Where has the money gone?

MaizieD All the financial commentators could see it coming. It was written up and discussed on the financial pages of every newspaper.from the late 1990s onwards.

My point is, MOnica, that the 'orthodox' economists didn't see it coming.

And, when it did happen they were taken completely by surprise. Like the Chair of the Federal Reserve...

As I said before. I'm not trying to make partisan points, I am trying to talk about economic theory and the possibility that alternative schools of economic thought from the one now dominant in the US and the UK may have a better grasp of how economies work.

Maizie My hat goes off to you.You have put so much effort and research into this topic and IMO you way ahead of everyone else.

GrannyGravy13

Furlough wasn’t a cheap exercise neither was subsidising energy bills over the winter months.

Effectively the government had to borrow to fund these and other recent spending so some of the current spending is going on interest on this borrowing - they can't conjure money from nowhere so have to borrow.

cc

GrannyGravy13

Furlough wasn’t a cheap exercise neither was subsidising energy bills over the winter months.

Effectively the government had to borrow to fund these and other recent spending so some of the current spending is going on interest on this borrowing - they can't conjure money from nowhere so have to borrow.

The borrowing takes the for of bonds issued (gilts) which are taken up by pension funds but also ordinary people with savings who would like a reasonable rate of return. Could be a win win situation!

Dinahmo

M0nica

Deregulation was the result of adherence to the prevailing economic theory about the ability of markets to self regulate.

When you go deeper into the build up to the GFC you wonder how 'the market' could have been so irresponsible as to encourage people to go deeper into debt and then to try to monetise that debt.

It had absolutely nothing to do with Labour expenditure in the preceding decade.

Maizie surely para 1 answers the question you pose in para 2. Markets self-regulate by swinging between boom and bust. They are amoral not immoral and have no interest in what effect their operations have on individuals.

There were warnings from the late 1990s that markets were overheating, particularly that the property market, especially that the domestic was being dangerously overlent, but while Labour expenditure contributed little to the 2008 collapse then government, and we could never have completely avoided the 2008 meltdown, but action by the (Labour) government under its 'prudent' chancellor could have done much to mitigate its effects.

The catalyst of the collapse in the UK was the collapse of Northern Rock, which had been offering mortgage loans of 125% and the reckless explosion in 'self-certified mortgages' beyond the narrow bounds of their previous limited use.

The government had the power to dampen down the property market and was, indeed urged to do so, but chose not to. The party cannot wriggle out of the accusation that it was instrumental in making the 2008 crisis far worse than it needed to be.

Because the bankers were greedy - as were some of the people who took out sub prime loans. They took loans in order to buy property to let. A similar thing is happening in the UK now. Many people who took out several buy to let mortgages are having to sell the properties because they can no longer afford the repayments.

Yes, greed from bankers, from buy to let landlords, from board members drawing huge salaries and benefiting from bonuses and equity schemes related to growth which was due to borrowing rather than sound business management.

As @Whitewavemark2 said
"The banks allowed the situation to develop though, and were far too highly leveraged. They knew the risks that they were taking, where the financial products they had developed were offered to lower-income people with little understanding of the risk."

Personally I am very risk-averse and though I am a buy-to let-landlord I did not do it through borrowing. I get a reasonable return and provide a good home for somebody.

So many of our problems have arisen through borrowing to fund greed, be it personal or in the misguided believe that growth is always best, ignoring the fact that a well-managed profitable company is a good thing, it doesn't need to be a multi-national or to double in size.
"Growth through acquisition" is another of my pet hates, companies swallowing other companies and destroying employment to gain a larger turnover. But is is a larger turnover? In many cases it is no more than the turnover of the two companies would have been and it is not sustainable.

Dinahmo

cc

GrannyGravy13

Furlough wasn’t a cheap exercise neither was subsidising energy bills over the winter months.

Effectively the government had to borrow to fund these and other recent spending so some of the current spending is going on interest on this borrowing - they can't conjure money from nowhere so have to borrow.

The borrowing takes the for of bonds issued (gilts) which are taken up by pension funds but also ordinary people with savings who would like a reasonable rate of return. Could be a win win situation!

Indeed the bond market is doing well at the moment, but few ordinary investors have the expertise to know when to buy and when to sell, though the calculations are not that hard. But the more the government borrows the higher the interest rate rises (as there is only so much money available) and the more it costs them to service the next round of borrowing. Also the pound may weaken as governments overseas see what is happening.

One interesting side effect could be that institutions (typically those who run pension funds) will be getting a higher return on their investment in Gilts and fixed interest securites - which they need buy to provide income to pay pensions in the short term. This could pull their investments from equities, lowering stock market prices.

cc sometimes growing through aquisition is to remove one company from competition. It seems to happen with hi tech games companies for example.

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Dinahmo

Maizie My hat goes off to you.You have put so much effort and research into this topic and IMO you way ahead of everyone else.

Thank you, Dinahmo.

I find it really interesting. I didn't believe MMT when I first learned of it, though I've always thought that Keynes, whose economic insights have informed MMT in many ways, made far more sense than the economic 'theory' that drove austerity.

So I've tried to read widely and, I hope, critically, over the past few years.

