Economics for Idiots

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El Pollo Diablo
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Economics for Idiots

Post by El Pollo Diablo » Thu Feb 04, 2021 2:37 pm

I feel regularly out of my depth on economics issues, so I thought it'd be good to have somewhere where people who do know what they're talking about get to be patronising explain things kindly and gently to idiots like me.

First thing. This story in the Guardian about negative interest rates. I feel like I should know the full set of ramifications of this decision (and some are mentioned in the article), but I don't. What would likely happen beyond what's stated in the article? And why are base interest rates so low at the moment?
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Re: Economics for Idiots

Post by El Pollo Diablo » Thu Feb 04, 2021 2:39 pm

I should probably also ask - why do we have base interest rates? How does all that work, and how does it interact with inflation?
Mike Patton wrote:"You overdo it sometimes. There I am, peeing on Axl Rose’s teleprompter." He looks rueful: "I didn’t really have to do that."

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Re: Economics for Idiots

Post by monkey » Thu Feb 04, 2021 3:46 pm

El Pollo Diablo wrote:
Thu Feb 04, 2021 2:39 pm
I should probably also ask - why do we have base interest rates? How does all that work, and how does it interact with inflation?
You might find this paper on money creation from the Bank of England helpful, it summarises the effects of the base rate in how it controls interest rates that we get, but covers much more related stuff, like where money really comes from, how it's destroyed, and quantitative easing: Money creation in the modern economy.

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Re: Economics for Idiots

Post by Stephanie » Thu Feb 04, 2021 4:47 pm

El Pollo Diablo wrote:
Thu Feb 04, 2021 2:37 pm
I feel regularly out of my depth on economics issues, so I thought it'd be good to have somewhere where people who do know what they're talking about get to be patronising explain things kindly and gently to idiots like me.

First thing. This story in the Guardian about negative interest rates. I feel like I should know the full set of ramifications of this decision (and some are mentioned in the article), but I don't. What would likely happen beyond what's stated in the article? And why are base interest rates so low at the moment?
I thought the base rate was lowered after the credit crunch, and just hasn't gone up much since, but I could be wrong on that
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Re: Economics for Idiots

Post by Woodchopper » Thu Feb 04, 2021 5:43 pm

El Pollo Diablo wrote:
Thu Feb 04, 2021 2:39 pm
I should probably also ask - why do we have base interest rates? How does all that work, and how does it interact with inflation?
Banks have lots of money going in and out every day. To prevent them running out of cash when you want to make a withdrawal the banks borrow money from the government.

The base rate is the amount of interest the Bank of England charges your bank when it needs some cash (which in practice is every day). Usually the amount of interest charged to consumers by the banks reflects the base rate. Banks don’t have to follow the base rate but competition means that their floating rates will coalesce around it.

So your bank borrows £10 million from the Bank of England at 0.1% interest, and then it loans that money out to consumers like you at 0.3% and makes a profit.

An exception is fixed interest rate loans. There you and the bank are gambling on the future base rate (ie whether it’ll be higher or lower than the future base rate)..

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Re: Economics for Idiots

Post by Woodchopper » Thu Feb 04, 2021 5:45 pm

I’ll try and inflation later when I’m not using my phone.

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Re: Economics for Idiots

Post by monkey » Thu Feb 04, 2021 7:14 pm

Woodchopper wrote:
Thu Feb 04, 2021 5:43 pm
El Pollo Diablo wrote:
Thu Feb 04, 2021 2:39 pm
I should probably also ask - why do we have base interest rates? How does all that work, and how does it interact with inflation?
Banks have lots of money going in and out every day. To prevent them running out of cash when you want to make a withdrawal the banks borrow money from the government.

The base rate is the amount of interest the Bank of England charges your bank when it needs some cash (which in practice is every day). Usually the amount of interest charged to consumers by the banks reflects the base rate. Banks don’t have to follow the base rate but competition means that their floating rates will coalesce around it.

