Hosted on Acast. See acast.com/privacy for more information.
[00:00:00] Normally, being a little extra might be a bit much, but not when it comes to healthcare. That's why United Health Care's Health Projector Guard Fixed Indemnity Insurance Plans, underwritten by Golden Rule Insurance Company, supplement your primary plan so you manage out of pocket costs. Learn more at UH1.com.
[00:00:30] Showing that it's not just going to be about this year's borrowing, but look we have to take into account this is going to be two, three, four years of high borrowing from the UK government.
[00:00:39] This is the Debunking Economics Podcast with Steve Keen and Phil Dobbie.
[00:00:47] Well, I was Bloomberg chewing over the high level of government debt issuance. This week what does the government propose to do about it? Well, one thing they have done is open up the purchase of government bonds on the primary market to retail investors.
[00:01:00] Now the UK isn't alone in doing this, it happens in other parts of the world, but what exactly does it mean? Why are they doing it? And what are the consequences? Well, look at all of that. This week on the Debunking Economics Podcast.
[00:01:17] Well, as you know, doubt no when the government has debt issues bonds to cover their debt so their balance of the Bank of England doesn't go too far into the red because they've issued those bonds and those bonds are sold to banks and other institutional investors who might sell them on but the initial buyers are usually banks and banks buy them with money that they have sitting in reserves in their own accounts at the Bank of England in other words.
[00:01:40] And as we've said before, there's never a shortage of interest in buying UK government bonds which are called guilt by the way they're called buns in Germany, treasuries in America.
[00:01:49] But now the UK treasury for whatever reason are making guilt available to retail investors on the primary market through retail investment platforms.
[00:01:59] They're using a dealer called Winterflute Securities and great name Winterflute Securities given evidence of climate change, this Northern winter.
[00:02:09] But Steve, I mean the official line on this from the UK debt management office which is the office responsible for issuing bonds and managing the auctions that were their sold.
[00:02:20] They said they have been exploring the potential for retail investors to contribute more significantly to meeting the overall financing, financing requirement.
[00:02:29] In other words, they fear there's not going to be enough interest in new bond insurances because they are issuing so much more of it that just seems a bit unlikely doesn't I mean they never have any difficulty selling these these bonds.
[00:02:43] It just shows what happens when you have neoclassically trained people running the bloody country.
[00:02:49] It's ridiculous and that's the only way to describe it.
[00:02:53] They don't understand the actual mechanics of bond financing in the very first instance.
[00:02:59] And this is textbook economics textbook neoclassical economics teacher's you complete fallacies about government finances.
[00:03:09] And then people who don't believe these complete fallacies become the people who run government finances and then do things based on the beliefs of those fallacies.
[00:03:17] So it's just ludicrous, just ludicrous.
[00:03:20] So what they say I mean the financing requirement for 2024 25 this year next year.
[00:03:26] Sorry it's going to be 277 billion pounds which is 16% higher than the financial year that we're just about to the end of.
[00:03:36] And their fear is well I presume the big fear really is there's going to be less interest with so much more.
[00:03:44] So that's going to lower prices and we'll explain why but lower prices means higher yields.
[00:03:50] That's their fears now they're trying to keep the try to keep the yields down and they think well if we can broaden the spread of buyers.
[00:03:57] If we can get some retail investors then maybe they'll put the price up.
[00:04:02] I can't help feeling they're thinking will they put the price out because they don't really know what they're doing so we'll get a better price.
[00:04:08] Do you think that's what they're thinking now I'm assuming that's what they're thinking probably probably I mean I haven't got the actual link to this but I'll give a recommendation people have a look at this straight away to get a deep understanding of how the financial system from the government point of actually works as the three.
[00:04:25] People I know moderately well Andrew Berkeley Richard Ty and Neil Wilson wrote a paper called an accounting model of the UK's checker and they explain the actual mechanics of government financing.
[00:04:38] And I reprised this not not their entire very very detailed this 2013 page document for those who are considering reading it not not the individual gone into in that document with the basic the basic principles.
[00:04:53] And it there is absolutely no possibility of the UK in particular and governments in general who issued it in their own currency absolutely no possibility of not having a the potential bars not having sufficient funds to be able to buy all the bonds.
[00:05:11] The government of self issues it is a given the nature of government financing how it works out there's zero possibility absolutely zero possibility there won't be the funds available.
[00:05:22] There can be dilemmas caused by other stupid policies such as putting up interest rates which then reduce the value of bonds and damages the the asset side of the banks that is supposed to buy them and it makes it makes it a bit of a you know please put your hand in this mouth trap so I can understand that reluctance we'll talk about that during the show but it is 100% guarantee the funding will be available if the government issues bonds to match the scale of its deficit plus out the money.
[00:05:51] It's deficit plus outstanding interest payments on outstanding bond because there's so much money sitting in bank deposit say within the within the reserve.
