Thursday 29 August 2019

Brexit Aftermath: Printing Money, or Taxes?

I notice that recently (just before the tactical nuke went off) a bright spark amongst the Graun writers opined that there was not much for it than for Labour to "pivot to Revoke" (everyone has to 'pivot' these days - so much more delicate than U-turning or just plain changing your mind: and a lot more dignified than flip-flopping.)  This is in keeping with Polly Toynbee declaring 'civil war', as she has done in her bid to beat Owen Jones in the hyper-ventilation stakes. 

So, as the armies head off doggedly to Philippi, we are left to wonder about post-Brexit strategy - notwithstanding our musings earlier in the week as to whether Cummings/Johnson even has one, beyond a GE at any rate.

Aside from dealing with short term issues and civil commotion of various sorts (not so easily brushed aside in reality, I well realise) the question will surely arise: to print money, or to tax?  Nations have been perennially been confronted with this issue in times of War (Polly's coinage, not mine) and its aftermath.  It seems to me that (a) there is a very strong anti-tax camp within the Tories (rather like 18th & 19th century America, in fact - they always printed money); (b) Keynsian spending is getting a new lease of life in several quarters; and (c) even McDonnell hasn't sounded too bullish on tax, and the Corbyn-Left are toying with something called Modern Monetary Theory which seems to absolve them of the need to do anything so atavistic as smashing the rich with a supertax.

I freely admit to knowing nothing about macro-economc theory (even as I reckon to know quite a bit about practical micro-economics).  But I well recall how our good host Mr CU predicted Quantitative Easing last time around (and, for good measure, the £/$ collapse from 2.10).  

What do the highly knowledgeable, or even the more modest, C@W readers reckon (i) Boris / Javid; and (ii) McDonnell have up their sleeves for us, in the event they have their hands on the levers of power next year?



Charlie said...

Printing money transfers wealth from the asset-poor to the asset-rich. This is not a vote winner, even amongst traditionally asset-rich Tory voters, now having to gift tens of thousands of pounds to their kids to help them onto the housing ladder.

In years to come, historians will point the finger at QE as being responsible for Trump, Brexit, and the forthcoming collapse of the EU. The proles tend to tolerate, even celebrate, people becoming rich by working for it. Getting rich because you were on the right side of an essentially political decision (no matter how much the BOE leans on its supposed independence) - not so much.

There will be no printing.

SJK said...

Hasn't McDonnell been musing about abolishing tax-free personal allowances? Allegedly, this is a progressive tax measure.

jim said...

Any fool can get to Baghdad, what to do when you get there is the problem.

Just suppose Boris et al do intend to 'make Britain great again' (a big if) then we will have to export goods and services like mad. But for Europe, against a tariff headwind, elsewhere, it depends. Short of making time machines and trans galactic transporters we are forced into the traditional markets. New thinking required.

Perhaps a big push into weapon sales and the rental of nuclear bombs to all and sundry (deposit back if unused). Perhaps provide assistance in global terrorism, warmongering and blackmail. Codebreaking might become a useful earner. Pay us the money or we bring down your banking system or release the videos via proxies of course. Perhaps take up brothel keeping on a gigantic scale (think dedicated airports and cities). In short go back to the days of Good Queen Bess and take up global piracy. Boris and Dominic seem just the chaps.

Or we could stick to the boring commute to Brussels, Zurich, Paris, Berlin etc etc and grind out widgets and insurance policies like before.

Anonymous said...

Assuming we leave, and Boris holds on, I'll take a punt on helicopter money.

Everyone gets £X000 to stimulate spending, just in time for a GE.

Who do you vote for, Grandad Spart who tried to stop Brexit, or Boris who paid for your new 80" 8K curved telly and is giving you HS3?

Anonymous said...

"In years to come, historians will point the finger at QE as being responsible for Trump, Brexit, and the forthcoming collapse of the EU."

So QE is a Good Thing.

Don Cox

Sebastian Weetabix said...

I quite fancy a bit of helicopter money. It’s better than bank bailouts. Everyone to get £100k, to be put against debts first, and whatever is left, piss it up the wall! What’s not to like?

AndrewZ said...

The strategy is probably the “Singapore on Thames” plan discussed here recently. Force an early election, win on a “People vs Parliament” ticket and then it’s five years to transform the economy.

But the short-term prospect is very many job losses and bankruptcies as our exports to the EU rapidly drop to the level that is possible without any formal trade relationship, leading to a recession in 2020. Tax cuts will be difficult with falling tax revenue, sharply rising unemployment and political pressure to help struggling industries. Tax rises would go against the long-term plan.

That points to QE and increased borrowing to fund a year or two of frantic firefighting, then a mixture of tax cuts, deregulation and yet more spending borrowed money in the hope of creating an economic boom before the next election – assuming that the government lasts that long, of course.

