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St.Ives

Economics Question

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I have been trying to get me head round this for a while now.

The UK national debt currently stands at $1.6 tn http://www.nationaldebtclock.co.uk/. This is the public (govornment) debt? The Chancellor has been telling us since 2010 'we' must pay down the debt, which why we have austerity.

As all money is debt (created when banks make loans), apart from the 3% that is physical notes and coins, then surely to pay down the public debt we must expand the private debt which already stands at 375% pf GDP http://www.3spoken.co.uk/2015/10/uk-private-debt-levels-q2-2015.html. How can a further expansion of debt be sustainable? Surely as some point it must be obvious that the debt can never be repaid, at least not in full. What will this do to the value of money? Is this not the natural conclusion in a debt based money system?

If we pay down both public and private debt we have a reduction in the money supply causing a recession.

How did we manage to pay down the total uk debt in previous times without causing recession? http://www.debtbombshell.com/history-of-national-debt.htmand if we did, why can we not do this now?

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I highly recommend this book on the topic.

http://www.amazon.co.uk/This-Time-Different-Centuries-Financial/dp/0691152640/ref=sr_1_1?ie=UTF8&qid=1448990680&sr=8-1&keywords=this+time+is+different

To sum it up very crudely, the answer depends on whether we are talking about external or internal debt, but the common theme is default. For internal debt, default through inflation is common. For external debt, outright default is the main route out.

I don't think it follows that private debt levels must rise to pay down public debt. Both can fall. It doesn't necessarily result in a recession, there are other sources of growth apart from debt expansion, but they are slow and much of the voter base are too thick to be able to tell the difference.

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If your monthly salary is paid into your bank account it is an asset, not a debt. No matter whether you draw it out as notes and coins or not. Government debt is easy. The accumulation of years of debt and interest owed during periods in which Government expenditure was greater than tax reciepts

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If your monthly salary is paid into your bank account it is an asset, not a debt.

It is someone elses debt. All money is debt, that is how money is created.

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if someone transfers $$'s into ££'s then that can pay off the debt. so think about this, if the uk made a + net flow through tax or people actually liked the nhs and came here 2 use it, when that amounts 2 1.6 trillion we will be debt free. (lmao)

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if someone transfers $$'s into ££'s then that can pay off the debt. so think about this, if the uk made a + net flow through tax or people actually liked the nhs and came here 2 use it, when that amounts 2 1.6 trillion we will be debt free. (lmao)

So we need a balance of payments surplus to acheive this. It is currently a deficit of -3.6% of GDP. Is that how we paid off the debt post war? In that case, considering most of our exports are manufacturing do we not need to massively expand that sector?

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It must be true that if the money supply is the product of private borrowing and the Government wants to run a surplus then either the amount of money in the system must shrink or the amount of private debt must increase if that money supply is to be maintained, since the only way a surplus can be achieved is for the Government to take out in taxation more than it puts in.

But if the aim is to simply reduce Government debt to zero then is this a zero sum game in which the impact of Government policy neither adds to the money supply nor subtracts from it?

I'm not sure that's right because as the OP suggests to pay down it's debt the Government must either tax more or spend less, both of which will tend to reduce the amount of money in the system. Unlike a business the Government cannot earn it's way out of debt- it can only spend less of the taxes it receives or increase it's income with higher taxes.

So it seems to be true that for Government debt to go down private debt must go up- or the money supply must shrink.

The caveat being that if private profits and therefore taxes rise this would create a genuine surplus from which government debt could be paid down.

This suggests that the current 'Austerity' solution to the problem is the wrong one- the correct solution is to focus on maximizing private profits to generate more income for the government rather than to obsess about taking money out of the system via cuts in Tax Credits ect which would have the effect of shrinking the money supply and undermining business confidence as sales would reflect this decline in spending power.

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It must be true that if the money supply is the product of private borrowing and the Government wants to run a surplus then either the amount of money in the system must shrink or the amount of private debt must increase if that money supply is to be maintained, since the only way a surplus can be achieved is for the Government to take out in taxation more than it puts in.

But if the aim is to simply reduce Government debt to zero then is this a zero sum game in which the impact of Government policy neither adds to the money supply nor subtracts from it?

I'm not sure that's right because as the OP suggests to pay down it's debt the Government must either tax more or spend less, both of which will tend to reduce the amount of money in the system. Unlike a business the Government cannot earn it's way out of debt- it can only spend less of the taxes it receives or increase it's income with higher taxes.

