Richard Murphy points out the futility of Article 123, Lisbon Treaty

From The Telegraph:

[Jeremy Corbyn] has proposed a “People’s Quantitative Easing” scheme in which the Bank of England would “be given a new mandate … to invest in large-scale housing, energy, transport and digital projects”...

Mr Corbyn’s proposals would clash with Article 123 of the Lisbon Treaty, which forbids central banks from printing money to finance government spending. Lawyers warned that a lengthy fight with the EU would be a certainty, and could mean that infrastructure projects end up incomplete.

Traditional QE was introduced by the Bank in 2009, since when it has intervened in the bond market to buy Government debt. Key to this is that the Bank buys bonds from the so-called secondary market - from private investors rather than directly from the Government.

Buying the instruments directly from the state is illegal under Article 123 of the Lisbon Treaty. Richard Murphy, who Mr Corbyn has named as the architect of People’s QE, has proposed “a ruse” in order that the Labourite’s plans not attract the ire of EU lawmakers.

“The bonds have to be sold into the financial markets first, but there is no reason at all why this could not be for an agreed fee akin to underwriting, after which the bonds are, indeed purchased by the Bank,” he has said.

Mr Murphy said that Article 123 was clearly a piece of legislation whose “sell-by date had passed”, and that some fiddle would be required to get around it. But the EU may not look kindly on attempts to bypass its rules.

Whatever the merits or otherwise of Corbyn's suggested projects are (housing is a great money spinner, you'd struggle to lose money on that), Murphy is bang on with that one.

The Bank of England was originally set up to borrow money from the general public and give it to the government to spend on enlarging the navy. It has somehow turned into a 'central bank' over the years, but that is a question of fact and degree.

HM Government, HM Treasury and the Bank of England are all different parts of the same thing. Why would it make any difference which one of them borrows or prints money to finance public expenditure? Who cares what the book debts between different parts of the government are, it all nets off to nothing.

To cut a long story short, if I need money to pay for my loft conversion, it doesn't make any difference whether I borrow the money in my own name; whether my wife and I borrow it jointly; or whether she borrows it and then lends it on to me. Our total household indebtedness and our total household assets are exactly the same. The only relevant question is this: "is it worth getting a loft conversion done?", that is all.

IMF drops HM Treasury a hint

Playing clever funny money games is ok, up to a point, but watch you don’t find yourself getting stung when the time comes to try and unravel them.

This is what you want, this is what you get. This is what you want, this is what you get.

This is what... hacks me off about right-wing think tanks like the Centre for Policy Studies. As far as facts and figures go, they are usually pretty reliable, but there is no intellectual coherence to the conclusions they draw; so in one context, a figure is seen as good news and in another it's seen as bad news:

• The quantity of UK sovereign bonds issued has increased by two and a half times in just five years, by £832 billion – the equivalent of £33,000 for every UK household.

• At the same time, monetary policy has been extremely loose: UK base rates at 0.5% are at their lowest in 300 years. QE has also been larger, relative to GDP, in the UK (at 22% of GDP) than in either the US (13%) or the Eurozone (4%).

• These policies, while extreme, have had unimpressive results. Since 2008, UK growth has been the weakest of any G20 nation (with the exception of Italy).

• The Bank of England and the Treasury promised that QE would be temporary, stimulatory, and non-inflationary. These promises have been broken.

• QE has punished the innocent parties of this recession to the benefit of the indebted*. QE has imposed a stealth tax on savers, who are losing an estimated £65 billion a year in interest foregone**. Pensioners and the young have also lost out.***

• The sovereign bond market is no longer a free market in the normal sense of the phrase. Low gilt yields should not be taken as a 'vote of confidence in the UK economy' (as the Chancellor has previously claimed).

• If public spending had grown in line with nominal GDP since 2001/02, it would have been £150bn lower than it was in 2011/12. There would be no deficit. Despite claims of austerity, total spending is rising, not falling.

All of which is factually correct and good stuff etc. You get the impression that they are in favour of small government and low taxes and against subsidies - most of the subsidies (i.e. deficit spending) they rail against here are subsidies to the land owners and bankers.

