Greg 7.35 With news that the Bof E may print up to 500 billion and Citi predicting they will buy up all outstanding gilts I would say now is the time.
October 7, 2011
Companies I know of have property developments and other manufacturing production investments on hold for the sake of about £750,000 of borrowing that they could easily pay back and yet are having difficulty finding a lender – even with sound property security and a very good record. This sum would create about 6 jobs directly and further spending in the economy.
If similar could be found and the £75 Billion were lent in this way through some banking that is 600,000 jobs and extra spending in the economy so yet more jobs. And they would get the £75B back with good interest, pay less in benefits and get more in taxes on the wages.
On the other hand if Natwest/RBS and other continue sucking loans back from sound business to service their black hole – as they are, the opposite will and is happening all over the country.
Which do they prefer?
October 7, 2011
We should be generating some mechanism for pensioners/savers with money in these waste-of-space Banks to lend money to such Companies under a Govt guarantee, which they invest on tooling equipment and wages.
I’ve come to the conclusion that the only answer to this serious problem with the Bnaks is to go round them wherever we can.
October 7, 2011
I tend to agree why lend unsecured to dodgy banks and get perhaps 2% when you can lend well secured to business and get 5-10%+.
Cut out the parasitic middle man I say.
Allow the “Enterprise Investment (tax) Scheme” to give to some minimum guarantee of return to investors and relax the complex rules a bit too.
Allow pension funds and individuals to invest with fewer legal restrictions.
October 7, 2011
EIS investemnts are equity investments not loans. Thus they are at risk of 100% loss less the tax releif. I know this to my cost having had to write off a couple. VCTs potentially help spread the risk over a portfolio of businesses, but they remain equity risks.
October 7, 2011
I know that – but there could be a option to sell back the shares to the company or other party at some set price after the 3 year holding period.
The existing rules prevent this and the tax reliefs are lost if this happens.
Understandably people are reluctant to use the scheme with no such guarantee. If the rules were relaxed companies could find investors rather more easily and make more use of the scheme.
October 7, 2011
Jim F
Your suggestion sounds like a sensible idea with possible legs to go further, as it could be useful to both parties.
The simple ideas are usually the best.
October 7, 2011
Both parties being investors and borrowers.
October 7, 2011
Isn’t that a bit like a mutual society?
I like the idea of cutting out the middleman (the dysfunctional banks), but when you say the govt has to guarantee repayment, doesn’t that really mean the taxpayer?
Maybe we should get back to basics where you control and price your own risk?
With the benefit of hindsight, demutualisation was a mistake.
October 8, 2011
The taxpayer guarantees £100K to the banks, why not to SMEs?
October 8, 2011
When I was learning about double entry bookkeeping I asked the teacher why the “bank accounts” were not under the same ranking in the balance sheet as “debtors”.
He told me it was because of the solidity and liquidity of the banks. I wonder if that rule still holds true?
October 7, 2011
“……and yet are having difficulty finding a lender – even with sound property security and a very good record.”
I think the banks are worried about the value of the developed property if a scheme went ahead and the time it might take to sell on even at impaired price levels. After all, the property price bubble has yet to burst.
But I agree with your extrapolation re’ the numbers of real jobs that could be created; indeed, need to be created. Unfortunately, we can rely on the planning system to ensure that the construction industry remains moribund as there is no chance whatsoever of a sufficient number of consents being issued in time to enable the sector to boost growth in the time frame required.
As I understand it (corrections please, if I’m wrong here) for every one pound spent up front in the construction sector £4 is created down the line. And most of the expenditure in the sector goes to domestic suppliers.
The environmental piety worn by anti-development lobbyists cloaks the simple selfishness they seek to conceal. What saddens me the most about these lobbyists is the sheer paucity of their imagination; the lack of any positive vision for how we might live to enjoy our lives in balance with our already man-made environs. Their views are almost entirely retrospective; anything and everything old or ‘historic’ equals good; any change equals not merely bad but total destruction of everything we hold dear. That’s the general mantra repeated ad nausium at every soundbite opportunity afforded by the media peddling their readers’ prejudices.
The government should face down the scaremongering hysteria of the National Trust and CPRE: much of what these lobby groups wind people up about will not happen anyway. They’re out to protect their own and their sponsors interests, not the national interest and have hitherto succeeded in damaging that national interest by means of fear and myth peddling.
Note to environmentalists: if you’re so concerned about a dearth of habitats for newts, bats etc (what next—algae? bacteria? viruses?) when will you be demolishing your house and grubbing up your garden to compensate for the shortfall? Oooh whoops, where is that bats live again?
October 7, 2011
I do not think the bank is not lending due to “perceived risk” they are not lending because they are unable to lend due to the Basel III rules, lack of capital and their internal problems.
They only have £X pounds to lend so they only lend to very straight forwards (and very low Loan To Value borrowers). Anything complex or slightly higher LTV forget it.
The sad thing is there are good profits, good margins, good development buys (and low risk) in lending at the moment and much of business needs it to get moving again.
The old story banks only lend you an umbrella when its sunny only to snatch it back as soon as it rains.
October 7, 2011
I think there have been some significant price falls in the commercial property sector, even while the residential sector has been seeing relatively stagnant prices in much of the country, and rising ones in London. That’s not to say that commercial property prices haven’t got further to fall, of course.
October 7, 2011
Many of our offices have long been empty, either to let or for sale, or both. That didn’t stop the Environment Agency completing a huge new blot on the townscape, and the Triodos Bank is to share it. Brown’s last memorial.
Housing of course is desperately short, as more and more people pour in, and the birthrate is soaring so our midwives and primary schools can’t cope. Younger people can’t afford to buy or to rent – if they are paying their own way that is. Many of the city centre shops are shutting, but the burger vans are booming – 3 in one small street this evening.
October 7, 2011
Reported to day.
Twelve UK banks have been downgraded by a leading credit ratings agency, on the back of reduced Government support. Moody’s cut its rating on state-owned banks RBS by two notches and Lloyds TSB by one notch, taking both to Aa3.
Other institutions to be downgraded included the UK arm of Spain’s Santander, Co-Operative bank, Nationwide building society and several smaller UK banks.
Sort them out by making the UK lending arm stronger and dealing with the old debts as a separate issue in some way.
A weak zombie bank is as pointless as a chocolate tea pot. Worse in fact – you can at least eat the tea pot.
October 7, 2011
If I had owned RBS group for some time (and I could borrow as cheaply as the UK government can) yet could not hive off the lending arm and sort it out to get profitable safe UK lending going in this market within a few months – I would want to shoot myself.
Who in government is charged with this job and why have they done so little?
October 7, 2011
They could choose to borrow from global markets that are harped on about by these companies all the time. Different story when they want something ain’t it?
October 7, 2011
The BBC is to save £670M by cutting 2000 jobs (over six years – 333 PA). This is £335K per person. I know they need offices and computers and things and have very good pensions but this is rather a lot – is (or has) the BBC been taking the p somewhere.
A company I know of employs over twenty on a (gross) profit of circa £800K or £40K per person (and in the expensive South East including their overheads) so just one eighth of the BBC.
