Bite Size Economics No. 1 (remix)
'interest is the price of risk'!
If a higher interest rate is being charged there is more risk of non-repayment.
This is why some people are charged more for loans & why some 'investments' are offered with higher interest rates.
Knowing this helps make sense of loans & investments; and is a useful scam warning
If an interest rate is out of line, ask yourself, why?
Bite Size Economics No. 2
'Money is trust'
Money is usually seen as a store of value or a means of exchange but these functions depend on its manifestation of trust.
We trust money is acceptable to others (in the form we want to use from paper money to digital payments); we trust its value is (at least in the medium term) relatively stable.
When our trust declines so does money's stability (inflation, barter exchange). So, without our trust money cannot work!
Bite Size Economics No. 3
'markets are never free'
The idea that in some ideal world markets can be free misunderstands how markets work; they are dependent on property & contract laws shaped by the state (or in earlier times the local political authority).
Historically markets have operated without formal laws, but even then community trust & local authority set the norms for market interactions.
All markets are regulated the issue is how & by whom?
@ChrisMayLA6
There are a lot of assumptions in the idea that deregulated markets best serve a healthy economy. Deregulation itself is a loaded term. My understanding is that the deregulation which has occurred in the last 40 years or so mainly concerns financial markets. Hence the history of financial markets are peppered with failures, some of them so catastrophic they impinge on trade.
While not fully disconnected from financial markets the so-called free trade in a the global sense are more often than not binding bilateral trade contracts framed within legal systems, so not free at all.
At least that has been my understanding up to now. Happy to be corrected though.
No, you're fine; you seem to have it all understood... we're on the same page
Agreed; part of the green transition has also to be a transformation in the way markets are governed
Firms ought to account for external costs.
Although if they did then that might spell the end of capitalism as we know it.
Not only are 'free-markets' impossible - it's an idea that nobody really believes in - it's just code covering up the freedom to exploit.
You can easily expose gung-ho free market advocating multinational corporations, simply by suggestion we really do away with market regulation, starting with intellectual property rights. Watch them turn on the spot into arch-regulators !
They are entirely, whole-heartedly committed to market regulation. There is no disagreement over this. The disagreement is over whether regulation facilitates exploitation, or protects the exploited.
Indeed; the phrase is a mask!
Hmmmm, "trust" again.
As one wag said several years ago, it's ironic that you walk into a building with the word "trust" on it and all the pens are chained to the desks.
ha ha, great comment
@ChrisMayLA6 beautifully phrased and devastatingly true.
What shall we all use as a store of value and means of exchange?
What is solid?
We'll find out soon enough, I suppose.
If trust in money is a proxy for trust in the government issuing currency, we see what happens when trust in the government collapses: hyperinflation, flight to gold, etc?
Loving this series already!
thanks, another one tomorrow
@ChrisMayLA6 Is that changed, or charged in the second paragraph?
Your typos make your posts very confusing to me 🫤
apologies - now corrected - it should have been 'charged'
@ChrisMayLA6 This is why governments have to be careful not to oversupply money or devalue it in other ways (e.g. like Henry VIII debasing the coinage in 1542).
https://en.wikipedia.org/wiki/The_Great_Debasement
People don't like it if money loses its value too quickly due to inflation, it means they have to spend it straightaway, as in Weimar Germany in 1923.
https://en.wikipedia.org/wiki/Hyperinflation_in_the_Weimar_Republic
This is all a matter of trust as you say. I would like to see an argument for unlimited public spending that addresses this properly.
The oversupply is actually savings as now, i.e bonds, gilts. It's currently called the national debt, which is a misnomer. Inflation doesn't happen due to money supply but due to a shortage of real resources
@kbm0 @ChrisMayLA6 I guess my stumbling block is that if you create more money you need to also delete money through taxation, otherwise you will surely cause high inflation?
People who hold government debt don't like inflation because it devalues the amount they are owed. So they will ask for a higher debt interest rate to compensate, surely?
The key issue here is how the creation of credit impacts on asset values & their treatment in the recording of inflation.... so, we are sometimes told that QE (a massive creation of credit) didn't really cause any inflation, but actually it did in asset markets (and continues to do so) but these (housing & shares especially) are not included fully in inflation measures, hence obscuring the role of credit creation (I'm not a monetarist but the effects are also not trivial)
I have this idea in my head that convincing most working-class people that inflation is something they should worry about is one of the political right's most devious tricks. If your debts exceed your cash holdings, as is typical for an owner-occupier with a mortgage, then inflation per se is good for you (and central banks raising interest rates in an attempt to curb inflation is bad for you)...