Anonymous said...

If you look at the "government" within the Government (DC and the SpAds) they are mainly from the Taxpayers Alliance, so more tax is out and less tax is in.

Printing money may be in if it trashes sterling - the first choice of most UK government of any hue.

Then there is always austerity aka cuts aka efficiency drives.

But to deliver these revolutionary changes needs something more that SpAds. It requires numbers in the House which they don't have.

Brexit perhaps but not much after that.

Anonymous said...

Surely if our exports to the EU drop. Our £ value drops and keeps dropping until our exports to the rest of the world increase by exactly the factor that doesn’t go to the EU anymore?

Or are we dealing in MSM talk here? Where whatever the value of trade is today, is somehow fixed eternally at this point and can only ever go down.

AndrewZ said...

@Anonymous at 7:37pm, the Single Market removes all the regulatory barriers between EU member states and the Customs Union removes the (much less important) tariff barriers. That gives British exporters unrestricted access to the markets of our nearest neighbours. “No Deal” means we lose a great deal of that access. Exporting to the EU becomes more difficult and more expensive and some products may not be allowed in at all, so the volume of trade drops.

But it is difficult for companies to find new customers in other, more distant markets so some won’t survive long enough to do it. The time and expense required to ship goods over long distances (e.g. to the USA) will also make British suppliers less attractive to potential customers in those markets than more local suppliers. Regulatory barriers and cultural differences will affect the delivery of services. Also, none of the trade deals that we will have with countries outside the EU will provide the same level of market access as the Single Market.

So, a fall in the pound will not compensate for the reduction in access to our nearest foreign markets. Perhaps we can make it up in the long term but the short term will be tough.

Matt said...

What stops companies producing to EU standards?

Anonymous said...

Or, more pertinently, what would make Uk companies that ALREADY conform exactly to EU standards in every single one of the billion or so EU regulations, suddenly say , “ Nah! Let’s change all our spec so we can no longer export there.”

AndrewZ said...

@Matt at 8:38pm, @Anonymous at 9:10pm, it doesn’t matter if UK companies are producing goods to the exact same standards as EU companies if there is no legal framework for recognising that conformity. That’s what is missing in “No Deal”. There would be no formal relationship between the UK and the EU so there would be no documents that UK authorities could provide that would be accepted as proof that British exports did conform to EU standards. Therefore, the UK would be treated like any other “third country” and subjected to all the same restrictions.

Indeed, the EU can’t do anything else without falling foul of WTO “Most Favoured Nation” rules. You may wonder how enforceable those rules actually are, but if the UK gets special access to European markets then the United States and China will demand the same and they can back it up with very credible threats.

I understand that Brexit is about more than economics. I voted to leave on the principle of democratic accountability. But “No Deal” means a serious economic hit and you need to recognise that because it’s the regular citizens like us who will be paying the price, not the politicians who pretend that it will all be easy. I’m warning you that there’s a storm ahead and you need to prepare for it the best you can.

jim said...

Merely spaffing a bit more of our cash - either via a helicopter or via taxation will do no good at all. Such money will merely go on holidays, conservatories, cars or property or dividends, the traditional soakaways. Soon be back where we started.

Our economic neighbours have built up their economic structures over many years, we have neglected important sectors. In short our economic picture is poorly composed and crudely painted. Throwing money at it with a firehose is useless, it needs some careful re-drawing by a competent artist unafraid to upset apple carts.

The structure of our economy needs to change. The barriers that have prevented economic vibrancy for years need to be torn down. Proroguing seems in fashion, so prorogue the Green Belt and prorogue planning permission for say 10 years. Perhaps lease Norfolk to the Chinese, Brenda gets to timeshare with President Xi.

We might also go for two year parliaments, just to keep their minds on the job.

Nick Drew said...

Nobody's chipped in on MMT yet - any views?

andrew said...

No taxes or borrowing or printing money.

I think the BOE will issue a new form of cyptocurrency that has an open, centralised, non-anonymous ledger system (you can see who spent what, it will be fast and cheap, it can scale)

It will be pegged to a basket of currencies

The world is looking for a new reserve currency - the left pondians dont want it to be the USD, only europeans want the EUR, even the chinese dont want RMB

Indeed _really_ become the worlds financial centre.

Lets manufacture britcoin.

Matt said...


Your opinion is not shared by the Government.

Their advice on regulatory alignment in the event of no deal is here -

The only issue might be a new product that needs to be assessed by an EU recognised body. Existing products already sold in the EU will continue.

Things like the CE mark are self-certified anyway and so are only open to retrospective action if found to not be in conformance.

CityUnslicker said...

MMT - worthy of a post in its utter madness, beyond belief that anyone can fall for it. It literally was taken from magic money tree and formed as an idea of how to make that real for leftists.

