Quantitative Easing

This term only came to my attention quite recently. I imagine it was called something else before, because it is not a new action.

What it means is that the central bank puts money into the economy by buying "assets". Those assets are government bonds. As we have seen before, the government issues bonds which are bought by institutions like banks. The central bank gets some money which is then used by government to do the things governments do. The lender ( banks etc) get an "asset" which is really a promise to pay them back at some date in the future: and meanwhile they get interest. The central bank has an equal liability, and that is called sovereign debt.

When quantitative easing is used, the central bank buys the bonds back. So the banks and other financial institutions get cash and the central bank gets an "asset". Sort of. It seems to me that the "asset" changes its character in the process. That is because the asset is a promise to pay: and it is odd to think that you will promise to pay yourself some money, is it not? If you had a loan of £100 and you repaid it early (bought it back) you would not have £100 in any meaningful sense. You would have less outgoings because you would not be paying interest: but you would not have gained anything. When you took the loan you brought forward consumption of whatever you bought with the money. When you paid it back you deferred consumption of whatever you would have bought with the money you used to repay the loan. But you haven't actually gained anything: you have merely moved your spending in time.

It is not like that for a central bank, though, because a central bank can print money. It does not need to defer spending on something else: because it just magics the money out of thin air. It seems to me that the analogy with domestic arrangements falls to bits at this point. Which is why analogies can only go so far.

In fact, so far as I can see, quantitative easing reduces sovereign debt, as you might expect. It reduces the deficit as well, because interest does not need to be paid. Yet the accounts require that this is an asset: and if it is an asset there has to be a liability somewhere. So where is it? As far as I can tell, and this may well be wrong,. it has to be with government: because the assets are government bonds. So in accountancy terms it seems that it does not affect the sovereign debt. I have been thinking about that.

As I see it this is an artefact of the demand that central banks be independent. The importance placed on that is amply demonstrated by the response to the Hungarian government's policy (see What is going on in Hungary thread). I find it odd. To me a central bank is a part of government. I cannot see how it can be anything else in reality: notwithstanding what it may be on paper. I can understand why it is seen as important: so long as you have a particular political view. But I don't share that view.

If you consider the central bank as separate from government what you get is this: the central bank buys back the bonds and holds them as an asset. The government issued those bonds and so they are liable for them. That means they have to pay the interest. Governments have only two sources of money (if they have their own currency): they can print it, or they can raise it through taxation. If the central bank is seen as wholly separate that reduces to one: taxation. So it does not matter where the bonds are held: the government has the same amount of debt and must pay the same amount of interest. And it can only do so by paying with tax revenue.

Tax revenue is justified by the need for government to do stuff. In a sane world, where the debt is held by the central bank it would effectively be cancelled. So interest payments would cease and the money could be spent on useful stuff. In short the sovereign debt would fall by the amount of the debt repurchased: and that is analogous to what happens in the domestic setting. Since the bank bought it with money it printed it just disappears.

There is a problem with that if you happen to be obsessed with inflation, and you happen to believe that governments are evil irresponsible people who do not care about sound money. If you take that view what you think will happen is that the government will print money to buy up all the debt and then run up more debt: the end result will be hyperinflation. They will keep printing money and the money supply will increase out of control: and the currency will eventually not be worth anything. In my reading around on the subject of inflation that does not seem to have happened. Ever! The most usual example cited is Germany in the days of Weimar: but that is not what happened there at all. The problem there was that the reparations had to be paid in foreign currency: and the government cannot print foreign currency. All the production etc had to be sold abroad to get foreign currency. Inflation is often described as "too much money chasing too few goods": if all your domestic production has to go abroad there are too few goods: the outcome is obvious. Prices go through the roof and the government has a stark choice: it can print more money so folk can buy stuff: or it can let them starve. Hardly enviable: but not evidence of evil politicians who recklessly do terrible things to the economy. Yet this is the bogeyman which informs our thinking about sovereign debt. And it is that which underpins the insistence on an independent central bank, I think. When government faces that choice, if they are reasonable at all, they will print more money. It is assumed that the central bank will make the other decision: they will let the people starve. This is what we see with "austerity". It is portrayed as rational and desirable.

The problem is that there is no good answer once you are in that situation: it should never be allowed to arise in the first place. So the other assumption is that with an independent central bank the problem will not arise. They will take action before it gets to that point. But that depends on your analysis of cause and effect. The european union considers that inflation is the cause of all ills, I think. The ECB has a specific remit to prevent it,and the bank of england has a similar role, in that it is supposed to aim at a target rate of inflation and take steps to intervene if that is not met. This has become the function of a central bank and they cannot see past it. As is often said of armies, they are well equipped to fight the last war: but the next one is always different in some ways.

The EU has recently issued a paper ( lost the link to it, sorry) which belatedly recognises that the relationship between money supply and inflation is nothing like they had assumed: and that is because of the development of new financial institutions. Money which goes into the system never reaches consumers: it is absorbed in inflation of asset prices (which does indirectly impact through the housing market: but not in the expected way in relation to other goods): it is held by speculative and banking bodies to a much greater extent than before. Added to that is the fact that 95% of money is not generated by central banks: it is created by commercial banks instead, as previously discussed. It follows that the central bank can't control inflation because it is not caused by them or by governments. If it is generated by increase in money supply it is caused by banks: and if they do not release the money into the real economy it is not manifested in increased price for consumer goods; it shows up in asset bubbles.

The reason I have raised this today is this: it is reported here that the bank of england is likely to release more quantitative easing this month because M4 (broad money) is shrinking. This is the opposite of inflation: it is too little money in the system. That is the point of QE from the other side. They want to release more money because of a danger of deflation. And this gives rise to some very curious concerns: you have to be schizophrenic to reconcile what is going on in any honest way, so far as I can tell. This is amply demonstrated in this article from The Guardian.

www.guardian.co.uk/business/2012/ja...ll-money-supply

So what we are seeing is "austerity" on an unprecedented scale for ordinary people: while there is simultaneous concern that people are not spending and are payng off debt. How anything that can tie its own shoelaces cannot see that is related is beyond me: but then I don't think they have missed it. I think they are using the "crisis" to dismantle the state for ideological reasons, and opportunistically. But for clarity: they want to hold down wages and benefits and increase unemployment, while maintaining consumer spending and borrowing. Good trick, that.

The IMF and some of the other international bodies are now worried about the effects of austerity: they have begun to talk about the adverse effects of it: while still insisting on it in practice. It is good that they are beginning to have some doubts but the driver is not a recognition that the system is failing: it is much less radical. Rather than deal directly with the problem we will get some more QE: that is money will be put directly into the pockets of banks who will continue to sit on it. It will not work now as it has not worked in the past: but it will mean that bankers' profits and bonuses are safe. So that is good

Edited by FionaK - 3/2/2012, 10:12

Let me try to put some numbers on this.

It was reported recently that UK debt had reached £1 trillion. If that figure is accepted it is easy to see how one can make a case that there is a debt crisis: it is an awful lot of money. As it happens it is 64% of GDP: that is not an enormous figure when compared with some other countries but it is above the level required in the eurozone, for example. This is the justification for the savage attack on our welfare state and the people have been persuaded that this is necessary. All over the financial press there were horror headlines, and articles asserting that this cannot go on. Cutting public spending is the only answer and while this is regrettable the pain of austerity is necessary and show the government is willing and able to make the "hard choices" (that is impoverish the population) in order to deal with it.

Those articles do not show who holds the debt. They specifically say that they exclude the banking bailouts, and that would seem to imply that this is debt owed to people other than the central banks. Richard Murphy assures me that is not correct: what it means is that the debt of the nationalised banks is not included, apparently. If that is correct then of that £1 trillion of debt, £350 billion is owed to the bank of england, because that is the amount they have spent on quantitative easing. That is, £350 billion is owed to ourselves. It is not a debt in any meaningful sense at all.

The outstanding debt is not trivial: it is still £650 billion. But if £1 trillion is 64% of GDP then the reduction is significant, surely? The debt is actually about 42% of GDP if my sums are right (this may be unlikely). That is comfortably within the Maastrich rules which specify that government debt must not be above 60%.

