That zero cost of printing all the money to spend

Another one of those little effects of the Magic Money Tree coming back to bite us on the economic fundament:

‘Vulnerable’ £1.8trn private loans pose threat to UK’s financial stability

Scale of these high-risk loans has tripled to £1.8 trillion – but now ‘appears vulnerable’

Well, yes, this would happen.

Andrew Bailey has joined a growing chorus warning of the risk to the financial system of a collapse in the £1.8 trillion private credit market, which boomed in the era of rock-bottom interest rates.

The scale of these loans, which are often considered high-risk and take place behind closed doors rather than in banks or in public debt markets, has more than tripled globally since 2015, but now “appears particularly vulnerable,” the Bank of England said.

Recall what we actually did with Quantitative Easing. We deliberately printed new money with which we then bought government debt. Thiis lowered - by design - the risk free interest rate, that yield on gilts. At which point the rational investor went further out along the risk curve in a desperate attempt tp gain some sort of income. Which was the point of the printing and the buying, to push people out along the risk curve and hunt for yield.

As that problem inducing QE goes away and we come to Quantitative Tightening, QT, then that hunt for yield, acceptance of risk, is also going to change. Which is also the purpose of QT. We want investors to wind their necks in that is.

So far, so good and all is going according to plan. The difficulty is that the money printing, the bond buying, gave government free money to spend. As long as that remained in the financial system we did not have a system-wide change in prices. Capital assets changed in price, yes, but then that’s the same thing as reducing yields to push people out along the risk curve. Just a different description of the same process.

One government got a taste for actually spending that newly minted money we got inflation - which we’re now trying to reduce of course.

Which is where we get to that cost of Modern Monetary Theory, or that magic money tree. By funding government via money printing we do indeed reduce the general interest rate. Which will make the corporate world riskier as investors reach along that risk curve for yield.

Anyone complaining about these “private loans” has to accept that this just is what will happen in a world of QE and MMT. Anyone objecting to these risks needs to understand that they are a product of that money printing method of funding government spending.

Just one of those things - you don’t have to like what economics tells you but you do have to pay attention. For economics does add up. This action here creates that effect there and no, you can’t take this action without that effect.