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Increased tax, higher unemployment & economic difficulties

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AsleepInYorkshire
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Increased tax, higher unemployment & economic difficulties

#347261

Postby AsleepInYorkshire » October 13th, 2020, 8:42 am

Tax rises of more than £40bn a year 'all but inevitable'

Taxes rises of more than £40bn a year are 'all but inevitable' to protect UK government debt from spinning out of control, a think tank has warned.

Potential Headwinds
  1. Increasing unemployment
  2. Recession
  3. Brexit
  4. Increased taxation
  5. The national debt
  6. Lingering Covid 19
I am beginning to feel as if the potential conditions for a perfect "economic downturn" are beginning to press home there advantage. Speculatively there could be another decade, at least, of economic misery. Whilst there will be opportunities during such [potential] circumstances there will also be many traps.

AiY
*Bearish

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Re: Increased tax, higher unemployment & economic difficulties

#347274

Postby doug2500 » October 13th, 2020, 9:24 am

Hard to disagree. The only saving grace being that most issues are global rather than UK specific, to a certain extent anyway.

It might remove the competitive element e.g. where do you put capital that's any better?

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Re: Increased tax, higher unemployment & economic difficulties

#347286

Postby odysseus2000 » October 13th, 2020, 9:52 am

AsleepInYorkshire wrote:Tax rises of more than £40bn a year 'all but inevitable'

Taxes rises of more than £40bn a year are 'all but inevitable' to protect UK government debt from spinning out of control, a think tank has warned.

Potential Headwinds
  1. Increasing unemployment
  2. Recession
  3. Brexit
  4. Increased taxation
  5. The national debt
  6. Lingering Covid 19
I am beginning to feel as if the potential conditions for a perfect "economic downturn" are beginning to press home there advantage. Speculatively there could be another decade, at least, of economic misery. Whilst there will be opportunities during such [potential] circumstances there will also be many traps.

AiY
*Bearish


I want to agree with you as it all makes sense and yet I don't.

I expect people to find new ways of prospering and that this will lead to changes in a number of ways of doing business leading to declines in some traditional business more than balanced by rises in many other business.

If we compare now with the UK economy in 1945, we are in a hugely better position and yet once the rationing and price controls of that era were abolished the UK boomed and within 15 years we had the swinging 60's.

I expect that remote or e-working will become the way that much of the service sector operates and this will hurt the commercial property industry while at the same time lead to effective wage rises for workers who will no longer have to pay commuting charges and also kill off a lot of the service sector that existed to support the needs of office workers. This will lead to new opportunities and good times for suppliers of remote working equipment and builders and such who will adapt houses, build extensions etc to create remote offices etc.

The biggest danger to this radical change are the politicians and their love of making rules. However, the recent moves to remove the animal welfare and food safety standards on imported food is indicative of the current government wanting to remove restrictive practices. This is terrible news for animals, the quality of UK food and UK farmers, but suggests that the politicians are intent on free trade and that means lower prices albeit with lower quality.

At the same time there are two clear secular themes in the economy: Renewable energy and electric cars. Both of these will require capital and labour and will directly put money into the UK economy.

If Brexit happens the UK will also have its own floating currency free from the influence of EU regulations and that will lead to the opportunities that come from either a weak or strong £, a huge competitive advantage compared to say Italy who are stuck with an exchange rate on the Euro that is more suited to the German manufacturing industry.

Regards,

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Re: Increased tax, higher unemployment & economic difficulties

#347337

Postby ursaminortaur » October 13th, 2020, 11:58 am

odysseus2000 wrote:
AsleepInYorkshire wrote:Tax rises of more than £40bn a year 'all but inevitable'

Taxes rises of more than £40bn a year are 'all but inevitable' to protect UK government debt from spinning out of control, a think tank has warned.

Potential Headwinds
  1. Increasing unemployment
  2. Recession
  3. Brexit
  4. Increased taxation
  5. The national debt
  6. Lingering Covid 19
I am beginning to feel as if the potential conditions for a perfect "economic downturn" are beginning to press home there advantage. Speculatively there could be another decade, at least, of economic misery. Whilst there will be opportunities during such [potential] circumstances there will also be many traps.

