Sunday, 23 August 2015

Marjorie Dawes economics

Jeremy Corbyn continues to get plenty of attention, and hard left media commentators (hello Owen) are now pointing to the fact that some economists (including one who predicted that the government's austerity plan would result in unemployment of 5 million) have broadly welcomed Corbynomics.  Let's examine one of his suggestions, which is "QE for the people". QE for "the people" sits in opposition to QE "for the bankers", and bankers are evil profit-makers whereas people are nice.  [Bankers presumably are not people; maybe they are lizards. Who can be sure?]

David Smith takes the "for the bankers" bit apart in his Sunday column (also available to Times subscribers).  He points out that original QE was not designed to bail out the banks, but to lower long-term interest rates to encourage investment in things other than government bonds.  Also noted is that QE money is not "free" because it is borrowed from the central bank's reserves.  It is cheap, for sure, but not "free".  It is also not risk-free, and ultimately the taxpayer stands behind the Bank.

People's QE is the same cheap money but this time ploughed into bonds issued by a state investment bank, whose goal is to direct investment into things which the private sector and existing government spending are allegedly incapable of producing themselves: public transport, social housing, green energy.  On the face of it it seems seductive: if you asked people whether the country would benefit from improved public transport/social housing/green energy you would probably get a resounding "yes!".

Of course, people also say yes to motherhood and apple pie, yet neither comes for free.

Proponents of PQE say that the idea stems from "Modern Monetary Theory".  MMT says that a sovereign government need never default in its own currency.  This is obviously true: a government which can print its own money will never run out.  MMT then says that because of this fact, the nominal size of the government's deficit is irrelevant: all that is needed are balancing taxes to ensure that inflation does not run away, and to ensure that investment and spending are directed to the "right" things.  

What the government does if it wants to keep inflation in check is to raise taxes or cut government spending, for a given monetary policy.  If the government wants loose money, it runs a tighter fiscal policy (hello George); if the government wants to splurge on spending, it must keep the money supply in closer check (hello Gordon).  Does this sound familiar? It should, because effectively it is what the UK government and others have been doing since sloppy Keynesianism went out of fashion and Friedmanism came in, in the late 70s/early 80s. Since the Bank of England was made independent in 1997, the UK government can choose to tighten money by running a looser fiscal policy or the other way around, and the Bank will react accordingly to meet its inflation target.

If we run a quick thought experiment around PQE what might happen?  The Bank is instructed to print a few tens of billion quid to put into this magic investment bank, and as the money starts to be "invested" in new railways or broadband links or housing, the economy starts to pick up.  Inflation prospects start to pick up at the same time, so the government now has the choice of whether to keep inflation in check by tightening fiscal policy or to let it rip.  I can't say I've seen the Corbyn manifesto's section on inflation, but if inflation is going to stay on target then he's going to have to raise taxes or cut government spending.  He's hardly likely to cut spending on one state project as a result of new spending by the "investment bank", so it looks like taxes are going up.

When we look at what the PQE crowd are actually suggesting, it looks as though it is a quite straightforward expansion of the state within the economy.  PQE is just trying to pull the wool over voters' eyes, because even the hard left know that the electorate won't vote for significantly higher taxes.  As Ed Balls of all people once said: people think they pay quite enough taxes already.  

The coalition and Conservative governments took and continue to take a view that the state needs to shrink as a proportion of the economy, so fiscal policy is tightening so that money can stay looser, longer, so the private sector can expand.  Corbyn is proposing the exact opposite. 

There is space for legitimate debate over what the state can do better than the private sector, over what the right level of taxes and spending are overall, over the level of inflation, and so on. The fact that the Corbyn camp are basically trying to hide their desire for a much bigger state behind a complex-sounding magic money policy may tell us how confident they are that the electorate will vote for their Courageous State.


Lord Blagger said...

Proponents of PQE say that the idea stems from "Modern Monetary Theory". MMT says that a sovereign government need never default in its own currency. This is obviously true: a government which can print its own money will never run out


Not the case.

A simple thought experiment shows why this is false.

The state pension is inflation linked. If one inflation basket costs 6,000 pounds, then a state pension is one inflation basket a year.

So lets increase that. How about 10 inflation baskets a week?

If you're correct, the state can never run out of money, and that money can buy the inflation baskets.

The problem is that with the inflation baskets exceeding the total GDP of the UK, the state cannot produce the goods, since its goods that are the debt, not pounds.

It's the same as Argentina and its debt in USD. The debt is denominated in USD and the Argentines can't print USD.

In the case of UK pensions, the debt is denominated in inflation baskets, but paid in GBP. The baskets need to be converted into GBP and paid. Just as the Argentine Pesos need to be converted into USD and paid.

Neither the UK controls inflation and the Argentines their exchange rate.

So its a myth.

It works for fixed rate debts, it doesn't work for inflation linked debt, and 90% of the UK debts are inflation linked.

So what happens if the Corbyn tries. As fast as he prints to pay the pensions, the debts get bigger. You can't print and devalue the currency, when you debt is for value.

ie. Fixed rate - print away. Fixed value? You're stuffed.

