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The funding of the $1.9TN relief package and effect on yields

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TheMotorcycleBoy
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Re: The funding of the $1.9TN relief package and effect on yields

#391666

Postby TheMotorcycleBoy » March 2nd, 2021, 9:36 pm

Snorvey wrote:
TheMotorcycleBoy wrote:
NeilW wrote:
Refuse licences to the crypto exchanges to clear the asset exchange into real money, and jail anybody in the finance industry that facilitates such an exchange.

Just as they do with hard drugs.

All hard assets of any type - from crypto to drugs - uses the liquidity mechanisms of the payment system to enable wider trade.

Crypto, gold, property and the like all have the same effect. They help reduce the demand for financial asset saving in the denomination, which will reduce the deficit and increase the tax take.

If everybody held their savings in other currencies, gold or crypto then we would automatically eliminate the deficit and have a balanced budget.

So what's your view of the questions posed in my OP, Neil?

Printing or borrowing?

Matt


Same thing really.

I think they are quite different actually. Printing swells the countrys money supply effectively, but borrowing moves existing money around. Printing money inflates the nominal prices of assets, borrowing doesn't. Printing money and borrowing it options available only to CBs, whereas individuals are confined to only borrowing....etc..etc.

Matt

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Re: The funding of the $1.9TN relief package and effect on yields

#391702

Postby odysseus2000 » March 2nd, 2021, 11:08 pm

I think they are quite different actually. Printing swells the countrys money supply effectively, but borrowing moves existing money around. Printing money inflates the nominal prices of assets, borrowing doesn't. Printing money and borrowing it options available only to CBs, whereas individuals are confined to only borrowing....etc..etc.

Matt


This is all logical, but we have had a lot of both printing and borrowing and yet inflation has remained low.

Perhaps there are other forces at work?

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Re: The funding of the $1.9TN relief package and effect on yields

#391719

Postby NeilW » March 3rd, 2021, 5:16 am

TheMotorcycleBoy wrote:I think they are quite different actually. Printing swells the countrys money supply effectively, but borrowing moves existing money around. Printing money inflates the nominal prices of assets, borrowing doesn't. Printing money and borrowing it options available only to CBs, whereas individuals are confined to only borrowing....etc..etc.

Matt


That would be a 'fixed amount, fixed exchange rate' view. It's wrong as a matter of accounting.

"Borrowing" creates Gilts which expands the 'money supply' by exactly the same amount. You only see it as 'moving existing money around' because you're concentrating on the 'swapping' part and not on how they ended up with excess reserves to 'swap' in the first place. Let me show you how your 'printing money' conception is exactly the same 'swapping around' as Bond payments.

The process is as follows. Parliament authorises, say, furlough payments. The Comptroller verifies that authority and grants credit on the Exchequer account at the Bank of England, which is passed to the DWP. The banking entries for that leave the DWP with a deposit at the Government Banking Service, and the Consolidated Fund with the balancing asset 'Net Financial Assets' which is essentially money Parliament has created that it hasn't yet collected the tax for. This is the modern equivalent of 'tally sticks' and is the 'creating money' part of the process. It's pure Parliamentary Authority.

(See https://new-wayland.com/blog/uk-government-spending-gory-details for more detail)

The denomination for this money is 'Exchequer Credits', and that is essentially the base currency government operates in. Let's call it 'Gold'.

When the Exchequer want to pay somebody it hands over the Gold to the Bank of England who gives it 'Silver' in exchange (ie Sterling) - at a one-to-one exchange rate. As you can see, the Bank of England operation is just 'moving money around'. Nothing new is created. The Silver is then transferred to the account of the person that the government wishes to pay.

For there to be any demand for Gilts, that person, or whoever they swap that Silver for goods with, must decide not to spend their Silver. Otherwise the Silver will simply change hands more times, and at most changing of hands create a tax liability that sends some Silver back to the Exchequer, eventually exhausting the pile of Silver. The Tally stick 'stock' this Silver represents will return home as tax to be matched with the 'counterfoil' held at the Consolidated Fund. Just as it has for centuries.

