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Bank of England to directly fund UK Government Spending

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  • Registered Users Posts: 2,314 ✭✭✭KyussB


    Geuze wrote: »
    Paul de Grauwe calls for monetary financing of budget deficits, and says the higher price level is a price worth paying.

    https://voxeu.org/article/what-price-pay-monetary-financing-budget-deficits-euro-area
    That article relies on the largely debunked Quantity Theory of Money, in trying to model inflation - he also says QToM applies in the long-term, yet he is applying QToM to analyze the short/medium-term. That is bad economics.

    One of the core things the QToM depends on for its validity, is the concept of the neutrality of money (the idea that the stock of money doesn't affect the 'real' economy, only affecting nominal variables) - which is also false and bad economics - and it's very easy to show that money is not neutral: Debt.
    Inflation and deflation affect the 'real' value of debts (reducing and increasing it), and this has a real effect on the economy - e.g. through debt deflation.


  • Registered Users Posts: 12,993 ✭✭✭✭Geuze


    KyussB wrote: »
    One of the core things the QToM depends on for its validity, is the concept of the neutrality of money (the idea that the stock of money doesn't affect the 'real' economy, only affecting nominal variables) - which is also false and bad economics - and it's very easy to show that money is not neutral: Debt.
    Inflation and deflation affect the 'real' value of debts (reducing and increasing it), and this has a real effect on the economy - e.g. through debt deflation.


    Is it not the case that money neutrality more or less holds over the long-run?

    But that in the SR, the classical dichotomy breaks down, and money and prices can affect the real economy, like the debt-deflation theory?

    The debt-deflation process will only work with unexpected inflation?


  • Registered Users Posts: 12,993 ✭✭✭✭Geuze


    KyussB wrote: »
    That article relies on the largely debunked Quantity Theory of Money, in trying to model inflation - he also says QToM applies in the long-term, yet he is applying QToM to analyze the short/medium-term. That is bad economics.

    They do defend/justify the use of the QTM.


  • Registered Users Posts: 2,314 ✭✭✭KyussB


    Debt deflation has been going on for decades in Japan. The effects of inflation and deflation on debt have a real and often long term effect on the economy, even without debt-deflation as an example - as e.g. for long term mortgage holders, it affects peoples lifetime spending and quality of life etc..

    Be suspicious of when theories shift from a 'strong' to a 'weak' form, citing 'in the long run' often coupled with ceteris-paribus i.e. 'all other things held equal' - they are often (but not always) variations of holding on to dead theories, by assuming multiple can openers.


  • Moderators, Science, Health & Environment Moderators, Society & Culture Moderators Posts: 3,368 Mod ✭✭✭✭andrew


    KyussB wrote: »
    That article relies on the largely debunked Quantity Theory of Money, in trying to model inflation - he also says QToM applies in the long-term, yet he is applying QToM to analyze the short/medium-term. That is bad economics.

    One of the core things the QToM depends on for its validity, is the concept of the neutrality of money (the idea that the stock of money doesn't affect the 'real' economy, only affecting nominal variables) - which is also false and bad economics - and it's very easy to show that money is not neutral: Debt.
    Inflation and deflation affect the 'real' value of debts (reducing and increasing it), and this has a real effect on the economy - e.g. through debt deflation.
    KyussB wrote: »
    Debt deflation has been going on for decades in Japan. The effects of inflation and deflation on debt have a real and often long term effect on the economy, even without debt-deflation as an example - as e.g. for long term mortgage holders, it affects peoples lifetime spending and quality of life etc..

    Be suspicious of when theories shift from a 'strong' to a 'weak' form, citing 'in the long run' often coupled with ceteris-paribus i.e. 'all other things held equal' - they are often (but not always) variations of holding on to dead theories, by assuming multiple can openers.

    I really don't think that the QTOM has been as debunked as you think it has been, and when someone cites an article by someone who definitely knows what they're talking about then I think it warrants a more considered response than 'they're wrong'.


    My understanding is that there is some decent econometric evidence out there at money is neutral in the long run but that there is some variation in the strength of the effect and the extent of the effect cross countries. Though it's not a new theory, even a quick Google scholar search shows that it's still an active area of research. That indicates to me that it's not quite as open and shut a case as you're suggesting.
    s for trading value (i.e. foreign exchange): As long as a country produces goods that other countries want to buy, and need to exchange into the local currency in order to buy - then that solidifies the demand, that will keep a currencies trading value.

    As for the value of the currency itself: As long as the government isn't pouring money into supply constraints/bottlenecks - which would cause inflation - then there is ample room for spending in this manner. General rule is government stops spending when Full Output is reached - and that point, is roughly around the point of Full Employment - otherwise they'll be pushing inflation.

