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The meaning of money

including Budgets
NeilW
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The meaning of money

#377149

Postby NeilW » January 14th, 2021, 3:43 pm

Moderator Message:
This topic split from the previous discussion on wealth Tax.
As that thread appears to have veered off wealth taxes and onto the meaning of money and debt
Gryffron



88V8 wrote:[government employing everyone] worked well in the USSR. And Cuba. And still works in North Korea.
Oh.


Works well here, as we've seen over the past year in spades. Here's a full analysis of the process https://gimms.org.uk/2020/12/26/accounting-model-uk-exchequer/

Given you clearly have insights I don't have, perhaps you'd be kind enough to read it and let me know where we got it wrong.

Particularly as you are proposing taking money from other people.

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Re: Wealth tax academic paper

#377153

Postby dealtn » January 14th, 2021, 3:55 pm

NeilW wrote:
88V8 wrote:That worked well in the USSR. And Cuba. And still works in North Korea.

Oh.

V8


Works well here, as we've seen over the past year in spades. Here's a full analysis of the process https://gimms.org.uk/2020/12/26/accounting-model-uk-exchequer/

Given you clearly have insights I don't have, perhaps you'd be kind enough to read it and let me know where we got it wrong.

Particularly as you are proposing taking money from other people.


Neil it is 155 pages long, and not at all obvious from the Index, so please can you help me and point me to the "employ everybody at the same time" bit.

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Re: Wealth tax academic paper

#377162

Postby johnhemming » January 14th, 2021, 4:16 pm

There always has been some basic increase in the money supply. QE has made this happen to a much greater extent. As I see it the big question is what happens when we get a bit more inflation.

In the end sterling has no inherent value. Hence people's willingness to hold "Sterling" affects the exchange rate and also to some extent the willingness of people to sell goods or services for a price agreed in materially advance of the payment.

We are getting away with printing money today as are other countries. What happens when inflation ticks up to say 1%, then 2%, then 3%?

One argument as to why QE works where just printing the deficit doesn't is that it is reversible.

My own view is that the difficulty arises when there is material inflation. At that point QE has to stop (and potentially have some reverse).

That is not a practical way of handling normal government revenue budgets as any spending funded by QE also has to stop.

As it stands I am expecting that once the virus has faded as an ongoing problem(possibly end of March) there will be a boost of demand to the economy. Exactly where that goes is unclear.

I have not read the 155 page document.

However, in the end I understand the proposals as being "Print the deficit". The risk in the past has always been a devaluation of Money. (following which people print more deficit and you get more devaluation).

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Re: Wealth tax academic paper

#377163

Postby NeilW » January 14th, 2021, 4:16 pm

dealtn wrote: "employ everybody at the same time" bit.


We're already doing that bit (largely). It's called the "Coronavirus Job Retention Scheme". Employing everybody isn't "government employing everybody". It is "everybody is employed". The vast majority in the private sector.

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Re: Wealth tax academic paper

#377164

Postby NeilW » January 14th, 2021, 4:18 pm

johnhemming wrote: QE has made this happen to a much greater extent


It hasn't. Read the document.

QE is an asset swap to adjust the yield curve. The Exchequer increases the 'money supply' every day and has done for at least 150 years.

One argument as to why QE works where just printing the deficit doesn't is that it is reversible.


What's the material difference between selling an old Gilt from the BoE and a new one from the DMO, in your view? The system has less bank reserves and more Gilts in both cases.

Particularly as the BoE tends to borrow Gilts from the DMO to sell into the market - and vice versa.

It's always 'reversible', because that's what happens every day. Reserves are added and then swapped for Gilts and Treasury Bills.
Last edited by NeilW on January 14th, 2021, 4:28 pm, edited 1 time in total.

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Re: Wealth tax academic paper

#377168

Postby johnhemming » January 14th, 2021, 4:26 pm

NeilW wrote:
johnhemming wrote: QE has made this happen to a much greater extent


It hasn't. Read the document.

QE is an asset swap to adjust the yield curve. The Exchequer increases the 'money supply' every day and has done for at least 150 years.

I am sorry, but although I am willing to spend some time engaging with you on this issue that does not go as far as reviewing a 155 page document.

What's the material difference between selling an old Gilt from the BoE and a new one from the DMO, in your view? The system has less bank reserves and more Gilts in both cases.

Particularly as the BoE tends to borrow Gilts from the DMO to sell into the market - and vice versa.

The difference between QE and simply printing money is that Gilts are issued to the market and then bought in. The real problem is that the market is only buying them because they know they can sell them on to the BoE. We can get away with this for a bit, particularly as other countries are doing this as well.

Its all about confidence.

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Re: Wealth tax academic paper

#377172

Postby dealtn » January 14th, 2021, 4:31 pm

NeilW wrote:
dealtn wrote: "employ everybody at the same time" bit.