But the CPS are also at the forefront of Home-Owner-Ism, they are the ones crying out for these subsidies and for low interest rates! Any self-respecting free market liberal would like to see an end to artificially low interest rates and those who have thought about it would also like to see taxes on income and output replaced with a user charge for benefits received by land owners (i.e. Land Value Tax).

* They merrily gloss over the fact that about 90% of all indebtedness relates to mortgages secured on or taken out to buy vastly overpriced land. These people and the banks and the really big landowners are the main beneficiaries of the ultra-low interest rate policies.

** That £65 billion figure for "interest foregone" is most interesting. Assuming it is correct (it seems a bit on the high side to me), then there's your answer. If we introduced LVT (at about 3% of current house prices) and increased interest rates to where they "should" be, i.e. inflation plus two per cent (so three or four per cent higher than what they are now), then a genuine prudent home owner who holds the same amount in real cash savings as his house is worth would be able to pay the LVT out of his interest income. Sorted.

*** That's crocodile tear crap. Home-Owner-Ists couldn't give a stuff about "pensioners and the young", they are quite happy shafting the latter group via inflated house prices. If you only need to save up a small deposit to buy a sensibly priced house, then whether you earn any interest or not in the couple of years you are saving up makes precious little difference to anything whatsoever.

"Helicopter cash in London: Two killed, 15 injured in scenes of panic, soaring house prices and absolute madness'"

From The Evening Standard:

A helicopter piloted by the Governor of the Bank of England started showering cash from a 600ft tower block in central London today and cartwheeled on to the street in a hail of wreckage and fluttering fifty pound notes.

Two people died and 15 were priced out of the market after the 'copter’s cash hit local house prices. Empty briefcases crashed down on Wandsworth Road, 20 yards from Vauxhall station as thousands of commuters stopped off to look in estate agents' windows.

Houses were snapped up by cash-rich buyers as the notes and coins poured down a road and there were reports of people shouting for help in picking up their windfall. A motorcyclist was unable to brake in time and rode into a pile of freshly printed notes.

Witness Craig Marchland said: "People were screaming. It was madness, absolute madness. There was cash to the eyeballs. The house price explosion was like a bomb. There were three cars snapped up for list price straight off the forecourt."

Another said of the helicopter: "There was a loud crack as the briefcases were opened and the money came spinning out of control towards us. Nobody would have got out of there penniless."

Commander Neil Basu of the Met Police said: "It was something of a miracle that this was not many, many times worse."

Vauxhall Tube and rail stations were deserted over Vauxhall Bridge to Pimlico. Traffic along the whole of Millbank and both sides of the river was jammed and commuters were forced to scramble for the injection of QE money on foot. No pedestrians were allowed across Vauxhall Bridge.

The pilot was named this afternoon as Sir Mervyn King, 64, who is believed to be married with children. He had over 25 years’ experience in banking and was working for City-based financial services firms.

Fun Online Polls: Quantitative Easing & The Gay Gene

The results to last week's Fun Online Poll were as follows:

If one govt department pays interest to another govt department, what is this, from the point of view of the govt or the taxpayer?

An expense - 25%
Income - 4%
The two net off to nothing - 71%

The first two answers are of course wildly incorrect, and those who propose either view are doing it for knee-jerk political reasons, the right-wingers because they think that everything is government spending and the left-wingers because they want to add the cash value of that nominal transfer to public spending. Or else they are just stupid.

The same point holds for all transfers between government departments. What matters is the amount of tax going in at one end and the amount of spending going out at the other, so internal transfers from council to Whitehall or HMRC to Treasury etc do not matter too much.
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And lo to this week's Fun Online Poll, based on this exchange in The Guardian, Is there a gay gene?

To my mind, Paul Burston talks from personal experience and applies logic, his conclusion makes good sense to me. I have no idea what Julie Bindel is waffling on about, she seems to be arguing about which explanation she'd prefer to be true, and then gives rather convoluted reasons for preferring that, rather than presenting any evidence or logic to support her assumptions as to which explanation is actually true. But hey ho, maybe that's just me being a male chauvinist pig. Or maybe being lesbian is more of a personal choice but being a gay man is something you are just destined to be?

