tag:blogger.com,1999:blog-7820485130017459619.post7852140205201343140..comments2023-10-24T01:46:47.151-07:00Comments on CynicusEconomicus: UK Government Borrowing - Where is the Money Coming From?Unknownnoreply@blogger.comBlogger7125tag:blogger.com,1999:blog-7820485130017459619.post-59484171951089643492009-05-24T06:43:41.787-07:002009-05-24T06:43:41.787-07:00so, i deposit 10k in the bank and 10% is held as "...so, i deposit 10k in the bank and 10% is held as " leagal reserve " (£1000)and the other 9k is use to fund other depositors loans. And his/her`s monthly deposits of that loan are also used to build up a loan to another body who filed for a loan (-10%).<br /><br />And theres me thinking pyramid schemes were highly illeagal in this country.Unknownhttps://www.blogger.com/profile/12838518048896311120noreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-3953268493574487702009-01-10T09:21:00.000-08:002009-01-10T09:21:00.000-08:00Very interesting article AND comments. I will just...Very interesting article AND comments. I will just address B33ENN.<BR/>Yes, savers money are used as a reserves - so what? Banks still need that money to create reserves - to create the "new money" for lending. So the basic idea was right...?<BR/>Regards,<BR/>JayAnonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-45598382644502079852009-01-09T16:21:00.000-08:002009-01-09T16:21:00.000-08:00Large numbers being hard to comprehend, I'm gratef...Large numbers being hard to comprehend, I'm grateful to the Daily Mash for explaining matters in terms I can more easily grasp:<BR/><BR/>http://www.thedailymash.co.uk/politics/politics-headlines/national-debt-to-reach-christ-on-a-bike-200811251417/Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-44379570462086066682009-01-09T15:03:00.000-08:002009-01-09T15:03:00.000-08:00You raise very good questions!Forgive my ignorance...You raise very good questions!<BR/><BR/>Forgive my ignorance, if the government are currently engaged in covert "quantitative easing" how will this manifest itself in months/years to come? (apart from a surprising ability to raise required funds). In the official inflation figures? In hidden inflation, not officially reported?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-2745003962477025572009-01-09T06:39:00.000-08:002009-01-09T06:39:00.000-08:00Dear Cynicus,I differ with you on some of your con...Dear Cynicus,<BR/><BR/>I differ with you on some of your conclusions here.<BR/><BR/>“...if savers are not depositing money with the banks, where is the savers' money actually going to go?”<BR/><BR/>I would suggest the larger savers will either convert to real physical assets, such as property, precious metals etc. Smaller holdings would probably look for transfers to the largest, most secure banks, probably international/foreign banks.<BR/><BR/>“...on government borrowing, they are competing with private companies for the stock of available capital.”<BR/><BR/>I disagree. In attempting to borrow our way out of the crisis, the Government is acting as guarantor of the debt on behalf of the real borrowers in the economy. For instance, if a person is fresh out of university, and has a limited or even poor credit score, they might find it hard to secure a mortgage, or even rental agreement. In this case, a lender may offer the loan if say, the person’s perants were willing to act as guarantor of the debt. If the person therefore could not support the debt, the lender would have right to reclaim funds from the perants, who would have a much better credit score and/or, have real assets to back up the loan.<BR/><BR/>It is my opinion, the government is acting in this capacity. They are not competing for the loans. They are facilitating loans to businesses/banks/individuals that are being declined loans because they are now seen as a greater credit risk.<BR/><BR/>“...In a 'normal' situation, people deposit money with the bank, the bank then uses that money to lend to business and consumers.”<BR/><BR/>This is not exactly as I understand the mechanism. Yes, the banks do use the reserves as a basis for lending. However, the banks actually use the reserves as margin for leveraged lending. In simpler terms, they create “new money” in the form of new loans by amplifying the reserves according to the fractional reserve lending criteria. So for example, if a bank holds £10 in saved deposits, it then can create a further £90 worth of loans. These loans then become “real money” in the economy flowing out through business and individuals who borrowed and then deposit it into more banks that repeat the exercise until you reach a maximum amount that can be created from that first £10.<BR/><BR/>“...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.”<BR/><BR/>The bank that sits on top of this heap, the so-called “lender of last resort”, is the central bank of the nation (BoE to us) which is a private organisation given a legal monopoly to create “legal tender” fiat money for the UK. This bank doesn’t actually have any money to lend. It creates money when required based on debt obligations received from the government (gilts). It then offers to lend this money to the retail banking sector. Without going further into the workings of the system, the point is that I believe, they are always “printing money” as the cash the central bank gives us is not backed by any physically limited commodity.<BR/><BR/>The problem that has now occurred is that the retail banks are over extended and cannot pay up the interest without cutting back lending, and liquidating peoples assets. If they do this, the result will be homes repossessed, businesses going bust, and people without jobs. That is the asset reclamation phase, i.e. the recession/depression – or the nasty side of the business cycle.