Does anyone know who was going lined up to get all this money – had the BBC not made the cuts? Indeed where does all the vast BBC money go – it cannot cost that much to put on all these repeats and hire a few Guardian types to talk nonsense – they are usually quite cheap to employ.
October 8, 2011
lifelogic: “.. the BBC been taking the p somewhere.”
You can bet your life they have been!
In the papers a while ago, a fellow who used to work for the BBC but was made redundant (with the comfortable package) moved to the US and COMMUTED to Salford, with the BBC paying the expenses and accommodation fees incurred.
You can bet that wasn’t an isolated example.
October 8, 2011
If the job was a reporter then the high cost may be due to them travelling all over the world; so would include flights, hotels, car hire, food, replacing equipment, etc.
Alternatively they may be cancelling several programs so they will not longer need to pay for the writers, actors, sets, costumes, props, recording equipment, editing, and test screenings.
October 9, 2011
Still one hell of a lot of overheads per job lost compared to a well run business.
October 7, 2011
Today most of the UK banks have been down graded 3 notches by Moodys. The rest by 2 notches. Moody’s are real ratings – unlike S&P probability ratings. The down grade is caused by the Government withdrawing bailout guarantees.
This will have a direct effect today on prices in the money markets. As ratings flow through the computers algorithms will raise the price of borrowing and that will effect mortgage rates by as much a 0.5-1.0%.
So the Government is running out of cash to support the banks, lenders are seeking higher returns. The cracks are appearing in the financially engineered fake recovery – and things are starting to get back to reality. The real downturn is looming. Plus real inflation is rising as others recover and costs increase. Consumer price inflation is rising because of the fake recession.
As I said we should have gone into a natural recession.
October 7, 2011
Javelin – tottaly agree – the hard yards need to be done- the quicker we let natural events take their course the quicker we can get through it. We can cut government expenditure and cut employment taxes and most of all the huge amount of unnecessary regulatory burden and this will help speed up the recovery and eventual return to growth. Not an easy path but an honest one and where sound money and reinforcing the ‘right’ virtues of thrift and balanced consumption get rewarded!
October 7, 2011
Robert: “the quicker we let natural events take their course the quicker we can get through it ..”
Iceland of course has been through the whole scenario, their banks crashed, but they still survived.
It helped that they are outside the EU, with relatively low rates of immigration and a reasonably functioning democracy.
In fact, all those things our political class have denied us.
October 7, 2011
Why doesn’t somebody from the BBC pin King down as to why he is failing to meet his inflation target, and that the figures are getting worse?
October 7, 2011
He was asked about interest rates. His response was “Do you want people losing their jobs and their homes ?”
October 7, 2011
Sadly yes – if they made the wrong decisions! They ( BOE) were at fault for trying to prevent previous downturns and therefore distorted sensible and prudent values , twisting risk reward to the extent that risk was massively mispriced and hence the mess we are in ! More of the same however inventive will not get us out of jail! Face the problem tell thetruth, offer a credible hard solution and do the time. But no the establishment can’t admit its mistakes and change course!
October 7, 2011
Electro-Kevin:
Did Sir MK really say this “their homes” comment? This is shocking, does Sir MK believe people who have overborrowed for mortgages have an ethical high ground compared with those who are renting and trying to save? I truly hope that this is a misquote.
October 8, 2011
”do you really want people to lose their homes”
My take
”must protect the banks”
”those that did not borrow were to cautious and should have just taken the money from the bankers when available. You see inflation is a solution for us in banking”
October 8, 2011
Everyone over borrows on their mortgage due to high house prices. Unless you have the money to buy the house outright you have to borrow a large amount.
October 7, 2011
King doesn’t talk to the little people.
Geoff Boycott asked him on air during the recent test series against India, why the bankers get to keep the profits while the taxpayers take their losses ? King asked if Boycott was an economist, and if not he should stick to cricket.
In other words, even though it is our money, don’t ask about it.
October 7, 2011
Mervyn engaging in argumentum ad verecundiam.
Discredited three thousand years ago.
October 7, 2011
‘King asked if Boycott was an economist, and if not he should stick to cricket.’
To which the resposte should have been ‘Are you a cricketer ?’
October 7, 2011
I think Geoff Boycott might well be a better bet at the head of the bank – being a down to earth straight talking Yorkshire man and good at wielding a bat.
October 7, 2011
And today we have PPI input prices ‘unexpectedly’ up, of course such inflationary pressures must be temporary.
October 7, 2011
I wonder if the BoE has thought far enough to ensure the printing of huge numbers of the £500 and £1000 notes we shall soon need to take with us to buy our food for the week? A Dad’s Army phrase keeps running though my head “we are doomed, I tell you, doomed!)
October 7, 2011
It must be an addiction, as Alan Jutson says, or group madness even, because no rational educated person would continue on the path the bank of England and the Treasury are on.
Anyone who has studied economics or looks back at recent political history can predict what this policy will cause.
If its such good idea then why not just carry on and on doing QE and make us all millionaires or wipe out all debt or abolish poverty for everyone?
I thought we learnt in the 70’s and early 80’s how bad inflation was for our nation and that the longer you allow inflation to take hold and increase, the worse the effects of the eventual cure become.
Rather like the addict the longer you’ve been addicted and the bigger your habit the more painful and difficult is the eventual withdrawal and cure.
October 7, 2011
Spot on – but they don’t seem to realise that when you are in a hole you should stop digging, unless of course you expect it to get really ugly! Then you wil need Gold, guns and corned beef and don’t forget your Rhodesian Ridgeback!
October 7, 2011
Here are some suggestions as to how we could create honest money.
1. Have a government which deeply understands the details of how our society is run and can rapidly and correctly identify which people are capable of generating efficiencies and growth and empower and support them in doing that.
2. Have a government full of people who deeply understand human behaviour and rapidly spot way in which economic activity can be stimulated (and taxed).
Such as –
a) In Scotland, Alzheimers Scotland run a massive private business where relatives/those with dementia fund mature adults to ‘befriend’ those who are ill. It costs £17/hour and the befrienders are properly trained and supported so they will be paid perhaps £10/hour but they can work the hours which suit them. It’s far cheaper and much better for the health of the individual than residential care which most would otherwise need. Because it’s centrally organised it’s easy to track and tax.
b) We have depressed empty-nesters and young families who are not coping. Let’s link them up and make them both much more happy and active.
c) lets have discussion forums where people who are not economically active can talk to the community and there can be mass discussions about possibilities for them.
Mass online discussion and cyberconnectivity could positively transform our society to make it much more efficient, health and economically active.
This government needs to harness the positive attributes of human nature rather than to label us all as being stupid and fight us.
I understand that sound fiscal and economic policy is also essential and suggestions along these lines are in no way a substitute for it. But they should also be part of the landscape and it seems to be a part that this government is completely missing.
October 7, 2011
One way the government could transform its ability to act along these lines would be to get as many as possible of its MPs blogging.
I’ve worked on the social dynamics of mass online discussion – the human behaviour which work and how to be aware of the pernicious dynamics and avoid them -and am happy to provide information on that to add to insights from the likes of John and Douglas Carswell and Alastair Campbell and so on.