Vote here or use the widget in the sidebar.

Fun Online Polls: Voting tactics and QE insanity

The responses to last week's Fun Online Poll were as follows:

How do you make up your mind how to vote at elections?
I've always voted for the same party - 7%
I read the manifestos etc carefully and vote for the best candidate - 24%
I make up my mind in the voting booth - 3%
I cast a protest vote for whoever is most likely to upset the incumbent(s) - 34%
I don't bother voting any more - 18%
I've never voted - 2%
Other, please specify - 13%

That was a good turnout, thanks to everybody who responded. Of the "others", the best one was this: DBC Reed: I always read all the manifestos and end up voting for the same party (Labour). Which is somewhere between the first two options, I suppose.

I find the responses all very heartening, it seems there is plenty of room for protest parties.
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And lo to this week's Fun Online Poll, which relates back to the insane logic propounded by George Osborne last week.

No clues. Apply common sense and then vote here or use the widget in the sidebar.

Reader's Letter Of The Day, Nearly

From today's FT:

Sir, John Plender is wrong to suggest that the ratio of public sector debt to gross domestic product could be reduced by the Bank of England writing off the gilt-edged stock it has acquired through quantitative easing...

No part of the national debt has been suspended as a result of QE, and none would therefore be cancelled by making any element of the QE transactions permanent. For central banks are state institutions, and debts owed between different arms of the same government are a nullity for the sovereign debt aggregates.

What has happened, in all countries undertaking QE, is that a significant slice of sovereign debt held by the private sector has been switched from long-term bonds to cash or near-cash instruments, all of which remain very much part of the national debt. The immediate effect of each QE instalment is a ballooning of commercial bank reserve balances with the central bank...

Andy Thompson, Worcester Park, Surrey.

All good stuff, that letter would have scored 10/10 on his description of the facts. I disagree with his conclusion that "QE has been, I think, an entirely appropriate policy instrument in current and recent conditions", but that's his opinion and he's entitled to it.

The bit that perturbs me is the following from the first paragraph:

... although he is of course quite right to note that such action would make the Bank itself insolvent.

Of course the bloody Bank of England is insolvent, it has been from Day One, it was originally set up to do the bookkeeping for when the English government decided it was a good idea to borrow money from people to invest in the Royal Navy to try and gain control of the high seas and ultimately build a trading empire (in which they succeeded most successfully).

And whatever the history of any Western central bank, they are by and large merely a branch of government, and most Western governments are - on a pure balance sheet basis - totally insolvent and always have been, because they owe, at today's date, far more than they have in assets. Their real assets are the ability to collect taxes in future and a small part of those taxes will be used to repay the national debt.

You can take the whole thing with a pinch of MMT salt anyway - when governments borrow money, it is the same as spending more than they collect in tax or 'printing money', and when they repay the national debt (as even the crappest Western government has been known to do from time to time), it is the same as collecting more in tax than they spend (which is 'unprinting money'). So, for example, an annual tax of 10% on the value of outstanding national debt would see it 'repaid' in ten years.

Fun Online Polls: QE and airport expansion

The responses to last week's Fun Online Poll were as follows:

Would it make any big difference if the UK gilts held by the Bank of England were cancelled?

No (the correct answer) - 53 votes
Yes (the wrong answer) - 23 votes

So well done, seventy per cent of you. The other thirty per cent ought to stop reading and believing what other people think and read up on some basic bookkeeping.

If you want to understand any productive business (cars, films, dentistry, plumbing, whatever) then there are thousands of things you need to know about or have experience in, and I doubt that anybody knows everything about any of them. Banking, on the other hand, is a pure paper exercise, you start with blank pieces of paper and write numbers on them. You are allowed to write as many positive numbers as you like, provided somewhere is prepared to accept the corresponding negative, and provided you are prepared to accept your original bit of paper going round in a circle and ending up as a negative number on the other side of your balance sheet.

