Tag Archives: England

Germany vs Greece: The battle commences!

Well done Syriza and well done Alexis Tsipras! The only way is up from here. Surely the economic crisis can’t get any worse for Greece! We’ll see.

The German population will have been fed a steady stream of disinformation on reckless, untrustworthy, lazy Greeks who agreed to borrow money they had no intention of ever repaying and which they have now squandered etc etc.  It’s all nonsense of course!

So where to now? If Greece’s creditors wish to see any of their money back, there has to be a recognition  that something has to change, and notwithstanding any useful improvements that might be made to the Greek taxation system, primarily that change has to come from the Germans and the EU governing class. The Germans, and others, have to realise that if they want to run a trade surplus, which they seem to like doing,  (it was about 7% of GDP the last time I looked), then they should be actively encouraging other countries, including Greece,  to run deficits. The larger their deficits the higher the German surplus.

Naturally, those trade deficits translate into government budget deficits too. That way the Greek government spends Euros into its economy so that ordinary Greeks will be able to afford more German imports and so further increase German trade surpluses.

If there sounds to be an element of  Alice-Through-The-Looking-Glass about all this, and that  everything is working backwards, that’s because there is. As Alice put it:

“If I had a world of my own, everything would be nonsense. Nothing would be what it is, because everything would be what it isn’t. And contrary wise, what is, it wouldn’t be. And what it wouldn’t be, it would. You see?”

Well, no not quite. And, neither do we quite see the point of Germany insisting that Greece and everyone else in  Euroland runs a surplus too.  How can Germany ever be repaid when it always wants to run its own, even bigger, surplus?  Why does it even care  about being repaid in money it can never spend? Germany, and German creditors,  can only ever be repaid when it decides to change its ways and run a deficit in trade and a deficit in its Government budget.

In the world of international trade, debts can only be repaid in things.  ie real goods and services. If Country A exchanges more things, for fewer things, with Country B, so putting Country B into debt, that debt can only be repaid, at some time in the future if Country B gives Country A more things than it gets back.

So, the battle isn’t just between Greece and Germany. It’s between German neoliberal economic stupidity, otherwise known as  ordo-liberalism,  and the idea of scientific rationalism.

As Alice, herself said:

“It would be so nice if something would make sense for a change! “

 

 

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Nationalisation Costs Nothing and Privatisation Raises Nothing!

There is some discussion in British Labour Party circles on the question of bringing the railways, and other key industries, back into public ownership. Those opposing the idea usually argue along the lines of “we can’t afford it”. They say the capital, or money, required would be far better used on housing, education and other growth promoting projects.

They either don’t understand the economics or they are deliberately misrepresenting them to suit their own nefarious political purposes.

Apart from the administration costs of making it happen,  renationalising the railways, or nationalising any other industry, in Britain, or anywhere else, costs nothing. This must be true when you think about it. Otherwise, how possibly could they have been nationalised in the first place, by the Attlee Labour government, immediately after WW2 when the country was said to be virtually bankrupt?

It works in the same way as QE. Before the repurchase of railway shares, or whatever else such as govt securities from the banks in the case of QE, there are two zeros on either side of the balance sheet.

After the repurchase, the assets of the shares or securities, on one side of the balance sheet exactly equal the liabilities , created by any payments, on the other. So the balance sheet still balances. You can’t do this, and I can’t do this but Government is an issuer of its own currency, and it is really no problem at all.

Conversely, it must be true that if nationalisations cost nothing, then privatisations don’t actually raise any extra usable money either. And they don’t. The recent sale of the Post Office/Royal Mail  in the UK didn’t raise a single extra spendable penny!

What the Government don’t want you to know about taxes! But it’s easy enough to work out anyway.

Taxation is simply the process of governments collecting back some of their own IOUs , what we call money. They have earlier  created and spent them into the economy. If they hadn’t done that no-one would have ever been able to pay any taxes, at least  using government IOUs, for the simple reason that there would  never have been any to pay taxes with.

So why do governments tax? After all it would be much easier to just write out new IOUs as needed. They generally just tear up their old IOUs when they receive them back, just like you or I would.

Two reasons:

1) Taxation creates a demand for government IOUs. That gives them a value. It makes the $ and the £ worth something.

2) Taxation reduces our spending power. This is unfortunately necessary to prevent inflation.

