Tim W was raggin' on Ritchie again today, and in order to try and disprove what Ritchie had claimed, linked to a publication by KPMG which stated: "Over the 12 months to June 2009, banks increased their aggregate holdings in gilts from a slight negative holding to £120 billion."
Because I know about these things, I left a comment saying that this was clearly wildly overstated, but have now done the requisite digging in order to satisfy my blogger's honour (or publish a humble retraction).
i. A table in a BBC article titled Who owns the UK's debt shows that "Banks, including Bank of England" owned about £185 billion of UK gilts as at 30 September 2009.
ii. The Bank of England's balance sheet in turn shows that it has lent £199 billion to a subsidiary to buy up gilts (which is the usual figure bandied about, but it's always best to check these things - it's in Note 13 on page 65 of their balance sheet as at 28 February 2010). Quite what happened to the missing £14 billion (£199 billion minus £185 billion) is a separate topic, but that suggests very strongly to me that the Bank of England owns all £185 billion
iii. Therefore it's reasonable to assume that commercial banks own not one penn'orth of gilts - why would they? The whole point of QE was to enable commercial banks to sell gilts at a profit and leave the proceeds on deposit with the Bank of England (the same accounts show deposits from commercial banks of £169 billion, note 23, page 77).
iv. I can forgive Tim W for this oversight (he makes the mistake of grabbing any evidence to prove that Ritchie is wrong, even when, occasionally Ritchie is right, or in this instance, Ritchie is wrong but for quite different reasons) but this just shows what a bunch of smug useless twats the leading provider of professional services, which include audit, tax, and advisory can be.
Forbidden Bible Verses — Genesis 10:21-32
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17 comments:
In passing ,despite no money having been created apparently ,the BoE has got a load of old gilts and corresponding sums on deposit.
DBC, as Onus Probandy explains over at his, what banks do is "split zero". Out of nothing they create a plus and a minus; a loan and a deposit; an asset and a liability.
Don't forget that once the BoE has bought the gilts, they are just a pile of waste paper fit to be pulped - or do you imagine that the BoE lads in Room 42 at HM Treasury intend to wander down the corridor to Room 37 where The Debt Management Office is and to demand repayment when they mature?
And for the comm bank very little has changed - instead of having gilts, backed by HM Treasury, they have deposits at BoE, backed by HM Treasury.
It's all bits of f-ing paper, believe me on this one.
All this monetary stuff amuses me greatly, at the moment we are a rich nation based on the fact that funny money is recognised worldwide, what will we be after the inevitable world war III?
He who controls the resources has the power and we got shite.
> He who controls the resources has the power and we got shite.
There's only one resource that counts, and that's people who reciprocate. We have lot's of that. It's just a pity that marxists have quite successfully tried to get us out of the habit.
SW, I was going to say what AC1 said.
Firstly, the UK has a lot of natural resources (water, fisheries, farmland, coal, wind and waves, and dwindling amounts of oil and gas) and secondly, it is human beings who are the main resource, not 'natural resources' (or how do Japan and Switzerland manage?)
Which is why reciprocation destroying taxes are so economically as well as morally bad
"or do you imagine that the BoE lads in Room 42 at HM Treasury intend to wander down the corridor to Room 37 where The Debt Management Office is and to demand repayment when they mature?"
Having worked for the Civil Service, my answer to that is an emphatic "yes".
B, quite possibly.
Then the DMO people run to the Chancellor crying that they have no money to repay the BoE people, and the Chancellor explains kindly that he'll have their money in a day or two.
He then prints himself a £200 billion note, gives it to the DMO people (once the ink has dried), who hand this to the BoE people in exchange for the gilts (the DMO then tears up the actual bits of paper on which the gilts were printed).
The BoE people then proudly carry the £200 billion note (on a red velvet cushion) back to the Chancellor saying "Look sir, all the gilts were redeemed! Here's £200 billion for the government coffers!"
"Well done lads and lasses," says the Chancellor and sends them off with a free bottle of wine each. Once they have left the room, he takes the £200 billion note, tears it into shreds and throws it on the fire that is merrily blazing in the hearth.
Please note: no actual money was created or destroyed during the making of this film.
I loved, "Please note: no actual money was created or destroyed during the making of this film." Well said, Mark!
That's one of the true but not obvious points about fiat money in a state with its own free-floating currency. I saw a rather good posting on one of the Chartalist websites -- I think it was Warren Mosler's -- that a government is in many ways like the scorekeeper at a sports game. Although the scorekeeper awards "points" to the players, that doesn't mean that the scorekeeper has a big bag of points which are in danger of running out. The points are just a way of keeping track of who's ahead in the game and are created (or destroyed) as necessary by the scorekeeper. Likewise with the government. Money doesn't have to have an intrinsic value as it is really just a way of keeping score in the game of life. In other words keeping track of who can buy a lot of "stuff" and who can't. Looked at from that viewpoint, you can see why money no more needs to be made of gold than the points scored in a cricket match need to be made of gold.
Of course the analogy is complicated a bit because the government is a player as well as a scorekeeper. Plus some of the players (ie the banks) can also create points. And sometimes the government "cheats" by handing out points or by taxing them away arbitrarily.
But I can see what the Chartalists are getting at. So there's one more type of money to add to commodity-based money (gold) and credit-based money (banknotes) and thus complicate the whole money picture. No wonder it's so difficult to get a handle on how money really works in an economy!
Money is just a measure of the productivity/time exchanged in the economy.
Money is of maximal use (i.e. most stable) when the change in money volume matches the change in productivity/time in the economy.
I have an idea for a post about why a Georgist government could run a stable currency, much better than at present thanks to Ricardo.
I may even post it on MW.
Derek, the scorekeeper analogy is a good one as well.
PS, gold is not money, it is a real thing with intrinsic value for jewellery and conducting electricity. It is merely historically the case that most countries in the world had gold as a common medium of exchange for centuries.
It is only if you can borrow gold and spend it, so you have a gold-denominated liability (i.e. negative gold) that gold obtains the characteristics of 'money'.
AC1, I look forward to that.
Agreed about gold. I was just using it as an example of a commodity used as money. My favourite type of real commodity money is actually tins of mackerel which according to the Wall Street Journal, are used in some US prisons as money.
Now I know what I'm stocking up on for the End Of Civilisation As We Know It!
I thought that the purpose of QE was to force pension funds to hold less gilts and more corporate bonds and paper?
Isn't the explicit goal of the APF to purchase gilts from non-banks?
V, pension funds are a separate issue - the government is 'encouraging' them to invest in gilts (nothing to do with QE, as such).
The APF in the UK is 99% between central bank and commercial banks and involves gilts (it's not like TARP in the US.
Mark:
According to the BoE, the APF's explicit purpose is to purchase assets from non-banks. See, e.g. Bean 09 "QE: An Interim Report":
"Fortunately, increased bank lending is not necessary for Quantitative Easing to work. Indeed, it was precisely because the Monetary Policy Committee expected the additional monetary injection not to stimulate bank lending directly at the current juncture, that the Asset Purchase Facility’s purchases were targeted at assets held primarily by the non-bank private sector. So if the Asset Purchase Facility buys gilts from pension funds or asset managers, they will then have to look for another home for their money."
And, of course, the banking sector is up newly created reserves by the same amount that non-banks are up newly created deposits because that's how the BoE pays for the gilts it buys.
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