Money is not a thing in itself, it is a unit of measurement, and without there being somebody somewhere who wants to borrow money* (i.e. is prepared to be in debt) then 'money' cannot come into existence. If you take all the financial assets (including the cash in your pocket) and all the financial liabilities, it always nets off to precisely nothing.

* Even in a system where the only legal tender is gold coins, 'money' cannot exist until somebody wants to borrow a gold coin and somebody else is prepared to lend him it. In that split second, a new financial asset and a new financial liability have been created out of nowhere (the number of actual gold coins in existence stays exactly the same).
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Yesterday, James Higham asked which would be the best place to build new runways in the south east of England (assuming that this is necessary or desirable, let's skip that debate).

So that's this week's Fun Online Poll.

Vote here or use the widget in the sidebar.

Fun Online Polls: Party conferences and QE

The result in last week's Fun Online Poll was as follows:

What was the stupidest idea from this year's party conferences?
Lib Dems: Use your pension fund as a mortgage deposit - 42%
Tories: Any suggestion that the leadership is in any way EU-sceptic - 31%
Labour: Spend 4G licence money on propping up house prices - 27%

So a pretty close run thing there.
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There were howls of outrage from the usual suspects when Adair Turner pointed out that the IOUs which one department of HM Treasury has issued and which are now held by another department of HM Treaury are effectively null and void and that to all intents and purposes it would make no difference to the outside world if these were cancelled. Golden rule: you cannot owe money to yourself.

The very real debts which the government has post-QE is the £366 billion-odd which the Bank of England now owes the commercial banks, i.e. the amount 'paid' for the UK gilts which the commercial banks have left on deposit with the self same Bank of England. But seeing as the banks can't withdraw this (or at least, they haven't done so far), no new money has been 'printed' or 'created' by QE and very little QE money has actually gone 'into the economy'. It's the deficit spending which creates 'money', the method and mechanics of the actual financing of that debt is a separate and secondary issue.

Just to see if anybody at all has been paying the slightest bit of attention, that's the topic of this week's Fun Online Poll.

Please vote using the widget in the sidebar.

Shut up and take your medicine! It'll do us good!

From The Telegraph:

The Bank [of England] has been under attack for months from pensioner groups(1) who have claimed the Bank’s £375bn of money printing has triggered a "death spiral" in pensions, by slashing income from annuity rates.

However, the Bank fought back on Thursday by claiming pensioners have gained from QE and that the effect on those preparing to retire has been “broadly neutral”. Those to have suffered from the Bank’s response to the financial crisis and recession have been the young and the poor,(2) the study found, while the richest 10pc the population are estimated to have seen their wealth rise by more than £120,000 per household.(3)

Pensioner groups have argued that QE has forced down gilt yields and, consequently, reduced the value of annuities bought on retirement. However, the Bank claimed that the lower interest payments had been offset by an increase in the size of the pension pot used to buy the annuity.(4)

In addition, the Bank said that QE had helped “boosted the value of households’ financial wealth held outside pension funds” by about £600bn. More than half of those holdings are held by people aged 55 and over, and roughly 40pc by the richest 5pc of households, the study said.

1) Yes, that means you, Save Our Savers. So what if those pensioners who actually squirrelled away some cash for a rainy day are losing money - house prices are being kept higher than otherwise which makes you richer!

2) Yes, that means you, Priced Out. Paying rent and trying to build up a deposit? Ain't gonna happen, because low interest rates insulate BTL landlords against their bad decisions and the value of your pathetic 'savings' is being eroded. It's your own fault that you weren't born a decade or two earlier,

3) This is the whole foundation and basis of UK government's Home-Owner-ist policies. Rig things to benefit the One Percent but ensure that enough illusory wealth trickles down to enough people to trick them into voting for you again at the next election, it's worked perfectly for decades.

4) That's sort-of true, actually, if you are on the verge of retirement and your tax-favoured pension fund is largely invested in gilts, which is what you are traditionally supposed to do, then the two effects more or less cancel out in the short term.

Spotted by Stillthinking at HPC.

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.

