Which if the banks balance sheets hadn’t been so poor would lead to inflation.
It led to huge inflation, but only in non essentials. The stock market surged, classic cars, whisky and art increased at previously unheard of levels. It effectively drove the crypto boom.
I feel we are in for a tough 12 months. With inflation soaring, there has hardly been talk about mortgage repayments in the news, its been all energy and petrol costs.
With pay rises nowhere near inflation, people are going to be reigning in their spending which will only hit the retailers that have already been hit badly by Covid.
Always a first time – and then what
Lol. A technical impossibility.
They're the currency issuer.
It's impossible for the UK government to not make its payment commitments.
Always a first time – and then what?
I really think you need to learn how the fiat money system works. The only way the govt could not repay the bonds it issues is if it stopped creating money, or suddenly stopped using sterling as its currency. You’re worrying about something that will never happen.
You’re worrying about something that will never happen.
I'm not "worrying", just responding to the statement:
"The government has never failed to repay it’s gilts."
And this idea we can always print more, that's fine within the UK but if we're buying from elsewhere at some point folk could decide that Sterling isn't a 'worth' what we think - a bit like how it's depreciated against the Dollar recently (pushing up the cost of oil by 10% for example) - then what?
And this idea we can always print more, that’s fine within the UK but if we’re buying from elsewhere at some point folk could decide that Sterling isn’t a ‘worth’ what we think – a bit like how it’s depreciated against the Dollar recently (pushing up the cost of oil by 10% for example) – then what?
The USA operates the same system as the UK in terms of monetary operations for deficit spending. As do lots of economies.
Yes they are a much larger economy and the dollar is the reserve currency but the USA makes payments to the public sector with exactly the same methodology.
Fiat currencies are subject to all sorts of global forces it's impossible to extrapolate one element and say that's responsible the £/$.
The self imposed financial crash caused the biggest drop in £/$ that has never really recovered.
If you want to blame anyone for the £/$ blame the private sector and the shitty short term speculation that goes on.
Oh really?
Low wages not driving inflation then?
mortgage repayments
The elephant in the room.
And with all those newly mortgaged-up-to-the-hilt wannabees from the last two years of artificially turbo-charged housing market out there?
Suffice it to say, my former employer (conveyancing services), is paying a lot of attention to its Repo (repossession) subsidiary at the moment. Making sure it has sufficient capacity to cope with increased levels of work.
Fiat currencies are subject to all sorts of global forces it’s impossible to extrapolate one element and say that’s responsible the £/$.
I didn't.
Still feels like you're avoiding the risk, and IMO there is one - that there's a run on Sterling that the Govt is unable to 'manage' and causes huge economic & social impact.
"In the early post-war years, inflation was growing at an alarming rate, but the government simply printed more currency to pay debts."
https://en.wikipedia.org/wiki/Weimar_Republic#Hyperinflation
Still feels like you’re avoiding the risk, and IMO there is one – that there’s a run on Sterling that the Govt is unable to ‘manage’ and causes huge economic & social impact.
“In the early post-war years, inflation was growing at an alarming rate, but the government simply printed more currency to pay debts.”
Honestly if I had a fiver for everyone that cites the Weimar Republic ...
One more time - the DEBT for the Weimar Republic was denominated largely in a foreign currency.
We are a Sovereign country. Our 'DEBT' is not denominated in a foreign currency.
I don't want to be rude but you're simply not informed. Most people that don't understand MMT cite hyperinflation / Weimar / Zimbabwe - those examples are all dismantled. They had baulked economies due to production / labour issues - this causes the Hyperinflation and then the governments try to 'print' their way out of trouble. You can't do that. MMT goes on to say you can't do that without inflation.
Still feels like you’re avoiding the risk, and IMO there is one – that there’s a run on Sterling that the Govt is unable to ‘manage’ and causes huge economic & social impact.
The risk for national catastrophe is already here and not by the mechanisms you are citing.
Still feels like you’re avoiding the risk, and IMO there is one – that there’s a run on Sterling that the Govt is unable to ‘manage’ and causes huge economic & social impact.
Well then you're looking at a global recession, caused by interlocking asset driven expansion and the will to dump quickly - and the USA is not outside that risk.
