UK and IMF bailout

[Tara]

Some economists are warning that the UK may need to get another bailout or loan from the IMF. The same thing that happened in the 1970s when the UK got a loan from the IMF.

Why are economists saying this when the central banks of UK/EU/US/Japan have just been printing hundreds of billions of pounds and trillions of euros and dollars and yen for the last two years? Any money that is needed by these central banks can obviously just be printed.

And why do economists never say that the EU/US/Japan may need an IMF loan? Their debt and deficits are just as bad as the UK or even worse. The debt of Japan and Italy is far worse than the UK for example. Do economists just like to constantly “talk down” the UK, and ignore the similar or even worse debt and deficits in the EU/US/Japan?

And given that the UK can easily just print hundreds of billions of pounds as required, why did it even need to go to the IMF in the 1970s?

https://www.marketwatch.com/story/u-k-m ... 1662394489

[1nvest]

IIRC the IMF loan wasn't actually required in the end, but had to be set in place in order to cover 'cash flows', when otherwise there was a risk the UK would default on its debt (not had the cash to cover interest payments).

Japan has multiples of GDP debt, but where much of that is internal - which isn't a real debt, just a internal capital distribution matter. £3.5Tn of external debt, compared to over £7Tn for the UK, and where they run with a trade surplus compared to the UK's deficit. If, as Truss seems to be planning to do, the BoE prints to buy up more new issues of Gilts that the treasury issue 0 in order to hand that to the energy firms, then whilst that debt is internal, the markets will be more likely to ramp up yields (lower prices/£) to critical levels where the UK struggles to cover existing external debt interest payments. A 2% increase in cost adds the equivalent of the entire NHS budget spend for instance. She's also further intending to lower the taxes that energy firms pay.

Truss opines that lower taxation will attract inward investment and growth, she's wrong, as the UK has a history of changing things often, isn't consistent/stable, so she'll hit us with a double-whammy of higher debts, slow growth. She's aiding energy firms excessive profiteering, leaving the UK competing for UK gas on the same terms as others - such that whilst having gas, we see no benefits from that. Better would be to impose a withholding tax on UK gas, perhaps 50% such that it would be better to sell UK gas to the UK at £1.10/unit (or whatever) than it would be to sell gas in the commodity markets at £2/unit. And with cheaper energy within the UK compared to others who didn't have their own gas so UK products would be more competitive/attractive - inducing growth.

As-is, the economists predicting another IMF bailout becoming necessary is just a reflection of them thinking Truss as a useless PM. Quite a common opinion, and that both debt and interest rates will rise, likely also with high inflation, basically a mess. But the energy firms will do well. Ian Blackford formerly was promised a lucrative chairman position in one of Putin's energy firms upon him leaving politics, that seems to have fallen through, but maybe Truss has had similar offers by others in order to leverage energy firms excessive profits continuation, even at the taxpayers longer term cost. Can't otherwise reason her UK self harm intent.

[UncleEbenezer]

We could print as much as we want. But we'll still starve when the exchange rate hits £1000 to the dollar. A bailout - with strings attached - might be a less bad option, though I can't say I've heard the suggestions to which you allude.

I'm no economist, but none of the other countries you mention has an economy so highly geared to finance as ours.

As for the 1970s, the generation then in charge remembered Weimar.

[Dod101]

The point that UE makes is of course the exact issue. Print enough money and the exchange rate falls through the floor. Hence we cannot borrow on international markets and need to have an IMF loan to dig ourselves out of the hole we will have created. See the current situation with Sri Lanka.

Dod

[Spet0789]

They key point is that the U.K. is vulnerable in having large twin deficits. We have a fiscal deficit and a balance of payments deficit. Add to that an ageing population and low productivity growth and you have the ingredients for a currency crisis.

[Tara]

The point that UE makes is of course the exact issue. Print enough money and the exchange rate falls through the floor. Hence we cannot borrow on international markets and need to have an IMF loan to dig ourselves out of the hole we will have created. See the current situation with Sri Lanka.

Dod

But all of this huge money printing applies equally to the US/EU/Japan. And no economists ever talk about any of them having to go to the IMF. There seems to be a bias against the UK whenever it comes to bad economic news. The budget deficit in the US is far worse than in the UK and other G7 countries but the dollar just keeps rising against sterling.

And the Euro seems to get a free pass because all of the European countries with basket case economies are now linked under the one currency and so they all hide safely behind Germany. If Italy and Greece and other countries were using their own currencies they would all probably collapse in value against sterling.