AiY
*Bearish


I want to agree with you as it all makes sense and yet I don't.

I expect people to find new ways of prospering and that this will lead to changes in a number of ways of doing business leading to declines in some traditional business more than balanced by rises in many other business.

If we compare now with the UK economy in 1945, we are in a hugely better position and yet once the rationing and price controls of that era were abolished the UK boomed and within 15 years we had the swinging 60's.

I expect that remote or e-working will become the way that much of the service sector operates and this will hurt the commercial property industry while at the same time lead to effective wage rises for workers who will no longer have to pay commuting charges and also kill off a lot of the service sector that existed to support the needs of office workers. This will lead to new opportunities and good times for suppliers of remote working equipment and builders and such who will adapt houses, build extensions etc to create remote offices etc.

The biggest danger to this radical change are the politicians and their love of making rules. However, the recent moves to remove the animal welfare and food safety standards on imported food is indicative of the current government wanting to remove restrictive practices. This is terrible news for animals, the quality of UK food and UK farmers, but suggests that the politicians are intent on free trade and that means lower prices albeit with lower quality.

At the same time there are two clear secular themes in the economy: Renewable energy and electric cars. Both of these will require capital and labour and will directly put money into the UK economy.

If Brexit happens the UK will also have its own floating currency free from the influence of EU regulations and that will lead to the opportunities that come from either a weak or strong £, a huge competitive advantage compared to say Italy who are stuck with an exchange rate on the Euro that is more suited to the German manufacturing industry.

Regards,


Sterling is already a free floating currency without any currency ties to the EU since the UK unlike Denmark isn't shadowing the Euro in ERM II.
As to Brexit it has already happened and whether or not there is a bare-bones FTA the UK is going to suffer economically when the transition period ends. As to regulations/redtape that is going to massively increase for all imports/exports from/to the EU and also other parts of the world where the UK hasn't been able to fully rollover the EU's current agreements.

https://en.wikipedia.org/wiki/Denmark_and_the_euro

Denmark uses the krone as its currency and does not use the euro, having negotiated the right to opt out from participation under the Maastricht Treaty of 1992. In 2000, the government held a referendum on introducing the euro, which was defeated with 46.8% voting yes and 53.2% voting no. The Danish krone is part of the ERM II mechanism, so its exchange rate is tied to within 2.25% of the euro.

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Re: Increased tax, higher unemployment & economic difficulties

#347373

Postby ursaminortaur » October 13th, 2020, 1:21 pm

Snorvey wrote:Sterling is already a free floating currency without any currency ties to the EU

yes, but you missed the second part of Ody's statement....free from the influence of EU regulations

Hence, a large part of the current negotiations are focused around state aid and the EU keen to maintain a 'level playing field'.


I'm not sure how having the ability to massively increase state aid (going back to the failed policies of the 60s/70s when government tried to pick winners), especially when the government won't actually go as far as saying that is what they would actually do rather than them just fighting for the right to do so, would actually help the UK or Sterling.

https://www.mit.edu/afs.new/sipb/user/ayshames/Python/LORETTA.PYTHON

Judith: Here! I've got an idea. Suppose you agree that he can't actually
have babies, not having a womb, which is nobody's fault, not even the
Romans', but that he can have the *right* to have babies.
Francis: Good idea, Judith. We shall fight the oppressors for your right to
have babies, brother. Sister, sorry.
Reg: (pissed) What's the *point*?
Francis: What?
Reg: What's the point of fighting for his right to have babies, when he
can't have babies?
Francis: It is symbolic of our struggle against oppression.
Reg: It's symbolic of his struggle against reality.

NeilW
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Re: Increased tax, higher unemployment & economic difficulties

#347375

Postby NeilW » October 13th, 2020, 1:25 pm

AsleepInYorkshire wrote:Taxes rises of more than £40bn a year are 'all but inevitable'


Only inevitable for those who are hard of accounting.