I am also wondering how much the same applies within the eurozone. I remember that the ECB was buying up Greek debt. While the ECB does not count itself a central bank in any normal sense of the word the same reasoning applies if we let it. If debt owed to the ECB is characterised as not debt, how do the figures look in Ireland and Greece and Portugal? I do not know. But I bet it makes a difference.

Hi Fiona.

The bit you leave out - as Richard Murphy does as well - is the effect on the currency of printing money to monetise debt. There are several parts to this.

1) When you print more of a currency, each individual unit becomes worth less, which means - all other things being equal - you need more of it to buy the same items. If debt is monetised in a growing economy, therefore, the effect is price inflation unless goods and services production increases to match the increase in money. However, if the amount of currency in circulation is falling because people are paying off debts or saving a lot (deflation), then printing more of it to maintain the money supply supports existing price levels but should not cause price rises. This is the stated purpose of QE according to the Bank of England and it is an appropriate response to what is currently a deflationary domestic economic environment. The only problem is that if banks aren't lending, the QE money doesn't reach the real economy and "broad money", M4, continues to collapse even though the monetary base, M0, is expanding. Which is what is currently happening. For this reason I regard the QE undertaken since 2009 as virtually useless and a better strategy would have been fiscal expansion. The Government's fiscal austerity is pushing the economy into recession and QE is not really able to counter it because people don't want to borrow more money at the moment.

2) In an open economy whose currency floats freely against others and is not anchored to an asset such as gold (i.e. fiat currency), printing more money also reduces its international value expressed through exchange rates. This raises the prices of imported goods. The UK is a net importer and dependent on imports for some essential goods (notably fuel and some foodstuffs), so debasing the currency by printing money does cause CPI inflation in imported goods. Sterling has declined by about 25% since 2009 and this has surely fed through into higher import prices. Consequently it is possible to have both deflation (M4 collapse) AND CPI inflation at the same time when doing QE. I think we are seeing that at the moment.

3) Hyperinflation - the big fear - doesn't have the same cause as "ordinary" inflation. Ordinary inflation is caused by increasing costs of production ("cost-push" inflation) feeding through into higher prices and/or increasing demand for products whose supply can't keep up ("demand-pull" inflation). Hyperinflation is quite different - it is a phenomenon of floating fiat currencies only and occurs when the currency is rejected internationally and the exchange rate collapses. The usual reason for currency rejection is that international investors do not trust the issuing government to protect its value, so they dump it. The equivalent process where there are locked exchange rates is rejection of government debt, as we are seeing in the Eurozone at the moment (particularly Greece, where 1-year bond yields are currently something like 450%). "Ordinary" inflation can morph into hyperinflation if the government adopts very loose monetary and/or fiscal policy. Hyperinflation may also be associated with supply-side shock and collapse of production, as happened in both Weimar (externally imposed) and Zimbabwe (internally created), but fundamentally it is currency collapse due to inappropriate government policy. There have been a lot of instances of hyperinflation in the last hundred years or so, and every single one has involved monetisation of fiscal deficits. As I said in point 1), monetisation is a reasonable strategy when there is deflation. Otherwise it is extremely dangerous. We go down that path at our peril.

Hello Frances Coppola: welcome to this board


I don't think Richard leaves it out: and I don't think I do either, though I have not expressed it in this thread cos I am trying to get to grips with things by breaking them up a bit. Not sure that is a good strategy but it is the only way I can try to see what is happening.


Yes.


You have to bear with those of us new to economics . That sentence is not clear to me. What I think you mean is that if money is printed to cover debt then there is price inflation. But I do not get it. If credit is extended when there is no money, there is still inflation: because debt is indistinguishable from an increase in the money supply.

You either save up money and buy what you want: or you take on debt to get what you want. In the first case there is less consumption before you buy: and in the second case there is less consumption after you buy. Is that correct? If it is, the problem I have is this: what you seem to be saying is that there will be inflation if money is printed to cover the debt, because the consumption afterwards will not fall. But that does not seem to work because the debt itself has the same effect as the printing of money. That is the point of the finding that the printing of money by central banks follows the creation of debt by financial institutions. What else can they do?


Indeed. But is there not a further danger if your analysis is correct? The money released is not circulating now. That is obviously true. But it is not disappearing either. Either it is left in hoards held by financial institutions ( and perhaps in some domestic savings or debt reduction), or the central bank buys it back (and burns it when the time comes?) As the EU has recently said, the money is not reaching the real economy: it has translated into asset bubbles. Therefore the orthodox view which informs ECB etc policy is not correct. And the relationship between money supply and inflation is not as it was.


Perhaps. The value of a currency is somewhat related to how much of it there is. But in fact I think this leaves out the fact that there are also issues of "confidence" and other irrational elements to all of this. I doubt the relationship is actually linear, though that is certainly what we are asked to believe


Yes. I agree that hyperinflation is nothing to do with ordinary inflation and to me that implies that policy which presumes that the one can lead to the other is misguided. Yet that appears to be the analysis which informs the focus on control of the money supply and on inflation targets.


And there is the rub. Government cannot protect the value of the currency since they do not control the money supply.


The vast bulk of the debts in all of the countries which are under threat at present are (or were) private. There is certainly rejection of government debt but I see no rational reason for it. What does seem obvious to me is that if the rejection is based on lack of confidence in the debtor to pay there should be no credit available to any of the financial institutions which hold a lot of debt. So QE makes no sense whatsoever. Why should the people lend to banks which cannot pay any more than banks should lend to a population which cannot pay? What we are saying is that banks are too big to fail but countries are not. Shurely shome mishtake?



I don't agree with that. The governments have willingly and (to me) irresponsibly abdicated their control of the economy and while that remains the case it is not much to do with their actions at all. When 95% of the money is created by private institutions that is where the control lies.

But the real problem is who pays the price: at present the cost fall on the people and not on those who caused the situation. They have the money and we are giving them more. The sums are enormous. The ordinary people had no part of this: and the governments are complicit because they susbcribed to the demand for "light regulation" etc. But the demand came from the financial sector and the capture of the governments was bought and paid for, so far as I can see. I do not think we can or should tolerate that: but because of the pervasive nature of the financial orthodoxy we have no practical alternative for democracy itself has been undermined.

In these circumstances we genuinely do need what Richard Murphy calls a "Courageous State", and I call a functioning democracy. For I put people first. If impoverishment of the population is the answer then the question is wrong.

Hi Fiona.

You attribute far to much to money creation by commercial banks and you assume that government (or central bank) has no tools whatsoever to control the money supply. That is simply not true, I'm afraid. QE - or its reversal - is a way of controlling the money supply. More usually, interest rates are used to control lending - obviously, high rates will encourage saving and discourage lending, which tends to reduce the rate of growth of the money supply, and low rates have the opposite effect. Low interest rate policies by both the Fed and the Bank of England were at least partly responsible for the overgrowth of the money supply in the 2000s. The limitation on these tools is that banks have to be complicit for them to work properly: they must pass on interest rate changes to customers, and for QE to work there must be both consumer appetite for borrowing and bank willingness to lend. Interest rates are also the main tool used to control the value of the currency as there is a direct relationship between the level of interest rates and the exchange rate. Which is why in 1993, when Norman Lamont was desperately trying to keep sterling in the ERM, he raised interest rates by huge amounts before finally admitting defeat and taking sterling out of the ERM.

Whether you agree with it or not, history does show that monetisation of fiscal deficits is associated with hyperinflation. However, these examples are of course all stressed sovereigns. I don't know if there have ever been governments that financed responsibly through currency creation without hyperinflation. It would be an interesting piece of research. As far as I am concerned monetisation is a reasonable approach to a deflation problem. Whether it is an appropriate approach to government financing in the longer term depends whether you trust politicians and their lackeys to manage the country's finances responsibly. I have some doubts about this personally. Assuming politicians can be trusted, though, there should be no preference for debt financing over currency creation as the interest payable on debt will be equivalent to the drop in the value of the currency if money financing is used instead of debt. Does this make sense?

I have not suggested that QE would be the only factor in currency depreciation. There would always be other factors at work as well, and these may be sufficiently large to cancel out the QE effect completely.

Nor have I suggested that inflation doesn't occur when commercial banks create too much credit. Clearly, it does - the inflation in the housing market in the 2000s shows this clearly. The only reason we didn't have CPI inflation then in my view was the availability of cheap imports from emerging market. But it's equally incorrect to suggest that commercial banks creating money is inflationary but central bank creating money is not. Both can be inflationary.