So your bank borrows £10 million from the Bank of England at 0.1% interest, and then it loans that money out to consumers like you at 0.3% and makes a profit.

An exception is fixed interest rate loans. There you and the bank are gambling on the future base rate (ie whether it’ll be higher or lower than the future base rate)..
Not really.

From the paper I linked to above:
The interest rate that commercial banks can obtain on money placed at the central bank influences the rate at which they are willing to lend on similar terms in sterling money markets — the markets in which the Bank and commercial banks lend to each other and other financial institutions. The exact details of how the Bank uses its money market operations to implement monetary policy has varied over time, and central bank operating procedures today differ somewhat from country to country, as discussed in Clews, Salmon and Weeken (2010).(1) Changes in interbank interest rates then feed through to a wider range of interest rates in different markets and at different maturities, including the interest rates that banks charge borrowers for loans and offer savers for deposits.(2) By influencing the price of credit in this way, monetary policy affects the creation of broad money.
(Broad money is mostly made of the type of money in bank deposits, for more detail on types of money see here)

So the base rate influences interbank lending rates, which in turn influences the rate you get on a loan.

When a bank lends you money, they actually create it by just upping the numbers in your bank account, they do not borrow it from the central bank, or any other bank. It's subsequently destroyed when you pay it back*. Most money we have today is created like this. Details, including the limits to how much money a bank can create in this way are set out in the paper above.


*An alternative interpretation to this is that the bank lends you the money that you are going to pay them back in the future, but I am not sure looking at it that way gives you different results or offers much extra insight.

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Re: Economics for Idiots

Post by jdc » Thu Feb 04, 2021 7:26 pm

Stephanie wrote:
Thu Feb 04, 2021 4:47 pm
El Pollo Diablo wrote:
Thu Feb 04, 2021 2:37 pm
I feel regularly out of my depth on economics issues, so I thought it'd be good to have somewhere where people who do know what they're talking about get to be patronising explain things kindly and gently to idiots like me.

First thing. This story in the Guardian about negative interest rates. I feel like I should know the full set of ramifications of this decision (and some are mentioned in the article), but I don't. What would likely happen beyond what's stated in the article? And why are base interest rates so low at the moment?
I thought the base rate was lowered after the credit crunch, and just hasn't gone up much since, but I could be wrong on that
You're not wrong. https://www.bankrate.com/uk/mortgages/b ... te-history

Was 5.75% in Jul 2007 at which point it crept down a bit, then sh.t hit fan in 2008 and it suddenly slumped from 5% (before 8th October 2008's change in the rate) to 0.5% by March 09's change. Only rises since were Nov 17 from .25 to .5 and Aug 18 from .5 to .75

March 2020... it went straight back down to 0.25% on 11th Mar and then down to 0.1% on 19th Mar.

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Re: Economics for Idiots

Post by Stephanie » Thu Feb 04, 2021 8:14 pm

Cheers pal, I knew someone would come with figures at some point.

I was working in financial education at the time of the credit crunch, so I knew that affected the base rate (and I had to update some text books with credit crunch stuff). But I've not paid much attention since I stopped working for them.
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Re: Economics for Idiots

Post by plodder » Thu Feb 04, 2021 10:07 pm

monkey wrote:
Thu Feb 04, 2021 7:14 pm
Woodchopper wrote:
Thu Feb 04, 2021 5:43 pm
El Pollo Diablo wrote:
Thu Feb 04, 2021 2:39 pm
I should probably also ask - why do we have base interest rates? How does all that work, and how does it interact with inflation?
Banks have lots of money going in and out every day. To prevent them running out of cash when you want to make a withdrawal the banks borrow money from the government.

The base rate is the amount of interest the Bank of England charges your bank when it needs some cash (which in practice is every day). Usually the amount of interest charged to consumers by the banks reflects the base rate. Banks don’t have to follow the base rate but competition means that their floating rates will coalesce around it.

