a thread in which ilx interprets economics and finance, sometimes linen by linen*, and disagrees a lot (probably)

*points furiously at table as it flips on its head*

it's weird out there people (things turning into money)

https://pa1.narvii.com/7781/2594f7301ac2d1776fc9b8290c70ad144d3f7241r1-480-270_hq.gif

LRB 3.11.2022

https://www.lrb.co.uk/the-paper/v44/n21/paul-taylor/academic-benefits

I read this new article on pensions. I did not comprehend it. A pity as I have one of these pensions.

I particularly lost track around here.

One great attraction of government bonds is that powerful countries with their own currencies don’t default – if all else fails they can print the money required to meet their obligations. Another is that they pay a guaranteed rate of interest. The only problem, as far as pension funds are concerned, is that you can’t predict the interest rates on bonds the government might issue next year or the year after. If interest rates go up, then bonds already issued, which pay the old, lower rate of interest, will seem less valuable. If you want to sell those bonds you will have to accept a lower price. In a world where bonds are continually traded, it makes sense to think of the income generated by the bond as a proportion of the current rather than the initial price. Traders talk about the yield rather than the interest: if the price of a bond goes down, then since the interest it pays stays the same, the yield will go up.

In a simple world, a pension fund manager could use the contributions from employees to buy bonds, and the fund’s liabilities and assets would be perfectly matched. But fund managers have traditionally put at least some funds into riskier investments, such as stocks, to generate higher returns. The risks are manageable because pensions are long-term investments and can ride out market fluctuations. The managers of closed schemes, however, are primarily focused on balancing the books, so invest in bonds rather than stocks. In recent years they have used a strategy called Liability Driven Investment (LDI) to guard against the risk that the yields from their assets will be lower than the yields used to calculate their liabilities. A key element of LDI is hedging – for example, protecting a fund against low or falling bond yields by betting that yields will go down. If yields go up, you can buy high-yielding bonds and not worry about the bets you lost. If yields go down, you will have to buy more bonds to get the same return, but at least you have an additional income from the bets you won. For the last ten years, bond yields have stayed low, LDI has been a winning strategy and many schemes have moved into the black.

I revert to the reflection that it is frustrating, for me, that a publication to which I subscribe prints things that I cannot comprehend.

Never mind the fact that this apparently directly relates to my life.

https://www.bloomberg.com/opinion/articles/2022-09-29/uk-pensions-got-margin-calls

this may be an easier explanation for you?

pension funds are a whole new exciting concept for this thread! It also goes back to math and nerds solving math problems. Pension Fund Managers (the people who are responsible for making sure there is enough money in the pension fund to pay out) are generally some of the most conservative investors (i.e. risk averse), because they aren't investing/managing money for rich people, but for old people who rely on the pension in order to live, and the pension itself was something contributed by the employer on behalf of the worker, as in, the worker lacks control over the money that will pay for their comfort in their old age or disability. The worker trusts the employer, and the employer trusts the pension fund manager.

Pensions are what are called (at least here in the US) "Defined Benefit Plans" -- as in, the pensioner is guaranteed to get a certain amount out of the fund when they retire. The concept is, "they will have enough to live comfortably until they die".

So, then someone has to determine what that amount is. And a lot of the problems that pension funds have had in the past 20 years (perhaps more), is the "until death" aspect of the calculation. People live longer. Therefore the pension fund needs to have more money (and earn more money from investments) in order to cover that expense. This is why you see pension funds investing in riskier things (e.g. the mortgage backed securities in 2008 that caused the recession), so that the pension fund will have enough money to pay the pensioners.

I think the largest problem pension funds have had in the last 20 years beyond that is that they have nearly ceased to exist outside of a handful of unions. Most corporations switched to a 401k-with-some matching model and the legacy pension obligations just get traded to whatever company loses in mergers/spinoffs

Literarily speaking, one could draw examples from "Lord of the Flies" in a description/analysis of pension funds ...