[00:05:58] Sorry I should say of that not even that but this is the other this is the other puts a white you have to know the mechanics overall and like every time the trouble is I'm so used to this stuff that I I obviously get outraged they have the very idea that
[00:06:10] they can be a problem which clearly this people have issued these bonds to retailers actually believe that can be so I get outraged that stupidity and you know and I dive in and I mean I'm just very ridiculous I think this is but so I'm thinking it sounds a
[00:06:25] Ford interlocking double entry balance sheets and the fundamental one is the is the the central banks the central banks capacity to buy existing bonds
[00:06:39] I would currently own whether it's by the private sector or by by the banking sector the capacity to buy existing bonds is limitless so if they're
[00:06:50] example let's let's say there's a hundred trillion pounds worth of outstanding bonds which is ridiculous sign up just want to use an exaggerated figure then the bank of England and say oh we'd like to buy those bonds of you our dear private bank
[00:07:05] and non-bank bondholders we will pay you 1.1 trillion this is a big over one point run trillion will give you for those bonds
[00:07:14] and so they say we're going to put whether numbers 1.1 trillion in your banking accounts and those banking accounts need to be the reserve accounts of the private banks at the bank of England
[00:07:25] or it can be the deposit accounts of individuals of bank with banks not non-bank so bank with banks no but no difficulty in doing either of those
[00:07:36] these 1.1 trillion oh dear we've got a deficit of 100 billion okay so we'll then having by giving by having given you 1.1 trillion
[00:07:46] you now have 1.1 trillion in your reserve accounts would you like to use you know one tenth one tenth of that to buy a hundred billion worth of outstanding bonds
[00:07:57] the mechanics and even even people who know is a little about the financial sector has been ben anki I'm going to let that hang up for a moment
[00:08:05] as Ben ben anki I can quote my like my mage or geolawais in his motion even he understood that Ben because he was actually a Ben anki
[00:08:14] yes that's that's that's that's that's that's that's that's yeah just yeah I love the fact by the way for those say in the in the UK
[00:08:21] he just as we're recording this recording this actually the morning after he won the roghtale biolection and and he said
[00:08:28] because it was a labor with trans basically because the labor candidate being disgraced from conspiracy theory and the like and George
[00:08:37] Galloway said yes stammer and Rishi Sunak are both two cheeks of the same backside and they well untruthy got
[00:08:54] a spanked tonight shema stepped up the line but that's just classic George Galloway there's one wonderful wonderful
[00:09:01] anyway completely lost your train now but I mean we were no no no I have him because on this train it's one of the
[00:09:06] the train powered back on the train leaving the station back on the train and that has been ben anki was asked about you know what would
[00:09:15] you know what what can the government do with its finances during the before the financial crisis and he said
[00:09:21] the government has this technology called a printing press now that's the only mistake he made because it's not
[00:09:25] printing presses double entry bookkeeping which enables it to produce a limitless amount of money now but what what
[00:09:31] what happens is bonds are the rivers the number of bonds which are outstanding right now in other words
[00:09:39] bonds which are owned by either the non the bank the banking sector or the non bank private sector
[00:09:45] which can include other financial institutions non bank financial pensions and some like yeah yeah that that is that
[00:09:51] is the sum total of the what we call government debt now let's say in the UK is case I'm not sure the actual numbers
[00:09:58] because you know I know the private debt numbers much better than the public with private is what actually
[00:10:02] bloody matters which these idiots ignore but it's a government said 100% of GDP I know it's more than that
[00:10:08] 100% of GDP what's your deficit even if it's this 25% of GDP since the government said that the bank of England
[00:10:18] can literally tell let's say let's say all the debts owned by the private banks that have accounts
[00:10:25] of the bank of England the bank of England can decide to say we're going to buy all the outstanding government bonds
[00:10:31] which is 100% of GDP that then means that the bond holding and then they'll offer a deal you partly you can't
[00:10:39] this is just some extent the way central banks offer it's a mafia they can make an offer to good refuse
[00:10:45] so they can you know they could say we're going to buy them a power or buy them above part doesn't matter
[00:10:50] but like I say above part 10% above part you got bonds outstanding with a hundred percent of the UK's GDP
[00:10:56] we're going to pay you 110% of the GDP you've been idiot to turn that deal down all they have to do
[00:11:02] and both Benanke and Greenspan have said themselves at various times is type the number 1.1 times GDP into the bank
[00:11:12] into the deposit accounts of the private banks at the central bank which are a liability of the central bank
[00:11:20] and then that that requires the banks to hand over the bonds back to the bank of England
[00:11:27] so what happens is in terms of looking at the private bank accounts they currently it's they've got no reserves which is quite feasible
[00:11:34] quite an operator that's a usually quite a near operating situation
[00:11:38] suddenly they've got reserves worth 1.1 one hundred and ten percent of GDP
[00:11:43] then the government issues bonds for say a deficit of 10% of GDP and says we can convert 10% of that
[00:11:52] or 9% of that a certain amount of reserves you have into interest earning bonds would you like to deal?