Here’s some justification for that claim.
http://www.scribd.com/doc/55142332/Exploring-Discussion-Forums
People have lots of good ideas and they want to be listened to and that’s so important if you want them to accept austerity.
October 7, 2011
Here are some key points which would help to make government managed blogs / discussion forums work well.
1. Establish a culture whereby people must be who they say they are and must be prepared to give some basic information about themselves in order to post. The format for establishing identities should allow people to also link to their other profiles, websites, publications and to add further information which adds to others’ understanding their identity.
Although this might appear to exclude some who wish to post about sensitive issues in fact people can post for each other – I know a person who is in this position …. and so on.
2. Those who wish to post/comment on official sites should go through a process whereby they are taught about the protocols and realities of posting. They should be taught to expect abuse but never to rise to it because it is the nature of online discussion that offense is caused and feather are ruffled and if people don’t take offense this should resolve itself naturally. They should also be taught about the natural tendency to ‘straw man’ someone else’s position and how to ask them to explain their position rather than to make assumptions about what it is. This could all be done in a short video with clear examples. It’s appropriate to remind people about other basic human and personal protocols but issues with these are not as bad as they used to be because, as a society, we are learning how to behave within online discussions.
October 7, 2011
As Prof. Martin Shubik explained:
An economy that uses paper money must have its value supported in some manner. A way to model this support is to have in the rules that it be redeemed in some manner or another for an item of value. Furthermore, if money is owed and not paid back the individual defaulting should suffer a loss. The first is achieved by having a fractional reserve ratio between the paper and the amount of gold in the bank and the second calls for a default penalty [which could be economic such as garnishing or capturing assets or uneconomic such as debtor’s prison or even death or slavery (see the ancient Roman Laws of the Twelve Tables, 450 B.C., or the criminal code of Draco 623 B.C.]
http://cowles.econ.yale.edu/P/cp/p08a/p0812.pdf
Evidently there isn’t a severe enough penalty for the default that is QE. Roman Laws, or Draco, do you think?
October 7, 2011
I can see why Mr Cameron isn’t relying on your economic talents, you’re obviously not radical enough. You see you could actually print 4 trillion and we could pay off all the UK debts and there would be no more hassles. Please be sure to pass my details on to Mr Osborne. He and his officials really shouldn’t stress so much when such practical advice is readily at hand….
zorro
October 7, 2011
You also seem to be under the misconception that the government is actually running the country for the benefit of its citizens (aka the electorate). Hopefully, the actions of the Bank/Government during these troubles firmly makes it clear in the minds of people that the banksters run the country.
Q. What’s the difference between the mafia and the government?
A. The mafia only charge 10% to provide effective protection
Cheers
zorro
October 7, 2011
A. The mafia only charge 10% and provide effective protection.
Fixed it for you.
October 7, 2011
yes they cab be very efficient.
zorro
October 7, 2011
Just listened to Osborne. He is still talking about his “credit easing” (how many other easings are there?). Is this more fake money? Where does it come from? Will you tell him and Cameron to stop talking about paying down our debts when they are increasing them? Whenever I hear that lie I tell myself that you cannot believe a word these people say. For over a year I haven’t understood just why the markets thought that the economic problems were being sorted out and were in safe hands. My sense of unease increases daily.
October 7, 2011
Tell them to stop telling us to pay down our debts while increasing theirs ?
Good idea.
By that same token tell them to stop breaking promises to us whilst taking the moral high ground about keeping them for the peoples of other countries. (Foreign Aid)
Yet another round of military related redundancies here today. Foreign Aid is insulting to our own people. Whether right or wrong they view it as costing them their jobs.
October 11, 2011
Couldn’t have put it better myself!
October 7, 2011
The Governor gave an extended interview to Ed Conway, Economics Editor of Sky News yesterday. This was very revealing; unfortunately the Sky News website only offers a summary of it.
Among other things he said:
“We’re creating money because there’s not enough money in the economy.” (Presumably this will help fund Mr Osborne`s sub-prime lending wheeze he mentioned at the conference.) He didn`t know if it would work. He explicitly did not care about the effect on savers of high inflation and low interest rates. He said inflation would drop sharply early next year (well we know that the VAT rate increase will drop out of the inflation data then!).
Those on charge do not inspire confidence that they know or understand what they are doing. And if they do, their cavalier attitude to savers and investors is both shocking and self defeating.
October 7, 2011
The Governor really does have a contempt for savers.
He needs sacking, he has nothing new in the way of thoughts and actions to help get the nations economy back on track. We need new ‘outside of the box’ managers.
October 7, 2011
It’s not just savers who suffer as a consequence of QE. Higher inflation erodes everyone’s living standards if incomes fail to keep pace. We may well be heading for the kind of hyperinflation that blighted the
1970’s. This time around there will be no 10 and 20 percent wage rises to protect living standards. My instincts tell me that the Government and the BOE are intent on inflating much of the nation’s debt away over the next 10 years. As always it will be ” the punters” that take the pain.
October 7, 2011
In the UK there is no substitute for sorting out RBS.
Moodys seems to agree
October 7, 2011
I agree (and LloydsTSB) it has been over three years and it is still not sorted and the government owns much of them!
How much growth has been lost in those 3 years.
October 7, 2011
Only the liquidator knows how
October 7, 2011
The German Euro notes all have serial numbers beginning with X. I despair of this coin clipping which is devaluing my savings. Perhaps its time for right minded folks to just withdraw all their savings and swap them into German Euro notes.
Who are we to vote for now that all our politicians seem to agree that saving is a mugs game? And can someone explain to me why it is virtuous to save up for one’s retirement (which is being pushed further away from me), and yet for the second time in my life the government has followed a policy of deliberate inflation which steals those savings from me?
Who are we to vote for?
October 7, 2011
Perhaps put your investments in hard currencies or things that will not devalue.
October 7, 2011
In the old car world, especially the top quality end, this seems to be what people are doing internationally. Businesses that support the old car world are benefitting as people improve and maintain their asset. The advantage over an old master hung in the bank is that you can use it for runs in the country and hopefully make a bit of a profit in the longer term.
If what is wanted is to encourage spending of capital then low interest rates and high inflation would seem to be working. Is this indeed policy?
But there is only so much “available” money to fund this type of investment, and there is a risk, of course.
October 7, 2011
Like what? Gold cannot devalue?
October 7, 2011
Not financial advice but what I might do:
I personally would not touch gold now at current prices and it does not pay any income either.
It has had a very good run since Brown gave away the UK’s at about $300 in the late 90’s
Perhaps the best thing is to ask Gordon Brown for his financial advice then do the opposite of what he says.
October 8, 2011
Here’s my financial advice.
Pay off all debts including mortgage and don’t believe the hype. This will lead to a greater return on your lack of investments and a larger income causing a reduction in prices, with the consistent long term bonuses of ‘ram it’.
Long term forecasts, unless overwhelmed by forseen stupidity, will look good.
October 7, 2011
“Who are we to vote for?”
I suggest you have a look at UKIPs manifesto (online).
