The money go round

Several people have reminded me that the government and Bank are going round in circles. They have sold £3.5 billion of 2015 stock, and bought back £3.5 billion of stock with maturities in the range 2014-18. They did the first to fully fund their spending. They did the second as part of their quantitative easing policy.

What’s the point? It makes work for the Debt management Office and the Bank. There is the chance that the people selling the gilts back will then go and spend the money and help create more activity, whilst there is also the chance that the people buying the new stock would not have spent the money anyway and might not have kept it here in the UK as a bank deposit. That might have been a pig flying past your window.

I think it shows there is still muddle around what they are trying to do. One simple way of easing money supply is to sell less debt than you need to borrow and print the rest. It is more difficult doing it by fully funding the deficit first, then negating some of that by buying back similar gilts to the ones you have just sold.

It would help the markets if we knew what they are trying to do. Is there a target interest rate for longer dated government borrowing they wish to hit? Is there a specified quantity of money they are trying to create? Do they have a target in mind for the increase in bank deposits? They are in danger of paralysing the gilt market because no-one really knows what the authorities are up to, but they do understand that for the time being the authorities can make the prices what they want them to be. If they do not maintain confidence in their actions they will lose this ability, and then things will get a lot tougher for them.

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12 Comments

  1. TomTom
    Posted April 3, 2009 at 8:24 am | Permalink

    There is clearly no plan but someone had the ear of Brown and piut forward this scheme which has the opacity Brown likes when he thinks he is bamboozling people. When you spend your time with journalists who swallow guff like “Q E” instead of “monetising debt” you know they have not a clue but want to sound professorial with the great unwashed looking up at the tv in their mud huts.

    Trouble is the real brains in this country are not in government, they are outside wondering how monkeys got to climb so high that we can see their bottoms

    • Denis Cooper
      Posted April 3, 2009 at 12:31 pm | Permalink

      But for the man on the Clapham omnibus, “monetising debt” is no less incomprehensible than “quantitative easing” …

  2. Demetrius
    Posted April 3, 2009 at 8:54 am | Permalink

    This can be briefly described as the “Old Mother Riley” strategy. That is trying to survive by taking in your own washing.

  3. Pete Chown
    Posted April 3, 2009 at 9:17 am | Permalink

    What happens if you buy back bonds for quantitative easing purposes, but then you can’t sell them again, or can’t sell them at a reasonable price?

    Perhaps you notice that inflation is going up, so you want to cool the economy by reducing the money supply. Unfortunately by then bonds are likely to be worth less. Inflation is going up, which pushes the value of fixed interest bonds down. Also, by this point, the government will have borrowed more, which will make the markets concerned about credit risk and future inflation.

    By playing the bond markets, the government could easily end up making a substantial loss. Even worse, it might be unable to sell the bonds quickly enough to prevent a large rise in inflation.

    • Denis Cooper
      Posted April 3, 2009 at 12:45 pm | Permalink

      If I was a devious and unscrupulous politician in government, I would quietly arrange for the bonds to be cancelled.

      That’s for gilts, bonds which were issued by one branch of government – the Treasury – and which are now owned by another branch of government – the Bank of England – and which therefore represent an internal debt.

      Not for corporate bonds, obviously, because they’d have to be bought back and cancelled by the company which issued them.

      Cancelling all the gilts acquired by the Bank would slice a chunk of the national debt, at a stroke.

      It might need a few lines inserted into a Finance Bill, but I could rely on my lobby fodder Commons majority to let it through.

  4. Acorn
    Posted April 3, 2009 at 9:33 am | Permalink

    As an amateur guess, you would think that they are trying to flatten the yield curve across guilts. Buying longer dated stock will push the price up and drop the effective interest rate.

    http://markets.ft.com/markets/overview.asp?ftauth=1238747091500

    Lower interest rates for longer stock used for backing mortgage lending; may encourage more mortgage lending by banks. I think that until house prices start to rise, (even in a devalued currency), the UK economy will not improve. Current mortgage holders, big on equity release fiat money, appear reluctant to play that game again.

    http://ukhousebubble.blogspot.com/2009/04/mortgage-equity-withdrawal-uk.html

    If you are just retiring and looking to buy an annuity with your pension pot; tough titty!

    • Denis Cooper
      Posted April 4, 2009 at 10:30 am | Permalink

      “Mortgage equity withdrawal was the engine of the UK economic miracle. Without it, UK households could not have kept spending. They needed the extra boost that came from borrowing money against the imaginary capital gain in their homes.”

      Just like last time, and eventually that excess house price inflation fed through into general inflation.

      But surely it’s not just people actively withdrawing equity by borrowing against their own houses?

      Because elderly homeowners die and the children inherit, and as they already have their own homes they sell their parents’ houses, and so (despite the costs of care, and IHT) much of the money lent to the buyers ends up as extra spending money for the inheritors.

  5. mikestallard
    Posted April 3, 2009 at 11:44 am | Permalink

    One way and another, I have spent a number of years working with left wing Labour people. In the end, you start arguing on their terms and what a muddle those terms almost invariably are! So I fully guess that your hunch about the fog is totally right.
    In truth, what ought to be happening is a radical reduction in government spending. This is now such old hat on this site that I won’t repeat it. But, as you constantly repeat, selling off a huge chunk of bank might be a good idea.
    Never mind, when we crash, the IMF will, thanks to the G20, be there now.
    (PS How much of the Trillion or so did we promise to the IMF? Does anyone actually know?)

    • alan jutson
      Posted April 3, 2009 at 5:59 pm | Permalink

      Mike
      Yes I am also interested to find out how much will our contribution be to the IMF Fund.
      Does it pay interest on the deposits (money loaned)?
      If so at what rate?
      How much will it lend to any one Country ?
      Given it may be us that has to go too the IMF, we may get our money back, but at what rate of interest ??
      If we borrow at a higher rate than we get for depositing the money, then why bother to contribute in the first place, we may as well keep it.
      ON THE OTHER HAND !!!!!
      Given that we are having to borrow money to fund everything else, are we actually borrowing money to put into the IMF fund, if so that seems mad.
      But if we have to borrow it back later. Then way we pay interest on it twice !!!!!
      All seems rather confusing as usual.
      All a bit too much for me, seems that I will never get a job as a Banker !!!!!!.
      Again as said before, lets hope some of the Sunday papers can make sense of this.
      Any idea’s on any of the above John, or have I lost the financial plot.

    • Denis Cooper
      Posted April 3, 2009 at 6:43 pm | Permalink

      At present our quota is just under 5%, if that helps.

      • mikestallard
        Posted April 4, 2009 at 4:31 pm | Permalink

        Doesn’t that come to £55 billion?
        The armed services cost about £35 currently, and the current educational services cost only double £55 billion. It is an awful lot of money to “invest” in the next election.

  6. Denis Cooper
    Posted April 5, 2009 at 8:05 am | Permalink

    It would be about that. But I don’t know how much of it is money that we actually have to pay in now, rather than money we have promised to provide should it be needed.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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