Via MBK, more hysteria about quantitative easing in The Telegraph:
Britain's extreme QE is dangerously counter-productive...
As this Greek drama unfolds, let us not ignore the significant news from the Bank of England last week. Members of the Monetary Policy Committee agreed to expand the UK’s “quantitative easing” program by another £50bn, taking the cumulative total to £325bn.
Back in March 2009, when QE began, the UK’s base money supply was equal to 7pc of annual national income. The increase since then has been absolutely enormous - an additional 15pc of yearly GDP...
Since early 2009, the Bank of England has bought more than half the £475bn of IOUs sold by the UK government. Another £100bn or so were bought by high street banks either owned by the government, and/or forced to buy more in the name of “macro-prudential regulation”.
*sigh*
i. It's government spending which matters most. At least a third of what the UK government spends money on is pure theft or waste, from the point of view of taxpayers and the general public. That's the big problem.
ii. It seems sensible for governments to aim for balanced budgets, at whatever level of spending. However much is theft or waste, this means that enough tax has to be collected each year to break even. In practice, it doesn't seem to matter too much if governments run small deficits each and every year in perpetuity as long as GDP is growing at least as fast as the debt is growing - which is clearly no longer the case in the UK, the National Debt has doubled over the past five years or so, unlike GDP which was flat.
iii. So these deficits, caused by excessive and wasteful public spending, are a big worry on two fronts; firstly because of the waste today and secondly because of the higher taxes in future.
iv. Having established all this, how those deficits are financed is rather less important. There are advantages and disadvantages to borrowing very long term borrowing using gilts which do no need to be repaid for twenty years, and to borrowing very short term, i.e. taking cash deposits, but broadly speaking these advantages and disadvantages cancel out.
v. QE is nothing more than the government re-financing long term, fixed rate borrowing with short term borrowings, for reasons best known to itself. This does not increase the National Debt (and in the medium term, it reduces government spending because the interest rate on short term borrowing is a lot lower than on long term fixed rate borrowing).
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vi. To use a folksy analogy, if your partner comes home from a shopping trip and proudly displays £1,000's worth of new gadgets/clothes (delete according to gender of your partner), you consider that a waste of money. Whether s/he acquired these items using cash savings, a store card, a credit card, a personal loan or by increasing the mortgage is not so important. It's the fact that your partner has spent £1,000 on rubbish that upsets you most.
If your partner didn't save up for them first, but ran up debts, that is highly irritating, but it's a secondary issue, and quite what type of debt your partner ran up to finance this spree is not so important at all. So while it would be fair to blame your partner for wasting £1,000 on gadgets/clothes OR for running up £1,000 of debts, it would be quite wrong to accuse your partner of wasting £1,000 on gadgets/clothes AND running up £1,000 of debts. The total loss is £1,000 NOT £2,000.
If it turns out that your partner paid for it using very expensive store card debt, then you can save money by paying off that expensive debt by increasing the mortgage on your house. QE is analogous to that last little bit, it's shifting from one kind of debt to another without increasing the overall level. You can shuffle between different types of debt any time you like, you can do it at a time when you are running up debts or when you are paying them off. QE does not increase the deficit or National Debt in the slightest, any more that taking out a second mortgage to pay off expensive store card debts increases your total debts.
Again, the total loss incurred by your partner is £1,000. It would be even wronger to accuse your partner of wasting £1,000 on gadgets/clothes AND running up store card debts of £1,000 AND increasing the mortgage by £1,000. The total loss is £1,000 NOT £3,000.
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vii. Under the so-called QE programme, a department of HM Treasury (the Bank of England) has, or will have, acquired £325 billion in gilts from commercial banks in exchange, which HMT pays for by crediting these banks with a balance on a quasi-deposit account with the BoE. In other words, the commercial banks could withdraw this money tomorrow if they wanted, which of course won't happen.
viii. Since early 2009, the article tells us, another department of HM Treasury (the Debt Management Office) has issued £475 billion in gilts. Apart from their repayment dates, gilts are entirely interchangeable of course. It might be that the BoE bought back £325 billion's worth of the new £475 billion, it might be that the BoE studiously bought back gilts issued prior to 2009 and left the new ones alone.
ix. So even without the QE, the total deficits would have been £475 billion over three years. Those gilts which were issued would have been issued anyway. HM Treasury could have cut out the middleman by just inviting banks to deposit cash with the BoE in the first place, rather than taking cash for new gilts, and then buying back those gilts with deposits, but hey, that's the least of our worries.
x. On that final point, what really annoys me is the notion that "QE pumps money into the economy" or even, as the Telegraph puts it more cynically, that "QE pumps money into banks". It does not such thing. You could argue that government spending puts money into the economy, but when the government borrows money, whether long term, short term or even by printing bank notes, it sucks an equal and opposite amount of money out of the economy.
