The Uk economy

However you present the health of the economy, it is judged by others who use established yardsticks, ratio of borrowing to GDP is one of those. We live within a global financial free market system, their opinion affects us directly, not only interest rates but currency exchange rate too. We cannot have an import and export trade without our supplier/customers knowing the value of our currency.

The government have to present finance in a way most understand, the concept of all money being new, “ created” and then “destroyed” and not related to income is foreign to the general public.

When you have children there comes a time when you have to tell them that Santa isn't real. Why would you want to continue to infantilise grown ups by telling them a story about taxation and public money that isn't true?

Unless, of course, it is more convenient to tell the public that 'there is no money' when a government does something unpleasant like cutting public spending, than it is to tell the truth that it's softening the country up for privatisation..

The government have to present finance in a way most understand, the concept of all money being new, “ created” and then “destroyed” and not related to income is foreign to the general public.

You are correct it is the interest that is revenue, the capital of the loan is paid month by month so it is reduced
Money the banks create can be inflationary it’s the interest rate that regulates that, the BoE sets a floor, banks add to that according to risk they see.

Although technically BoE creates money it all has destruction date and has to be replaced, if insufficient revenue has been collected more has to be created, the money “supply” has to be increased.
Whether we like it or not finance markets look at the amount borrowed/created ratio with GDP as an indicator of financial strength. That not only affects borrowing cost but exchange rate as well, again it’s the global free market system we are in.

Why can’t we just create all the money and not pay interest on borrowing?. Probably because there’s a need for a secure UK investment to pay UK pensions etc, we all want our investments to at least keep pace with inflation UK bonds/gilts provide that guarantee.
Any other opinions on that

We need speculators to provide a ready buyer or seller for any shares, commodity or investment, without them it would be a very slow operation. Some might say slowing transactions would provide a more stable market, I would agree but that is not the global system we have.

That’s not a concept usually promoted. If I get a mortgage the bank “creates” the mortgage according to my ability to pay it back, my repayments are the banks revenue which cancels out the loan month by month.

That is incorrect, David. The bank has created new money for the loan. The 'new money' is cancelled when you repay the loan. If it weren't, we''d have that inflationary, devaluing situation that you are so worried about. The bank's revenue is the interest you pay on the loan. I did check this with a friend who is a retired banker. She confirmed that repayment of the loan destroys the money created for it.

So now tell me why bank created money isn't inflationary, nor does it devalue sterling, while you are so certain that money created by the BoE does both of these things?

Its the ratio between borrowing and revenue that lenders judge the UK by, if they see risk of currency falling they want more higher interest.

What is the difference between the money that 'the lenders' lend us, which we pay for with interest, and the money the BoE can create for us, just like the commercial banks create money, with the BoE's permission, which costs us nothing? It's the same money, it buys stuff...

The bond buyers (i.e the 'lenders') either want a regular income from the interest on their bonds, or they want to speculate with them by buying cheap and selling high on the secondary market.

In the first case we could just as well offer a high interest savings account.

In the second case, we don't need the speculators at all. The only revenue we get is from the initial sale of bonds. Once they get onto the secondary market we get nothing. The speculators can go and play their attempts to make money games somewhere else.

Whitewavemark2

I thought that the only vehicle that can “create” money was the BoE via the government auspices?

If you agree that all money issued is new money “created” day by day to meet the needs of the nation, then on the other side is revenue that cancels it out, any spare is surplus (rare) any shortfall is borrowing.

That’s not a concept usually promoted. If I get a mortgage the bank “creates” the mortgage according to my ability to pay it back, my repayments are the banks revenue which cancels out the loan month by month. If my income rises or the asset increases in value I can borrow more.

Its the ratio between borrowing and revenue that lenders judge the UK by, if they see risk of currency falling they want more higher interest. To be transparent the UK counts QE as Borrowing, not doing that would create further uncertainty.
Currently the financial markets doubt that the measures in the budget will be enough, personally I think Reeves could have done much more.