So if it happens the UK won't be alone in my opinion. So not sure where all the people fleeing assets will go to.
Let's face it the asset class have a had a good run. And still do.
if you create more of a thing (be it oil, gold, or money) without increasing the demand for it (as quantitative easing does), you reduce the value of that thing, compared to other assets. issuing more currency reduces the value of the existing currency in circulation, creating inflation. Sometimes (like during 2008) the inflation is desirable to reduce deflationary pressures. Other times (like now, when there's already 13% inflation coming) it is undesirable.
You can't magic value into existance. whether you pay for government services through taxation or by creating more currency, the people pay for it - either by losing a percentage of their income (and whatever else you want to tax), or by their income and savings being worth less than last year.
most people don't want their income to be worth less and less year on year due to inflation, so they will demand more pay from their employers to keep standards of living up. This drives the costs of goodds up, which then drives more inflation, which then drives more wage demands etc etc. In not too long you're into a hyperinflationary cycle. In addition to that, appetite for the bonds will drop through the floor, leading to the govermnent paying very high interest rates on their debt, which they print more cash to cover, leading to.. more inflation.
goverments being able to quantitatively ease in the long term instead of tax is a myth. No country has ever done it successfully.
you create more of a thing (be it oil, gold, or money) without increasing the demand for it (as quantitative easing does), you reduce the value of that thing, compared to other assets. issuing more currency reduces the value of the existing currency in circulation, creating inflation. Sometimes (like during 2008) the inflation is desirable to reduce deflationary pressures. Other times (like now, when there’s already 13% inflation coming) it is undesirable.
You can’t magic value into existance. whether you pay for government services through taxation or by creating more currency, the people pay for it – either by losing a percentage of their income (and whatever else you want to tax), or by their income and savings being worth less than last year.
You're talking nonsense.
Issuing more currency as per government spending does not reduce the value. We operate a Fiat system and the currency is not backed by anything (apart from the BoE's guarantee to pay.)
Government money is issued (every day - the same system for the last 40 years +) to pay for public services. The money is backed by the BoE ability to pay. Taxation takes money out of circulation and is not used for spending.
You - like many others are conflating Q/E, and the regular function of governments spending money in a modern economy with central banks.
Inflation has been at 2% for years.
goverments being able to quantitatively ease in the long term instead of tax is a myth. No country has ever done it successfully.
Q/E is simply buying back the bonds that have been issued by the government in the first place. it's a swap of one asset to another. Money already spent into the economy by the government.
This chap (Richard Tye) and colleagues authored (for University study) the BoE/Treasury spending system in the UK:
https://twitter.com/widespreadhaze/status/1556501044925980672?s=20&t=ZMuu0F46AMRl2THchvnr-Q
https://twitter.com/widespreadhaze/status/1556501337600413698?s=20&t=ZMuu0F46AMRl2THchvnr-Q
Q/E is not needed for government spending to take place. It's not part of regular operations.
Here is the full paper:
https://gimms.org.uk/2021/02/21/an-accounting-model-of-the-uk-exchequer/
goverments being able to quantitatively ease in the long term instead of tax is a myth. No country has ever done it successfully.
It was done successfully during the covid pandemic. People got paid and the economy stayed alive.
The fact that Governments stopped supporting economies is exactly why we are where we are because the private sector isn't growing.
to inflation, so they will demand more pay from their employers to keep standards of living up. This drives the costs of goodds up, which then drives more inflation, which then drives more wage demands etc etc. In not too long you’re into a hyperinflationary cycle. In addition to that, appetite for the bonds will drop through the floor, leading to the govermnent paying very high interest rates on their debt, which they print more cash to cover, leading to.. more inflation.
... Other than the current inflation we have is a product of supply shocks. Real wages are suppressed.