– Flat tax rate
– Return of grammar schools
– Independence from the EU
– Scrap the Human Rights Act
– ‘Three strikes and you’re out’ policy to deal with persistent “offenders”
Clearly the Tories are no longer representing conservative voters, especially in this Lib Dem led coalition!
October 8, 2011
Yes but UKIP will clearly never get many, if any, seats at Westminster under the current voting system.
October 8, 2011
That sounds like defeatism.
You can carry on voting for the Tories, and they can carry on ignoring you. The choices are socialism, EU and QE under Labour or socialism, EU and QE under the Tories.
Don’t be a boiling frog!
If you want change, then you must vote for it!
October 8, 2011
Is there a way to get socialism and the EU without QE?
October 8, 2011
@uanime5
“Is there a way to get socialism and the EU without QE?”
No. Socialism always ends in financial colapse.
October 13, 2011
Socialist and the EU looks like what you will get but you won’t like it when you get it. No one ever does unless they are the using the special government car lanes.
October 8, 2011
Problems with UKIP manifesto:
– Flat tax = tax cut for the rich
– We can only be independent of the EU if we cease to trade with them. This would greatly harm the economy.
– Any organisation that opposes human rights is morally repugnant.
– They tried this in the US and it just resulted in a massive prison population. Does UKIP plan to raise taxes to pay for the extra prisons?
There’s a reason so few people vote for UKIP; it’s an inept party.
October 8, 2011
@uanime5
Flat tax = tax cut for the rich
No. Just a fairer less complicated tax system. The threshold would be raised to £11,500 p.a. We would save a fortune on tax inspectors and tax lawyers, and they could be retrained to do something productive.
We can only be independent of the EU if we cease to trade with them. This would greatly harm the economy.
Political independence, would not stop us from trading with the EU or anyone else.
“Any organisation that opposes human rights is morally repugnant.”
They don’t oppose human rights, just the abuse and exploitation of the EHRA by criminals, and greedy lawyers.
– They tried this in the US and it just resulted in a massive prison population. Does UKIP plan to raise taxes to pay for the extra prisons?
IF more prisons were needed, they would be built, but no need to raise tax, we would just pay for it out of the money saved from not paying billions to the EU every year.
There’s a reason so few people vote for UKIP; it’s an inept party.
They beat Labour in the EU elections, and scored a million votes in the GE. They are not inept, but the political system here amounts to a stand off between people who vote against Tories and People who vote against Labour, which has resulted in political stagnation. What is needed is a British “spring”, at the election where large numbers of people abandon their tribalist instincts and give change a try.
October 7, 2011
Who are we to vote for and where might we put our money? What a pretty pass for so called democracy
October 7, 2011
Given that JR is an experienced and serious politician, and also seems to be writing in near disbelief at what is going on, it is impossible to find anything positive to say about the UK and where power lies. There will not be a clear, coherent, rational explanation from either the Governor or the Chancellor.
On the BoE’s website there is a pitiful explanation of the decision, other than the poor economic reasoning and poor argumentation of the released statement, my biggest worry is:
“The scale of the programme will be kept under review”
What this means is that if the BoE’s apalling forecasts indicate that there is more than a 50% chance of inflation being below 2% in the medium term then it will print more money. Simply, inflation will never again be fought in the UK and the UK is prepared to print for as long as it maintains an existence.
October 7, 2011
I find it hard to believe that the BoE is the prime mover in this disastrous policy.
Cameron and Osborne have not got what it takes to give this country a fighting chance of getting out of the Nulab mess and create a sound economy.
October 7, 2011
George Osborne said on Today this a.m. that channelling money to specific companies via credit easing is ‘properly a job for the elected government’. Is he still a Conservative? It is properly a job for the market and the govt should have no place in it at all. I think the problem in the UK and probably elsewhere in Europe is banks realise that if they actually had to mark their assets to market and meet capital requirements they would be bust. They are desperate to avoid mandatory capital raising and are shrinking their balance sheets instead. Remember that the decision makers mostly hold many shares. We have to recognise this insolvency – and lets start with RBS as you suggest – realise the equity isnt worth anything, put the banks’ mangements out of their misery and let them start again with a clean sheet. Credit easing seems to be an admission that QE doesnt work with zombie banks. In the UK and in Europe govts need to stop playing games with banks’ balance sheet valuations so the market economy can work. None of these interventionist, socialist solutions will work.
October 7, 2011
George never has been a Conservative. George is a socialist in all but name as you might see from the fact his policies are very similar to those of Balls; indeed he would have matched the spending policies of Brown as late as 2006.
For the time being the socialists have won and Keynesian/ Monetarist economic policies reign.
Not for long though.
October 7, 2011
I have no more access to information than anyone else but I imagine that King would not overstate the seriousness of the crisis we are in. I agree that managing inflation is a priority but so also is the banking system. Moody’s have downgraded our banks and it really looks like the contagion could spread to the UK banks. My expectation is that as the EU slides into recession and Greece defaults that this will have a further drag on our economy and prices will also fall. The euro will fall as rates are cut and the pound would then be higher hurting our exports. Perhaps this QE is about stabilising it against a possible euro decline?
You are correct that we should sort out RBS but the window of opportunity closed and now.Bloomberg are reporting a possible need for another $20 billion bailout of RBS. On your blog we have regularly discussed what the various available options are for the taxpayer getting its bailout funds returned. If RBS is not to have a bailout again it may have to have a rights issue.
To paraphrase Bill Gross the issue we are now confronting is not how much return am I getting on my bonds but will I even get my initial investment returned?
October 7, 2011
“I imagine that King would not overstate the seriousness of the crisis we are in”
Yes, Sir MK’s plan to keep prices rising as long as there is no/little wage inflation is indeed a great way to achieve a soup kitchen environment, but he has not yet managed to create this environment.
October 7, 2011
I cashed in all my outstanding bonds with UK Banks, for this very reason. The capital is at risk if one holds more than £85K in a British Bank. If there is a run on the Banks, say RBS and Lloyds, then sure as “eggs are eggs” it is Private Bond Holders who will suffer. First they may stop anyone exiting their Bond and may also reduce the capital paid back to the Private Lender when the contract date comes due.
October 7, 2011
Let us not forget that Mr King of the BofE announced in July 2007 that the banking crisis would all be over by Christmas.
I happen to believe that this situation is exceedingly scary but I am calmed somewhat by the King forecast. Quite amazing that the guy still has a job.
October 7, 2011
Re JR’s suggestion that we could monetise (i.e. pay off) the entire national debt, he is quite right. Advocates of Modern Monetary Theory, me included, have been pointing this out for some time. (Not that I’m in favour of such a sudden and drastic reduction in the debt.)
Obviously the above debt reduction ploy on its own would be too stimulatory / inflationary, so it needs to countered with a deflationary ploy of some sort. Raising taxes / cutting public spending would do. As long as the above inflationary effect equalled the above deflationary effect, the end result would be no net effect on GDP, numbers employed, public sector spending etc etc.
The above over simplifies the issue, but only slightly. I set out more details here:
http://www.positivemoney.org.uk/2011/05/let%E2%80%99s-print-money-and-buy-back-national-debts/
Reply: I was not recommending it!
October 7, 2011
Expanding money by QE, should only be used to counter a similar money supply contraction with serious structural changes. Otherwise we will get just get devaluation and inflation and no societal benefit.