So it seems to be true that for Government debt to go down private debt must go up- or the money supply must shrink.

The caveat being that if private profits and therefore taxes rise this would create a genuine surplus from which government debt could be paid down.

This suggests that the current 'Austerity' solution to the problem is the wrong one- the correct solution is to focus on maximizing private profits to generate more income for the government rather than to obsess about taking money out of the system via cuts in Tax Credits ect which would have the effect of shrinking the money supply and undermining business confidence as sales would reflect this decline in spending power.

Keen's work suggests that credit acceleration is the thing that needs to be maintained. Preserving the money supply, or even increasing it too slowly, will generally be insufficient to generate economic growth in a consistent fashion. The role played by credit derivatives must also to be considered.

Goodhart's Law - any measure of the money supply you target becomes subject to distortions that make it hard to control - acknowledges the dynamic complexity of capital markets, where naive monetarism fails.

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I have been trying to get me head round this for a while now.

The UK national debt currently stands at $1.6 tn http://www.nationaldebtclock.co.uk/. This is the public (govornment) debt? The Chancellor has been telling us since 2010 'we' must pay down the debt, which why we have austerity.

As all money is debt (created when banks make loans), apart from the 3% that is physical notes and coins, then surely to pay down the public debt we must expand the private debt which already stands at 375% pf GDP http://www.3spoken.co.uk/2015/10/uk-private-debt-levels-q2-2015.html. How can a further expansion of debt be sustainable? Surely as some point it must be obvious that the debt can never be repaid, at least not in full. What will this do to the value of money? Is this not the natural conclusion in a debt based money system?

If we pay down both public and private debt we have a reduction in the money supply causing a recession.

How did we manage to pay down the total uk debt in previous times without causing recession? http://www.debtbombshell.com/history-of-national-debt.htmand if we did, why can we not do this now?

Your analysis is lacking velocity. If people keep passing money around fast enough you can pay off the debt without issuing new debt, however this is very simplistic analysis.

The other issue is Osborne like all politicians is confusing debt repayment and deficit reduction (either deliberately or out of stupidity), with the rather novel idea of paying down the deficit. Our politicians appear to use debt/deficit for the same point but each word has a different meaning.

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Well in my view its a catch 22, the whole system that is .

Banks cannot exist without lending ever increasing amounts to cover bad debts and costs. So, who are they going to lend to and where do those people get the money from to pay back?

Well they could be paid by the govt but that increases the national debt which is out of control, so we have to rely on the private sector.

This could include shops and such like, however they too rely on customers having the ability to pay.

So in the end the real growth in the country has to come down to the success of exporters and how much they pay their employees and how many employees they have.

The trouble is that through globalisation they can put downward pressure on wages and suppliers. So the people that work for the exporters don't have spare cash to spend.

This fantasy world can carry on until those clever financial people run out of scams to lend people more money.

They've pretty much got to this point, reduced interest rates as low as possible, QE, and reduced lending criteria.

At the same time some of the big boys have realised the banks are a bit stuffed if people don't pay back every penny plus interest. As happened in the financial crisis. So they want banks to shore themselves up a bit . But if they do that how do they lend people more money.

They want to believe that extrapolating the price rises in a very small sample of a huge group of assets actually means the wealth of the country has increased. However it doesn't because its not real.

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I guess keen doesnt really care about how GDP is measured, just that its 'growing'

Increase the money supply faster than productivity+population growth, you get inflation.

Of course, the authorities turn this around by not measuring certain things, or else rather than subtract inflation from growth, add it on to growth, as they do with house prices.

If they measured actual growth rather than GDP they'd find the economy has been contracting for years.

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Your analysis is lacking velocity. If people keep passing money around fast enough you can pay off the debt without issuing new debt, however this is very simplistic analysis.

The other issue is Osborne like all politicians is confusing debt repayment and deficit reduction (either deliberately or out of stupidity), with the rather novel idea of paying down the deficit. Our politicians appear to use debt/deficit for the same point but each word has a different meaning.

Indeed, crudely net wealth = money supply * velocity * per transaction productivity. This is where the broken window fallacy is relevant since fixing broken windows create a 0 in the last term of the equation. It also highlights the flaw in GDP as measure of wealth since it includes a high proportion of imaginary (and hence 0 productivity) transactions such as imputed rent.

Edited by goldbug9999

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That graph I have linked would indicate public debt went from 250% gdp in 1945 to 50% GDP by the mid 1970s,.

Nominal GDP soared. Debt didn't.