So your bank borrows £10 million from the Bank of England at 0.1% interest, and then it loans that money out to consumers like you at 0.3% and makes a profit.

An exception is fixed interest rate loans. There you and the bank are gambling on the future base rate (ie whether it’ll be higher or lower than the future base rate)..
Not really.

From the paper I linked to above:
The interest rate that commercial banks can obtain on money placed at the central bank influences the rate at which they are willing to lend on similar terms in sterling money markets — the markets in which the Bank and commercial banks lend to each other and other financial institutions. The exact details of how the Bank uses its money market operations to implement monetary policy has varied over time, and central bank operating procedures today differ somewhat from country to country, as discussed in Clews, Salmon and Weeken (2010).(1) Changes in interbank interest rates then feed through to a wider range of interest rates in different markets and at different maturities, including the interest rates that banks charge borrowers for loans and offer savers for deposits.(2) By influencing the price of credit in this way, monetary policy affects the creation of broad money.
(Broad money is mostly made of the type of money in bank deposits, for more detail on types of money see here)

So the base rate influences interbank lending rates, which in turn influences the rate you get on a loan.

When a bank lends you money, they actually create it by just upping the numbers in your bank account, they do not borrow it from the central bank, or any other bank. It's subsequently destroyed when you pay it back*. Most money we have today is created like this. Details, including the limits to how much money a bank can create in this way are set out in the paper above.


*An alternative interpretation to this is that the bank lends you the money that you are going to pay them back in the future, but I am not sure looking at it that way gives you different results or offers much extra insight.
Yes. Banks just create money. They are allowed to do this, it's how it works. They used to be able to create around 10x the assets secured on the loans they had because prudent risk management. This multiplier was reduced after the credit crunch. I forget the technical term for it.

Edit: remembered it. The concept of banks lending far more than they possess is Fractional reserve banking. https://en.m.wikipedia.org/wiki/Fractio ... ve_banking
Last edited by plodder on Thu Feb 04, 2021 10:13 pm, edited 1 time in total.

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Re: Economics for Idiots

Post by plodder » Thu Feb 04, 2021 10:11 pm

Here's a fun website and explainer. There's a reason no-one understands this stuff - it's because it's f.cking mental.

https://positivemoney.org/how-money-%20 ... ate-money/

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Re: Economics for Idiots

Post by dyqik » Thu Feb 04, 2021 10:39 pm

I find I end up thinking about it from a viewpoint of managing risks to the confidence of various different parties. But that's probably just me.

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Re: Economics for Idiots

Post by Herainestold » Thu Feb 04, 2021 11:15 pm

plodder wrote:
Thu Feb 04, 2021 10:11 pm
Here's a fun website and explainer. There's a reason no-one understands this stuff - it's because it's f.cking mental.

https://positivemoney.org/how-money-%20 ... ate-money/

Is this not the very definition of a bubble?

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Re: Economics for Idiots

Post by Millennie Al » Fri Feb 05, 2021 4:04 am

El Pollo Diablo wrote:
Thu Feb 04, 2021 2:37 pm
I feel regularly out of my depth on economics issues, so I thought it'd be good to have somewhere where people who do know what they're talking about get to be patronising explain things kindly and gently to idiots like me.

First thing. This story in the Guardian about negative interest rates. I feel like I should know the full set of ramifications of this decision (and some are mentioned in the article), but I don't. What would likely happen beyond what's stated in the article? And why are base interest rates so low at the moment?
I have some bad news for you. Economics seems to be a field in which an expert is someone who confidently asserts things that are wrong (often obviously so) without realising it. I don't think its possible to know the full ramifications until it is tried and they can be observed - especially as people frequently fail to behave as economists assume they will.

