Why Is Debt Monetisation Seen As A Bad Thing?

[Traktion]

Are you sure that is always true? When the UK came off the gold standard and was able to print new money in the 1930's we did relatively well compared to the rest of the world.

...

I think you have to be careful with the use of 'we'. I'm sure some people did much better, but likely at the cost to others.

Money printing is just another form of socialist redistribution - stealing from one set to give to another. In this case, it's stealing from the prudent to give to the feckless.

Central planners love to lump people into one amorphous mass, then refer to it as 'we' or 'us'. The reality is that we're all individuals. Collectively, individuals may appear to be one 'thing', but in reality the latter is just a reflection of the former... it doesn't exist in itself.

[leicestersq]

Capitalism without bankruptcy is not capitalism. The end point of what you are supporting is Fascism.

You have lost me there. I did point out that in the UK in the 1930's, loose monetary policy was used to build up our armaments to oppose such policies. And where did I state that there would be no bankruptcy? Private debts should never be monetised in my book, I was only talking about the state monetising it's debt. That means there could be bankruptcies as always.

This idea of the paradox of thrift is a theoretical nonsense.

I have never seen anyone argue successfully against it.

In the real world there are winners and losers. What you are proposing is to not permit losers, by penalizing winners.

Not at all, winners and losers remain. Remember, private debts should not be monetised.

Deflation actually rewards the prudent.

That isnt necessarily true. Deflation can destroy an economy, reducing the wealth of everyone. What would happen to the UK economy if you took 50% of the money out of it? It would grind to a halt and civil society would break down. Got lots of money saved up have you? It wont get you much if our productive capacity seizes up.

Inflation penalizes, and rewards those who have access to money first. The 'trickle up' effect. What you are proposing is more of the same.

I thought I was opposed to inflation, did I not make that clear?

As this continues there will be fewer and fewer people who will be motivated to work. The working population will dwindle. People will choose to opt out of the system. This is already happening in the US.

Where did this come from? I was arguing that judicious use of monetary policy can help improve the wealth of the nation. There is no wealth if people dont work and opt out of the system, I never advocated that. What you are talking about here is the use of the government to take money from workers and give to non-workers. This is an entirely different argument.

[Bloo Loo]

Well yes, we are talking about monetising government debt, which is a pledge against the taxes raised on future production. Instead of it being a debt for the future, you increase the supply of money now with something that has no debt (debt being defined as something you can extract payment for in a court of law).

Whether or not that is a good choice depends on the circumstances, but it isnt always a bad choice.

I am not sure what relevance 'monetising wealth' has in this debate.

because, monetising wealth is what give money its value.

Monetising (and the monetising takes place at the BoE, not at the point of sale of the guilt from the private bank) against nothing means the money is backed by nothing at all. Its not worth the paper its not printed on.

[leicestersq]

I think you have to be careful with the use of 'we'. I'm sure some people did much better, but likely at the cost to others.

Money printing is just another form of socialist redistribution - stealing from one set to give to another. In this case, it's stealing from the prudent to give to the feckless.

Central planners love to lump people into one amorphous mass, then refer to it as 'we' or 'us'. The reality is that we're all individuals. Collectively, individuals may appear to be one 'thing', but in reality the latter is just a reflection of the former... it doesn't exist in itself.

Money printing can be part of a socialist redistribution, but that isnt all it can do. Changes in the money supply can have a dramatic affect on the real economy of trade, goods and services. Austrian economists often argue that this is not the case, but I find the argument difficult to accept. The contracts and laws that underpin our trade systems, are not flexible in a backwards direction. Bank accounts alone are a good example of this. If banks reduced the amount of cash each depositor has as the value of its loans goes down, there would immediately be a run on all the banks, and credit would just dry up.

Few would argue that credit isnt vital to a modern economy. Those nations that have developed sophisticated means of advancing and controlling credit, have become wealthy. Other nations that dont use it have found it difficult to develop.

[leicestersq]

because, monetising wealth is what give money its value.

