Tuesday, February 23, 2016

But..

Get ready to be showered by helicopter money

Interest rates are paid by people who borrow money, this is kind of a crucial point in our financial system. If you just print money, then the banks books go from -100:+100 to -100:+1000 and there are not enough borrowers to pay the interest. This is, if, for example, you felt interest rates would be a good way to control inflation. Or at the very least, you can capture zero interest rates, as the UK government has done by repatriating the interest paid to the BoE while pushing rising interest rates into the general population, but basically the same thing stands. This is imo the problem with helicopter money and why ultimately the central banks are bluffing, because they cannot drop helicopter money without losing pretty much the only rein they have on runaway inflation.

Posted by stillthinking @ 01:35 PM (4972 views)
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10 thoughts on “But..

  • I disagree, because … If the money printing takes place outside the private banking system the banks’ balance sheets are unaffected. E.g. the government prints money and spends it into the economy. A bit of this still takes place via seignorage on issuing the currency. Whether you get inflation with government issued money depends on how much unemployment or spare capacity there is. Like with bank credit.
    With QE it’s not clear to me what the effects are. It’s printing money but as central bank reserves to buy back already existing bonds. If that stimulates bank lending (probably it doesn’t) then everything takes place as before concerning banks’ balance sheets.
    N

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  • Peoples QE would be nice!

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  • I am standing with my sheet ready to catch money falling from the sky

    its a bit cold out here

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  • Money printing most certainly does not take place outside the private banking system (i.e. the one the members of the public use!). When the government spends money into the economy where else can it go apart from the banks balance sheets?

    If there is to be an interest payment, then somebody has to pay it. If you were to print the money for interest payments on effectively un-backed printed money itself, ?? surely disaster immediately. Otherwise bank of Japan, USA, England Eurozone would have simply neutralised the debts already. If you ever read (imo) that these debts will be retired due to low inflation because of productivity, excess oil production, then that is crappy reporting. If you stick extra money in, where does the interest come from?

    Answer= nowhere. So the debts have to be formally maintained.

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  • sorry to post again, but this is the crux of the matter. the governments -have- to persuade their populations to expand credit on their own, because the general population has to pay borrowing costs. if, the government fails to achieve this, because for example they have crippled the population with fear (japan) or made it impossible to borrow because of restrictions (uk housing) or because the government isn’t even believable (greece). in this case then government debts, which have to be paid from tax on an existing stock of credit expanded by the public, starts to look like it doesn’t work. if you are paying debts by taxing transactions (which is what tax is, its not a tariff), then if the transactions go from a pool of 1000 billion down to 500 billion because people have paid off their debts, then your tax revenue is collapsed.
    hence the accusation of idiocy against gordon moron, because he borrowed on the basis of funds that are simply not available to be taxed even now.

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  • It will be interesting to see what this currency fluctuation will have on inflation and possibly interest rates. Not the best time to have a referendum!

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  • @tom101 if the Goldman Sachs’ prediction of a possible 20% fall in GBP with Brexit happened that would affect UK inflation significantly and so too our IR. Goldilocks becomes stagflation.

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  • all this fear mongering from companies who make huge sums from EU /UK shifting money around

    before EU we were a productive country

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  • Stillthinking

    >Money printing most certainly does not take place outside the private banking system (i.e. the one the members of the public use!). When the government spends money into the economy where else can it go apart from the banks balance sheets?

    I think we are talking at cross purposes. Of course balance sheets are not unaffected in that sense. But it won’t create an imbalance as you suggest, because when you deposit into a bank both its assets and its liabilities increase.

    In the past notes and coin, not created by the private banking system but by the mint, with seignorage benefit to the Treasury, were a higher proportion of the money stock. Was the system any worse for it than today? NI don’t think so.

    Nick

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  • Lornestreetloyal says:

    I stopped reading this after….The trouble is, it didn’t work either. Its main impact has been to destroy the profitability of the banking system…

    Have you seen the Barclay’s results today!!!

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