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)

From: Bank of England Quarterly Bulletin 2014 Q1
'Money Creation in the Modern Economy'

www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf

Best read in conjunction with the first article in the same Bulletin 'Money in the Modern Economy' which I linked to earlier

www.bankofengland.co.uk/quarterly-bulletin/2014/q1/money-in-the-modern-economy-an-introduction

Commercial banks create money under licence from the Bank of England, and with certain conditions attached, as the article explains.

Commercial banks have always 'created' money. Adam Smith described the Scottish banks doing it in the 18th C! It was then a dodgy practice because it depended on not all depositors asking for their gold or silver deposits at the same time. It regularly caused bank failures when people lost confidence in their bank's ability to pay them and there was a 'run on the bank'.

Although the ability for any bank to create its own 'currency '(in the form of bank notes, which are, in effect, promissory notes) was abolished and controls were put in place by the BoE to reduce the risks, it could still happen now. Indeed, Northern Rock at the start of the GFC was ultimately brought down by depositors all withdrawing their funds.

Which is why I asked the question...

I thought that the only vehicle that can “create” money was the BoE via the government auspices?

David49

QE used in times of emergency like Covid is fine to keep services functional and pay government wages, in that situation confidence has already been weakened and the value of the currency has fallen.
QE/borrowing should not be used to bolster day to day spending in normal times, the government has stated that should be payed for with revenue, implying borrowing be used for expanding the economy.

Do you never question the nonsense 'the government' says, David?

When has tax revenue ever paid for day to day spending?

I'll ask you the same question I asked MOnica. How is it that the £millions that commercial banks create daily when they make loans to businesses and the general public don't cause inflation? Or devaluation of sterling?

M0nica

Maizie Inflation has more than one cause and QE is one of them. Prices being put up because of scarcity is another, but one does not preclude the other.

Just prove to me that the QE which has been effected in the UK since 2008 caused inflation.

Perhaps you can also explain why commercial bank loans to businesses and potential home owners, which create £millions, if not £billions of completely new money every day, don't cause inflation?

Maizie Inflation has more than one cause and QE is one of them. Prices being put up because of scarcity is another, but one does not preclude the other.

Starmer may be playing Wilson's 'White heat of technology' card which came to very little in Wilson's day but it was a well-regarded ploy. No government since WW2 has been able to stimulate productivity to any great extent. I don't expect Reeves to do any better

QE used in times of emergency like Covid is fine to keep services functional and pay government wages, in that situation confidence has already been weakened and the value of the currency has fallen.
QE/borrowing should not be used to bolster day to day spending in normal times, the government has stated that should be payed for with revenue, implying borrowing be used for expanding the economy.

fancythat

Someone once sednt me a list of Empires that were brought down by inflation.

If QE were to cause high and persistent inflation.....untold damage.

Sorry, fancythat, it is nonsense that money creation inevitably causes inflation. It is shortage of resources to purchase that leads to inflation, any academic analysis of specific inflationary episodes will tell you that. Only few people bother to go so far as to read them.

But we have a nice example right here on this forum today. Rental charges in Los Angeles are being increased by unscrupulous landlords taking advantage of the housing shortage situation caused by the catastrophic wildfires. Not a single bit of ‘money printing’ in sight.

M0nica

Maizie And I’m sure you must know that QE was pure money creation by the BoE on the instructions of the government.

Exactly, and money creation like that causes inflation

That’s like a Pavlov’s dog response, Monica. It isn’t true. We had several bouts of QE in the first 20 years of this century. We had no inflation as a result.

Why should ‘created’’ money’ be ‘inflationary’ and the same amount of ‘borrowed’ money not be?

But we are not there yet, so hopefully things will get sorted.

I am another one who would be happy for Rachel Reeves to get her marching orders.
Is there someone better who can take her place?

Someone once sednt me a list of Empires that were brought down by inflation.

If QE were to cause high and persistent inflation.....untold damage.

We don’t have to borrow anything, David. We have a secure and trusted currency with which we could purchase any resources we need. Will Hutton in the Observer today suggests that we initiate a round of that pretend borrowing called Quantitative Easing. That’s the first sensible suggestion I’ve heard from a mainstream commentator.