Taxation is nothing to do with raising funds for government spending in a country which issues its own currency. If governments tell you they need to have a high level of taxation, when there is no inflationary problem, they aren’t being truthful.

Can commercial banks create money out of thin air?

If the title of this posting is Googled there will be many hits suggesting that banks are able to do just this.

For instance according to Michael Kumhof Deputy Division Chief, Modeling Unit, Research Department, International Monetary Fund “The key function of banks is money creation, not intermediation.”

Some banks are also able to issue their own banknotes (or bills in the US). For instance Scottish banknotes, designated in £ sterling,  can be issued by several of their commercial banks and are readily accepted there.  But, maybe less so in England!  Normally UK banknotes are issued by the Bank of England. The Bank of England is the reserve bank of the UK,  part of the UK government and the issuer of the £ sterling currency.

When commercial banks issue loans they credit the bank accounts of the borrower and but they don’t debit their own reserves. The bank has the asset to the amount of the loan, and the borrower assumes the liability of repayment.

Of course, there are rules, which vary from country to country, which govern the lending practices, and ability to print banknotes, of the commercial banks. There is often, but not always, a requirement for the commercial bank to maintain a certain level of reserves. However, subject to these rules, the commercial banks can borrow as they need to provide commercial loans. They borrow at a low rate of interest, either from the reserve bank or their depositors, and lend out at a higher rate. The difference between the two rates provides the banks with their profit margin and also acts as an insurance against a default on the loan.

But if they feel they don’t need to borrow anything they don’t. They just write out an IOU which we all tend to think of as if it were the same as a government IOU.

Government, or their reserve banks, set interest rates as a matter of policy to regulate lending. The conventional, but erroneous, wisdom,  is that money can be created by the Reserve bank,  in printed  form or by keystroke,  and lent out via  the commercial banks  to regulate the level of activity in an economy.   It is is not considered that this should be done to directly fund additional government spending though. That needs to be done via the process of printing or creating treasury bonds. Somehow, for reasons which don’t appear to be quite logical, the economic mainstream don’t consider printing bonds to be the same as printing money.

Swapping money for bonds, or vice versa, doesn’t really change anything much at all , as has been recently seen through the so-called process of Quantitative Easing so maybe something of a rethink is called for on this point.

However, regardless of any inconsistency, the process works reasonably well in normal times but less well when interest rates are deliberately reduced to ultra low levels. The control knob can’t be turned any further.

Does this mean the commercial banks,  too,  are also acting as currency issuers rather than users? Are the Scottish banks assuming the role of a currency issuer when they print banknotes?

No, they aren’t.  Apart from being able to borrow directly from the reserve bank, individuals can do the same thing. They can issue IOUs as they please which in principle can be traded by a third party. Casinos can issue £5 chips, which are their IOUs, for use on , say, a roulette table. They, too, in principle could be traded on an open market. Of course, if the casino were considered a credit risk the chips would lose their value. Scottish banknotes could lose their value too if the issuing bank was considered to be in risk of default. Similarly, any bank customer with a bank account full of newly created credits would need to have all payments cleared using those credits. It is possible that they would be refused, by another bank, if the issuing bank were considered to be at risk of default.

It’s the financial viability of the issuing institution which guarantees any written IOU. Conventional theories involving banking multipliers are bunk! That’s not how it works.

So, in conclusion,  the “thin air” expression is somewhat misleading. Commercial banks aren’t doing anything special at all. The only issuer of a currency is the government, or governments in the case of the Euro,  via their Reserve bank. Everyone else is a user, and cannot , unless they are in the counterfeiting business, create their own extra units of that currency.

Further reading:
http://neweconomicperspectives.org/2013/06/do-banks-create-money-from-thin-air.html

29/11/2013

PS This posting has generated more heat than any other with 23 comments so far. I think I now understand the  problem better than I first did, so I’d like to thank everyone for their contributions. It seems to me that there needs to be a recognition that what we see in our bank accounts, at the commercial banks, isn’t quite the same thing as money. The figures actually do refer to bank IOUs which can of course be always swapped for government printed banknotes, which are certainly money,  providing the bank is solvent.
Similarly what the bank creates isn’t quite money. They generate their own IOUs or asset/liability pairs in the same way as anyone else can.  Should they be prevented from doing this? I’d have to say no. Anyone has the right to issue an IOU.  But, that of course is a political and not an economic question.