No, Goodbye

EU member states are backing a European commission demand that trade talks can only start once Britain has agreed to pay a hefty Brexit bill, despite fears of a backlash from Theresa May.

The Czech Republic has joined Germany, Italy and France in insisting the UK must come to an arrangement on the divorce settlement, expected to come to about €60bn (£50bn), before any substantive negotiations on a future relationship.

We get to leave, whatever they say. Worst possible terms are WTO, terms we can live with happily. That is, WTO is the default without agreement.

Sure, there are things we desire but perhaps not £60 billion worth. Thus it is all up for negotiation, we don’t have to agree to pay first.

58 comments on “No, Goodbye

  1. No-one pays to start negotiations.

    These Eurocrats assume Britain has no aces. May should threaten back that anyone who thinks like that is not worth having as an ally, since they are obviously not friends, and she’ll withdraw from NATO. Then the US will tell the Eurocrats to pull their heads in, as NATO without Britain is worth nothing to the US.

    Playing hard by the EU needs to be reflected right back at them until they realise they actually need to stay friendly.

  2. OK. So they want Britain to pay up-front for Brexit.

    OK, salut, tschüss, ciao, enjoy putting up your WTO maximum tariff wall which, as lefties have just discovered with the Trump MX tariff wall proposal, their consumers will pay.

    What kind of threat is this? You pay us £50B or our consumers will pay slightly more for your products?

    If the net UK contribution to the EU is £6.5 p.a. then they’re talking 7.5 years of net contributions to even start negotiations. Delusional.

  3. They can fuck off and take their demands with them.

    Although it is likely the old “half a loaf” ploy from second eleven crooks.

  4. Plus the fact that the EU itself is shortly going to collapse.

    Who would pay billions for a trade deal which will soon be a dead letter?

    No trade talks, no money beyond the agreed annual dues pro-rata, and out of that existing money the EU has to pay pensions etc for British officials.

  5. I don’t think they understand how this works. Britain is a large contributor to the EU budget. If they refuse to talk about it, we will just leave. Keeping all the money. What are they going to do about it?

    Presumably the EU is worried that Britain will talk to each state independently and so split the EU as a whole. If they can go around to the East European beggar states and tell them that their money is at stake, they may well toe the French line and refuse to deal with the British separately.

  6. Timmy’s link relates to the Naples hospital skiving story so it’s a bit of a poser but this does look like fake news (talking of which, BBC seems to be hot under the collar about being excluded from a White House presser, teehee) – because Germany is not taking the position claimed.

  7. talking of which, BBC seems to be hot under the collar about being excluded from a White House presser, teehee

    I’ve often wondered why Tory governments bother to send ministers for interview on the BBC. It’s not like they get any opportunity to explain any policy without being harangued every 3 words. All they end up with is looking defensive as they struggle to get a word in edgeways.

    In the world of YouTube and Twatter, who needs to use the BBC to get their message out?

    (For oppositions I guess any publicity is good publicity, so can understand why they’d do it then.)

  8. The EU (the guys at the top) are demonstrating that they are bullies and crap negotiators.

    They must be shi**ing bricks to make such a ploy.

    A simple analysis is that they are on a total loser. They have absolutely no power at all in this situation.

    The attitude they are taking is bound to alienate other members.

    They are probably bringing on the end of the EU faster than it would otherwise happen.

  9. BiW: I’ve often wondered why Tory governments bother to send ministers for interview on the BBC

    It probably stems from the realisation that if the government were to boycott the state broadcaster it might be expected to refuse charter renewal and that would be a major political hot potato, apparently.

    So one way and another, it’s because they are spineless.

  10. The PM should tell the Eu that the opportunity of dealing with them is far too high and that last payment will be made on 31st March 2019. She should also tell them that if any grown ups want to discuss Brexit they can make a proposal and we might listen.

  11. I’ve often wondered why Tory governments bother to send ministers for interview on the BBC. It’s not like they get any opportunity to explain any policy without being harangued every 3 words. All they end up with is looking defensive as they struggle to get a word in edgeways.

    And of course the BBC will draft in 31 nutters to ‘balance’ the discussion who will then be given all the time they want to spout off whatever they want, unchallenged.

  12. Bloke in North Dorset
    February 25, 2017 at 10:18 am
    The PM should tell the Eu that the opportunity of dealing with them is far too high and that last payment will be made on 31st March 2019. She should also tell them that if any grown ups want to discuss Brexit they can make a proposal and we might listen.

    Indeed so.

