The UK's Debt Management Office issued £4.3 billion of new gilts last week, i.e. investors were willing to lend the government £4.3 billion, which, multiplied up would indeed support a budget deficit of £200 billion this year. On the other hand, the Bank of England bought back £6.5 billion of previously issued gilts last week.
So, last week the Bank has actually bought back £2.2 billion more gilts than the Treasury issued, bringing total purchases to £45.5 billion - gilts which have removed from the market and taken out of circulation as part of the Bank's programme of "quantitative easing", aka "rigging the gilts market".
Can this game carry on forever? Either investors will tire of being bribed to take part, but more likely the crunch will come when the Bank of England refuses to co-operate. Officially this is being done as part of "monetary policy", to ward off deflation. But if the next Inflation Report suggests that deflation is no longer a danger, then the brown stuff could start to impact the rotating vanes.
Thanks to Denis Cooper for researching and emailing me this.
Sunday, 3 May 2009
The money-go-round: QE in practice
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3 comments:
I don't understand the inwardness of this DMO sells, BoE buys rigmarole. Am I richer or more creditworhty if I move my pennies from one trouser pocket to another?
D, exactly not, it's a money-go-round whereby some people become slightly richer in terms of £-s-d (those who sell gilts back to the government at over-value) and by definition others become slightly poorer (those how are sitting on cash savings, whose purchasing power is being eroded).
For every penny you move from one pocket to another, we collectively lose one-hundredth-of-a-penny.
But if the next Inflation Report suggests that deflation is no longer a danger, then the brown stuff could start to impact the rotating vanes.You've inadvertantly exposed the true purpose of the BoE inflation forecasts.
For the MPC, basing decisions on current inflation levels became 'tricky' a couple of years ago when the MPC wanted to lower rates to chase house prices but inconveniently, inflation was rising. So what did they do? They predicted that inflation would drop back soon so that the cut was justified. Magic!
And they noticed a special and initially rather clever trick. All inflation could be dismissed as temporary according to projections - a rise in inflation is labelled a spike, al fall in inflation a permanent trough.
And the rest, as they say, is history. It has got us where we are today. If all inflation is temporary, rates never need to go up and inflation runs silently amok as we've seen with house price inflation.
If you find it difficult to believe, look back two years to find out where the BoE predicted inflation would be now? You guessed it - almost certainly lower than it is.
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