[00:11:59] and the answer is yes please yeah absolutely no but Vincent repeat as required
[00:12:05] but I mean what you described there is QE isn't that's exactly what happens with QE
[00:12:09] QE was just the usual government the usual buying of the central bank on steroids
[00:12:15] so this is why I'm going to get people to talk about it
[00:12:17] but what's the difference because they say the situation you've described
[00:12:21] the central bank is saying yet your bonds will give you a good deal for it
[00:12:25] and we'll put it on our balance she what's the difference in what you've described and what QE is?
[00:12:30] absolutely none just scale yeah that's all the difference
[00:12:33] so the usual approach of the government and like tight my good and my tight Cains is to properly
[00:12:40] disrupt itself of the world's greatest minskie model has put a model of this together in minskies
[00:12:44] we might actually back that up on the Patreon and sub stack website so people can see it
[00:12:50] but the basic story is if you you have I'll go through the four accounts because that's what I'm saying in my head
[00:12:57] you have the treasury the treasury whether it's planned it or by by circumstances
[00:13:02] spending is greater than taxation and let's say it's 10% greater and then it's got to all
[00:13:08] ignore the interest payments but the interest payments are just another step in exactly the same process
[00:13:13] actually I'll conclude them and I won't specify that the 10% of GADP is your deficit
[00:13:18] that then means that they put money equivalent to 10% of GADP into private bank accounts
[00:13:25] because the spending exceeds taxation by 10% of GADP then 10% of GADP turns up as additional money
[00:13:32] in people's deposit accounts whether that's individuals or non-bank financial institutions or companies
[00:13:37] that that's where it turns up the balancing side of that on the private bank's ledger
[00:13:42] is an increase in reserves of the same amount of money and then what then you can say
[00:13:49] the government is then required to issue bonds so the treasury of the new shoes bonds are equivalent to 10% of GADP
[00:13:54] they are then sold in an auction process and the money which is used to pay for them is actually
[00:14:03] the reserve that have been created by the deficit now people often say you've got to see all the way around
[00:14:08] well if it is the other way around you then have this you know outstanding stock of what at least 100% of GADP
[00:14:14] worth of bonds already owned by the non-bank the banking sector and the non-bank private sector
[00:14:22] so all the central bank has to do and it's required to support the treasury in these operations
[00:14:29] is to then go and buy those bonds off the banks themselves and the public, the private sector
[00:14:38] yeah it will be usually in a confusing way so the buy it off them and that then means the reserves rise by guess what 10% of GADP
[00:14:47] so suddenly when the auction is required to be held all the potential bars have the available funds in reserves
[00:14:55] which reserves you use not to get interest on you now you get a lower rate of interest and you get on bonds
[00:15:01] interest of rate of rentional the bond will offer a higher interest rate and you can't trade and speculate on the value reserves
[00:15:08] when the bond market is by far the biggest financial market in the world and banks are trading and gambling on the
[00:15:17] value of bonds all this time so the offer to convert those reserves which have been created for you by the central bank buying existing
[00:15:25] bonds off you previously the opposite is to convert those back into interest earning bonds which you can trade the banks take it
[00:15:33] so no possibility it shows how ignorant the people I have put this idea together
[00:15:38] well I wonder whether there's no ulterior motive which will come onto that but in that situation that you've described
[00:15:43] where the money ultimate the bonds are ultimately being bought up by the central bank which is releasing more reserves
[00:15:51] which can then be used for the next tranche of government debt in all of that of course the government is spending some money
[00:15:59] is going into people's bank accounts so it's expanding the money supply the government spending is expanding the money supply isn't it in effect
[00:16:06] yeah well this is actually what we are going to do is imagine that question is to I'm wondering what happens if it's not banks
[00:16:12] that are buying it because if the money is being bought is being used to buy those bonds by the consumer then that's not expanding the money supply
[00:16:20] this is reducing it yeah this is why I say it's so ignorant when you sell those bonds to the non-bank private sector
[00:16:29] then their deposit accounts go down by that which means the amount of money in the circulation goes down
[00:16:35] in return they get an asset which is the bond which on which they'll interest over time and the naive
[00:16:42] and there's a polite way of putting it the naive belief that mainstream economists have that this is the same thing as you are going
[00:16:49] getting a loan from the private private bank is just nonsense when you look at the actual mechanics of it
[00:16:55] but the crazy thing is I've been used to this solution being commonly held
[00:17:01] and I thought that that was possibly the way that people issuing war bonds thought during the Second World War
[00:17:10] but Nathan Tancas has done a lot of brilliant original research found the documents that explain the policies behind the issuing war bonds
[00:17:20] for example and the people who were selling who even the people were selling it and that includes Charlie Chaplin during the Second World War
