Top Gear solves the deficit, could it work?

DonDaddyD

Top Gear on Sunday,

James May said that he could sort out the deficit. His solution was to write a cheque from the Bank of England for the amount of the deficit.

I got to thinking, why wouldn't this work?

America does it every time they increase their debt ceiling and it's not like it's me writing a cheque knowing that I don't have the funds in the Bank. It's the Bank of England they could just print the wonga.

Serious question why wouldn't this work and if we did do this what would happen?

CiB

I paid my mortgage off that way. Used the credit card to make the final payment of about £38k, then paid the CC off with the available funds in the mortgage account. Sorted.

Kieran_Burns

Look up Quantitative Easing and then come back.

http://en.wikipedia.org/wiki/Quantitative_easing

and explained by the Bank itself:

http://www.bankofengland.co.uk/educatio ... video.aspx

pangolin

That's exactly what they did with quantitative easing.

They can't do it indefinitely because of inflation. Think how if would censored the economy, it would devalue the 'real' money people/institutions had earned if the bank had an unlimited supply.

graeme_s-2

See Weimar Republic - neither you nor James May paid attention in history at school did you?

rick_chasey

History lesson fail.

gtvlusso

Isn't this how the credit crisis started? When a big bank said 'No cheques please, cash only'

And all the other banks replied 'Errrr......we have some numbers on a screen....'

I guess that printing more cash devalues the currency? Doesn't it?

clarkey cat

I think we are all missing the really important point that DDD is making here guys:

DDD watches Top Gear.

davmaggs

gtvlusso wrote:

Isn't this how the credit crisis started? When a big bank said 'No cheques please, cash only'

And all the other banks replied 'Errrr......we have some numbers on a screen....'

I guess that printing more cash devalues the currency? Doesn't it?

Banks have the legal right to create money from thin air. RBS for example had "assets" greater than the entire UK economy which is why we weren't far off being back to bartering. When you deposit a £100 with a bank they then create IOUs for say £1,000 (or whatever the legal ratio is) which are used to buy assets. These assets could of could be from other banks who magiced their £100 into £1,000 or occasionally real things, and they in turn can be turned into IOUs and so the amounts become bigger and bigger.

Hence unwinding a failed bank takes years.

For more, Google fractional reserve banking. Be aware that this can lead to the Austrian school of economics of Americans worried about the Federal Reserve conspiracy.

I recommend an old book (you can find it as a PDF) called "The Death of Money" to understand why every politician s*** themselves and agreed not to really take about how much trouble the UK was in.

DDDs idea would wipe out the lives of every person who posts here (assuming we are all wage gimps).

walkingbootweather

clarkey cat wrote:

I think we are all missing the really important point that DDD is making here guys:

DDD watches Top Gear.

To be fair they did attempt to design a car for the elderly and easily confused this week so I can see how he might have needed to see that

jds_1981

davmaggs wrote:

RBS for example had "assets" greater than the entire UK economy which is why we weren't far off being back to bartering. When you deposit a £100 with a bank they then create IOUs for say £1,000 (or whatever
the legal ratio is) which are used to buy assets.

Think you misunderstand this slightly. A bank with £100 of deposits can lend out £93.
Subsequent to this there is then the multiplier affect as with all money in circulation.

davmaggs

jds_1981 wrote:

davmaggs wrote:

RBS for example had "assets" greater than the entire UK economy which is why we weren't far off being back to bartering. When you deposit a £100 with a bank they then create IOUs for say £1,000 (or whatever
the legal ratio is) which are used to buy assets.

Think you misunderstand this slightly. A bank with £100 of deposits can lend out £93.
Subsequent to this there is then the multiplier affect as with all money in circulation.

I have over simplified to fit within a few sentances, but you've chopped on the point that the original £100 is lent on many many times and the reserve is only needed for the original deposit. This diagram shows how it happens, and at the end notes explain leverage.

http://geographyfieldwork.com/HowBanksWork.htm

FoldingJoe

I think that is what JDS is describing when he mentioned the multiplier effect.

pangolin

I think you should all read Making Money by Terry Pratchett. It explains all of this very clearly.

bigmonka

How the European bail out works:
The rain beats down on a small Irish town. The streets are deserted. Times are tough. Everyone is in debt and living on credit. A rich German arrives at the local hotel, asks to view its rooms, and puts on the desk a €100 note. The owner gives him a bunch of keys and he goes off for an inspection.
As soon as he has gone upstairs, the hotelier grabs the note and runs next door to pay his debt to the butcher. The butcher hurries down the street to pay what he owes to his feed merchant. The merchant heads for the pub and uses the note to pay his bar bill. The publican slips the note to the local hooker who's been offering her services on credit. She rushes to the hotel to pay what she owes for room hire. As she puts the €100 note on the counter, the German appears, says the rooms are unsuitable, picks up his €100 note and leaves town.

No one did any work. No one earned anything. Everyone is out of debt. Everyone is feeling better. And that is how a bail-out works.

anonymousblackfg

Also, if going down this route it's worth trading your wallet in for one of these...

http://www.diy.com/nav/garden/garden-to ... me-9219221

Not that Government views inflation as a bad thing, high inflation means your debts get eaten up regardless, as long as you're able to manage the interest...

davmaggs

BigMonka wrote:

How the European bail out works:
The rain beats down on a small Irish town. The streets are deserted. Times are tough. Everyone is in debt and living on credit. A rich German arrives at the local hotel, asks to view its rooms, and puts on the desk a €100 note. The owner gives him a bunch of keys and he goes off for an inspection.
As soon as he has gone upstairs, the hotelier grabs the note and runs next door to pay his debt to the butcher. The butcher hurries down the street to pay what he owes to his feed merchant. The merchant heads for the pub and uses the note to pay his bar bill. The publican slips the note to the local hooker who's been offering her services on credit. She rushes to the hotel to pay what she owes for room hire. As she puts the €100 note on the counter, the German appears, says the rooms are unsuitable, picks up his €100 note and leaves town.

No one did any work. No one earned anything. Everyone is out of debt. Everyone is feeling better. And that is how a bail-out works.

I think you missed the rent the seeking out of the sums

Each time that note is passed on, the bank that collaterilised that debt would skim a few cents. Then one day a genius at the bank decides that they could cut out the hooker, the publican and the butcher and create a debt and move it around again and again and again amongst imagery members of the town so that they could keep skimming a little commission on each transaction. Then they have an even bigger brain wave, why not sell hundreds of the transactions to a mate at another bank who is doing the same thing and wants to swap thousands of his own imaginery transactions.

The hooker et al then wait for the banker to get his commission so that he can spend it on them.