Countries in the Eurozone vary as to how much private debt they carry. Generally, where there is high public debt private debt tends to be lower, and vice versa. Public debt is traded internationally and historically has been seen as a safe asset. The problem we have is that some countries' debt is no longer seen as safe so is being rejected by international investors - and I made the point that this is the equivalent to currency rejection and the cause is the same, ie the issuing government is not trusted. Whether you like it or not, investors don't have to hold currency and they don't have to hold sovereign debt. If they choose not to, the value of both falls.

You may think it is unfair that far more attention is paid to preventing banks failing than to maintaining the standard of living of citizens in countries with debt problems. So do I. I don't support what the Eurozone is doing to Greece and I don't agree with bailing out banks.

Politicians should act courageously, yes - but they should also act responsibly. They have singularly failed to do either.

95% is widely quoted. If you do not accept that figure what would you substitute and why?


If the commercial institutions create the bulk of the money supply it is true, I am afraid. We have had policy to control government's ability to create money since Maastricht at least: and in this country the adoption of monetarist prescriptions predates that. The fact is that the analysis is obviously wrong. The money supply is not under government control and I say that because it would not have been out of control if it were: governments were wedded to monetarism, and while they may not have followed it in practice completely they did stick to it to a great extent. The creation of money moved when they did that, and it is an integral part of the transfer of power from democratically accountable bodies to those over whom we have no control whatsoever. As I said, central banks print money after the debts are created. This has also been widely reported and it seems to be well evidenced. Again, if you disagree with that can you say why, and show the alternative analysis in support of that view, please.


Not really. QE is a way of putting more money into the economy with a view to having it circulate and so lead to investment and growth. But in fact it does not work, and it cannot work because the banks etc are entirely free to sit on it. The amount of money in circulation does not depend on the central bank releasing it; it is dependent on what the banks etc do with it. Thus, once again, the central bank is begging:not controlling. The power does not rest with them


That is the theory. Doesn't seem to work. The reason I think it doesn't work is that most people pay very little attention to interest rates. They do not think: oh, rates are high, so I will save". Rather they think "damn, rates are high and I am going to struggle to get a mortgage I can afford". But they will pay more than they can easily afford anyway. Because they have to live somewhere. So they take on more debt. If they have the means to save and they wish to do so, they will seek higher interest somewhere else, to some extent: which is why a surprising number of people had their money in Icelandic banks. But although a lot of people were affected, they were hardly a majority. Most people kept their money in a local bank as they always do. The interest on what little most folk can save is neither here nor there, so far as their decisions are concerned.

As an aside, why do you think high rates would discourage lending? Saving is lending. It is lending to the bank. By the same token if the rate of interest is high then the incentive to lend is also high because the return is high. So that does not make sense to me.


Disagree. I think you confuse cause and effect. Low rates were engineered by the asset price bubble: when a great many people have borrowed to the limit, raising interest rates becomes politically difficult. But the origin of the problem is the creation of debt (money) by the commercial banks


All that means is that it cannot work. And if it cannot work the theory is wrong. This is what confuses me about economists. They never abandon the theory just because it demonstrably doesn't work.


Yes. That didn't work either.


Examples would be nice. The mere assertion is not very helpful. If you refer to Weimar we have already agreed it was imposed from outside, and so it is not possible to support your case for the transition arising from the actions of free governments. I hardly think Zimbabwe can be seen as anything other than an outlier.


They have consistently done a better job than economists and financiers, so far as I can tell. We did not have major crashes of the sort we have seen since the plutocrats took over after 1979. We did not have the totally unacceptable levels of unemployment either. A comparison of the post war period up to that date, with what has happened after it is conclusive, to my way of thinking.


I see no reason to think that it does. I seems to be predicated on sums: but people do not behave that way.


OK.


I would be interested to know more about that. The EU takes the view that we did not see wider inflation because the money did not reach people: it stayed in the financial sector and produced the asset bubble. That is the point of their fresh analysis of why this did not happen. They do not attribute it to cheap imports: that was not mentioned in the paper they produced.


Never disagreed with that.


Some figures would be nice. So far as I have read, in the UK both were high. That is also true of the US I think, though I may be misremembering that.


Certainly. But since they only have the money because they stole it I see no reason to believe we can do nothing about that. They are not making sensible decisions as rational actors. If they choose to impoverish the people through their control of the wealth we need not accept that. I see no reason why we should. Those who susbscribe to the neoliberal theories never trust governments. At. All. It is a basic premise of their philosophy. That being so they will play their games and they will impoverish us all in the process. I really don't care about their "trust" because it can only be won by appeasment and they will never be appeased until we are all serfs. What I want to see is democratic governments in control. We should confiscate their wealth since they are not to be trusted with it. I sound just like them through the looking glass? So be it


Here we agree. They have been captured by economic idiocy/self interest. They are not democrats and they do not represent the interests of those who elected them. They represent the interests of the banks and financial institutions. The problem is that there is no functional alternative at present. And I fear there will not be until they have once again engineered a catastrophic war. After that they will retreat because they must; for a while...

Fiona,

It would help considerably if you read ALL of what I say before you comment, rather than picking holes in individual bits.

Regarding money creation by commercial banks. I meant you assign far too much importance to this, because you don't distinguish between broad money and "high powered money" (HPM). HPM can only be created by the central bank. It is leveraged by commercial banks. Yes, HPM creation in practice is driven by demand for reserves from commercial banks because lending precedes reserves. It has ALWAYS operated that way - your idea that somehow money creation by commercial banks is a recent phenomenon is simply wrong, I'm afraid. The problem with Friedman-style monetarism is that it assumes that governments a) can control HPM b) that controlling HPM creation also controls the growth of broad money. QE is a monetarist phenomenon, because it involves directly increasing the amount of HPM in circulation in the expectation that it will be leveraged normally. The fact that it doesn't appear to work properly when banks aren't lending normally demonstrates the limits of monetarism.

There are arguments around at the moment (e.g. from Positive Money) that all money should be created directly by government and banks should only lend money they physically have, rather than running short lending positions during the day and balancing it all out through interbank borrowing/lending and (as a last resort) reserve creation by the central bank, as happens at the moment. The problem with this is firstly that it would require far more savings to be kept in banks than is currently the case, and secondly that it would require a degree of accuracy in economic forecasting that is close to alchemy, and if the MPC were to get it wrong the result would either be inflation or a credit crunch. The MPC's record on forecasting inflation is not exactly encouraging! Personally I think there are other ways of controlling lending volumes and therefore the growth of broad money - for example, leverage ratio and loan/deposit ratio limits, and taxes on loan interest and on bank asset expansion.

Regarding high interest rates. High interest rates DO discourage people from borrowing, because it makes payments less affordable. That applies not only to mortgages, where affordability is taken into account when a mortgage is granted, but even more to unsecured lending. I'm well aware that saving is lending, although these days most people's life savings aren't lent to banks - they are lent to pension funds and insurance companies. And people do save more when interest rates are higher. You seem to think that commercial interest rates have no effect at all on people's behaviour. I beg to differ and I think you will find that the body of evidence is on my side.

Regarding the effect of low interest rates - I do not confuse cause and effect. Go and look at when interest rates were cut. You will find it was BEFORE the asset bubble started. In fact the Bank of England raised rates during the growth of the house price bubble, which did calm it down a bit and possibly explains why the UK did not suffer a housing market crash on the scale of the US.

The reason why interest rates failed to prevent sterling falling in 1992 was because it was the subject of a speculative attack aimed at bringing down the ERM - which it succeeded in doing. Normally, interest rate changes do affect the exchange rate.

I'm quite happy to provide evidence supporting my assertion that episodes of hyperinflation are universally associated with monetisation of fiscal deficits. But I did not say that Weimar hyperinflation was externally imposed. I said that the collapse of production that contributed to hyperinflation in that case was externally imposed when the French seized control of the Ruhr in order to obtain war reparations that the German government had ceased to pay. Hyperinflation occurred when. in response to that, the German government printed money to pay people in the Ruhr not to work. Zimbabwe is certainly not an outlier - the pattern is similar. And there are lots of other examples of hyperinflation, in Latin America, Greece, Hungary, China, Poland....all within the last 100 years. All of them involve deficit monetisation, and the conclusion of every researcher I have ever read on this is that monetisation of deficits by sovereigns that have no other way of raising money is a cause of hyperinflation. Do you wish to write off all those pieces of research as rubbish?

