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

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.

sorry - I think I didn't read the italicized thoroughly enough before responding -- basically it's less about reputation and trust, and more about whether you can pay in the trading partner's currency (if they are stronger) or if you have enough goods/materials to equal or exceed what they are giving your country. Like, if your country's currency is of questionable value, but you can trade raw materials or finished goods of value (oil, lumber, diamonds, the stuff they make cellphones out of, Beatles records, etc.) then that would compensate for your crap currency. If your currency is crap and you don't have enough valuable things to trade, then you have a big problem.

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

In the USA the power to 'print money' for the government has been vested in the Federal Reserve, not the US Treasury. The Fed accomplishes this by buying US Treasury bonds using some newly created money. The jargon for this is monetizing the government's debt.

But nations kind of do just print the money don't they? I read somewhere that the Bank of England holds around 35% of the UK national debt. In other words, the UK government issues bonds, a third of which are bought by the BoE (owned by the UK govt) presumably by printing money...

xp - the existence of the Federal Reserve in the first place is another issue (for well over a century the US didn't have central banking, and there were lots of runs on banks) -- it was a concept we imported from Europe

as well as the various other things i'm not (including qualified to expound on this thread lol) i'm not an economic historian, so i only had the vaguest grasp of financial strategy in interwar germany after the hyperinflation (a hyperinflation usually explained as a consequence of the peace settlement imposed on germany by the victorious allies at versailles) (tho this is contentious, like everything else in this thread), so after reading sarahel's posts and went and looked some stuff up abt it

anyway its architect (to be fair to me i actually did know some of this this) was one hjalmar schacht -- a reactionary conservative who wasn't *strictly speaking* a nazi (he often found them annoying and disgusting) but nevertheless inarguably their invaluable collaborator for several years (he was part of the von papen / von neurath gang). unlike many nazis and the rest of that gang, he had a p good grasp of his field (economics and finance) and also a p flexible imagination: if the new deal lifted the US out of the depression, then schacht's "new plan" got there first (and helped inspire it): it being a popular largescale keynesian project of road-building and public works that more or less ended unemployment (tho as sarahel suggests, in germany and in the US, the full recovery was as much fuelled by war as civic keynesianism)

the thing i *really* didn't know was that schacht's full name at birth was horace greeley hjalmar schacht -- greeley was a pioneering US newspaperman who supported lincoln and north in the civil war (tho he later broke with the republicans over reconstruction and worked to undermine grant); he is also the editor largely credited with firewalling the opinionating op ed aspects of a newspaper from the (factual) news reports and also with the frontier-busting meme-campaign "go west young man!")

er so anyway hjalmar schacht everyone, a very shitty figure in economics who is nevertheless also fairly interesting

oh i’ve heard of horace greeley! that’s wild. i had no idea.

what an attempt at nominative determinism from the parents

(actually strictly speaking greeley didn't invent the actual op-ed page, that was herbert bayard swope in the early 20th century: but greeley is generally credited with being first to insist that news and opinion are NOT THE SAME and should be distinguishable on the page)

possibly useful, and uk centric

https://www.bbc.co.uk/sounds/brand/m001dwr7

"Understand: The Economy
Radio 4

From inflation to GDP, from the stock exchange to bonds, Tim Harford goes back to basics to explain the terms we hear every day, and what they mean for you."

i was surpeised to see some uk bank offering 4.5% on isa (fixed, for a couple of years) whereas my savings have all been earning fractions of a percent for the last decade.

I heard an episode of this programme just now. I agree that it is very relevant to this thread.

Early in the programme he gave this increasingly familiar scenario:

"I borrow money from my friend X, and give her an IOU for £100, which she then sells to her friend Y".

I stop at this point because I cannot conceive a friend, or anyone really, doing this.

If I did borrow £100 from Mark S, it is pretty much inconceivable that he would sell the fact that I owe him £100 to poster koogs. This would not be normal or comprehensible human behaviour. I borrowed the money from Mark S, I will give it back to him. That's all. If another person was involved then I would no longer understand what was going on or why.

So what is meant as a helpful analogy does not work for me.

I did not understand the rest of the programme either.

no this is a interesting point and it struck me when i was inventing explanatory examples up thread that they often sit on the boundary between different ways of describing the world -- and the nature of that boundary is scale

what i might do, after all, is myself then borrow £100 from poster koogs and afterwards say to you "you might as well pay koogs back, not me" -- likely or not, this feels like a plausible scenario, and where it becomes enstranged is that to do this, on my part, would indeed be "selling the fact that I owe poster pinefox £100, to poster koogs"

i don't naturally think of it like this, but ppl who live in a world of multiple such personal small loans in every direction evidently do (if only for book-keeping and for conceptualising purposes)

so what creates this boundary is the multiplicity: quantity becomes quality, as hegel was possibly the first to observe out loud

what i might do, after all, is myself then borrow £100 from poster koogs and afterwards say to you "you might as well pay koogs back, not me" -- likely or not, this feels like a plausible scenario

Does it?

I can't even understand why it would be mathematically logical, let alone humanly plausible.

Nonetheless I register my appreciation of your posts on this topic, Mark S - they are generous and good-humoured.

I have the heard the Hegel line - from ... Lanchester! (Has anyone ever read it in ... Hegel?) I actually think it is somewhat intuitively true.

Has anyone ever read it in ... Hegel?

not me, i own a copy of the philosophy of right but have read perhaps three (3) pages of it, the going is laborious!

the scenario would be something like this: shortly after i lend you the money i realise i actually needed it myself for something i'd completely forgotten about; rather than hurrying after you and grabbing it from yr hand (while shouting "actually, no!") i decide to approach poster koogs, who i know to be both flush and generous in such situations

interpeting "anyone" more broadly: our mutual acquaintance non-poster b3n w4ts0n* has, or so i venture -- first bcz he devotes several pages to it in his essay collection art, class and cleavage: a quantulumcunque concerning materialist esthetix, and second bcz once when i was in his flat long ago (or actually the flat of his then-gf who is very much not his present gf, this was a LONG time ago), i noticed he had the same pb edn of the philosophy of right as me, so i idly picked it up and realised it was chock-full of marginal notes in his distinctive (and rather attractive) handwriting