So the US dollar and the Euro seem to be considerably overvalued against sterling and most other currencies in the world. This is also quite evident from looking at any comparisons of Purchasing Power Parity. The prices in the supermarkets and the shops in Ireland also seem to be about double that of shops in the UK.

[ursaminortaur]

The point that UE makes is of course the exact issue. Print enough money and the exchange rate falls through the floor. Hence we cannot borrow on international markets and need to have an IMF loan to dig ourselves out of the hole we will have created. See the current situation with Sri Lanka.

Dod

But all of this huge money printing applies equally to the US/EU/Japan. And no economists ever talk about any of them having to go to the IMF. There seems to be a bias against the UK whenever it comes to bad economic news. The budget deficit in the US is far worse than in the UK and other G7 countries but the dollar just keeps rising against sterling.

And the Euro seems to get a free pass because all of the European countries with basket case economies are now linked under the one currency and so they all hide safely behind Germany. If Italy and Greece and other countries were using their own currencies they would all probably collapse in value against sterling.

So the US dollar and the Euro seem to be considerably overvalued against sterling and most other currencies in the world. This is also quite evident from looking at any comparisons of Purchasing Power Parity. The prices in the supermarkets and the shops in Ireland also seem to be about double that of shops in the UK.

During the financial crisis the IMF provided loans to Cyprus, Greece, Ireland, and Portugal.

https://www.imf.org/en/About/Timeline

Soaring budget deficits sow doubt about ability of several European countries to repay debts. Government bailouts of ailing banks add to pressure, temporarily shaking confidence in viability of euro. IMF joins European Central Bank and European Commission in providing emergency loans to Cyprus, Greece, Ireland, and Portugal.

[murraypaul]

This whole discussion seems be based around one comment from one strategist at one firm?

[Tara]

“During the financial crisis the IMF provided loans to Cyprus, Greece, Ireland, and Portugal.”

And the people who earn their income in these peripheral EU countries benefit from vastly overvalued incomes and salaries simply because they share the same currency as Germany. If these peripheral EU countries were still using their old currencies such as the Drachma or the Irish pound, the income of their citizens would be far less.

Salaries, shop prices, and even house prices, are far higher in Ireland than in the UK. All of these things used to be far lower in Ireland than in the UK. They are basically living well beyond their means in countries like Ireland, and when the Euro eventually breaks up, as it inevitably will, countries like Ireland and Greece will have to devalue their currency by up to 50%.

[Dod101]

The point that UE makes is of course the exact issue. Print enough money and the exchange rate falls through the floor. Hence we cannot borrow on international markets and need to have an IMF loan to dig ourselves out of the hole we will have created. See the current situation with Sri Lanka.

Dod

But all of this huge money printing applies equally to the US/EU/Japan. And no economists ever talk about any of them having to go to the IMF. There seems to be a bias against the UK whenever it comes to bad economic news. The budget deficit in the US is far worse than in the UK and other G7 countries but the dollar just keeps rising against sterling.

And the Euro seems to get a free pass because all of the European countries with basket case economies are now linked under the one currency and so they all hide safely behind Germany. If Italy and Greece and other countries were using their own currencies they would all probably collapse in value against sterling.

So the US dollar and the Euro seem to be considerably overvalued against sterling and most other currencies in the world. This is also quite evident from looking at any comparisons of Purchasing Power Parity. The prices in the supermarkets and the shops in Ireland also seem to be about double that of shops in the UK.

If you are really concerned about the question of an approach to the IMF you would need to refer the matter to 'some economists' that you quote. I have certainly heard no concerns expressed on the matter but all I think we are trying to do consider is when such an approach might be required. I think it depends on several things, how deep we are in debt and our ability to weather it surely being a couple of fundamental points. We certainly cannot just keep printing money because in the end that will simply significantly devalue the currency. Our inflation rate appears to be higher than say the US and that will eventually weaken our economy faster than the US's and put us in a weaker position. I guess that the US economy is seen as stronger than ours which would be another factor against us but I have no interest in knocking the UK and it seems perfectly possible for us to weather the storm without recourse to an IMF bailout especially as you say, if others are in as bad a position as we are.

Dod

[servodude]

We certainly cannot just keep printing money because in the end that will simply significantly devalue the currency.

What if everyone else keeps doing it also?

If the the GBP and USD were being printed at the same rate would anyone really notice?

[ursaminortaur]

We certainly cannot just keep printing money because in the end that will simply significantly devalue the currency.

What if everyone else keeps doing it also?

If the the GBP and USD were being printed at the same rate would anyone really notice?