But we didn't reduce it.

Got it now?

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That graph I have linked would indicate public debt went from 250% gdp in 1945 to 50% GDP by the mid 1970s,.

Ah you see that's the relative to GDP trick.

Doesn't change the debt or the interest on it, Osborne briefly tried this, the debt per capita or per GDP or something has gone down.

A bit like saying that if you have more kids your mortgage per person is lower.

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Ah you see that's the relative to GDP trick.

Doesn't change the debt or the interest on it, Osborne briefly tried this, the debt per capita or per GDP or something has gone down.

A bit like saying that if you have more kids your mortgage per person is lower.

Ah, I see.

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St. Ives have you read the Bank of England publication in 2014 talking about what you mentioned? It's called 'Money Creation in the Modern Economy'.

Just to add the previous post about the GDP trick, Osbourne realised the deficit wasn't falling so he changed the deficit reduction mantra from 'a third' to 'half in terms of GDP'.

It was some rubbish like that, can't quite remember. Sounds better right? :lol::lol::lol:

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I have been trying to get me head round this for a while now.

The UK national debt currently stands at $1.6 tn http://www.nationaldebtclock.co.uk/. This is the public (govornment) debt? The Chancellor has been telling us since 2010 'we' must pay down the debt, which why we have austerity.

As all money is debt (created when banks make loans), apart from the 3% that is physical notes and coins, then surely to pay down the public debt we must expand the private debt which already stands at 375% pf GDP http://www.3spoken.co.uk/2015/10/uk-private-debt-levels-q2-2015.html. How can a further expansion of debt be sustainable? Surely as some point it must be obvious that the debt can never be repaid, at least not in full. What will this do to the value of money? Is this not the natural conclusion in a debt based money system?

If we pay down both public and private debt we have a reduction in the money supply causing a recession.

How did we manage to pay down the total uk debt in previous times without causing recession? http://www.debtbombshell.com/history-of-national-debt.htmand if we did, why can we not do this now?

You clearly have a pretty good grasp of the argument. Much more so than Osborne or Cameron.

Nominal debt of course is mostly irrelevant. It only has some significance in relation to national output over the very long term.

"paying down the debt" is just political short hand for "shrinking the size of govt" and is a bizarre throwback to an 18th century view of the world. It has little merit in a modern post-industrial economy.

£375bn is in any event held by Bank of England (QE) and the coupon payments remitted back to the Treasury. Overseas bond holders buy debt as a consequence of trade flows i.e. current a/c deficit (capital a/c surplus) for lending UK money to buy their goods/services & the bulk of the remainder represents savings/deferred consumption held by pension funds/asset managers/banks etc on behalf of their clients (pensioners etc) who need safe assets to match their long term liabilities & in return for which they receive a nominal interest payment from the govt.

Edited by R K

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That graph I have linked would indicate public debt went from 250% gdp in 1945 to 50% GDP by the mid 1970s,.

Private sector debt went exponential in the 1960s then super-exponential after 1980.

chart.png

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Ah you see that's the relative to GDP trick.

Doesn't change the debt or the interest on it, Osborne briefly tried this, the debt per capita or per GDP or something has gone down.

A bit like saying that if you have more kids your mortgage per person is lower.

No its not. It like saying if your earnings increase 10 fold your mortgage becomes insignificant.

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Private sector debt went exponential in the 1960s then super-exponential after 1980.

Nominal chart axis fail.

Back to kindergarten with you.

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No its not. It like saying if your earnings increase 10 fold your mortgage becomes insignificant.

That depends if you define your earnings as if you won the lottery every year even though you don't enter.

Or if you define your earnings as how much some bloke down the pub said they were and he exaggerated massively.

It's no good normalising if the thing you're normalising against is a made up number.

What you could do is calculate the interest if charged at the average rate for say the last 20 years, then compare that with say the tax take.

Edited by frederico

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St. Ives have you read the Bank of England publication in 2014 talking about what you mentioned? It's called 'Money Creation in the Modern Economy'.

Just to add the previous post about the GDP trick, Osbourne realised the deficit wasn't falling so he changed the deficit reduction mantra from 'a third' to 'half in terms of GDP'.

It was some rubbish like that, can't quite remember. Sounds better right? :lol::lol::lol:

I have skim read it so I understand the basic principle.

Do you believe Cameron and Osborne actually understand the money creation process and the resultant debt this creates? In the case of Cameron, I think not, as demonstrated by his statement a few years back that everyone should be saving their money.

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