Blue Eyes said...

You missed the second part of MMT which is to raise taxes to balance out the inflationary money printing. Plus, "pensions" (I presume you mean the state pension) is linked with inflation because the government says it is. Is it beyond the wit of Corbyn to change the state pension rules?

The other debts may well be inflation linked, which is an incentive to keep inflation down or to keep printing more and more to try to catch up.

Hey - I didn't say this was a good idea!

Lord Blagger said...

No I've not left it off.

How much tax do you need to raise to pay the pension debts?

Ah, you need to start with the size of that debt.

So on the changing of the rules. You mean Corbyn is going to f*** the public over. Of course he is.

The key part, you can't print your way out of debt linked to value, because that's devaluing the currency.

Works for fixed rate, doesn't work for value linked debt.

MMT applies, I agree. You need to tax to extract the value in the form of taxes.

So you need the present value of the debt. Then you can work out how much value you need to extract in taxes.

Well the annual increase in the pension debt is 1,000 bn a year. Can you extract that on top of the current taxes? Nope. You would need to tax 100% of the value of GDP.

See bottom of page 4 for the last number. The Tories have doubled it [9,200 bn]

Blue Eyes said...

I am not sure why you think I am promoting MMT or Corbynomics. Perhaps I am not very good at writing.

Lord Blagger said...

I know you're not. I'm pretty certain that you realize that Cobynomics is complete bullshit.

However I'm 100% certain that you are ignorant of the size and nature of the state's debts.

That's deliberate policy by the state.

Blue Eyes said...

"However I'm 100% certain that you are ignorant"

Thank you, come again.

Lord Blagger said...

You missed the second part.

"It's a deliberate policy by the state to keep you ignorant"

Blue Eyes said...

I still am not sure which bit of my post made you think that I am blasé about the UK government's finances. Point it out, and I will acknowledge pig ignorance.

One of the things I really enjoy about writing for this site is the amazing number of people who come on the comments thread 1) commenting on an issue not raised in the post and 2) managing to include words to the effect of "you are too thick for words".

TOP TIP: If you don't like the site, go and read a different one. There are plenty about, and most of them are freely available. Better yet, write your own. (I probably won't read it, but someone might.)

Lord Blagger said...

It's directly related to the article.

Proponents of PQE say that the idea stems from "Modern Monetary Theory". MMT says that a sovereign government need never default in its own currency. This is obviously true: a government which can print its own money will never run out

ie. It's wrong that a state with its own fiat can't run out of money. You've pretty much got the reason why.

With inflation linked debt, you need to pay value. To pay value, you need to tax. So the question is how much tax do you need to impose to pay the value? If you can't tax enough, you can't pay. You run out of value.

With fixed rate debt, you can print as much money as you want and pay. It's not without side effects, but you can get rid of fixed rate debt, debt for a known number of pounds by printing.

So the article is wrong. It confuses money and value. They are different things.

The bit then why the debt and its value matters is whether you can tax enough to pay the value.

But the state makes sure you are ignorant about that. It's not a critism of you, its of the state.

Blue Eyes said...

And I answered that already. The state runs the pensions as well as the printing presses. The government could print enough money tomorrow to buy all the gilts in existence at tomorrow's prices. Does it then owe itself the inflation-indexed coupon? Ding. Next problem? Also, there is nothing in MMT to say that a government can't be prudent if it wants to. The rest of my blog post (did you read the whole thing, or did you stop when you got angry at seeing one sentence you didn't like?) talks about how the whole thing becomes moot if you want to keep inflation under control.

"It confuses money and value."



Lord Blagger said...

Think pensions.

That is spread over the next 100 years and is inflation linked.

So how does it buy up the pensions?

What the's fair price of that debt?

If it prints, you get inflation. So the lump sum you paid for the debt is immediately devalued. You then don't get the purchasing power in 100 years time that's part of the deal?

So I'm interested in how you calculate how much you have to pay for it to not matter.

The reason is that its the same as present value of those pensions.

[On the QE side, its irrelevant. Take that off the debt. You can't owe yourself money. I agree]

talks about how the whole thing becomes moot if you want to keep inflation under control.

That's why I'm pushing you. You can only keep inflation under control if the printing is low scale. You can either raise interest rates, which causes damage, or you can tax and destroy money. Bit odd that one since the policy is creating more money. Plus it makes people poorer. Perhaps that's Corbyns aim.

Blue Eyes said...

"That's why I'm pushing you. You can only keep inflation under control if the printing is low scale. You can either raise interest rates, which causes damage, or you can tax and destroy money. Bit odd that one since the policy is creating more money."

OK, so you didn't read the blog post, or I really am crap at writing.

Thud said...

B.E. not sure about your writing but always argumentative and entertaining,please continue.

Lord Blagger said...

I did

MMT says that a sovereign government need never default in its own currency. This is obviously true: a government which can print its own money will never run out. MMT then says that because of this fact, the nominal size of the government's deficit is irrelevant: all that is needed are balancing taxes to ensure that inflation does not run away, and to ensure that investment and spending are directed to the "right" things.