[00:17:27] realized the purpose of selling the bonds was not to finance the war it was to reduce the amount of money in the private sector
[00:17:35] so that there'd be less competition from non-war demand for goods during the war if it seemed to have more for building tanks and ships and so on
[00:17:46] and that was part of the idea to control the inflation which had been very bad during the First World War
[00:17:52] if you want to deflate the economy, if you want to reduce the level of economic activity this is a bloody good idea
[00:17:57] and what is Britain in now it's in a recession
[00:18:00] yeah but it's also got inflation so maybe that's part, you know maybe they're smarter than we think they are
[00:18:07] no I very much doubt it's been through a mainstream economics could have learned this garbage
[00:18:13] then there's probably what's lying behind the decision making
[00:18:17] but I mean it is a point isn't it? I mean during the and we've spoken about this before
[00:18:22] that you know when inflation was high during the pandemic because we had so much spare cash that just wasn't rotating around the economy
[00:18:29] you know the ideal thing would be to have that money taken aside and spend later and the easiest way to do that would be to issue bonds
[00:18:37] you know say okay
[00:18:38] yeah that's the functioning of issuing bonds to the non-bank sector
[00:18:42] is to reduce the amount of money in the accounts and reduce the amount of potential demand pressure on the economy
[00:18:51] when it's hardly demand constraint
[00:18:53] but we're not in demand constraint economy right now and I've got a feeling that UK's inflation problems got more to do with supply chains
[00:19:00] at a lack of domestic manufacturing than anything else
[00:19:03] I'm sure you're right and look you know and funny enough that reason wasn't given by the management office
[00:19:09] more back there must be hiding what they know potential for retail investors to contribute more significantly to meeting the overall financing requirement
[00:19:17] other than to invest in the government blah blah blah
[00:19:20] but when we come back we'll talk more about this
[00:19:22] but I also want to talk about the role of yields in all of this as well
[00:19:27] and also whether you know it's an area because it's complicated isn't it's an area where you really want to get retail investors involved
[00:19:35] and whether they could you know get their fingers bent in this whole process as well
[00:19:38] so look at that when we come back it's the deep banking economics podcast
[00:19:41] it's me I'm Phil Dobby he's Steve Keem back in the moment
[00:19:47] Hi this is Bachelors Clues from Game of Roses of course
[00:19:50] and I want to talk about Club Med
[00:19:53] everybody knows Club Med has been the pioneer of the all-inclusive resort since 1950 with almost 70 resorts worldwide
[00:20:02] ranging from beach side destinations in the Caribbean and Mexico to exotic locations like the Maldives and Morocco
[00:20:10] or even the mountain destinations like Japan and the European Alps
[00:20:14] Dine on delicious gourmet cuisine enjoy more than 20 activities and make memories with your family
[00:20:21] for more information visit clubmed.us or call 1-800-clubmed or your travel advisor
[00:20:29] A lot can happen in three years like a chatbot maybe your new best friend
[00:20:32] but what won't change?
[00:20:34] Needing health insurance, United Healthcare tried to her medical plans underwritten by Golden Rule Insurance company
[00:20:38] offer flexible budget-friendly coverage that lasts nearly three years in some states learn more at UH1.com
[00:20:46] This is the Deep Unking Economics Podcast with Steve Keem and Phil Dobby
[00:20:52] It is the Deep Unking Economics Podcast we are looking at the UK Government's decision
[00:21:00] and this has been done in Europe as well it's not just a UK thing I'm sure it is in other parts of the world as well
[00:21:05] to issue bonds, to consumers, to retail investors rather than banks and financial institutions
[00:21:13] so that retail investors can actually be there buying in the initial tranche of shares
[00:21:20] and the first offering through the allocation process from the debt management office
[00:21:25] is a good idea or bad idea where we've said it's a great idea if you want to reduce the amount of money in the economy
[00:21:31] but otherwise there's no problem with banks and financial institutions funding the debt requirements of governments
[00:21:39] The question about, of course, the idea behind all of that as you've described
[00:21:45] is the central bank buying up all of that money and putting it onto their balance sheet
[00:21:51] there seems to be a lot of resistance to that for whatever reason
[00:21:55] and in fact central banks are obviously trying to reduce their balance sheets now because they're trying to undo QE
[00:22:00] so why is this adversion to the fact that central banks can just basically in effect carry this debt?
[00:22:08] Again I think it's just having this whole set of interlocking conventional beliefs which are mythical
[00:22:16] about how the financial sector operates and you have people in positions of power, particularly politicians
[00:22:21] but also often bureaucrats who are trained in their classical economics
[00:22:25] believing that this is what we used to sacrifice versions to make sure the sun would rise
[00:22:33] because if you didn't kill a version the sun wouldn't come up and you couldn't possibly take the risk of not killing a version
[00:22:39] because then if it was blackness well that's it, you know you've destroyed everything
[00:22:42] so let's go find another version to sacrifice. It's really about as sensible as that
[00:22:47] because if I don't explain the bad weather we'll be having a Britain-like leave aren't you?