<BR/><BR/>Understandably, to prevent this political nightmare, the government is offering to be guarantor of those bad debts, and so rather than cause a nasty recession to pay off the over-extended boom time growth, they are in effect, taking on those debts on behalf of the economy. However, why should the government be able to do this? Why would the BoE lend to government?<BR/><BR/>Well, again in my opinion, it is because the government is the Bank’s most valuable client, and has a higher net worth than any business or individual in the economy. It has guaranteed income from tax by law, the highest income in the country apart from the Bank itself. But, as we can see, the BoE is not convinced the government could take on so much more debt without major tax increases. So what guarantee does the Bank have that in the event of non-payment, it will still get something back?<BR/><BR/>Well, in the 70’s when the British Government had a similar problem, they took out massive loans from the Bank (the IMF at that point) to sort out the immediate economic downturn. After this, the next government came to power on a mandate to sort out the economy. During the 80’s Thatcher government, Britain appeared to completely sell off many government owned (public) assets and this continued through the 90’s with subsequent leaders. An economic miracle in the form of the rise of the Financial Services industry diverted attention from the consistent asset stripping from public to private hands. Whatever companies bought these assets or took controlling share, the money to do so came from banks, and just like any mortgage, ultimately the banks own it until it is completely paid off.<BR/><BR/>Strangely enough, in the last 10 years the Blair/Brown continuum has also been selling assets in the name of privatisation. I believe a large quantity of gold reserve was sold off when the market was at its lowest, the Royal Mail has slowly been moving to complete privatisation into foreign hands, the nuclear energy industry is now in the hands of the French (public company) EDF. I’m sure others can name more examples.<BR/><BR/>I believe the latest “fiscal stimulus” measures are going to be collateralised against whatever remains in public hands. The BoE itself is thought of as a public government institution since 1946, but there is much belief that it ceased to be so shortly after the 1976 economic crisis mentioned before. And it has slowly been transformed during these Labour years and is now no longer even a government department, and its legal obligations to account have been stealthily neutralised (i.e. the money printing change of disclosure), and it has independence over monetary policy, and is so becoming very similar to the format of the US Fed, ECB and international IMF that is composed of all these independent central banks.<BR/><BR/>I think we shouldn’t be too surprised if in a few years once we are “booming” again, we find the Government, whichever party, suggests it would be more “efficient” to sell off the NHS hospital by hospital, surgery by surgery to private interests who are much more experienced in handling a modern medical infrastructure than we backward Brits.Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-20067760308563599342009-01-09T04:09:00.000-08:002009-01-09T04:09:00.000-08:00Yes I, too, noticed Alistair Darling's weaselly wo...Yes I, too, noticed Alistair Darling's weaselly words last night.<BR/><BR/>Mark you say "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."<BR/><BR/>Revealing my ignorance and confusion: as I understand it, the money that people deposit with the banks has previously been created temporarily by that bank, or other banks, as loans (fractional reserve banking and all that) and almost all money in circulation exists only temporarily in this way. These loans have to be repaid over time, whereupon the money vanishes under FRB. Apparently this system, in itself, is considered 'sound' i.e. when an economy is growing, at least partly via this mechanism, with low price inflation, the exchange rate of the currency does not reduce and the amount of money in circulation is considered to be appropriate to the amount of economic activity taking place. (Yes, I know that such an apparent equlibrium may just be an illusion!)<BR/><BR/>However, I see no difference in principle between the commercial banks printing temporary money, and the government effectively printing temporary money *except* that under normal circumstances there is a demand for a loan from a private citizen or organisation, rather than a government decree that money should be spent on something. However, as we know, there is no law that says that commercial banks or private citizens and organisations have a monopoly on wisdom - an imaginary government might possess much more wisdom than its electorate.<BR/><BR/>Yes, I know they'll cock it up, and we're starting from a fundamentally bad position, but economically what is the big objection *in principle* to a government printing temporary money and spending it in the economy, as long as they get it to the 'right' places?Anonymousnoreply@blogger.comtag:blogger.com,1999:blog-7820485130017459619.post-39117391483621488862009-01-09T01:54:00.000-08:002009-01-09T01:54:00.000-08:00Excellent post. If quantitative easing leads to i...Excellent post. If quantitative easing leads to inflation investors would be crazy to buy government bonds.Thoughtshttps://www.blogger.com/profile/17866896441731516034noreply@blogger.com