To give an analogy with physics, we know that Newton discovered that F=ma so the harder you push on something the greater the acceleration (and it's linear). But we instinctively know that this is a limited principle, and physicists are fully aware of this. In the real world, if you try to push something too hard the law does not correctly describe what happens because you'll break the thing you are pushing. (We also know it's wrong because of Einstein's relativity, but that is a different matter). In economics when someone discovers some rule they seem to get that crazy idea that the real world just obeys the rule regardless. In other fields we don't discover some principle and then bet a trillion dollars on it being correct - especially when it predicts something which does not match reality, but economists do - see the Black-Scholes model, the volitility smile, and the fate of Long Term Capital Management.

And to give an example of something obviously wrong, see the document Money creation in the modern economy (https://www.bankofengland.co.uk/-/media ... conomy.pdf) referred to by monkey. On page 15 arguing that it is a myth that banks use deposits to enable them to make loans it says:
Saving does not by itself increase the deposits or ‘funds available’ for banks to lend.
[/qoute]

then on page 18 it is explaining that a bank cannot just create arbitrarily more money as it is limited by its reserves and:
By attracting new deposits, the bank can increase its lending without running down its reserves,
which is effectively saying direct opposite to the first quote.


And finally, the best sign of economists being useless is that they can explain everything yet predict very little.
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Re: Economics for Idiots

Post by plodder » Fri Feb 05, 2021 7:42 am

Herainestold wrote:
Thu Feb 04, 2021 11:15 pm
plodder wrote:
Thu Feb 04, 2021 10:11 pm
Here's a fun website and explainer. There's a reason no-one understands this stuff - it's because it's f.cking mental.

https://positivemoney.org/how-money-%20 ... ate-money/

Is this not the very definition of a bubble?
No, because they’re expert risk managers. Highly sophisticated. And there’s a regulator and government to blame if things go wrong (for us, not them).

But cheap credit means cutting a few corners, and we all want that, right?

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Re: Economics for Idiots

Post by lpm » Fri Feb 05, 2021 9:09 am

The above link from noggins is the best summary of money.

The Bank of England is best seen as a deity able to change reality with a word. If it says something is money, it becomes money. If it says base rate is 0.10%, the base rate is 0.10%.

There's all sorts of technicalities around this, on how the different forms of money interact or on how they use devices to control the interest rate, but that's just tedious small print around the fundamental fact that money is merely what we decide.

I might have mentioned once or twice the need to look at real world resources when allocating between alternatives, rather than money, even if money is often convenient way to measure resources. The Bank of England can create money out of thin air but it cannot create nurses out of thin air. Which is why claims like "the money wasted on test & trace could have given us 200 million extra nurses" always collapse to nothingness. There are things money can't buy because money isn't real.
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Re: Economics for Idiots

Post by nezumi » Fri Feb 05, 2021 9:24 am

lpm wrote:
Fri Feb 05, 2021 9:09 am
There are things money can't buy because money isn't real.
This.

We have fiat money which is, as lpm says, a fictional concept.

Here is my simplistic understanding of the problem, I'm sure someone will be along to correct any misconceptions I have:

The problem the BoE are always fiddling with is the money supply ie. how much money to create. Money is created as debt, in our case, debt to the BoE which is repayable with interest. The problem comes in when people hoard money, as seen in offshore accounts, as the money supply is reduced but the debt still exists and has to be repaid, with interest. This gets extracted from the little people via taxes so the money supply for the little people reduces even though the overall supply is the same. The more people hoard* in offshore accounts, the more money has to be created to supply the market or the money supply for the little people reduces. This leads to a vicious circle of money being created, causing inflation, then being hoovered up by the offshore accounts. It's done the inflation damage, then quickly disappeared, still existing on the BoE debt books, but being untouchable and therefore unpayable. It has to come back from somewere or the whole system collapses, therefore, yep! Back it comes out of the little people's empty pockets.

* In the sense that, yes, IMO hoarding money is a mental health disorder just as much as hoarding newspapers in a grotty flat is.

