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What Do They Think Slashing Interest Rates Will Achieve?


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Why does the government bother taxing us? Why not just print money to run the public services?

This is exactly what is currently happening in Zimbabwe; the government increases public workers pay, and then prints off more money to pay for it. They also print untold money to pay off their national debt.

Their annual rate of inflation is currently 10.2 Quadrillion percent :blink:

http://en.wikipedia.org/wiki/Hyperinflation_in_Zimbabwe

Edited by echelon
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Who will print it? This is the bit that puzzles me. How is lowering interest rates going to increase the availability of credit?

Why does the government bother taxing us? Why not just print money to run the public services?

Are you running for office, if this is your manifesto I will vote for you. This is flawless, brilliant no taxes, just print more money to pay for everything. What a fantastic idea, why go out to work, why not send out money printing machines to everyones houses, will reduce the carbon footprint cutting out cars on the road. :lol:

I am running out of ideas, I dont know what will save the housing market, it probably just needs to swallow a bitter pill and go through the process of finding its correct market level, which it will inevitably find. In the meantime, the government will try smooth out the crash, so they do not look stupid. The end result will be the same, the equilibrium price will be found. Lower interest rates will bound to cushion the crash, but I agree I dont think it will make credit more widely available, thus I dont think it will cause a futher spike in house prices.

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*** SORRY FOR LONG POST ***

You know I think everyone is trying to pin down specifics on the creation/destruction of money into the closed system (that is call the world). I think I can have a crack at some answers, but I am in no way an expert (only of armchair economics LOL) and I hope someone will put me right on some of the wacky ideas picked up here.

The understanding I have is that; the government can't just print money, if they did then all foreign investors holding our currency will see that we are devaluing it. Exactly why this is I am unsure, but thats the consensus I have picked up. Maybe its because human nature just doesn't like it when you blatantly have a resources which has value but in which someone else (who is also playing the game of finance with you) can make it one demand and you can't, that must leave a lump in ones throat. The demand verses scarcity price point of something of value.

My understanding is that the support the government has made to the banking sector recently is more a promise to pay out of future taxation than it is real money. All that money are just numbers in the computer system (no tangable thing) needed to be managed in the process, a stroke of the pen did the trick.

Having a society where all public services were funded 100% from printed money might not work very well for a lot of reasons. The employees and suppliers to your public services are citizens / private companys and they will spend their money into the economy - in a robust economy the creation/destruction of money should follow the patterns of population growth, real wealth creation (i.e. real physical and tangible changes in the environment) - maybe my definition of a "robust economy" is not well thought out enough for this post, but that was a crack as it.

So it would be no good if there was a continuous stream of money created into the economy the rate at which is set by the scale of the total amount of public projects in any one year. The only purpose of money is to spend it and while savings and reserves are good insurance for a rainy day any excess surpluses that are not moving through the economy might be considered bad for the economy. I think this fact is born out by the weight given to various taxation, slow moving money not creating wealth is taxed higher than money being used to create wealth. It could be argued that slow moving money gets bank interest ~5% and fast moving money gets a higher return (~8% for business profit dividend, 30% for stock market surfing, wish I could cite better examples but someone else wrote this better than me in something I read).

So taxation is a good way to recycle money, provide government with budgets and keep the total supply of new money low.

Part of the reason why a small amount of inflation is good is that while everything is going up slowly and steady you cant just sit around on your ass with your money and expect to be in a good position. If you do nothing and hoard your money under your mattress your money looses value over time, so dead money or financially inactive money looses value, Going up steadily allow people to plan and build in a small amount of price increase and makes them look for ways to be more efficient business in resource usage etc. So deflation is the opposite of this why should I build cars today if its cheaper for me to build them tomorrow, assuming people could afford them, why carry stock of anything, infact there is no incentive to create a surplus and abundance of stuff anymore since it will only loose value. I suppose said like that it can be easy to understand why real deflation can not every happen again but there must be a lower limit where no one makes a profit and the price is based on need/demand rather than frivolous consumption of stuff that really isn't required. But not creating anything unless its required is also bad, no more Research and Development of anything unless you do it for free, no new technology, no new pharmaceuticals, little diversity of industries, only 2 types of loaf, only 2 types of pen there is no market exception one of need and most pens will do the job and there market cant support 50 companies all doing different pens anymore, yadda yadda.

In relation to board inflation in the double digits. My understanding of this is that much of that extra money is locked away in as yet unpaid for property which has then been stored in the stock market (by the banks investing the money) which has now been recently wiped away due to lack of confidence. I hear you say "but the seller got the money right away" yes but that payment always ended up in someones bank account somewhere in the world and the bank that received it wrote out new loans because it was deposited.

