From yesterday's City AM:
Take quantitative easing (QE): in today’s Britain the distinction between fiscal policy (the Treasury’s job) and monetary policy (the Bank’s) has broken down. Under the guise of counter-acting the negative impact on the money supply of new banking regulations, the Bank of England is helping the Treasury finance spending to an astonishing degree.
In October 2011, the Bank bought £16.9bn worth of gilts, compared with £17bn raised by the authorities – the entirety of the budget deficit that month was monetised. It was even more extreme in November 2011: the Bank bought £23.9bn of gilts while the Debt Management Office (DMO) issued “only” a net £11.9bn. In December, the Bank bought £15.3bn against an issuance of £13.4bn. In 2012 (up to 2 February) it has bought £23.9bn worth of gilts, against issuance of £16.1bn.
Concentrated bouts of QE have benefits as well as costs, of course – but among the latter must be included reduced discipline at a Treasury that no longer needs to worry as much about levying taxes to fund spending.
Seeing as the Bank of England and the Debt Management Office are just two different departments of HM Treasury (the ones supposed to be in charge of collecting taxes and setting spending limits), the government could just cut out the middleman and just borrow short term from banks instead of the DMO issuing gilts to banks on Tuesday and then the BoE buying them back on Thursday. That would cut down 'transaction costs' (i.e. risk free profits for the banks) enormously, and at least it would be honest.
Put On Your Big Boy Pants, Maybe?
3 hours ago
16 comments:
That last point about reducing discipline is rubbish, because the main plank of the government's economic policy is to reduce the structural deficit over time. The government can only do what it's doing because it's a short term thing. The debt hasn't been monetised until the gilts are cancelled, which they haven't been so far.
This is absolutely NOT the same as the central bank printing cash to pay state employees.
BE: "The debt hasn't been monetised until the gilts are cancelled"
Apply commonsense.
If the DMO issues bits of paper called 'gilts' and gets money from banks, and then the BoE buys the bits of paper back off the banks and puts the bits of paper in its own safe, those gilts are effectively cancelled.
It is an accounting or economic nonsense to pretend that the DMO lads in Room 34 owe the BoE chaps in Room 35 £325 billion.
If you consolidate those two departments of HM Treasury, the net position is precizely zero; the only important thing is the relationship between HM Treasury and outside world, and that position is that HM Treasury owes banks £325 billion (or however much).
Lots of people have pointed this out, ask any accountant how they prepare consolidated accounts of a group of companies. If Subsidiary A owes Subsidiary B £100, then on consolidation, the £100 asset in B is netted off with £100 liability in A and the true position is precizely £zero.
The point is that the Bank intends to sell the gilts back *at some point*. Now, you and I may or may not agree about the likelihood of this given the practical difficulties, but until it becomes absolutely clear that the new money has simply been spent in the economy hopefully we won't have the painful consequences of a collapse in confidence in the currency.
Fiat currencies always operate in this weird phoney world where everyone knows that they could collapse at any moment. Just look at the Euro: the Eurozone mostly carries on as if there was no existential crisis, because it basically has to. It's not like the Emperor's New Clothes: while everyone believes that there is value, there is value.
"...and at least it would be honest.. Eh? That's a bit of a niaive expectation Mr W, isn't it? When did you last see genuine honsty from any of the boinling lot of them - Government, Treasury, Bank of England, Failed FSA, etc etc
BE: "The point is that the Bank intends to sell the gilts back *at some point*."
Perhaps it does, perhaps it will, or maybe not. That's not the point. The point is that the BoE has a huge great stack of gilts in its safe. Let's say it has bitsof paper saying "Pay the bearer £1 billion in 2020".
Whether the BoE sells that particular bit of paper, or tears it up and issues two bits of paper saying "Pay the bearer £500 million in 2023" or anything else is irrelevant, it can do what it wants.