That changing hands process - before the Silver stops being spent - will go via the asset market in the same way - driving up asset prices to their indifference level.

The Exchequer, as a favour, then offers to swap unspent Silver back for Gilts - Gold Edged Paper (ie a derivative of Gold). It's no more a borrowing process than you placing a deposit with a bank is the bank 'borrowing' from you. Technically it may be, but functionally it is the saving side that is doing the driving. The government is no more getting down on bended knees begging for money, than the bank was when your salary was paid into your current account.

There is no need to offer the swap back to Gold. The end individual could save just as easily in Silver - by leaving it on deposit in a bank. The bank then does the 'borrowing'.

Apparently that is usually ok, but the state doing the exact same thing isn't. Which is the basic failure of logic in mainstream economic belief.

NeilW

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Re: The funding of the $1.9TN relief package and effect on yields

#391789

Postby TheMotorcycleBoy » March 3rd, 2021, 11:23 am

Hi Neil,

NeilW wrote:
TheMotorcycleBoy wrote:I think they are quite different actually. Printing swells the countrys money supply effectively, but borrowing moves existing money around. Printing money inflates the nominal prices of assets, borrowing doesn't. Printing money and borrowing it options available only to CBs, whereas individuals are confined to only borrowing....etc..etc.

Matt


That would be a 'fixed amount, fixed exchange rate' view. It's wrong as a matter of accounting.

That could well have been what I had in mind. I had pictured a closed society (an autarky I believe), comprising 50 families, totally self-sufficient within their group, with 5,000,000 clay tablets in circulation. Borrowing between families would be possible and interest may or may not be charged. In that guise, the money supply would remain fixed.

After some years due to the expansion of the population, 200,000 more clay tablets are printed. In this case obviously the supply rose.

"Borrowing" creates Gilts which expands the 'money supply' by exactly the same amount. You only see it as 'moving existing money around' because you're concentrating on the 'swapping' part and not on how they ended up with excess reserves to 'swap' in the first place. Let me show you how your 'printing money' conception is exactly the same 'swapping around' as Bond payments.

The process is as follows. Parliament authorises, say, furlough payments. The Comptroller verifies that authority and grants credit on the Exchequer account at the Bank of England, which is passed to the DWP. The banking entries for that leave the DWP with a deposit at the Government Banking Service, and the Consolidated Fund with the balancing asset 'Net Financial Assets' which is essentially money Parliament has created that it hasn't yet collected the tax for. This is the modern equivalent of 'tally sticks' and is the 'creating money' part of the process. It's pure Parliamentary Authority.

(See https://new-wayland.com/blog/uk-government-spending-gory-details for more detail)

The denomination for this money is 'Exchequer Credits', and that is essentially the base currency government operates in. Let's call it 'Gold'.

When the Exchequer want to pay somebody it hands over the Gold to the Bank of England who gives it 'Silver' in exchange (ie Sterling) - at a one-to-one exchange rate. As you can see, the Bank of England operation is just 'moving money around'. Nothing new is created. The Silver is then transferred to the account of the person that the government wishes to pay.

In my humble opinion you have contradicted yourself in these earlier words of yours. The contradiction can be found by comparing the 2 emboldened statements, the first being 'my bold', the second being your original bold. In the first statement you've just stated that Borrowing expands the money supply, and in the second just 'moving money around'. Nothing new is created. Only one of these can be true. In my original argument I believe it to be the second.

For there to be any demand for Gilts, that person, or whoever they swap that Silver for goods with, must decide not to spend their Silver. Otherwise the Silver will simply change hands more times, and at most changing of hands create a tax liability that sends some Silver back to the Exchequer, eventually exhausting the pile of Silver. The Tally stick 'stock' this Silver represents will return home as tax to be matched with the 'counterfoil' held at the Consolidated Fund. Just as it has for centuries.

Ok. I like this explanation, it's a nice clear explanation of tax.

That changing hands process - before the Silver stops being spent - will go via the asset market in the same way - driving up asset prices to their indifference level.

I don't quite understand this.