The problem is with the difference between value and money. It can get away with defaults for money. It can't get away with defaults for value, because it runs out of the ability to generate value via taxation.

What the government does if it wants to keep inflation in check is to raise taxes or cut
government spending, for a given monetary policy.

Or ramp up interest rates. Doesn't have to be taxes

The conclusions for PQE are correct.

So yep, I've read the whole article.

Just pointing out one non obvious flaw and one obvious one.

Blue Eyes said...

Thud, first sensible comment of the thread. You are welcome any time :)

Blue Eyes said...

LB, your reasoning on pensions would be sound were it not based on the biggest false premise in history. Do you really think that the government will honour all those political promises on the state pension as the economy spirals out of control and half the productive population emigrate?

Nobody of my generation expects to collect their state pension. My retired mother cetainly does not expect hers to hold its value over time.

So, fantastic thought, but it fails the test of realism.

Lord Blagger said...

Where's the false premise?

The state is not going to pay the pensions. That's blatently obvious when you value the pension debt. That's why the state doesn't publish the number. It would be blatently obvious.

The state pension is a compete rip off.

Now for the reality, its the critical point.

What will the state do to try and pay? What's the consequences of those actions.

You've pointed one of the options out. Print away. Consequences are inflation but the debt doesn't devalue.

There are others.

Greece is a prime example of what happens.

If you are middle class you may well conclude you aren't going to get.

If you are poor you have no choice. You're screwed if you aren't paid.

andrew said...

The trouble (?) is that the 'Corbynomics' will work for a while.
... until the bill becomes due.
Just like pay day loans.

As long as one can convince the Great British Public of this all will be well.

Upper middle class middle aged white people preaching at the GBP might not be the appropriate approach (talking about Me, George O, Tim Worstall, Matthew Parris, Yvette Balls, BQ, probably you.)

After years of 'austerity' and 'cut backs' there is an increasing air of 'its our turn now'.

Despite the truth that the bankers did not get 'bailed out' by QE, and many have lost their jobs,

It is also undoubtedly true that the people who have suffered least since '08 are bankers and others who work in that sort of industry (lawyers / accountants) and these are the people who gazumped you so they could do a BTL, and drive past in a nice new car.

There is a soft underside to the cons.

There are big problems out there that the Cons should be talking about and doing something about.

- Lack of investment in infrastructure
Corbyn suggests we (the govt) build lot of things like roads and rail and houses.
This is what we should have started doing 5 years ago.
While we can borrow at 0.5% for 100 years (well, really cheap for a vv long time) we should take advantage of this.
The cons could have knocked up a good shopping list and invited bids

- Lack of investment by companies.
Corbyn suggests something like a national enterprise bank
This is how we got Back to the Future 1/2/3 - Fun films but not such great cars and not many jobs.

- Lack of productivity
We still lag France and the US.
It may be because there are no good jobs, but there are many shortages of skilled people too. The education market needs to respond to the labour market better.
Personally, I think adult education should be looked at.

All you sensible people should not underestimate the attraction of hope, escape, fantasy and someone else paying the bill.

The SNP lost but not by much.

Unlike the rest of the Labour party, Corbyn seems to be learning.
I don't think we accord him enough respect.
When he says something, he is not talking to us.

Refusing to attack Hamas will have gained him a lot more votes than he loses.
The thing is that I think they are votes he would have got anyway.

Being somewhat anti-EU is a classic bit of blairite triangulation.

Lord Blagger said...

So after Greece, do you really think lots more borrowing is a great idea?

The problem is that you've missed the basics out of any investment.

The investment has to generate sufficient money to pay the debt servicing costs and more to cover the risks.

Blue Eyes said...

Andrew you are that it is attractive on the face of it, and easy money will give a nice boost at the start, but it doesn't stand up to scrutiny. Did you see Peston's incredibly polite trashing on his blog?

The UK had an opportunity just over three months ago to vote for fantasy economics.

Bill Quango MP said...

Its more the planning laws and local people and councils that makes new housing so slow.

Pa Quango, a property developer. Had a piece of land that he had readied for a giant computer company to take over, in 1999. Then the dotcom collapse came and the deal failed.

So Pa Quango had a brownfield site with its own power station, and all the roads and power lines already laid down, on the very edge of a major city.
It took 15 years to get the planning for the 200 houses.

In the meantime the site was used for a car boot.

He also had a site near an airport as a waste incinerator. That took over 20 years. Who has the money to invest for 15-20 years?

{Pa Quango was lucky and unlucky- He had sold the site to a power company, but for a minimal upfront payment. Once the incinerator was running, he would receive a substantial payment each month. He got nothing for 20 years, and only had a payment for the last 5. - It took so long because of permits, EU rules changes, local council objections and very strange decisions & actions by the department of energy, that had to be overturned in court. -}

andrew said...

BE, to Corbyn it is not fantasy.
He really believes, and some believe in him.

