[DaveO]

Re: Austerity gone too far? : Wed May 15, 2013 9:40 am  

LeighGionaire wrote:

All government borrowing is bad.

Why borrow money from banks (who create said money out of nothing and charge interest) when the government could just create the money themselves and spend it into the economy?

This is a daft argument. If you create money you devalue it and inflation goes up.

That is why Governments issue bonds to raise cash.

The bonds are fixed term and and fixed interest rates so those who buy the bonds thus loaning the government money take a view on whether or not its worth it but they also do it even the rate of return is low because the money is considered safe (when invested in UK bonds). This is very different than a simple loan.

Now given the interest rates the government can sell it's bonds at are very low it is pretty much a no-brainer to borrow with a view to using the money raised to generate growth in the economy thus ensuring a higher rate of return on the money borrowed than you pay in interest on the debt.

What is stupid is to sell bonds to raise money to pay for people to sit on their backsides and that is the crux of the argument regarding austerity having gone too far. The government is having to borrow to pay its bills and is borrowing very little in comparison to invest in boosting the economy.

The motivations given for auterity are false i.e. we will end up like Greece. It is complete tosh to say so, so you have to wonder at the reasoning behind it and many believe austerity (and the increasing debt that results) is a price the Tories see as worth paying to shrink the state.

So back to your original point of printing money, even if that were a viable solution I don't think there would be any interest in adopting it because simply getting out of our current economic hole isn't the sole agenda.

Re: Austerity gone too far? : Wed May 15, 2013 9:52 am  

DaveO wrote:

This is a daft argument. If you create money you devalue it and inflation goes up...

Psst: he hasn't heard about Germany after WWI.

Re: Austerity gone too far? : Wed May 15, 2013 12:03 pm  

DaveO wrote:

This is a daft argument. If you create money you devalue it and inflation goes up.

The banks have DOUBLED the money supply in the past ten years and although there has been some inflation (mainly in house prices) the world hasn't collapsed yet. Every day the government borrows more money from banks who create it from nothing and charge interest, how stupid is that when they could just create the money themselves and spend it into the economy?

Secondly creating new money does not automatically create inflation. If you create new money to pay somebody who's unemployed to make something, he or she is adding real wealth to the new money you created. For example pay a man £300 in new money to make some chairs, every chair he makes is new, real wealth. Printing new money can cause inflation but it isn't a certainty like you seem to think.

Anyway on another note I read the other day that the Government ran up over a £1000 new debt for every man woman and child in the country over the past 12 months. Anybody who thinks these government debts are repayable are living in cloud cuckoo land IMO.

Re: Austerity gone too far? : Wed May 15, 2013 12:33 pm  

LeighGionaire wrote:

If you create new money to pay somebody who's unemployed to make something, he or she is adding real wealth to the new money you created. For example pay a man £300 in new money to make some chairs, every chair he makes is new, real wealth.

It does not actually create new wealth. It seems to because the resources used and the environmental damage in economic activity are not valued in proper economic terms. If they were then most "economic" activity would not be economic. That fact that these things are not properly valued will result in the life-times of younger members of this forum in a something much worse than inflation.

[DaveO]

Re: Austerity gone too far? : Wed May 15, 2013 1:13 pm  

LeighGionaire wrote:

The banks have DOUBLED the money supply in the past ten years and although there has been some inflation (mainly in house prices) the world hasn't collapsed yet. Every day the government borrows more money from banks who create it from nothing and charge interest, how stupid is that when they could just create the money themselves and spend it into the economy?

It depends on what you want to do with the money. There is an argument that the money the B of E created to give to the banks via quantitative easing so they had money to lend in an attempt to kick-start the economy would generate more economic activity if it were parachuted into every citizens pocket.

However be that as it may you still seem to be under the impression the government is borrowing at some punitive rate off the banks. They aren't. To borrow they issue bonds as I explained. Printing money is not an alternative to that.

We then have the other aim which is to increase the money supply which is when the B of E employs quantitative easing. That isn't borrowing.

You also seem to be saying the fact money supply increases due to fractional reserve banking can or should be replaced by the B of E printing the cash instead. That would simply devalue the currency even faster than we have seen due to the amount of quantitative easing already occurred and inflation would rocket not just go up as the currency devalued more and more.