    Whether you like Mr. Trump or not, that is exactly the sort of thing you could imagine him saying and doing in a similar situation.

    And there is next to no possibility of our spineless politicians doing it to the EU.

    Can we elect a business person as PM next please?

  13. Whenever you start a negotiation, you’re first offer is never the one you expect to end up agreeing to. Our first offer was full access without freedom of movement. Their first offer was £60bn and then we’ll think about it. Neither, obviously, is going to happen. It will presumably be somewhere in between.

    And it’s a good sign, because if they’re asking for our agreement to pay it, that presumably means they don’t think they can enforce payment legally.

    Unless of course they think they can, and so this is more like a vacuous face-saver? We publicly agree to pay an amount that we would have had to pay anyway, and never had any intention of not paying, and they can claim a victory for their media. Dunno.

  14. Well from their perspective you’d ask wouldn’t you?

    I hope i’ve interpreted the mood music with too jaundiced an eye but it looks like May and Hammond merely intend to use the free traders position as a counter bargaining chip. They use scare words like ‘fundamentally change the British economic model’. But its also scary to the electorate as well given in that context and with that spin.
    Worst possible scenario is they go all Tony Blair and trade off against something absurd like paying EU bills post Brexit, and paying them in advance is even absurder.
    Just reiterate the principle of ‘yes we’ll pay into progams our citizens will benefit (or have an equal opportunity to benefit from) and yes no cross subsidising either we’ll pay for stuff where the price and the product is clear. We’ll not pay for your shit, and if you want to impose tariffs then your consumers can pay for your shit.

  15. I don’t think we should underestimate the deviousness, or cravenness, of the UK’s political class. We need to remember, the majority were in favour of a remain vote. The PM, herself, was a Remainer. Project Fear. If there must be a Brexit, they’ll be wanting the softest Brexit possible.Brexit in name only, if they can manage it. And there’ll be two levels of negotiation. The public negotiations, where they can strut their stuff & look tough. And the negotiations behind close doors where they’ll work with their Eurochums to cut the best deals for politicians.
    For, after all; the one thing we can be certain about politicians is we can’t trust the cnuts.

  16. What’s all this about 31st March 2019? Surely it should be 2017? We missed the chance for it to be 24th June 2016.

  17. The media represents the truth in our society, but the truth lies.
    The media lie by omission, by change of emphasis, by distortion or just outright lies.
    Putting words and images into your ears and eyes that were never there.

    The Czechians are just stating what everybody already knows, the UK cannot enter into its own trade agreements whilst it is still a member of the EU.

    The 60 billion is hearsay included to slant the story

    Todays suggestion that ‘thousands of children at London schools breathe toxic air’ is cover for the Heathrow Airport expansion (because airplanes run on diesel not unleaded) and politicians like Sadiq Khan were elected because they were opposed to it.

    That’s just the Graun, the BBC and Telegraph (along with most of the rest) are also full of it, agenda based yellow journalism at its worst.

  18. Apart from our military, our intelligence services, seat on the security council, financial services prowess, relationship with the US and our ability to pivot to a low tax free market economy, we don’t seem to hold many other ace cards.
    Tell them to fck off and come back when they have found some adults to supervise them.

  19. The two years limit is a maximum. It could be less. If the EU won’t negociate in good faith the UK would be quite right to make it zero days after invoking art.50.

  20. We keep hearing about Article 50, but what about Article 8? All this bluster from Brussels much surely be in contravention of that?

  21. BiS: And the negotiations behind close doors where they’ll work with their Eurochums to cut the best deals for politicians.

    This is perhaps excessively pessimistic. After all, that’s what David Cameron attempted to do and he was rumbled and villified for his trouble.

    Once the top team of Messrs Juncker, Verhofstadt and Barnier start laying about the hallowed UK noggin with their life-preservers, it will be impossible for the government here to cobble together any kind of hole-in-the-corner deal.

    Moreover, any attempt to duff up the UK will push voters the way of Marine so counter-productive to the wider interests of the EU project.

  22. Falling back on WTO rules? External tariffs forced down? Woo hoo! Bring it on!

    Just discovered another one: EU members have to pay 10% on imports of pre-built cars from outside the EU. WTO rules would force a maximum of 5%.

  23. just like the U.K. Government’s posturing, this is all entirely for public consumption so both sides can show a quick ‘win’ straight away – this is a straw man they can give May in exchange for something she’ll have to give up would get otherwise shouted at for doing by the Daily Mail.