[00:22:50] Okay you have to kill it even more versions but believe there's lots of them and then I'm generation these guys
[00:22:56] It's fashionable yeah, there we are you see there's an old new theory as well
[00:23:02] Alright let's talk about yields in a second first of all though you know there's a bit of response to last week wasn't it?
[00:23:08] Elon Musk and Mars on both counts we certainly got people fired up
[00:23:14] We did, so by the way if you go to the website debunkingeconomics.com
[00:23:19] no one's ever done this before but there is a thing you can click on to send a voice message
[00:23:25] so have a listen to this one which came from Greg Harper
[00:23:29] Steve I've been a long-term listener of your podcast and most recent podcast really is disappointing
[00:23:38] Elon Musk is an appalling human being with right wing views on most things
[00:23:45] and no real concept of environmental sustainability full stop
[00:23:51] So there I asked Steve I think you were standing up too much for Elon Musk last week that seems to be the message there
[00:23:58] I before you answer that I also got in trouble
[00:24:01] Ulf Dallan on the website said why is Phil against free speech on Twitter?
[00:24:07] The one really good thing Elon Musk has done is buying Twitter and firing all the woke censorship crowd
[00:24:12] I mean Steve's economic theories might well have been censored on the old Twitter
[00:24:17] Well actually the argument against that is Ulf is that they weren't
[00:24:21] But there we are so I don't know because it's Ulf saying that it doesn't matter what you say on Twitter
[00:24:28] You can spread lies from a bot factory in Russia does it matter if you use those lies to drive the next election victories
[00:24:35] and you know challenge democracy? I mean anyway but yeah what about Greg's comments on Elon Musk
[00:24:44] I have very young dunk sharp hing approach to Elon Musk and that is they don't care what is black or white
[00:24:52] so long as he catches mice you know the classic statement dunks up into the get away from ideology and just see what works
[00:24:59] I wish if we hadn't had the neoliberal take over of economic policy and intellectual framing as well back in 1970s
[00:25:08] which is when it began we would probably have a nasar outpost on Mars and the Moon by now
[00:25:13] Okay so the fact that we had this was kibosh was due to this whole obsession about government debt
[00:25:19] Tally pretty much government debt and blaming government debt for inflation
[00:25:22] which is where we had the rise of Milton Friedman's approach to economics
[00:25:26] One of the many things that destroyed was the nasar program
[00:25:29] which the idea of the NASA plan was to get it get it get it established a permanent base on the Moon
[00:25:34] and then to move to exploration of the planets
[00:25:37] Neoclassical economists killed that as they killed many many other things
[00:25:41] and they have fast enough and he would I am 50 years 50 years and I don't in some ways I wouldn't care if you know it was a chemical song
[00:25:50] We kind of done it 50 years ago because he would have been five or whatever
[00:25:54] Yeah, technology has enabled it the private sector has gone it and I really don't
[00:26:01] And Elon Musk would say that's a good thing that's why because he I'm sure he would say he's a neoliberal
[00:26:05] so he'd say well hey look what the private sector can do
[00:26:08] Yeah, and they're like a mariana as a carto's approach on that and also Jane way Bill Janeway's approach
[00:26:15] is quite sound and it says the government will be a loss leader in things like this
[00:26:20] doing things the private sector could never undertake when it first began
[00:26:23] There's no way the private sector would have got us to the moon in the 1960s
[00:26:26] But the technology is established by the government at that stage
[00:26:29] The huge investment all those ideas after 50 years finally reached the point where a private individual
[00:26:34] With large amounts of money can decide to take on space travel and now we have a space industry
[00:26:41] Which is becoming quite substantial
[00:26:44] And my whole thing is look if this reflects my knowledge on climate and change in the disaster
[00:26:51] I think we're going to experience courtesy of that
[00:26:54] And again, neoclassical economists are responsible there
[00:26:57] I just want humanity to have a potential out
[00:26:59] And I don't think it's going to happen
[00:27:01] I don't think it's going to succeed
[00:27:03] But I'd think Christ there's a possibility of it
[00:27:06] And that is the fact that it's must is doing it
[00:27:09] If you're an object of an individual, I don't actually don't give a rat's ass
[00:27:13] I simply want to have a human outpost on Mars
[00:27:17] And people talk about it, if they try to do the libertarian stuff there
[00:27:21] It'll fail faster than you can say Argentina
[00:27:24] Because the constraints they'll be imposed by being in that environment is so extreme
[00:27:30] You have to have 100% virtually agreement with the policies you're undertaking
[00:27:35] If you have any discord whatsoever, the social system breaks down and a system like that
[00:27:40] Then bang down and walk down here
[00:27:42] Where he's breaking down here anyways and then absolutely
[00:27:43] Yeah, let's see a more condensed environment
[00:27:47] Let's go back to talking about bonds now because we're going to have time
[00:27:50] So look, think about yields
[00:27:53] I mean I think most people who listen to this podcast will understand it
[00:27:56] But if you buy a million pounds worth of guilt for example and it pays a 4% yield