Secondly creating new money does not automatically create inflation. If you create new money to pay somebody who's unemployed to make something, he or she is adding real wealth to the new money you created. For example pay a man £300 in new money to make some chairs, every chair he makes is new, real wealth. Printing new money can cause inflation but it isn't a certainty like you seem to think.

Well its not like you think that is for sure. You are on about printing billions with the aim of increasing the money supply without that being backed by any kind of asset value. That is nuts.

When they use QE the B of E uses the money it prints to buy assets off banks. The banks then in theory lend the money on (at low interest rates because you don't do QE when interests rates are not low). This policy may or may not work in its aim but you can't just print money as an alternative way to increase the money supply.

Anyway on another note I read the other day that the Government ran up over a £1000 new debt for every man woman and child in the country over the past 12 months. Anybody who thinks these government debts are repayable are living in cloud cuckoo land IMO.

A different issue and so long as the interest on the debt is serviceable that doesn't really matter.

Re: Austerity gone too far? : Wed May 15, 2013 3:04 pm  

LeighGionaire wrote:

Secondly creating new money does not automatically create inflation. If you create new money to pay somebody who's unemployed to make something, he or she is adding real wealth to the new money you created. For example pay a man £300 in new money to make some chairs, every chair he makes is new, real wealth. Printing new money can cause inflation but it isn't a certainty like you seem to think.

Yes it does increase inflation. To use your example, that £300 given to the chair maker increases demand in various markets. Say he uses £200 of it to actually make the chairs then that's increases demand for the materials he uses to make the chairs, plus any other costs like electricity etc and he uses £100 to live on whilst he makes the chairs, so that's an increase in demand for food, water etc

Re: Austerity gone too far? : Wed May 15, 2013 3:20 pm  

Him wrote:

Yes it does increase inflation. To use your example, that £300 given to the chair maker increases demand in various markets. Say he uses £200 of it to actually make the chairs then that's increases demand for the materials he uses to make the chairs, plus any other costs like electricity etc and he uses £100 to live on whilst he makes the chairs, so that's an increase in demand for food, water etc

But if there were spare capacity in supply of those things that may be purchased (ie in recessionary times where stimulus were needed) would it create inflation?

Re: Austerity gone too far? : Wed May 15, 2013 7:55 pm  

Dally wrote:

But if there were spare capacity in supply of those things that may be purchased (ie in recessionary times where stimulus were needed) would it create inflation?

Yes. The price would be higher than it would have been. It doesn't mean it's a bad thing to do, the benefits in increased demand, higher employment etc might outweigh the negative of higher inflation.
In a recession (or recession-like conditions) it would make sense for the government to fill some of the demand gap by a combination of higher borrowing and temporarily printing money. (So long as the printing of money is controlled by a body other than the government. Ie the Bank of England)

Re: Austerity gone too far? : Wed May 15, 2013 8:05 pm  

Him wrote:

Yes. The price would be higher than it would have been. It doesn't mean it's a bad thing to do, the benefits in increased demand, higher employment etc might outweigh the negative of higher inflation.
In a recession (or recession-like conditions) it would make sense for the government to fill some of the demand gap by a combination of higher borrowing and temporarily printing money. (So long as the printing of money is controlled by a body other than the government. Ie the Bank of England)

But why would prices increase just because demand increased when there was spare capacity and maybe unsold stocks? It is possible to print money without inflation but the danger comes if the printing goes on too long. and that's something that can only be judged in hindsight.

Re: Austerity gone too far? : Wed May 15, 2013 8:43 pm  

Dally wrote:

But why would prices increase just because demand increased when there was spare capacity and maybe unsold stocks? It is possible to print money without inflation but the danger comes if the printing goes on too long. and that's something that can only be judged in hindsight.

Because if there's spare capacity and unsold stock then companies have to lower their prices to sell that stock, if they don't sell anything they'll go out of business pretty bloody quickly. Prices won't necessarily go up, but will either stay stable or not decrease by as much. So prices and inflation are higher than they would have been, which is an increase.
It is almost impossible to print (and effectively use) money without inflation, but there might be additional deflationary factors that are either stronger or even it out.