  24. Sc,

    ‘just like the U.K. Government’s posturing, this is all entirely for public consumption’

    this is normal, we wouldn’t expect anything less from the Government, but what of the media, why aren’t they calling them out, that is the job they claim the 4th estate is for.
    In fact when was the last time the media called anybody in authority out ?
    It seems that MOTPs have to relentlessly pursue a partisan cause for years before they begrudgingly acknowledge that an issue might be important and the reports are minimal and condescending before the general public force the issue and it gains national prominence whence the media claim to have backed them from the start.

    It’s not Fake News but Perception Management and it’s been going on for years, it’s going to take more than a few sherpas to bulldoze this into the public consciousness.

  25. “just like the U.K. Government’s posturing, this is all entirely for public consumption so both sides can show a quick ‘win’ straight away – this is a straw man they can give May in exchange for something she’ll have to give up would get otherwise shouted at for doing by the Daily Mail.”

    I’m not so sure. Usually you’re right, the Mark 1 media strategy for Eurosummits is for the EU to talk up some stupid ‘demands’ to get the Daily Mail roiled up, then row back (only slightly) at the actual summit so the politicians can go home with a ‘win’, but the Eurocrats get 75% of what they want (which is always more Europe of course).

    Thats not going to apply here. One way or another the result of the Brexit negotiations is not going to be ‘more Europe’ because the UK is leaving. So I don’t know if they are capable of that sort of compromise where they actually lose something, because in the past they always got what they wanted. Plus they have an extra dimension to incorporate into the Mark 1 strategy – they can’t be seen to be giving the UK an even half decent deal, because that will encourage other countries to think ‘Hey the Brits didn’t get a bad deal, why can’t we?’

    So I think they are painting themselves into a corner. They’re demanding the sun and the moon up front, but if they row back and give the UK a half reasonable overall compromise deal they risk encouraging more Leaver countries. Whereas May has been spot on, declaring early that no deal is better than a crap deal, thus putting all the pressure on the other side. They now know they can’t ‘punish’ us, because we’re happy to walk without a deal, so if they push us to that point they will only be punishing themselves.

  26. @jgh, February 25, 2017 at 1:24 pm

    Falling back on WTO rules? External tariffs forced down? Woo hoo! Bring it on!

    Just discovered another one: EU members have to pay 10% on imports of pre-built cars from outside the EU. WTO rules would force a maximum of 5%.

    Thanks for that info.

    Question for Tim W:
    How do EU achieve that? I thought WTO max tariff applied to all members, is EU not a WTO member?

  27. Withdrawal from Nato has got to be a threat, and we should point out that if leave Putin is welcome to invade Estonia etc – not our problem any more.

  28. @pcar. Different story rules apply to customs unions and free trade areas such as the EU.

    As to the wider issue of the 60 billion, the answer should be, we don’t need to agree a figure, we just pay the legally required amounts as they fall due.

  29. anon: Withdrawal from Nato has got to be a threat, and we should point out that if leave Putin is welcome to invade Estonia etc – not our problem any more.

    One of the more irritating claims of the Remain camp was that the EEC/EC/EU had been responsible for maintaining peace in Europe since WWII.

    One of the silliest things to do now would be to link UK membership of NATO with membership of the EU.

    Having hosted various Baltic communities and ghost political entities in London throughout the Cold War it would be rather more than peevish for the UK to stand aside while Russia threatens to move back in.

  30. The Meissen Bison – “Having hosted various Baltic communities and ghost political entities in London throughout the Cold War it would be rather more than peevish for the UK to stand aside while Russia threatens to move back in.”

    Defending the Baltics against the Soviets was a totally different thing to defending them against the Tsars. One is evil, the other mildly regrettable. To which category does Putin belong? I am not sure he is Stalin even if he is not Nicholas II.

    Besides, Britain’s support for the Baltics was weak. Did we boycott the Moscow Olympics? I can’t remember. But if the UK team went, it implicitly recognised that the Baltics were part of Russia because the Soviets put some events there.

  31. We live in interesting times. The gold standard is looking a lot smarter now.

    No, it really isn’t.

    While I have my issues with the abuse of fiat currency by the Bank of England and other state controlled institutions, I doubt very much that we could return to the gold standard in any meaningful form without causing major disruption to the economy.

    Maybe we should emulate Moist von Lipwig and start moving towards the “Golem Standard”.

    I am perfectly happy for those who believe in the value of gold over fiat currency to buy and hold gold in both physical and paper forms. In fact if I had the money, I would probably hold 10% of my capital in gold anyway as a hedge against hyperinflation.