I posted a link to A Very Quiet Coup, it still applies.
http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/7364/?single_page=true
Benefits for some, the financial system, the banks and the very highly paid and secure inflation proofed public sector.
Now that QE has been sanctioned by the relatively well protected elite, we must consider the best use of the funds versus BUT how they will choose to use them.
Restructuring of banks and the rebirth of the newco’s.
New banks? Competition from newly capitalised entrants?
Why do we have bonuses and high wages in companies which appear to need direct and indirect systemic support? If they cant raise new long term private capital then its no bonus distributions or 100% tax on them and dissallow the distribution for tax purposes.
How about infrastructure spending , import reducing measures, tax simplification (NI & PAYE combined),higher pa’s now, benefit simplification and caps at a practical sensible level versus unsupported taxpayers.
Serious reduction in Senior Public Service Headcount (no revolving consultants).
Why do we have Fractional reserve banking? Banks seem to run for the benefit of the bonus recipients.
I think it should be a core curriculum subject, the history of democracy and money specifically fractional reserve banking and alternatives including wars and economic wars of independence fought on these issues.
Competition and taxes maybe just for the little people.
Its like Oliver Twist in reverse ”More please sir!”
All talk and little action by Mr Osborne (Tick for the bank balance sheet tax- too big to fail tax)
October 7, 2011
@ Ralph Musgrave 9.39. Selling Gilts to foreigners is a material way of attracting foreign exchange reserves into the country and a country like the UK who have a chronic balance of payments deficit do need a means of paying for imports.
I do believe there is a bit more than tunnell vision to the sort of economics you employ, particularly when you compare gilts to cash just because they are traded for cash.
Should the Bank of England decide to follow your advice and buy back all the issued Gilts for new money, I think they will be for some very nasty surprises
October 7, 2011
Let’s just forget that a material proportion of our reserves are made up of foreign funds that have invested in Gilts.
Maybe the Bof E will go ahead with advice from the Modern Monetarists and completely pay off the National Debt with manufactured money on the assumption that as it is mainly in sterling it will not matter. Frankly it would not be suprising given their capacity for thought so far, but should they do so I suspect they will be in for a rather nasty suprise.
Not so much unforseen circumstances but more unfortunate castration
October 7, 2011
Tell you what we can do burn all worthless money and return to the gold standard-but not at this time because the economy is fragile. Quantitative easing is just another term for a bailout. Giving money to fledgling companies and governments that convince themselves they have no other option.
October 7, 2011
Most of all, the number crunchers at the Treasury must fear 1. a collapse in the housing market and 2. a large increase in unemployment.
No.1 would put the banking system and the whole economy into crisis. The whole country is assessed on its total worth and the value of property is the main security, against private and public deb, for borrowing at low rates. The banks will prefer to lend their easy government money on well secured mortgages and let business sink. This way the property bubble may continue for longer. The government can also grab a real CG rate of 60% on long term property investments.
Any over enthusiastic reduction in regulation and functionaries would mean the dole for all the Brown appointees and a big government bill. This would not be logged on the productive side of public spending, although one could argue that keeping them in their jobs makes the rest of the economy even more unproductive. It would take years to transfer them to private sector, even if they were capable of practical employment.
It is quite understandable, though not right, that the collective Fabian like mind of the Coalition can fool themselves into believing that QE is not really inflationary and merely funding a collapse in money supply.
October 7, 2011
“Why do we go through the painful process of demanding tax revenue from people, when you could just print some more tenners? ”
Always wondered why they don’t do this.
I assumed it was just about making the proletariat feel under the thumb (easier to control that way) or like they have invested in the system so less inclined to destroy it.
A flat tax of 0% would be very cheap and easy to administer!
October 7, 2011
As Ralph Musgrove, MMT and Chartlalusm suggest thst our fiat currency mainly has value because of the demand created to pay taxes.
October 7, 2011
It is SO unfair, talk about one rule for them and another for us. When I print loads of £20 notes and start spraying them around I get arrested and sent to prison. However, when Mervyn King does it the BBC think he’s helping the economy, that’s what I want to do. See, its SO unfair.
October 7, 2011
Yes and you would probably spend your printed cash more sensibly than Mervyn King would too.
October 7, 2011
What’s the betting that most of the QE funding for business, if any, will go to firms milking the wind energy and PV bonanza. When a retired wrestler came before the Dragons with his PV sales business, the two dreadful women were almost wrestling to open the biggest handbag. With consumers legally bound to pay for this expensive folly, the goverment will be bound to get its money back.
October 7, 2011
43 comments and it’s only 10 o’clock. What’s the world coming to?
Ah, silly me. It’s QE. Silly me again, because Mervyn doesn’t like that term and prefers to use “asset purchase”.
So the taxpayer is buying “assets” which all the banksters regard as diabolical liabilities.
There is some mad logic operating here. Well, Stephanie Flowers, doesn’t believe it and told the chancellor so at 8.30am on Today. I’m with Stephie on this one, and do it detect that Dear John is becoming credulous, if not rebellious.
We are entering the end game. Mervyn and George are playing for time hoping for the well-known economic panacea that “something turns up”. God help us.
October 7, 2011
What is happening with government debt has huge resemblances to the South Sea Bubble of 1720 where the government was trying to fund its deb in the days before electronic moneyt. The main difference was that the then Chancellor of the Exchequer, John Aslabie (who happens to be a cousin of one of my wife’s ancestors) was thrown into the Tower when it all went belly up!
We should have kept this sanction for errant Chancellors, I can think of at least one that should be there now, and I’m beginning to think Osborne should join him.
Its worth reading Wikipedia on the subject.
October 7, 2011
Yes, Osborne and Brown, both. And Cameron.
October 7, 2011
Tes that is pretty much what Professor Laffer suggested.
For probably a little over half that money we could build a factory to mass produce nuclear reactors at a fraction of the current cost. This would both give us as much cheap power as we could use (quite a lot0 and give us a world class export industry.
For about 1/5th we could have X-Prizes sufficient to industrialise space. For a couple of billion we could support the creation of a factory or 2 mass producing modular houses by the 10s of thousands.
When government “invest” they almost always do it to prop ip failing industries (Labour with the coal mines, Tories and Labour with banks) because they have the political clout and the desire to use it. Government could use the same money to kickstart new industries, so long as they are careful to do it for industries that deserve it.
October 7, 2011
Neil Craig: “When government “invest” they almost always do it to prop ip failing industries .. ”
Yes, and look at British Steel, The British Motor Company, The National Coal board, now…..
October 7, 2011
Would anyone like to buy my spare wheelbarrow?
October 7, 2011
I have just sent in to Ten Downing Street a Petition ( for their approval to vote upon) that Jon Redwood should be made “Chancellor of the Exchequer” with immediate effect. I have now lost all confidence in the integrity, ability and experience of George Osbourne and particularly the Governor of the BOE… This last bout of QE for the mere sum of £75 Billion, which is about ten times the UK Student Loans bill, has been the straw which breaks the Camels Back.