    The quotes i have in bold are the key things for me. Leaving aside the Economics of it, I don't think those preconditions could ever be met consistently.


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  • Registered Users Posts: 2,314 ✭✭✭KyussB


    andrew wrote: »
    I really don't think that the QTOM has been as debunked as you think it has been, and when someone cites an article by someone who definitely knows what they're talking about then I think it warrants a more considered response than 'they're wrong'.


    My understanding is that there is some decent econometric evidence out there at money is neutral in the long run but that there is some variation in the strength of the effect and the extent of the effect cross countries. Though it's not a new theory, even a quick Google scholar search shows that it's still an active area of research. That indicates to me that it's not quite as open and shut a case as you're suggesting.



    The quotes i have in bold are the key things for me. Leaving aside the Economics of it, I don't think those preconditions could ever be met consistently.
    Don't paraphrase me as merely saying "they're wrong", when I've provided direct counterpoints to the QToM - that is extremely lazy when I've provided detailed arguments.

    You saw me point out how changes in the value of money (inflation/deflation), affect the real value of debts - and that this leads to decades-long effects on the real economy in many cases, e.g. through debt-deflation like in Japan lasting multiple decades (among other examples).

    This means that in the long-term, changes in the value of money affect real variables in the economy - disproving both the short and long term versions of QToM.

    There is no evidence for the QToM - there is only evidence of a loose correlation between the money supply and the value of money. That is not evidence that the QToM explains that correlation. It explicitly can't be evidence of that, as long-term debt-deflation (among other effects of debt on the real economy) excludes the QToM from ever explaining that, or anything else.

    That means any correlation between the money supply and the value of money, must have an explanation other than the QToM.


  • Closed Accounts Posts: 68 ✭✭Banner fights back


    Bank of England governor Andrew Bailey telling sky news today that Britain was on the brink of economic insolvency due to the volatility in the financial markets and that the bank had to intervene by actively buying government bonds or gilts to ease pressure on the price the UK govt had to pay to borrow on the international financial markets.

    What are the chances of the UK getting into the same financial crisis when Brexit commences on the 1st of January 2021? What happens in the event of there being a second wave of covid 19? IMO this is a deeply troubling development for a supposed "triple A" credit rating nation. Their debt to GDP ratio is over 100% and rising.

    Those that think Brexit is the "best thing to happen to the UK" should think very carefully about what they wish for if events like in the early stages of covid 19 that caused market Armageddon during March of this year are replicated again.


  • Registered Users Posts: 2,314 ✭✭✭KyussB


    Here's an article on it:
    https://www.theguardian.com/world/2020/jun/22/britain-nearly-went-bust-in-march-says-bank-of-england

    Key point there is, that the UK can only become insolvent if the BoE chooses to voluntarily allow the UK to become insolvent.

    The UK (as a state which includes the BoE and the UK government, including full control over legislation/laws) - can never involuntarily become insolvent.

    So it's pretty much a non-story. The BoE isn't going to just implode the UK economy by voluntarily allowing the country to become insolvent.

    What it should get people asking, is whether there's any point pretending central banks have any independence. If the BoE are forced to help fund the UK government (even indirectly), because the UK will never be allowed become insolvent - then they aren't really independent, it's just a facade of independence.


  • Registered Users Posts: 13,104 ✭✭✭✭Danzy


    Bank of England governor Andrew Bailey telling sky news today that Britain was on the brink of economic insolvency due to the volatility in the financial markets and that the bank had to intervene by actively buying government bonds or gilts to ease pressure on the price the UK govt had to pay to borrow on the international financial markets.

    What are the chances of the UK getting into the same financial crisis when Brexit commences on the 1st of January 2021? What happens in the event of there being a second wave of covid 19? IMO this is a deeply troubling development for a supposed "triple A" credit rating nation. Their debt to GDP ratio is over 100% and rising.

    Those that think Brexit is the "best thing to happen to the UK" should think very carefully about what they wish for if events like in the early stages of covid 19 that caused market Armageddon during March of this year are replicated again.

    With this BoE move the risk is changed. The BoE is one of the few that have set up to face any economic crisis.


  • Registered Users Posts: 2,314 ✭✭✭KyussB


    An incredibly good economics documentary is The Age of Uncertainty by John Kenneth Galbraith (it's a bit hard to find, the YouTube version isn't complete - need to go hunting for 'alternative' sources) - am rewatching it, and this episode covers the history of money and (23min in) partially of the BoE, including money creation in the American Revolution - really interesting, recommend the whole series:


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