    But, I’m buggered if I want the economy to be controlled by a magpie-like addiction to shiny metal that has little real use other than to enable Scrooge McDuck-like caricature.

  32. John Galt – “No, it really isn’t.”

    You know, this would be a lot more interesting if you bothered to explain why you think it isn’t.

    “While I have my issues with the abuse of fiat currency by the Bank of England and other state controlled institutions, I doubt very much that we could return to the gold standard in any meaningful form without causing major disruption to the economy.”

    It would take an act of absolute genius to misjudge the currency level in such a way that it would have any meaningful impact on the economy at all.

    “Maybe we should emulate Moist von Lipwig and start moving towards the “Golem Standard”.”

    If we had a limited supply of Golems that would make sense. Or indeed any.

    “But, I’m buggered if I want the economy to be controlled by a magpie-like addiction to shiny metal that has little real use other than to enable Scrooge McDuck-like caricature.”

    The economy is hardly controlled by the currency. As long as the currency is maintained correctly, the exact nature of the currency should be irrelevant. The impact of a currency is usually only felt when it fails. The little real use is the point. Fiat currencies have precisely no use except as fiat currencies. That is why they are good currencies. If we went over to the gin standard it would be hard to work out how much was being drunk.

  33. You know, this would be a lot more interesting if you bothered to explain why you think it isn’t.

    I would have thought it was obvious, but lets start with the biggie, which is liquidity. The entire worlds gold supply is about 165,000 tons and given the current valuation is worth about $7.3 trillion USD of which only a tiny proportion is held by the Bank of England (currently about 5,000 tons) or $248 billion USD

    The size of the UK economy is about $3 trillion USD, so we’d need to go out and buy another $2.7 trillion worth of foreign gold to back our new gold currency?

    It could probably be done, but even if done as a transitional arrangement over a longish period of time as a move from fiat to the gold standard, it would cause major price distortion of gold (prices would rise rapidly and then fall when buying tailed off) as well as causing a fall in the current value of “fiat sterling” as well as an opportunity for exploiting the difference between the current currency and the new currency (as Soros did with Sterling during the ERM days)

    It would be a recipe for decades of disaster on top of all of the existing problems of the UK economy (BRExit confidence, house price bubble, etc.)

    Even if the end goal was justified (and I don’t believe it is), the route to that destination would be an economic Trail of Tears.

    I could go on, but you get the picture…

  34. Why would the price of gold fall off once Britain had stopped buying?

    Sure, the price of gold would rise. So what?

    No government needs to hold 100% of their reserves in gold. They simply need a guarantee that people can exchange the currency for a certain amount of gold. As long as people believe they will, the government may not need to hold any at all.

  35. Why would the price of gold fall off once Britain had stopped buying?

    Basic supply and demand. If any commodity is being bought in an ongoing series of purchases over a reasonable time frame then you will get “buying pressure” causing an overall increase in the purchase price as opposed to a neutral market where buys and sells are roughly equivalent.

    When the buying pressure is relieved (at the end of the final purchase period, because the UK government’s volume requirement is fulfilled), then there would be a natural “reversion to mean” of the gold price which may fall significantly before levelling out at it’s long term average, which be at a level below the inflated prices subject to the earlier “buying pressure”.

    This would result in the final mark-to-market asset value of the gold held by the UK government after all the transactions were completed, being potentially substantially lower than the overall cost of the purchase.

  36. @SMFS

    You don’t appear to be contesting my contention that it would be unwise and unwarranted for the UK to link its NATO obligations with negotiations to leave the EU so I shall content myself with that.

  37. John Galt – “Basic supply and demand. …. When the buying pressure is relieved (at the end of the final purchase period, because the UK government’s volume requirement is fulfilled), then there would be a natural “reversion to mean” of the gold price which may fall significantly before levelling out at it’s long term average, which be at a level below the inflated prices subject to the earlier “buying pressure”.”

    Sorry but why would there be a reversion to the mean? There were 500 people buying gold. The British buy a third of it. That means that 500 people continue to chase the remaining 66% of it. That means prices not only go up, they stay up. Prices can only come down if demand comes down – adding new buyers means demand is higher – or if supply increases. Which it will. Eventually.

    You add a massive new demand to a fairly small market and the prices will go up. They will also stay up.

    The Meissen Bison – “You don’t appear to be contesting my contention that it would be unwise and unwarranted for the UK to link its NATO obligations with negotiations to leave the EU so I shall content myself with that.”