Re inflation. The growth of unsecured lending in the UK in the decade before the financial crisis suggests that consumer spending was rising. This coincides with the enormous growth of exports from emerging markets, particularly China. Please show me the paper in which the EU says this is irrelevant?

I'm quite appalled by your suggestion that we have had worse crashes since 1979 than ever before, and worse unemployment. I'm afraid that is simply nonsense. Even in the UK, unemployment in the 1930s and 1970s was higher than we have seen since, and the Wall Street Crash in 1929 followed by the Depression was a far worse crisis and collapse than we are experiencing now.

Private debt in the UK is quite a bit higher than public debt. In Greece it is the reverse. As I said, in the Eurozone generally high public debt goes with lower private debt and vice versa. This is not terribly surprising really given that economically they are opposite sides of the coin. However, it's all relative - it may be just high public debt and even higher private debt, or vice versa. And the country's external trade balance contributes to this too. An economy that has low public and private debt would be likely to have a large trade surplus (see Germany): conversely an economy that has high public and private debt would be likely to have a large trade deficit (see the US). The UK also has relatively high public debt and so, not surprisingly, it has a largish trade deficit. I'm quite happy to explain how this works if you like.

Regarding international trading of sovereign debt and currency. International investors are pension and investment funds, not banks. Are you saying that they "stole" money and are trading what they have stolen? That is an extraordinary assertion. I would certainly criticise pension funds for ripping off their customers with high fees and low returns, but to say they have "stolen" the money they invest is bonkers.

International investors not trusting some governments (and therefore rejecting their currencies and/or debt) doesn't necessarily have anything to do with "neoliberalism", although I would have to agree that neoliberal ideas are fashionable in the financial world at the moment and this does influence investor behaviour. They will change their tune when they realise that austerity doesn't create the vibrant, thriving economies that they want to see (because thriving economies give them the best returns on their investment). That change can't happen too soon for me - I think the "expansionary fiscal austerity" mantra that is dominating economic behaviour worldwide at the moment is an unmitigated disaster.

I did not exclude any part of your post, Frances Coppola. I quoted and commented on every part of it. No cherry picking, I assure you. No attempt to misrepresent you either. If you feel I have done that despite carefully quoting you then I am sorry. I can not consider anything except what you say in responding to your post.

So far as misrepresenting things is concerned, you are apt to do a bit of that yourself, you know. I accept that my statement was not as clear as meant it to be when I said


You repled


So for clarity I consider that the democratic politicians were in control from after WW2 until 1979, in the UK. From that date they abdicated their responsibilities in favour of t the market. If you took me to mean we had never seen economic crises on this scale before that war then you have completely misunderstood my position, and I apologise for not making it plain that the comparison I suggested at the end of the paragraph is the evidence I take in support of that position. I completely agree that the 1930's depression was as bad, and some would say worse, than the current mess. I note that you think it was far worse: it is a well attended school of thought: though certainly by no means universally accepted.

It is not true that we had higher unemployment in the 1970's, however. This is supported here:

http://www.parliament.uk/documents/commons...99/rp99-111.pdf

where the graph shows quite clearly what I am arguing. What is it you found on?

As I see it the abdication of economic policy to the market in 1979 and thereafter is a return to the position seen in the 1920's and thereafter: that approach led to the depression, and it has done so again, not surprisingly.

Again in your consideration of my position vis a vis the creation of debt and subsequent issuing of money. You are of course correct that I did not take account of HPM: it is not a term I know and it does not seem to have much currency. However now you have mentioned it I have checked what it means: and it means central bank created money, as you say. What is high powered about it is beyond my ability to understand. It seems to mean M0 (or possibly M1), which is a more common term: not that much hangs on that, of course. Nonetheless it is not ignored in my point: it is central to it. If government only produces 5% of all money it cannot control the money supply. You do not dispute the figure, I see

But for the rest I do disagree, and I found on what seems to be a good analysis by Steve Keen: here

http://www.debtdeflation.com/blogs/2009/01...aliersofcredit/

According to him the position I have described is what is taught in neoclassical economics: I imagine he knows about that, though you may have reason to know better and I will be interested if you have. At present I take his word for what is taught because he is an economist, after all. I presume they do not teach what they do not believe (though that is also a dubious assumption)

But at bottom I am not seeing much disagreement. You state
I infer from the use of the word "problem" that you do not think that is correct, and I agree. Government does not and cannot control the money supply if it is created by banks. Their scope for doing so must be limited, and it is not limited effectively. That is in part because the reserve requirement is not in play in any meaningful sense: and that is a real change and it makes a difference. All is not as it was.

I saw your blog post and I think your reference to Positive Money is addressing the same points. I do not propose to touch on that here because I think we have enough to be going on with

I did not say interest rates had no effect on people's behavour. I did point out that many people put their money in Icelandic banks because of higher rates of interest. It follows that it has some effect, so I would not accept that you have accurately understood my position. I just don't think it is very important. But you will no doubt be able to show me wrong on that when you show the evidence which supports your assertion. At present my view is that most of what people borrow is to put a roof over their head in the form of a mortgage. In the past there were strict rules about the amount which could be borrowed relative to income: that is no longer the case. There are some internal rules, but as a broad generalisation what you can borrow has moved from a regulated 2.5 times income to more than 4 times. That is a cause and a consequence of the asset bubble which is represented by property price inflation. Interest rates are low but that is not why people borrw more: they borrow more because houses cost more, by and large. TINA.


I have looked. When do you date the start of the asset bubble (house price inflation), I wonder? Do you count the bubble in the 1988/9 bubble? What lag do you include for the effect, if any? Interest rates were12.38% at the start of 1986 and were 10.88 at the start of 1987. They fell to 8.38% at the start of 1988. Then rose to 12.88% at start of 1989. Price to earnings ratio was highest in 1988-1990 during that decade. If your analysis is correct the lag is quite short.

Interest rates were cut dramatically in 1992. But the second spike does not show up until 2000 (or arguably 2002), though rates were substantially unchanged from 1992 until that year (5.88% at the start if 1993 and 5.75% at the start of 2000. If we have an asset bubble when rates are over 10% (or even, taking the lowest figure, are 8.38%, then why did the cut in interest rates in 1992 not produce the same effect in the same time frame? The rate at the start of 1992 was 10.38% and it was 6.88 by the end of that year. We see no spike. By 2003 the price to earnings ratio was an average 3.36%, pretty much the same as at the height of the 1988 boom: by 2008 it was 5:1. So for about 10 years we had interest rates half of what they had been in the 1980's, pretty much: and no asset bubble. From 2001 rates did fall, reaching 4% by the end of that year and staying at that rate throughout 2002. They were 3.75% in most of 2003 and rose to 4.75% by the end of 2004. In 2005 they stayed the same in the first half and fell to 4.5% in the later months: and they stayed at that level for most of the following year. They rose to 5% in the last two months of 2006 and rose again in 2007 (which I assume is the rise you refer to: ended that year at 5.5%) It is true that the bubble peaked in 2007: but that was not because of interest rates: I thinkthere were other, rather more important things, going on in 2008.

In short I do not see the association between interest rates and borrowing that you see. .But I will be interested if you could elaborate the link you perceive.

As to the ERM point: if, when the theory does not work, that is identified as an exception because of special circumstances, then of course you do not need to give up the theory. I have demonstrated that approach more extensively in discussing economic growth in another thread. It is not persuasive in any way.

I look forward to your evidence on hyper inflation. I will certainly read what you provide.

The EU paper does not say it is irrelevant: it does not mention it at all, as I said. That is because it explains the phenomenon without it. The paper is here:

www.ecb.int/pub/pdf/other/art1_mb201201en_pp59-73en.pdf

As to the relationship between public and private debt. In the UK private debt is not "quite a bit higher" It is enormously higher. But that maybe depends on how you think of the ratio, and may not be important. The total external greek debt (public and private) was $86.72 billion in 2008. It was $532.9 billion in 2011.