"Nine reasons why QE is a farce"

Ralph Musgrave summarises.

To me, Reason 4 alone would suffice to show that QE is a farce, but just about any single one of the other eight would do.

"General Staff commits 50,000 more troops to Western Front"

From the BBC:

General Staff has announced it will send a further 50,000 infantry to the Western Front over the next four months through its trench warfare (TW) programme to try to help win the war. TW aims to win the war by forcing the German army to use up all its machine gun ammunition. The latest increase will take the total number of British casualties to 375,000.

Senior generals confimed that British front lines had "barely moved for a year and a half". They added that activity in no man's land had also slowed. The European war was "weighing on confidence here", they said.

"UK economy requires emergency cash injections to reverse fall in inflation"

Bob E has read between the lines of an article in The Independent:

The UK economy may have to adopt a more aggressive routine monthly injection of cash from next month after figures today showed a surprise drop in inflation. Falling petrol prices meant the Consumer Price Index (CPI) rate of inflation dropped to 2.8% in May, down from 3% in April and to the lowest level since November 2009. City analysts expect that without intervention the rate may remain unchanged or move below the currently recognised "danger level" of 2%.

Inflation has already fallen from 5.2% since last September and with further declines predicted, the Bank of England is expected to beef up its quantitative easing (QE) programme, which currently stands at only £325 billion following the, in hindsight, rash decision in February by members of the Monetary Policy Committee to suspend the £50 billion a month structured interventions.

Exhibiting his customary prescience, Governor Sir Mervyn King's gave a strong hint that more and more regular QE was needed during his annual Mansion House speech last week. Analysts said it looked likely that the necessary action would nevertheless have to wait until July 5, when the committee concludes its next two-day meeting.

Vicky Redwood, UK economist at Capital Economics, said: "Mervyn King has already hinted strongly that more quantitative easing will soon be forthcoming and these worrying figures today should ensure members vote to renew the programme at the upcoming meeting"...

The waning impact of the VAT hike at the start of 2011 and falling energy, food and commodity prices have also contributed to the problem. Last month, inflation moved to within 1% of the Government's 2% minimum rate, meaning Sir Mervyn had to send a fulsome private letter of explanation to the Chancellor.

A Treasury spokesman today said: "Inflation is now open letter territory. For the second month in a row the rate has fallen, provoking dismay."

In further evidence that some retailers may have been foolhardily cutting prices to draw in customers, overall food and drink prices rose by just 0.3%, compared with the better levels of 1.3% achieved last year.

The ONS said this 0.3% was also driven by declines in the price of fruit, particularly grapes, bananas, peaches and nectarines. The price of vegetables, mineral waters, soft drinks and juices also fell. Consideration is being given to attaching special import duties on these goods to address the problem.

Good work by the Pensioners' Party

Exhibit One, from The Guardian:

The pain that quantitative easing has caused pensioners and savers should be offset by government compensation, a report by MPs has said. The Treasury select committee recommends that the Bank of England provide an estimate of "the overall benefit and loss" to those groups as a result of the money-printing operation

"Loose monetary policy, achieved through quantitative easing and low interest rates, has redistributional effects, particularly penalising savers, those with 'draw-down pensions', and those retiring now," it said in its report on the budget. "The Bank of England has argued that some of those effects may be mitigated by the increase in asset prices stimulated by quantitative easing. While the aggregate of savers and pensioners may have received some benefit from higher asset prices, there will be many individuals who will not have benefited."

Ultimately of course, the purpose of QE was propping up and bailing out banks. To achieve that, the government had to push down interest rates. All QE boils down to is the government replacing long-term borrowing at higher interest rates with short-term borrowing at lower interest rates; so superficially the taxpayer makes a saving, but the commercial banks were allowed to bank a large part of these savings up front. This has the added bonus, from the banks' point of view, that low interest rates push up house prices, and if house prices are high, banks can trick people into borrowing ever larger amounts of money.