No-one really believed in Ed M apart from his mum.

Sackerson said...

If it gets to the point of raising taxes to counter the results of PQE, who will pay them? Could we see monetary expansion by the State, financial extraction and tax-havening by the few, and the many left behind paying lots of direct and especially indirect taxation and being worse off than before?

Much like now, I suppose, but bigger and faster.

Ralph Musgrave said...

Blue eyes right. Lord Blogger wrong.

John Miller said...

If you find that your audience does not understand PQE (and judging by the comments I've seen on the wobbly wobbly web, that's 90% of the population) argue from a different viewpoint.

You want to promote a bit of economic activity, you need a new bathroom and you've just received £50,000 lump sum from your pension scheme.

You invite 3 plumbers to quote. To each you say; "I have a great deal of money to spend and I want to spend as much of it as I can. I know nothing about bathroom construction and I don't give a toss how long you take to build it. I am also really crap at project management generally, but I would like to have a progress meeting with you every afternoon at which I shall probably change my specifications for the bathroom. This may involve ripping everything out and starting again, for which I will pay you extra."

Given that you have just outlined every government supervised project from the aqueduct at Segovia to the NHS computer systems, ask yourself how much your bathroom will cost and when will it be finished?

Blue Eyes said...

Andrew, he is free to believe whatever he wants to believe (in contrast to the world he would create). Can he persuade 30+% of the electorate between now and May 2020?

Blue Eyes said...

Ralph Musgrave, I am your new biggest fan :)

John Miller, spot on. I carefully avoided even mentioning value for money or opportunity cost to keep things simple, but you are entirely right.

Blue Eyes said...

Sackerson, I was thinking about that, too. Wouldn't the people who saw this coming take their money and stick it somewhere else, fairly pronto?

Normally this kind of siege economics requires borders and exchange controls. Having said that, I was amazed how long it took for the Greeks to carry on using banks...

Sebastian Weetabix said...

I would imagine Mr Corbyn is probably in favour of Berlin Wall arrangements. That's what his political heroes have historically had to do.

Capitalist countries have to build walls to keep the 3rd world hordes out. Socialist ones have to build them to keep everyone in. Once you do that, you can have your exchange controls to your heart's content.

Dave said...

Magic Money Tree/Corbynomics is really very simple to understand once you realise one thing: it's code for something socially unacceptable.

If you believe, as the likes of Corbyn and Murphy do, that the world is run by a giant Jewish/ZOG conspiracy, and that those ebil, ebil jooz are creaming unearned profits off the top at the expense of the hard-working anglo-saxon labourer, then it's clear that all you need is a 'solution' to that problem and the labourer will see the full product of the virtuous sweat of his brow. It's straight out of The International Jew, only someone's run a find&replace on the word 'Jew'.

So let's look at what we've got. Antisemitic conspiracy theories? Check. Fascism-flavoured mega-statist system of government? Check. Grand infrastructure construction projects for the greater glory of the state? Check. Populist promises of unaffordable spending? Check.

Not to put too fine a point on it, Murphy is the founder of the neo-Hitlerian school of economics.

John Miller said...

Mr Weetabix, it's strange isn't it? One of the ironies the Left never appreciate.

The doors to the Socialist Paradise have no handles on the inside, because everyone wants to get out, but it does have handles on the outside, even though nobody wants to go in.

Sackerson said...

But how did we get to this point? We have had decades of economic mismanagement by both red and blue. And that's being charitable - thieves, tyrants and traitors on both sides too, some might say.

andrew said...

...Can he persuade 30+% of the electorate between now and May 2020?

I think he needs about 38%+.
The answer is no chance.

Two things concern me
(a) he is raising a number of issues that are important and real and us dismissing him as a nutjob does not make those issues go away.
(b) when the cons win with about 40% in '20, some of his supporters (not him) will not question the wisdom of their policies, they will question the democratic process. some small voices are already doing this.

Blue Eyes said...

Thanks for your comments everyone. Could we stay away from personal attacks, though, please? There is absolutely no evidence whatsoever that any of the proponents of PQE are proposing it because of their dislike of a particular group of people.

Naïveté, possibly; racism, no.

Sebastian Weetabix said...

Given Corbyn refuses to be interviewed by the Jewish Chronicle, and habitually associates with people who openly call for the eradication of Israel and all the Jews, it seems to me to be entirely fair to accuse him of displaying signs of anti-semitism.

hovis said...

Andrew: innaswer to you rather than the post:

(a) yes - not always coherent and some policies are antidiluvian, however the wrong policies but many of the the right questions. Corbynism is simply the impetutus that fuels UKIP in the other side of the political spectrum. Interstingly I see Steve Keen signed the letter and he is nowhere near a marxist - ( I have just fallen into the labels trap there myself.) I should say not a traditional advocate of a larger state or even nationalisation.

(b) You can argue an elected dictatorship with 30-40% is no democracy at all. And with the decline of grass roots poltical involvement and rellacement by party machines - why bother?

