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In an innoucuous sounding article, 'Are UK and US turning Japanese?' pesto drops this:

http://www.bbc.co.uk/news/business-14589325

But what if the worst happens? Is there nothing that the UK authorities can do?

Well there is an extreme remedy, which policy-makers have muttered about to me.

I should say at this point - because it is the sort of remedy which will upset lots of people - that I am not saying this will happen.

But you probably need to know what theoretical treatments are left in the armoury if the patient - the British economy - were to go on the critical list.

The Bank of England could engage in an extreme form of quantitative easing.

It could purchase a sizeable amount of British government debt and then announce that the debt was being cancelled, that it never needed to be repaid.

It would therefore be dropping cash into the economy, it would be pure helicopter money, to use the phrase beloved of economists.

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In an innoucuous sounding article, 'Are UK and US turning Japanese?' pesto drops this:

http://www.bbc.co.uk/news/business-14589325

It is the last card. It could work if you had the correct fiscal policy from the government, which means running a deficit to allow the QE to work, but running a surplus just as soon as inflation takes off.

Desperate stuff mind, the risk is that you LOSE the pound. It could hyper-inflate to zero if you dont do what you need to do, run a fiscal surplus.

Gold has never looked so shiny.

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there's a logic to it.given what's passed before,it would be the route of least resistance.

as ever though,it would be kicking the can down the road.

no it wouldn't, it would be year zero

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Nothing would surprise me now, in fact the only thing that would surprise me would be TPTB taking responsible steps.

QE leads to one place and one place alone, Mugabe pointing and laughing at us...

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no it wouldn't, it would be year zero

One thing to watch with this policy, if they do it, is how they do it.

If they buy gilts in the open market, they are giving bankers free money at the expense of everyone else.

If they do this properly, they will fund government expenditure directly, no free money for bankers that way, as they wont be able to sell their bonds to the BofE and above market prices.

They will probably do it the first way.

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But for most us, this isn't good news. When investors won't take risks, it is very hard for the economy to grow.

Think the link to this FT story came from hpc on a thread earlier today. It's the same with UK QE.

Those with the capacity to hire American workers―small businesses as well as large, publicly traded or private―are immobilized.

Not because they lack entrepreneurial zeal or do not wish to grow; not because they can't access cheap and available credit. Rather, they simply cannot budget or manage for the uncertainty of fiscal and regulatory policy. In an environment where they are already uncertain of potential growth in demand for their goods and services and have yet to see a significant pickup in top-line revenue, there is palpable angst surrounding the cost of doing business. According to my business contacts, the opera buffa of the debt ceiling negotiations compounded this uncertainty, leaving business decisionmakers frozen in their tracks.

http://ftalphaville....-money-problem/

If I was investing in a business I want value for my investment and a reasonable sense of future demand and ability to pay from the market. I don't particularly want to invest my good money to competitive against a load of zombie businesses I know are being kept alive with forbearance, the billions of pounds of QE already snapped into existence by the BoE, prospect of more happy QE whenever markets wobbles back, and five hundred year low interest rates. Especially not businesses who expanded in the boom expecting evermore boom growth..The threat of more QE is even more paralysing.

Same paralysis for buying my first home with mostly 2000-2007 prudent savings of sound money, not funny money that's protecting those who enjoyed house prices trebling, embraced debt, and don't want them to fall back. Not going to be QE threatened to pay a game of rigged prices.

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If they do that then the Pound Dollar would dramatically lose value.

Really they would be better off and just cancel all debt, as just clearing government debt wont fix the fundamental problem that the current system is breaking down. Start all balance sheets off at zero and if a company cant make money from that position it shouldn't be in business anyway.

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Great post.

Yep that is exactly how I feel. That's not to say that I'm not very scared of the next myxomatosis QE rabbit to be pulled out of the policy hat/ärse.

