The U.K. 2022

“Oh, Katie, you should have read the articles in the BoE bulletin I posted a link to the other day.”

The thread above was about state borrowings and QE, I should have been clearer that it was all state borrowings, they control Commercial borrowing with the interest rate.

It's really not that difficult a concept, but I honestly think people think that banks have pots of bank notes in their vaults, just waiting for somebody who wants to borrow it.

You'd think it wouldn't be a difficult concept when it's the BoE that says it...

But then, you'd think that the idea of the BoE creating as much new money as the state needs wouldn't be a difficult concept, either. But when I'm told that it 'borrows money' to carry out QE with, I do look for that brick wall....

MaizieD

^ if they are successful the bank will lend them cash to expand,^

And the interesting thing is that, as explained in the BoE article, this loan will be completely new money created by the bank...

[sigh]

It's really not that difficult a concept, but I honestly think people think that banks have pots of bank notes in their vaults, just waiting for somebody who wants to borrow it.

PS. Hope you've got a strong brick wall Maizie.

^ if they are successful the bank will lend them cash to expand,^

And the interesting thing is that, as explained in the BoE article, this loan will be completely new money created by the bank...

Growstuff

"How many people on GN have made money from borrowing money with a mortgage? They haven't just paid the money back, but they've made a profit too."

Many people lost money on house sales during the period of negative equity. If a profit has been made it's because of rising house prices which is not in the home ownwers' control.

Katie59

“I doubt whether many companies have started off with savings to cover their initial costs”

Actually a lot do just that, they set up as a small company using savings if they are successful the bank will lend them cash to expand, many big names today started that way.

Not only that, the banks often want a personal security before lending.

No not Mo

growstuff

But Mr Micawber wasn't a nation with a sovereign currency and couldn't issue his own bank notes.

Mo he wasn't but Thatcher thought like him with her idea of housekeeping.

“I doubt whether many companies have started off with savings to cover their initial costs”

Actually a lot do just that, they set up as a small company using savings if they are successful the bank will lend them cash to expand, many big names today started that way.

How many people on GN have made money from borrowing money with a mortgage? They haven't just paid the money back, but they've made a profit too.

I doubt whether many companies have started off with savings to cover their initial costs.

Cash (or its electronic equivalent) is just a way of enabling an exchange of services, so people don't have to take the pig they've raised (or whatever) when they want to buy something. If people don't like QE, an alternative would be to redistribute people's credit (assets) through tax, so that everybody (including the poorest) has enough to buy essential services - unless people actually want those at the bottom to rot.

But Mr Micawber wasn't a nation with a sovereign currency and couldn't issue his own bank notes.

MaizieD

Dinahmo

It really is about time people understood double entry book keeping. When I was first in articles debits were by the door and credits by the window. Made life difficult when I sat in a desk facing in a different direction.

I rather think that people's idea of a 'balanced national budget' (wrongly called 'balancing the books' by most politicians and commentators) is that the nation's outgoings equal the nation's incomings.

Which isn't how it works at all.

I doubt whether anyone can ensure that their spending exactly equals their income. There's always going to be a balancing figure whether a debit or a credit. Even for Mr Micawber -

'Annual income 20 pounds, annual expenditure 19 [pounds] 19 [shillings] and six [pence], result happiness. Annual income 20 pounds, annual expenditure 20 pounds ought and six, result misery. '

growstuff

Katie59

We have an independant BoE that provides liquidity to the UK PLC. They have to have enough funds to cover all borrowings and they regulate borrowings by interest rate, if there is a shortfall the BoE has borrow more or in recent times buy UK bonds - QE.

So yes the accounts do have to balance, no magic, nothing underhand it’s all done openly, incidentally the BOE holds around 25% of bonds, the majority of the rest are owned by pension funds etc who are looking for a low risk investments.

Where did this come from?

It's not how the national budget works at all.

It's not how the BoE works, either (grin)

Katie59

We have an independant BoE that provides liquidity to the UK PLC. They have to have enough funds to cover all borrowings and they regulate borrowings by interest rate, if there is a shortfall the BoE has borrow more or in recent times buy UK bonds - QE.

So yes the accounts do have to balance, no magic, nothing underhand it’s all done openly, incidentally the BOE holds around 25% of bonds, the majority of the rest are owned by pension funds etc who are looking for a low risk investments.

Where did this come from?

It's not how the national budget works at all.

Dinahmo

It really is about time people understood double entry book keeping. When I was first in articles debits were by the door and credits by the window. Made life difficult when I sat in a desk facing in a different direction.

I rather think that people's idea of a 'balanced national budget' (wrongly called 'balancing the books' by most politicians and commentators) is that the nation's outgoings equal the nation's incomings.

Which isn't how it works at all.

It really is about time people understood double entry book keeping. When I was first in articles debits were by the door and credits by the window. Made life difficult when I sat in a desk facing in a different direction.

Oh, Katie, you should have read the articles in the BoE bulletin I posted a link to the other day.