Greek government debt totals 166% of GDP, which is 0.2 trillion euros. So it owes 33,200,000,000. As the total figure of external debt is 0.4 trillion euros it would seem that the government does now owe more than the private sector. What I am wondering is how much of that is due to the interest it has to pay on borrowing: for that is what causes the Italian problem. And the huge increase in total external debt from 2008 is interesting, to say the least. Certainly the greek economy suffered a lot from the 2008 crash because of the nature of its economy (heavily dependent on shipping and tourism etc) . But Greek bonds were oversubscribed after the problem was known about: ie in 2010. That is odd, to say the least.

I am very interested in why you say the ratio does not matter. It seems to me that private debt is private and should be paid (or not) by private companies. Public debt is not like that because it is paid by the population, if it is paid at all. I think that matters. It may be that you argue that the people pay it in the end no matter who it belongs to: Ireland would tend to support that view; Iceland not quite so much.

As to the relationship between the level of public and private debt, and trade supluses: how does Hungary fit in to that analysis?

You are correct that international traders are not all bankers: I should have said bankers and financiers. They use pension fund money as they use other money, though: that is why they are too big to fail, in part. Because they leverage that money just like all the rest. There has been a shift because pension funds have become more involved in equity and asset investment than they were in the past. They place their money with investment banks and other institutions rather than investing directly in the real economy: why would they not? Returns on financial investments have outstripped manufacturing etc, while the party lasted. Shame about our pensions: but there it is. As with banks, a lifting of regulation coupled with the notion that there was little risk to that kind of speculation has led to a disastrous result. If you take someone's money in trust for them and you give it to a compulsive gambler then when he loses it you are culpable: you have effectively stolen it. That seems obvious to me.

I think it is precisely to do with neoliberalism: which is not just fashionable: it is ideological hegemony. They will not change their tune because those who actually believe it are faith based: they are not rational. And those who do not believe are getting very rich. They don't give a toss about vibrant thriving economies. That is not how they make their money.

We don't have time for this: because it ends in poverty and then in war.

Fiona,

Several points here.

1) I accept your point about 1970s unemployment. I was thinking of the 1980s - got my decades muddled. But you ignore other factors - such as the very high inflation in the 1970s (25% in 1975) coupled with economic stagnation - that was when the term "stagflation" was coined.

The recession of 1973-75 was the deepest since WWII and deeper than anything since until 2008. There are useful figures on this in this article (your forum does not allow me to post links, so you will have to cut and paste this reference into your browser):

telegraph.co.uk/finance/recession/4320908/UK-recession-How-does-this-one-compare-to-those-since-1945.html

There were also economic recessions - albeit shallower ones - in 1956/7 and 1961. I would venture to suggest that the reason why unemployment generally stayed low during the recessions in the period when you say "democratic govts were in control" was to do with the prevalence of Keynsian economic theories at the time and the importance assigned to full employment policies. What changed in 1979 was the dominant economic ideology, but it is not true to say that govts abdicated responsibility. They changed their economic priority: instead of aiming for full employment they aimed for price stability. Consequently price inflation has remained pretty much under control - we have never again experienced devastating wage-price inflation like that in the 1970s - but there have been higher unemployment and asset bubbles.

2) Are you suggesting that I agree with the traditional "money multiplier" explanation of bank lending and the money supply? I do not. I have written extensively about this myself because it is plain to me, having worked in the industry, that lending takes no account of reserve availability. The "money multiplier" theory is simply wrong and because of it the role of banks in creating credit and expanding broad money is not understood by classical economists. I don't think we are really in disagreement on this.

The term "high powered money" is a well-used and respected one for money created by the central bank on behalf of the government. It is also known as the monetary base, so corresponds to M0.

At present the Bank of England doesn't set reserve balance targets, because the fact that it is doing QE complicates things rather. It did set targets between 2006 and 2009 though. These were voluntary and were met retrospectively rather than in advance of lending. Reserve ratios have always worked retrospectively, of course: banks have never, ever "lent out reserves". If you think they ever did you basically don't understand fractional reserve banking.

Exactly how bank reserve balancing works is set out in the Bank of England's Red Book. Again, I can't post the link because your forum won't let me, but here is the reference (pdf) bankofengland.co.uk/markets/money/publications/redbookreserves.pdf

3) The housing slump of the 1990s cannot possibly be included in the housing bubble of the 2000s - it was a different spike, as the chart in this article (sorry, Wiki) clearly shows. wikipedia.org/wiki/Affordability_of_housing_in_the_United_Kingdom

It was caused by the late 1980s interest rate rises and the recession of the early 1990s. The slump continued until 1995, when the housing market started to recover as the economy came out of recession. The major growth in house prices started when interest rates started to fall from 2001 onwards. Obviously, low interest rates were not the only cause of the spike - the laxity in lending standards started to build up then too, light-touch regulation and all the rest of it. But they were a contributory factor.

3) Public and private debt. I did not say the ratio didn't matter. I said it varied from country to country. Private debt does matter - hugely - because too much private debt is a serious brake on economic growth. Over-indebted households and businesses don't spend, don't invest, don't do anything except pay off debt, which economically is the same as saving. Trying to control public debt when the private sector is saving and there is a trade deficit drives an economy into recession. This is basic economics. If you are a fan of Steve Keen, you should read his work on the impact of private debt on an economy.

Greek bonds were oversubscribed in 2010 because of highish yields compared to reference German bunds. They carried the same risk weighting as bunds, and were assumed to have the backing of the entire Eurozone, but gave higher returns. This made them attractive to investors. Greece's economy was trashed by the 2008/9 recession, frankly - as was Portugal's too. Obviously the interest on its external borrowings rose hugely, but so did the actual debt pile itself. It is normal, and necessary, for public debt to rise in a recession, of course.

Hungary's main problem is that a high proportion of its public and private debt is denominated in foreign currency. That foreign currency has to be bought in at market rates to meet its obligations (including enabling people to pay their mortgages). The forint is falling, so servicing its external debt is becoming more and more expensive. It is also suffering from capital flight because Eurozone banks are withdrawing cross-border assets at a rate of knots in order to improve their balance sheets. And it was already economically fragile - had to be bailed out by the IMF three years ago. But the same basic economic equivalence applies. Trade deficit + private saving = public deficit. Always.

4) I'm quite happy to provide extensive links on hyperinflation, but would you please fix the bug in your forum that prevents me posting links?

5) I'm not going to argue with you about your use of the emotive - and legally inaccurate - term "stolen" for the mismanagement of people's savings by the financial sector as a whole. They have behaved badly. On that we can agree.

There is a peculiar feature in this forum which means you cannot post links until you have 5 posts. I am sorry, but there is nothing that can be done about it. I would fix your links but it is no hardship to copy/paste, and it will resolve itself soon

Turning to your post. It is curious you would muddle your decades because we seem to be agreed about the cause of unemployment: it was a deliberate change of policy predicated on the adoption of neoclassical economic theory. I do not ignore the other things going on in the 1970's: they just were not relevant to that part of the discussion.

I disagree when you say Government did not abdicate their responsibility. The deregulation of banks and lifting of credit controls etc passed the economic power from government to market: and there it remains. That is based on the neoclassical theory and it is certainly a change in priorities: but the fact remains that over the period since 1979 the goverment of the UK relinquished control over the economy and they did so deliberately because of their beliefs. The change from keynesian to monetarist analysis demands exactly that. You may think it a good thing or a bad thing: but it is intrinsic to the change, whichever you believe. As to inflation and price stability: as you said yourself the asset bubble in house prices is enormous: that is functional inflation of a very high order. So I do not accept that there has been price stability in that period at all: I agree that was the stated aim: but since government has given up control it is a wish not a policy.

To come back to recession:

It is helpful to bear in mind that the UK had enormous debt after the war (256% of GDP, IIRC). Nonetheless there was no recession until 1956/7 and that was at least partly due to the Suez crisis. Since the policy was reversed quite quicky in face of US opposition it was not disastrous: but it did mean that oil imports were rather expensive.

By the end of that decade Macmillan chose to run his 1959 election campain on the slogan "you've never had it so good" and that reflected his expansionary policy. It resulted in a trade deficit and that gave rise to the 1961 recession so far as I am aware. It was again rather small and rather short lived.