Here's a chart showing monetary supply growth v inflation:
https://twitter.com/DEhnts/status/1556202723757793280?s=20&t=ex01GHxyeYxvr8elYND1oA
And here is energy v inflation:
https://twitter.com/MusicalChairs14/status/1556205408590901248?s=20&t=ex01GHxyeYxvr8elYND1oA
you create more of a thing (be it oil, gold, or money) without increasing the demand for it (as quantitative easing does), you reduce the value of that thing
Nice bit of mansplainy a-level economics101 there. What rone said above. What you describe is an economic system which was abandoned in the 70s. The only things that are finite in an economy are real physical resources and labour. Money is simply a promise from the government to repay its debts, and has no inherent value so comparing it to oil or gold is silly. No one is suggesting we keep creating money to pay debts without the resources and labour to back it up. If a govt doesn't issue debt then the economy will deflate and eventually collapse. And if a govt doesn't pay its debts then the economy deflates and eventually collapses. See the connection? Why would any govt collapse its own economy?
Honestly if I had a fiver for everyone that cites the Weimar Republic …
One more time – the DEBT for the Weimar Republic was denominated largely in a foreign currency.
We operate a Fiat system and the currency is not backed by anything (apart from the BoE’s guarantee to pay.)
Rone - both your comments.
The UK relies on the 'value' of Sterling to buy it's imports, in other currencies - why is this any different to Germany's war reparation debt?
This is a genuine question.
I did do the Weimar Republic at O-Level, but it was +40 years ago...
Issuing more currency as per government spending does not reduce the value. We operate a Fiat system and the currency is not backed by anything (apart from the BoE’s guarantee to pay.)
correct, its not backed by anything, its valued simply by the market. in an extreme case, if the goverment simply produced an extra, say, £100,000 per individual, and mailed everyone a cheque, what do you think would happen? assets, as priced in GBP would immediately climb in value, effectively devaluing the money you have in your bank account.
Government money is issued (every day – the same system for the last 40 years +) to pay for public services. The money is backed by the BoE ability to pay. Taxation takes money out of circulation and is not used for spending.
how is it "issued"? they sell bonds which is effectively the goverment getting a loan. Thats all fine, but no money is being created, instead some pension fund or similar is putting its money there as a very low-risk, low-reward store of value.
Taxation takes money out of circulation and is not used for spending.
any evidence of this? taxation does not take money out of circulation, it is entirely used for spending and the gap is met by issuing bonds. The goverment does not issue bonds to cover all spending. Trying to claim otherwise is like claiming that tesco doesn't use customer money to buy pallets of beans, because their corporate debt rises slowley over time.
Q/E is simply buying back the bonds that have been issued by the government in the first place. it’s a swap of one asset to another. Money already spent into the economy by the government.
most (maybe all, I'm not sure) QE was buying bonds that hadn't already been spent - it was buying bonds that the goverment was issuing that day (rather than buying bonds from other institutional investors). Once the goverment had that cash (which would otherwise have come from a pension fund), they can spend it, bau. what QE achieved was forcing the investors to buy other things (like investing in company bonds) which increased the flow of cash in the economy.
Q/E is not needed for government spending to take place. It’s not part of regular operations.
Here is the full paper:
https://gimms.org.uk/2021/02/21/an-accounting-model-of-the-uk-exchequer/
MMT is a fringe theory. It might be what you believe, but it is not how most people believe the economy works and shouldn't be proported as fact, as you are doing. further reading for interested parties -> https://en.wikipedia.org/wiki/Modern_Monetary_Theory -
A 2019 survey of leading economists by the University of Chicago Booth's Initiative on Global Markets showed a unanimous rejection of assertions attributed by the survey to Modern Monetary Theory
It was done successfully during the covid pandemic. People got paid and the economy stayed alive.
this does not count as long term.
No one is suggesting we keep creating money to pay debts without the resources and labour to back it up. If a govt doesn’t issue debt then the economy will deflate and eventually collapse. And if a govt doesn’t pay its debts then the economy deflates and eventually collapses. See the connection? Why would any govt collapse its own economy?
thats exactly what MMT suggests, and exactly what quantitative easing does if used excessively. It is the government (or the bank of england) creating money to pay for (future) debts without the resources or labour to back it up.
It might be what you believe, but it is not how most people believe the economy works and shouldn’t be proported as fact
It's not a question of belief, it's how the economy actually works. The 'T' bit is the concept of using that mechanism in a different way than is currently exercised to deliver a sustainable economy of full employment and to eradicate poverty. That's not what we're talking about though, all we're currently discussing is the mechanics of how the currency issuer (ie the govt) creates money and what impact that has on inflation. The economy has been run like this for decades and it hasn't resulted in hyperinflation. Comparing what happened in the past under a very different economic system to what is happening now is plainly silly.
