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Does Government Borrowing Affect Money Supply?

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OK we all know by now when someone borrows money the bank just types the money into the computer and new money comes out of thin air.

My question is is this the same for government borrowing?

My guess it is not. A person buys new government bonds with savings money supply doesn't increase.

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Last I heard, the Bank Of England were buying Govt Bonds with newly created money and then refunding back to the Govt the interest received on the bonds - otherwise known as QE

Thanks for your reply but it doesn't really answer my question.

I think it is important because if there are too many savers and not enough money spent into the economy then maybe governments have to borrow and spend and the talk of austerity is ******.

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The state sell bonds. A bond is a promise to repay the buyer + some interest in the future.

As both the bond and the interest must be paid back, this means it must come out of present day or future taxation (i.e. more borrowing today).

So, borrowing today to avoid increasing taxation requires increased taxation in the future to pay for it. This is why people say it is borrowing from your kids.

It also means that other bonds - such as those of corporations - don't get bought. This is why people say that government borrowing squeezes out private investment.

Moreover, banks don't just create money. It is a vast simplification which leads people to daft conclusions. Banks extend credit, which is a promise to repay in the future, which results in spending being brought forward, at the expense of spending in the future.

Anyone can extend credit and they don't need to be a bank. Even the act of invoicing someone is am extension of credit. Banks just have the reputation to essentially allow those invoices to be traded as money (especially with state deposit insurance etc).

I am sure someone will give a more technical answer (and any corrections), but unless QE is involved, the state isn't printing up anything. However, the state accepts bank credit for payment too (they just have a bank account too, essentially), so more private credit means more potential funds to buy bonds and the cycle continues.

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The state sell bonds. A bond is a promise to repay the buyer + some interest in the future.

As both the bond and the interest must be paid back, this means it must come out of present day or future taxation (i.e. more borrowing today).

So, borrowing today to avoid increasing taxation requires increased taxation in the future to pay for it. This is why people say it is borrowing from your kids.

It also means that other bonds - such as those of corporations - don't get bought. This is why people say that government borrowing squeezes out private investment.

Moreover, banks don't just create money. It is a vast simplification which leads people to daft conclusions. Banks extend credit, which is a promise to repay in the future, which results in spending being brought forward, at the expense of spending in the future.

Anyone can extend credit and they don't need to be a bank. Even the act of invoicing someone is am extension of credit. Banks just have the reputation to essentially allow those invoices to be traded as money (especially with state deposit insurance etc).

I am sure someone will give a more technical answer (and any corrections), but unless QE is involved, the state isn't printing up anything. However, the state accepts bank credit for payment too (they just have a bank account too, essentially), so more private credit means more potential funds to buy bonds and the cycle continues.

Thanks for you answer I will have to give it a bit more thought but as it stands I don't think government borrowing increases M4 broad money in the same way as someone taking out a loan.

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OK we all know by now when someone borrows money the bank just types the money into the computer and new money comes out of thin air.

My question is is this the same for government borrowing?

The traditional view is that government (excess) borrowing does increase "the money supply" because no-one has ever kept a straight face when they say that it will be repaid (once it is spent). When private borrowers borrow, they need to keep a straight face, and - sometimes - they do pay it all back (with interest).

I think the real problem with which you are grappling is what actually constitutes "the money supply" - and *that* is a 64-quadrillion dollar question. :)

Edited by A.steve

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The Financial Stability Board (FSB) released its fourth annual Global Shadow Banking Monitoring report in October 2014, revealing that shadow banking activities increased by $5 trillion from 2012 to 2013, reaching $75 trillion. That means that shadow banking assets involved in credit intermediation now make up a quarter of total financial assets, half of banking assets, and are equal to 120% of global GDP.

http://www.financialstabilityboard.org/wp-content/uploads/r_141030.pdf

Blowing an even bigger bubble:

fsb-fin-inst-assets-1014.png

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I find myself more confused than ever I thought I had a full understanding of how things work.

Say I borrow £10,000 at 5% to buy a car off you and you deposit the £10,000 into your bank.

Is there any reason the bank cant take the £10,000 that you deposited with them and buy gilts yielding 2%?

So for the £10,000 loan they get 2%+5%= 7% minus what they pay you to deposit the money.

This make sense in a way because some mortgage loans are lower than the money earned in deposit accounts.

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I find myself more confused than ever I thought I had a full understanding of how things work.

Say I borrow £10,000 at 5% to buy a car off you and you deposit the £10,000 into your bank.

Is there any reason the bank cant take the £10,000 that you deposited with them and buy gilts yielding 2%?

So for the £10,000 loan they get 2%+5%= 7% minus what they pay you to deposit the money.

This make sense in a way because some mortgage loans are lower than the money earned in deposit accounts.

It is confusing due to the fraudulent language that the banks use along with no clear contract about what the bank will do with the money.

In short, borrowing isn't borrowing and savings aren't savings, when referring to banks.

Borrowing is actually credit extension and savings are investments in reality when using a bank.

As credit is seen as an equal to cash, especially as the state insurers them, the credit balloons as previous credit is used as collateral - as the asset on the other side of the liability. People can call their bluff by keeping cash outside of the banks, but no doubt the state will prove a bailout anyway.

Equally savings are not secured in a safe. They are used as collateral with further credit extension. This puts the cash at risk, as you would expect from an investment.

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Is there any reason the bank cant take the £10,000 that you deposited with them and buy gilts yielding 2%?

Yes. The £10,000 is on deposit and must remain a positive balance in your account. That money goes no-where until you spend it.

The bank can buy an (almost) arbitrary number of gilts anyway - without depending upon your deposit. There are capital adequacy rules - but the bank needs only the tiniest amount of capital to buy gilts on a vast scale. To buy gilts, the bank will borrow (shorter term) on the money markets and profit from the difference in the yeild curve - while hedging the risk of sovereign default or changes in the market price of bonds arising from interest rate changes and the like. Of course, while doing that with one hand, the bank can lend on fractional reserve (including making loans to other banks doing exactly the same) - meaning that, in principle, there should be no shortage of credit to expand balance sheets... and, if for some reason there is, the central bank will step in to provide more.

The incredible thing about today's world is that, in spite of (effective) limitless credit, prices for ordinary things are not rising... The reason for this is that borrowers are already insolvent - or... the risk of insolvency from another loan makes the risk of making that loan too great for it to be commercially viable to hedge the risk. As a result, we should expect to see a tiny number of very wealthy people swapping supposedly invaluable, revered, objects among themselves for huge sums... creating the illusion that, as a demographic, their assets make them a great credit risk... thus keeping down the market price of hedging the risk of them defaulting their debts (due to spiralling risk premiums)... a necessary charade for the demographic to remain solvent.

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