Monetising (and the monetising takes place at the BoE, not at the point of sale of the guilt from the private bank) against nothing means the money is backed by nothing at all. Its not worth the paper its not printed on.

Money is given value by what it can buy you.

In the UK, notes and coins are not backed by anything other than the state being willing to accept money as payment for tax. This though, means that the money is generally acceptable as payment for all things.

Does printing money devalue it? Not always. Sometimes a little more money can stimulate more production than there would otherwise have been, making it more valuable than before.

[Toto deVeer]

You have lost me there. I did point out that in the UK in the 1930's, loose monetary policy was used to build up our armaments to oppose such policies. And where did I state that there would be no bankruptcy? Private debts should never be monetised in my book, I was only talking about the state monetising it's debt. That means there could be bankruptcies as always.

I have never seen anyone argue successfully against it.

Not at all, winners and losers remain. Remember, private debts should not be monetised.

That isnt necessarily true. Deflation can destroy an economy, reducing the wealth of everyone. What would happen to the UK economy if you took 50% of the money out of it? It would grind to a halt and civil society would break down. Got lots of money saved up have you? It wont get you much if our productive capacity seizes up.

I thought I was opposed to inflation, did I not make that clear?

Where did this come from? I was arguing that judicious use of monetary policy can help improve the wealth of the nation. There is no wealth if people dont work and opt out of the system, I never advocated that. What you are talking about here is the use of the government to take money from workers and give to non-workers. This is an entirely different argument.

How can you separate monetization of government debt from private debt? In the real world one always bleeds over into the other. Can you say that today there is no monetization of private debt? Of course there is. Once the money taps open up to the banks. it happens. Money is fungible. Everything else I've said follows from this situation.

[Bloo Loo]

Money is given value by what it can buy you.

In the UK, notes and coins are not backed by anything other than the state being willing to accept money as payment for tax. This though, means that the money is generally acceptable as payment for all things.

Does printing money devalue it? snip

always.

If I have 10 loaves and I monetise them into a loan of £10. No problem, I get £1 for each loaf. a value is set for each £1 paper...its a loaf.

the bank decides to print a £1. and decides to buy a loaf with it.

It does so. there are now 9 loaves and for some reason my £10 now can only buy 9 loaves.

[Traktion]

Money printing can be part of a socialist redistribution, but that isnt all it can do. Changes in the money supply can have a dramatic affect on the real economy of trade, goods and services. Austrian economists often argue that this is not the case, but I find the argument difficult to accept. The contracts and laws that underpin our trade systems, are not flexible in a backwards direction. Bank accounts alone are a good example of this. If banks reduced the amount of cash each depositor has as the value of its loans goes down, there would immediately be a run on all the banks, and credit would just dry up.

Few would argue that credit isnt vital to a modern economy. Those nations that have developed sophisticated means of advancing and controlling credit, have become wealthy. Other nations that dont use it have found it difficult to develop.

Papering over the broken promises of one set of people, at the cost of another, is always redistribution.

'The economy' is just another collectivist term, in which a high 'GDP' is supposed to be some sort of holy grail. Is a high GDP good for you or I? How about the bankers or the politicians? Does it make people happy or does it mean they are working themselves into early graves?

You may want to measure throughput in a factory, to see how hard the people are working, but why is this paradigm even used at the state level? Wouldn't people rather be at home, spending time with their families, rather than toiling away to keep the rent seekers wealthy?

I'm sure you will read this and consider it completely irrelevant and beside the point. However, it is the bigger picture. If the central planners pick one benchmark and then target it at all costs, they are removing the market mechanism for choosing what is good or bad... they are dictating it.

Having an efficient economy and a high GDP are not the panacea for finding human happiness. They're just arbitrary targets.

EDIT: P.S. if banks fail because they don't have a reverse gear, they are flawed and need replacing. People value different things at different times and any systems which aren't flexible enough to cope are not fit for purpose.

Edited February 13, 2012 by Traktion

[leicestersq]

always.