I think I was one of the last people through the door eligible for the pension fund when I started a job, and that was back in the early 00s. They completely killed it a year or so after I was vested

I think the largest problem pension funds have had in the last 20 years beyond that is that they have nearly ceased to exist outside of a handful of unions

many of these are government workers though. So, they are nowhere near "vestigial" in terms of impact on current economics ... I'm sure we've had this discussion on other threads but, a lot of US Cities have budget problems due to pension obligations to Police and Fire retirees, who tend to retire earlier than the average worker.

going back in a way to Marx ... this is another thing to blame cops for.

poster [unreadable symbol], I can't access that article.

I actually do understand sarahell's post about pensions above.

Does anyone else comprehend the LRB article?

LDI
Here is a simple model of a pension fund. You know you will need to pay out a bunch of money 30 years from now, so you buy some 30-year government bonds and hold them to maturity. When the bonds mature in 30 years, you have money, which you give to the pensioners, and you’re done. This model is obviously oversimplified, 1 but it’s a good start.

Let me make three points about this model. First, a financial point: Doing a pension fund this way is expensive. Thirty-year UK gilts (government bonds) paid about 2.5% interest this summer. If you want to have £100 in 30 years, and bonds pay 2.5%, you’ll need to put aside about £48 now, which will grow at 2.5% over 30 years into £100. 2 If you are a company or government, you might not be jazzed about putting aside almost half the money now to pay pension obligations in 30 years. What if you bought some stocks instead? If stocks return 8% a year on average, you can put aside just £10 now to get back £100 in 30 years. That’s a much better deal, for you, now. Of course the gilts pay 2.5% guaranteed, while the 8% stock-market return is just a guess; in 30 years, you (and your pension beneficiaries) might regret your riskier choice. But it saves you money now, and it’ll probably work out fine. Or, you know, you do some mix of super-safe gilts and riskier corporate bonds and stocks, etc., still targeting £100 in 30 years but putting less money in now and taking more risk to get there.

Second, a financial-stability point: Structurally, pensions are about the safest form of investing. Most big investors in financial markets are, to some degree or other, structurally short-term, in ways that make markets fragile. Banks borrow most of their money short-term (from depositors, from capital markets), and if there’s a run on the bank then the bank will need to dump assets to pay back depositors. Mutual funds let their investors take money out every day, and if a lot of investors want out then the funds will have to dump stocks to give them their money back. Hedge funds let investors take money out and also tend to borrow money from prime brokers; if their assets go down then they will get margin calls from brokers and will have to sell assets to meet them. The common theme is:

You buy some assets with other people’s money.
The assets go down.
The people — depositors, investors, prime brokers — call you up and say “you used my money to buy assets, and the assets went down, so now I want my money back.”
They have the right to do that.
You have to sell assets to pay them back.
This makes the price of the assets go down more.
Go to Step 2.
More or less every bad story in financial markets is this story, a “deleveraging” or “run on the bank.” Pensions are immune to this. Pension funds own assets (gilts, stocks, etc.) with other people’s money, in the sense that they are ultimately supposed to use those assets to pay benefits to pensioners. But the beneficiaries can’t take their money out if the fund has a bad year. They just have to wait. There are no runs on pensions. The pension has to come up with £100 in 30 years, but that’s it; it can’t be forced to sell early along the way.

This means, for one thing, that if you run a pension you can confidently invest in risky assets like stocks: If stocks go down one year, you can make it up next year; you’re not going to have to shut down your pension fund because investors withdraw money after a year of bad returns. It also means that pensions are not supposed to destabilize financial markets: They are long-term investors and are not forced to sell when markets go down.

Third, an accounting point. Take the simple model of a pension: You buy a bond today to pay £100 in 30 years. I said above — with some simplification — that you pay about £48 for that bond. That is the value of that bond: The value of getting £100 in 30 years is £48 today. How do you account for that? What does the balance sheet look like? At some conceptual level, the balance sheet looks like “in 30 years I will have pension liabilities of £100 and assets of £100,” so it balances. But in practice accounting doesn’t work that way. In practice you will record the value of the bond as an asset, today, at £48. But by the same logic, you will record the value of your liability at £48: The cost of paying £100 in 30 years is £48 today, so you have assets of £48 and liabilities of £48 and it all balances.