[00:28:01] Then you get 40,000 per year in coupon payments each year for the life of that bond
[00:28:07] And bonds obviously is a different maturity
[00:28:10] Same summer, two years, five years, ten years and so on
[00:28:15] But you get the same amount for the life of the bond for every 4% yield will be 40,000
[00:28:20] But if there's less interest in buying those bonds then rather than paying for a million
[00:28:25] You might pay 900,000 for it if there's less demand at the auction
[00:28:29] But you'd still get the 40,000 per year because that is what was claimed at the issuance
[00:28:34] So the annual payment as a proportion of the price will be higher
[00:28:39] And I wonder whether that is actually what the government is worried about
[00:28:43] That if they get a flood of retail investors bidding in this new guilt issuance
[00:28:50] Then that's going to keep prices up so yield to be lower
[00:28:54] So the government can issue then lower payouts when they advertise it
[00:28:57] They can say well okay we're going to pay less and they're going to, you know, as far as the way they see it
[00:29:01] They can save themselves a few quits
[00:29:03] So their liability for future payments is going to be less
[00:29:07] I wonder whether that's part and parcel of
[00:29:09] Given the people who are thinking this stuff has been trained by a new classical economist
[00:29:12] Possibly something as stupid as that as they're part of their reasoning
[00:29:15] Again, the central bank has the capacity to buy all outstanding bonds today if it wanted to
[00:29:21] And that would create 10 times as much money in reserves as is required by the current legally enabled buyers to buy the bonds
[00:29:30] It is simply not understanding the capacity of the central bank
[00:29:35] Because the central bank can manipulate the asset and the liability side of its account simultaneously
[00:29:43] As a private bank can do with the added advantage that it the central bank does not have to remain
[00:29:48] Positive equity and this is in your finder pepper by I've forgotten his first name but
[00:29:53] Bo Latz, B. H. O. L. A. C. at the Bank of England explaining that the central bank does not have to maintain positive equity
[00:29:59] So they have none of the constraints that the private banks have where they must make sure their assets exceed their liabilities
[00:30:06] And if they want to buy all the outstanding bonds on the market they can and when they do that what happens is
[00:30:13] The asset side of the bank bank in England rises which is what QE has been all about
[00:30:19] And so does the liability side and that liabilities are what we call reserves we should really call them settlement accounts
[00:30:26] That's what they normally make use for and then when the Treasury then issues bonds for the current deficit
[00:30:32] Let's say it's 10% of GDP there's ten times as much money as is necessary not money funds
[00:30:37] Now this is again I want to make this point money is stuff you got in a positive account or in cash
[00:30:42] And you can spend you can buy whatever you like by enhance your dildo collection whatever you want to do with it
[00:30:49] And by shares issued by corporate corporate wankers who cares you can do it
[00:30:56] In reserves and this is the aftermath of the great depression
[00:31:01] Banks are only allowed to buy a very restricted range of assets which includes of course government bonds
[00:31:07] So if you have zero reserves initially but a hundred we could have a good bond zone by the private banking sector say 100% of GDP
[00:31:17] Then the government the Treasury could sorry the central bank could buy a hundred percent of GDP of worth of by outstanding bonds
[00:31:26] Put them on their balance sheet the private banks now have a hundred percent of GDP in their reserve accounts
[00:31:31] Along comes this way to say we've got an issue of cover not just 10% of GDP
[00:31:35] That's you over described by a factor of ten and not on saying mechanics I think is where this nonsense comes
[00:31:42] Right so yeah that explains why they're doing it but what about the dangers behind it as well
[00:31:47] Because I just I worry about retail investors getting involved in what is actually quite complex
[00:31:55] I mean I you know as you know I do a finance podcast every day and I get confused all hell by bonds because you're looking at the various yields
[00:32:03] You're looking at the element of future risk and the reward based against that then you're looking at the relativity to other bonds overseas
[00:32:11] And to corporate bonds that say you're looking at the spread between you know 10-year guild yields and German bun yields for example
[00:32:17] And between 10-year guild yields and two-year guild yields then you've got a factor in the inflation
[00:32:22] And how much do you think the inflation is going to affect your returns
[00:32:25] You know will you have will the payments you receive at the end compensate for the loss in value of the guilds
[00:32:31] You know based on the coupon payments they've had for the lifetime
[00:32:34] It's not like saying look I think I'm going to buy a few more than a video shares
[00:32:38] They're going to be these the more complex area of the whole finance industry
[00:32:42] And for retailers to play in that they're just going to get their fingers bent on it
[00:32:45] I mean shares are pretty volatile as well but far more volatile than bond prices are
[00:32:50] But bond prices have got into that same class now
[00:32:53] Nothing volatile is all hell over the last two years
[00:32:56] They have been courtesy of the central banks putting up rates and not realizing what they're doing