As for UK, with a hard brexit there will be a good bit of money printing, the pound will sink anyway so, so what? As AndrewZ states, shifting away to more distant export markets will take a long time so big subsidies will be needed to boost demand in the UK to the point that most companies survive. Shot term, might work, medium term horrid, long term, job done. Governments only go for short or medium term though so no way Tories survive past 2024 9assuming election this year post Brexit to capitalise before the economic mess really deepens)

Jan said...

The whole world will be printing in the wake of the FED to stave off a global depression but here it will be blamed on Brexit of course! The money will go to government infrastructure projects. We've had our helicopter money in the form of PPI. Pity I didn't get any.

andrew said...

MMT - well, I will have a go in the furtherance of being told I am wrong :)

"MMT advocates argue that the government should use fiscal policy to achieve full employment, creating new money to fund government purchases"

MMT is no more mad than any system where you in aggregate give a govt some money and the govt in aggregate spends a bit more than that.

The difference between different approaches (disclaimer - I am not an economist) is who pays and when.

If the govt borrows 100m, spends it on whatever(*), taxpayers pay (say) 1.75m pa and then roll the debt over at whatever the rate is in 30 years time.
- future taxpayers pay

If the govt prints 100m and passes it into the financial system (QE) by buying bonds, spends it on whatever(*), in the short term this drives up the price of the stuff that new money was used to buy (shares, houses). In the long term the value of the currency is decreased. One would think that if total money supply was ~2400bn and of that 435bn is QE, one would expect the value of the pound to drop by ~18%.
Indeed, exchange rates in 2009 were around 1.6 a lot of the time and 1.6 * 0.82 = 1.312 - the current rate is 1.22.
So everyone who has GBP assets pays over time - but they were the ones who benefited from that asset inflation so the people who are the biggest dis-beneficiaries are people who did not have much in the way of assets at the time of QE.
- citizens who did not have lots of assets at the time of QE pay

If the govt prints 100m and passes it into the financial by spending it on whatever(*), In the long term the value of the currency is decreased.
- citizens with assets pay

So, no MMT is not nutjobbery, it is a tax on assets denominated in your local currency

It is also interesting to see what they think they should do wit the money
- government should use fiscal policy to achieve full employment

now, if the money spent really does allow unused resource (people) to be put to productive use (work) and that extra productive use is greater than the cost of making it so, the value of currency will not fall (*).

here is the real thing - what is whatever.
Money spent wisely and a profit made is good.
HS2 at 30bn with benefits of 50bn - good deal for the taxpayer - sensible
HS2 at 70bn with benefits of 50bn - bad deal for the taxpayer - nutjobbery

Money spent unwisely and a loss made is evil.

I think there is a dickens quote in there somewhere.

Matt said...
This comment has been removed by the author.
Matt said...

The problem with MMT is that governments do not have the discipline to stop at £100m. Take the example of Zimbabwe where they kept printing money until they couldn't afford the ink for new bank notes!

The austerity we have supposedly experienced (actually a increase in reality) is fuelling calls for more government spending. It's addictive - until it all goes wrong.

So once they let rip, and don't stop we get hyper-inflation. How does MMT deal with that? Supposedly, you tax the demand back out of the economy.

So in the end, all tax payers will pay for it. Of course, if it's a crazy Leftist government they will have exempted everyone from paying tax except for middle-age (or older) rich white men.

Not being daft, these will have seen the writing on the wall and buggered off. Leaving who holding the can?

Anonymous said...

Andrew - In your QE example, where you say the pound drops 18%. What is the 18% relative to?

If it's just the UK going through QE I get the example, pound drops so more expensive to import or go on holiday. However if every other major currency is money printing then wouldn't this lessen the impact?

andrew said...

but they did 800bn QE / more than 14770bn (M3 not M4) = under 5% - much less than us.

I do not understand exchange rates

Anonymous said...

You've been reading Rees-Mogg again

- "Lifetime employment will disappear as "jobs" increasingly become tasks or "piece work" rather than positions within an organization."
- "Many members of learned professions will be replaced by interactive information-retrieval systems."
- "The new society, and therefore the new culture, will be defined at one end by what machines can do better than people, by automation that will do away with increasing numbers of low-skill tasks, and at the other by the power that information technology gives to people who actually have the talent to take advantage of it."
- "When the state finds itself unable to meet its committed expenditures by raising tax revenues, it will resort to other, more desperate measures. Among them is printing money."

From the 'Sovereign Individual' by JRM's dad, whose conclusion is:

Out of the [economic] wreckage will emerge a new global dispensation in which a cognitive elite will rise to power and influence as a class of sovereign individuals commanding vastly greater resources who will no longer be subject to the power of nation-states and will redesign governments to suit their ends

Choose. But choose wisely.