To the rest of us, we just find the IFS completely laughable. They are a micro-economic setup way, way out of their depth on macro issues.

The actual answer is this:

UK Gilts are a financial asset issued by the UK’s National Loans Fund, and which are held as savings by individuals, pension funds and banks. They also represent the bulk of what is known as “National Debt”.

When those savings are finally spent, they become the earnings of another person. Both the spending and earnings are taxed. The remaining money is then spent again, becoming income for a further person. Again, both spending and income are taxed. And so on, until all that was spent from savings turns into tax.

In effect, Gilt savings assets pay themselves off once the person holding them decides to spend their savings. The “debt” pays for itself.

There is no need to change tax rates or look for new taxes to make the numbers look better. The numbers will always sort themselves out eventually at any positive tax rate. Taxes have a different purpose in a modern money economy.


In terms of government debt

The UK Government spends via the Consolidated Fund and can only ever be in debt to the National Loans Fund, as dictated by the National Loans Act 1968. Both the Consolidated Fund and National Loans Fund are administered by the Treasury with the bank accounts maintained at the Bank of England. The Consolidated Fund can be regarded as central government’s current account whereas the National Loans Fund can be regarded as central government’s main borrowing and lending account.

In essence, despite an elaborate Wizard of Oz routine to try and hide what is going on, when you look behind the curtain you find that when the Exchequer borrows it ends up owing itself.

As a matter of political policy, the National Loans Fund creates Gilts and regularly offers them for sale to the financial markets (via the Debt Management Office, which issues short term Treasury Bills in the same manner). If the financial markets decide to turn down this offer, they just end up with less interest income. In aggregate, their only alternative is to leave their Sterling savings on deposit at a bank or hold them as banknotes or coins.

The full matching rule, where Gilts and Treasury Bills are issued to match the level of loans from the National Loans Fund to the Consolidated Fund, is a political decision by the UK government based upon its belief about how monetary policy works. It has no operational bearing on the day to day spending of government and has little economic value in a world where the Bank of England implements monetary policy by paying interest on reserves.

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Re: Increased tax, higher unemployment & economic difficulties

#347377

Postby dealtn » October 13th, 2020, 1:37 pm

NeilW wrote:
AsleepInYorkshire wrote:Taxes rises of more than £40bn a year are 'all but inevitable'


Only inevitable for those who are hard of accounting.

To the rest of us, we just find the IFS completely laughable. They are a micro-economic setup way, way out of their depth on macro issues.

The actual answer is this:

UK Gilts are a financial asset issued by the UK’s National Loans Fund, and which are held as savings by individuals, pension funds and banks. They also represent the bulk of what is known as “National Debt”.

When those savings are finally spent, they become the earnings of another person. Both the spending and earnings are taxed. The remaining money is then spent again, becoming income for a further person. Again, both spending and income are taxed. And so on, until all that was spent from savings turns into tax.

In effect, Gilt savings assets pay themselves off once the person holding them decides to spend their savings. The “debt” pays for itself.

There is no need to change tax rates or look for new taxes to make the numbers look better. The numbers will always sort themselves out eventually at any positive tax rate. Taxes have a different purpose in a modern money economy.


In terms of government debt

The UK Government spends via the Consolidated Fund and can only ever be in debt to the National Loans Fund, as dictated by the National Loans Act 1968. Both the Consolidated Fund and National Loans Fund are administered by the Treasury with the bank accounts maintained at the Bank of England. The Consolidated Fund can be regarded as central government’s current account whereas the National Loans Fund can be regarded as central government’s main borrowing and lending account.

In essence, despite an elaborate Wizard of Oz routine to try and hide what is going on, when you look behind the curtain you find that when the Exchequer borrows it ends up owing itself.

As a matter of political policy, the National Loans Fund creates Gilts and regularly offers them for sale to the financial markets (via the Debt Management Office, which issues short term Treasury Bills in the same manner). If the financial markets decide to turn down this offer, they just end up with less interest income. In aggregate, their only alternative is to leave their Sterling savings on deposit at a bank or hold them as banknotes or coins.