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Re: Economics for Idiots

Post by Bewildered » Fri Feb 05, 2021 11:25 am

plodder wrote:
Thu Feb 04, 2021 10:11 pm
Here's a fun website and explainer. There's a reason no-one understands this stuff - it's because it's f.cking mental.

https://positivemoney.org/how-money-%20 ... ate-money/
Hmm... this sounds similar to a colleague who was claiming he had ~ predicted the 2008 crash, and that it was caused by banks creating money through debt coupled with the fact that that the debt increased through interest. I think his argument was as simple as the debt growing too large so there cannot be enough money to repay it, since most new money is being created along with more debt, which then results in a crash. I actually made a similar thread to this one somewhere (maybe on the old place) to try to get others to help me understand/analyse his arguments. I forget a lot of the details, but I eventually got convinced he simply wasn’t properly accounting for assets that the loans were secured against and his claims that 2008 style crashes were guaranteed by this was faulty. Though it’s possibly I was more persuaded that repossessions are a necessary part of economic growth through money creation and not simply an unfortunate consequence of accidental hardship or individual irresponsibility.

Not that I would place much faith in my understanding then and I have forgotten most of it now...

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Re: Economics for Idiots

Post by dyqik » Fri Feb 05, 2021 12:49 pm

nezumi wrote:
Fri Feb 05, 2021 9:24 am
lpm wrote:
Fri Feb 05, 2021 9:09 am
There are things money can't buy because money isn't real.
This.

We have fiat money which is, as lpm says, a fictional concept.
Although it's no more fictional than the concepts of "laws", "contract", "property deeds", "country" or "society".

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Re: Economics for Idiots

Post by monkey » Fri Feb 05, 2021 2:22 pm

Millennie Al wrote:
Fri Feb 05, 2021 4:04 am
I have some bad news for you. Economics seems to be a field in which an expert is someone who confidently asserts things that are wrong (often obviously so) without realising it. I don't think its possible to know the full ramifications until it is tried and they can be observed - especially as people frequently fail to behave as economists assume they will.

To give an analogy with physics, we know that Newton discovered that F=ma so the harder you push on something the greater the acceleration (and it's linear). But we instinctively know that this is a limited principle, and physicists are fully aware of this. In the real world, if you try to push something too hard the law does not correctly describe what happens because you'll break the thing you are pushing. (We also know it's wrong because of Einstein's relativity, but that is a different matter). In economics when someone discovers some rule they seem to get that crazy idea that the real world just obeys the rule regardless. In other fields we don't discover some principle and then bet a trillion dollars on it being correct - especially when it predicts something which does not match reality, but economists do - see the Black-Scholes model, the volitility smile, and the fate of Long Term Capital Management.

And to give an example of something obviously wrong, see the document Money creation in the modern economy (https://www.bankofengland.co.uk/-/media ... conomy.pdf) referred to by monkey. On page 15 arguing that it is a myth that banks use deposits to enable them to make loans it says:
Saving does not by itself increase the deposits or ‘funds available’ for banks to lend.
[/qoute]

then on page 18 it is explaining that a bank cannot just create arbitrarily more money as it is limited by its reserves and:
By attracting new deposits, the bank can increase its lending without running down its reserves,
which is effectively saying direct opposite to the first quote.


And finally, the best sign of economists being useless is that they can explain everything yet predict very little.
Those two sentences are only contradictory if you take the first out of context and ignore what they mean by "by itself". The first is in a section telling you that banks don't only lend out money deposited savers. The "by itself" bit of "Saving does not by itself increase the deposits or ‘funds available’ for banks to lend." is important. Taken in context, it's telling you that the amount of loan a bank can make is not limited to the same amount of savers' deposits they have, but the "by itself" implies that the deposits are involved in the limits. So this does not contradict a statement like "By attracting new deposits, the bank can increase its lending..."

Economics does have a problem that it tries to understand a really complicated system which you can't properly experiment on, but I suspect things would be a lot worse if the Bank of England didn't know where money came from, or how banks do things.