Or the BoE could hold it to maturity and then pop round to the boys at the DMO in Room 34 and say "All right boys, payback time, where's our £1 billion?". What happens then?
L, I don't expect them to be honest about anything, what amazes me is that their frauds are so transparent, and that anybody can see straight through them... yet the great unwashed continue to believe this crap (even Ros Altmann has seen through it, see earlier post).
You are not wrong in an accounting way, but the government is being utterly transparent about what it is doing. The Bank also knows what the risks are. If there are smoke and mirrors they are provided by the interpreters in the media.
What I find interesting about the whole thing is whether this will lead to a collapse in the currency at some point or whether we can somehow "get away with it".
I can't feel sorry for "the savers" though. The government does not guarantee the value of anyone's cash. The people who are bleating about annuity rates are by and large the same people who paid tuppence ha'penny for their house in the 60s, 70s or early 80s and are now sitting on assets that have appreciated beyond any investment made in them. People like my mother.
If there is anything to rail against it is the government policy which almost forces people to put a large chunk of their savings into highly restricted pension schemes.
Mark if the DMO does not repay its credits to the BOE then that is a massive stealth tax. The general population would have its holding of sterling diluted. You ask what happens when the BOE pops round to the DMO for pay back . Well that does happen and when it does the DMO auctions new bonds to get the money to pay the old bonds. Or it uses tax money to pay the debt as G Brown did with the 3G phone liscense subscriptions.
BE: "the government is being utterly transparent about what it is doing"
That's the strange thing - if you think about it, and look at official BoE accounts online and so on, it is crystal clear. But the official propaganda is that "QE pumps money into the economy" which is patently not true. It is quite sufficient to look at govt spending/deficits.
If govt overspends by £15 billion in a month then we know what is going on, the fact that there was QE of £15 billion to finance this is irrelevant, the total deficit is £15 billion, not £15 billion + £15 billion = £30 billion.
As to the rest of your comment, completely agreed. My large pile of cash was earned in exactly this manner, which is why I don't bleat too hard about shitty interest rates and inflation, it's easy come, easy go...
Din: "Well that does happen and when it does the DMO auctions new bonds to get the money to pay the old bonds."
Agreed, you've got it in one.
"Or it uses tax money to pay the debt as G Brown did with the 3G phone license subscriptions."
Of course bonds can only ultimately be repaid out of tax revenues. And the 3G licences were a brilliant way of raising money, it's like LVT but for airwaves (and I hadn't even heard of LVT at the time). Which is why I voted Labour in 2001; sensible money raising (tax on monopoly rights) and sensible use of money (pay off debts).
Considering we are now in default by any normal measure, QE3 is a joke.
All government spending transfers wealth from tax payers to the recipients of government spending however it is financed
I think I quoted we'd need to monetise 5-600bn to match the 'assets' of the housing bubble. All on track, nothing to see here....yet, apart from MK being a bit slow
JH, but don't worry too much. QE does not add to the deficit, QE is the deficit. You don't need to add deficit to QE, that's double counting.
Din, not necessarily. What about roads and law and order?
JQ, there is that theory, that TPTB need to create inflation somewhere else as an escape route for inflation which is currently in house prices.
QE does not have to use government bonds. The Bank of England can also issue Sterling against coporate bonds or bonds issued by commercial banks.
substitute the word wealth with the word money --
All government spending transfers money from tax payers to the recipients of government spending however it is financed
Din, 10.34, exactly. Coins, bank notes, 3-month Treasury bonds, ten-year gilts, these are all more or less interchangeable.
Din 14.50. In the broader sense yes, but are you prepared to include huge indirect transfers?
For example, if you own a house and the government (using taxpayers' money) pays for police, street lighting, road repairs, refuse collection, the local school, and intervenes to prevent any new houses being built, then that is a transfer of wealth from taxpayer/non-homeowner to homeowner. The total volume of this transfer, every year, is approx. equal to all the money handed out as cash welfare or old age pensions.
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