[00:32:59] Both to the income flow which actually it's just where borin knows the point comes in
[00:33:03] If you're increasing the interest rates on exist on new bonds then you're paying people more money
[00:33:08] Like what you've gone from with a 1% yield to a 5% yield
[00:33:12] You're giving up a substantial amount of money to people who own bonds
[00:33:16] Normally that those being banks and non bank financial institutions and some wealthy people
[00:33:21] So you're doing you know you're giving a stimulus from the high interest rate
[00:33:25] What are you also doing is devaluing existing bonds
[00:33:28] This is the point you made earlier in the podcast that if you put up the rate
[00:33:34] If old bonds are offering 1% a new bonds are offering 5%
[00:33:39] Then those old bonds have to be devalued at the point where they're 1% paper yield
[00:33:45] Because equivalent to 5% and that devalued
[00:33:48] And that's what actually seen that happened quite dramatically in the value of bonds owned by
[00:33:53] I've seen the data for America here
[00:33:56] In effect if the banking sector in America was required to have record all bonds and what they call mark-to-market
[00:34:05] That would mean that they had been the entire financial sector would be insolvent
[00:34:13] Because the value of the assets they had would have fallen so much
[00:34:17] That the liability would exceed their assets they'd be in negative equity
[00:34:20] And that's the definition of bankruptcy or a bank
[00:34:23] So it is very dangerous to be playing with these interest rates
[00:34:29] But for the individual buyer if you're buying like a short-dated government bond
[00:34:35] Then large variation interest rate have a very small effects
[00:34:38] If you buy long dated bonds the longer the date is the more inverse relationship is moving interest rates
[00:34:44] Between interest rates and the value of the bond
[00:34:47] So you could face like if there were selling consoles for example
[00:34:53] Being bonds that had never repurchased they'd have an infinite life
[00:34:58] Then if there was an interest rate increased by a factor of 5 the value of the console would fall by a factor of 5
[00:35:04] So you might have bought a console for 1,000 it's worth 200,000, you've lost 800
[00:35:09] So there is that potential danger for retail buyers getting involved in it
[00:35:12] And we even without retail buyers
[00:35:15] By the way retail buyers can be involved in it just in the second remark
[00:35:18] You could buy EFTs in government bonds
[00:35:23] But because we saw during the list trust presidency that we had
[00:35:30] Bank of England having to step in because the value of bonds had fallen so much
[00:35:36] They had to buy and get those yields down and get the value back up again
[00:35:40] Otherwise pension funds would have collapsed
[00:35:43] But that again shows the capacity of the central bank to intervene in the secondary market
[00:35:49] And also they can't buy in the primary market
[00:35:52] This is one of these legal restriction is that the people who buy bonds in the primary market must be authorized dealers and banks
[00:36:01] Which have accounts at the central bank
[00:36:03] But the central bank can buy in the secondary market which already has ten times as many bonds
[00:36:09] Outstanding as any deficit you might imagine would be available
[00:36:13] And then by making that transaction in the secondary market they provide the primary dealers with all the funds
[00:36:20] Funds not money, all the funds they need to buy the bonds which are offered for the current deficit
[00:36:26] So why are they doing it then?
[00:36:28] Is it just the misunderstanding of the way the system works by a large?
[00:36:33] Yes
[00:36:34] I think so I can't see any other reason
[00:36:36] Well the other reason might be that they're thinking, well hang on a second
[00:36:39] There's so much money swimming around in the finance sector now
[00:36:42] There's more and more money being saved as every year goes on
[00:36:46] Is that all going to find itself in the share market?
[00:36:48] And we're just going to have asset prices in the share market increase or more dangerously
[00:36:54] If we've got the US share market doing so well
[00:36:56] We're going to have a flood of all this money going overseas which would shrink our UK money supply
[00:37:01] So they worried about that
[00:37:02] So this so we can't we're going to offer more opportunity to retail investors within this country
[00:37:06] What can we do? I know we'll let them buy government bonds could that be part of it as well
[00:37:10] That's about the only sensible reason I can think of to enable this in the first instance
[00:37:16] So yeah, but like I might probably
[00:37:18] And even then you just say well they can still buy on the secondary market you can still buy FT
[00:37:22] And then I have bought bonds on the secondary market way way back in 1993
[00:37:28] And I'm embarrassed to say this but it's true my then wife asked me to buy a property
[00:37:33] And I said no because the Sydney property property prices are in a bubble and I refuse to write a bubble
[00:37:39] Stupid old me. I should have done it specifically and I'm married to anymore
[00:37:42] Yeah, well there's another story different calls there
[00:37:45] But anyway, they would want to see what will you know so I'll buy government bonds
[00:37:49] So I bought $200,000 worth Australian dollars worth of as I have to lose Queensland state government bonds
[00:37:54] Because I believe interest rates were going to fall over the subsequent period which of course they did