    I am not and I agree it would be unwise. In the long run there is nothing to stop Germany playing the role in Europe that its numbers, power and competence suggests it should. The tragedy of the 20th century is that Britain and France could not allow Germany’s peaceful rise.

    The only solution is to bring in a power from outside to keep Germany down. If America and to a lesser extent Britain withdraw from NATO, it will scare the French now they have to deal with a stronger Germany on their own. They might reach out to the Poles as they have done in the past. More likely they will reach out to Russia as they have done in the more recent past. The vile nature of the Soviet government prevented De Gaulle going all the way with his Soviet outreach. But that does not apply to Putin’s Russia. So Britain would end up where it has been traditionally – and should have been in WW1 – on Germany’s side against a Franco-Russian alliance.

    Not an ideal outcome right now.

  38. JG

    “The size of the UK economy is about $3 trillion USD, so we’d need to go out and buy another $2.7 trillion worth of foreign gold to back our new gold currency?”

    I’m not supporting the case for gold at all, but I can’t see the relevance of that? “Amount of gold held” being equivalent to “one year’s throughput of activity” (in rough concept)?

    Why one year?

    If you don’t mean one year’s throughput (ie annual GDP), then I am not sure where the $3 trillion equates to?

  39. @PF:

    I’m not supporting the case for gold at all, but I can’t see the relevance of that? “Amount of gold held” being equivalent to “one year’s throughput of activity” (in rough concept)?

    In part I am being serious, but at the same time somewhat facetious.

    A return to “the gold standard” means promising to pay the bearer of an issued paper note an equivalent fixed amount of specie for an equivalent number of currency units.

    The rate of exchange is not fixed, nor floating, but rather is changed at periodic intervals (hence a devaluation of the pound is achieved by reducing the amount of specie received for each currency unit.

    Thus, if you are going to propose a “return to the gold standard” then you’re going to have to have some amount of gold to back that up.

    Clearly the Bank of England’s current store of roughly $248 billion USD worth of physical gold is insufficient to do that (otherwise the Bank of England wags would have already announced a return to the gold standard), so presumably some higher amount is required.

    Is it $1 trillion, $3 trillion or $7.3 trillion (i.e. the entirety of the worlds physical gold)? I have absolutely no idea.

    Presumably you could use the $248 billion USD of gold as a reserve for any conversion of sterling notes to gold and make up the shortfall from the spot gold market as deemed necessary, but it does seem to put an upper limit on the amount of liquidity that can be generated at any point in time, under the current Bank of England regime liquidity is theoretically unlimited, although in practice holders of UK debt would balk at too much liquidity due to the inflationary effects.

    In summary, if not $3 trillion then how much? I have no idea as I’m not the one supporting the argument, merely illustrating the practical consequences of implementing it.

  40. JG

    Sure, I understand.

    I don’t have time now – but I simply can’t see what the problem is with the current system.

    Hence, what you said:

    “I am perfectly happy for those who believe in the value of gold over fiat currency to buy and hold gold in both physical and paper forms.

    But, I’m buggered if I want the economy to be controlled … etc”

  41. John Galt – “Because over the long term prices always revert to the mean.”

    All that means is that over the long term the market moves too far either way. It does not mean that if a massive new demand for something comes along prices will remain the same.

    John Galt – “The rate of exchange is not fixed, nor floating,”

    It is fixed if everyone else is also on gold – and they hold to it.

    “Clearly the Bank of England’s current store of roughly $248 billion USD worth of physical gold is insufficient to do that (otherwise the Bank of England wags would have already announced a return to the gold standard), so presumably some higher amount is required.”

    Why do you think it is insufficient? The BoE does not need enough gold to cover every pound note. It needs enough to meet day-to-day demands. It needs enough so that the number of people coming in and asking for gold does not out-weigh the number of people coming in and giving them gold. They could run a system with no reserves at all – as long as people trusted them.

    And obviously the BoE is run by politicians and none of them are interested in returning to the gold standard. So that is irrelevant.

    “but it does seem to put an upper limit on the amount of liquidity that can be generated at any point in time”

    Isn’t that, you know, the point? Inflation being bad and all that?

  42. Why do you think it is insufficient? The BoE does not need enough gold to cover every pound note. It needs enough to meet day-to-day demands. It needs enough so that the number of people coming in and asking for gold does not out-weigh the number of people coming in and giving them gold. They could run a system with no reserves at all – as long as people trusted them.