When you take out a loan you have to choose the deal you think is best for you, only time will tell if it’s the right decision you might be lucky you might not.
One thing for sure the bank knows more about the future prospects than you do, so hedging your bets with part fixed part variable will be safest.

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I’m surprised nobody has mentioned the Financial Services Authority that were supposed to be regulating the Banks, the didn’t, they just sat on their fat backsides, enjoying expense account lunches and watched it happen, as did Gordon Brown.

I think we have a parallel now Ofwat is supposed to be regulating the water industry, but isn’t.

Well, who reported all that lot?

Katie59

I’m surprised nobody has mentioned the Financial Services Authority that were supposed to be regulating the Banks, the didn’t, they just sat on their fat backsides, enjoying expense account lunches and watched it happen, as did Gordon Brown.

I think we have a parallel now Ofwat is supposed to be regulating the water industry, but isn’t.

Nobody has mentioned the FSA because the conversation isn't really about the GFC, even though posters are desperately trying to make it so. But we've all discussed it before, quite recently.

The conversation is trying to be about economic theory and how it relates to real economic events.

Actually, I apologise, Katie59

The conversation was originally a question about what have the tories done with all the money that has rapidly increased the 'national debt' in the 13 years they have been in power, yet there's been little spent on infrastructure or public services.

Which is odd because I thought that that was one of the main functions of the state, to provide infrastructure and public services.

MaizieD it doesn't matter whether someone is an orthodox or unorthodox economist when they are the disciples of some over reaching economic theory, it is not that they dont see trouble arising, it is that they won't see the trouble arising and will not believe the evidence even when it is affecting their own lives because it contradicts their pet theory.

You quote Keynes admiringly. Well, Keynes was known for changing his mind and once when challenged on this his response was “When the facts change, I change my mind. What do you do, sir?”

This is why I am wary of anyone who nails their colours to the mast of any one economic theory and pursues it single mindedly. That is an absolute gurantee that they are heading for a fall.

MaizieD where does HS2 sit in your argument re public services and infrastructure?

ronib

MaizieD where does HS2 sit in your argument re public services and infrastructure?

HS2 is a public infrastructure project, there is a great deal of doubt that it will result in any growth or benefit. Would the money be better spent in other areas.

M0nica

MaizieD it doesn't matter whether someone is an orthodox or unorthodox economist when they are the disciples of some over reaching economic theory, it is not that they dont see trouble arising, it is that they won't see the trouble arising and will not believe the evidence even when it is affecting their own lives because it contradicts their pet theory.

You quote Keynes admiringly. Well, Keynes was known for changing his mind and once when challenged on this his response was “When the facts change, I change my mind. What do you do, sir?”

This is why I am wary of anyone who nails their colours to the mast of any one economic theory and pursues it single mindedly. That is an absolute gurantee that they are heading for a fall.

MMT and Keynes are just economic theories, both are partly relevant but need to be regulated and are subject to confidence of investors. Before the 2008 crash almost everyone was following the “herd” in the blind belief that the boom would last for ever, easy credit with banks willing to lend at very low rates against poor collateral.

When confidence was lost and the “herd” changed direction as investors scrambled to sell investments, it started with US sub prime and spread when others realized assets were over valued.

Katie59 HS2 was encouraged by the EU as part of an integrated railway system. Oh well …..

Katie59

ronib

MaizieD where does HS2 sit in your argument re public services and infrastructure?

HS2 is a public infrastructure project, there is a great deal of doubt that it will result in any growth or benefit. Would the money be better spent in other areas.

There might be doubt that HS2 will bring future benefit to economic growth, but at present some of the money the government has put into it is providing jobs, both directly and indirectly, and therefore is entering the domestic economy as workers spend their wages. Not only that, but money will be going to the suppliers of all the materials and machinery being used for the construction, to the contractors carrying out the work etc. etc. etc. It is not being poured into a big black hole. It is circulating in the economy and sustaining people and businesses.

Of course, we don't know how much is going abroad to sustain the businesses of foreign suppliers and we don't know how much is sitting doing nothing in the accounts of profiteering companies and overpaid CEOs and company executives (because the already well off tend not to spend their surplus money into the domestic economy). But every single penny of the money the government is investing in HS2 is being paid to someone and much of it will be benefiting the economy.

Of course, a great deal of that money will be coming back to the state by way of taxation and very likely the wealthier recipients may invest some of their surplus in gilts, which also returns some of the money to the government.

And, the expenditure will show up in our GDP and growth figures.

So, however much the project might be considered as a great white elephant, however much of a loss it might make once it is in operation, the money currently being put into it is benefiting our economy. Money doesn't make moral judgements or judgements of utility or cost effectiveness; it's a completely neutral instrument.

What is frustrating is knowing that more money could be spent elsewhere with the same immediate benefit to the economy and arguably better long term outcomes for the economy but the idea that the country has a finite quantity of money constrains it.

And, of course, we have a government which cares nothing for the wellbeing of our citizens and which is ideologically opposed to state spending because it is in the grip of neoclassical economic dogma.

MaizieD I thought your reply was pretty good until the last paragraph. Has any government ‘cared’ about wellbeing? Didn’t think it was part of its remit.

Also how can it be claimed that this government is ideologically opposed to spending when it hasn’t stopped?