What happens if interest rates change? Let’s say that the interest rate on 30-year gilts falls to 2%. This means that the market value of your bond goes up, to about £55. Do you have a windfall profit? Can you sell a portion of the bond? No, of course not. The market value of your bond has gone up, but you don’t care about that. The bond, for you, is a long-term, hold-to-maturity investment. For you, the bond pays £100 in 30 years; you don’t care about its market price now. But by the same logic, the present value of your liabilities goes up: Your obligation to pay £100 in 30 years is now “worth” £55, using a 2% discount rate. So your balance sheet still balances.

In the simple case, none of this matters and it is sort of a confusing fiction. You have to pay £100 in 30 years, you have an asset that pays £100 in 30 years, you’re done; market fluctuations don’t affect you at all. Accountants will want you to record the value of your asset and the value of your liability at their discounted present value, and that value will fluctuate with market interest rates. As rates go up, the value of your bonds will go down but the discounted cost of future pension benefits will go down; as rates go down, the bonds will go up but your cost will go up too. In the simple case these things will always offset and won’t trouble you very much.

But once you move beyond the simple case this gets worse. Let’s say you have to pay £100 of benefits in 30 years, and you plan to pay for that using half bonds (gilts worth £24 today) and half stocks (stocks worth £5 today). If gilts yield 2.5% and stocks return 8% per year for 30 years, that will give you £100 in 30 years, enough to pay those benefits. But today, you have assets of £29 (£24 of gilts and £5 of stocks), and liabilities of £48 (the present value of that £100 pension obligation in 30 years at a 2.5% discount rate). So your pension is underfunded, by £19. 3 It happens! It might be fine, if you get the returns you want. But it could make you nervous. One way to overcome this nervousness is to invest in even riskier assets with higher returns, so that next year you have, you know, £33, and are less underfunded.

The bigger problem is what happens when interest rates change. Again, say that the interest rate on 30-year gilts falls to 2%. Now you have £55 of liabilities (the present value of your pension obligations discounted at 2%). The value of your gilt holdings has gone up to £27.50 as rates fell. The value of your stock holdings might not have, though; stocks don’t move automatically with interest rates. Still, let’s say that your stocks have gone up, by 20%, to £6. Now you have £55 of liabilities and £33.50 of assets. You are underfunded by £21.50 instead of £19, which is worse. You have “lost money,” in a very accounting-fiction-y sense. Your actual pension obligations (how much you need to pay in 30 years) have stayed the same, and the market value of your assets has gone up. But your accounting statements show that you have lost money.

Notice that what this means is that, on a reasonable set of assumptions, pensions are short gilts: They lose money (in an accounting sense) whenever interest rates go down (and gilt prices rise), and they make money (in an accounting sense) whenever interest rates go up (and gilt prices go down). 4 Notice also how counterintuitive this is: In its simplest form, a pension fund just is a pile of gilts. The basic default move for a pension manager is to take a bunch of money and put it in gilts. Intuitively, she is long gilts: She has a pile of government bonds, and as rates go down the value of her holdings goes up. But as long as she doesn’t put all of it in gilts, and as long as the pension is underfunded, then she is as an accounting matter short gilts.

I said above that pension funds are unusually insensitive to short-term market moves: Nobody in the pension can ask for their money back for 30 years, so if the pension fund has a bad year it won’t face withdrawals and have to dump assets. Still, pension managers are sensitive to accounting. If your job is to manage a pension, you want to go to your bosses at the end of the year and say “this pension is now 5% less underfunded than it was last year.” And if you have to instead say “this pension is now 5% more underfunded than it was last year,” you are sad and maybe fired; if the pension gets too underfunded your regulator will step in. You want to avoid that.

And so the way you will approach your job is something like:

You will try to beat your benchmark, buying stocks and higher-yielding bonds to try to grow the value of your assets.
You will hedge the risk of rates going down. If rates go down, your liabilities will rise (faster than your assets); you are short gilts. You want to do something to minimize this risk.
The way to do that hedging is basically to get really long gilts in a leveraged way. If you have £29 of assets, you might invest them like this:

1. £24 in gilts,
2. £5 in stocks, and
3. borrow another £24 and put that in gilts too.

