Amazingly enough, CityAM published an edited down version of my rant from last Friday, it's the fourth letter down:
Accounting fiction
The idea that one department of HM Treasury owes another department of HM Treasury £350bn is an accounting fiction. We might as well cancel the gilts owned by the Bank and recognise the commercial banks' loans to the BoE as government debt instead.
Still, the taxpayer isn’t paying interest to the Bank, another department of the Treasury (the Debt Management Office) is. The accounting fiction nets off to precisely nil. The Treasury is not only paying interest to itself, it is receiving interest from itself, it is a zero-sum game.
Rather worryingly, the first letter is from a former member of the Bank of England's Monetary Policy Committee, i.e. somebody who ought to know what he's talking about, who kicks off his letter with this bold statement:
Cancelling the bonds would undermine the credibility and independence of the Bank and leave a huge hole in its balance sheet. It would leave the Bank technically insolvent because it would no longer hold assets to match the substantial sum of money (about 20 per cent of GDP) created under the quantitative easing (QE) programme.
FFS!
Until recently, gilts were issued, redeemed and interest payments organised by the BoE (a department of HM Treasury). In 1997, these functions were transferred to a new department of HM Treasury called the Debt Management Office, see page 26 here. This makes it easier to sustain the accounting fiction that the DMO still owes somebody that £350 billion, or that those £350 billion in gilts are still in issue - and that conversely the BoE holds real financial assets, but does not change the substance of the matter one iota.
Clearly, if the BoE as creditor were to waive/cancel the gilts, it would have a paper loss of £350 billion, but the DMO would have a paper gain of £350 billion, so for HM Treasury as a whole, the exercise is completely neutral, it would not affect the money supply (a giant fiction in itself) or the taxpayer or interest rates one little bit.
Furthermore, QE in itself did not 'create' money in itself, all that happened was that the UK government swapped its borrowing/repayment terms from long term to short term, it's the same as paying off a personal loan with a credit card on an introductory low-interest rate offer.
So as ever, the question is, is Andrew Sentance lying or stupid?
Monday, 16 April 2012
Reader's Letter Of The Day
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10 comments:
Re Andy Sentance - both. I suspect that he the archetypal 'clever idiot' aka 'intellectually autistic. He's clever enough to know he's clever, but not clever enough to know he's not clever enough.
I've just gone and read Sentances' letter. I am sorry, I just can't be polite about this. The man is a c**t.
L, but how deluded does he have to be to be able to only ever look at one half of the equation (the BoE side) and compeltely ignore the DMO side? It's basic bookkeeping.
Does he not notice that when he gives his wife her housekeeping money* that he has less cash, his wife has more cash but that the total position of the Sentance household remains unchanged? His letter more or less says that when he gives his wife her housekeeping money that the Sentance household as a whole gets poorer.
* Apologies for chauvinistic example.
MW Worse than that he admits the whole thing is a deceit..."Cancelling the Bank's bonds would reveal that QE had been all about printing money to finance the government's deficit – the kind of policy which led to rampant inflation in the Weimar Republic and Zimbabwe. The resulting collapse in financial confidence and the value of the pound would be catastrophic for the British economy.
Clearly New Labour through and through.
L, that puzzled me. Our UK version of QE is nowhere near as radical or as dangerous as everybody makes out, and cancelling the bonds is just a tidying up exercise.
He is now publicly saying a) the whole thing was a huge great deceit and b) he doesn't want anybody to find out.
I suspect that he's actually genuinely stupid. QE wasn't a big deceit and they were quite open about it. And if he really wants it to stay secret, why is he writing to the newspaper?
(Quite what the purpose of it all was, apart from enriching bankers a bit, I do not know, there was no chance it would help the economy and it didn't).
"So as ever, the question is, is Andrew Sentance lying or stupid"
Conspiracy or cockup? In this case I'll go for conspiracy. It's the official line and too few know it's bollocks to matter.
It's also untrue - a collapse in the value of the pound would make our imports dearer (not a major problem) and our exports cheaper, erm, so?
Sentance, wasn't he the only one who kept voting to increase the BOE rate until he got kicked off? I thought that was a Good Thing, but now he shows that he doesn't understand QE after all.
B, but a conspiracy that is public knowledge and so feebly transparent?
L, £ has already fallen, if you ask me, all currencies are overvalued.
J, yes he was. Turns out he's as nuts as the rest of them.
MW - For a salutory lesson in currency failure find a plot of all the various fiat currencies against gold; or oil come to that.
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