Some of that money was new created money, I read figures of as much at 95% was due to 20:1 basel2 capital adequacy ratios. I'm not sure myself if the capital used to buy the house can be created money, I just can't get my head around believing that although I've read it enough times. But given that over 25 years the buyer can pays back as much as 250% of the original price that leaves 150% profit over 25 years, I can believe that this money is created money that the bank gets to reintroduce into the economy.

Maybe someone else can cite references to threads detailing the exact interplay of money creation during the lending process, there have been enough discussions on this point.

Maybe this is an argument for not treating debt-money as real-money (maybe capital adequacy rules should state you can only lend from real-money) and as a mortgage is repayed debt-money is converted to real-money at the rate of repayment. But at things stand debt-money is treated as real-money.

Getting money into the system I thought was an easy one to understand. Government makes guarantee to underwrite banks to the value of, this is done with a stroke of a pen. The promise here is that the government will see to it during the future that it will use the tax system to pay it all back. Example of long term financial matters like this include the WWII debt the UK had to the US until recently, took decades to clear. I wonder if we'd needed to pay up if we lost, LOL.

I'm wondering how the government will extract the money from the economy once it does start getting payed back, I'm thinking that we want to destroy money but not at as fast a rate as has been happening, we want a steady and orderly destruction of debt. At some point in the future the extra money pumped in will swing the pendulum the other way where there is now money being created before the levels of debt have been reduced as far as they want this being the hyperinflation phase. I'm thinking there needs to be a way for the money to continue to be destructed to eat up the inflation (cause by the recent bailouts). I think of this like a corporate "buy back" of stock, this is where a company buys up its own shares on the stock market and in so doing reducing the amount available which usually increases the share price (demand verses supply again) but it has to do this out of its own profits and reserves and it is no longer paying face value they we issued at but the market price. So can governments do something similar to maintain the price of their currency ? Would they want to, it seems that no currency in the world wants to replace the USD by being dominant and strong (everyone needs to export something) and the USD is doing what it can to weaken itself (lower IR etc...) I guess due to needing a reduction in debt servicing burdens.

My throats dry lol... please point out my errors :) as I'd like to understand the detail better.

Thanks to all who responded - and in particular for this lenghty effort.

I'm beginning to think that, in the same way some people don't get Maths, I don't get finance.

If a flick of a pen can 'create' the half a trillion the government are using to bail out the banks, why stop at half a trillion? Why not create a trillion and give us all a bonus? If we are putting the burden of repaying this on future generations, why not just ramp it up a bit?

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If a flick of a pen can 'create' the half a trillion the government are using to bail out the banks, why stop at half a trillion? Why not create a trillion and give us all a bonus? If we are putting the burden of repaying this on future generations, why not just ramp it up a bit?

Pyramid selling ? Market saturation ?

Imagine you are in a position where you can create something that the rest of the world thinks is worth a lot of value but it cost you next to nothing to make/create/produce. But the rest of the world is so stupid they just don't understand where it is, what it is or how to make it. So they always come back to you when they want some.

Lets call it a "air in a bag". You'd soon setup a factory that could produce many bag of air for the minimum amount of cost, so now you have a warehouse full of your product you have made/created/produced. The rest of the world because they like your product and can't get enough of it, they will exchange your product for diamonds and crude oil and steel. Now you think to yourself, "Hey; I'm overrun with these bags of air, they are no use to me, I have too many of the damn things".

So what strategy do you employ next ? Do you ?

A) Slowly sell/exchange your product for more useful stuff (diamonds/crude oil/steel/food - stuff that is more valuable to you, because its stuff you don't have) as and when you require this other stuff, drip feed the world with your product ?

B ) Produce as much of the product as fast as you can and exchange it for whatever you can get ?

C) Sell as many as you can for the cost to produce plus a 15% margin ?

D) Give everyone in the world a free sample, if they pay for shipping ?

Now remember you can not actually do anything useful with the "air in a bag" itself (you can't eat it, drink it, shag it, etc...), it has no practical purpose on its own, but because everyone considers it a currency, the only use for it is in exchange for other things you do want..

What do you think happens when something that has no actual use on its own merit and is not consumable, what happened to the perceived value of the item when every man, woman and child has 10 in their possession ? I bet they won't be t*ssing themselves off to get some more. Well that results in the price of the asset collapsing, those that wanted some got some, so who do you sell it to now ?

A government can at the stroke of a pen create money, they can do so, because they have the power of future taxation and sovereign commitment/contract to back them up, that is the entire workforce and/or army to do its bidding to make good on the deal. All they have to do is give their word. The question now since many countries are supporting the financial institutions unilaterally what is the net gain ? Some think its massive hyperinflation down the road once all those monies make their way into the economy and into the hands of the citizens.

Hence my question, what mechanism is in place to allow a state to "buy back" its own currency ? massive taxation could do it, so long as the money was destined for the incinerator as soon as the government received it. Has this every been tried before ?

To you money has value because you work so hard to get it.