The full matching rule, where Gilts and Treasury Bills are issued to match the level of loans from the National Loans Fund to the Consolidated Fund, is a political decision by the UK government based upon its belief about how monetary policy works. It has no operational bearing on the day to day spending of government and has little economic value in a world where the Bank of England implements monetary policy by paying interest on reserves.


So debt is just a future tax, from an accounting perspective.

That's fine, then. So the country should just stop issuing Gilts then, as ultimately they are only a debt to ourselves.

Good luck with that then. It wouldn't be very long before we saw a much worse economic situation than the present one. Those pesky Gilt buyers (some of whom unfortunately live overseas) won't be suffering with "less interest income" for long given the likely impact on market interest rates.

An accountant can always balance the books (until they fall apart maybe), but books that balance aren't necessarily comparable. Creating larger (and larger) obligations to the future, to balance today, isn't optimal I'm afraid.

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Re: Increased tax, higher unemployment & economic difficulties

#347382

Postby NeilW » October 13th, 2020, 1:56 pm

dealtn wrote: Those pesky Gilt buyers (some of whom unfortunately live overseas) won't be suffering with "less interest income" for long given the likely impact on market interest rates.


What market interest rates? They have no power to ask for more money - as the Treasury Bill auctions which jumped from £3bn per week to £9bn per week showed. And that's with the current institutional arrangements.

Why? Because the government threatened to use the Ways and Means account and kick the banks off the interest gravy train.

For rates to go up, prices have to go down. If prices on Gilts drop below par, the Bank of England can "QE" the Gilt out of existence - which removes the interest income from the market permanently, saving the government redemption costs. It is functionally a tax. And they can do that until the cows come home - with no impact on anything as the evidence shows.

QE causes a portfolio reconfiguration. Income assets go up and income yields come down as there are fewer interest earning assets in the private market.

You have no mechanism for "market interest rates" to go up. Because the market is supplicant, not master. They are on corporate welfare, and like all other people on welfare they get what they are given.

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Re: Increased tax, higher unemployment & economic difficulties

#347394

Postby dealtn » October 13th, 2020, 2:22 pm

NeilW wrote:
dealtn wrote: Those pesky Gilt buyers (some of whom unfortunately live overseas) won't be suffering with "less interest income" for long given the likely impact on market interest rates.


You have no mechanism for "market interest rates" to go up. Because the market is supplicant, not master. They are on corporate welfare, and like all other people on welfare they get what they are given.


Not often I laugh out load on this site, but you achieved it. Congratulations.

Cancel Gilt issuance and see who blinks first.

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Re: Increased tax, higher unemployment & economic difficulties

#347397

Postby TheMotorcycleBoy » October 13th, 2020, 2:42 pm

AsleepInYorkshire wrote:Tax rises of more than £40bn a year 'all but inevitable'

Taxes rises of more than £40bn a year are 'all but inevitable' to protect UK government debt from spinning out of control, a think tank has warned.

Potential Headwinds
  1. Increasing unemployment
  2. Recession
  3. Brexit
  4. Increased taxation
  5. The national debt
  6. Lingering Covid 19
I am beginning to feel as if the potential conditions for a perfect "economic downturn" are beginning to press home there advantage. Speculatively there could be another decade, at least, of economic misery. Whilst there will be opportunities during such [potential] circumstances there will also be many traps.

AiY
*Bearish

A similar article did whizz past my screen. But I don't know who the think tank is, and I don't really believe their claims. Since interest rates (globally!) will remain very low (well possibly <0%) for the foreseeable, so UK ltd can just refinance their debt when required, I guess.

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Re: Increased tax, higher unemployment & economic difficulties

#347400

Postby NeilW » October 13th, 2020, 2:50 pm

dealtn wrote:ten I laugh out load on this site, but you achieved it. Congratulations.

Cancel Gilt issuance and see who blinks first.


Are you going to explain the physical mechanism? Or just stick with the belief?

