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August 03, 2015

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Bob

"If inflation can rise when there's so much unemployment then we suffer from a massive supply-side problem. If this is the case, then Labour should offer some solution to this."
I would argue that it won't. The UK economy now is mostly service based. There are very few hairdressers who can't fit in another cut of hair.
It's a demand problem, as Bill Mitchell and others have demonstrated.

Luis Enrique

just by the by, your claim here that "higher taxes on companies and the rich ... would tend to depress demand and employment" is not something Corbyn is going to want to admit, so tricky to use that to assuage fears about QE.

What do you understand Corbyn to have in mind - a one-off burst of QE to capitalise a national development bank, or persistent annual money financing of public expenditure (rate of seigniorage > rate of real economic growth)? What mandate will the BoE be given? I don't think we can say much about whether inflationary, without knowing.

Peter K.

Why we can't have nice things:

budget deficits and inflation.

I'm not as well-versed in UK economic history, but in the U.S. we haven't had inflationary problems since the 1970s, in fact inflation has been too low.

In the 1970s it wasn't even that bad and was the result of special circumstances. One big factor was oil. "The more obvious cultpit would be the quadrupling of world oil prices in 1973-74 when OPEC first flexed its muscles and then again in 1979-1980 when the Iranian revolution shut off oil flows from what was then the world's largest oil exporter. The sharp reversal of oil prices in the early 1980s, as more oil came on line and demand fell, was a major factor slowing inflation."

http://www.cepr.net/blogs/beat-the-press/robert-samuelson-is-unhappy-over-a-15-an-hour-minimum-wage

I'm a supporter of unions and the labor movement, but another factor was that unions were powerful enough to negotiate price hikes into future contracts. That's no longer the case.

I don't see inflation getting out of control. If it does uptick, they could allow it to go to 4 percent which as Yates says wouldn't be a disaster. Then they could raise rates and/or raise taxes to slow the economy if they need to.

Aren't savers always complaining that rates are too low. Aren't deficit hawks always complaining about balancing the budget?

Chris Purnell

As the Bank of England is undershooting its target of 2% inflation and has been for some considerable period isn't inflation scaremongering out of the Germanic songbook? As a born-again Brownite (2007) and a Blairite (2007-10) he seems to have a habit of jumping onto the wrong bandwagon as they cross in front of him. A jump to 2% would be bracing to say the least for a section of the Tory voting aspirant population. Wrong criticism; wrong analysis; wrong politics.

James

It seems like the more serious threat to inflation from Corbynomics is constraining the independence of the BoE by mandating that it buy new government bonds irrespective of monetary conditions. Would this not hamper any efforts to control inflation and expectations of inflation? We'd end up with taxes to control inflation. My main problem with Corbynomics is it begs the question, how is any of this better than the much more conventional borrowing at historically low rates to spend on infrastructure and keeping monetary policy independent?

Bob

James, "central bank independence" to "control inflation" is a total scam. If it actually happens (see ECB) it means rule by an undemocratic autocracy.
See:
http://bilbo.economicoutlook.net/blog/?p=29770
As to "much better" it is not that much different except no corporate welfare to bondholders.
Payment of bond interest is just a welfare payment, like housing benefit or disability payments, and has no special effect.
All govt spending is effectively "printing money." Taxes unprint money. It makes no sense for govt to have an account with its own IOUs.
Borrowing just prints interest bearing IOUs and you can view tax as govt burning money and printing new for spending or spend "taxpayer money." Makes no difference.

Bob

I've noticed this along the right wing. Whenever they implement policies they say they "increase growth" regardless of whether it does or not and growth should be persued at all costs. Cut taxes on the rich, "pro-buisness", balance the budget etc. But whenever the left introduce " pro-growth" policies they say it causes inflation and should be avoided like the plague because we will "go back to the 70s."
Hypocrites.

Ralph Musgrave

Contrary to Chris’s above suggestions, there’s no more reason for there to be excess inflation under a “print and spend” regime than under the EXISTING regime if the body that is ALREADY responsible for controlling inflation, the central bank, determines how much is printed. And that’s exactly what Positive Money and the New Economics Foundation advocate under their version of “print and spend”. (Though to be accurate, the advocate EITHER the BoE MPC do that job, or some similar independent committee of economists).