If things go seriously wrong it is becuase like the French 3rd republic, the status quo was sclerotic, no longer inspired loyalty ( or reward for it) and didnt address issues with wokable answers.

Dick the Prick said...

It has constantly confounded me how left wing politics always hurt their voters the most - it's a horrendous trinity of ignorance, conceit and mendacity and frankly, it's rather upsetting.

CityUnslicker said...

Dick - what is the quote- you always end up hurting those you love most?

Lord Blagger said...


It's pretty obvious that the state is the problem.

Look at the unions. The only one's left are the public sector unions.

Look at the other protest groups. eg. Fathers for justice. It's citizen versus the state.

Look at the debt problem. It's the state not the public.

Look at banks. It was regulation and setting too high a capital ratio. That's the state.

Look at wars. That's the state.

Take the latest. The police will only investigate if your house has an even number.


At the heart of pretty much every problem in the UK the state has its hand in the pie.

Sub Specie Æternitatis said...

First, I have to say that I just ran across this blog. From sampling its contents it is obvious that its contributors, including Blue Eyes, are well-informed, intelligent, and good writers. The policies supported I either agree with, or when in doubt, find plausible. It is definitely going into my RSS feed.

Second, from the more limited sample of Lord Blagger's comments, I'd tentatively come to the same conclusion about him.

Third, while I am not the manners police, I think both are being a little bit rude to each other in expressly or implicitly denying each other's apparent virtues. I'd enjoy their continued disagreement more if they offered each other the respect they appear to deserve.

Tedious preliminaries aside, on the to substance!

The core of the disagreement seems to me to be equivalent to Blue Eye's claim that "The government could print enough money tomorrow to buy all the gilts in existence at tomorrow's prices. Does it then owe itself the inflation-indexed coupon?"

That certainly seems plausible and for relatively small amounts of inflation-linked debt is doubtlessly true. But I am not it is necessarily true once the amounts become large. To see why, consider this hypothetical:

I am the sovereign. Today, after the markets close, I sum up the market prices of all my outstanding inflation-linked debt. Let's call that sum M. Then I announce that tomorrow I will "print" M and buy up all of this debt in the market.

Yet, tomorrow when I try to execute this plan, I run across a curious problem: The market price of all inflation-linked debt will have gone up to M+X. Why? Because my announcement that I'll print M increased inflation expectations so much that its nominal market value increased by X. So I can not buy it all with just M.

Plan B: Instead of announcing that I'll print M, I announce that I'll print M+X instead. But now I find that the market prices have further increased due to the additional inflation expectations thanks to printing X more. Now they are M+X+Y. And so on.

I find that I really have to print M'=M+X+Y+Z+... in order to execute my plan.

Ordinarily, that should be feasible. If M is small compared to some relevant monetary aggregate, M' will hardly differ from M. If M is a bit larger, M' may be substantially larger, but it is still doable; albeit taking a bigger inflation hit that I thought.

But for sufficiently large M (I think although I have not done the math), M' will diverge to infinity. I couldn't print it, even if I turned all the paper in the world into pound notes and effectively devalued my currency to nil.

Perhaps, I could do better by not announcing what I am doing and proceeding very gradually. But the markets aren't stupid. Eventually they'll figure out my scheme and M' once again potentially diverges.

So, if M is in that danger zone--and I do not know if it is, though it plausibly could be--you could never execute Blue Eyes hypothetical scheme. If I erred in my reasoning, please (gently) correct me.

Lord Blagger said...

Spot on.

Now you have to include the inflation linked pensions as well as the ILG.

Think about it. It's the same problem. People need compensation such that they can replace their pension with something that gets them the same value of income. Not the same amount of money, the same value.

That needs to generate the income for the rest of their life.

IT's exactly the problem. Print the money to pay, and immediately you get inflation and the people owning the pension have not been suffieciently compensated for being bought out. They have lost their inflation protection, and the state has under paid.

That's why the link at the start is interesting. It puts the present value in 2010 at 5,010 bn pounds. That's doubled since. It's now more than UK wealth.

The state can't extract that value via taxation (MMT) to pay the debt, either now or over time. Unless it invades somewhere and taxes them.

ie. It's that M going to infinity.

So whether or not you like the writing, you have spotted the problem.

The state can't print infinite amounts of money to pay off large value linked [inflation] debts. It can for fixed rate, not inflation linked

andrew said...

Sub Specie Æternitatis

Good afternoon

You are describing a geometric series.
These things can sum to a finite value - or become infinite.
It depends on the interest rate/ common multiplier.

Sub Specie Æternitatis said...

Andrew, that is indeed what it is called in the simplest case, on which I based my intuition, but I did not want to so claim because the feedback might in fact be a function depending on the magnitude of M in a manner more complicated than a simple multiplicative factor. I think my conclusion holds even in the more general case.

Dave said...


I respect your right to set the rules in your own house (so to speak), so I won't argue the point further here except to say that there is in fact extensive evidence that Corbyn and Murphy are primarily (or maybe solely) raving mad antisemites.

Ryan said...