I've explained very clearly how higher interest rates cannot happen because there is no institutional mechanism for it to occur. Just like currency collapse hasn't happened in Japan - despite predictions, and no inflation to note of anywhere.

There comes a point when the evidence trumps the belief.

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Re: Increased tax, higher unemployment & economic difficulties

#347408

Postby dealtn » October 13th, 2020, 3:08 pm

NeilW wrote:
dealtn wrote:ten I laugh out load on this site, but you achieved it. Congratulations.

Cancel Gilt issuance and see who blinks first.


Are you going to explain the physical mechanism? Or just stick with the belief?

I've explained very clearly how higher interest rates cannot happen because there is no institutional mechanism for it to occur.


I know the market well.

There are very few people on the planet, currently alive, that can claim to have set up a GEMM, let alone on this site. As someone who can legitimately say that I am fairly certain I know how that market operates. The prices of Gilts in both the primary issuance market, and the secondary trading market (and the much smaller other markets) are not set by the Government, or any of its agencies I'm afraid, but by demand/supply interaction in that market. The issuer has no power to ask for less money to be paid.

There are many cases of drops in demand for new Government paper, and further more increased and distressed selling of already issued paper in the secondary market. There is plenty of physical mechanism for that to have happened in the past, and that is no different to either now or the future.

In the primary market you can have uncovered auctions, in the secondary market you can have selling driving prices lower. Each marginal transaction moving prices lower as sellers only attract new buyers at progressively lower prices (or higher yields). As secondary market yields rise the necessary price, and connected yield for primary issue reflects this. The issuer, being reliant on the market and buyers, has no choice (other than not to issue) but to accept a higher rate of interest, which usually means a higher coupon.

If you add to this mix the facts that many sellers maybe overseas based they might, as well as selling government paper, also be selling £s. This £s sold will be bought (of course) but again, this might necessitate a fall in the price of £ vs alternative currencies. In turn this may prove to be inflationary, and the compensation by way of interest for (new) holders of UK assets might be a rising interest rate.

If prices (of which interest rates, and the £, are ones) are not set by the market, who is setting that price, and making a rule such that "interest rates can't go up"? How are "they" able to achieve this when no other free market countries have been able to, be that now or in the past? The track record of command economies attempting to achieve the same doesn't inspire confidence it can be done, and certainly is limited in evidence it has been achieved.

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Re: Increased tax, higher unemployment & economic difficulties

#347421

Postby dspp » October 13th, 2020, 3:22 pm

NeilW wrote:
There comes a point when the evidence trumps the belief.


Try living in Argentina and see how far your beliefs will get you.

regards, dspp

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Re: Increased tax, higher unemployment & economic difficulties

#347425

Postby dealtn » October 13th, 2020, 3:26 pm

dspp wrote:
NeilW wrote:
There comes a point when the evidence trumps the belief.


Try living in Argentina and see how far your beliefs will get you.

regards, dspp


No doubt there will some there claiming there is no mechanism for interest rates to fall. They would be wrong also.

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Re: Increased tax, higher unemployment & economic difficulties

#347431

Postby NeilW » October 13th, 2020, 3:45 pm

dealtn wrote: The issuer, being reliant on the market and buyers, has no choice (other than not to issue) but to accept a higher rate of interest, which usually means a higher coupon.


The issuer isn't reliant on the market and buyers is it. It can just use the Ways and Means account. The buyers are reliant on the market for extra interest, since their alternative is to leave the money on deposit. And the reserves that would have been drained by the Gilt issue will then remain on deposit at the Bank of England - matching the amount in the Ways and Means Account on the other side.

The government owns the Bank of England outright. If you owned a bank outright who would you borrow from to reduce your interest bill?

Just the threat of using the Ways and Means Account halted the Treasury Bill tender price rises in April. They have now collapsed through the floor despite a huge expansion in the "National Debt". QED.

If you add to this mix the facts that many sellers maybe overseas based they might, as well as selling government paper, also be selling £s. This £s sold will be bought (of course) but again,


To sell requires somebody coming in the opposite direction. What do they know that you don't? That's just a market operating - those who don't understand how a modern monetary system works leaving the currency and those who do moving in. Those who move in then get to purchase goods, services, and assets at a lower price and UK businesses make more profit from the maintained economy.