QE is of course neither borrowing nor spending so can neither be said to pump money in or to suck money out. It's the same as increasing your mortgage and using the money to pay off store card debt. The ultimate finance provider is the same old banking system, and you still owe it the money. By rejigging your debts like this, have you "pumped money into the economy"? Of course you bloody well haven't. Have you "sucked money out of the economy"? No neither, it's had no impact on the economy whatsoever.
*/sigh*
They Need To Find A New Legal Term...
2 hours ago
26 comments:
it's had no impact on the economy whatsoever
It keeps interest rates pinned down (for now) so it takes money from one group of people and gives it to another basically. It helps keep the house price bubble propped up. I'd say that's quite a big impact.
SL, agreed.
QE, by shortening time to maturity of government debts pushes down interest rates and therefore stokes inflation, thereby transferring wealth from savers to land owners, especially highly leveraged ones.
This is probably the reason for them shortening maturities like this. But QE in isolation certainly does not "pump money into the economy", and it would be fair to say that by transferring wealth to land owners and borrowers, it ultimately sucks money out.
Too much sucking blows the economy!
:-0
I agree that QE is a bit of a non-event. But I’d suggest leaving out references to government spending being “waste” when it comes to discussions about QE (and many other economics topics). Reason is that the decision as to what proportion of GDP is allocated to public spending is a POLITICAL decision taken at election time. And the voters who take that decision are well aware that public spending involves some waste, but then so too does private spending. For example the activities of private banks prior to the credit crunch can now be seen with the benefit of hindsight to have involved waste on an astronomic scale.
It increases that "velocity" thing you were slagging off earlier.
Anon 14.03, too true.
RM, yes but the so-called "private banks" are in a symbiotic/parasitic relationship with the government. Without the government rigging the housing market, the bankers wouldn't have been rolling in money.
As to waste, ultimately nearly all private spending is waste, is a flash car or a foreign holiday really sensible spending? Who knows, but so what? People can spend their own money how they like, that's the point of earning money in the first place, is't it?
Anon 14.49 exactly not.
As Steven_L explains above, the artificially low interest rates induced by QE actually are a drag on, and hence slow down the economy. Thus mathematically, they reduce velocity of money, if that's a metric which anybody cares about.
If there was no QE available... then the government would not be able to borrow so much money and would have to face up to the "waste" inherent in government spending in order to get to the desired balanced budget. That would have massive implications for the economy.
If one form of borrowing is simply replaced by another, why would it be called quantitative easing?
That would surely be a qualitative difference, not a quantitative one.
Martin
Andrew, that might well be true or it might not. We know that HM Treasury has no problem with selling new gilts (i.e. borrowing more) at the moment, but is that because banks know that they can dump them two days later as a small profit? I don't know.
Martin, as to why QE is called QE, you might as well ask Prof Richard Werner (from Southampton Univ), the man who is credited with inventing the expression, and who last week said that it wasn't working and couldn't possibly work.
Whatever way you look at it, it's a md merry-go-round. It's, basically, bad money, and sooner or later someone's goimg to tumble that and then...
To take your consumer analogy, when I tell Mrs Lola that I've spent £1000 going racing, but it's alright because being a Tyrant in my own home (Yeah. Right.) I've just gone and printed some more money to refinance our spending...Will she believe me? No.
I'ver just been to the B of E's website.
They have a pamphlet titled "Quantitative easing explained"
Under the title are the words "Putting more money into our economy to boost spending"
Martin
L, no she won't, but as a matter of fact, if you run up debts, you have printed money. It's the same thing.
Martin, yes i know that's what the BoE says, that's the official line, but like many government claims it is a Huge Great Big Fat Lie. I'm not overly cynical, but I don't believe a word of what they say three-quarters of the time.