There is a simpler problem. Given that we have 7% unemployment, and given that this unemployment is likely biased towards the bottom end of the skillset, then expansion of the public sector (by whatever means) can only occur at the expense of the private sector. However, since the private sector generates all the real wealth, you can only extract resource from the private sector if there is latent capacity in the private sector. This would imply that the private sector is generating a trade surplus rather than a trade deficit. Since this is not the case, the private sector is actually at the present time too small, and needs to expand at the expense of the public sector.

Thus it doesn't matter how you mess around with the finances, there just aren't enough people available to work for the government and support them all at the same time. We cannot all be nurses, no matter how "nice" a policy that might seem to be.

Blue Eyes said...

SW, you are entitled to your views, but for the avoidance of doubt they do not reflect my views or those of the proprietor of, or contributors to, this blog.

As far as I know the blog is not registered to a boiler-plate LLP in Dublin, and we do not have the resources of a wild and excitable following of disciples.

Blue Eyes said...

That goes for "Dave" too.

1) I don't believe it
2) I don't fancy getting dragged through the courts arguing over it

Blue Eyes said...

SSA, I think I have not explained my view on this.

I don't argue that the government printing money to buy all of its debt to monetise it would not be a) hugely inflationary or b) hugely disruptive.

I am simply making a practical point that the government potentially could award itself the power to do it on Day One.

Ryan, you are right. You agree with my post. Great!

Sub Specie Æternitatis said...

Blue Eyes, I think I understand your statements and never thought that you believed that monetizing the debt would be a good idea or without enormous drawbacks such as inflation.

But I also read you as saying that it is always possible. That is where I disagree. For the reasons set forth in that lengthy initial comment, I believe that for sufficiently large amounts of inflation-indexed debt (which may or may not be the ones we currently have), it is actually mathematically impossible to monetize it.

Given the generally-correct common-sense wisdom that a sovereign can always monetize its debt that is a somewhat surprising conclusion, but I think the correct one. Would love to know where you think I went wrong.

CityUnslicker said...

Ryan, and even more so there are problems here too. For the public sector hires 'qaulified' people - nurses, doctors, univeristy professors and teachers.

They have no use for the unskilled workers that the private sector takes on. So expanding the public sector will have little impact on the unemployment rate anyway - it will provide jobs for back to work middle class mums like it did in the early 2000's.

Electro-Kevin said...

Peter Hitchens points out yesterday (as I have been for weeks.)

Corbyn is a distraction to make us look the other way.

Sub Specie Æternitatis said...

Perhaps a different way of understanding why you can't monetize away unlimited amounts of inflation-linked debt would be clarifying.

Consider this hypothetical scenario:

PM Corbyn comes in and announces the following plan:

On Day 1, the government gives everybody in the country a gift: A bond than guarantees an inflation-adjusted coupon of a million pounds annually in perpetuity.

On Day 2, the government monetizes all that debt.

This would, undoubtedly, have some unfortunate consequences, among them massive inflation. But our gilts would still each pay the equivalent of a million pre-inflation pounds annually, however many trillions that might be in post-inflation pounds. We might have to switch to paying our bills in dollars or euros.

But, on balance, it would still be great. In real terms, we'd all be very rich! Nor would our tax burden increase because all that new debt was monetized away. The temporary inconvenience of carrying our money in wheel barrows or using a different currency would be quite minor compared to all that real wealth.

So the reason that this plan would be lunatic is not that its consequences would be bad. The reason is that it is mathematically impossible because you can't monetize unlimited amounts of inflation-indexed debt.

Blue Eyes said...

There is not an unlimited amount of indexed debt.

Timbo614 said...

It's been a while chaps, so SSA hasn't seen of my contributions of simple analogies and anecdotes and arbitrary musings oh and allegory and alliteration :)

But he is going about proving my point from a few years back: The numbers have simply gotten too big! You can't play around with numbers in the trillions, especially anything exponential, they get away from you very quickly.

I still maintain there will need to be a reset eventually. Wipe out the debts start again. You have to remember the money is really an illusion. All the real resources left on planet do not change in the slightest, whether there are quadrillions of 'money' them or just a measly few trillions. I can't remember what, but Harold Wilson got in trouble for spending/committing a 3 MILLION. Not 90 Billions for a little train set!

Sub Specie Æternitatis said...

Blue Eyes said: "There is not an unlimited amount of indexed debt."

Absolutely true. But you cannot monetize even a sufficiently large, but finite amount of indexed debt. I do not know--and do not know if anybody does--whether the current amounts are near, below, or above that critical amount.

By the way, none of this is to imply that indexed debt is necessarily a bad thing. To the contrary, I'd look more favorably on the self-denominated debt of a sovereign if a substantial fraction of it was inflation-indexed.

Why? For the same reason. By inflation-linking its debt and thereby making monetization much more costly, or even impossible, the sovereign has essentially taken its soft-default option off the table. That means that I am less likely to be screwed over, regardless of whether I buy their indexed or non-indexed debt.