If I have 10 loaves and I monetise them into a loan of £10. No problem, I get £1 for each loaf. a value is set for each £1 paper...its a loaf.

the bank decides to print a £1. and decides to buy a loaf with it.

It does so. there are now 9 loaves and for some reason my £10 now can only buy 9 loaves.

This is the point though, if you use that money you have printed properly, you can end up with 11 loaves, not 10.

Austrian economists believe that if you print money, output remains unchanged. I dont buy that argument.

[Bloo Loo]

This is the point though, if you use that money you have printed properly, you can end up with 11 loaves, not 10.

Austrian economists believe that if you print money, output remains unchanged. I dont buy that argument.

at first, printing does stimulate...that is Austrian theory....but the returns will diminish sharpely and you dont realise what has happened until it is too late.

Austrian theory explains all this...most people say that the Theory misses out what you said...it doesnt...it explains why yuo get diminishing returns.

In the loaf case, you can make a loaf without any money at all. Money is a means of exchange, it doesnt make a loaf, boil a kettle or anything. But, we do now have a £1 which someone has got without making a thing, expended no effort, taken no risk...and that £1 has diluted the first 10 into 11....for the same wealth.

If the theory that printing makes economies were true, then go ahead,,,,print £20....£100,...£10000.....and see what happens.

[leicestersq]

How can you separate monetization of government debt from private debt?

That is easy. Government bonds are government debt. You should only monetise this.

And let me point out my distaste for the current method of monetising this in the open market. The only proper way to monetise is for the state to print to make up a portion of any deficit it is running. Buying in the open market gives free money to bankers, and is somethign I find repugnant.

In the real world one always bleeds over into the other.

Yes, the multiplier effect. This is what you want to happen, for the new money to circulate.

Can you say that today there is no monetization of private debt?

Well I dont support the monetisation of private debts in any way. The current government is monetising the debts of equitable life, and RBS and HBOS. It has the power to do this, and I oppose it all.

Of course there is. Once the money taps open up to the banks. it happens. Money is fungible. Everything else I've said follows from this situation.

Only if the government chooses to do so. That newly printed money can be used to pay off other debts though, is this what you are talking about? I would hope that any government exacts a good bargain for any money it spends. I know it doesnt always do that, but government corruption and largesse is another discussion.

Edited February 13, 2012 by leicestersq

[leicestersq]

at first, printing does stimulate...that is Austrian theory....but the returns will diminish sharpely and you dont realise what has happened until it is too late.

Austrian theory explains all this...most people say that the Theory misses out what you said...it doesnt...it explains why yuo get diminishing returns.

In the loaf case, you can make a loaf without any money at all. Money is a means of exchange, it doesnt make a loaf, boil a kettle or anything. But, we do now have a £1 which someone has got without making a thing, expended no effort, taken no risk...and that £1 has diluted the first 10 into 11....for the same wealth.

If the theory that printing makes economies were true, then go ahead,,,,print £20....£100,...£10000.....and see what happens.

Everyone agrees that if you print too much, for an economy that is at close to productive capacity, you just get inflation, I think I said that before. It is what happens when an economy is well below full capacity.

As for the introduction of a sly extra pound coin, well in the past that did happen. What was the affect? The money did stimulate new production and enabled people to buy and exchange new products. Would the economy have grown anyway without new money being introduced at all?

I say to the Austrians, if you are right, lets just take away all the money and see what happens, your model suggests that the real economy will be unaffected.

[Guest_flaps_*]

I'm afraid I'm one of the flash Harrys where the term is concerned. Seriously, the chicks just dig it!

[JustYield]

I say to the Austrians, if you are right, lets just take away all the money and see what happens, your model suggests that the real economy will be unaffected.

Good series of posts leicestersq. The Austrian's tell us how the world should be (or could be in an ideal world after a reset) but aren't very convincing in explaining what we actually see.

Do Govts who monetise debt have to promise to reverse the process at some stage, or do they just ratchet up each time with impunity (and I suppose cross off trailing zeroes from the currency periodically)?