Dinero

> Bob

The money, deposits, used in Government taxing and spending and borrowing is not created by the government it is created by commercial banks.

Bob

Ralph, I would argue the responsibility lies with Treasury which has reserve powers over the BoE:
"The Bank of England is a subsidiary of HM Treasury (as shown in the Whole of Government Accounts), and is required by law to take direction from HM Treasury (4(1) of Bank of England Act 1946). Any 'independence' the BoE has is limited. "
Although I disagree with Positive Money for lefty (ideological) reasons, in that I dislike committees making decisions and would rather have elected politicians make the choice, as this does not seem to work well where tried (EU/eurogroup) although China is a counterexample and runs on PM-style lines. I have bigger beef with their suggestion.
Under PM politicians get given an amount of money worked out by the committee (correct me on this.) The problem is different types of spending have different effects.
A better system would be what are the desired savings distribution, current savings distribution and output gap.

Bob

Dinero, we have been over this many times. Government spends by crediting reserve accounts of private banks. It is effectively forced bank money creation.
See:
"To pay your taxes you need to present the government’s own bank’s liabilities to settle that debt. If you don’t then you haven’t settled them.

Therefore for the taxes to be credited to the National Loan Fund Account or Consolidated Fund Account (using the UK as an example), the banks making the payment have to have access to central bank liabilities.

It is the function of the intermediary Government Banking Service to translate whatever liabilities the punter provides into central bank liabilities which can be transferred to the Tax accounts at the central bank.

And that is the key driver in the system. The operation of the tax account at the central bank is the way that central bank liabilities are given to and taken from the private banks rather than lent to them.

And that matters – due to the fixed exchange rate between the central bank and the private banks.

I’ll use Treasury rather than Government. Government owns or controls both the central bank and the Treasury in modern states. MMT generally consolidates the balance sheets of Treasury and Central Bank to avoid the confusion of the internal transactions.

The Treasury can’t create central bank money. If it credits an account, one has to be debited as well. The tri-party transaction involves the Treasury, the central bank and the private bank.

What the Treasury is doing functionally is purchasing new private bank liabilities with central bank liabilities via the internal fixed exchange rate mechanism.

So an amount of central bank liabilities are transferred to the private bank. That causes the private bank to increase its own assets and liabilities via the fixed exchange rate structure. Those private bank liabilities are then transferred to the target of Treasury’s beneficence.

You’ll note that mechanism is functionally the same as the private bank issuing a loan. Assets and liabilities are increased and the private bank receives an income from the assets (interest on reserves). It is forced private bank money creation.

Similarly in reverse. The overburdened tax payer presents some private bank liabilities to the Government Banking Service at a private bank. The private bank transfers some central bank liabilities to the Treasury central bank account and the private bank extinguishes an amount of its own assets and liabilities under the fixed exchange rate mechanism to maintain parity with the central bank.

Again functionally the same as paying off a private loan. Assets and Liabilities go down and the private bank loses the income from the assets. In other words forced private money destruction.

The relationship of Government to central bank is generally one of beneficial owner (and often legal owner). Therefore it can direct the bank and Treasury receives the bank dividend. Pretending otherwise is a fantasy.

So not only can it drain its account balance to spend, it can ultimately ‘borrow’ from the central bank and cause the central bank to enter into money creation – unless the Government as a whole has signed up to some supranational pact preventing that by treaty (and the Government wishes to abide by the treaty).

And that’s the key to Treasury Bonds and Cash. Both are the same thing really. Cash is a bearer bond directly representing Central Bank liabilities. Treasury bonds are Treasury liabilities operating as a proxy for Central Bank liabilities."

