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There will be someone along in a moment to get this wrong

Summary:
The only limitation on the coming flood of articles shouting that the government should borrow more is how fast people can type. Perhaps allied with the willingness of editors to publish them. For if the government can borrow at negative rates then the government should borrow more, right?The new government bonds, known as gilts, were issued with an effective negative interest rate of 0.003 per cent and found ready takers, with investors prepared to lend £8.1 billion on those terms, according to the Debt Management Office.The government can borrow at a profit and create such wonders! Of course, this presupposes that government allocating resources within the economy is an efficient manner of resource allocation, an idea we reject after the certain basic minimum of things that government

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The only limitation on the coming flood of articles shouting that the government should borrow more is how fast people can type. Perhaps allied with the willingness of editors to publish them. For if the government can borrow at negative rates then the government should borrow more, right?

The new government bonds, known as gilts, were issued with an effective negative interest rate of 0.003 per cent and found ready takers, with investors prepared to lend £8.1 billion on those terms, according to the Debt Management Office.

The government can borrow at a profit and create such wonders! Of course, this presupposes that government allocating resources within the economy is an efficient manner of resource allocation, an idea we reject after the certain basic minimum of things that government must do. But let us remain agnostic, for our purposes here, on the desirability or not of more borrowing.

The argument will be put forward that market prices are indicating that such borrowing is profitable - thus the market is demanding more such. The problem here being that the Bank of England already owns just shy of £700 billion of such gilts, or soon will do. That is, that yield, that market price, is not actually a free market price, it’s a highly manipulated one.

In itself this is fine for the point of quantitative easing is to distort the free market price. That’s actually the aim. But this then conflicts with the general injunction that prices are information within the economy. A distorted price is distorted information, it tells us things which aren’t quite true.

We should therefore reject that coming flood of pieces. For if we are to use the argument that market prices tell us what to do we do have to then insist that it is free market prices, not deliberately distorted ones, that do.

Think on it for a moment. The Venezuelan government distorted the price of toilet paper with the well known effect of there being none available. A distorted price was not, thus, a good guide to the supply and demand of toilet paper, was it? The same is true of the QE distortion of the price of money, we should not argue from that incorrect price.

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Tim Worstall
Tim Worstall is a British-born writer and Senior Fellow of the Adam Smith Institute. Worstall is a regular contributor to Forbes and the Register. He has also written for the Guardian, the New York Times, PandoDaily, the Daily Telegraph blogs, the Times, and The Wall Street Journal. In 2010 his blog was listed as one of the top 100 UK political blogs by Total Politics.

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