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March 30, 2016


Deviation From The Mean

This really is a piss poor analogy and irrelevant to the EU debate (If you are bored try playing minesweeper or join the other city boys in the pub).

For one thing if we Brexit it will not mean a free trade world, whatever that Utopian bullshit even means. Also if the EU is sub optimal it may mean reform is required and not Brexit. And so on and so on.


Not much will change either way. Firstly because Ireland has a veto. But Corbyn et al support the EU so much that if they get in power they have no problem with them tying their hands. Hence, Brexit.

"and, perhaps, by raising borrowing costs."

Why would "borrowing costs" rise? There is no transmission mechanism. Just a scare story.

The entire conclusion put forward follows from the premise that the bond markets can decide things.

However if it is clear to the markets that the government believes it ultimately controls the Bank of England and the understanding is that the Bank of England will prevent yields from rising, then they will not rise.

Any bond that drops below par can be purchased by the Bank of England and cancelled. That means that the private sector gets less back than it paid out for the bond.

And that is a tax. Show me a financial person that will voluntarily queue up to pay a tax and I'll show you a unicorn.

So it matters not what the bond market thinks. It matters whether the government decides to *voluntarily tie its hands*.

Outside of the EU the government can run an overdraft at the Ways and Means Account and there is no need to issue Gilts at all.

At the moment:

Government spending from cash buffer/intraday overdraft => taxation plus private savings => purchase newly created government bonds => QE by the Bank of England of government bonds.

And we *only* have to do the double shuffle because the EU treaty prevents us from simply running an overdraft at the BoE.

I've seen that piece of propaganda from the BoE in the Guardian rather than the FT. It is bullshit.

The BoE offers *unlimited intra-day overdrafts* and nobody operating those accounts needs to co-ordinate the balances until the end of the day. That's how it works.

The money to 'pay for' the interest on Gilts comes from HM Treasury's Cash Buffer and on a heavy spending day the intraday overdraft - aka created - to pay the interest. It is either spent or saved in precisely the same way as any other government spending - generating taxation and net-increases in saving to the penny.

Government spending is always paid for by spending the money.

The injections that the government make into the economy from their spending buffer increases the demand for Gilts at the DMO. It's like the economy breaths in before it breaths out.

The key thing to remember is where the control point is. There is *nobody* in this system that can bounce a government cheque and there is nowhere else for anything HM Treasury spend to go other than to other accounts at the Bank of England. So it all just bounces back and forward intra-day and settles up nicely at the end of the day (with DMO borrowing back from the banks like any other bank does if they are short of reserves to hit the arbitrary end of day 'clearing' figure).

Everything is always 'fully funded' because the money can't go anywhere else. It's like sitting on a water bed. And that's the key point.

When you look at France, the money there can leak out to Germany - because they are in a fixed exchange system called the Euro. That can't happen here.

"they under-estimate how slow and costly the transitions can be"

Even more in the EU due to state aid rules. Outside, the state can compensate freely.


«Back in 1984 Patrick Minford argued in favour of pit closures on the grounds that unemployed miners would find work elsewhere – that the adjustment process would be swift enough to more than offset the short-term hardship. He was wrong: ex-mining communities are still depressed.»

I am depressed by this type of delusional-leftie argument that ridicules in the eyes of many "common-sense" southern voters many "progressive" positions.

The #2 piece of evidence that "common-sense" southern voters see in the past 10-20 years is that a few millions hardscrabble poor from depressed ex-mining and ex-industrial communities in Poland, Romania, Slovakia, and various north african and eastern asian countries have found employment in southern England by beating the ex-mining communities of the north and periphery in the race to the bottom, by "gettin' on yer bikes" and then eagerly accepting very low wages and by living 4-8 to a bedroom.

The obvious conclusion of "common-sense" southern voters is that «unemployed miners would find work elsewhere – that the adjustment process would be swift» if only had they "gotten on yer bikes", but those scroungers have preferred a lifestyle on benefits well above average earnings enabling them to live in mansions with many spare bedrooms by pretending to be disabled.

That several millions of ex-mine and ex-shipyard and ex-steelmill workers from poor areas of eastern Europe, north Africa, eastern Asia, have beaten the northern unemployed in the race to the bottom is a very obvious fact, and needs to be explained, phrases like «ex-mining communities are still depressed» just enrage "common-sense" southern voters.

Many of those southern voters who want to get out of the EU also largely want to get rid of the restrictive EU immigration rules that prevent them from getting unlimited really cheap hired help from the many much poorer countries outside the EU, because they are fed up with having to pay the ridiculous wages demanded by northerners gobbling up their taxes who like more the easy, luxurious lifestyle they get on benefits.


«which closed the water troughs from which they refuelled, thus locking us into petrol engines»

I just read that page and to me it seem quite ridiculous even if interesting, as it confuses the fuel (coal vs. gasoline) with the technology (external/steam vs. internal/explosive combustion).

The problem with coal is that it is heavy and has less energy than oil distillates, and this is why both trains and ships (Agadir incident, Churchill) switched to oil distillates, quite independently of cars.

Cars with heavy coal tenders would have been rather less preferable than cars with a tank of oil distillate.

Oil distillate can do both external and internal combustion engines. But my understanding is that oil powered external/steam combustion engines are not as good as the internal combustion ones (power/weight ratio for example). While coal can just about be used only for external/steam combustion ones; except perhaps for fine carbon powder ones, but then they would not be steam even if coal powered.

PS BTW steam and electricity are not fuels, they are just transmission mechanisms.


«The key thing to remember is where the control point is»

Oh "Bob", the system as a recent paper by the BoE states, already works like that, even if the accounting is more complicated.