    But this is exact the point. A genuine return to the “Gold Standard” means that there is an equivalent amount of specie in the Bank of England to cover every note in circulation.

    Bloomberg Markets on the Return of the Gold Standard*

    * – This relates to the US, but the concept remains the same.

    This means not just the £73 billion in notes and coins, but all of the electronically circulating stuff as well, although what the net value of that is (offsetting credits against debits) is unknown to me, although some wonk at the Bank of England could probably say.

    It’s hard to tell from the current Bank of England balance sheet as most of it is “funny money” (to my mind at least), in the form of UK Treasury bonds, QE and other stuff which the Bank of England classifies as assets, but I’m dubious (since these are effectively government IOU’s)

    Bank of England Weekly Report 22 February 2017

    In short, I believe you need to have an equivalent amount of specie for every pound in circulation, regardless of whether physical or digital. I have no idea what this net figure (offsetting sterling assets against sterling liabilities) actually is.

    Anyone?

  43. Except for the notes and coins, it’s all represented by debt, that’s the point?

    It’s summarised here:

    https://www.ons.gov.uk/economy/nationalaccounts/uksectoraccounts/bulletins/nationalbalancesheet/2015estimates

    Go down to item 7. Somewhere else on the ONS site, I can’t find it just now, there is a really good breakdown of those financial assets and liabilities between sectors (households / banks / public / commercial, etc), which makes it very clear what is happening in terms of where all the assets and liabilities are in the different parts of the economy.

    Ie, you can see “people” (house, pension assets, less mortgage liabilities etc) and which all comes to a big plus (in terms of wealth), “banks” (lots of assets as longer term loans (including mortgages), liabilities as current accounts), etc.

  44. Ie, you can see “people” (house, pension assets, less mortgage liabilities etc) and which all comes to a big plus (in terms of wealth), “banks” (lots of assets as longer term loans (including mortgages), liabilities as current accounts), etc.

    Sure, in a credit money environment that we have at the moment (or debt money if you are cynical), then you can define these things as assets, but in a hard money environment based upon gold specie you can’t that is they whole point.

    The problem here is that we’re not comparing like-with-like, indeed that maybe impossible because terms and measures which are critical to credit money are irrelevant when the only thing of monetary significance, the only “real money” is gold.

  45. “Is it $1 trillion, $3 trillion or $7.3 trillion (i.e. the entirety of the worlds physical gold)? I have absolutely no idea.”

    UK M4 money supply is about £2,000,000,000,000 as of December 2016. Not sure if that’s the most appropriate measure, but I think the others are all smaller.

    https://www.cato.org/blog/uks-capital-obsession

    “Maybe we should emulate Moist von Lipwig and start moving towards the “Golem Standard”.”

    Pratchett knew what he was talking about. Most money is backed by the value of future human labour. That’s a lot more valuable than gold. Anyone dribbling about “fiat” money doesn’t know what they’re talking about. You think that government-issued currency has value just because the government says so, by law? You think Zimbabwe didn’t just try that one? Or Venezuela?

    The basic problem with locking the value of the currency to any single asset is volatility. The supply of money isn’t determined by demand, but by how much gold you happen to have, so it doesn’t follow the peaks and dips of the economy. Any jump in gold prices hits the economy arbitrarily, and any jumps in the economy are constrained by the fixed supply of capital.

    If you’re going to back the currency by fixed assets, you want a spread portfolio of lots of different types of asset to smooth out the bumps, and you want to pick assets that you can vary the supply of quickly in response to demand.

    But frankly, the thinking is based on a misunderstanding of how money creation works.

    You can do it yourself. Every time you take out a loan or mortgage, you create money. You can back a loan with fixed assets (your house is most common, but pawnbrokers will take gold…), or you can back a loan with the promise to repay it from your future income (as with a mortgage). That’s how most money is created.

    So the demand that all money is backed by gold is equivalent to demanding that every personal loan anybody in the economy takes out anywhere has to be secured with big chunks of gold.. Like every mortgage, every business, every credit card,… The only asset you’re allowed to use to guarantee a loan is actual gold. Kinda inconvenient, wot?

    Dribbling.

  46. John Galt – “But this is exact the point. A genuine return to the “Gold Standard” means that there is an equivalent amount of specie in the Bank of England to cover every note in circulation.”

    You know, there are so many problems with your claims it is really a waste of my time bothering to correct them. This is the No True Scotsman Fallacy. No, the gold standard does not need an equivalent amount of specie. It needs the Bank of England to stand ready to give you a fixed amount of gold in exchange for your piece of paper. It does not mean they need to hold that gold in their vaults. This is not even a No True Scotsman fallacy. It is just a basic lack of understanding what a gold standard is.