October 7, 2011
The government should announce that the BOE monetary policy objective is no longer to produce price stability and specifically isn’t to keep inflation at 2%
October 7, 2011
Inflation is 5%, GDP growth is 0.5%. Net growth is minus 4.5%. So we have stagflation.
The state will always be terrified of deflation because it will reveal the scam of inflation being an alternate form of taxation. Who cares whether some notional measure of national income – GDP – declines or increases? What matters is the soundness of the money supply.
October 7, 2011
“Or we could use the £75 billion to recapitalise the state owned banks”
Isn’t that exactly what the money will be used for?
October 7, 2011
No – it will be used to pay the government’s deficit spending, rather than borrowing or raising taxes. It undermines the credibility of any supposed intention to cut government spending.
October 7, 2011
Dear Mr Redwood, all this adds up to the fact that the governing classes no longer have any real idea what to do about the problems that face us. Certainly not the Chancellor or the Prime Minister, a pair whose performance to date does not even deign the term inadequate. I am sorry to say this, I had hopes after the Labour years, should have realised I suppose that the modern Conservatives are really a fraud. All Britain has are a few individuals who understand matters, yourself, Mr Carswell and others, but alas that is not enough.
October 7, 2011
JR: “In the UK there is no substitute for sorting out RBS.”
Do I detect a hint of frustration in this article?
As to your last point, yes, close it down and write off the losses. That organisation has had two years to right itself with government backing and carte blanche to fleece its customers.
From Newsnight.
Dr Robert Shapiro “.. melt down in soverign debt .. ” which may ” spread to the UK in part through sovereign debt problems in Ireland ..”
Well thank you Messrs Cameron & Osborne who not so long ago
shoveledinvested a shed load of cash to the Irish Republic.Lord Myners ” .. on the verge of a perfect storm .. ” and ” .. a number of European countries cannot raise money .. “
October 7, 2011
Looking at Merv’s M4 Lending stats, there is definitely a considerable case of constipation in the money moving colonic system. http://www.bankofengland.co.uk/statistics/fm4/2011/aug/Sectoral%20breakdown%20of%20aggregate%20M4%20and%20M4%20lending.pdf .
It will be interesting to see where this £75 billion ends up. Possibly as “excess reserves” on the BoE balance sheet; being used as collateral for some casino trading by the banks? Merv does not buy corporate debt, 99% of his last QE bought Treasury Gilts for the APF. Has he changed his mind this time? If Merv does not print money to buy stuff for the APF, the DMO has to do it with some more debt.
“Lenders reported a fall in demand for credit from small businesses and large companies, although demand from medium-sized companies was reported to have picked up a little. Demand for credit from the corporate sector was expected to fall across companies of all sizes in Q4.” http://www.bankofengland.co.uk/publications/other/monetary/creditconditionssurvey110928.pdf .
What! I thought small business was crying out for loans? Who can you believe?
October 8, 2011
I note that M4 is just over £1.5 trillion, or about the same as GDP. That suggests that the velocity of circulation is about 1.0, and therefore an increase of £75bn will add 5% to the money supply, and 5% to the price level, following the simple monetarist equation PV=MT. Osborne was talking of topping that up with a further ~£50bn of direct injection to “business”, giving us inflation in total of about 8.3%.
Since wage inflation is largely suppressed there will be increases in inflation linked current spending on benefits and PFI contracts, partly offset by increased VAT receipts. Future liabilities that are effectively or actually index linked, including IL gilts, and pensions will also increase. Both the current deficit and the government balance sheet will deteriorate. The government (and therefore also taxpayers) are also on the hook for losses on the £274bn of gilts held by the BEAPFF, should the bond bubble burst.
I’m not sure that when you do all the sums the government doesn’t end up worse off than before, despite the “free money” they will get from the exercise. It’s already geared against them.
Meantime the credibility of the BEAPFF will deteriorate. It is looking increasingly like a SIV full of toxic waste.
October 7, 2011
I think the thing I heard suggested was to use 7 billion of the money to make a yearly draw, open to all citizens of the world. Winner gets a cool billion, tax free. Would go quite a way to paying off the deficit.
October 7, 2011
I have lifted this direct from Dan Hannan’s blog. He writes about Ludwig von Mises.
Here are some of the things Mises wrote in anticipation of our present discontents.
What is needed for a sound expansion of production is additional capital goods, not money or fiduciary media. The credit expansion is built on the sands of banknotes and deposits. It must collapse.
Human Action
True, governments can reduce the rate of interest in the short run, issue additional paper currency, open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression.
Omnipotent Government
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.
Human Action
Ponder those words, Mervyn King, and tremble.
October 7, 2011
I suspect Sir MK and the Chancellor do not believe in Austrian business cycle theory.
October 7, 2011
The Conservative Party has become the party of inflation.
If you look at the past 30 years, inflation has simply been much higher under the Conservatives than it was under Labour’s 13 years. An uncomfortable fact, I suggest.
Given that the Chancellor is presently entirely unconcerned about inflation, I think it is already a fair statement.
October 7, 2011
That really simply illustrates how hard the inflationary genie is to tame once it has escaped, and also that Ponzi schemes take time to be discovered: to begin with, enough people can be made to believe that it isn’t all too good to be true. But I share your concern as to whether Osborne really understands the risks of undermining credibility in the pound and his programme of deficit reduction.
October 7, 2011
A further thought. At the time of the last crisis there was a major outflow of foreign money from the UK. Has the same thing happened again? After all, both Cameron and Osborne have helpfully pointed out that UK national debt ratio is as bad as that of Greece, yet we get away with very low interest rates on that national debt. What better signal could a foreign investor have that it was time to take their money and run, especially as another bout of currency devaluation is surely on its way? Only asking.
October 7, 2011
Merv King should be retired immediately.
The BofE should come back under govt control.
The independent bank has made too many bad calls.
If the govt wants to give out £75bn … raise the tax threshold and reintroduce the 10p rate …
October 8, 2011
JT
I go with that.
October 8, 2011
The Governor asked the Chancellor for authorisation:
http://www.bankofengland.co.uk/monetarypolicy/pdf/govletter111006.pdf
and the Chancellor gave the Governor his authorisation:
http://www.hm-treasury.gov.uk/d/chx_letter_061011.pdf
Osborne didn’t have to do that, any more than Darling had to do it.
October 7, 2011
In view of what happened last time round I’m rather inclined to wait and see what actually happens.
When the Asset Purchase Facility was first set up the stated intention was that the Bank would use Treasury notes to buy private sector assets, but that had barely got started before it became using Central Bank Money to buy a mixture of private sector assets and gilts, and it ended up with 99% of the newly created money being used to buy previously issued gilts:
http://www.bankofengland.co.uk/markets/apf/results.htm
So who knows how the £75 billion will be used this time, or even if it will run as high as £75 billion, or it will end up being much more?
October 7, 2011
The BoE has said how it intends to do things here:
http://www.bankofengland.co.uk/markets/marketnotice111006.pdf
Basically, they plan on £1.7bn of gilts purchases every week, with different maturities being bid for on different days, across ranges covering 3-10 years, 10-25 years and over 25 years – excluding index linked issues, so a total of £5.1bn per week. They estimate the process will take 4 months, allowing for a Christmas break.