That way, if rates go down, the value of your portfolio goes up to match the increasing value of your liabilities. So you are hedged. You were short gilts, as an accounting matter, and you’ve solved that by borrowing money to buy more gilts. In practice, the way you have borrowed this money is probably not by actually getting a loan and buying gilts but by doing some sort of derivative (interest-rate swap, etc.) with a bank, where the bank pays you if rates go down and you pay the bank if rates go up. And you have posted some collateral with the bank, and as interest rates move up or down you post more or less collateral.

This all makes total sense, in its way. But notice that you now have borrowed short-term money to buy volatile financial assets. The thing that was so good about pension funds — their structural long-termism, the fact that you can’t have a run on a pension fund: You’ve ruined that! Now, if interest rates go up (gilts go down), your bank will call you up and say “you used our money to buy assets, and the assets went down, so you need to give us some money back.” And then you have to sell a bunch of your assets — the gilts and stocks that you own — to pay off those margin calls. Through the magic of derivatives you have transformed your safe boring long-term pension fund into a risky leveraged vehicle that could get blown up by market moves.

I know this is bad but I find something aesthetically beautiful about it. If you have a pot of money that is immune to bank runs, over time, modern finance will find a way to make it vulnerable to bank runs. That is an emergent property of modern finance. No one sits down and says “let’s make pension funds vulnerable to bank runs!” Finance, as an abstract entity, just sort of does that on its own.

Anyway, as I said above, 30-year UK gilt rates were about 2.5% this summer. They got to nearly 5% this week, and were at about 3.9% at 9 a.m. New York time today. You can fill in the rest. Here are Loukia Gyftopoulou and Greg Ritchie at Bloomberg News:

Fund managers running billions for pension funds faced collateral calls on strategies meant to give them exposure to long-dated assets to help match obligations that can extend decades. The so-called liability-driven investment, or LDI, funds were forced to post more collateral after receiving margin calls when gilt prices collapsed.

The central bank stepped in Wednesday after the calls threatened to push the gilt market into a downward spiral. The BOE had been warned by investment banks and fund managers in recent days that the collateral requirements could trigger a gilt crash, according to a person familiar with the BOE’s deliberations before they stepped in.

“The BOE intervention was required to prevent a vicious cycle becoming even more dangerous for pension funds forced to sell their gilt exposures,” Calum Mackenzie, an investment partner at Aon, said after the BOE intervention. “The market’s swift and significant reaction underlined the big risk faced by pension funds who have had or who could have had their liability hedges reduced.”

Firms including BlackRock Inc., Legal & General Group Plc and Schroders Plc manage LDI funds on behalf of pension clients. The pension firms use them to match their liabilities with their assets, often using derivatives.

The size of the LDI market has exploded over the past decade. The amount of liabilities held by UK pension funds that have been hedged with LDI strategies has tripled in size to £1.5 trillion in the 10 years through 2020, according to the Investment Association. These trades are typically used by defined benefit pension schemes. ...

When yields fall the funds receive margin and when yields rise they typically have to post more collateral. After the spike in gilt yields on Friday and into this week, LDI fund managers were hit by margin calls from their investment banks.

LDI collateral buffers are partly set using historical data to build models based on the likely probability of gilt price movements, according to Shalin Bhagwan, head of pension advisory at DWS Group. The sudden recent surge in gilt yields “blew through the models and the collateral buffers,” he said.

And here is the Financial Times on the BOE’s intervention:

The bank stressed that it was not seeking to lower long-term government borrowing costs. Instead it wanted to buy time to prevent a vicious circle in which pension funds have to sell gilts immediately to meet demands for cash from their creditors. That process had put pension funds at risk of insolvency, because the mass sell-offs pushed down further the price of gilts held by funds as assets, requiring them to stump up even more cash. “At some point this morning I was worried this was the beginning of the end,” said a senior London-based banker, adding that at one point on Wednesday morning there were no buyers of long-dated UK gilts. “It was not quite a Lehman moment. But it got close.” …

“If there was no intervention today, gilt yields could have gone up to 7-8 per cent from 4.5 per cent this morning and in that situation around 90 per cent of UK pension funds would have run out of collateral,” said Kerrin Rosenberg, Cardano Investment chief executive. “They would have been wiped out.”