The recession in the 1970's was a consequence of the oil crisis: it was not a consequence of the economic policy (Keynesian very largely, as you say) nor was it a consequence of a deep seated problem in the internal balance of power, as it is now so fashionable to pretend. Between October 1973 and January 1974 OPEC quadrupled the price of oil. There is no developed country which could deal with such a sudden and immense price rise in a basic and essential commodity. It did not really matter what kind of economic theory you had: there was an inevitable recession. Economic growth fell and inflation rose: to suggest that is comparable to the 3 recessions we have seen since 1979 is odd to my mind. There has been no such challenge to explain them.

If you suggest that inflation was driven by wages in that decade I must disagree. It is true that inflation was relatively high in 1970 and 1971:but the pound was devalued in 1967 and that is at least part of the reason for that inflation, I would suggest. There was some austerity immediately following that devaluation and the working population were playing catch up to some extent as well, I think. But the story of wage inflation does not fit the facts, and I take the view that history has been distorted to support the neoclassical agenda.

I am not suggesting anything about your stance, beyond what you have written here, Frances Coppola. I do not know what view you take on such issues. You appear to agree with Keen about how debt is created first and money printed to meet it afterwards ( to make a rather crude characterisation of what we are discussing): the point was not about what you believe on that matter: it was about what neoclassical economists believe and teach. And yes, I think we agree.

I do not understand your next paragraph. The point of a reserve is that it is not lent, surely? It is a major tool whereby the central bank can control the money supply. The UK has largely abandoned it in favour of the system you link to. This is one factor in the genesis of the problem, IMO.

As to your third point (about housing): What slump in the 1990's? There were two separate bubbles: one in 1987-9 roughly: and a second which began in 2000 (or arguably 2002). I had thought your point was that interest rates directly affected borrowing. Interest rates were slashed in 1992 yet there was no spike until at least 8 years later. The graph you link confirms this. I see no relationship of the sort you seek to establish.

I misunderstood what you said about private and public debt: I apologise for that. We are agreed that private debt matters.

The problems with greek debt and economic downturn were known from 2007 and certainly from 2008. Greek bonds could not possibly carry the same risk as german bonds because of that. If the banks and financiers oversubscribed an issue in 2010 they were incompetent or they were gambling. That seems self evident to me. It is my belief they were reckless because they did not believe a country would be allowed to fail and that is quite different from a responsible approach. It is assuming that they will not be allowed to suffer from the consequences of their actions; and so it proved (though the proposed write down may change that it is unlikely because they are still being bailed out).

Hungary has a big trade surplus, so whether your final sentence is true or not it does not apply to that country.

And yes my terms are legally inaccurate: when plutocrats write the laws, I would not expect anything else. However there is no doubt in my mind that companies like RBS committed fraud: and I do not think they are alone. Since pension funds invest in such companies when they act as investment institutions they are complicit in that fraud. It remains to be seen whether there will be charges but I do know that at least 3 bankers have been arrested in Iceland for similar behaviour. It is not identical but it does show that if the will is there it can be done

Edited by FionaK - 11/2/2012, 02:23

Fiona,

1) I think we may have to "agree to disagree" on your idea that governments abdicated responsibility for economic management to the markets. I don't think the facts support that view. What governments have done since 1979 is targeted retail price inflation rather than full employment, which is a major change in approach. Prior to 1979 the priority of the UK government was full employment, and it struggled to control retail price inflation. Since then, the priority has been to control retail price inflation, and governments have struggled to control unemployment. This is not surprising, because at the margin there is an inverse correlation between retail price inflation and unemployment, so it depends which you think is more important - and since 1979, successive governments have regarded generally higher levels of unemployment as a reasonable price to pay for generally lower retail price inflation. We now know that a narrow focus on retail price inflation meant governments took their eye off the ball with regard to other forms of inflation and their potentially devastating effect. That I think is the reason for the current debate about whether governments should be targeting NGDP rather than inflation. I do agree that deregulation of banking went too far, and the Blair government in particular made some very stupid decisions - not least the fragmentation of the regulatory environment, which killed off effective regulation and supervision of banks. But I wouldn't call that abdication. I'd call it incompetence, coupled with over-reliance on fashionable economic theories.

2) I have never argued that high public debt necessarily causes recession. External shocks do, so it is not surprising that the Suez crisis had a recessionary effect. But living standards after the second world war were far lower than they are now, and rationing was not lifted until 1954: part of the reason for the 1965 recession was the spending bonanza when rationing was lifted, I'd suggest. Private debt during the whole of that period was very low. As I've said before, it is total debt that acts as a brake on growth, not public debt alone. But the UK did struggle to return to economic growth after WWII. And the public debt mountain was, at least partly, inflated away during the 1960s and 70s.

Re the 1973-5 recession and subsequent stagflation. The oil price crisis was a factor, but not the only one. I'm sorry if that isn't what you want to believe, but it is the truth. I lived through that period and I remember the 25% wage demands, the three-day week imposed to ration power because the miners' strikes in support of their wage demands were reducing the supply of coal - which provided a high proportion of the UK's energy needs at the time - and the knock-on strikes in other industries. Successive governments from the 1960s through to the end of the 1970s ran incomes policies to try to control inflation, but this strategy comprehensively failed in the 1970s and the entire decade was marked by industrial unrest, high wage demands, inflation and rising unemployment. Yes, the oil price rises caused inflation in the first place, but it was then aggravated by a wage-price spiral as workers demanded wage rises to match price inflation - and the miners were actually demanding wage rises that exceeded inflation, because the country had become so dependent on coal. The 1980-81 recession was also a consequence of the industrial problems of the 1970s, particularly the Winter of Discontent, although deflationary policies by the Thatcher government made it worse. The 1970s was the decade from hell. Dismissing this as unimportant and ignoring the facts about it that don't suit your world view is not worthy of you.

3) Re bank reserves. No, that is not the point of a bank reserve. The money supply is the money in circulation, not money sitting in a bank vault. If a reserve is not lent, it is not in circulation so has no impact on the money supply. Which is the problem with QE, really.

Banks run ahead of their reserves, and always have done. If a positive reserve target is set - as was the case 2006-9, as I explained previously - it is the amount they have to have left in their BoE reserve accounts at the end of the day after all claims have been settled. If they don't have enough, they have to borrow the money either from other banks or from the central bank via the repo market. You seem to think that the UK has fundamentally changed how fractional reserve banking works at some point in the last thirty or so years. It has not. All that has happened is that much settlement is now electronic, which speeds things up considerably and can lead to loans being in effect self-funding - which is rather bizarre. But we have never had full reserve banking (in which reserves are not lent), or even 100% reserve banking as Positive Money would like. The monetarist idea that governments can control the money supply by controlling central bank reserves was always based on a wrong understanding of fractional reserve banking.

4) Re housing slump in the 1990s. So if there wasn't a slump, how come I - and many other people - were in negative equity from 1990-95? I didn't buy my first house with a mortgage that was more than the house was worth, I assure you. No, house prices collapsed and did not start to recover until 1995. I lived through that slump, and because of it I couldn't move into the larger house that my family needed. When the housing market is collapsing, interest rate reductions can't possibly create a bubble - all they do is reduce the rate of collapse.

5) I totally agree with you about the recklessness of investors in Greek debt - or rather, the underlying assumption that they couldn't possibly lose because Greece would not be allowed to fail. It's rather similar to the recklessness of financial investors in the run-up to the financial crisis, who assumed that they would be bailed out and therefore took on excessive risks. Moral hazard is inevitable when it is unclear where the boundary lies between public and private, and between one country and another.

As I said before, Hungary's main problem is its foreign currency obligations (public and private) and the falling forint, which is making servicing that debt too expensive. But the equivalence I gave is standard. Concurrent private and public sector deleveraging in the presence of a trade deficit does cause recession. Concurrent private and public sector deleveraging where there is a trade surplus may also cause recession - it depends whether the trade surplus is large enough to offset the deflationary effect of concurrent deleveraging. Whether that applies to Hungary at the moment I don't know.






Sorry, that should be "1956 recession" of course!

We will agree to disagree then. I do not see any evidence of unacceptable inflation during the period from WW2 until 1979, with the exception of external shocks like the oil crisis. Nor have you shown any. Those shocks were nothing to do with full employment policy.