Presented like this, it doesn't sound too attractive, but the banks have harnessed the forces of Home-Owner-Ism. High house prices make us all poorer in the long run (and the banks correspondingly richer), but a large part of the electorate love the idea of high house prices because it makes them feel richer. Who are these people?Chart from the Intergenerational Foundation

Yup, it's the the Baby Boomers born since 1945. The people actually old enough to have fought in World War II don't own that much housing (bearing in mind they have next to no mortgage debt and the figures above show net housing equity after deducting mortgage debt); the Boomers couldn't give a shit about their children taking on crippling mortgages and aren't too fussed about how little their parents have to live on either - they are rubbing their hands in glee at all their lovely inheritance.

So fair enough, the pensioners have been done over, but at least they are organised enough to ask for handouts. But what are the chances of the Treasury select committee pointing out that people aged 40 and under are being done over as well, working out what they've lost in terms of interest on whatever deposits they have saved up, and more to the point, all the extra money they will have to pay out to be able to buy a house at today's inflated prices? And what are the chances of the Planning select committee (if there were such a thing) pointing out that NIMBYism has also driven up the price of housing?
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Exhibit Two, a sob story from The Daily Mail:

Walter Harper has lived in his beloved home for two decades — but last July he was forced to put it on the market.
He shared the Luton bungalow with his wife and, after she passed away, his partner, and has watched his grandchildren play there. But he is being forced to move because he owes £110,000 on an interest-only mortgage that he can’t afford to repay. Instead of spending his last days in the house he loves, he will be forced to rent elsewhere.

Mr Harper, 69, first put his house on the market for £230,000. He has dropped the asking price by £20,000 and even if he gets this, he will still lose half of the money paying off the bank. These are savings he desperately needs, as rent is going to cost him almost £9,000 a year.

If he bought two decades ago, at the age of 49, the house can't have cost him much more than £50,000. The article says he had an interest-only mortgage, but why has it crept up to £110,000? A bit of mortgage equity withdrawal, perchance? And yes, his pension lump sum only turned out to be half what he'd been promised, but it still paid out £34,000, meaning he would left with a very modest £16,000 outstanding on his mortgage, which is still a fantastic deal, seeing as the mortgage he was paying was probably a lot cheaper than renting and he's made a £150,000 windfall, tax-free gain on the house.

But for some reason, The Daily Mail see this as a hard luck story (although he doesn't get much sympathy in the comments), while having no sympathy with somebody who's starting out today who's expected to magic a £40,000 deposit out of nowhere and then pay off a £160,000 which will cost twice that by the time it's paid off.

Again, mortgage equity withdrawal is the banks' secret weapon - a lot of the Boomers will be disappointed to find that their parents have already spent it all on themselves. Remember: in the end, the bank always wins (until I'm in charge).

Reader's Letter Of The Day

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?

Half right is still completely wrong

The editor of City AM tries to be clever and fails:

Speaking of which, in theory the Bank of England will eventually sell back to the markets the £350bn or so in gilts it will own as a result of quantitative easing (QE). Yet I doubt this quantitative tightening (QT) will ever happen. The UK will still be borrowing too much for years to come.

QE in the UK was (by and large) simply swapping long term government debts (gilts) into short term government debts (commercial banks deposits with, i.e. loans to, the Bank of England). Whether they will ever reverse this we do not know, but it is nothing dramatic and it would not be 'tightening' (apart from the marginal upward push on interest rates).

A more honest and preferable option would be for the authorities to admit that the £350bn has been permanently monetised and for the Treasury to cancel all of the gilts owned by the Bank - ...

Correct. The idea that one department of HM Treasury owes another department of HM Treasury £350 billion is an accounting fiction. We might as well cancel them and recognise the commercial banks' loans to the BoE as government debt instead, i.e. reflect reality.

... in other words, admit that the Bank has permanently created more money, and used that to pay off government debt.

Aaargh! To the extent that the BoE "created more money" it has already used it to pay off government debt, because when a borrower buys back his own debt he is repaying it. The money has been spent on buying on back debt and the commercial banks have lent it back to the BoE (i.e. the government). And money issued or created by a government is debt, and clearly, if you borrow money to repay debts, you are running to stand still.