To your government money is just a tool and they can easily take more off you in taxation at another stroke or the pen.

Edited by Odin
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The understanding I have is that; the government can't just print money, if they did then all foreign investors holding our currency will see that we are devaluing it. Exactly why this is I am unsure, but thats the consensus I have picked up. Maybe its because human nature just doesn't like it when you blatantly have a resources which has value but in which someone else (who is also playing the game of finance with you) can make it one demand and you can't, that must leave a lump in ones throat. The demand verses scarcity price point of something of value.

To add to odins post.. and try and thrash out what "money" actually is. Money doesn't exist, it's an abstract concept (I'm not going all injun on you), it's bit's of paper or metal with stuff printed on it. The thing that gives money it's value is it's rarity. If you've got a 1000 widgets which everyone is fighting over (to you and me that's called work!), then magically produce another 1000 then they effectively half as rare - so the rich guy who was happy with his 100 widgets suddenly wants another 100 to hold his position in the pecking order. Just because something is rare that doesn't give it value, money is also a division of our countries output - or "pool of resource" - most of that output is used internally (ie providing goods and services to other people etc), but it's efforts are rewarded by money - in a really simple model it would be a case of taking our countries pot of resouces for the year, putting tokens againt's those divisions then distributing the tokens amongst the population depending on how mucy they have worked, it's like saying "our economy has earnt x amount this year, you personnaly did 1% of that so here is the 1% of our big pot of gold" - of course things are more complex than that, and different skills and jobs have different values to our economy. That's all money supply is, in economics "moneterist policy" is essentially trying to control the economy by controlling the money supply. The value of money is inversely relative to how much money is in circulation, so if you double the supply of the money it becomes worth half as much. So if you print more money, you increase the money supply, making money worth less, which leads to massive inflation. So if governments printed more money to get out of a hole, it doesn't increase the worth of the "pool of resources" it simply divides it into small peices. Which is what happend in the 70's and early 80's - hence really high inflation.

It's important to keep an economy growing, so you want a small amount of inflation (otherwise it stagnates). Central banks pay out interest on their "stock" (guilts etc) in a controlled way, this keeps money going through the system. It also allows the country to pay interest to other countries (ie anchor it's value against other economies), and to the domestic banks. By slashing interest rates it discourages people and banks from saving and to go out spending, which you need at a time of recession.

Things get a bit more complicated because banks lend the same money out several times over (fractional reserve banking), however it's important to note, that this money they have lent out only comes from the money supply once, so it didn't really exists in most instances. In a situation like we're in currently the banks trying to convret that debt to real money, but the money never actually existed. So the government could now print more money, without it devaluing the money supply - because the value of money is already flowing about in our economy as debt. They could deal with this by printing lots and lots of money, giving us high interest rates - which aren't good for the recession and the overall effect will be massive inflation, or they could let us wonder into deflation, where money becomes worth more, because converting these debts is taking real money out of the economy. The interest rate cuts, are partly to try and discourage banks from trying to cash in their debts (ie debts from joe public earns way better profit than anything the actually money could do) - but this is why a lot of people are worried about deflation because banks will keep trying drop the debts and start fighting over finite money (so it becomes worth more) agianst a backdrop of recession. So it's a juggling act between trying to stimulate the economy, and paying off the mass deleveraging as banks try to realise their balance sheets..

That's some of my understanding anyway - feel free to correct me anyone.

Edited by jimjones
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Computer says: NO! (So it does it matter what the interest rate is)

That is correct for people and businesses with less than perfect credit history, or where banks assess they will have problems repaying debt in the future.

Some banks and building societies are awash with money to lend for genuine good credit risks [witness all the loan offers still being bandied about] - but good credit risks are mostly in retrenchment and risk adverse.

Even good risks for lending might have some uncertainty about their own future, or a mind that there will be better value for purchasing opportunities in the future, and so just don't want to borrow from banks anyway.

Or at least that is true for me anyway, with no desire to take out a loan for a new car or holiday as the Britannia leaflet that came through my door today suggested I deserve, nor a mortgage, or a business loan.

You can't make people or businesses take money they don't want, when there are conditions which make for a revulsion of credit.

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Thanks for the various erudite and enlightening answers.

What I was hoping for, I think, was a pat on the head and reassurance that bloody house prices will continue to fall and that they (the bloody government and banks) cannot somehow continue to rig things so that people go further and further into debt - just to keep transferring wealth to older farts like me.

My eldest lad is 19 - having the time of his life at the moment. Life is an endless party with no responsibilities. I look at him sometimes as he disappears out the door with a cheery 'laters' - off out with his mates or his girlfriend - and I think 'boy, you have no idea what's coming in 10 years time when you want to settle down'. The idiots in charge should be crucified for the debts they are racking up which my lad's generation - which includes many of you on here - will have to repay.

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