Quantative easing is different from commercial bank debt as it does not require a saver to defer spending to finance the debt. The debt is funded by a new issue of sterling by the BOE that did not exist before. This seems to be missing from your analysis.
Din: "Quantative easing is different from commercial bank debt..."
Well yes of course,
I'm not in the business of stating the bleeding obvious, QE is quite simply the government shifting the national debt from long term to short term borrowing, and has precious little to do with commercial bank debt. It's like saying "The British Army is different from a new set of golf clubs".
"... it does not require a saver to defer spending to finance the debt. "
Government borrowing is government borrowing and requires savers to defer spending (the flipside is that the government spending saves people the bother of saving). But QE is not borrowing in and of itself. It is merely a change in the average time to maturity of government debt.
That's why I gave the example of paying off store cards by increasing your mortgage. Or you could pay off the mortgage with a credit card. None of these things increase your total debts, they just change it from one type of borrowing to another.
"The debt is funded by a new issue of sterling by the BOE that did not exist before"
Again, nope.
Government borrowing is government borrowing, whether that's twenty year gilts, three months Treasury bonds, taking overnight deposits from commercial banks or printing new notes. These are all interchangeable. I explained that.
Once bought back, the gilts cease to exist and are replaced with deposits by commercial banks. if the government wants, it can issue new gilts and exchange those for the deposits again.
"This seems to be missing from your analysis."
Nothing is missing from my description of the world as it is, because I look at all the facts and figures and describe the world as it is.
MW - Quite.
Mark Wadsworth said...
" As Steven_L explains above, the artificially low interest rates induced by QE actually are a drag on, and hence slow down the economy. Thus mathematically, they reduce velocity of money, if that's a metric which anybody cares about. "
No. Low interest rates or negative real interest rates increase money velocity by making holding money less desirable.
" Velocity was trending down in the earlier period but has risen since early 2009, probably reflecting negative real deposit interest rates, which have encouraged households and firms to reduce their money holdings. "
http://www.mindfulmoney.co.uk/wp/simon-ward/a-monetarist-case-against-more-uk-qe/
Interest rates rose during the first UK QE1, they fell after QE1 ended. In the U.S. interest rates fell after QE1 and at the end of QE2. If our current QE is doing any good interest rates will start to rise during the programme.
Although it is counterintuitive for QE to raise interest rates and for them to fall when it ends there is a very good reason. QE is expansionary monetary policy and if it is working, the economy is expanding and able to generate higher interest rates. At the end of the programme if the economy is still not able to expand without the unconventional monetary measures, interest rates will again decline due to lower economic activity.
Completely agree with you that QE makes no difference to the deficit or the total stock of national debt.
Where I disagree with you is about banks. The banks hardly buy any gilts above 5-yr maturity because that length of maturity carries credit risk. Banks buy government securities as assets to use in repos. The longer maturity stuff that the BoE buys is not much use as a repo asset. Therefore, it is mostly short-dated they buy, preferably under 12 month Treasury bills.
When they do buy the longer stuff through their primary dealers it is on behalf of someone else. Therefore, the BoE can't be buying assets from the banks in QE when the banks do not own any of that stuff. What makes QE different from normal monetary policy is the central bank are buying assets further out the yield curve. Only pension funds, insurance companies and foreign central banks etc own those type of assets. Sure, the central bank credits the reserve accounts of the banks, but that is because the seller of the asset obviously has a bank account.
The central bank buying long-dated debt does shorten the maturity of the total stock of the national debt. The more long-dated gilts they buy the less there are in public hands so the maturity shortens. I believe the BoE have done some swaps with the DMO to counter the shortening maturity.
Cutting out the primary dealers in the primary market by the BoE buying direct from the DMO would be illegal under the terms of the Maastricht treaty. Nothing to stop the DMO from not conducting auctions and borrowing direct from the banks. Called underfunding the deficit and used to happen regularly in British history. In fact, syndicated sales like they often do with 50-yr ultra-long bonds is a form of underfunding.
A bit off topic, but surely QE artificially boosts GDP? Because, as Mervyn keeps proudly telling us, it isn't filtering through into inflation. Have I understood that correctly?
R: "Low interest rates or negative real interest rates increase money velocity by making holding money less desirable."
