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swissy_fit

Deflation/inflation Question Regarding Govt Debt.

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If QE was inflation (I believe it was), then what about paying down Government debt?(should that ever occur)

In the unlikely event that the Government was able to sell its shares in RBS and LBOS for a "profit" of (say) 50bn, and this money was used to pay down government debt(equally unlikely) , would that be deflation?

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Really depends on what people decide to do with the money in their hands, the velocity if you will.

Well yes.

It's too damned complicated for me, and I'm allegedly pretty bright.

It appears to me that paying off government debt is deflation (ie the money supply will diminish).

However I can't see how consumers paying off debt reduces the money supply, doesn't it merely reduce the velocity?

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Well yes.

It's too damned complicated for me, and I'm allegedly pretty bright.

It appears to me that paying off government debt is deflation (ie the money supply will diminish).

However I can't see how consumers paying off debt reduces the money supply, doesn't it merely reduce the velocity?

from the Ticker forum

So as debt level rises your ability to keep taking more goes down. That debt adds to aggregate demand just as would more income. But when that debt accumulation ceases, so does the demand that it sponsored, and when it reverses you wind up subtracting from demand that which goes to pay off the debt!

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Well yes.

It's too damned complicated for me, and I'm allegedly pretty bright.

It appears to me that paying off government debt is deflation (ie the money supply will diminish).

However I can't see how consumers paying off debt reduces the money supply, doesn't it merely reduce the velocity?

If you imagine a country which was completely self-contained, then it could still have a national debt by borrowing from its citizens and corporations. The security for this borrowing would be the future tax revenues the Govt should be able to raise.

So the Govt can spend in any one year more than it receives in tax by the additional debt. As a private citizen who owns Govt bonds, you have saved some income, put it to one side for a while and let the Govt decide how to spend it, in return for some coupon (regular interest payment). When the Govt repays you in full, they do so from tax revenues (or new debt) and you are now free to decide how to spend or save it. If the Govt is on a drive to pay down the national debt, then a lot of private citizens will have the problem of what to do with the money they've been handed back which is now not earning anything.

Govt tax receipts (which pay for the public sector and spending) come primarily from tax on gross incomes, VAT and corporation tax (earnings, spending and profits). Note that the Govt tax revenue is reduced when the private sector incurs losses. Private savings in turn come from after tax income. So if the tax burden goes up too far, there will come a point where there is hardly anyone is able to finance public sector, so rates will rise to encourage them...

I don't know if this is going anywhere and I'm requested elsewhere.

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If you imagine a country which was completely self-contained, then it could still have a national debt by borrowing from its citizens and corporations. The security for this borrowing would be the future tax revenues the Govt should be able to raise.

So the Govt can spend in any one year more than it receives in tax by the additional debt. As a private citizen who owns Govt bonds, you have saved some income, put it to one side for a while and let the Govt decide how to spend it, in return for some coupon (regular interest payment). When the Govt repays you in full, they do so from tax revenues (or new debt) and you are now free to decide how to spend or save it. If the Govt is on a drive to pay down the national debt, then a lot of private citizens will have the problem of what to do with the money they've been handed back which is now not earning anything.

Govt tax receipts (which pay for the public sector and spending) come primarily from tax on gross incomes, VAT and corporation tax (earnings, spending and profits). Note that the Govt tax revenue is reduced when the private sector incurs losses. Private savings in turn come from after tax income. So if the tax burden goes up too far, there will come a point where there is hardly anyone is able to finance public sector, so rates will rise to encourage them...

I don't know if this is going anywhere and I'm requested elsewhere.

You're probably right, not going anywhere other than to Injinland.

I've no idea who the UK national debt is owed to, I suspect it's not the citizens of the UK, I think that scenario is the Japanese situation.

If money is debt(which it appears to be), then paying off debt reduces money supply.

so paying off debts, in particular government debts, reduces money supply and upsets banks, this would explain why there is no plan to ever do this.

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You're probably right, not going anywhere other than to Injinland.

I've no idea who the UK national debt is owed to, I suspect it's not the citizens of the UK, I think that scenario is the Japanese situation.

If money is debt(which it appears to be), then paying off debt reduces money supply.

so paying off debts, in particular government debts, reduces money supply and upsets banks, this would explain why there is no plan to ever do this.

IIRC, about 40% is foreign investors, 40% is for UK pensions and 20% is for UK savers. Give or take 10% and I could be wrong (read it a while back).

Government paying off debt, allows the private sector to borrow that money instead. Labour thought the private sector wouldn't, so wanted to borrow lots on their behalf (racking up debts for the next generations), while the Tories wanted to borrow less (but still lots) on the private sector's behalf.

There is just one pool of money, from which both the public and private sector can borrow against.

P.S. Foreigners have to buy Sterling to buy government bonds (gilts). This adds to the demand for Sterling too, although so can private investment (FTSE, private equity etc).

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IIRC, about 40% is foreign investors, 40% is for UK pensions and 20% is for UK savers. Give or take 10% and I could be wrong (read it a while back).

Government paying off debt, allows the private sector to borrow that money instead. Labour thought the private sector wouldn't, so wanted to borrow lots on their behalf (racking up debts for the next generations), while the Tories wanted to borrow less (but still lots) on the private sector's behalf.

There is just one pool of money, from which both the public and private sector can borrow against.

P.S. Foreigners have to buy Sterling to buy government bonds (gilts). This adds to the demand for Sterling too, although so can private investment (FTSE, private equity etc).

What really happen is that say there are £4T worth of M4 money around - they will either be in commercial banks BoE accounts, or other Central Bank's BoE account or cash under mattress. When the government 'borrows' it simply transfers a chuck of the money into its BoE account (or it can simply add to its BoE account balance if it likes).

If the government sells RBS and pays bond holder, it simply move money from one of the BoE account (as the buyers of RBS stock will eventually transfer money from one of his commercial bank account) to the government's BoE account. The government then transfers the money from her BoE acocunt into the Bond's investors account. So money supply is not destroyed.

Money supply is said to be destroyed if the government sells the RBS shares and then lock the money in her BoE 'saving' account and never allow that out of BoE wall again.

So, if the government prints money to pay down all debt, the money supply is not destroyed, it is just swapping 'gilt' for another type of gilt says 'BoE I owe you note'.

Troubles only begins when too much / too little money gets into the private sector hands (government spending = put money into private sector hands, tax/issue of gilts = taking money off private sector hands).

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  • 142 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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