Mean time, the DMO site shows that for the remainder of the financial year to next March, they need to raise £80bn in new gilt sales to meet their planned remit and finance planned borrowing and redemptions of £49bn during the 2011/12 financial year. Thus QE purchases will exceed new issues over the next 4 months.
http://dmo.gov.uk/reportView.aspx?rptCode=D4E&rptName=7c3cc096-5658-4e0b-bb99-d137352260ea||GILT%20MARKET&reportpage=Current_Remit
Of course, it may be that borrowing follows the pattern of August, with spending running ahead of budget, and taxes falling short, so the DMO may need to sell extra gilts to cover that. However, in essence the budget deficit is being more than covered by money printing, with potentially extra sums to come from Osborne’s giving to business scheme (I can’t call it lending!).
If we look at gilts in issue:
http://dmo.gov.uk/reportView.aspx?rptCode=D1A&rptName=91068115&reportpage=D1A
we find there is currently some £860,469m of conventional gilts issued, of which £15,747m is due for repayment on 7th December, and a further £26,867m on 7th March. Adding in the planned extra £80bn of DMO sales implies that there should be just under £900bn of conventional gilts in issue at the end of the financial year, of which the BEAPFF will own £274bn, or a little over 30%.
The redemption value of index linked gilts at present RPI levels stands at a further £243bn.
October 7, 2011
Very interesting. Once QE is over, it is hard to imagine why anyone would want to hold gilts over 5 years on a yield that gives virtually no real return even if inflation falls back to 2 per cent – unless they can count on more QE, expect prolonged deflation or, most likely, are forced to do so by regulatory requirements. And if it is the last, future pensioners and any company still offering guarantees face a bleak future. That is one of the problems with current policies: they are a nightmare to unwind.
October 8, 2011
So the “money-go-round” is being restarted.
But why?
And will the organ play a different tune this time?
October 8, 2011
Here’s the Debt Management Office calendar for selling new gilts up to the end of this year:
http://www.dmo.gov.uk/reportView.aspx?rptCode=D5J&rptName=606701fe-de7b-4393-800e-870985a69557||EVENTS%20CALENDAR&reportpage=Events_Calendar
So while the Bank will be buying up previously gilts from private investors on Monday, Tuesday and Wednesday each week the DMO will be selling new gilts to much the same set of private investors at much the same overall rate, but only on certain Tuesdays and Thursdays plus once on a Wednesday.
October 7, 2011
I am getting particularly upset with Vince Cable repeating the sayings of the Indian industrial leaders as his own considered views, slagging off the British workforce, hailing Tata, supporting open doors immigration
Its almost as if we have a foreign power having a seat in the cabinet
And boy are they raping us in the process
Doesnt matter how much we devalue our currency nobody is going to buy from this country when we have handed over all our intellectual property to the competition
October 7, 2011
I’m so disappointed with Mr Osborne – seemed to make a good start, good rhetoric, brought the markets onside.
Result – we can borrow at German levels.
I’m disappointed that he hasn’t acted against inflation, has let Mr King and his MPC chart this terrible course. (my view Mr King has been wrong on all the big issues)
Maybe the government thinks it’s easier to have a bout of inflation than to deal with public expenditure cuts.
Pity the poor pensioners and those with a few savings, they’re about to make a sacrifice and don’t deserve this.
Mr Osborne should ask Mr King to pass the steering wheel .
Then just what is the government doing to make the UK more competitive?
October 8, 2011
Osborne won’t stop King because he benefits from it. High inflations means cheap borrowing and a reduced debt.
October 7, 2011
If they must print money, then why don’t they build a really first class public transport system, including silent tarmacked roads, and state of the art airports in the estuaries, as the Japanese did? At least they still have it all to get comfortably around on, and when they emerge from their present difficulties, it will be even more necessary.
October 7, 2011
£79bn? Well maybe we could elect to give it to SOUTH EASTERN TRAINS and then they might actually get to run a good value, puntcual service without cancelling trains, stranding passengers and generally being incapable of meeting their customer charter or running a train franchise efficiently.
Just a thought?
October 7, 2011
Mr Redwood,
Very good point as usual.
Inflation is at 5.2% but the Bank of England is worried about a double dip recession and the Global slow down.
The Bank of England is supposed to keep inflation down to 2%. Not above or below – but 2%. 2% inflation according to the BoE, is good. 0% is Bad. So what is 5.2% ? Good or Bad?
Is it in the remit of the Bank of England to worry about recession or alleged low capital reserves of Banks?
As you rightly point out, why buy Government debt with this electronically created money? Trickle down theory has not worked.
What it looks like has worked is that the Banks were very successful in threatening the Labour Government into giving them £200 Billion. So now it’s time to try the same trick on the Conservative Party.
To prove how naive even the Prime Minister is about economics, all we have to do is look at the recent story in the mainstream press about David Cameron’s thoughts on how to solve the debt problem. Pay off all our Credit Card and Store Card Loans.
David Cameron obviously doesn’t understand how money is created – through lending. If we pay off those loans, the money disappears. This glimpse into the ignorance of a leading politician – or perhaps his speech writer; shows us that we – yet again; have the wrong people in charge.
http://www.positivemoney.org.uk/2011/10/pay-credit-cards-sake-economy-you-serious-mr-cameron/
October 8, 2011
Anything over 3% is supposed to be bad – that is the level that triggers a letter to the Chancellor (as does below 1%). 5.2% is a long way into bad territory.
October 8, 2011
And then we could change our country’s name to something more appropriate – “Greece” for example.
October 8, 2011
I’m getting bored with this.
It’s now over two and a half years since I first asked the obvious question:
“Why is the Bank of England buying gilts?”
Extracts from various comments posted in various places in early March 2009:
“I find it very difficult to see the rationale behind this scheme …”
“For example, let’s say I’m running a pension fund, and I’m holding a lot of gilts.
That’s because I not only want to, I need to; in fact I have a legal obligation to hold a certain fraction of the fund in safe assets like gilts.
But let’s say that one day I realise that in fact I’m holding rather too many gilts. So what do I do?
a) Wait for the Bank of England to set up a programme of buying gilts, when I will be enormously grateful that at last I can dispose of my excess holdings.
b) Sell my excess holdings in the gilts market, immediately.
Let’s say that I do b).
Now along comes the Bank of England, and offers to buy some of the gilts I’m still holding.
Why should I take up that offer? I’ve already adjusted the fund’s portfolio, and I wasn’t intending to sell any more gilts just yet.
The answer can only be – because the Bank of England is making me such a good offer that I’d be a fool to refuse it.
But, nevertheless, I may refuse it, because by announcing that it intends to buy up a large chunk of the existing gilts it has pushed up the prices in the market, so maybe I could do just as well by selling in the market, and at my own convenience …
Meanwhile, even as the Bank of England is begging pension fund managers to sell some of the existing gilts, which they actually want and need in their funds, and which the Bank would pay for with newly created money, so the Treasury’s Debt Management Office will continue to issue new gilts to roll over the government’s debts and fund its budget deficit, exactly as before, and crediting the receipts to the government’s account at the Bank of England.