True, there is always the risk of a hard default and inflation-indexing does nothing to protect you from that. But hard default is also very costly to the sovereign and there are many plausible scenarios in which a sovereign would soft-default if it could, but blanches at the option of hard default. So reducing or eliminating the risk of soft default is a good thing for investors (which in turn is a good thing for the sovereign who then can issue debt at a lower rate).

Sub Specie Æternitatis said...

Timbo614 wrote:
"The numbers have simply gotten too big! You can't play around with numbers in the trillions, especially anything exponential, they get away from you very quickly."

Maybe you are right. It really is possible for sovereign debt to get so big as to leave no non-catastrophic options. At 70%+ debt/GDP ratios as some advanced nations have and projected to grow, we are at least in the unease zone and rapidly heading for the danger zone.

But then I think of this passage from what is, in my opinion, the finest essay in the English language, penned almost 200 years ago:
"[T]hough in every age everybody knows that up to his own time progressive improvement has been taking place, nobody seems to reckon on any improvement during the next generation. We cannot absolutely prove that those are in error who tell us that society has reached a turning point, that we have seen our best days. But so said all who came before us, and with just as much apparent reason. 'A million a year will beggar us,' said the patriots of 1640. 'Two millions a year will grind the country to powder,' was the cry in 1660. 'Six millions a year, and a debt of fifty millions!' exclaimed Swift; 'the high allies have been the ruin of us.' 'A hundred and forty millions of debt!' said Junius; 'well may we say that we owe Lord Chatham more than we shall ever pay, if we owe him such a load as this.' 'Two hundred and forty millions of debt!' cried all the statesmen of 1783 in chorus; 'what abilities, or what economy on the part of a minister, can save a country so burdened?' We know that if, since 1783, no fresh debt had been incurred, the increased resources of the country would have enabled us to defray that debt at which Pitt, Fox, and Burke stood aghast, nay, to defray it over and over again, and that with much lighter taxation than what we have actually borne. On what principle is it that, when we see nothing but improvement behind us, we are to expect nothing but deterioration before us?"

Lord Blagger said...

There is not an unlimited amount of indexed debt.


Correct. However there was 222 bn of ILG last time I looked on

There's around 9,200 bn of inflation linked pension debt.

PFI deals have components where the lenders can call the loans and covert to inflation linked debt.

The expected losses on the guarantees, are primarily pension based and so linked to inflation

Nuclear clean up is work, its effectively inflation

They are all debts/liabilities, and any accountant will tell you they should be on the books.

I put that at around 11 trillion of inflation linked debt.

So your answer contains a question.

If it was just 222 bn, I'd agree with you, its an irrelevance. You could monetaize it or you just wait and pay it off.

For example, 375 bn of QE is larger than the ILG nominal values.

11 trillion, particularly with the 100 year maturity on the pension debts, its not possible to monetaize. It's more than total UK wealth for example.

Somewhere in the middle it becomes very difficult to monetaize.

Lord Blagger said...

ons. At 70%+ debt/GDP ratios as some advanced nations have and projected to grow, we are at least in the unease zone and rapidly heading for the danger zone.


That's borrowing not debt. You have PFI, Nuclear clean up, Pensions, Expected losses on guarantees that are all liabilities.

The debt/gdp ratio is odd too. The 70% manipulates the number.

First make the debt (numerator smaller). This is done by leaving off the big debts. ie. Your pension

Second make the denominator bigger. Use GDP and not taxes. Even on the taxes there's the question of core spending. Spending which you cannot cut. Argueable what is in. The correct denominator should be (tax - core spending)

That's a far more realistic measure of affordability.

Sub Specie Æternitatis said...

I used the standard legal-outstanding-debt/GDP ratio because it does relate to the affordability of the government debt--I think we can all agree that if that ratio was 1% we'd be fine and if it was 1,000% we'd be screwed, no matter what else--and it is based on two highly-auditable, hard-to-fudge figures.

We might be able to come up with a better measure, but any such measure would quickly get bogged down into far more subjective and fudge-able factors. The number you calculate may or may not really be a better measure on balance. It is certainly bigger. But considering that it measures something completely different, whatever standards of riskiness you need to compare it to also become that much bigger. Hence saying that your measure is bigger does not mean that it corresponds to a more dire situation. Switching your thermometer from Centigrade to Fahrenheit won't make you hotter.

This argument reminds me a little of one commonly heard whenever one remarks, for example, that the unemployment rate has fallen to 5%. Invariably, somebody will pipe up with the observation that this is just the "official rate!" and will proceed to cite some obscure, broader (hence, surprise!, higher) measure of unemployment at 15%. Everybody will sagely nod that this is bad because everybody knows that 15% unemployment would be pretty bad.

Yeah. 15% unemployment measured the standard way would indeed indicate a fairly dire situation. But is 15% of this obscure version of the statistic good or bad? They have no way of knowing. And when informed, for example, that by this same measure the unemployment rate in the greatest boom times in living memory was still 13%, they'll merely be confused.

Lord Blagger said...

s based on two highly-auditable, hard-to-fudge figures.


But you've fallen for the trick.