And FT Alphaville has two very good explainers of the LDI problem, one by Toby Nangle and another by Alex Scaggs and Louis Ashworth, which I have drawn on here. And here is Nangle’s prescient LDI explainer from July. Modern finance made UK pensions vulnerable to runs, and then there was a run on those pensions, and the Bank of England had to step in to buy gilts to save them, because that’s what happens in a bank run.

" You know you will need to pay out a bunch of money 30 years from now, so you buy some 30-year government bonds and hold them to maturity. When the bonds mature in 30 years, you have money, which you give to the pensioners, and you’re done."

I don't think I follow your second sentence.

If you have the money at the start, why would you buy something else with it?

you don’t have enough money at the start for what you need to pay out in 30 years, so you buy something that allows you to do so (gilts) because gilts accumulate interest

Does gilts mean gold bars or another gold item?

it’s a britisher version of a bond, which is a basic security that pays fixed interest on a schedule until the principal is due, at which point you also get the principal… imagine a loan but the loan gets chopped up and many different people can own a piece of the loan.

what you're buying with the money "at the start" is very precisely access to this same money in 30 years time, at a guaranteed (increased) value, guarantee and increase defined by the fund in the question (perhaps bcz as 龜 says you need the increase to pay for something you can't afford right now)

it's also guaranteed to be there when you need it in the future (a shoebox under the bed can be stolen by others and raided by you): it's there to privde you with cash after you've stopped earning and to be safe from temptation in the meantime

"you have money" is an intrinsically ambiguous phrase:
• cash in hand is right there and useable but that may be a drawback (you fritter it away on books by perry anderson when you're meant to be saving up for a yacht)
• cash in the bank is less convenient (but you earn interest in addition to the original sum)
• cash in bonds or a pension fund (or various other things) can only be accessed after a certain pre-decided timelapse but it doesn't "go elsewhere" and ideally when the time has lapsed you will be able to withdraw more rhan you put in (sometimes quite a lot more)

however sadly sometimes it DOES "go elsewhere": banks and funds can fail, basically because -- for reasons relating to their other activities -- when it comes time to pay out (which means paying out to a LOT of people at once) they don't have the readies and people are queuing and pushing and fighting to get their share first before it runs out (this is called a "run on the bank")

"you fritter it away on books by perry anderson when you're meant to be saving up for a yacht"

I like this. It's very realistic.

gilts are british government bonds

a bond is a fancy iou (ie set about with all kinds of legal safetyguard), where you give the govt money for some project and they promise to pay you back after a given time at some agreed rate

they're called "gilts" bcz the docs used literally to be gilt-edged; consequently "gilt-edged" as a metaphor can mean reliable, because (unlike high street banks and other institutions), the government never runs out of money -- it can always just print more

(there are drawbacks to "just printing more": famously inflation is one of these, where it doesn't run out of money but the banknotes do "run out of value" -- a million marks for a loaf of bread, this kind of thing -- but that's matter for a different post lol)

So 'IOU' meaning - the *government* owes the citizen who buys the 'bond'?

You spend £100 and they say 'I owe you this £100 at a later date' ?

And the reason to buy it is that it comes back to you as more than £100?

If so, where does this extra money come from?

the simplest answer is the government can create more money to pay the interest on your IOU

it doesn’t “come back to you” at more than 100 pounds - you get paid back 100 pounds when the gilt matures (that is, at the date the government is required to pay you back). the extra money comes from the interest the government is required to pay you for as long as you hold the IOU. this is known as an ‘interest rate’ and is usually paid either semi annually or annually

And the extra money comes from the government 'printing' more money? (Maybe they don't literally print it?)

where it's from depends what the bond is funding: sometimes for example it's a project that will return a profit so the extra money comes from that profit (though this is more a stock than a bond i guess); and sometimes it simply goes into a financial fund which is "managed" in such a way it "grows" (i think i'm going to leave the explanation of *this* to a later post lol)

but often it's for projects that are not at all profitable in the normal sense (during wars in the past the government would issue "war bonds" to fund troops and guns, items many of which by definition would simply end up blown to pieces)

however where the government is concerned the extra money in the end can always come from their ability to control huge amounts of money (and to print more when it's need) (except in very rare case, states collpasing, hyper-inflation): a government can *always* find the extra money and so they can keep the promise they made

do they still print it? sometimes yes! but yes, they can also simply declare that a number on a screen will get bigger

It seems like the bond involves a citizen loaning money to the government.