The Exchequer, as a favour, then offers to swap unspent Silver back for Gilts - Gold Edged Paper (ie a derivative of Gold). It's no more a borrowing process than you placing a deposit with a bank is the bank 'borrowing' from you. Technically it may be, but functionally it is the saving side that is doing the driving. The government is no more getting down on bended knees begging for money, than the bank was when your salary was paid into your current account.

I disagree with this. It's definitely a typical borrowing, as the Exchequer/Govt./etc. pay coupons back to the other party in compensation for them shouldering the risk implied by the loan.


Anyway....FWIW I'm not a QE antagonist. I'm actually eager to learn more about it. But I'm certainly behind on the education process. I've recently finished a 100 page summary of "Wealth of Nations", now I'm reading Keynes (The General Theory...), then it will be Friedmann and then Kelton (QE). Hopefully I'll have it licked by then.

So I'm afraid to disagree with what Snorvey stated earlier. My view is that that I very briefly summarised here viewtopic.php?p=391075#p391075. I believe the Fed will continue TB re-purchases to keep the recovery on track, as long as inflation remains below 2.5%. They will also monitor Non farm payroll numbers as this will indicate relative consumer power (as a driver towards subsequent inflation).

I was interested in this question i.e. that posed in the OP, since continued QE will probably keep yields low and continue to make investors reach for yield and buy growth and tech shares. Whereas if yields rise it seems more likely that growth and tech shares will be sold in preference for value and income stocks.

Matt

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Re: The funding of the $1.9TN relief package and effect on yields

#391796

Postby NeilW » March 3rd, 2021, 11:48 am

TheMotorcycleBoy wrote:In my humble opinion you have contradicted yourself in these earlier words of yours. The contradiction can be found by comparing the 2 emboldened statements, the first being 'my bold', the second being your original bold. In the first statement you've just stated that Borrowing expands the money supply, and in the second just 'moving money around'. Nothing new is created. Only one of these can be true. In my original argument I believe it to be the second


The source of the money is parliamentary authority. That creates the credits. The credits are then swapped for either Silver or Gold Edged Paper over the entire process. Both 'Printing money at the Bank of England' (your words I believe) and 'Borrowing via Gilts' expands the money supply by precisely the same amount - zero. The money supply is expanded by the same tally process that backs both, and it stays expanded.

I don't quite understand this.


What's the difference between these two scenarios:

    I give you a new £100, which you then use to bid up my shares to a higher price by buying them, and when I get the £100 back I stick it in a bank account.

    I give you a new £100, which you then use to bid up my shares to a higher price by buying them, and when I get the £100 back I buy a Gilt from the Debt Management Office with it, or stick it in National Savings

The answer is of course nothing. So there is no difference between 'money printing' and 'borrowing'. They all cause the same process in the economy - assets rise to an indifference level.

I disagree with this. It's definitely a typical borrowing, as the Exchequer/Govt./etc. pay coupons back to the other party in compensation for them shouldering the risk implied by the loan.


The alternative is that reserves are held by a bank as a loan on which they receive 'interest on reserves' at the Bank Rate of 0.1%. And you hold a deposit with that bank that is paid interest. All that differs is the rate and the term. In monetary terms it is 'Floating Rate Debt', vs 'Unfunded Fixed Rate Debt'. We tend not to issue 'Funded Debt' any more (perpetuals and consols).


I was interested in this question i.e. that posed in the OP, since continued QE will probably keep yields low and continue to make investors reach for yield and buy growth and tech shares. Whereas if yields rise it seems more likely that growth and tech shares will be sold in preference for value and income stocks.

Matt


Artificial interest rate intervention in the market by central banks keeps asset prices low. As we have removed those interventions assets have returned to their correct market price. The payment of interest from government to market holders is an asset price suppressant - just like any other welfare payment. It is time it was stopped and private banks learned to stand on their own two feet - earning an income by generating productive investment.