You've said its debt to gdp. That's the published number by the state.

The first fudge is that debt is not the same thing as borrowing. Borrowing is just one type of debts. ie. The numerator has been fudged to exclude the big debts. Makes it look more affordable.

The denominator likewise. By using GDP instead of taxes, you make it look more affordable.

Debt / tax which is a far more accurate measurement of affordability is really dire.

Debts are around the 11 trillion mark. Taxes at 0.6 trillion. that is over 1800%. ie. The state is going to default big time.

The denominator is moot. The numerator is not. You need to include the pension debts and the other debts fudged off the figures.

So there are various measures of affordability of all debts.

Ability to meet cash flow.
Assets << liabilities with no chance of a reversal.

They are the two conditions for bankruptcy. Invariably, its the first that precipitates the disaster.

So its the cash flows required on the debt, and the rate of increase of those cash flows that precipitate the crisis.

Turns out that the ONS put the annual rate of increase of the debt at 636 bn a year [2005-2010] That's close to total taxation now.

Dick the Prick said...

Well, this is getting printed out tmrw. Cheers folks, to China!

Sub Specie Æternitatis said...

Let me explain what I meant by the subjectivity and fudging which including all that other "borrowing" in the debt figure would entail. Please forgive me for using as an example the U.S.--the system I have all the relevant facts and figures on top of my head. I'm sure that the British system is fairly similar and similar conclusions hold, but to be specific would require some research on my part which I'm too lazy to do right now.

In the U.S. the principal government retirement system is Social Security. The Social Security Administration, a government agency, every year receives a substantial fraction of the receipts of the income tax system (though its receipts are not technically "the" income tax). Then it pays out, according to a formula set by law, pensions to all retired former U.S. workers. If--as it has been over recent decades--it receives more than it pays out, it puts the surplus into a separate fund which buys actual U.S. government bonds. When--as in recent years and for the indefinite future--its payouts are larger than its tax receipts, it goes into this fund to make up the shortfall.

Under current payout ratios and projected demographics, the expected payments of the SSA over the next half-century will, by many trillions, exceed its receipts. Even offsetting the amounts currently held in the trust fund, the excess is dramatic. In some sense, it is reasonable to consider that a liability.

But these are merely spending plans under current law. As the Supreme Court has held more than once, no current or future SS recipient has any legal rights to any funds. Congress could perfectly legally change or even eliminate the payouts tomorrow. In that sense, they are no more legal liabilities to SS recipients than current U.S. plans to buy X F-35 fighters from Boeing in 2020 create an actual legal liability. This is very different from the vested legal rights of the holders of U.S. bonds.

Once you start including such non-legal liabilities and assets based on speculation what is or not going to happen to and Congress will or won't react to it, you get near infinite malleability in your estimates.

For example, under current U.S. law, once the SS trust fund runs out the SSA is obligated to automatically slash SS payments (by an estimated 30% or so) in order to balance payouts and receipts. You might say that Congress wouldn't do that, but just top off the trust fund from general revenues. Maybe, maybe not. But Congress doesn't do anything, most of that huge pension liability you want to add to our statistics disappears.

For another less-well known example on the asset side, the world's largest known oil reserve, dwarfing anything in Saudi Arabia or Russia, is under some Western states and owned by the U.S. government. It is not currently exploited for environmental reasons and because it is expensive to extract. But if oil returned to the $100/barrel levels recently seen and stayed there for a while, it could be exploited so profitably that the U.S. could not only supply itself, but much of the world, for decades and with conservatively-estimated royalties sufficient to wipe out the national debt (including the SS "liabilities"). Include this in the U.S.'s assets and it is golden.


Sub Specie Æternitatis said...


There are countless other such examples that allow you to fudge the numbers endlessly and to any degree in any direction based on some uncertain, but not entirely implausible assumptions.

As for putting taxes or GDP in the denominator, it hardly matters. In the U.S., federal government tax revenues have stayed within a narrow 1%-2% band around 20% of GDP. So if you want to use taxes instead of GDP, just multiply your statistic by 5. The raw number will be bigger, but no greater or lesser in terms of implication.

As for what the implication is, historical and geographical comparisons suggest that the situation is bad, but not probably not unrecoverable. The United States has in the past had higher debt/GDP ratios and recovered; other stable, civilized nations (such as Japan) currently have substantially higher ratios and have not (yet) collapsed. Clearly, at some point this ratio will become so high that catastrophe becomes unavoidable. While we probably aren't yet at that level, the only way to discover what that level is exactly is the hard way. You don't want to do that.

Ryan said...


I don't entirely agree with that. Ordinary Joe understands Debt relative to Income. He uses that himself when he takes out a mortgage. Clearly it is the pertinent figure. Average Joe doesn't know what GDP is, and if he did he would reject it as a measure anyway - who ever heard of adding your spending to your income to determine how well your finances are doing!

Yes, democratic governments will fudge the numbers.... unless the constitution of the UK is changed to ensure that the numbers are not produced by the democratic government. And that is where the Crown comes in.....

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