But why would a government borrow from a citizen, as the government is almost infinitely more wealthy than a citizen?

And as was pointed out above, the government seems to be able to create more money if it wants to?

So it doesn't need to borrow our money.

thats a great question, and i can think of a couple of different answers. the first is that if the government just printed everything it needed, that would massively accelerate inflation because of all the new money the government is introducing into the money supply

another answer is that its a way to facilitate private lending by setting the “risk free” rate. because the government can always pay back its debts by printing more money, when you lend money to the government it is seen as being virtually 0 risk. compare that to lending money to your neighbor down the street, who might abscond with your money without any recourse by you!

so if lending to the government is risk free, then the interest rate paid by the government is the risk free rate. if you lend to anybody else other than the government (for example, you buy a bond/IOU issued by a company like Jaguar) you will ask for the risk free rate + a spread, that is more interest than if you were lending to the government, to compensate you for the increased risk of lending to a non-government entity. so if the government interest rate was 2%, you might ask for 3.0% for your bond from Jaguar.

since tons of private companies borrow all the time, it’s important for everybody to know what the “risk free” rate really is, in order to set a benchmark against which to price IOUs not issued by the government

regarding yachts and novels I think someone said the same about housing and his choice to live out of a suitcase which is why I think minimalist functional housing that eliminates hoarding (fear of loss of manna or the future) would be a good end but not one that I have attained yet

I think the government is betting on its tax revenue and the future governments likely to sustain that.

Thanks poster [don't know the name] for your replies, they were quite helpful.

another (more political than economical) part of an answer to "why do govt issue bonds when they could surely just print the money?" is very much that it brings the general public into the projects: as well as raising funds it's both straightforwardly informational ("this is what the government is doing! building roads!") and propagandist ("you can be part of it -- and you will be directly rewarded as well as socially rewarded!". cheaper war bonds especially were the subjects of stories and adverts in big newspapers and popular magazines, with the aim of exciting the less moneyed readership into feeling they were contributing and helping create a better future*

so wars or railways or whatever across taking place or being built in distant parts of the empire back then (i guess i'm thinking late 19 the century to between the world wars) seemed much more immediately part of "our collective national journey!" -- the investor helped build and and got fairly speedy return even if he/she never used the road or the railway him/herself

*in many if not most cases this was a highly questionable assumption

Have definitely heard of war bonds. (I think Batman and Captain America advertised them?)

So I seem to learn something here. War bonds (WWII) meant 'citizens loaning money to government to spend on tanks'.

Then presumably the citizens received the money back after WWII.

https://translate.google.com/?sl=auto&tl=en&text=%20%E9%BE%9C&op=translate

yes!

tho as 龜 notes they possibly got the yearly interest on the investment back even earlier

A recurrent statement seems to be 'creating more money causes inflation'.

I think that means: It makes the value of money (eg £1) go down?

ie: £1 would buy less - so the Perry Anderson book would cost £30 rather than £15?

I try to grasp this. Is it about scarcity, ie: things that are scarce are more valuable for some reason (unsure why), so if money is less scarce it is less valuable.

If copies of Mark S's book A HIDDEN LANDSCAPE ONCE A WEEK were given away at every railway station then the value of the book for sale would go down.

Unsure, though, if that relates to how many copies of the book exist. Maybe lots of copies could exist and all cost £20.

adding (re my cynicism abt war bonds, above): i guess if "a better future" entails the interim defeat of fascism that's not so "questionable"

i am sour abt them partly bcz i recently edited a highly entertaining biography of turn-of-the-century fraudster and politician horation bottomley, who in WW1 set up a "war bonds" scheme thru his shrieking and ultra-gammony monthly john bull, which -- to cut a long story short -- merely fleeced his readers, bcz the money entirely ended up in his own pocket (or more precisely funding the various shortfalls of multiple earlier frauds lol)

pinefox, it might be easier to start with smaller scales of government. in the USA, cities can't print money, but they CAN issue bonds. let's say the city gov't wants to build some piece of very expensive infrastructure, like a bridge or a sewage treatment plant. there's no money in the normal budget to do anything remotely this big, and raising the extra money through taxes is politically undesirable. instead they issue bonds, in other words going into debt: everybody buying a bond is effectively loaning the city $100 today for the promise of getting that $100 back, plus interest, in due time.