What you ignore is how that change of priority, as you describe it, was effected. The government did not "struggle to contain unemployment": they made no attempt to do so, because they believed that was a matter for the market. Nor do I believe that it was incompetence. It was a deliberate policy based on "fashionable economic theory", and it achieved what they wanted: which appears to have been mass unemployment ( which is as good a way as any to contain inflation if you happen not to care about a large section of the population whom you are elected to represent); and increased inequality (on the theory that this would be good for us in the long run). As they achieved their stated aims, it can hardly be described as incompetence.

Similarly, I can see no difference between "deregulation went too far" and "abdication of responsibility". It is a distinction without a difference, so far as I can tell. The effective regulation of banks and financial institutions places the elected body in control of economic and monetary policy, and that is the responsibility of a government in a democratic society, for they represent all of the people. Deregulation means they do not have that control, and it follows that the power passes to those deregulated (and unaccountable) bodies. That is precisely what neoclassical economists believe should happen and they quite overtly decry government "interference" in the market as the route to bad outcomes. They wished to take control, and governments agreed that they should, with the predictable consequences we now see.



Don't think I said you did, did I ? My point was that high public debt is not a problem which requires austerity, nor one which necessarily leads to recession. Yet we are asked to believe that it is sovereign debt which is the problem, and austerity is the solution. That is, to use your phrase, bonkers.


Indeed. That is my point. Your appeared to argue that recessions are similar in character between WW2 and 1979; and in the period thereafter. They weren't. And that is what I sought to show.


I have no idea what you are talking about here. Rationing never applied to more than 1/3 of consumer spending and was about 1/8 from 1949. In addition most rationing had been lifted by 1949, and what remained was primarily on foodstuffs. Do you honestly believe that the lifting of food rationing in 1954 led to a spending frenzy on butter and bacon in 1956???

The next couple of paragraphs arose because I did not notice your edit immediately. But I will leave them in because although they are not addressing your post they do touch on matters which I feel are relevant.


For myself I think that the trade deficit which was such a problem after the war was at least partly due to the loss of empire, since Britain had largely depended on exports of manufactured goods to those nations: the markets there, and domestically, were relatively small and there was an emphasis on small scale production. The advance of mass manufacturing on the American system did not suit the structure of British industry and the debt burden, together with American demands for "free trade" in return for loans, did not help. Management and workforce were both slow to adapt and there was an ongoing balance of payments problem. Tariffs imposed by commonwealth countries (eg on imported cars) were also a factor.

In addition there was an indirect effect of the loss of empire, in that the UK failed to accept that it was no longer in a position to be a world power: investment was hampered by a focus on defence and foreign commitments, which directed much wealth away from infrastructure investment and towards "punching above our weight" on the international scene. UK defence expenditure was third highest in the world in 2011, in money terms, at 2.7% of GDP. But that is a very significant reduction from the spend in the 1950's and 60's when it was generally higher than 6%.

The character of sterling as a reserve currency also played its part. The uk could not afford that role but failed to recognise the changed situation: that also diverted funds which in other countries went to capital investment.

Demand was also affected by women's participation in the workforce. That had a two fold effect, I think: higher disposable income per household: and greater need for "labour saving devices". It is an open question which is chicken and which is egg, however. It is also difficult to gauge how far living standards now would be better than those shortly after the war, were households generally dependent on one wage (as they mainly were then) rather than two (more common now)

However that may be it, I note that Germany suffered its first post war recession in 1966/7. From the early 1950's Germany had much greater economic growth than the UK, and the income of the people (GDP per capita) increased more quickly: from a much lower starting base it equalled that of the UK by 1960/61. If it is the case that recession is caused by increased spending then one would expect that Germany would have suffered recession earlier than the UK: it did not.

Between 1950 and 1973 per capita disposable income in the UK approximately doubled: it increased about 3.5 times in Germany in the same period, and from about 1968 (but not before) it outstripped the rise in GDP. Labour's share of GDP was about 70% throughout this period in the UK: in Germany it was 58% in 1950; 65% in 1967; and over 70% in 1973. Absolute disposable income equalised in 1967. From then until at least the late 1970's German disposable income relative to the uk grew more quickly than its GDP relative to the UK. It is true that Germans save more than British people and that has been consistent over time, I think. But despite that German households gained a lot of consumer goods. particularly in the 1950's, just as British households did. What they spent their money on is in part due to political decisions: white goods etc in the UK were subject to 60% purchase tax, for example: German white goods attracted a 10% tax. In both countries the rise in per capita consumer expenditure almost exactly mirrored the rise in disposable income. For many items average Germans were spending less than British people, because the income distribution was more unequal: but nevertheless by the end of the 1950's a household in the 5th decile could afford a TV despite the differences in income.


I agree UK economic growth was low in the post war period compared to many countries in europe, and it certainly did have an enormous public debt. I agree that this was partly eroded by inflation.


Once again, what is your evidence for problematic inflation in the 1960's? Or do you mean the effect of the 1967 devaluation, which we have already discussed? Not very clear what you mean here, sorry.

I agree that there was industrial unrest in the 1970's. What I do not accept is your view of the reasons for that. Nor do I think you have a monopoly on truth . If you have any actual evidence that those wage demands caused inflation rather than arising as a response to it, I will be happy to see it. It seems to me that you have in fact already acknowledged that, given you state that there were wage demands to match price inflation.

As to the miners. In the 1950's there was great demand for coal and a shortage of miners. The solution proposed was to bring in foreign workers:anything but raise wages and reduce the 40 hour working week, and grant the three weeks paid holiday the miners suggested to boost recruitment. Supply and demand laws are mysteriously abrogated when it comes to labour.

Those issues continued to be live when the subsequent reduction in the demand for coal had led to a major contraction in the industry. The NUM had been cooperative in the changed situation and there were more than 500 pit closures between 1957 and 1969; the number of miners had halved; and productivity had increased by 35%. There was no national strike in that period despite the destruction of many mining communities. They were told there was no demand for coal and they accepted that. They sought a "managed decline" and assistance with adverse consequences of the restructuring. It was not forthcoming and the pit closures and redundancies continued apace. The NUM continued to support a programme which was destroying their industry with very little support or sensitivity, and the miners themselves became increasingly disaffected from their union. The country had not "become so dependent on coal":quite the opposite. The NUM had proposed that demand for coal be supported by limiting the use of North Sea Oil to import substitution: and that, too, had been rejected

They were not alone. There was serious opposition to the wage freeze introduced in 1972, and given the inflation which had followed the 1967 devaluation and the effects of the US abandonment of gold in 1971 the workforce were trying to maintain their financial position; then, as now, people do not see why they should bear the costs incurred by others. I agree with them.

The 1980 recession was nothing to do with industrial unrest as it affected the economy. The Thatcher government chose to adopt monetarism since it happened to fit with their objectives. One of those objectives was to destroy the unions. They made no bones about it, and they engineered recession in full knowledge that was what they were doing.

In the 12 months leading to the 1979 election inflation averaged 8.48%. The year before it averaged 13.34%.

In the 12 months following that election it averaged 15.05%: and in the following year it averaged 15.65%.

Mrs Thatcher was perfectly happy to increase inflation to further her ends.Dismissing this as unimportant and ignoring the facts about it that don't suit your world view is not worthy of you



You lost me. It is a reserve: it is in the bank: it is not circulating. The bank which deposits it can neither lend nor leverage it. It therefore reduces the money supply.


I do indeed think it has changed. Where there is a compulsory reserve deposited with the central bank that money is not in circulation. If the banks do not have that reserve on their balance sheets they cannot lend it. The change is from compulsory reserves (which are still required in Germany and in the US, as I understand it) to voluntary ones. And from limits on the creation of credit to no limits (following deregulation), of course.


The bit between two bubbles is not a slump. If you were in negative equity you most certainly did buy it at too high a price.


If you will look again at the graph you linked you will see that house prices did not "collapse" except in the sense that the 1987-9 bubble burst. A fresh bubble is not a "recovery": it is a fresh bubble.


