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

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

Why is this English bloke on US TV? He sounds like Ben Elton.

for several years john oliver was "british correspondent" for the US talkshow the daily show (host jon stewart)

at some point in that he moved to new york, and at some point after that (maybe when stewart retired from the daily show?) he was evidently liked enough by us networks and audiences that he got his own spin-off

(i had to look all this up, he makes me bristle a bit tho i think his heart is basically in the right place)

On the "why do govt issue bonds when they could surely just print the money?" question:

I wonder if there's a issue of market confidence as well. Govts can print money - but can they persuade anyone to trade with them if the currency is perceived as worthless.

I've sen it stated a lot in newspapers recently that a sovereign state like the UK can never ultimately go bankrupt because as a last resort it can always print more of its own currency - but I'm really doubtful about this. If a sovereign state's reputation goes down too low - other countries will want to carry out transactions with it in a currency they trust - like the US dollar.

But then. I'm also puzzled how quickly Iceland recovered from its financial problems: it seemed to come back from the brink really easily.

English people on US media often do not seem good. Gervais, Corden come to mind, unfortunately.

#3 is pretty surprising. I hope we don't hear about it again if it doesn't already exist.

pinefox: i don't know about London, but NYC lays out its bond sale practices here: https://comptroller.nyc.gov/services/financial-matters/nyc-bonds/invest-in-nyc-bonds/buy-nyc-bonds/

point number one establishes that "Bonds are sold only through licensed broker-dealers, who can help determine if the bonds are a suitable investment. Investors must have an open brokerage account in advance of the bond sale to place orders for the bonds."

so the target market is not the average person on the street, but larger entities that deal with debt financing and long term investment all the time. banks, funds, foundations, yadda yadda... or at least, individual investors who are wealthy enough and involved enough to have their investment broker put ten grand into a municipal bond here and there.

one important aspect of this, and one thing that i think more ardent capitalists would point to as an example of how the profit motive could be socially beneficial, is that the people buying the initial bond don't have to care one bit about your city and its urgent infrastructural problems. they or their brokers just look through the figures to make sure it all adds up, and so long they're guaranteed a modest little profit over the long term, all of a sudden, almost magically, there's all this money to build infrastructure. doesn't matter to them whether they're funding a bridge in Casino City, a new park in East Ilxor, or wheelchair ramps at all the government buildings in Nowhere County. the mayor doesn't have to go around trying to sell a tax locally, or even wander the country trying to sell investors one by one on the merits of the scheme. the abstraction of the bond sale opens up this huge pool of potential lenders.

(the only thing is that the price you're selling the bonds at, and the interest rate you're guaranteeing, have to be competitive not only with other cities at the present time, but with *the present prices and yields of the secondary bond market.*. no one's going to buy your city's new bonds if existing bonds currently being traded around offer a better deal.)

P.S. I'm not an expert in this at all ---- I just had to get some sense of the basics while doing my dissertation work on municipal infrastructural *architecture*.

the mayor doesn't have to go around trying to sell a tax locally

How will the bond be paid?

I wondered that too, but I think it's in what Dr Casino said:

"the bridge tolls, or the few cents of additional sewer charges on everybody's water bill, will ultimately cover the loan."

Are those taxes generally proportional? They could have uses e.g. gas tax but I wonder about the whole mechanism as opposed to taxing directly with more proportional responsibility?

https://www.nytimes.com/2022/10/09/us/california-high-speed-rail-politics.html

someone else thinks about finance.

It makes me think that fundamentally the banks aren’t so bad after all. They keep our money for us, but they look upon it like a loan, and they pay us interest. Just like when they lend us money to buy a house, but they charge us interest. It’s the same rules.😎

— stuart murdoch (@nee_massey) November 5, 2022

But banks don't pay us interest, do they? I don't get any extra money for what money I have in a bank.

in a savings account you generally will get interest yes, in the ordinary in-and-out accounts not so much

you can definitely earn interest if you keep it at a bank that offers to pay interest on deposits. what kind of bank / account do you keep your money in now? xp

Well, I should not be too explicit talking online, but it's a current account (from which I can pay for things), which is connected to a savings account (which does not seem to pay any interest on whatever is in it).

As I mentioned upthread:

Recently it was said that "interest rates have risen". But does that mean the bank will give me more money? Presumably not. Why? I suppose because they don't want to and I can't do anything about it.

might want to change banks, I don’t know what english websites are reputable but this suggests you could be earning some interest on your savings account

https://moneyfacts.co.uk/savings-accounts/regular-savings-accounts/

You definitely earn (or should earn) interest from certain bank accounts, but not much compared to investments. You essentially sacrifice growth for the sake of security/liquidity. That's why banks are less incentivized to raise interest rates, or maybe a better way to put it, that's where things like bonds become preferable to cash, as far as investments go. As rates go up, bonds generally raise payout rates as well, to remain attractive to investors. That's where the juggling of things like bond coupons and yield and stuff come in, though that can become a full-time job, since they are constantly shifting around and coming and going, at least as I understand it.

On the "why do govt issue bonds when they could surely just print the money?" question:

I wonder if there's a issue of market confidence as well. Govts can print money - but can they persuade anyone to trade with them if the currency is perceived as worthless.

I've sen it stated a lot in newspapers recently that a sovereign state like the UK can never ultimately go bankrupt because as a last resort it can always print more of its own currency - but I'm really doubtful about this. If a sovereign state's reputation goes down too low - other countries will want to carry out transactions with it in a currency they trust - like the US dollar.

A lot of the answer involves trade with other countries. While a nation could make its own citizens accept its money at a stated value, they have less ability to do so with foreign governments or foreign individuals investing or trading with them. If a nation didn't import goods from other countries, and was entirely self-contained, then theoretically, yes, it could do this. It's less about reputation, and more about how much your nation's economy is dependent on money/goods from other, stronger countries (i.e. the US).

I am a bit surprised that we haven't gotten to this point yet in this very nice thread, and I don't want to ruin this very nice thread, but ... a prime example of this interdependence and how a nation can't just print as much money as it wants and have everything be fine is Post WWI Germany. Part of Germany's strategy was to reduce trade with other nations that had stronger currencies and be more self-sufficient. However, the German nation (as it currently existed) lacked certain resources in order to increase its self-sufficiency ... which encouraged Germany to obtain those resources by force.