Dinero

> Bob

All interbank transactions are conducted in reserves, the govenment spending is not a special case.
The amount of reserves moving back and fourth on a daily basis is small releative to the amount of taxing and spending. The relatively small amount of reserves shuttle back and fourth, reciprocally , between commerfcial banks of tax payers and recipients of government spending, and the Treasury, and that reciprocal movement facilates the transfer of money between tax payer and the beneficiaries of government spending. The actual transactions of taxing and spending occur in the deposit accounts. Deposit accounts dwarf the reserve amounts, and the transactions in them dwarf the reserves shuttling back and fourth. The movement of reserves is a mechanism to fascilitate the actual process that is transactions in deposit accounts. Government taxing and spending occurs in deposit accounts, and they are created by commercial banks

Bob

Government spending and tax occurs by crediting and debiting reserve accounts. That's a fact. You haven't paid tax if it there is no settlement. The banks intermediate the exchange.
But yes banks can create money.
Deposits are just bank IOUs nominally in £. I can create an IOU - I promise you £1 if you cut out this comment. There. They can either be demand deposits - convertible on demand or time deposits - convertible after a while.
And yes when you shift from Bank A to Bank B the first bank puts transfers reserves to Bank B.
The government is a special case as it is the currency issuer and its buffer is infinite. It also regulates the banks' lending and has them on a tight leash.
Government spends from its cash buffer. It gets some of it back as taxes. The rest it gets back when it issues bonds for reserves.

Spending only increases reserves in the commercial sector temporarily on an intra-day basis because the debt management office is constantly shuffling them back by issuing Gilts to refill the buffer.

So spending causes an increase in Gilt holdings - but only because of the institutional framework that is in place. You have a small amount of reserves that just bounces around the place as a buffer. What you really spend is Gilts.

This is just basic Treasury operations that you do with any financial institutions. Similarly in commercial banks they make loans and then backfill the funding by issuing bonds and shares or accepting deposits. But you know what your cash buffer has to target because loans take *weeks* to complete and in aggregate you know roughly how many will complete on average and therefore you can project your funding requirement really quite accurately for weeks in advance.

It's the same with government.

Ultimately all this talk is a lot of hot air. The control function that stops you spending as much as you want is the bank stopping your cheque. Nobody will stop a government cheque because they have neither the authority, nor the bottle to do so. THIS BIT IS IMPORTANT!
And the buffer can be extended to be as large as possible.

Bob

"Government taxing and spending occurs in deposit accounts, and they are created by commercial banks"
Technically no but basically yes. Government spending works using reserves but the vast majority of people use Bank IOUs.
So the banks don't create money - reserves, but they do create "money."
And as the Greek crisis has shown the government has the power (or the ECB in the case of the EU.)

Dinero

All spending occurs with reserves when more than one bank is involved. So that not so important.
If the transactions between the tax payers bank and the treasury net off then the tax has been payed although there is no net reserve movement. So your second statement is not quite true either. The funds are received in the consolidated fund , and then after that they a available for government spending. Spending doesn't create gilt holdings if it nets with taxation. Nobody would stop a government cheque in the process of payments as cheques are not stopped by payee'sbank , they are refered to the issuers bank.
Tax payers pay from funds in their deposit accounts and bond buyers buy from funds in there deposit accounts.

The point is - Bank deposits are the stock of money from which government taxing and spending is drawn from. It is not something that the government creates itself, unlike the reserves that it can make, It is created by banks operating in concert with their customers.

Bob

State IOUs are at the top of the pyramid of money.
http://neweconomicperspectives.org/2011/09/mmp-blog-15-clearing-and-pyramid-of.html
"The point is - Bank deposits are the stock of money from which government taxing and spending is drawn from. It is not something that the government creates itself, unlike the reserves that it can make, It is created by banks operating in concert with their customers."
Look at the government sector and think of it as acting like a bank overall Dinero.
Odd way of looking at it Dinero. I assume you believe Bank IOUs are on the top of the "pyramid."
Do you consider Cash money?
Government spending is forced bank money creation.
You leave out "printing money" or QE. And that Gilts are Money.

Neil Wilson

"The point is - Bank deposits are the stock of money from which government taxing and spending is drawn from. I"

The point is incorrect. Just because something nets off on a daily basis doesn't mean that the transfer didn't occur.

Otherwise all those transfer *between* commercial banks didn't occur.

You are confusing yourself.

Nobody bounces a government cheque. It always clears - primarily because of the intra-day overdraft regime and of course because anybody who tried to stop a government cheque would lose their job.

Bob

Chris, what is your view on all this (and MMT)?