Also, if you write Newton's 2nd law as F = dP/dt (change of momentum with respect to time), it holds true for relativistic and Newtonian mechanics. And at normal human speeds the gamma in the relativistic equations is so close to 1 that you can ignore the complicated bits and you end up with Newtonian mechanics. And if something breaks while you are applying force to it, the bits still obey the same laws they did when they were in one piece - the rules stay the same, things just got more complicated. In a way you did a good analogy, but it was about lies to children, rather than things being wrong.

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Re: Economics for Idiots

Post by monkey » Fri Feb 05, 2021 2:52 pm

nezumi wrote:
Fri Feb 05, 2021 9:24 am
The problem the BoE are always fiddling with is the money supply ie. how much money to create. Money is created as debt, in our case, debt to the BoE which is repayable with interest. The problem comes in when people hoard money, as seen in offshore accounts, as the money supply is reduced but the debt still exists and has to be repaid, with interest. This gets extracted from the little people via taxes so the money supply for the little people reduces even though the overall supply is the same. The more people hoard* in offshore accounts, the more money has to be created to supply the market or the money supply for the little people reduces. This leads to a vicious circle of money being created, causing inflation, then being hoovered up by the offshore accounts. It's done the inflation damage, then quickly disappeared, still existing on the BoE debt books, but being untouchable and therefore unpayable. It has to come back from somewere or the whole system collapses, therefore, yep! Back it comes out of the little people's empty pockets.
If you deposit you money in Swiss Bank, Swiss Bank is going to want to invest it. They can't invest pounds in Switzerland, so they will either invest it in the UK, or sell it to someone else who wants to trade or invest in the UK. The money comes back, though some may be "hoarded" by banks and governments using it for reserves. As long as Swiss Bank can afford to buy enough pounds when you want to withdraw your money, it'll works out fine.

Offshoring money is bad, but because it's a thing rich people do to avoid paying taxes, not because it reduces the money supply.

A little bit of inflation is a good thing, which is why the target is set at 2%. Too low and it can encourage stock market and housing bubbles. Below zero and people don't spend money, because why would you buy something today, when it would be cheaper tomorow?

Taxes only pay off government debt and destroy the money government creates (which is done on a day-today basis, not the long term, so government created money isn't really part of the money supply).

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Re: Economics for Idiots

Post by nezumi » Fri Feb 05, 2021 4:25 pm

monkey wrote:
Fri Feb 05, 2021 2:52 pm
nezumi wrote:
Fri Feb 05, 2021 9:24 am
The problem the BoE are always fiddling with is the money supply ie. how much money to create. Money is created as debt, in our case, debt to the BoE which is repayable with interest. The problem comes in when people hoard money, as seen in offshore accounts, as the money supply is reduced but the debt still exists and has to be repaid, with interest. This gets extracted from the little people via taxes so the money supply for the little people reduces even though the overall supply is the same. The more people hoard* in offshore accounts, the more money has to be created to supply the market or the money supply for the little people reduces. This leads to a vicious circle of money being created, causing inflation, then being hoovered up by the offshore accounts. It's done the inflation damage, then quickly disappeared, still existing on the BoE debt books, but being untouchable and therefore unpayable. It has to come back from somewere or the whole system collapses, therefore, yep! Back it comes out of the little people's empty pockets.
If you deposit you money in Swiss Bank, Swiss Bank is going to want to invest it. They can't invest pounds in Switzerland, so they will either invest it in the UK, or sell it to someone else who wants to trade or invest in the UK. The money comes back, though some may be "hoarded" by banks and governments using it for reserves. As long as Swiss Bank can afford to buy enough pounds when you want to withdraw your money, it'll works out fine.

Offshoring money is bad, but because it's a thing rich people do to avoid paying taxes, not because it reduces the money supply.