It’s not a question of belief, it’s how the economy actually works
its a theory. The main opposing theory is Keynesian, which is the theory used to manage nearly all modern economies, and is supported by the vast majority of economists around the world. You might believe in MMT, thats fine, but it should not be purported as fact in the same way that creationism should not be purported as fact.
hat’s not what we’re talking about though, all we’re currently discussing is the mechanics of how the currency issuer (ie the govt) creates money and what impact that has on inflation. The economy has been run like this for decades and it hasn’t resulted in hyperinflation.
outside of quantitative easing (2007+) - I'm not aware of any instance of the goverment or the bank of england issuing money. They borrow money by issuing bonds, which is a different thing - that is a net-zero transation, like getting a loan
The main opposing theory is Keynesian
Keynesian economics died in the 70s alongside the gold standard and dollar-pegged currencies. Again what you are describing is a system which doesn't exist any more.
Anyway, back on topic, the core issue here is that we are in an economic crisis where millions of households are not going to be able to pay their bills for the necessities of life - housing, energy and fuel, and food. We had exactly the same crisis when covid hit, and the govt created hundreds of billions of pounds to prevent the economy collapsing by way of propping up homes and businesses. Yet now we're told that's not possible and we have to accept the rise in fuel and energy bills because 'the market'. The result will be the same, a deflating and collapsing economy. Inflation is not the danger here, it's the opposite.
I wish I understood half this conversation. I'm not dim but I just don't follow if people are really struggling mostly due to inflation driven by external pressures why you would then make it a good deal worse by raising rates and then making mortgages more expensive.
it's going to be horrible when people drop off their fixes. I'm sure those who are that bit older and we're able to ride the equity wave will be able to sit smugly tutting about how people shouldn't have overextended. however, if you wanted a home, its what you had to do.
I’m sure those who are that bit older and we’re able to ride the equity wave will be able to sit smugly tutting about how people shouldn’t have overextended
until the tenants in their BTL portfolio start defaulting...
why you would then make it a good deal worse by raising rates and then making mortgages more expensive.
Because the wealth of the top 10% must be protected at all costs. The danger of that though is what happens when the 90% wake up and realise they're being ripped off?
until the tenants in their BTL portfolio start defaulting…
This.
See the start of the pandemic and previous economic wobbles - both times we had tenants and fellow landlord tenants have real issues....
Sooner or later, you have to buy something in USD.
If the currency markets know that you are actually devaluing your currency by creating more of it (which they will, instantly) then your £ buys less $ and the price of everything goes up because in reality the UK will always have to import something.
The spin off theories from MMT have nothing to say about this. They all assume that the country's economy is, or could be, a self-contained entity. The bigger the country's economy and store of natural resources the more MMT could be thought to be applicable, but it cannot apply to the UK where our economy largely generates nice-to-haves and we import most of the essentials.
I’m sure those who are that bit older and we’re able to ride the equity wave will be able to sit smugly tutting about how people shouldn’t have overextended. however, if you wanted a home, its what you had to do.
Up to a point, but an awful lot of people trade-up on houses to keep up with the Joneses and shout about their hot tub on Facebook too.
The spin off theories from MMT have nothing to say about this.
Don't know why people are obsessing about MMT in any case. The argument is not whether a government should print money or borrow to give people handouts, the argument is why working people should suffer from higher energy prices when energy and oil companies are making record profits. The solution to this problem of skyrocketing energy prices is obvious, but they won't do that because, again, 'the market'.
The solution to this problem of skyrocketing energy prices is obvious, but they won’t do that because, again, ‘the market’.
what is that in your opinion? Buy oil in dollars and then subsidise drivers to keep the cost low to the end user, by borrowing money at the government level? some countries (particularly poor ones) do that, so its not unheard of.