[winkie]

Why Is Debt Monetisation Seen As A Bad Thing?

...because it is an alternative way of defaulting on debt hoping others won't notice.

[Bloo Loo]

Everyone agrees that if you print too much, for an economy that is at close to productive capacity, you just get inflation, I think I said that before. It is what happens when an economy is well below full capacity.

As for the introduction of a sly extra pound coin, well in the past that did happen. What was the affect? The money did stimulate new production and enabled people to buy and exchange new products. Would the economy have grown anyway without new money being introduced at all?

I say to the Austrians, if you are right, lets just take away all the money and see what happens, your model suggests that the real economy will be unaffected.

Austrian theory is about money...not an economy without money.

An extra sly pound here or there is counterfeiting and is imprisonable....

If extra money is added to the economy, which it is all the time as we have a 2% inflation target, will be a good source of the 2% inflation....and what does inflation mean...it is the reduction in value in the money we hold.

Deflation is if course the opposite, and in my view, is the natural state of the economy today....you know...we get better and more efficient at making things....therefore they should cost less and less to make.

Indeed, things do cost less and less to make in many areas....we simply spend the money elsewhere....in the recent past, that elsewhere has been in unproductive areas like housing and shadow banking.

At the end of the day money is a means of exchange...if one entity has nothing in exchange and just hands it over having printed it....what worth is it to the receiver?....and the next and the next,,,,,Austrian Theory has an answer for you, probably so does Keynes.

Weimar repblikans will have something to say to...and Argentinians, Zimbabweans and many others.

[billybong]

Toto,

I trust you have considered the paradox of thrift. If you let a deflationary collapse occur, those who have savings will watch them disappear. Savings are only worth something if you have a productive economy to give those savings value. Replacing government debt with cold hard debt free cash, can help maintain a productive economy, whereas letting the whole thing slip into deflation can destroy that productive economy.

Remember with deflation, debts have to be written off through bankruptcy. It is that process which destroys life savings, be it in cash at the bank or equity in the now defunct factory. Seeing yours and other people's saving disappear doesnt do much to motivate people to work hard and invest for the future.

So it's not much different to the paradox of spendthrift.

[goldbug9999]

Toto,

I trust you have considered the paradox of thrift. If you let a deflationary collapse occur, those who have savings will watch them disappear. Savings are only worth something if you have a productive economy to give those savings value.

Thats only one side of the story though, deflation up to a point purges inefficiency and raises effective disposable buying power. Also the idea that deflation stops people making discretionary purchases is utter nonsense: people spend fortunes on stuff that routinely deflates at a frightening rate e.g. computers, TVs, guitars.

Edited February 13, 2012 by goldbug9999

[leicestersq]

Good series of posts leicestersq. The Austrian's tell us how the world should be (or could be in an ideal world after a reset) but aren't very convincing in explaining what we actually see.

Do Govts who monetise debt have to promise to reverse the process at some stage, or do they just ratchet up each time with impunity (and I suppose cross off trailing zeroes from the currency periodically)?

JustYield,

What I think a proper government should do, if inflation takes hold, is QT, quantitative tightening. That would be running a fiscal surplus, ie tax more than spend, and with a portion of the surplus, cancel that money.

I guess you are right, in a system with even mild but sustained inflation, at some point you are going to have to cross off a few zeroes, such is the laws exponential growth.

[leicestersq]

So it's not much different to the paradox of spendthrift.

By which you mean, for individuals those who spend everything they get end up poor, those who save end up rich.

For economies though, if people are spendthrift by nature generally, the economy becomes wealthy, but for a nation of thrifts, the result is national poverty.

An economy in the long run, is only as big as its ability to consume.

[leicestersq]

Thats only one side of the story though, deflation up to a point purges inefficiency and raises effective disposable buying power. Also the idea that deflation stops people making discretionary purchases is utter nonsense: people spend fortunes on stuff that routinely deflates at a frightening rate e.g. computers, TVs, guitars.