SimonF

Rightly of wrongly the problem is political. Whether or not Corbynomics will cause inflation or not isn't the risk, its whether we trust politicians to do something about it if it looks like running away.

There's a large part of the voting block that remembers what happened in the 70s and 80s with inflation and as we are close to retiring or have retired the impact on us of runaway inflation, no matter how low, is very high. Furthermore we also remember how hard it was to get it under control again and seeing our parents savings wiped out.

I think it was Hattersley in the BBC's excellent UK Confidential programmes of '78 or '79 who said that the Labour Government knew what to do, but they couldn't do it politically. I for one wouldn't trust Corbyn and those who egg him on to restrict spending once they get a taste for it, no matter what they call it, even if the initial idea is sound. We can always spend ever more amounts on the NHS, education and social services and they don't have the hard nosed political sense to say no.

Like it or not all the esoteric discussions about new money theories or whether its IOUs that are at the top of the pile means nothing to the rational voter who just here's inflation and thinks '70s & '80s if they are old enough or Zimbabwe and Venezuela if they aren't.

Hugo Evans

Dinero

Exam question 1: The Queen's cheques do not bounce. Discuss.

The candidate is expected to demonstrate knowledge of the following: the BoE Reserves Scheme, the structure of Treasury accounts at the BoE (OPG, HMRC, CF, NLF, DMA), DMO operations, GEMMs and primary and secondary auctions. Intraday buffer operations. Sterilisation. Liquidity Schedule management. The commercial bank deposit layer.

The candidate will be given credit for exploring whether sterilisation operations in response to fiscal action, whether overnight to hold the the DMA buffer at the agreed volume or via the treasury auction programme, are pointless in a post 2008 world when the interest rate corridor scheme is broken; extra marks are available for a discussion of endogenous money and whether exogenously created financial entities are pulled and pushed in and out of existence by the credit system.

Marks available; technically unlimited, but will be held at a max of 100 for accounting purposes.

Time limit: 31 Jan is the self assessment deadline.


Dinero

> Hugo Evans

Why are you asking me , I didn't say anything about cheques bouncing.
Can you be more specific.
If you are suggesting that a payment not pre funded will be covered by the debt mangement office selling gilts to a deposit holder , then that is another example of deposits as the source from which government spending is funded.

Bob

"another example of deposits as the source from which government spending is funded."
The government has a "Ways and Means" account - its access to central bank money usable at any time, although ideology stops it being used.
The government doesn't need to do this as it doesn't need outside forces to credit its account. It simply does not matter what number is in the govt's account. It doesn't even make sense to have an account full of its own IOUs. The government has "saved" £4. Oh whoopee.
Dinero, the government doesn't need "sources" to "fund" its spending. We can play this silly game but know the checks don't bounce.
The point is of course what they would do with it instead. Bondholders know the government will and can switch Gilts to "printed money" in an instant - and of course they will get a worse deal then.

Bob

"I for one wouldn't trust Corbyn and those who egg him on to restrict spending once they get a taste for it, no matter what they call it, even if the initial idea is sound. We can always spend ever more amounts on the NHS, education and social services and they don't have the hard nosed political sense to say no."
Any evidence of this that is not propaganda? What is morally correct about restricting government spending and wasting resources - creating real losses *every day* instead of nominal losses that can be recovered at the touch of a button? Sounds like Merkelnomics lite.
Tell this "saying no" lunacy to those using food banks.
We can start to restrict the size of the finance sector and end the housing bubble.
I would rather have an economy based on the NHS than the finance sector.

Hugo Evans

> Dinero

I’ve addressed you because you keep coming onto blogs arguing that the tax system is run over commercial bank accounts. Your evidence is that tax and spend operates via Treasury accounts held with commercial banks. The bouncing cheque is a thought experiment designed to force you to examine the interaction between the chartal and credit components of the contemporary hybrid money system and so understand that you are missing the wood for the trees. I then attempted to give you a way out by expanding your argument into a radical endogenous money view, which would award the credit system the status of theoretical first mover in the hierarchy.