I wish I understood half this conversation. I’m not dim but I just don’t follow if people are really struggling mostly due to inflation driven by external pressures why you would then make it a good deal worse by raising rates and then making mortgages more expensive.
it’s going to be horrible when people drop off their fixes. I’m sure those who are that bit older and we’re able to ride the equity wave will be able to sit smugly tutting about how people shouldn’t have overextended. however, if you wanted a home, its what you had to do.
all recent mortgages have been priced based on your ability to pay when the rates went up. high inflation of basics really significantly affects some people, but on the whole they're not the people with large debts or large savings - it impacts people on minimum wage more than any other. People or companies with large mortgages and debts can, generally, take the pain of higher interest rates by cutting other expenses. Yes, things will be tight, but the view is that if you're rich enough to have a £200k mortgage (the cost of which will rise by £150 as mortgage rates double from 1.5 to 3%), you've probably got £150 of disposable somewhere along the line, as you'll have needed to earn £50k to start with.
Additionally, someone with £10k in savings who might today go "well I may as well spend it as I'm not getting any interest" might, when rates get to say 5% (I think they'll stop around 4%, what we have now is nothing), consider saving it for longer, again reducing demand.
so basically, by adding additional tightening to those who can afford it a bit, you're reducing demand, and thus inflation for everyone, which stops inflation getting out of control. Interest rates are not meant to keep things comfortable for everyone, they're meant to keep the overall economy ticking along as best it can. They're a bit of a blunt tool, especially with longer mortgage fixes (if everyone fixes for 3 years the effect of a change aren't really felt for ~2 years), but they do work.
what is that in your opinion?
Price controls basically. By whatever mechanism. Either nationalise the energy firms and use govt funds to subsidise prices, or regulate to cap prices and/or tax the profits and channel those funds into direct support for consumers. Governments have the power to set prices, they should be using it. The only thing that stops it is ideology and the vested interests who lobby it.
The spin off theories from MMT have nothing to say about this. They all assume that the country’s economy is, or could be, a self-contained entity. The bigger the country’s economy and store of natural resources the more MMT could be thought to be applicable, but it cannot apply to the UK where our economy largely generates nice-to-haves and we import most of the essentials.
The USA runs with MMT too. MMT doesn't assume a self-contained pot. MMT extends the deficit to trade sector balances too. It just becomes a third pot of money/deficit.
And yes we're at the mercy of other factors - you are just spreading MMT to include every possible scenario.
I would spend a bit more time reading about it.
but it cannot apply to the UK where our economy largely generates nice-to-haves and we import most of the essentials.
It does apply to the uk. It says the government must spend on what's available / resourced.
It's a description of the UK (and other central bank basedsystems, Australia, Canada etc) monetary system for about the 20th time.
I wish I understood half this conversation. I’m not dim but I just don’t follow if people are really struggling mostly due to inflation driven by external pressures why you would then make it a good deal worse by raising rates and then making mortgages more expensive.
You understand 100%
Those saying that current inflation is not caused by money supply is forgetting the amount of money printde during Covid.
Money supply needs to match economonic growth. Print more and it’s inflationary. Lots more was printed than the economy was needed and ended up as withdrawals from tje economy (in the economic sense).
Correct. That's why it was capped at 80% furlough.
And no we didn't forget it was 400+billion to effectively pay people to stay at home.
One again when the government isssues money it does EVERY time it spends.
It's a normal operation.
Don't confuse what happened with Q/E versus normal governmant spending. Q/E was used in the pandemic to make it look like the government needed to borrow. It borrowed from itself.
There may of course come a point where the markets are only willing to lend in a hard currency (ie someone else’s).
Then the argument changes.
And significant inflation has caused this with other countries and massive borrowing tends to be inflationary.
There's always hugh demand for bonds.
What if. What if.
They don't borrow. They swap bonds/gilts for reserves in sterling which have entered the private sector by government spending in the first place. This matches the spending taken place already.
They don't need to 'borrow' though it's a mechanism to drain reserves. They could do it a different way too.
The government doesn't rely on bonds to spend. It spends first. Every time.
correct, its not backed by anything, its valued simply by the market. in an extreme case, if the goverment simply produced an extra, say, £100,000 per individual, and mailed everyone a cheque, what do you think would happen? assets, as priced in GBP would immediately climb in value, effectively devaluing the money you have in your bank account.
No one suggested that they should do that.
That is helicopter money.
So much whataboutery there.
Once more - government SPENDING has to match the real DEFICIT in the economy. Desperate for a bridge - build a new bridge if you can get the resources and the labour force. MMT says that wouldn't be inflationary.