The "control points" are the cost of imports, that is the willingness of foreign vendors to accept government checks, and the willingness of *domestic* vendors too to accept government checks.

There are plenty of countries where government checks drawn on their central bank overdraft are not accepted by anybody and the economy is dollarised or euroised.

«Outside of the EU the government can run an overdraft at the Ways and Means Account and there is no need to issue Gilts at all.»

That can be done entirely within the EU too, and the government only issues Gilts and raises taxes purely for customary and (somewhat stupid, admittedly) political reasons.

What really matters is the size, however reached, of that "overdraft at the Ways and Means Account"; regardless of Gilts and taxes and other details.

Getting rid of Gilts or taxes or the EU does not fundamentally change by itself the maximum size of that overdraft such that the government checks still get accepted by foreign or domestic vendors.

MMT is a description, not a «magic money tree» like southern properties :-).


"the maximum size of that overdraft such that the government checks still get accepted by foreign or domestic vendors."

Very good comment blissex.

"that is the willingness of foreign vendors to accept government checks"

Who are they gonna sell their products to instead? In a world short of demand, those with demand have the upper hand.

The end buyer always gets to use the type of money they want and the end supplier always gets the type of money they want. Otherwise there will be no deal. It doesn't matter what the invoice is priced in. It doesn't matter what the currencies are. It doesn't matter where people are physically located in the world. The finance system has to make the finance channel tie up or it all stops and the deal chain collapses.

Look around you. Read the documents. Export, export is the neo-liberal mantra.

When you look at the evidence foreign tokens move towards the central bank of export led nations. That is how the dynamics work - no matter how you dress it up with 'sovereign wealth funds' and the like.

Look at the swap facilities set up by the Chinese.

It costs a central bank *nothing* to buy up foreign tokens.

The important thing to remember is that when a currency goes down, *all* the others in the world go up in relation to it and nations that rely upon exports (export led nations) start to lose trade - which depresses their own economy. Then exporters start to moan for vendor financing.

Any one of those other economies can intervene in the foreign exchange markets, purchase the 'spare' currency and that will halt the slide *for everybody*. And all exporters to an import nation have a central bank with *infinite capacity* to do that *against their own currency.*

Since neoliberalism is all about 'export led growth' you have to show exporters don't care if the pound depreciates.


Sorry last part messed up. They have infinite capacity against their own currency, limited effect on others.


"not accepted by anybody and the economy is dollarised or euroised."

The government has to make it so you can't pay your taxes or your debts in those assets. You may as well say use Vintage Wine.

You have to get the scrip required, or you get jailed. Since most people don't like getting jailed, they get the scrip. Very simple.

That's why it is a monopoly. You can only escape it by moving to another country, where you subject yourself to another monopoly.

There is a reason there is a pretty hard dividing line in currency usage on the Irish border with the UK. The denomination of liabilities imposed on people is the reason.


"That can be done entirely within the EU too"

Article 123 prohibits so we need the double shuffle I mention in my first comment.

We have to change/repeal the ECA, although there is no law without enforcement. When we repeal/change we may well get "chucked out":


"The European Communities Act 1972 (c. 68) is an Act of the Parliament of the United Kingdom providing for the incorporation of European Union law (originally Community law) into the domestic law of the United Kingdom."

"The repeal of this Act would render European Union law unenforceable in the United Kingdom & Gibraltar, and would immediately return the powers delegated to the EU to the Parliament of the United Kingdom. [1]"


"A Member State which decides to withdraw shall notify the European Council of its intention"

The decision to withdraw is one for the country to undertake in accordance with its own constitutional requirements. Which in our case is *probably* an act passed by parliament to repeal the 1972 European Communities Act.


"They have infinite capacity against their own currency, limited effect on others."

Because it has the *effect* of fixing the problem for everybody, because all the currencies trade with everybody else and the arbitragers make sure that the effect spreads out across all the currencies.

If Japan suddenly decides for whatever reason that it doesn't like Sterling and starts selling Sterling for US dollars, then that move will spread via the other currencies - because there is suddenly money to be made buying and selling RMB/USD pairs and USD/GBP pairs. And there is suddenly excess demand for US dollars affecting every pair linked to the USD.

So other exporters to the UK are affected by the entities in Japan's decision - since the supply and demand has shifted.

Suddenly China has a problem with its dollar peg because there is an increased demand for US dollar, which it can fix by supplying the USD and buying the Sterling to keep the currencies in a range that it requires for its own exports.

All excess exporters have spare currency. The spread effect means that what they lose on Sterling won't necessarily be corrected by increases elsewhere - because of course nobody exports everywhere. Everybody has major markets and minor markets.

Everybody acts with view to their own interests and that tends to balance things out. An importing country can help that by ensuring that any currency pain is felt by those countries exporting to your country - imposing import restrictions on luxury goods for example.

Dave Timoney

Surely the lesson of QWERTY vs Dvorak was not the cost of change but the minimal gain? Rather than two clearly defined camps, there are many different keyboard layouts, not least because inventors imagine the enormous royalties that would accrue in the event of a mass switch. Their problem is that QWERTY is "good enough" for most people.

Perhaps a better analogy would be VHS vs Betamax, not least because that was close to a straight choice, i.e. neither had the advantage of incumbency. Though Betamax was technically superior, it lost out because most consumers did not value the gains highly enough to pay a premium (just as most never bothered to buy a top-end hi-fi).

If the EU vote comes down on the side of remain, this will surely reflect a scepticism that Brexit will significantly improve most people's lives as much as a fear of change.

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