Wouldn’t it be more straightforward if the Bank of England just credited the newly created money to the government’s account?
Here’s a quote from Gladstone in 1891, which suddenly takes on a new meaning now that Parliament has apparently agreed that the Chancellor can order the creation of as much new money as he pleases:
“The finance of the country is ultimately associated with the liberties of the country. It is a powerful leverage by which the English liberty has been gradually acquired. If the House of Commons by any possibility loses the power of control of the grants of public money, depend upon it, your very liberty will be worth very little in comparison.” ”
“It also seems to me that this scheme completely, and deliberately, avoids the problem of how to remove “toxic assets” from the financial system, which we were previously told was the essential step if banks were to regain trust in each other, and so resume lending to each other, and so then resume lending to their customers, and so get the economy moving again, etc etc etc.
That was the story we were repeatedly fed last autumn.
Instead of sequestering bad assets, so they could then be sorted out at leisure, the scheme as presented would remove some of the very best assets from the system, while leaving the “toxic assets” untouched – albeit that, as already pointed out above, while some of those existing sound assets were being removed from the system, they would be replaced by equally sound new assets, courtesy of the Debt Management Office …
It’s like a patient suffering from kidney disease being put on a recently invented machine, which unlike the normal dialysis machine doesn’t pass the patient’s blood over filters to remove the accumulated toxins, but instead leaves the toxins in the blood and instead removes the blood cells.
I simply can’t see any sense in this, at all.”
“A cynic might say that the essential purpose of this scheme is political, rather than economic.
Until now the government has been funding its deficit mainly by selling gilts, but as it needs to sell more and more gilts demand wll start to dry up.
Therefore the cunning plan is that while one arm, the Debt Management Office, will continue to offer new gilts for sale as before, another arm, the Bank of England, will buy up existing gilts, so ensuring that there’ll always be sufficient demand for the new gilts.”
“The net effect will be that much of the new money created by the Bank of England, ostensibly “to get the economy moving again”, will indirectly find its way into the government’s coffers, enabling them to maintain or increase public expenditure at a time of falling tax revenues.
I’ll leave it to others to speculate about the possible electoral implications of that.”
Now after all this time, I still come back to my original question:
“Why is the Bank of England buying gilts?”
And now with the new government very easily able to borrow as much as it needs to cover its budget deficit, and at very low interest rates, and with no general election in the offing, it doesn’t even make political sense let alone financial sense.
The reasons fed to us by the Labour government through the mass media in early 2009 were tosh, and now we’re being fed the same kind of tosh by this government, and it has become boring.
October 8, 2011
I’d prefer to have seen all the QE1, QE2, Qe3 new money given directly to the government so they could lower fuel tax.
Fuel Tax is currently over 300%. That’s a high rate of tax even for a socialist government!
Since fuel is needed to produce stuff and then to move it to where it is sold, fuel tax is a major drain on the economy. It’s not even as though governments are efficient at spending it.
If you want growth, cut tax.
If you want to cut tax, cut the public sector.
The public sector had become bigger than the private sector!
October 8, 2011
Absolutely spot on Mr Redwood. It’s articles like this written by people like you (those in positions of influence) that still give hope for the future of this country.
The only point I might challenge is about the banks: the growth that we have seen – not just in the UK but elsewhere since the credit crunch – demonstrates quite clearly that the expansion of lending is not a necessary condition of the creation of wealth. It is perhaps understandable that central bankers exaggerate the importance of banking (but nonetheless inexcusable that they do so at the expense of their mandate as you say).
October 10, 2011
There are always opportunities for the creation of wealth for individuals or companies even -when Banks are reducing their Lending. In fact, many would suggest that now is a perfect time for acquiring Assets – such as property; as the Market is falling – in real terms. The profit will be realised at a later stage which in a rising market.
Central Bankers are correct in asserting the importance of Bank Lending as it creates 97% of the UK money supply – with the Government only creating less than 3% in coins and notes.
Without continued Bank Lending – the money supply would dry up.
Our money supply is like water in a colander, without constant topping up; it drips away. Debt is what keeps the level topped up. The Interest Payments increase when we increase the debt which requires more debt to pay off the previous debt. It is the worst system of finance for the people, and the best for the Banks.
If the Government created ALL our money (through an independent MPC with Parliament setting the Policy), the strangle hold of Debt would be broken. Banks would only go bust if they broke the Law, Inflation would be very low and only reflect tru scarcity of goods and services, the National Debt and Deficit would reduce over time and would cease to be our major concern.
A World in which Finance wasn’t our prime concern – what a nice world that
would be. Perhaps we could then start producing quality items again and helping Third World Countries rather than smothering them in debt.
Rampant growth and consumption is only necessary in a World riddled with debt. Even King Henry I knew this; which is why he created Tally Sticks – Debt FREE Government Money.
After 1694, our economy began to sway violently from Boom to Bust, with the ending of Tally Sticks and the creation of Fractional Reserve Lending.
The Party was well and truly over by the early 1700s.
Parliament burnt down during the burning of Tally Sticks (16 October 1834) .
http://en.wikipedia.org/wiki/Burning_of_Parliament
October 10, 2011
Perhaps the buring down of a Democratic Building was symbolic of the end of debt free money.
All is not lost though …
There are new proposals for a debt free money, created by the Bank of England and provided to the Government for public spending.
There will be restrictions on how much is created and it will not be introduced overnight. The old debt based money will have to be phased out slowly to allow the economy to adjust.
There will be little sign that this money is introduced as most people still believe that our money is already created debt free by the Government. Banks will appear to operate as normal, loans will still be given; and Banks will still accept interest for this money. The only differnece will be that the money they loan will already exist.
The system proposed by PositiveMoney is a real opportunity for Politicians. As there is so much debt in the system that much new money will have to be created by the Bank of England, just to maintain the current money supply.
For the people who believe that such a system will encourage waste, well … The current system is based on “elastic” money which demands waste inorder to maintain the money supply. One of the advantages of debt free money will be to support our students in Universities who will be working and contributing to our future. There will no longer be an incentive to prop up a Housing Bubble – which is mainly due to Banks foolish lending to asset based borrowing, enouraging over financing and over pricing of an essential commidity – our Homes. This does not create output in the economy. It destroys creativity and concentrates the mind solely on survival.
The occupy Wall Street movement in America will arrive in the City of London unless something positive is done. No more sticking plasters to gaping wounds.
If politicians support the new Currency Creation Bill, it will be one of the best times to be a Politician in centuries.
Once the system is phased in – in a few years; it will be back to normal I’m afraid. But the economy will be extremely robust.
October 10, 2011
When I say “back to normal I’m afraid” , I mean – people will still be criticising Politicians; as they seem to enjoy that activity; but it won’t be about the Economy – that will be fixed.
The criticism will be about what to spend the Government debt free money on. The deficit will be a thing of History.
October 16, 2011
“Occupy Wall Street” has arrived in the “City of London”:
“Occupy London protests in financial district”
http://www.bbc.co.uk/news/uk-15322134
‘What are those lazy good-for-nothing students doing now?’
Trying to stop Banking Socialism perhaps? Something that the Conservative Party should have done a long time ago.