Anyway, the answer is : Liz’s cheques don’t bounce because Liz doesn’t writes cheques. She issues tokens which trade at par with everyone else’s cheques. If you’re on her side everything looks like tokens (BoE Sterling Current Accounts or bearer bonds on them called currency). If you’re on our side everything looks like cheques (orders to procure those choses in action called commercial bank deposits).

You are arguing from our side, and then saying what exactly? ‘look gov’t is funded by commercial banks’. Sorry, that’s a fail. Have another go.

Ralph Musgrave

Bob,

Re your point that “responsibility lies with Treasury which has reserve powers over the BoE”, that’s simply a statement of how the existing system works. That’s not a good argument FOR THE existing system.

My above point was that as long as the body that is responsible for inflation also determines how much new money is printed, there’s no more of a chance of excess inflation than there is under the existing system, where the body (the BoE) that is responsible for inflation also has the last word on how much stimulus is implemented.

Re your (lefty) desire to see politicians control the printing press, I suggest very few people (me included) will agree with you on that. If you want leftie policies, e.g. a big expansion in public spending, that’s fine by me in principle, and Positive Money has no objection to that either. Left wing policies are perfectly compatible with the BoE determining the amount of stimulus (done via money printing or done via interest rate cuts, QE or whatever).

“Under PM politicians get given an amount of money worked out by the committee..” No: under PM’s system, the amount of STIMULUS is determined by the BoE (or some similar committee of economists). In contrast, the total amount of money politicians can spend (i.e. the proportion of GDP taken by the public sector) is determined by politicians and the democratic process, and quite right too.

Dinero

> Hugo Evans

I have not said that the treasury has deposit accounts in commercial banks.

I'm pointing out the self evident fact that taxing and spending is instigated and termninated in deposit accounts.

It is true Commercial banks use reserve accounts to settle interbank transactions because they are a convenient way of settlement as their value is solid, but that does not mean that the government prints its own source of funding.

The reserves are a mechanism shuttling back and fourth between reserve accounts of the treasury and commercial banks in order to move the much greater mass of transactions of deposits from the payer to recipient.
So yes, as you ask, the government's abilaty to tax, borrow and spend is dependent on the amount of reserves at issue in the commercial banks.

Dinero

Typo

the amount of DEPOSITS at issue in the commercial banks.

_


You ask what am I saying - I was responding to Bobs comment that the gov taxes and spends it own IOUs. Which I pointed out It doesn't, It taxes and spend deposits.

JohnM

Which just demonstrates that since people who understand economics don't understand economics, why do they expect the electorate to understand market economics, when many do not understand domestic economics?

JohnM

And if they cannot understand it, then you can argue until the gilts come home. Simplicity always wins. Gideon knows that, or has been told that.
K
I
S
S

Bob

Propaganda works John.

Bob

http://heteconomist.com/government-spending-or-lending-logically-precedes-tax-revenue/
Dinero please read this.

Bob

"It is true Commercial banks use reserve accounts to settle interbank transactions because they are a convenient way of settlement as their value is solid, but that does not mean that the government prints its own source of funding."
Because their value is solid...?? They settle because they promise to convert ON DEMAND to government IOUs. A bank won't want to hold the liabilities of another bank.
Government spends by printing reserves and forced private money creation.

Bob

Dinero, read this again very carefully and the bits I have highlighted in bold:
Central bank liabilities are given to and taken from the private banks rather than lent to them.

And that matters – due to the FIXED EXCHANGE RATE between the central bank and the private banks.

I’ll use Treasury rather than Government. Government owns or controls both the central bank and the Treasury in modern states. MMT generally consolidates the balance sheets of Treasury and Central Bank to avoid the confusion of the internal transactions.

The Treasury can’t create central bank money. If it credits an account, one has to be debited as well. The tri-party transaction involves the Treasury, the central bank and the private bank.

What the Treasury is doing functionally is purchasing new private bank liabilities with central bank liabilities via the internal fixed exchange rate mechanism.

So an amount of central bank liabilities are transferred to the private bank. That CAUSES the private bank to increase its own assets and liabilities via the fixed exchange rate structure. Those private bank liabilities are then transferred to the target of Treasury’s beneficence.

