Well done Senior Lecturer, well done

Papers are filled with talk of the Theresa May’s NHS Brexit dividend this morning.

Thankfully, it appears that no one buys the story. Not one serious media outlet believes there is a Brexit dividend. The UK will still be paying the EU after Brexit. And because Brexit will shrink the economy there will be less tax paid.

But because the economy will be smaller the NHS will cost less money. Baumol’s Cost Disease, recall? Wages are set by the economy as a whole? Thus in a poorer country wages will be lower for all. Including those in the NHS.

Sigh.

I patiently explained that there are three ways in which government spending impacts the economy. First, I said that the government could simply create the money in question. I pointed out that over the last decade the government has created £435 billion to, in effect, bail out our banks. That is more than £40 billion of new money a year and there has been no inflation as a result: any inflation we have had is because of changes in oil prices or because we have left the EU.

QE wasn’t to save the banks. It was, as the BoE has repeatedly explained, to lower long term interest rates. Which it has done. And no inflation? Looked at asset prices recently?

Alternatively, we can let more people save with the government. That, after all, is all that government bond issues are: they are the creation of new savings accounts managed by the government for people who want to save with it. And, as I explained, as more and more people come to retirement age, more and more of them want more and more government debt to underpin their pension payments and as a consequence the demand for government savings accounts is growing exponentially. So, I argue, why not let them have what they want, especially when it has the benefit of having almost no net interest cost and providing funding for the NHS at the same time?

That low interest cost possibly having something to do with QE?

11 comments on “Well done Senior Lecturer, well done

  1. Oh, for Pete’s sake QE was to save Laurie Penny and friends who were up to their elbows in credit card debt, not the banks whose profit only partially depends upon the spread between deposit and lending rates and minimally upon upon the absolute level of interest rates.
    The other beneficiary of QE was the largest debtor i.e. the government.

  2. Banking is a very complicated business (especially in the modern world. I suspect we all struggle to understand it. However, I have formed a view as to why there has been negligible inflation for many years, despite QE.

    Following the banking crash of 2008, QE was used to ensure (well maybe assist ensuring) that there was sufficient liquidity in the world’s various national economies for any drop in economic activity to be modest.

    The reason that new liquidity was required is that the then existing bank liquidity was falling through the floor – because the banks had invested (their money and) our money in duff schemes (particularly residential mortgages for the feckless or otherwise unsound loan clients).

    As time went on, governments (through Basel III and its suspected upcoming) required all banks to markedly improve their own capital and liquidity bases. This by retaining higher proportions of shareholders’ funds and by effectively higher ratios for fractional reserve banking. [Important: On this, it should be noted that fractional reserve banking is not just a specification mechanism for ‘ensuring’ adequate bank liquidity and avoiding bank runs. All the more sophisticated requirements (eg Basel I, II and III) have effect that can be viewed through the eyes of higher fractional reserve rates: but as consequence rather than as motivational mechanism.]

    Anyway, the necessary improvement of bank liquidity was for many years, sucking liquidity out of world financing (which is effectively top-level working capital). This was complemented by the spitting of liquidity into world financing by government QE. The total effect on world financing liquidity has therefore been neutral to modest. Hence there was no or little inflation (or deflation).

    However, as and when new bank liquidity requirements become satisfied (no more sucking out), unless QE stops (or slows markedly, so no or little more spitting in), world financing liquidity will increase overall and inflation will follow. Then the more QE there is, the higher will be the inflation.

    Is that right? And how are we going on the timing of that?

    Best regards

  3. I thought anybody already could save with the government through ns&i? So isn’t he asking for something that already exists?

  4. I thought QE was in part a response to the serious threat of deflation? As we didn’t have deflation it follows that it must have caused some general inflation and not just asset price inflation.

  5. @ Nigel Sedgwick
    Pretty good.
    The change in capital:lending ratios acted both to cut lending – which QE offset – and to cut dividends after a period when banks were the leading source of dividend income so cutting disposable income for better-off pensioners. Since spending by better-off pensioners is an important contributer to GDP, the cut in their spending reduced inflationary pressures.
    Some yanks, but not “The Donald” (I used to think that meant Donald Duck) have understood your last point and are seeking to bring real interest rates up to zero.

  6. “I patiently explained”

    This is Murphybollocks for;

    “I kept repeating the same thing over and over again despite the increasingly incredulous and disbelieving looks on the faces of my audience”

  7. The man’s a loon!

    “as more and more people come to retirement age, more and more of them want more and more government debt to underpin their pension payments and as a consequence the demand for government savings accounts is growing exponentially. So, I argue, why not let them have what they want, especially when it has the benefit of having almost no net interest cost”

    So people want an investment which makes no overall return? And you think that’s just fine and dandy?

    I think the FCA would take a dim view of that!

  8. the demand for government savings accounts is growing exponentially

    I’m fairly sure it isn’t.

  9. Is there any way of tracking how easy it is for the debt management guys to sell gilts and whether index linkers are being preferred?

  10. There clearly is a Brexit dividend. It is the flip side of the EU budget shortfall after Brexit – income lost by the EU is money saved by the UK. And as for a fall in GDP post Brexit: it ain’t gonna happen. Most goods shipped to the EU attract little or no duty, and where they do, imports into the UK far exceed exports (cars).

  11. Oh, and we know how much the exit dividend is. It is twice the value of the UK rebate, which was set at one third of the UK’s net contribution before rebate.

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