The exchange rates would remain constant but unless there was some deflationary pressure (eg reduced bank lending so that the amount of money created by the banks was reducing to compensate for the additional money being printed) there would be inflation.

[Dod101]

We certainly cannot just keep printing money because in the end that will simply significantly devalue the currency.

What if everyone else keeps doing it also?

If the the GBP and USD were being printed at the same rate would anyone really notice?

The exchange rates would remain constant but unless there was some deflationary pressure (eg reduced bank lending so that the amount of money created by the banks was reducing to compensate for the additional money being printed) there would be inflation.

I hope I have made clear that I am no economist but I am sure that continuing to print money will never get us out of our poor economic situation. All it would do would be the opposite of a share consolidation and so instead of a loaf of bread costing £1 it could cost £1.50, a salary of £30,000 it would be £45,000. If the US Dollar was printed at the same rate the same would happen there. The end result would be that there would in effect be no change and no solution to whatever the problem was perceived to be. The Swiss would as usual be the ones who gained since their Franc would be worth a great deal more on international markets.

Dod

[1nvest]

We certainly cannot just keep printing money because in the end that will simply significantly devalue the currency.

What if everyone else keeps doing it also?

If the the GBP and USD were being printed at the same rate would anyone really notice?

The exchange rates would remain constant but unless there was some deflationary pressure (eg reduced bank lending so that the amount of money created by the banks was reducing to compensate for the additional money being printed) there would be inflation.

I hope I have made clear that I am no economist but I am sure that continuing to print money will never get us out of our poor economic situation. All it would do would be the opposite of a share consolidation and so instead of a loaf of bread costing £1 it could cost £1.50, a salary of £30,000 it would be £45,000. If the US Dollar was printed at the same rate the same would happen there. The end result would be that there would in effect be no change and no solution to whatever the problem was perceived to be. The Swiss would as usual be the ones who gained since their Franc would be worth a great deal more on international markets.

Dod

The Swiss dropped the gold standard (their money being backed by gold) as of the new millennium (one of if not the last to do so) - much of its 'safe currency' was a consequence of that coupling. IIRC they had a vote around 10 years ago whether to go back onto that, but I believe didn't. The Swiss Franc and Japanese Yen historically bettered the US$ (most other currencies tend to decline relative to US$, whilst US$ tends to decline relative to gold - all in a very broad sense), due to its massive budget surplus (rise of Yamaha, Sony ...etc. becoming global household names). As such the 'flight to Swiss Franc/Japanese Yen for safety' is rear view mirror based.

When you can't print more money without backing that with something finite such as gold, or where your trade surplus facilitates printing/borrowing from yourself as per Japan, then your currency holds up better than others who are dumb enough to think that they can print/spend whilst running a trade deficit, or in the belief that they can turn a trade deficit around by reducing taxes to attract inward investments - into a state/system that is renowned for changing the rules repeatedly/often (UK). Or that is stupid enough to permit gas extracted from its lands/seas to be sold back to its population at global supply/demand rates, when otherwise having lower cost domestic energy has massive knock on beneficial effects that might have had the UK being able to competitively produce the same products for less.

FT All Share performance is a indicator of how well/poorly UK governance is

[Tara]

We certainly cannot just keep printing money because in the end that will simply significantly devalue the currency.

What if everyone else keeps doing it also?

If the the GBP and USD were being printed at the same rate would anyone really notice?

The exchange rates would remain constant but unless there was some deflationary pressure (eg reduced bank lending so that the amount of money created by the banks was reducing to compensate for the additional money being printed) there would be inflation.

I hope I have made clear that I am no economist but I am sure that continuing to print money will never get us out of our poor economic situation. All it would do would be the opposite of a share consolidation and so instead of a loaf of bread costing £1 it could cost £1.50, a salary of £30,000 it would be £45,000. If the US Dollar was printed at the same rate the same would happen there. The end result would be that there would in effect be no change and no solution to whatever the problem was perceived to be. The Swiss would as usual be the ones who gained since their Franc would be worth a great deal more on international markets.

Dod

If printing money is not helpful for an economy then why does the US, the biggest money printer of all, and having the biggest budget deficits of all, have the strongest currency now?

It seems as though the US dollar, and the Euro to a lesser extent, always get a “free pass” from the FX markets. This favour is not extended to any other countries that decide to print trillions or run huge budget deficits.

The US dollar and the Euro are both overvalued.

[NotSure]

If printing money is not helpful for an economy then why does the US, the biggest money printer of all, and having the biggest budget deficits of all, have the strongest currency now?