The market has done its job by driving out the Jonahs. Good riddance to them. There is certainly no need to alter interest rates to get them back.

After all there is no source of excess demand anywhere else sufficiently large to absorb the physical supply to the UK - and now the UK is free from the shackles of the EU we can bring competition to bear to switch to other supply areas. Therefore the threat of "inflation" on imports can only be from people who don't actually believe international competition works. The idea that the UK is only ever a price taker is very bizarre - particularly when suppliers, in aggregate, have quite literally nowhere else to go.
Last edited by NeilW on October 13th, 2020, 3:51 pm, edited 2 times in total.

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Re: Increased tax, higher unemployment & economic difficulties

#347432

Postby NeilW » October 13th, 2020, 3:49 pm

dspp wrote:Try living in Argentina and see how far your beliefs will get you.

regards, dspp


I don't believe the UK issues government debt denominated in US dollars does it? Nor does it try to maintain its currency relative to the dollar. It is free floating.

So why do you think comparing apples and pears is relevant?

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Re: Increased tax, higher unemployment & economic difficulties

#347437

Postby dealtn » October 13th, 2020, 3:55 pm

NeilW wrote:
dspp wrote:Try living in Argentina and see how far your beliefs will get you.

regards, dspp


I don't believe the UK issues government debt denominated in US dollars does it? Nor does it try to maintain its currency relative to the dollar. It is free floating.

So why do you think comparing apples and pears is relevant?


True.

But were buyers of UK government paper issued in £ to run out such that supply had to be issued in non £, it wouldn't be hugely different would it? Do you think Argentina, and others chose to become "pears"?

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Re: Increased tax, higher unemployment & economic difficulties

#347446

Postby dealtn » October 13th, 2020, 4:05 pm

NeilW wrote:The issuer isn't reliant on the market and buyers is it. It can just use the Ways and Means account. The buyers are reliant on the market for extra interest, since their alternative is to leave the money on deposit. And the reserves that would have been drained by the Gilt issue will then remain on deposit at the Bank of England - matching the amount in the Ways and Means Account on the other side.



Go ahead. Try and use the Ways and Means account as anything other than a short term "overdraft" at the short end of the curve and see what happens to the Gilt market. That will be a brave real time experiment. Sure your accounts would balance.

I can transfer money from me left pocket to my right pocket, and make the claim nothing has changed (and continue spending). But If I am relying on others to put money into (either) pocket going forward (to fund that spending) then only the stupid can't see through it. In order to see some (all?) of their money back they need either more stupid people to replace them, or increased promises about the future (interest rate).

I could borrow on a credit card, spend the money, and repeat many times increasing both the liability and asset side of my balance sheet, always being in balance. eventually the interest will get applied and the lender have a practical claim over me. Substituting me for a country doesn't change much, even if I had a personal bank I could borrow from forever at 0%.

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Re: Increased tax, higher unemployment & economic difficulties

#347457

Postby scrumpyjack » October 13th, 2020, 4:48 pm

The absurdity is that they all break the state aid rules. Germany and Lufthansa, Italians and Alitalia etc etc.
Once again we would be the only ones sticking to the rules!

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Re: Increased tax, higher unemployment & economic difficulties

#347459

Postby dspp » October 13th, 2020, 4:53 pm

NeilW wrote:
dspp wrote:Try living in Argentina and see how far your beliefs will get you.

regards, dspp


I don't believe the UK issues government debt denominated in US dollars does it? Nor does it try to maintain its currency relative to the dollar. It is free floating.

So why do you think comparing apples and pears is relevant?


There's a reason why Argentina periodically abandons the peso for the dollar. It is because after a period of indulging in peso-economics using the applied NeilW school of beliefs they encounter the reality of the market. Many teenagers have a similar day of reckoning. What I'm struggling to understand is how apparently clever people can operate in a reality distortion field, apparently without end.

regards, dspp


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