the city's not as worried about that bill coming due as they were about the big initial price tag, because they can spread the costs over the long term, and also bake them into the accounting for the project itself. the bridge tolls, or the few cents of additional sewer charges on everybody's water bill, will ultimately cover the loan. and if they don't, well, most people are still confident that even a puny city government, unable to print money, has powers to gin up money (raising taxes, cutting essential services, issuing more bonds). in the worst case the city could beg for a bailout from the state of the feds. the people buying bonds know that the city will always use these powers if it can, because defaulting on bonds basically would ruin their credibility, and completely wreck their ability to finance projects in this way. so even though the city can't print money, it feels like a pretty safe investment.

all the tolls-and-charges math gets very carefully examined beforehand, and (since the Progressive era) the state sets debt limits for cities, to keep them from getting in way over their heads with capital projext debt like this. so this bond stuff is one big big reason so many municipal projects are expected to be "self-financing," that is, for it to involve its own income streams that will pay for the loan. in the absence of some bigger, richer entity coming in with sacks of no-strings-attached money, like say the federal government during the New Deal, it's very very hard to get a city government to say "this is just plain worth doing, we're gonna raise taxes and pay for it with no expectation that it will break even somehow."

cities also build all kinds of non-money-generating things, like schools and libraries. here they probably also issue bonds, but dedicate a chunk of their budgets to servicing the debt, and maybe raise taxes ("vote YES on the .2% sales tax, for better schools!"). but even this stuff is expensive and unattractive. you can see why so much American urban infrastructure/buildings date from the New Deal to Great Society period, when the money was basically flowing in from above, either as cash upfront or support for the debt service on bonds. as that federal faucet was closed by the neoliberal shift, cities got broke and stingy again. (also most of their tax bases had moved out to the suburbs.)

Wasn't that book covered in an LRB SHORT CUTS for some reason? I did read about him for sure.

Thanks poster Casino - a great name for the economic thread. I find your post quite lucid.

So, a citizen could loan money to their city? Are they invited to do so? I do not think I have ever been invited to loan money to London (the Greater London Authority?). Maybe if you are in a world of loaning money, you get invited.

the question "what causes inflation and what stops it" was already raised upthread and NOT RESOLVED (bcz it's a super-complex issue which economists have not stopped fighting about in two centuries, so it will take ilx more than two weeks)

but very roughly:
i: say there are one million (1m) transactions over a certain period, and the amount of money in circulation in that period is £1m, then (insane simplification klaxon), the average *monetary* value of the average transaction will be £1

ii: hence if you print twice as much money (2m) and this is all in circulation over this same period (and for the same aggregate number of transactions), then the average monetary value of the average transaction is 2m / 1m = £2. ie the monetary value of this same (average) transaction has doubled (despite its "use value" being identical).

so this is the basic assumption model re inflation and notes in circulation (in any actual real economic model there would be another 20 elements in the forumla qualifying this, but this maybe possibly perhaps explains the underlying dynamic?)

(assuming i didn't get something very dumb wrong lol, i did it without looking anything up to check)

2 x xp yes there was an extract from the bottomley book in LRB shortcuts!

Interesting post re inflation. Actually quite comprehensible!

other variables: ability to save as reflected in the amount in circulation

Do local governments in the UK get money from the central government and how much does that influence local taxation?

youn: yes they do, though in amounts that have been diminishing for decades, at times sharply (with occasional windfalls earmarked for very specific projects)

three things i guess influence local taxation
1: what has to be paid for
2: the rates people are willing to vote for locally
3: since the 1980s, centrally imposed caps on the taxable amounts (there was a fierce political struggle over this between central govt -- = thatcher -- and certain radical municipal councils, such as liverpool, sheffield, others i now forget)

There was actually (sorry for those that bristle) a really good John Oliver explaining inflation:

https://www.youtube.com/watch?v=MBo4GViDxzc