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Re: The funding of the $1.9TN relief package and effect on yields

#391946

Postby TheMotorcycleBoy » March 3rd, 2021, 6:43 pm

NeilW wrote:
TheMotorcycleBoy wrote:In my humble opinion you have contradicted yourself in these earlier words of yours. The contradiction can be found by comparing the 2 emboldened statements, the first being 'my bold', the second being your original bold. In the first statement you've just stated that Borrowing expands the money supply, and in the second just 'moving money around'. Nothing new is created. Only one of these can be true. In my original argument I believe it to be the second

The source of the money is parliamentary authority. That creates the credits. The credits are then swapped for either Silver or Gold Edged Paper over the entire process. Both 'Printing money at the Bank of England' (your words I believe) and 'Borrowing via Gilts' expands the money supply by precisely the same amount - zero. The money supply is expanded by the same tally process that backs both, and it stays expanded.

I disagree with your assertion that creation of either silver(sterling) or gold edged paper(gilts) both expand the money supply by the same amount.

Both sterling and gilts are forms of IOUs.

Sterling promises to pay the bearer the principal amount. Gilts promise to pay the bearer the principal amount at maturity plus the outstanding number of coupons until maturity. And therein lies the difference, the gilt vanishes at maturity.

So returning to your swap credits for either sterling (printing) or gilts (borrowing) remark; if the swap is for sterling the M supply increase is permanent but if for gilts the supply rise is temporary and is bound by the life of the gilt.

Hence printing and borrowing are different.

Matt

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Re: The funding of the $1.9TN relief package and effect on yields

#392060

Postby NeilW » March 4th, 2021, 3:16 am

TheMotorcycleBoy wrote:Sterling promises to pay the bearer the principal amount. Gilts promise to pay the bearer the principal amount at maturity plus the outstanding number of coupons until maturity. And therein lies the difference, the gilt vanishes at maturity.

So returning to your swap credits for either sterling (printing) or gilts (borrowing) remark; if the swap is for sterling the M supply increase is permanent but if for gilts the supply rise is temporary and is bound by the life of the gilt.

Hence printing and borrowing are different.

Matt


That's a fallacy of composition. What are the Gilts swapped back for at the end of the term? Sterling reserves. It doesn't disappear does it. It is simply exchanged for a period of time. Hence the point about the 'floating debt' and the 'unfunded debt'. Sterling reserves are just a different form of debt. You might call it 'money printing', but that is just pejorative.

As for the higher interest payment over time, that's precisely the point. Gilts are more expensive than the reserves which do earn a variable interest rate of, currently, 0.1%. So Gilt interest is a welfare payment (literally since the majority of the interest paid backs private pensions in payment), and welfare payments are spent - increasing the tax take which reduces the 'money supply' - funnily enough by the amount of the interest payment via the my spending is your income less tax and your income is my spending less tax chain.

You may want to spend some time drawing up the balance sheets and the journals. The only way the 'money supply' that comes from government can be reduced is via taxation. Or you can read Section 8.2 of https://gimms.org.uk/2021/02/21/an-accounting-model-of-the-uk-exchequer/ where I do it for you. 8.2.2 and 8.2.3 explain the issuing of Gilts. Redemption is merely the reverse of 8.2.3. You can refer to the corresponding tables in Appendix A if you want the Gory Details.

NeilW

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Re: The funding of the $1.9TN relief package and effect on yields

#392081

Postby TheMotorcycleBoy » March 4th, 2021, 8:08 am

NeilW wrote:
TheMotorcycleBoy wrote:Sterling promises to pay the bearer the principal amount. Gilts promise to pay the bearer the principal amount at maturity plus the outstanding number of coupons until maturity. And therein lies the difference, the gilt vanishes at maturity.

So returning to your swap credits for either sterling (printing) or gilts (borrowing) remark; if the swap is for sterling the M supply increase is permanent but if for gilts the supply rise is temporary and is bound by the life of the gilt.

Hence printing and borrowing are different.

Matt


That's a fallacy of composition. What are the Gilts swapped back for at the end of the term? Sterling reserves. It doesn't disappear does it. It is simply exchanged for a period of time.

I know, but from your earlier post:

The source of the money is parliamentary authority. That creates the credits. The credits are then swapped for either Silver or Gold Edged Paper over the entire process. Both 'Printing money at the Bank of England' (your words I believe) and 'Borrowing via Gilts' expands the money supply by precisely the same amount - zero. The money supply is expanded by the same tally process that backs both, and it stays expanded.