"Moral hazard", as you call it, exists for everyone all the time: the temptation to theft or murder is always there and we all go about failing to resist it every day. Oh..wait, we don't, do we? Those of us who do go to jail, unless we cannot be found. But I do not think there is much difficulty in finding those who did this: follow the money....it is probably in the Cayman Islands


OK




Edited by FionaK - 13/2/2012, 14:04

Fiona

I am astounded at the way you rewrite history and redefine terms to suit your world view. You seem to have decided on your own interpretation of events which at times is at variance with the recorded facts, and you dismiss or revise those facts to fit in with your interpretation. I feel particularly strongly about the following things that you have chosen to "revise":

- You dismiss rationing as "only applying to foodstuffs" and therefore (by implication) unimportant. Foodstuffs were immensely important to families who had lived through the war, who had experienced a degree of hunger that we nowadays can only imagine. I can only think you are not old enough to know anyone who lived through that time, or you wouldn't be so dismissive of food rationing and its importance. The spending spree when rationing was finally ended is a matter of historical record. However, I am quite prepared to accept that there are other explanations for the 1956 recession. I merely suggested that as a possible contributory factor.

- You suggest that I claimed there was "problem inflation" in the 1960s. I did not. But governments in the 1960s DID run incomes policies to control inflation. That is a matter of historical record.

Inflation was high throughout the 1970s - in fact by your own admission it was high from 1967 onwards. Whatever the cause of the inflation -whether internally or externally caused - it was higher during that time, and up to 1983, than it has been at any time since. Perhaps you believe there have been no economic shocks since that time large enough to cause inflation of 10-20% or more. Really I don't think this is a supportable argument. The difference is that since 1980 governments have actively sought to control inflation.

It is simply untrue to suggest that governments have made no attempt to control unemployment. Successive governments have devised policies to address long-term and youth unemployment, in particular. They just haven't been very successful.

- The effect of high wage demands on inflation is well documented. The wage demands of the 1970s were both a response to inflation AND a cause of inflation. I don't blame workers for seeking to maintain their real incomes, but the effect was more inflation. You may not want to believe that inflation-beating wage demands result in higher production costs and therefore higher prices - but that is what happens.

Oh, and that "supply and demand laws" thing. The UK is not a closed economy. Labour supply can come from abroad if that's cheaper than giving in to domestic wage demands. That isn't abrogating the laws of supply and demand, it's observing them.

- 1979. On the one hand you want me to accept that the recession and inflation from 1973-75 were caused by the 1973 oil price crisis, not by high wage demands and industrial unrest. Then on the other hand you claim that the recession and inflation of 1979-80 were caused by Mrs. Thatcher's policies - even though there was another major oil price hike in 1979? You really can't have it both ways. Either both recessions and associated inflation were caused by oil price hikes, or neither was. Or, more likely in my view , they were both caused by a combination of external shocks and domestic difficulties. I totally accept that Mrs Thatcher's policies drove the country into a deeper recession than the oil price hike alone would have caused. But equally, you really should accept that industrial unrest and high wage demands contributed to the recession and inflation of 1973-5.

The main piece of union-breaking was of course the miners' unions. There is no doubt that Mrs. Thatcher set out to break them. But she didn't do so until 1984-5.

- 1990s house price fall. Really you are indulging in semantics in arguing about whether the gap between two bubbles is or is not a "slump". But house prices DID fall significantly at that time and did not start to recover until 1995, and many people DID end up with mortgages more than the house was worth. That, I'm afraid, is fact. It is hard to see how a five-year period of falling then stagnant house prices can be the start of a new bubble. Arguing that I ended up in negative equity because I bought at "too high a price" is splitting hairs, frankly. I bought my house at the market price at the time - as everyone does, of course, because it isn't generally possible to buy below the market price. The second housing bubble did not start developing until AFTER 1995, and because of the five-year period of falling and stagnant prices before it, it isn't reasonable to conflate it with the previous bubble. It is hard to establish exactly when a housing recovery turns into a new bubble, but it certainly can't be any earlier than that.

And finally.

I feel I must make the following point about banking and finance. You seem to know very little about how fractional reserve banking works. In particular, you don't understand what "reserves" are or how they are accounted for. What you have said above in reply to my explanation is very, very wrong. Balances in central bank reserve accounts are ON commercial bank balance sheets, not off balance sheet. They are used to settle claims - i.e. loan settlement and deposit drawdown. We do not have, AND NEVER HAVE HAD, "reserve" banking in the sense of banks keeping unlent reserves backing deposit balances. Such a system is not used anywhere in the Western world, and to my knowledge never has been for any length of time. We have in the past had a CURRENCY that is backed by gold reserves at the central bank which are not lent out, and it may be that you are confusing bank reserves with these central bank gold reserves (which we still have, of course, though they are currently held by the ECB). But they are not in any way related.

If you are planning to write any more about banking and finance I seriously suggest you study it properly, because you are making basic errors at the moment. And please accept that I really do know my stuff about this. I have a masters degree in it.

Ditto


The point is not that. Of course food is important. Of course people bought more butter and bacon when they could. And of course that meant they diverted other spending into butter and bacon. What you do not seem to understand is that other goods were not rationed and that surplus wealth could be readily spent on a variety of other good which were not rationed. You say that there was a spending spree on these items and imply that was not diversion: do, please, cite the evidence you say is a matter of historical record. I would also be interested in your take on the actual impact of rationing. Are you aware that the possesion of coupons was only part of the story? You still needed money to buy the goods the coupon entitled you to. I notice that you have not addressed anything I have said about Germany in the same period. I think that is a challenge to your analysis and I am interested in your views on that.


I asked you if that was what you meant. That is not a suggestion: it is a question.

As to the latter, of course they did. So what? Inflation in that decade was insignificant. It averaged 1% in 1960; 3.45% in 1961; 4.2% in 1962; 2.05% in 1963; 4.1% in 1964; 4.7% in 1965; 3.9% in 1966; 2.5% in 1967.


No. Inflation did increase as a result of the 1967 devaluation; but of course there was a lag. The 1967 devaluation was in November of that year, when inflation stood at 1.9%. It rose to a peak of 6.3% in March 1969 before falling back. It would seem reasonable to suppose that the prices and incomes policies of the 1960's worked. As touched on later I did forget the 1979 oil crisis: so I will be interested to hear about the other external shocks since that time which I may have also forgotten. Can you list them please?


That is rubbish. Fig leafs, like YTS etc, are figleafs. They are not serious. You have said yourself that full employment was not an aim of post 1979 governments, and you are absolutely correct. It is certainly true that some token efforts must be made from time to time because unemployment of more than 2 million is a bit embarrassing: but there is no substance to that.


So document it.


Teehee! It is closed if you wish to make it closed and not if you don't. That is a choice we make. It depends on your goals, as you freely admit.


You are correct: I forgot the 1979 oil price hike. It is not directly comparable: a doubling of oil prices over 2 years (or if you want to focus on the peak 260%) is not the same as a quadrupling of them over 4 months. But I certainly do accept that that increase caused some of the inflation in 1980/81. I see no reason to think that industrial unrest was causal in either case. Your correction actually strengthens my case, I think: so thanks for that.


Indeed


Hardly.


Of course it is a fact. Who said otherwise? Oops, you did. You said you did not pay more for the house than it was worth. I am glad to see we now agree.



???

There was a bubble. That means that the asset price, in this case houses, was higher than the thing was worth. That happened between 1987 and 1989. So far we seem to be agreed. The bubble burst. Prices fell back to "normal" levels. No "slump". This is not semantics, Frances Coppola It is a description of what happened. Nobody claimed there was a bubble which began in 1995, so far as I can see: the question is whether it should be dated at 2000 or 2002.

I absolutely agree that the fact that you bought at too high a price was because you had no choice: that is my point, in fact. Interest rates have nothing significant to do with it: you have to live somewhere. You pay the price, whatever it might be. Your own experience makes my case.


I rather think we are talking at cross purposes. I do not know what you are talking about, but I am talking about reserve requirements. Far from being unusual there are very few states which do not have such requirements.

www.imf.org/external/pubs/ft/wp/2011/wp1136.pdf


The argument in favour of reserve requirements is precisely its effect on the money supply: the argument against them is two fold: they are held to be a tax on financial institutions and they are said to be increasingly unenforceable as banks find ways around them.

http://moneyterms.co.uk/reserve-requirement/




If you are planning to make any more assertions which contradict information from the IMF and other sources, I trust you will allow me to discount them. Masters degree notwithstanding.

Edited by FionaK - 15/2/2012, 07:35

Very interesting thread.
I have lost all faith in the profession of economics, it is not a science, there is no "revealed truth", so the fact that someone has a masters degree is completely unimpressive, it just means they are likely locked into a certain way of thinking that is doing us all no good at all.