Pretty sure I personally dont agree with a word of that MaizieD>

QE gives me the shivers.
There may be occasions when it "works"[propping up Banks Balance Sheets} but not for much else else financial chaos.
And the fact it is mentioned means we really are in big trouble.

A "secure and trusted currency" only works when it works. It doesnt seem to take too much to lose that important status.

Maizie And I’m sure you must know that QE was pure money creation by the BoE on the instructions of the government.

Exactly, and money creation like that causes inflation

MaizieD

We don’t have to borrow anything, David. We have a secure and trusted currency with which we could purchase any resources we need. Will Hutton in the Observer today suggests that we initiate a round of that pretend borrowing called Quantitative Easing. That’s the first sensible suggestion I’ve heard from a mainstream commentator.

As it is, the BoE is not only keeping interest rates high and fuelling inflation but it is also selling off the ‘bonds’ from previous rounds of QE and making the financial situation even worse.
Neither the chancellor nor the governor of the BoE have any intention of improving the economy…

We have a currency that is sensitive to confidence, trusted to the extent that we still have assets to back the borrowing. Currently the value of sterling is under threat, those who lend us money are only gong to do so at high interest rate, QE is accounted for as borrowing, the BoE already owns 1/3 of debt.
It saves interest payments and it’s justified in times of emergency like Covid not to fund day to day costs.

The UK could increase taxation or reduce expenditure and reduce borrowing but no we choose to fund our lifestyle by borrowing at high interest rates, that does not get much sympathy from investors. Today it’s been announced that we are to spend £17billion on AI to improve efficiency, enabling us to fix pot holes quicker.

As we have no AI industry at all, expecting anything to change soon is not realistic,is Starmer clutching a straws.?.

M0nica

Quantative easing was one of the causes of the mess we are in now, doing it again will only accelerate inflation

No it wasn’t. The first bout, post the GFC caused asset inflation, mostly bonds, equities and property, but that only affected the wealthy. The rest, post the Brexit vote to prop up sterling, and the pandemic money, had no effect at all on inflation. It was supply shocks following the invasion of Ukraine that drove inflation and the Bank of England raising interest rates when it should have known that higher interest rates would do nothing in the case of inflation driven by supply shortage.

And I’m sure you must know that QE was pure money creation by the BoE on the instructions of the government.

Quantative easing was one of the causes of the mess we are in now, doing it again will only accelerate inflation

We don’t have to borrow anything, David. We have a secure and trusted currency with which we could purchase any resources we need. Will Hutton in the Observer today suggests that we initiate a round of that pretend borrowing called Quantitative Easing. That’s the first sensible suggestion I’ve heard from a mainstream commentator.

As it is, the BoE is not only keeping interest rates high and fuelling inflation but it is also selling off the ‘bonds’ from previous rounds of QE and making the financial situation even worse.
Neither the chancellor nor the governor of the BoE have any intention of improving the economy…

Thanks for the link, Maisie. I’ll check it out tomorrow.

“Money is a social institution that provides a solution to the problem of a lack of trust.(5) It is useful in exchange because it is a special kind of IOU: in particular, money in the modern economy is an IOU that everyone in the economy trusts. Because everyone trusts in money, they are happy to accept it in exchange for goods and services — it can become universally acceptable as the medium of exchange.”

We have the luxury of a more or less secure currency, even if it has halved in value in the last 50 yrs.

Malawi and many many other sovereign countries do not.
The value of the Kwatcha in Malawi halved last year, there are now 2000 KW to £1, any commercial deals are done in US$
It doesnt make much difference to 90% of the population they don’t miss what they havn’t got. The money runs out regularly and police, teachers and nurses don’t get paid, that’s normal.

So you have the situation that the business community deals in Dollars and locals use Kwatcha, it doesn’t matter much to them they grow the food, they live in shacks or mud huts, a bike is the usual transport. The government has no control because it has no resources to sell.

Much of what we import is priced in dollars, we have been reduced to selling off our assets, the family silver went decades ago, many of our businesses are owned by foreigners. We can borrow more we can afford to pay the interest but it doesn’t solve the problem, we are paying ourselves too much.

I hope someone more competent replaces her before long.