Of particular interest at the moment is the way in which the UK government is making itself ever more central to the economy and how it is achieving this. An article in the Times was a prompt for me to discuss this:
The lowest interest rate in the history of the Bank of England will deter savers from depositing money and further undermine troubled banks, it was claimed yesterday.
Two thirds of savings accounts are set to pay less than 1 per cent after the Bank cut the cost of borrowing to 1.5 per cent yesterday. It has now cut interest rates by 3 percentage points in as many months.
Financial experts warned that the ultra-low rates would not boost the stalled economy.
Essentially, the underlying point of the article is that, without savers depositing money into the banking system, the banks ability to lend will continue to become constrained. However, the article does not follow this train of thoughts as far as it should.
There are several problems here. One of them is that, if savers are not depositing money with the banks, where is the savers' money actually going to go? It is not entirely clear, and I will confess that I do not have an answer.
The other problem is that the government is currently borrowing huge sums of money to support the neo-Keynesian boosting of the economy. In so doing, as I explained a long time ago in my post on government borrowing, they are competing with private companies for the stock of available capital. At its most basic, for every unit of capital borrowed by government, there is one less unit available for private industry, or at least in principle (more on that later).
As such we have two constraints on credit to private business. On the one hand we have the deterrence of deposits into the banking system, and on the other hand we have government borrowing soaking up large amounts of the limited capital available. Put simply, the government has engineered a situation in which there is likely to be a shortage of capital available for lending into business. This is a rather curious outcome to pursue.
However, governments believe that they can get around this capital shortage for business by acting as a lender to troubled businesses, by offering bailouts of businesses which it determines are strategic and so forth. Furthermore, it is becoming the 'capitaliser' of the banking system, with ever more measures in prospect to overcome the problems that the banks do not have enough money to lend into business. As you will note, there is something rather circular in all of this.....
In a 'normal' situation, people deposit money with the bank, the bank then uses that money to lend to business and consumers. Thus money is channeled through the economy. The situation now is that people do not want to deposit money in banks, so the government borrows money from the banks in order to lend money to the banks, and then the banks continue to lend the money to the government. The government then uses the money to provide Keynesian boosts to the economy to support the economy, and bailouts of chosen industries, and supports business through creation of activity in the economy.
At this point, you may be noting that governments are placing themselves in a position in which all economic activity rests upon the role of government as the ultimate creditor. The central problem in this scenario is that governments themselves are net borrowers. How can a net borrower become the main creditor?
It is here that we come to a significant problem. At present, across the whole of the OECD (now including Germany), governments are all borrowing huge sums of money. I do not have figures for the aggregate borrowing, but we can safely assume that, with the US alone projecting a $US 1.2 trillion deficit, we are dealing with some extreme numbers. Where is all of this money coming from?
Are the big creditor nations still financing all of this? There have been many indications of late that they have been pulling back from such lending and, even if they were lending, do they have sufficient finance to support such massive levels of borrowing from so many countries?
The reality is that there is something fundamentally wrong with all of this. I have posted before on the subject of printing money, and the US is openly undertaking this and the UK possible already covertly doing so (see post here). The idea that the Bank of England is thinking of printing money is firmly 'out there', but is it already doing so? This from the Telegraph:
'Other potential moves include using more taxpayers' money to re-capitalise banks, wholesale nationalisation or printing more money to buy up government or commercial debts'
To this end, I sent an email to the Bank of England on 31st December. I do not like conspiracy theory so in light of my concerns about covert money printing, I thought it would be better to end the uncertainty. The email I sent was as follows:
I am an online publisher and have been made aware of a matter of some concern. In particular the latest banking bill saw the following provision:As you will guess, I have not been given a reply. It is quite possible that, as an unimportant blogger, they simply do not want to bother to reply. On the other hand, it is quite possible that they simply do not want to reply on the basis that an honest answer is not possible. I have no certainty as to which would be the correct interpretation, and that is the benefit for the BoE in giving no reply at all.
235 Weekly return
Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall cease to have effect.
The section in question was the following:
6 Weekly account in form in schedule (A.) to be rendered by the Bank of England
… An account of the amount of Bank of England notes issued by the Issue Department of the Bank of England, and of gold coin and of gold and silver bullion respectively, and of securities in the said issue department, and also an account of the capital stock, and the deposits, and of the money and securities belonging to the said governor and company in the banking department of the Bank of England, on some day in every week to be fixed by the [Commissioners for Her Majesty’s Revenue and Customs], shall be transmitted by the said governor and company weekly to the said commissioners, in the form prescribed in the schedule hereto annexed marked (A.), and shall be published by the said commissioners, in the next succeeding London Gazette in which the same may be conveniently inserted.
I have two questions regarding the abolition of this provision, as follows:
1. Can you explain why this provision was abolished. For example, although the London Gazette is no longer an appropriate publication, why did you not change the provision to the BoE website?
2. Can you confirm that you will continue the policy of full disclosure implied in the 1844 Act, including full disclosure of measures that are resultant from quantitative easing?
Thank you in advance for a clear and direct answer, and please note that your response may be published in full.
An interesting perspective on this is provided in a BBC news article (thanks to the commentator who provided the link). It can be noted in the comments by Alastair Darling that there is a denial of 'printing money'. It is quite possible to deny 'printing money', as nobody is proposing that the BoE will be churning out physical bank notes. However, this is not the denial of a policy of quantitative easing, which is a policy with an identical outcome, just without the physical printing press. In this confusion of terminology there are plenty of places to hide. This is what was said by Alistair Darling:
"Nobody is talking about printing money," he said.
"There's a debate to be had about what you do to support the economy as interest rates approach zero, as they are in the United States, but for us that is an entirely hypothetical debate.
"We are looking at a range of measures to support the economy, to support business and to help people, but nobody is talking about printing money."'
In short, he does not discuss quantitative easing.
The essential problem is this. It is quite possible that depositors are not depositing money in the banks. We know that the UK government is spending like a drunk. We know that worldwide there is a massive demand for finance. We know that, with a falling £GB, low interest rates, the UK will not look at all attractive as an investment opportunity. This from Bloomberg on January 7:
Britain may overwhelm bond investors with a record number of quarterly debt sales, risking the first failed auctions since 2002 as the economy sinks into the worst recession since World War II.
“I’m not predicting that we will have failed auctions, but I can’t rule that out,” Robert Stheeman, chief executive officer of the U.K. Debt Management Office, or DMO, said in an interview last month. “It’s a big amount of debt to be sold. We are in a very different world than we were six months or a year ago. But I believe it’s a challenge that both we as an organization and the market will be able to meet.”
The DMO, which oversees auctions of so-called gilts for the Treasury, today held the first of 20 sales earmarked for January through March, selling 2 billion pounds ($2.98 billion) of 4.75 percent bonds due 2038. The U.K. said it plans an unprecedented 146.4 billion pounds of debt sales in the fiscal year ending March 31 as Prime Minister Gordon Brown’s government seeks to finance bank bailouts and revive the shrinking economy amid a decline in tax revenue.
Somehow, the government is managing to borrow enough money to serve as the centre of the economy as creditor in chief. If deposits are not being made in the banks (a big if), and if there is less opportunity to raise international finance (a relatively small if), then what is the source of the money that the government is spending?
The question that is being raised in my mind is one for which I do not have a clear answer.