We're already doing that bit (largely). It's called the "Coronavirus Job Retention Scheme". Employing everybody isn't "government employing everybody". It is "everybody is employed". The vast majority in the private sector.


I'm just quoting your words to which you pointed towards a 155 document that we should read. Do I not need to read it then, as it's something that is already being done?

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Re: Wealth tax academic paper

#377173

Postby NeilW » January 14th, 2021, 4:37 pm

johnhemming wrote:[
The difference between QE and simply printing money is that Gilts are issued to the market and then bought in. The real problem is that the market is only buying them because they know they can sell them on to the BoE. We can get away with this for a bit, particularly as other countries are doing this as well.

Its all about confidence.


It has nothing to do with confidence.

What else are the banks going to do with the Sterling balances they are forced to hold? They get 0.1% on that at the moment - unless the BoE drops it to negative.

The market will buy whatever the government offers because the alternative is to hold reserves at the bank rate. Because they can only get rid of reserves in aggregate two ways - buying government paper, or paying taxes.

There is no need to issue Gilts at all. We can just leave the banks with the reserves. At which point those who would otherwise buy Gilts are left with bank deposits at whatever rate the banks offer.

The Bank of England explained it wonderfully in the 1960s.

"The banks cannot prevent the system working in this way, except by holding on to the surplus cash; this would be unlikely, however, because it would deprive them of earnings. "

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Re: Wealth tax academic paper

#377176

Postby johnhemming » January 14th, 2021, 4:41 pm

NeilW wrote:
johnhemming wrote:[
The difference between QE and simply printing money is that Gilts are issued to the market and then bought in. The real problem is that the market is only buying them because they know they can sell them on to the BoE. We can get away with this for a bit, particularly as other countries are doing this as well.

Its all about confidence.


It has nothing to do with confidence.


When people in other countries hold sterling they make a decision as to what confidence they have that the electronic balance they hold will hold value in the future.

This is all about confidence.

There is in fact a similar process going on in the UK.

We are getting away with increasing the money supply to pay covid costs at the moment.

If, however, the government said "We like this way of spending more without raising taxes so we are going to keep doing it" what do you think that would do to the value of sterling in the FX markets?

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Re: Wealth tax academic paper

#377177

Postby NeilW » January 14th, 2021, 4:43 pm

dealtn wrote:I'm just quoting your words to which you pointed towards a 155 document that we should read. Do I not need to read it then, as it's something that is already being done?


The pithy points are in the Postscript in section 9.

Everything else is a detailed expansion of those points.

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Re: Wealth tax academic paper

#377181

Postby JamesMuenchen » January 14th, 2021, 4:47 pm

NeilW wrote:
dealtn wrote: "employ everybody at the same time" bit.


We're already doing that bit (largely). It's called the "Coronavirus Job Retention Scheme". Employing everybody isn't "government employing everybody". It is "everybody is employed". The vast majority in the private sector.

But you claimed it would provide "a boost to productivity, which is what actually funds improvements in the standard of living for all. "

Can you explain how furlough achieves that?

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Re: Wealth tax academic paper

#377183

Postby NeilW » January 14th, 2021, 4:48 pm

johnhemming wrote:When people in other countries hold sterling they make a decision as to what confidence they have that the electronic balance they hold will hold value in the future.


They do it as a function of the banking system and modern monetary processes. https://new-wayland.com/blog/anatomy-of-an-fx-transaction/

Nothing to do with confidence and everything to do with making trade and finance work.

If, however, the government said "We like this way of spending more without raising taxes so we are going to keep doing it" what do you think that would do to the value of sterling in the FX markets?


We are doing that, and only an idiot would be believe we're not going to keep doing it. And people in the FX market are not idiots - it's a very good market for weeding those sort of people out.

Plus to sell Sterling you need to have somebody coming in the opposite direction to exchange with. What do they know that you don't? And what would it do to Norwegian exports? So what would the Norwegian pension fund do?

The 155 page document would be well worth your time. It would dispel a few tired out myths.

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Re: Wealth tax academic paper

#377184

Postby dealtn » January 14th, 2021, 4:48 pm

NeilW wrote:
johnhemming wrote:[
The difference between QE and simply printing money is that Gilts are issued to the market and then bought in. The real problem is that the market is only buying them because they know they can sell them on to the BoE. We can get away with this for a bit, particularly as other countries are doing this as well.

Its all about confidence.


It has nothing to do with confidence.

What else are the banks going to do with the Sterling balances they are forced to hold? They get 0.1% on that at the moment - unless the BoE drops it to negative.

The market will buy whatever the government offers because the alternative is to hold reserves at the bank rate. Because they can only get rid of reserves in aggregate two ways - buying government paper, or paying taxes.

