Viewing 40 posts - 121 through 160 (of 207 total)
  • Interest Rates up again
  • thisisnotaspoon
    Full Member

    I’m far from an expert, but I can’t see this being anything close to a universal truth in business particularly if there are shareholders to keep happy.

    We are no longer in a short-term issue it’s now a mid-term concern.

    I think some of the problem is we’re well outside the envelope that most rules/theories would claim to apply to.

    If base rates were 5%, inflation was 2.5%, employment was 95%, supply and demand were balanced, then you could read an economics textbook and say “If this then that”. But we’re so far off normal that there isn’t a simple answer to any of this anymore. Inflation being this much higher than interest rates isn’t “normal”.

    People can jump up and down shouting MMT until they’re blue in the face but:

    Plenty of countries end up defaulting on their debt and it never ends well (except for the very rich).

    Case in point, Thatcher. She might have ideologically loved the free market, austere government, etc. But at the same time the country was near bankrupt, subsidizing coal (c.f. calls to subsidize energy now), and having to go cap in hand to the IMF. It suited her ideology to close mines and end free milk, but it was as much circumstantial as it was a choice.

    dazh
    Full Member

    But at the same time the country was near bankrupt

    Care to explain what this actually means? How does a country go bankrupt?

    thisisnotaspoon
    Full Member

    Care to explain what this actually means? How does a country go bankrupt?

    You can’t but that doesn’t mean that teetering on the edge unable to borrow money from the markets is some sort of goal.

    https://en.wikipedia.org/wiki/Crisis_in_Venezuela

    dazh
    Full Member

    You can’t but that doesn’t mean that teetering on the edge

    ???

    How can a country ‘teeter on the edge’ of bankruptcy if it can’t go bankrupt? Countries which issue currency and then borrow from markets in that currency can by definition never go bankrupt. The government has never failed to repay it’s gilts. That’s because by definition those bonds are guaranteed, which is why there’s always a market for them. The alternative is the private sector allowing their savings to degrade from inflation, and no sensible company or individual would do that.

    https://en.wikipedia.org/wiki/Crisis_in_Venezuela

    “Venezuela didn’t pay coupons on its dollar eurobonds, causing a cross-default on other dollar bonds.”

    Can you spot the difference here with the UK which issues bonds in sterling?

    igm
    Full Member

    Countries which issue currency and then borrow from markets in that currency can by definition never go bankrupt.

    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.

    thisisnotaspoon
    Full Member

    That’s because by definition those bonds are guaranteed, which is why there’s always a market for them.

    And the market set’s the price of them.

    What happens if you go to the market and can’t sell them for the usual 2%, and instead they want 20%?

    Edukator
    Free Member

    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).

    As Covid ended some of the money went back into circulation but as supply failed to meet demand prices rose. Curent inflation is the result of printing money for Covid, the Covid inpact on supply, climatic change related drought and geopoloitical factors.

    Restricting money supply by rasing interest rates will reduce inflation. But tightening to the poit where there is insufficient money in circulation to sustain the current level of economic activity wiil result in a recession.

    There’s no point making money available if there is limited supply – and that is the current situation. There aren’t enough cars being made, houses built or holidays to book, util there are printing money will just drive inflation.

    I think the BoE is about a year behind the xurve along with all the other central banks but they are heading in the right direction. They have been slow but might be able to stop before rates get really painful. If tbey hadn’t raised now rates would have had to be higher in the future

    dazh
    Full Member

    What happens if you go to the market and can’t sell them for the usual 2%, and instead they want 20%?

    The same as what happened after 2008. The govt buys back the bonds via Q/E to lower bond yields. It uses it’s position as a currency issuer to manipulate the market to ensure that its bonds are always saleable.

    thisisnotaspoon
    Full Member

    The same as what happened after 2008. The govt buys back the bonds via Q/E to lower bond yields. It uses it’s position as a currency issuer to manipulate the market to ensure that its bonds are always saleable.

    Which if the banks balance sheets hadn’t been so poor would lead to inflation.

    argee
    Full Member

    Edukator
    Free Member

    Those saying that current inflation is not caused by money supply is forgetting the amount of money printde during Covid.

    It’s a funny one, almost globally this happened, including the ecb for all the EU nations. There wasn’t really any more money in the system, it was supporting the structure. It’s one of those weird scenarios where everyone says there’s no magic money tree, but as a once in a lifetime global event, I think they ran out of ideas on how to keep going.

    finephilly
    Free Member

    FWIW the B of E could have raised them more steeply last time, maybe reducing the long-term effect. Now they’re catching up. Either way, it was going to have an effect – that’s the whole point!

    You can’t blame them for inflation though.

    mattyfez
    Full Member

    You can’t blame them for inflation though.

    But the Conservatives and the right wing press surely will blame all of this on the BoE.
    This is the way.

    Truss is already muttering incoherently about re-examining the banks mandate.

    finephilly
    Free Member

    Well if the UK economy was more diversified, that would make it more resilient. eg a stronger industrial, energy and agricultural sector. It’s too reliant on the service sector and (city of) London.

    +1 or 2 % last time would’ve been harsh, but would’ve put much more pressure on spending to reduce short-term inflation. Like I say, interest rates are all they can do!

    The energy situation is a disaster waiting to happen – loads of schemes canned or objected to in the last 20yrs…

    Could end up with the govt compulsory purchasing all N Sea oil/gas this winter + paying a fortune for it!

    Letting the BofE set interest rates is better than govt – less interference.

    kelvin
    Full Member

    Energy issues are a product of short-term thinking where could have used government spending 10 years ago to support.

    This. This. This.

    And not just a lack of UK government spending, but actively preventing other governments from investing in UK onshore renewables for us. Loopy. And we have two candidates to be the next Tory leader and PM trying to out compete each other as regards who’ll put even more blocks in the way of installing more onshore renewables RIGHT NOW, even while the energy crisis is raw and immediate.

    intheborders
    Free Member

    The government has never failed to repay it’s gilts.

    Always a first time – and then what?

    Gribs
    Full Member

    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.

    dyls
    Free Member

    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.

    rone
    Full Member

    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.

    dazh
    Full Member

    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.

    intheborders
    Free Member

    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?

    rone
    Full Member

    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.

    https://www.theguardian.com/business/2022/aug/08/city-workers-get-double-digit-wage-rises-while-lowest-paid-see-1-increase?CMP=Share_AndroidApp_Other

    Oh really?

    Low wages not driving inflation then?

    super_12
    Free Member

    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.

    intheborders
    Free Member

    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

    rone
    Full Member

    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.

    rone
    Full Member

    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.

    5lab
    Full Member

    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.

    rone
    Full Member

    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.

    rone
    Full Member

    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:

    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/

    rone
    Full Member

    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.

    rone
    Full Member

    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:

    dazh
    Full Member

    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?

    intheborders
    Free Member

    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…

    5lab
    Full Member

    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.

    5lab
    Full Member

    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.

    dazh
    Full Member

    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.

    5lab
    Full Member

    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

    dazh
    Full Member

    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.

    DT78
    Free Member

    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.

    jam-bo
    Full Member

    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…

    dazh
    Full Member

    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?

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