The Fed are cranking up interest rates with the market predicting more to come. US government bond yields are higher than Europe (Italy excepted). In addition, they are planning to 'unprint' money (quantitative tightening, QT, i.e. selling assets to reduce the Fed's balance sheet). Markets are forward looking, and the US has a longish history of coming up smelling of roses.

[Dod101]

If printing money is not helpful for an economy then why does the US, the biggest money printer of all, and having the biggest budget deficits of all, have the strongest currency now?

The Fed are cranking up interest rates with the market predicting more to come. US government bond yields are higher than Europe (Italy excepted). In addition, they are planning to 'unprint' money (quantitative tightening, QT, i.e. selling assets to reduce the Fed's balance sheet). Markets are forward looking, and the US has a longish history of coming up smelling of roses.

And I think the other point is that the US economy holds a lot of world beating companies like MS, Apple, Tesla and so on. In the UK we are tied to 'old' industries such as tobacco, consumer goods, and the like. Very little that is world beating sadly. So I think that the reason that the US can print money and apparently get away with it is because they can afford to. That is I think, because they still have this immigrant 'get up and go' attitude and drive to take risks. The UK lost that about the time of the Second World War. Everyone has their time and this last longish period has not been the UK's.

Dod

[ursaminortaur]

If printing money is not helpful for an economy then why does the US, the biggest money printer of all, and having the biggest budget deficits of all, have the strongest currency now?

The Fed are cranking up interest rates with the market predicting more to come. US government bond yields are higher than Europe (Italy excepted). In addition, they are planning to 'unprint' money (quantitative tightening, QT, i.e. selling assets to reduce the Fed's balance sheet). Markets are forward looking, and the US has a longish history of coming up smelling of roses.

And I think the other point is that the US economy holds a lot of world beating companies like MS, Apple, Tesla and so on. In the UK we are tied to 'old' industries such as tobacco, consumer goods, and the like. Very little that is world beating sadly. So I think that the reason that the US can print money and apparently get away with it is because they can afford to. That is I think, because they still have this immigrant 'get up and go' attitude and drive to take risks. The UK lost that about the time of the Second World War. Everyone has their time and this last longish period has not been the UK's.

Dod

The US dollar is also the world's primary reserve currency with the Euro being its nearest competitor. The US dollar also gains from being the currency that commodities such as oil are priced in.

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

A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.

The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 19th century and first half of the 20th century.[1] However, by the middle of the 20th century, the United States dollar had become the world's dominant reserve currency.[2] The world's need for dollars has allowed the United States government to borrow at lower costs, giving the United States an advantage in excess of US$100 billion per year.[3][4][5]
.
.
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The United States dollar is the most widely held currency in the allocated reserves, representing about 61% of international foreign currency reserves, which makes it somewhat easier for the United States to run higher trade deficits with greatly postponed economic impact or even postponing a currency crisis. Central bank US dollar reserves, however, are small compared to private holdings of such debt. If non-United States holders of dollar-denominated assets decided to shift holdings to assets denominated in other currencies, then there could be serious consequences for the US economy. Changes of this kind are rare, and typically change takes place gradually over time, and markets involved adjust accordingly.[1]

However, the US dollar remains the preferred reserve currency because of its stability along with assets such as United States Treasury security that have both scale and liquidity.[22]

The US dollar's position in global reserves is often questioned because of the growing share of unallocated reserves, and because of the doubt regarding dollar stability in the long term.[23][24][25][26][27] However, in the aftermath of the financial crisis, the dollar's share in the world's foreign-exchange trades rose slightly from 85% in 2010 to 87% in 2013.
.
.
.
The euro is currently the second most commonly held reserve currency, representing about 21% of international foreign currency reserves. After World War II and the rebuilding of the German economy, the German Deutsche Mark gained the status of the second most important reserve currency after the US dollar. When the euro was introduced on 1 January 1999, replacing the Mark, French franc and ten other European currencies, it inherited the status of a major reserve currency from the Mark. Since then, its contribution to official reserves has risen continually as banks seek to diversify their reserves, and trade in the eurozone continues to expand.[31]

After the euro's share of global official foreign exchange reserves approached 25% as of year-end 2006 (vs 65% for the U.S. dollar; see table above), some experts have predicted that the euro could replace the dollar as the world's primary reserve currency. See Alan Greenspan, 2007;[32] and Frankel, Chinn (2006) who explained how it could happen by 2020.[33][34] However, as of 2021 none of this has come to fruition due to the European debt crisis which engulfed the PIIGS countries from 2009 to 2014. Instead the euro's stability and future existence was put into doubt, and its share of global reserves was cut to 19% by year-end 2015 (vs 66% for the USD). As of year-end 2020 these figures stand at 21% for EUR and 59% for USD.


