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Any economists out there - question

3 watchers
14 Apr
10:51pm, 14 Apr 2020
2339 posts
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Tim of MK
Governments and businesses worldwide are "borrowing" unprecedented amounts.

But who are they borrowing from?
14 Apr
11:24pm, 14 Apr 2020
6205 posts
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Dooogs
(Caveat: I'm a bean-counter rather than an economist so I'm well out of my depth here).

Slightly different answer, depending on the location and circumstances. For most businesses, it's a combination of private banks and government-backed lending. For many governments in the developing world, it's probably other governments who have a global balance-of-payments surplus (e.g. China). and the liquidity to exercise some hefty soft power by essentially investing in potentially strategic allies.

However, for a number of developed-world governments, including the UK, it's their own central banks:
theguardian.com

"During major crises, we are reminded of the fact that at the heart of the profit-driven, private financial economy is a public institution, the central bank. When financial markets are functioning normally, it remains in the background. But when they threaten to break down, it has the option of stepping forward to act as a lender of last resort. It can make loans, or it can buy assets from banks, funds or other businesses that are desperate for cash. Because it is the ultimate backer of the currency, its budget is unlimited. That means it can decide who sinks and who swims. We learned this in 2008. But 2020 has driven home the point as never before."

The risk of this is that I suspect it may drive inflation up (I suspect it's not dissimilar to printing money) -but preferable to the disruption of economic collapse...
14 Apr
11:27pm, 14 Apr 2020
48946 posts
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GlennR
Bond markets or, some cases, nobody. Investors are so desperate for a safe haven that they’ll lend to governments at very low rates, rather than risk the stock market.

In some cases central banks can simply ‘print’ (it’s electronic). The Bank of England has done a bit of this.
14 Apr
11:29pm, 14 Apr 2020
48947 posts
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GlennR
To Dooogs’s comment I would add that nobody is bothered about inflation right now. The economy is falling off a cliff.
14 Apr
11:40pm, 14 Apr 2020
6206 posts
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Dooogs
I was considering putting out the Glenners batsignal but thought it was a bit late at night for that.

Agree on inflation - no-one's going to thank to BoE for keeping inflation close to 2% if the economy tanks. Not sure if the government ever rescinded the BoE's statutory remit to keep inflation as close as possible to 2%, which should make its reports in late 2020 fun reading...
15 Apr
7:15am, 15 Apr 2020
2473 posts
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B Rubble
I only did A level economics so my understanding is rudimentary at best. I’m not sure the money supply (M3?) and supply/demand curves apply in these extraordinary times and although some degree of inflation is inevitable it’s far from certain that we will have the type of hyperinflation that may be expected. 2008 seemed to change the credibility of the standard economic models.

Surely the speed of ramping up production in China, Germany, Italy etc. will have a big effect, together with worldwide demand for products. I’m sure we’re already seeing significant inflation in food products as there is less choice, so we’re ending up buying higher priced substitutes.

I agree that inflation is not important at the moment. Production of critical care equipment, PPE and drugs is paramount, together with saving as many jobs as possible to enable us to get back to the new normal safely and as soon as possible.
15 Apr
8:31am, 15 Apr 2020
1081 posts
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puzzler
Yesterday's blog by Simon Wren Lewis is quite helpful in this respect mainlymacro.blogspot.com (as are pretty much all his blogs)

He makes the point that Bank of England is likely to ignore the inflation that comes from the short term imbalance of demand and supply. It the demand relative the long run capacity of the economy that matters for inflation targeting.
15 Apr
11:03am, 15 Apr 2020
48950 posts
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GlennR
Quite.
18 Apr
3:23pm, 18 Apr 2020
2475 posts
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B Rubble
That blog is really good. Interesting that he thinks that inflation will happen due to shortages rather than the amount of money in circulation or debt. It is a minor worry compared to the damage to the economy and impact on the poorest in our society.

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Maintained by Tim of Fife
Governments and businesses worldwide are "borrowing" unprecedented amounts.

But who are they borr...

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