People do spend money on stuff where prices are falling. Would they spend more if they were not? I know many people delay their purchases, but at some point you realise that the time spent waiting for further prices falls is a cost to you of not having the pleasure of the item you seek.

Deflation, as defined by shrinking money supply, is different to the deflation you are talking about. It is this that those in power worry most about. If that happens, through a shrinking in total credit, less stuff will be bought as there is less money (ok, I am making assumptions about money velocity but it probably wont be increasing in such a scenario). A factory that produces stuff may be financed with debt, and the fall in its pricing power may mean it is no longer viable because it cannot service the debt. If it goes into liquidation, its productive capacity is lost, as is the debt money financing it, as is the confidence of the previous workers there and those around them, which can lead to a further drawing in of ones horns.

[Traktion]

People do spend money on stuff where prices are falling. Would they spend more if they were not? I know many people delay their purchases, but at some point you realise that the time spent waiting for further prices falls is a cost to you of not having the pleasure of the item you seek.

Deflation, as defined by shrinking money supply, is different to the deflation you are talking about. It is this that those in power worry most about. If that happens, through a shrinking in total credit, less stuff will be bought as there is less money (ok, I am making assumptions about money velocity but it probably wont be increasing in such a scenario). A factory that produces stuff may be financed with debt, and the fall in its pricing power may mean it is no longer viable because it cannot service the debt. If it goes into liquidation, its productive capacity is lost, as is the debt money financing it, as is the confidence of the previous workers there and those around them, which can lead to a further drawing in of ones horns.

What people spend their money on and when is between them and the others they trade with.

If the financial system can't deal with changes to the above, it's not fit for purpose. Forcing everyone to do as you say, just so that some broken model can continue to operate, is nuts.

Perhaps the whole credit based system is simply not what people want. The only way you will find out though, is by letting them choose. Forcing people (and their children) to use something which is clearly flawed is not only rather evil, but also less efficient than letting them choose what they want to use.

[Sour Mash]

Because 95% of posters do no understand or believe that debt = money. If you do not accept/believe this and have the same understanding as the sheeple then the logical conclusion is that it is bad. Whereas debt monetisation is merely moving from debt to equity based money. If you owned a company that had £100M debt, and then issued £100M of new shares to wipe this out, so that the only liability that you had was the shares, this would be a good thing, no?

That analogy would only hold if you scaled back the banks ability to leverage base money through credit - which isn't happening.

It's highly unlikely to happen either as the banks would have less scope for profit making.

[billybong]

By which you mean, for individuals those who spend everything they get end up poor, those who save end up rich.

For economies though, if people are spendthrift by nature generally, the economy becomes wealthy, but for a nation of thrifts, the result is national poverty.

An economy in the long run, is only as big as its ability to consume.

The paradox of spendthrift. If a person or an economy spends and borrows more and more to the point of excess it'll end up in the same/similar position you described in the paradox of thrift. You might think that you're benefiting yourself and the economy by being spendthrift but eventually it leads to collapse and you're worse off as a result.

Thrift doesn't have a sole hold on the idea of paradox.

A sensible balanced approach doesn't have a paradox but we don't have that now with blatant overborrowing, QE and inflation out of control etc. The UK's been seeing the consequences of the paradox of spendthrift for a few years and particularly now and is only clinging on by it's fingertips by lax inflation remit targets, base rates at levels last seen more than 300 years ago (if ever) and QE/printing money etc with inflation, declining living standards, unemployment etc.

Greece seems to be an even more extreme example. It has loads of debt but months of rioting in the streets and getting worse all the time along with increasing unemployment etc. Relatively poor despite loading up on debt.

Edited February 13, 2012 by billybong

[Sour Mash]

What I think a proper government should do, if inflation takes hold, is QT, quantitative tightening. That would be running a fiscal surplus, ie tax more than spend, and with a portion of the surplus, cancel that money.

Which of course is absolutely not going to happen. Though the authorities would like the everyone to think that it is, hence the myth that the Gilts bought by the BoE will someday be sold back into the market and the balance cancelled on the BoE's balance sheet.