You stated that swapping the earlier credit for either sterling or gilts, expanded the money supply by the same amount. However they don't because 1) the gilts created are later swapped back for existing sterling, hence their initial expanding effect (as addition IOUs) is cancelled but 2) the sterling created does not mature in the same way as the gilts so their initial expansion effect persists.

I think we'll have to agree to differ until I finish reading the books I mentioned earlier.

Matt

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Re: The funding of the $1.9TN relief package and effect on yields

#392104

Postby NeilW » March 4th, 2021, 9:02 am

You stated that swapping the earlier credit for either sterling or gilts, expanded the money supply by the same amount. However they don't because 1) the gilts created are later swapped back for existing sterling, hence their initial expanding effect (as addition IOUs) is cancelled but 2) the sterling created does not mature in the same way as the gilts so their initial expansion effect persists.


They are swapped back for *new* reserves, not existing. The previously cancelled reserves are simply reissued (and then later in the day swapped back for Gilts by the DMO cash management process, so the Gilts don't really mature anyway). It's entirely a swapping process, and the accounting journals in the paper I link to show how that works. That's why I did a 200 page paper on the subject, in great detail.

Only taxation can reduce the amount of government debt in existence. Everything else is just a debt type swap.

I'm afraid you are incorrect, and you need to look at the accounting. It's not a matter of opinion. It's a matter of accounting fact.

NeilW

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Re: The funding of the $1.9TN relief package and effect on yields

#392137

Postby odysseus2000 » March 4th, 2021, 9:50 am

Interesting speculation on Powell might do to lower 10 year rates:

https://www.zerohedge.com/markets/will- ... 0-tomorrow

Regards,

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Re: The funding of the $1.9TN relief package and effect on yields

#392150

Postby dealtn » March 4th, 2021, 10:17 am

odysseus2000 wrote:Interesting speculation on Powell might do to lower 10 year rates:

https://www.zerohedge.com/markets/will- ... 0-tomorrow

Regards,


Kick the can down the road. Each time you do you create a slightly bigger problem to address, such that you have to kick the can harder or further each time you get to it. Eventually the road wins, you won't kick it to the end, it's just a case of when and how bad the problem has got in the meantime.

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Re: The funding of the $1.9TN relief package and effect on yields

#392339

Postby GoSeigen » March 4th, 2021, 3:54 pm

TheMotorcycleBoy wrote:Hence printing and borrowing are different.


-Money printing creates a liability for the issuer, so in the normal sense of the word it is no less a form of borrowing than gilt issuance! The real difference between money and bonds/gilts lies in their other properties. Calling it "money printing" as if that creates funding out of thin air is really misleading -- money is a debt of the State.

-The government will probably continue funding the way it has so far: heavy issuance of both money and bonds. I have previously stated what I think will finally happen: there will be a national campaign to encourage private individuals to invest in long-term gilts. This will be achieved by probably three incentives: 1. disappointment in other assets (e.g. a market crash); 2. dire warnings of the consequences if people don't do their patriotic duty; and 3. small but superficially attractive incentives (e.g. 105p of bonds for 100p of cash for early investors). Failing this, inflation looks a distinct danger.


GS
P.S. Will not be posting much here so sorry if no further replies.

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Re: The funding of the $1.9TN relief package and effect on yields

#392424

Postby TheMotorcycleBoy » March 4th, 2021, 6:25 pm

GoSeigen wrote:
TheMotorcycleBoy wrote:Hence printing and borrowing are different.


-Money printing creates a liability for the issuer, so in the normal sense of the word it is no less a form of borrowing than gilt issuance!

I assume thats because both sterling and gilts are effectively IOUs.

money is a debt of the State.

An IOU then!

The government will probably continue funding the way it has so far: heavy issuance of both money and bonds. I have previously stated what I think will finally happen: there will be a national campaign to encourage private individuals to invest in long-term gilts..

I believe I heard mention of "green bonds" from somewhere.

Thanks Matt


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