Hi Neil,
NeilW wrote:TheMotorcycleBoy wrote:I think they are quite different actually. Printing swells the countrys money supply effectively, but borrowing moves existing money around. Printing money inflates the nominal prices of assets, borrowing doesn't. Printing money and borrowing it options available only to CBs, whereas individuals are confined to only borrowing....etc..etc.
Matt
That would be a 'fixed amount, fixed exchange rate' view. It's wrong as a matter of accounting.
That could well have been what I had in mind. I had pictured a closed society (an autarky I believe), comprising 50 families, totally self-sufficient within their group, with 5,000,000 clay tablets in circulation. Borrowing between families would be possible and interest may or may not be charged. In that guise, the money supply would remain fixed.
After some years due to the expansion of the population, 200,000 more clay tablets are printed. In this case obviously the supply rose.
"Borrowing" creates Gilts which expands the 'money supply' by exactly the same amount. You only see it as 'moving existing money around' because you're concentrating on the 'swapping' part and not on how they ended up with excess reserves to 'swap' in the first place. Let me show you how your 'printing money' conception is exactly the same 'swapping around' as Bond payments.
The process is as follows. Parliament authorises, say, furlough payments. The Comptroller verifies that authority and grants credit on the Exchequer account at the Bank of England, which is passed to the DWP. The banking entries for that leave the DWP with a deposit at the Government Banking Service, and the Consolidated Fund with the balancing asset 'Net Financial Assets' which is essentially money Parliament has created that it hasn't yet collected the tax for. This is the modern equivalent of 'tally sticks' and is the 'creating money' part of the process. It's pure Parliamentary Authority.
(See
https://new-wayland.com/blog/uk-government-spending-gory-details for more detail)
The denomination for this money is 'Exchequer Credits', and that is essentially the base currency government operates in. Let's call it 'Gold'.
When the Exchequer want to pay somebody it hands over the Gold to the Bank of England who gives it 'Silver' in exchange (ie Sterling) - at a one-to-one exchange rate.
As you can see, the Bank of England operation is just 'moving money around'. Nothing new is created. The Silver is then transferred to the account of the person that the government wishes to pay.
In my humble opinion you have contradicted yourself in these earlier words of yours. The contradiction can be found by comparing the 2 emboldened statements, the first being 'my bold', the second being your original bold. In the first statement you've just stated that Borrowing
expands the money supply, and in the second
just 'moving money around'. Nothing new is created. Only one of these can be true. In my original argument I believe it to be the second.
For there to be any demand for Gilts, that person, or whoever they swap that Silver for goods with, must decide not to spend their Silver. Otherwise the Silver will simply change hands more times, and at most changing of hands create a tax liability that sends some Silver back to the Exchequer, eventually exhausting the pile of Silver. The Tally stick 'stock' this Silver represents will return home as tax to be matched with the 'counterfoil' held at the Consolidated Fund. Just as it has for centuries.
Ok. I like this explanation, it's a nice clear explanation of tax.
That changing hands process - before the Silver stops being spent - will go via the asset market in the same way - driving up asset prices to their indifference level.
I don't quite understand this.
The Exchequer, as a favour, then offers to swap unspent Silver back for Gilts - Gold Edged Paper (ie a derivative of Gold). It's no more a borrowing process than you placing a deposit with a bank is the bank 'borrowing' from you. Technically it may be, but functionally it is the saving side that is doing the driving. The government is no more getting down on bended knees begging for money, than the bank was when your salary was paid into your current account.
I disagree with this. It's definitely a typical borrowing, as the Exchequer/Govt./etc. pay coupons back to the other party in compensation for them shouldering the risk implied by the loan.
Anyway....FWIW I'm not a QE antagonist. I'm actually eager to learn more about it. But I'm certainly behind on the education process. I've recently finished a 100 page summary of "Wealth of Nations", now I'm reading Keynes (The General Theory...), then it will be Friedmann and then Kelton (QE). Hopefully I'll have it licked by then.
So I'm afraid to disagree with what Snorvey stated earlier. My view is that that I very briefly summarised here
viewtopic.php?p=391075#p391075. I believe the Fed will continue TB re-purchases to keep the recovery on track, as long as inflation remains below 2.5%. They will also monitor Non farm payroll numbers as this will indicate relative consumer power (as a driver towards subsequent inflation).
I was interested in this question i.e. that posed in the OP, since continued QE will probably keep yields low and continue to make investors reach for yield and buy growth and tech shares. Whereas if yields rise it seems more likely that growth and tech shares will be sold in preference for value and income stocks.
Matt