[00:37:59] So they went from about 6% to when I sold them about 2% so I gained about 30 or 40,000 profit on the value of the bonds that I purchased
[00:38:07] But this was actually me and I remember being challenged by an Austrian economist on the discussion group
[00:38:12] I was part of at the time. You said well you should put your money where your mouth is
[00:38:17] And I said yes I expect rates to fall because private debt is going too high
[00:38:21] High private debt will cause interest rates to fall over time because of the unsustainability of the level of private debt
[00:38:29] And bang that's what it's one of the elements of my experience in the lead up to the financial crisis
[00:38:35] So yeah, but there's no necessity for it in terms of financing the government
[00:38:40] Yeah, and this is why it's so irritating to hear this stuff being said
[00:38:43] It's only people who swallow it on an air classical textbook
[00:38:46] And frankly what they should have is in operation to remove the fact that it's textbook from their esophagus
[00:38:51] Rather than making decisions like this
[00:38:53] And the upshot of it is at a time when the country is struggling
[00:38:56] And you know, we'd say we need actually more money in circulation
[00:38:59] What it's going to do is withdraw money from circulation
[00:39:02] So I mean I'm not quite sure whether it's going to be significant
[00:39:05] The uptake is going to be significant to have that bigger difference but who knows
[00:39:09] So here's just before we go
[00:39:11] So similar but different so the government is also saying
[00:39:15] Hey, we've got all these net west shares we want to sell off net west now
[00:39:18] Because of course they bailed out the net west group during the financial crisis
[00:39:23] Hang been hanging on to those shares for a long time now they're saying
[00:39:26] Oh, we want to divest all our shares
[00:39:28] And we want to make you know, we want a strong retail participation in that share
[00:39:33] So I'm imagining a bit like
[00:39:35] Do you remember the tells to share offer in Australia
[00:39:38] Where every other ad on TV was by tells to shares
[00:39:42] So maybe they got the same idea for net west
[00:39:45] Because you know, if you sell it to the public and they don't know what they're buying
[00:39:49] Then you're able to push the price up
[00:39:52] Use government money to push the price up so you get about a better return
[00:39:55] And not sure that should be allowable
[00:39:57] But that is obviously what goes on and in Australia
[00:40:00] The share price was sold well
[00:40:02] And then went down and a lot of people got their fingers bent there
[00:40:05] But if they what happens there does that have any influence on them?
[00:40:09] I haven't thought this through at all but so I'm asking you to do the thinking for me as usual
[00:40:13] So the government holds those shares in net west
[00:40:16] It sells them to the public because that's just an asset
[00:40:19] What does it influence the money supply in any way?
[00:40:21] I was reduced the money supply
[00:40:23] Because the assets, I mean it depends on
[00:40:28] It was just a treasury or the central bank that holds the assets
[00:40:32] In that case where you bought net west I presume it's the treasury
[00:40:36] You think so?
[00:40:37] Yeah, okay
[00:40:38] So if you then selling those shares
[00:40:43] I mean I need to do the quadruple entry
[00:40:47] And this is really to work as out properly
[00:40:49] But ultimately that's going to reduce the amount of money in private bank accounts
[00:40:54] And therefore that's reducing the money supply
[00:40:57] You wouldn't want to do that in a hurry would you?
[00:40:59] I remember the third, it was at the third tranche of sales for Telstra
[00:41:05] And it was getting close to the deadline for the payments
[00:41:10] And it was about I don't know six or eight billion dollars
[00:41:15] Suddenly sucked out of the economy as everyone went to pay for those shares at the last moment
[00:41:20] So when you have big movements for lots of shares
[00:41:23] If they're trying to do it quickly that could have quite a profound effect
[00:41:26] Again, if they're doing it now and the economy that's struggling seems like very bad timing doesn't it?
[00:41:31] Yeah, well that's typical of neo classical economists
[00:41:34] So frustrating
[00:41:36] There we are
[00:41:38] They will end it there. It's so frustrating
[00:41:40] Yeah, good point
[00:41:42] All right, very good
[00:41:44] We'll catch you again next week. I've got a whole load of topics to talk about
[00:41:47] But if you're listening you've got something you do want us to talk about getting in touch with us
[00:41:51] I'll leave a comment or whatever we do listen and happy to take ideas as well
[00:41:57] But we'll catch you next week. Thanks Steve
[00:41:59] Welcome to Deepunking Economics Podcast
[00:42:07] Hi, I'm Dory Sheffrier
[00:42:09] And I'm Kate Spencer
[00:42:10] And we are the host of Forever 35
[00:42:12] And today we're talking about Club Med
[00:42:15] The best all-inclusive getaway for families
[00:42:18] Today Club Med has nearly 70 resorts worldwide from beach side resorts in the Caribbean and Mexico
[00:42:24] To magical locations in the Maldives and Morocco
[00:42:27] To ski resorts in the mountains from Canada to the Alps
[00:42:30] Between their all-inclusive family programming, wellness offerings, land and water sports
[00:42:35] And their French heritage inspired food and drink offerings
[00:42:39] Club Med is the best way to elevate your family getaway
[00:42:42] No matter which location you're at
[00:42:44] To learn more, visit ClubMed.us