Really not sure whether I could stand firm in the face of the type of QE mentioned in Peston's article, seeing as 100% of my 'wealth' is in cash (GBP), and there is no way I'm touching gold until we get a big correction.

Edit to add: That Kaminska FT Alphaville article, in particular the following passage, made me sit still and cry on the inside:

"Thus, what we may have is a financial crisis coupled — or at least partly exaggerated — by a demographic crisis. Too many savers are now ready to cash-in on accumulated wealth. Wealth they expect to be there, even though on a wider economic scale it’s never been replaced by the indebted younger generation."

My Dad turns 65 in 2 months - I expect he'll be one of the victims of the most recent rounds of the ongoing financial mess.

Edited by WageslaveX14

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I can't see it happening... for two complementary reasons:

1. An 'extraordinary' move like that might well "spook the markets" - suggesting a raised likelihood of other 'defaults' (as debt cancellation is equivalent to the government defaulting to its own bank) - this could cause a crisis of confidence in Sterling - either driving rates higher, or allowing the value of sterling to plunge relative to other currencies... perhaps it could spark dangerously high inflation.

2. This won't greatly improve the government's situation... it will make it harder to sell fresh debt - and, in any case, future coupons have already affected the market price of existing debt.

Extreme QE is something that could be done, I guess, but I doubt it would have any of the allegedly intended consequences.

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Well I certainly hope we don't go down this road.

Many on here, from cgnao through Daddy Bear to Injin, have suggested it would happen.

I've always thought it wouldn't, since the consequences would likely be so bad as to lead to overthrow of the politicians and bankers rather than just dislike of them.

But who knows...

Edited by scottbeard

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The only way to sell this is with say wiping out the lower rate of income tax for 1 or 2 years.

However the boost would be short lived.

Why not just bite the bullet and buy up mortgage debt and cancel 50% or 60% or people loans and then force banks to only lend 1 wage at 3 times earnings, they would at least then really give an inflationary boost to the economy...

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What do they gain by cancellation? It'll just cause panic. They can hold the gilts and pretend to pay themselves interest. Instead of issuing new debt, they can sell from this pool of gilts.

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The only way to sell this is with say wiping out the lower rate of income tax for 1 or 2 years.

However the boost would be short lived.

Why not just bite the bullet and buy up mortgage debt and cancel 50% or 60% or people loans and then force banks to only lend 1 wage at 3 times earnings, they would at least then really give an inflationary boost to the economy...

The problem is that's not enough, you need to address the problem in all the system, including personal, corporate and company debts. Tackling them all at the same time would be the only way to address it, and the only way to do that in a way that would work would be to nullify all debts and wipe out all monitory assets (which would in effect happen anyway by removing all debts). Really starting everything again from scratch and rebuilding the economic system from their could end up being the only option we have if someone doesn't come up with some magic fix to the broken western world. Would be one hell of a mess as countries would have to run balanced budgets from day one but would at least mean that the world / countries would have to live within their means and price goods to a price that people/companies can afford based on their income.

Its really a last resort option, but it will tackle the whole problem though rather than just parts of it.

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What do they gain by cancellation? It'll just cause panic. They can hold the gilts and pretend to pay themselves interest. Instead of issuing new debt, they can sell from this pool of gilts.

That's what I was thinking.

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That's what I was thinking.

They gain because the ratio of base money would increase.

The problem of indebtedness is linked to how much that base money, money unemcumbered by debt, is levered through the creation of bank credit. In a period of contraction, that reduction in debt plays havoc with the operation of the economy, as everyone starts worrying about getting their money back, rather than working hard and producing things. If you increase the amount of base money, then as the system ceases to be so highly levered, you can enable more people to pay what they owe through working and producing things.

The ratio of credit money to base money, should fall, allowing debts to be repaid more easily, and giving confidence to keep the overall level of borrowing as it was, or maybe even expanding a bit.