    “In short, I believe you need to have an equivalent amount of specie for every pound in circulation, regardless of whether physical or digital. I have no idea what this net figure (offsetting sterling assets against sterling liabilities) actually is.”

    And so we return to the basic point that you object to a policy you do not understand and so it is not really a valid objection is it?

    John Galt – “but in a hard money environment based upon gold specie you can’t that is they whole point.”

    Ummm, why not?

    NiV – “Most money is backed by the value of future human labour. That’s a lot more valuable than gold.”

    Not it is not. It is backed by a promise to pay. And to be used in payment. Mostly of taxes. Nothing much else. You do not get a pound note with a promise of 10 hours of work in five years time. Inflation proves that.

    “Anyone dribbling about “fiat” money doesn’t know what they’re talking about.”

    Curse every economics textbook ever written!

    “You think that government-issued currency has value just because the government says so, by law? You think Zimbabwe didn’t just try that one? Or Venezuela?”

    Well yes. The government may say a lot of things, some of them contradictory, but basically the Zimbabwe currency has any value at all because the government says so. When the government stopped saying so, it stopped having value and I believe they are on the US dollar now. The problem in these countries is that the government says one thing and then does another.

    “The basic problem with locking the value of the currency to any single asset is volatility. The supply of money isn’t determined by demand, but by how much gold you happen to have, so it doesn’t follow the peaks and dips of the economy.”

    Some people might think that is not a bad thing. And the supply of money is determined by demand of course. The more demand for gold, the more is dug out of the ground.

    “If you’re going to back the currency by fixed assets, you want a spread portfolio of lots of different types of asset to smooth out the bumps, and you want to pick assets that you can vary the supply of quickly in response to demand.”

    So basically you want a fiat currency that will allow the nice governments of Zimbabwe and Venezuela to do what they are doing? Isn’t that “varying the supply”?

    “So the demand that all money is backed by gold is equivalent to demanding that every personal loan anybody in the economy takes out anywhere has to be secured with big chunks of gold.”

    You know, it is amazing how the Bank of England managed in the days when they were on gold. You know, if they had to back every pound with actual real gold.

    Or alternatively, the gold standard doesn’t actually work that way. One or the other.

    “Dribbling.”

    Much around here is, I agree.

  47. ” No, the gold standard does not need an equivalent amount of specie. It needs the Bank of England to stand ready to give you a fixed amount of gold in exchange for your piece of paper.”

    Easy. Use the current currency, and if anyone is nutty enough to go into a bank and ask for gold, just pop down to the local pawnbrokers and buy the equivalent, take it back to the bank, and hand it over.

    Problem solved! We’re back on the Gold standard!

    “Not it is not. It is backed by a promise to pay.”

    Ha! Like if you submit this £5 note to me, I promise to pay you £5!

    “And to be used in payment. Mostly of taxes. Nothing much else.”

    I promise to use this £5 note in payment? What?

    Lots of people create money. Governments do it, but so do private individuals, businesses, all sorts of people.

    Governments create money by simply spending it (schools, hospitals, warships, etc.) and promising to accept them in payment of taxes.

    Other people create money by signing a contract promising to pay back the amount later, and exchanging this illiquid money for more liquid cash. It’s guaranteed by their future labour, that they exchange for money to pay it back. Paying back the loan destroys the money previously created.

    More money is made by non-government actors than by governments. The government acts as an anchor and guarantor, but most of the money is backed by the value of the economy itself. It probably always was.

    “The government may say a lot of things, some of them contradictory, but basically the Zimbabwe currency has any value at all because the government says so.”

    The Zimbabwe currency has no value, despite the government’s insistence that it does. It turns out the government aren’t making that particular decision…

    “And the supply of money is determined by demand of course. The more demand for gold, the more is dug out of the ground.”

    A few years later…

    “So basically you want a fiat currency that will allow the nice governments of Zimbabwe and Venezuela to do what they are doing? Isn’t that “varying the supply”?”

    Yes. And then I want them to stop doing it, even though they can.

    “You know, it is amazing how the Bank of England managed in the days when they were on gold. You know, if they had to back every pound with actual real gold.”

    Yes, and it caused all sorts of problems. Which is why they came off it.

    It’s feasible in a medieval society, but not in a modern economy.

  48. “It’s feasible in a medieval society, but not in a modern economy”

    This.

