Wednesday 15 August 2012

More QE idiocy

Spotted by Bob E in The Telegraph:

Michael Saunders, UK economist at Citi, said the Government could use the “accumulated profits from quantitative easing (QE) to finance a special temporary tax cut for a year or two”. According to official figures, the “potential profit” by February 2013 from QE to the Bank is £20.7bn – more than enough to knock 2.5p off income tax for a year...

The Bank is sitting on QE profits because it bought gilts with money it has effectively printed.(1) The gilts pay interest which is collected from the Government. Although the arrangement means the funds are effectively moved (2) from one arm of government to another,(3) it is still recorded as a normal payment... (4)

“The UK approach appears to differ from that in the US, where the Federal Reserve deposits its earnings into the Treasury’s account each week,” Mr Saunders said (5).


That's disappointing. Michael Saunders is usually quite sensible.

1) Not true. The BoE pays for gilts by crediting the commercial banks' deposit accounts with itself, on which it, the BoE, pays 0.5% interest.

2) Are they? How can you move money from one place to the same place?

3) The interest is not even shuffled between two branches of government, it's shuffled between two sub-departments of the BoE, which in turn is a sub-department of HM Treasury which in turn is a department of the government.

4) Who records it as a normal payment? Yes, it's true that the government's total, consolidated interest bill has gone down under QE - relative to what it would have been without QE - because instead of paying 2% or 3% or 4% on the gilts they bought back (and effectively cancelled - you cannot owe yourself money) the government (via the BoE) is now paying 0.5% interest - for the time being.

On the other hand, the government has to pay interest on £500-odd billion it borrowed and pissed up the wall over the past few years, so overall our interest bill has gone up, not down. There is no profit, there is a massive loss, it's just that the loss is not quite as big as it otherwise would have been had they been even stupider.

That's like boasting about having made £100 profit by buying something you don't need in the sales for £400 instead of £500. Truth is, you've lost £400.

5) The BoE also ultimately pays over all its "profits" (rather bizarrely, it seems to pay corporation tax first) to the government and is reimbursed all its "losses" by the government. Whether it does it weekly or annually doesn't make the slightest difference.

What all these bankers conveniently overlook is that the BoE was set up by the government for the sole purpose of borrowing money from people in order to finance the construction of the Royal Navy, it was, in modern parlance "The Debt Management Office" and it was an expense item not a profit making operation.

7 comments:

Bill Quango MP said...

That's like boasting about having made £100 profit by buying something you don't need in the sales for £400 instead of £500. Truth is, you've lost £400

Sounds like Mrs Quango.

She should really run the BOE.

the classic - I've got a new credit card with a one year 0.5% interest.
So if I transfer all the debt to that account I'll be saving a years worth of interest. .. Which I can spend!
AAANNNNDDD they say I can take out another £5,000 also at 0.5%!

..I'd be foolish not to do it!

Sarton Bander said...

QE in reality means we also tend to have shorter term debt which increases the problems when interest payments have to rise (as they will).

Mark Wadsworth said...

BQ, at 0.5% interest, you could borrow a shedload of money and put it on deposit with BoE for 0.5% interest, according to their thinking, this is a really clever move. Or something.

SB, that is the one bit about QE which really worries me. It works fine as long as it works fine, and then it doesn't.

Bayard said...

Apres moi le deluge.

Lola said...

Can't quite follow your point (1)....

Mark Wadsworth said...

L, BoE didn't literally have bank notes printed, which cost a few pence each but on which it doesn't have to pay interest.

What it did was create electronic balances with itself, which is as good as cash (from the banks' point of view) but on which the BoE has to pay 0.5% interest.

Lola said...

MW - Ta, that's what I thought you meant - bit slow on the English today. My brain has been damaged today - possibly permanently - by having to think about 'compliance' with the Failed FSA's farcical rules.