A little bit of inflation is a good thing, which is why the target is set at 2%. Too low and it can encourage stock market and housing bubbles. Below zero and people don't spend money, because why would you buy something today, when it would be cheaper tomorow?

Taxes only pay off government debt and destroy the money government creates (which is done on a day-today basis, not the long term, so government created money isn't really part of the money supply).
All very good points and I had forgotten the actual next step - people using the offshore wealth to buy more of our stuff and then make even more money off that, the logical endpoint being that everyone ends up owing money they don't have to 6 blokes who literally own everything.

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Re: Economics for Idiots

Post by lpm » Fri Feb 05, 2021 4:45 pm

There are two people in every trade, a buyer and seller.

We choose to buy cheap Chinese manufactured good. The Chinese choose to sell them.

The Chinese choose to buy ownership of our shares, bonds, govt gilts, companies etc. We choose to sell them.

It's easy to blame the people taking ownership of all the assets but it's actually us, and will continue so long as we are addicted to consumerism.
What ever happened to that Trump guy, you know, the one who was president for a bit?

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Re: Economics for Idiots

Post by monkey » Fri Feb 05, 2021 4:52 pm

nezumi wrote:
Fri Feb 05, 2021 4:25 pm
monkey wrote:
Fri Feb 05, 2021 2:52 pm
nezumi wrote:
Fri Feb 05, 2021 9:24 am
The problem the BoE are always fiddling with is the money supply ie. how much money to create. Money is created as debt, in our case, debt to the BoE which is repayable with interest. The problem comes in when people hoard money, as seen in offshore accounts, as the money supply is reduced but the debt still exists and has to be repaid, with interest. This gets extracted from the little people via taxes so the money supply for the little people reduces even though the overall supply is the same. The more people hoard* in offshore accounts, the more money has to be created to supply the market or the money supply for the little people reduces. This leads to a vicious circle of money being created, causing inflation, then being hoovered up by the offshore accounts. It's done the inflation damage, then quickly disappeared, still existing on the BoE debt books, but being untouchable and therefore unpayable. It has to come back from somewere or the whole system collapses, therefore, yep! Back it comes out of the little people's empty pockets.
If you deposit you money in Swiss Bank, Swiss Bank is going to want to invest it. They can't invest pounds in Switzerland, so they will either invest it in the UK, or sell it to someone else who wants to trade or invest in the UK. The money comes back, though some may be "hoarded" by banks and governments using it for reserves. As long as Swiss Bank can afford to buy enough pounds when you want to withdraw your money, it'll works out fine.

Offshoring money is bad, but because it's a thing rich people do to avoid paying taxes, not because it reduces the money supply.

A little bit of inflation is a good thing, which is why the target is set at 2%. Too low and it can encourage stock market and housing bubbles. Below zero and people don't spend money, because why would you buy something today, when it would be cheaper tomorow?

Taxes only pay off government debt and destroy the money government creates (which is done on a day-today basis, not the long term, so government created money isn't really part of the money supply).
All very good points and I had forgotten the actual next step - people using the offshore wealth to buy more of our stuff and then make even more money off that, the logical endpoint being that everyone ends up owing money they don't have to 6 blokes who literally own everything.
Yes, the distribution of wealth is still a problem (In my view, at least), but it is a problem that is solved by fiscal policy, regulation, and laws, rather than changing the system of money.

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dyqik
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Re: Economics for Idiots

Post by dyqik » Fri Feb 05, 2021 5:01 pm

lpm wrote:
Fri Feb 05, 2021 4:45 pm
There are two people in every trade, a buyer and seller.

We choose to buy cheap Chinese manufactured good. The Chinese choose to sell them.

The Chinese choose to buy ownership of our shares, bonds, govt gilts, companies etc. We choose to sell them.

It's easy to blame the people taking ownership of all the assets but it's actually us, and will continue so long as we are addicted to consumerism.
The "we" here is doing a lot amount of work, tbh.

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