The danger is of course, that immediately the banks take that money and lever that up to, producing an inflationary cataclysm. But the risk of not doing this is just as bad if not worse, a deflationary cataclysm.

That is why you need government fiscal policy to move in step with such a policy, to give confidence to the markets that should a large amount of inflation of credit money aggregates occur, the opposite policy, extreme Quantitative Tightening, which requires a government fiscal surplus, can and will occur.

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They gain because the ratio of base money would increase.

EDIT: Ahh, I see what you mean.

The problem of indebtedness is linked to how much that base money, money unemcumbered by debt, is levered through the creation of bank credit. In a period of contraction, that reduction in debt plays havoc with the operation of the economy, as everyone starts worrying about getting their money back, rather than working hard and producing things. If you increase the amount of base money, then as the system ceases to be so highly levered, you can enable more people to pay what they owe through working and producing things.

The ratio of credit money to base money, should fall, allowing debts to be repaid more easily, and giving confidence to keep the overall level of borrowing as it was, or maybe even expanding a bit.

The danger is of course, that immediately the banks take that money and lever that up to, producing an inflationary cataclysm. But the risk of not doing this is just as bad if not worse, a deflationary cataclysm.

That is why you need government fiscal policy to move in step with such a policy, to give confidence to the markets that should a large amount of inflation of credit money aggregates occur, the opposite policy, extreme Quantitative Tightening, which requires a government fiscal surplus, can and will occur.

Exactly.

If the ratio of credit to base money is too high, you can reduce the amount of credit OR increase the amount of money. If they are worried the banks will spunk it up the wall: Use Basel III to force them to hold it as increased capital, preferably in the form of gilts.

I wish someone would explain why this simple idea is unworkable.

Edited by Timm

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EDIT: Ahh, I see what you mean.

Exactly.

If the ratio of credit to base money is too high, you can reduce the amount of credit OR increase the amount of money. If they are worried the banks will spunk it up the wall: Use Basel III to force them to hold it as increased capital, preferably in the form of gilts.

I wish someone would explain why this simple idea is unworkable.

It isnt unworkable. It could work. But it is very risky.

A state needs two things to exist, an ability to defend itself, and an ability to finance itself. It cant do one without the other.

Key to this is the currency it issues, and demands as payment for tax. As long as the people it has dominion over accept that currency too, the state is strong. If however, they caused hyper-inflation through this policy, or to put it another way, cause the people to reject the currency, their ability to raise taxes in a form that they could spend on things like troops, would be diminished.

The state would then be in grave danger. You can see how a foreign power or even an enterprising individual or group, might be able to set up their own state that challenges the existing weakened one.

Mind you, if they didnt do this sort of QE, and banks collapsed and people lost their savings, they might well lose faith in the currency anyway.

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How about this for a solution? Raise the income tax threshold for individuals to 50k. That'll kick-start the consumer driven economy. Increase taxes on the rich, add mansion tax, etc to balance the budget.

Ie. the Plebs need more money, the Aristos need to take on more of the burden, otherwise the system collapses.

Edited by newbie

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lol tax the rich. that always works :lol:

Might wanna close the borders too.

People are disillusioned with the main parties, the police and the media. The UK is ripe for some populist policies...

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People are disillusioned with the main parties, the police and the media. The UK is ripe for some populist policies...

Agreed, but the 50% one hasn't been proven to actually work. Better off liberating ALL workers from tax on their first 10k of earnings, which both coalition parties agree on.

Once Osborne has recieved his independent (lol) report on the effectiveness of the 50p rate, he will soon shift public opinion away from it.

Even the mansion tax is more likely than taxing the rich more.

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The Bank of England could engage in an extreme form of quantitative easing.

It could purchase a sizeable amount of British government debt and then announce that the debt was being cancelled, that it never needed to be repaid.

It would therefore be dropping cash into the economy, it would be pure helicopter money, to use the phrase beloved of economists.

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  • 285 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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