Political will chooses what is needed. Not MMT.
Think about this: Furlough was a way of keeping the economy temporarily moving and stop the disease spreading and putting extra cost on the NHS/wages etc.
We could argue how successfully it was implemented but it was generally a good choice. And most modern economies took a similar route.
If the economy had just been left to the private sector and no furlough can you imagine the carnage?#
You know sometimes I just wish we operated a genuinely free-market: the world would be in Mad Max tatters by Friday.
Assuming those with large mortgages will be able to easily tighten the belt doesn’t account for all the other increases going on at the moment. It’s not just another “£150” a month at 3% (and it’s not 3% it’s going to be more). It’s also the impact of food and energy taking its toll too. Most who took out recent mortgages were means tested at 7% (I think, and aren’t they getting rid of that too?!). That means testing didn’t account for xx% inflation on essentials.
Sure a degree of belt tightening can be done, but whether it will be enough will remain to be seen. Many “well off” people could well find themselves loosing their homes and worse case in negative equity and owing a whole bunch for a situation made worse by the government when they should be stepping in and doing their best to prevent such damage.
Sure a degree of belt tightening can be done, but whether it will be enough will remain to be seen.
I reckon by the time October and January's energy price hikes kick in and my fixed mortgage rate expires at the end of next year I'll be paying close to an extra 1k per month more than I was at the beginning of this year, and that doesn't even include food, petrol etc. This problem is not going to be solved by 'belt tightening'.
the argument is why working people should suffer from higher energy prices when energy and oil companies are making record profits. The solution to this problem of skyrocketing energy prices is obvious, but they won’t do that because, again, ‘the market’.
9
Because we as a nation did **** all to reduce energy consumption when the only impending danger was climate change, but now its getting expensive people are actually starting to think about how to use less. Again, a blunt tool but it's working.
If only the government would ditch this stupid idea of subsidies for energy, bill discounts, whatever you want to call them. Imagine if all that money was instead poured into properly insulating houses, grants for double glazing, building wind and solar, etc, etc.
Subsidising people's gas bills makes it a bit more bearable this year, it does nothing to reduce demand, quite the opposite in fact. If they decide they need to do it again next winter the it would have been cheaper to give every household £1k to replace their draftiest windows, much bigger win in every respect, keeping people warm, climate, not funding Russia, jobs for window makers and fitters...
Price controls basically. By whatever mechanism. Either nationalise the energy firms and use govt funds to subsidise prices, or regulate to cap prices and/or tax the profits and channel those funds into direct support for consumers. Governments have the power to set prices, they should be using it. The only thing that stops it is ideology and the vested interests who lobby it.
While I kind of agree, I have some concerns about nationalisation being a Good Thing.
(For the record, I'm glad that Scotrail and Scottish Water are govt. owned)
Again, a blunt tool but it’s working.
No it's not. The end result of people being 'punished' for their energy use will be a growing campaign to bin green taxes and abandon net zero. Farage and the rest of the nutcase populists in the tory party have already latched on to this. You can't use free market ideology to solve a problem like climate change. It needs government intervention and support to insulate households from the impact of moving away from fossil fuels.
While I kind of agree, I have some concerns about nationalisation being a Good Thing.
Nationalisation of essential services and infrastructure has to be a good thing, because essential provisions should not be at the whim of capitalists. Sure, nationalised businesses might've been badly run in the past, but the solution is better run nationalised companies, not privatised ones. How much more evidence do you need that privately run companies aren't always well run?
You know those lovely European countries with great railways? State run. Maybe, just maybe, it's not state run things that are the problem - maybe it's our state.
No it’s not. The end result of people being ‘punished’ for their energy use will be a growing campaign to bin green taxes and abandon net zero.
I couldn't find figures for gas but for road fuel (UK Govenrment figures)
Jan-Mar 2020 (ie before Lockdown) average weekly sales per filling station 17,740 litres
Last four week, average weekly sales per filling station 15,520 litres, 13% drop.
We can shout about climate change until we are blue in the face but a hit to the wallet is the only thing whcih actually works.
you need to compare like for like months. loads of people are abroad, it's summer holidays