... OTOH, it occurred to me that, because wages (and Universal Credit) are typically paid monthly in arrears and rent is typically paid monthly in advance, working people who are renting do have significant de facto cash holdings - but even there, the fact that wages (and Universal Credit) are typically paid monthly in arrears and rent is typically paid monthly in advance is a political choice.
Yes... hence the parenthetical comment at the end of my toot.
Depends what alternative options the bank has for what to do with that money. If the alternative is holding it in physical cash, where they get zero interest *and* have to fund a secure physical vault to keep it in (as opposed to a homeowner funding security for them by buying buildings insurance), then mortgage lending could still be attractive, even at a below-inflation interest rate.
@kbm0 @huxley @ChrisMayLA6 That's how all governments (with sovereign currencies) spend money - the money is created as the government spends it.
In order that the amount of money sloshing around doesn't grow fast enough to cause undesired inflation governments also destroy money, by collecting taxes and by selling bonds. Selling bonds is however in part just a favour to the markets who need somewhere to save money - if the government doesn't like the interest rate that the market is offering for bonds then the government can simply choose not to sell any for the time being. This is why shenanigans in the bond market don't actually affect the government's ability to spend.
@TimWardCam @huxley @ChrisMayLA6 But that doesn't seem to be the prevailing narrative: If the bond markets lose confidence then the government is forced to give a higher return on bonds. Is that not what happened to Truss/Kwarteng? (Albeit they wanted to implement tax cuts instead of spending).
If money is all about trust, then I'd say there is serious a trust problem between the government and the private sector. And that does materially limit government spending.
@ChrisMayLA6 may wish to comment - he's a professional, and what do I know?
"If the bond markets lose confidence then the government is forced to give a higher return on bonds"
I believe the answer is "no", because the government can simply choose not to sell any bonds if it doesn't like the price. Whatever happens to holders of bonds in the second hand market doesn't directly affect the government.
"Is that not what happened to Truss/Kwarteng?"
They were just completely insane. I don't think it was just the bond markets that came to that conclusion.
"If money is all about trust"
The economy is certainly all about the management of trust even at the barter-with-your-neighbours level. (One of the few things that all my economics textbooks agree on.)
Indeed, the yield on already existing bonds is only of interest in that it drives the interest rates (yield/pricing - a subject of a Bite Sized Economics pst in a few days) of new issues of bonds.... so while the state can refuse to issue new bonds at a specific yield/price, unless it then expands credit creation (itself driving up yields) then it needs to still sell bonds.
The key issue is whether the state can wean itself off bond sales & what the costs would be
@kbm0 @ChrisMayLA6 @huxley If the government prints money enough to absorb underutilised real resources - unemployment and underemployment for example - nothing bad happens, and lots of good things happen.
What causes bad things - unwanted inflation - to happen is government printing *more* money than is needed to absorb the real resources. Then government and private sector are in a bidding war to hire scarce labour etc.
We're not at that point at the moment, eg all the recent news about NEETs.
Hmmm.... not so sure; without a cap on asset prices (housing & shares) actually as has happened over the last decades, surplus credit flows into these areas bidding up prices - as noted before this doesn't count as inflation due to a statistical anomaly (asset prices are outside the 'basket of good/services' used to calculate inflation)... so higher state credit creation without controls on asset prices would further increase inequality & command the housing crisis
Indeed, while in purely technical terms the Govt. doesn't *need* to sell bonds it could just create credit directly (and spend it into the economy), the bond route has remained useful because the bonds themselves have a very clear economic role & perhaps more importantly mask the inflationary impact of massive increases in credit (see earlier post on inflation & housing)....
@ChrisMayLA6 Loan interest rates has always struck me as one of the most unfair aspects of capitalism.
Those that could most benefit from a low interest rate loan are those most likely to be forced to use the services of loan-sharks.
Yet for such people, for whom a cheap loan say to finance a second hand car to keep them in a job, whether allowing them to continue to commute to a fixed place of work or earning money in the gig-economy are the ones least likely to get a good deal from anyone.
Yes, there's an old saying: its expensive being poor... and in the provision of credit that is *so* true
@
RaymondPierreL3
TerryB
Talia Hussain
Reg
Moray
GeofCox
Alan T Perry 🇨🇦
Dena
Larry
Greenpete 
Benoît Jones
JuneSim63 💚
Ken Milmore
Dan Hatton
Tim Ward ⭐🇪🇺🔶 #FBPE
Eggs now in different baskets.