As to UK world beating companies there seem to be two major problems.

1) Although UK scientists come up with good ideas it is often easier to get financing for their development into viable businesses in the US rather than in the UK.
2) When the UK does have a successful world beating company such as ARM it usually ends up being sold to a foreign company.

[Dod101]

If printing money is not helpful for an economy then why does the US, the biggest money printer of all, and having the biggest budget deficits of all, have the strongest currency now?

The Fed are cranking up interest rates with the market predicting more to come. US government bond yields are higher than Europe (Italy excepted). In addition, they are planning to 'unprint' money (quantitative tightening, QT, i.e. selling assets to reduce the Fed's balance sheet). Markets are forward looking, and the US has a longish history of coming up smelling of roses.

And I think the other point is that the US economy holds a lot of world beating companies like MS, Apple, Tesla and so on. In the UK we are tied to 'old' industries such as tobacco, consumer goods, and the like. Very little that is world beating sadly. So I think that the reason that the US can print money and apparently get away with it is because they can afford to. That is I think, because they still have this immigrant 'get up and go' attitude and drive to take risks. The UK lost that about the time of the Second World War. Everyone has their time and this last longish period has not been the UK's.

Dod

The US dollar is also the world's primary reserve currency with the Euro being its nearest competitor. The US dollar also gains from being the currency that commodities such as oil are priced in.

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

A reserve currency (or anchor currency) is a foreign currency that is held in significant quantities by central banks or other monetary authorities as part of their foreign exchange reserves. The reserve currency can be used in international transactions, international investments and all aspects of the global economy. It is often considered a hard currency or safe-haven currency.

The United Kingdom's pound sterling was the primary reserve currency of much of the world in the 19th century and first half of the 20th century.[1] However, by the middle of the 20th century, the United States dollar had become the world's dominant reserve currency.[2] The world's need for dollars has allowed the United States government to borrow at lower costs, giving the United States an advantage in excess of US$100 billion per year.[3][4][5]
.
.
.
The United States dollar is the most widely held currency in the allocated reserves, representing about 61% of international foreign currency reserves, which makes it somewhat easier for the United States to run higher trade deficits with greatly postponed economic impact or even postponing a currency crisis. Central bank US dollar reserves, however, are small compared to private holdings of such debt. If non-United States holders of dollar-denominated assets decided to shift holdings to assets denominated in other currencies, then there could be serious consequences for the US economy. Changes of this kind are rare, and typically change takes place gradually over time, and markets involved adjust accordingly.[1]

However, the US dollar remains the preferred reserve currency because of its stability along with assets such as United States Treasury security that have both scale and liquidity.[22]

The US dollar's position in global reserves is often questioned because of the growing share of unallocated reserves, and because of the doubt regarding dollar stability in the long term.[23][24][25][26][27] However, in the aftermath of the financial crisis, the dollar's share in the world's foreign-exchange trades rose slightly from 85% in 2010 to 87% in 2013.
.
.
.
The euro is currently the second most commonly held reserve currency, representing about 21% of international foreign currency reserves. After World War II and the rebuilding of the German economy, the German Deutsche Mark gained the status of the second most important reserve currency after the US dollar. When the euro was introduced on 1 January 1999, replacing the Mark, French franc and ten other European currencies, it inherited the status of a major reserve currency from the Mark. Since then, its contribution to official reserves has risen continually as banks seek to diversify their reserves, and trade in the eurozone continues to expand.[31]

After the euro's share of global official foreign exchange reserves approached 25% as of year-end 2006 (vs 65% for the U.S. dollar; see table above), some experts have predicted that the euro could replace the dollar as the world's primary reserve currency. See Alan Greenspan, 2007;[32] and Frankel, Chinn (2006) who explained how it could happen by 2020.[33][34] However, as of 2021 none of this has come to fruition due to the European debt crisis which engulfed the PIIGS countries from 2009 to 2014. Instead the euro's stability and future existence was put into doubt, and its share of global reserves was cut to 19% by year-end 2015 (vs 66% for the USD). As of year-end 2020 these figures stand at 21% for EUR and 59% for USD.

Thanks for that quote. In summary it shows quite clearly what has happened since the Second World War and why the US can afford to be a bit more liberal with its currency.

Dod

[NotSure]

[

Thanks for that quote. In summary it shows quite clearly what has happened since the Second World War and why the US can afford to be a bit more liberal with its currency.

Dod

When times are hard, one looks for the 'least bad' option. As someone or other famously said, few have made money betting against US in recent years.