There is no need to issue Gilts at all. We can just leave the banks with the reserves. At which point those who would otherwise buy Gilts are left with bank deposits at whatever rate the banks offer.

The Bank of England explained it wonderfully in the 1960s.

"The banks cannot prevent the system working in this way, except by holding on to the surplus cash; this would be unlikely, however, because it would deprive them of earnings. "


Banks aren't the only ones to buy/hold Gilts. In fact they don't hold that much.

The market isn't the banks, so the market doesn't have the alternative to hold reserves. You are right they have alternatives. They could buy alternative paper, much of it non-£. To do so they would have to sell them to somebody else willing to hold them, but that would mean finding buyers (and progressively more buyers). That means relative price adjustments. One of those relative price moves will be the £, against the non-£ investment alternative currency.

You will always have an accounting balance. But the stability of the £ requires ongoing confidence.

One of you says it is all about confidence, the other it is nothing to do with confidence.

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Re: Wealth tax academic paper

#377188

Postby NeilW » January 14th, 2021, 4:52 pm

JamesMuenchen wrote:Can you explain how furlough achieves that?


If the furlough scheme money wasn't there to be spent, what would happen to sales and output? And consequently to current productivity?

If people are retained as things recover so that labour remains fairly tight, what happens to the incentive for capital investment? How fast can firms get production back on line with furloughed staff as opposed to hiring from scratch?

That's not to say it is perfect. It could be more powerful. But it is an example of an employment automatic stabiliser.

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Re: Wealth tax academic paper

#377191

Postby johnhemming » January 14th, 2021, 4:53 pm

NeilW wrote:Nothing to do with confidence and everything to do with making trade and finance work.

At this point we have a clear disagreement.

I take the view that when someone buys an asset particularly a electronic record type of asset that they have to have confidence when buying that asset that it will have some future value that they are happy with. If they think it will have a lower value because say of inflation then they need to be given a good reason to buy it (such as interest).

You say that people don't need any confidence when buying things.

We disagree.

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Re: Wealth tax academic paper

#377192

Postby NeilW » January 14th, 2021, 4:55 pm

dealtn wrote:Banks aren't the only ones to buy/hold Gilts. In fact they don't hold that much.


Correct. They don't need to. Markets work at the margins - as the Bank of England explained in the 1960s...

But the stability of the £ requires ongoing confidence.


It doesn't. Not while there are net exporters to the UK who require that demand to maintain their own economy. Norway on its own can provide 'confidence' for Sterling to the entire world entirely in service of its own exports to the UK - simply by draining the excess Sterling to its Pension Fund. As can any of the other net exporters to the UK.

Hence the link above.

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Re: Wealth tax academic paper

#377195

Postby NeilW » January 14th, 2021, 4:57 pm

johnhemming wrote:I take the view that when someone buys an asset


They are not buying the asset. They are creating it ex nihilio - as my Norwegian link above shows if you care to work through it.

There isn't a fixed amount of money.

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Re: Wealth tax academic paper

#377198

Postby johnhemming » January 14th, 2021, 5:02 pm

NeilW wrote:
johnhemming wrote:I take the view that when someone buys an asset


They are not buying the asset. They are creating it ex nihilio - as my Norwegian link above shows if you care to work through it.

There isn't a fixed amount of money.


If the Norwegians are buying some sterling then they are not creating it. The Bank of England created it. I accept there is not a fixed amount of money.

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Re: Wealth tax academic paper

#377204

Postby NeilW » January 14th, 2021, 5:11 pm

johnhemming wrote:[
If the Norwegians are buying some sterling then they are not creating it. The Bank of England created it. I accept there is not a fixed amount of money.


It is created by the Banks doing the FX exchange and then pared back by the normal processes of bank payments.

The bank accounting is there in detail - which shows the above. I'm afraid what you believe is completely inaccurate.

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Re: The meaning of money

#377208

Postby johnhemming » January 14th, 2021, 5:22 pm

NeilW wrote:
johnhemming wrote:[
If the Norwegians are buying some sterling then they are not creating it. The Bank of England created it. I accept there is not a fixed amount of money.


It is created by the Banks doing the FX exchange and then pared back by the normal processes of bank payments.

The bank accounting is there in detail - which shows the above. I'm afraid what you believe is completely inaccurate.

The agreement of a contract creates and asset and a liability and in that sense yes you are creating something. However, that is not part of the M0 money supply (which is what we are talking about). When that is settled through the settlement system it uses the M0 money supply for settlement.

With many securities transactions there is an agreement of a contract (execution) followed by the settlement of that contract. Although the execution of a contract creates double entry transactions with assets and liabilities in the accounts of both of the contracting entities. That is not creating M0 money.


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