You’ll note that mechanism is functionally the SAME as the private bank issuing a loan (you agree loans increase the "money supply" yes.) Assets and liabilities are increased and the private bank receives an income from the assets (interest on reserves). It is FORCED private bank MONEY CREATION.
"Which I pointed out It doesn't, It taxes and spend deposits."
You can view things this way. So you agree that government spending creates deposits and taxation destroyed deposits?

Bob

" as long as the body that is responsible for inflation also determines how much new money is printed, there’s no more of a chance of excess inflation than there is under the existing system, where the body (the BoE) that is responsible for inflation also has the last word on how much stimulus is implemented."
That body is the Treasury at the moment. So if it is at the BoE but the Tree has reserve powers, fine.
The point is if its not you have made a change. Not saying bad or good, but a change.
Also, "stimulus" is somewhat vague term. Can you expand?

Dinero

>Bob

Answering your questions and points in order

1. Interbank settlement means settling outstanding debts betwen banks after the clearing process, if they do occur. It does not mean settling customer's requests for BoE notes.

2. Government spending does not print reserves. The reserves circulate between reserve accounts. Government spending does not create reserves or deposits, The DmO are quite explicit about this on the DmO website , to paraphase from the website " The DmO executes its operations in such a way as to not disturb the monetary conditions of the UK economy"

3. Central bank liabilaties are not given to commercial banks they circulate from the commercial bank's BoE accounts , where the started, to the Consolidated fund of the UK and then back out again.

4. The treasury is not "functionally purchasing" liabilaties. It is transfering them using the Bacs and Chaps clearing system. Same as other bank transactions when somebody writes a cheque.

5. There is no "fixed exchange rate" mechanism across a balance sheet. A liabilaty valued in one currency is matched with an asset of the same value in the same currency. There is not an exchange rate involved in a balance sheet.

6. It is not forced money creation. The deposits or reserves are not increased.

7. Government taxing and spending does not create and destroy deposits. That does not happen in the process. It transfers deposits from tax payers to the recipients of government spending.

The article you linked to is wrong.
The author says that government taxes and spends reserves, and the government must create them before the tax is paid. From that the article concluded erouneously that it follows that the government makes the currency and its own funding of spending. As I have explained before that is not the case.

The reserve movements are a mechanism of a process, the porocess is the movement of deposits.

Bank lending creates the currency that is used by tax payers and is payed in taxes by tax payers.

For example

Bank A and its customer Create £50K

Person B earns £50k
Government declare the tax is £20K
The government Spends £20K

At the end of the year B has £30K and the recipient of Government spending has £20K.

If the £50K was not created by the bank, the government would not have been able to spend it.

I Hope that is clarity.

Bob

"For example

Bank A and its customer Create £50K

Person B earns £50k
Government declare the tax is £20K
The government Spends £20K

At the end of the year B has £30K and the recipient of Government spending has £20K.

If the £50K was not created by the bank, the government would not have been able to spend it.

I Hope that is clarity."
When banks create money, they create no NFA, they "split the zero" to create a deposit and a loan.
What usually happens is when deposit and loan do not circulate in the same way.
The liabilities are spent and on many transactions tax is paid as it circulated. Drains to tax and imports leave the liabilities intact.
If the government wants to spend, it just does so. No government checks will bounce.

Dinero

Once again you are asserting that no government cheques will bounce, as if that had some significance.
But It does not.
Because Cheques are not bounced by the payee. They are only bounced by the issuer's bank and so of course the government would not bounce its own cheque, the DMO takes care of that by selling gilts to deposit holders , which is another illustration of the taxing, borrowing and spending of deposits.

Bob

"selling gilts to deposit holders "
And here is your problem. It doesn't have to. The central bank can buy the Gilts.

Dinero

> Bob


It could. But it does not.

Bob

"It could. But it does not."
It has and can do so at any time the Treasury tells it to do so.
Dinero, I fail to see how hard it is to see the woods from the trees.
Of course not. Otherwise the nice bondholders wouldn't get their private pensions paid.
But at any opportunity it can buy bonds.
And that matters - because if you have a money printer you can see ALL spending is via printing money.
Bond interest is just a type of welfare payment to certain people with "rights". So you can view it with a bunch of other welfare payments and see what you want to pay. Remember it is mostly a top up to private pensions.

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