The link between QE and quantities of money
QE has a direct effect on the quantities of both base and broad money because of the way in which the Bank carries out its asset purchases. The policy aims to buy assets, government bonds, mainly from non-bank financial companies, such as pension funds or insurance companies. Consider, for example, the purchase of £1 billion of government bonds from a pension fund. One way in which the Bank could carry out the purchase would be to print £1 billion of banknotes and swap these directly with the pension fund. But transacting in such large quantities of banknotes is impractical. These sorts of transactions are therefore carried out using electronic forms of money.

'Broad money' is money created, mostly by commercial banks under licence from the BoE, but in the case of QE by the BoE itself.

The reality of how money is created today differs from the description found in some economics textbooks:
Rather than banks receiving deposits when households save and then lending them out, bank lending creates deposits.

...................

Commercial banks create money, in the form of bank deposits, by making new loans. When a bank makes a loan, for example to someone taking out a mortgage to buy a house, it does not typically do so by giving them thousands of pounds worth of banknotes. Instead, it credits their bank account with a bank deposit of the size of the mortgage. At that moment, new money is created. For this reason, some economists have referred to bank deposits as ‘fountain pen money’, created at the stroke of bankers’ pens when they approve loans.(1)

How much more clear can this be? This is from the horse's mouth, so to speak.

I suggest you read it. Second article. It's called:

Money creation in the modern economy

www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/quarterly-bulletin-2014-q1.pdf

We have an independant BoE that provides liquidity to the UK PLC. They have to have enough funds to cover all borrowings and they regulate borrowings by interest rate, if there is a shortfall the BoE has borrow more or in recent times buy UK bonds - QE.

So yes the accounts do have to balance, no magic, nothing underhand it’s all done openly, incidentally the BOE holds around 25% of bonds, the majority of the rest are owned by pension funds etc who are looking for a low risk investments.

The BoE is obviously not comfortable with having to borrow more to keep the economy going

The BoE isn't borrowing anything.

the books have to balance.

The accounts have to 'balance' in that all the incomings and outgoings have to be accounted for by double entry book keeping.

But I don't think you're meaning it like that, are you?

The BoE sees QE just the same as other borrowing, they are buying UK Government bond

Yes, but what money are they buying them with?

And who owns the BoE?

Maizie

In the past “enterprise” did contribute a lot, but rarely quite enough in recent years, currently not much hope of a quick improvement so borrowing will be high.

www.bankofengland.co.uk/quarterly-bulletin/2022/2022-q1/qe-at-the-bank-of-england-a-perspective-on-its-functioning-and-effectiveness

The BoE sees QE just the same as other borrowing, they are buying UK Government bonds which have typically a 10 yr life and a nominal interest rate. Technically the interest should be paid but isn’t, however, those bonds do mature, so either they are replaced buy buying more - QE, or not replaced - QT. Currently the BoE claim not to be replacing maturing bonds, thereby reducing borrowing somewhat from a peak of close to £1 trillion pounds. The BoE is obviously not comfortable with having to borrow more to keep the economy going, because the books have to balance.

For what it’s worth the system works as I expected it to, borrowing or QE matures and is replaced if needed, it is not unlimited and has to be accounted for.

The Tories are out of touch, driven by fantasy ideology and most don't care what happens to ordinary people. Keir Starmer seems a decent sort but he's no Clem Attlee or Tony Blair. And if Liz Truss is the best the Tories can offer then we are all in for a poor future.

^I was thinking of state borrowing, probably borrowing amongst the lower earners is already at its maximum, those that have investments may well have to use some.
Apart from current problems, escalation of Ukraine, new Covid strain or China blockading Taiwan may well make it a lot worse. So “prepare for the worst and hope for the best”^

Sorry, that doesn't appear to answer my question. Are you saying that 'state borrowing' is funding 'today's lifestyle'?

In some ways I think you're right. The state funded so many people's 'lifestyles' during covid because without it people and businesses wouldn't have survived lockdown. But it was hardly frivolous (as the use of the word 'lifestyle implies) and there was no way that 'enterprise' could have contributed anything.

Likewise, in our current situation I don't see how anyone could expect 'enterprise' to contribute much. Not only has Brexit sent many enterprises to the wall, but soaring energy prices are going to see off a whole lot more.

You remain unconvinced, of course, but a large amount of state 'borrowing' to keep the economy going over the past 20 years hasn't been 'borrowed' from anyone. It's just extra money issued by the state via QE. The rest is savings and investments, both personal and institutional. Not something that is in any way necessary to be 'paid back'.

MaizieD

Katie59

“You are totally ignoring the realities of modern life, and the fact that the options open to our grandparents/great grandparents are not available now, so are actually irrelevant.”

We would like it to be irrelevant today, the cost of todays lifestyle has got to be found somewhere, increasingly it comes from borrowing not enterprise

Are you referring to individuals' personal borrowing or the state 'borrowing' that is either people's savings and investments or is newly created money?

I was thinking of state borrowing, probably borrowing amongst the lower earners is already at its maximum, those that have investments may well have to use some.
Apart from current problems, escalation of Ukraine, new Covid strain or China blockading Taiwan may well make it a lot worse. So “prepare for the worst and hope for the best”

[Grin] Yes indeed.