    In the modern world, all so called “money” is reflected by debt. As in, someone’s money is someone else’s debt. Money is nothing more than a debtor “someone else (via a bank to take away the risks) owes you the amount”. That’s it, Refer to the link above. It really does demonstrate exactly that.

    Or as Tim describes it – liquidity. Easing the process by which we can all borrow from / lend to each other. As NiV says, without the promise of future labour (or other means to satisfy) you won’t get the loan…

  49. Otherwise what we are saying is that no one should ever “borrow”?

    I “buy” a bicycle from my neighbour (that he made – his labour). I will pay it back over the next 6 months by tending his garden (my labour). No “hard” money changes hands, but we created a debt (through an obligation), and which was repaid.

    Modern “money” enables us (through banks – intermediaries) to do that billions of times over and without just doing it with people we personally know.

    Modern money (ie liquidity) creates enormous value to our world compared to what went before.

  50. NiV – “Problem solved! We’re back on the Gold standard!”

    The key word is “fixed”. If the BoE nipped down to the pawnbrokers and gave everyone who asked a guaranteed amount of gold, then yes, the problem would be solved and we would be back on the Gold Standard.

    That is what a Gold Standard is.

    “Ha! Like if you submit this £5 note to me, I promise to pay you £5!”

    Well yes. That pretty much is all a £5 note is.

    “Governments create money by simply spending it (schools, hospitals, warships, etc.) and promising to accept them in payment of taxes.”

    As I said.

    “Other people create money by signing a contract promising to pay back the amount later, and exchanging this illiquid money for more liquid cash. It’s guaranteed by their future labour, that they exchange for money to pay it back. Paying back the loan destroys the money previously created.”

    Indeed they do. More or less. They need a banking system behind them to do it. And of course it is not guaranteed by their future labour. Banks ask for assets as collateral. Not a promise to work given it can’t be enforced.

    “The Zimbabwe currency has no value, despite the government’s insistence that it does. It turns out the government aren’t making that particular decision…”

    The government did not insist it did. The government talked about a lot of things but they printed money like mad. It was worth precisely what the government chose to make it worth.

    “Yes. And then I want them to stop doing it, even though they can.”

    How realistic is that? You talk of counter-cyclical spending but the last person to try was Gordon Brown. How did that work out? The smart ar$es who run government think they are very clever but in reality they are doing what Mugabe did, only slightly slower. A currency ought to be a store of value and without gold, Western governments are not very good at upholding that.

    “Yes, and it caused all sorts of problems. Which is why they came off it.”

    No it didn’t. World Wars One and Two caused all sort of problems. That is why they came off it. Gold worked fine for the purposes chosen.

    “It’s feasible in a medieval society, but not in a modern economy.”

    There is no reason to think it is infeasible in a modern economy.

    PF – “In the modern world, all so called “money” is reflected by debt. As in, someone’s money is someone else’s debt. Money is nothing more than a debtor “someone else (via a bank to take away the risks) owes you the amount”. That’s it, Refer to the link above. It really does demonstrate exactly that.”

    And what makes a gold standard prevent all this?

    “As NiV says, without the promise of future labour (or other means to satisfy) you won’t get the loan…”

    Haitians labour pretty hard. No one will give them a loan. Banks do not lend based on the promise of future labour. Even if they did, why would a gold standard prevent them?

    PF – “Otherwise what we are saying is that no one should ever “borrow”?”

    Questions we can answer with a “no”.

    “Modern “money” enables us (through banks – intermediaries) to do that billions of times over and without just doing it with people we personally know.”

    Wonderful. So would money backed by gold.

  51. As probably the last word, people continue to confuse the gold standard with a 100% reserve system. The two are not the same. You can have a gold standard without holding 100% reserves. You can have a 100% reserve system without gold:

    https://en.wikipedia.org/wiki/Full-reserve_banking

    However even if gold was used to back every single pound, does it follow that there would be no lending? Or creation of new money through lending? Or any financial instruments at all? Well Hong Kong requires every KH dollar to be backed by an equivalent amount of American dollars at a fixed exchange rate:

    https://en.wikipedia.org/wiki/Linked_exchange_rate_system_in_Hong_Kong

    It is not quite 100% reserve banking but it is what people here seem to have in mind.

    So it must follow, then, that there is no lending in Hong Kong? That no one can buy a bicycle from someone else? There are no financial assets? This is the claim, right?

  52. SMFS

    Re your responses to me – fair point. After the sport yesterday, I was happily answering a question that hadn’t been asked!

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