That's what they want us to believe. It's not necessarily true though. The overstretched borrower has more money to spare, but the pensioner with savings will cut his spending by an equal and opposite amount.
And the 'velocity' of money is meaningless, we've covered that. GDP is important, money supply is mildly interesting but can be varied at will by the government. Dividing one by the other is entirely irrelevant.
"the BoE can't be buying assets from the banks in QE when the banks do not own any of that stuff"
Yes, actually most of the gilts were bought back from pension funds etc as you say, but it's done via banks.
So the money which the banks officially have on deposit with BoE is actually client money, it's not the bank's to withdraw and lend. And the pension funds in turn have lots of money on deposit with banks instead of gilts.
How on earth is that supposed to lead to an increase in lending or GDP?
RLJ: "as Mervyn keeps proudly telling us, it isn't filtering through into inflation"
As usual, he is having a good old laugh at our expense. I don't think people believe him any more on this point, so why do they believe all the other crap, like QE being good for the economy.
Mark, you give paying off your credit card by extending the mortgage as an example of changing the type of borrowing without changing the debt.
However, doing this will change your outgoings, because of the different interest rate charged. Is there a similar difference in QE?
B, yes, it reduces average interest rate to overnight variable rate of 0.5%. Which works fine until short term interest rates go above the rate we were paying on the redeemed gilts (3%?). I refer you to paragraph v. of the original post.
you say that once bought back the gilts cease to exist. That is wrong.
The BOE website lists 270 Billion pounds of UK gilts in its assets 13 Feb. Titled " Weekly stock of holdings of gilts by the Bank of England's asset purchase facility (in sterling millions) 13 Febuary 2012"
Google "boe stock of assets" for the BOE document and
Google "who holds UK national debt"
for an overview of who holds uk national debt
Din, yes I know all that, I checked. Boring.
Apply commonsense:
If you know the first thing about accounting and consolidating groups of companies, you know that if Subsidiary A owes Subsidiary B £100, then when you prepare the group accounts, the liability in A and the asset in B can be netted off to nothing. It just disappears - to the outside world, that debt never existed anyway.
So if one dept of HM Treasury (DMO) owes another dept of HM Treasury (BoE) £100, the liability in DMO and the asset in BoE net off to nothing. That particular debt does not exist from the point of view of anybody outside HM Treasury. The piece of paper might exist but it is meaningless.
Again, to use the folksy analogy, if you lend your spouse £1,000 to go on a shopping spree and your spouse spends it, then as between yourselves, the spouse owes you £1,000.
You have an asset and your spouse has a liability. But assuming that spouses pool all assets and liabilties, the debt does not exist, it does not affect the outside world.
"the piece of paper might exist but it is meaningless"
Not at all, the gvmt collects taxes to pay the interest and capital on that piece of paper.
Din, apply commonsense!!!!
"the gvmt collects taxes to pay the interest and capital on that piece of paper"
Sure, the DMO lads in one room get given money by HM Treasury to hand over to the BoE boys down the corridor, then the BoE goes proudly to its boss, HM Treasury and says "look at all this lovely money we've collected for the taxpayer" and hand it over. At which stage, somebody at HMT does the bookkeeping for the day and records
- expense £100 million interest paid by DMO to BoE
+ income £100 million interest received by BoE from DMO
= absolutely nothing.
Any transactions between two different departments of HMT (or indeed between any two government departments whatsoever) are SELF CANCELLING TRANSACTIONS!!!
This is the last time I can be arsed to explain this, seriously.
This is a quick summary of how the monatary system works
Government gives BOE an IOU
BOE gives government sterling credits
Government spends the money
Government collects taxes and pays them back to the BOE to repay IOU
It is deffered taxation it is not "absolutely nothing" as you say.
Din, please, please, please apply commonsense and stick to the actual topic, not wander off in a completely new direction.
Here are the hard facts:
1. The money which the BoE now owes commercial banks is a real debt, taxes have to be raised to pay the interest and one day repay those debts.
2. The gilts which BoE owns are NOT REAL DEBTS, because they have been replaced with the REAL DEBTS in 1.
3. I NEVER SAID that the money which BoE owes was not REAL DEBTS (which is the mistake that you are making), I said that the money owed from one dept of HMT to another is NOT REAL DEBTS IT IS JUST PIECES OF PAPER.
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