Do taxpayers really need to be paying interest to the Bank on the gilts that it holds?

Jesus H Christ. The "taxpayer" is not paying interest to the Bank, another department of the treasury (the Debt Management Office) is. It is an accounting fition which nets off to precisely nil. The interest which the taxpayer is paying is on the actual outstanding debt held by/owed to non-government bodies, which includes of course the interest on the deposits which the commercial banks have at the BoE (i.e. where the proceeds of the QE debt sales were deposited).

A cancellation would cut the UK’s debt to GDP ratio from 63 per cent to 41 per cent, and slash the interest bill on gilts from £50bn to £32bn per year.

Bollocks. By all means, let's cancel the gilts held by the BoE, they are meaningless, but in exchange, we have to recognise the deposits with the BoE instead. The overall impact on reported (or actual) UK government debt would be minimal - remember of course, that coins and notes issued by the BoE also count as liabilities.

Then right at the end, he goes back to common sense again, nearly, and contradicts what he said before:

The Bank holds these gilts on behalf of the Treasury, so the Treasury is paying interest to itself (and regardless of definitional niceties, the fact is that the state is borrowing from itself).

Agreed, those gilts are indeed an irrelevance, they are just waste paper. But what he misses is that the Treasury is not only paying interest to itself, it is receiving interest from its self, it is a zero-sum game.

Reader's Letter Of The Day

From the FT:

Sir,

Dennis Leech (Letters, February 22) attacks a piece of conventional wisdom, namely that bigger deficits lead to more debt. However, his argument is simply that the rise in debt will be smaller than the rise in gross domestic product, hence the debt to GDP ratio falls.

There is actually a far more fundamental weakness in the idea that deficits necessarily lead to more debt. This is that, as pointed out by J.M. Keynes in a letter to F.D. Roosevelt in 1933, the country can expand the deficit any amount it likes without any extra debt whatever, and simply by printing money.(1) Milton Friedman made the same point. And as for the idea that money-printing leads to inflation, those two great minds, fantastic as it might seem, thought of that [as] one.(2)

In practice, the latter is what we have done with quantitative easing.(3) The only nonsensical element remaining from QE is to continue counting debt in the hands of the central bank as debt. Those gilts might as well be torn up.(4)

Ralph Musgrave, Durham, UK

1) Printing money, i.e. bank notes, has ultimately the same effect as borrowing money. Bank notes are just non-interest bearing, low denomination government bearer securities. It would make little difference, in the grander scheme, whether the government gave somebody a suitcase with £1 million in bank notes in it, or whether the government issued him with a gilt with a face value of £1 million at a market interest rate.

2) I think there was a typo in the version as published.

3) QE is not actually printing money, it is just converting long term debt ("gilts") to short term debt ("deposits by commercial banks at the Bank of England"). The inflationary impact thereof is largely because this pushes down average interest rates (in the short term at least); the UK government was paying (say) 2.5% interest on the bonds it bought back and is only paying 0.5% on the deposits. So the people who have sold their higher yielding gilts and now hold low-yielding "cash" are looking round for something else to invest in (which leads to asset and commodity price bubbles).

4) "If you don't agree with any of it, why is this your reader's letter of the day?" you might ask. Well, firstly because Ralph is a blogging friend, and secondly because of the last two sentences - it's so nice to see them in print.

Remember: the deposits which the Bank of England has taken from the commercial banks are real debts*, and those have replaced the old debts (the gilts) - it's like you paying off your credit card debt by taking out a second mortgage on your house - so the old debts, the gilts themselves, the bits of paper, now merely serve as a record that one department of HM Treasury (the Debt Management Office) owes a different department (the Bank of England) money. But you cannot owe yourself money, can you?

* Merrily glossing over the fact that the Bank of England now owes a lot of these to nationalised banks, i.e. RBS or Lloyds could withdraw the deposits and use them to repay the soft loans which HM Treasury/the Bank of England gave them as part of the bank bail out of a couple of years ago etc.

Quantitative Easing does NOT increase the deficit or the total National Debt.

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*

Interesting facts on QE

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.