The Bank shifts its ground on QE

 

The explanations of the purpose of QE and its method working have changed over the years of its use. In the second quarter of 2009, explaining why it had embarked on a large £200 bn programme of QE, the Bank said:

“The introduction of large scale asset purchase using central bank money or QE shifted the focus toward the quantity of money as well as the price of money. Injecting more money into the economy should boost spending….the more that households and companies  use the new money to buy goods and services or other assets, the more it will raise spending. If banks use the additional reserves to expand their lending, the impact could be even stronger. ”

This explanation was altered by July 2012 when the Bank published a further explanation of  QE:

“the objective remained unchanged – to meet the inflation target of 2%…without that extra spending in the economy, the MPC thought that inflation would be more likely in the medium term, to undershoot the target….It does not involved printing more banknotes. Furthermore the asset purchase programme is not about giving money to the banks. Rather the policy is designed to circumvent the banking system”.. to “stimulate spending and keep inflation on track”

Inflation rose above 3% early in 2010 and stayed above 3% until early 2012, rising above 5% at one point. The MPC would presumably say their timing of asset purchase was related to their forecasts of inflation post 2012. Clearly if their use of QE in 2009, and in 2011 and 2012 was about inflation it was not about accurate forecasts of 2010-12 inflation but must have been about something  longer term. Perhaps they “looked through” the higher inflation brought on by the devaluation of sterling.

Today more people say the aim was merely to bring down longer term rates of interest, to make it cheaper to borrow long term. They see QE as an elaborate way of altering the price of long term money compared to short term loans. Perhaps the Bank’s first explanation that it was to try to inject cash into the economy to be spent is nearer the mark.

What is more interesting is the change of stance on unwinding the position. In the early days it seemed likely that first the Bank would stop new purchases, then allow repayments of debt to cancel the outstanding gilts as they matured, and then sell back the remainder before raising interest rates. Now the agreed policy is to raise the official short term rate before taking any steps to reduce the amount of bonds held. This has the perverse consequence of losing money on the bond holdings at market prices, if the Bank raises the official rate and that has the normal impact on the value of gilts.

 

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82 Comments

  1. Lifelogic
    Posted October 25, 2014 at 6:16 am | Permalink

    Has QE really achieved anything at all? I suspect it has just sent the wrong signals to industry, the market and investors. Encouraging them to do daft things, just as all the daft grants for so called renewables and CAP does. This reduces the investments in far more sensible things.

    What is needed is some real competition in banking to reduce the excessive bank margins and a huge reduction in the endless government waste and incompetence. There is such a vast scope after all. Start with the absurd HS2 and the excessive pay rates in the state sector. Set an example with MPs pays first.

    • APL
      Posted October 25, 2014 at 4:42 pm | Permalink

      Lifelogic: “Has QE really achieved anything at all?”

      It’s made everyone holding cash instruments or equivalents poorer as it increases the amount of cash in the economy but does nothing for the amount of goods and services*. In fact it’s worse; because it actually suppresses economic activity, by destroying the capital base available to the economy.

      *Otherwise called inflation.

    • Mondeo Man
      Posted October 25, 2014 at 6:07 pm | Permalink

      Lifelogic – QE is a form of default through the debasement of currency.

      The MPs’ pay recommendation is quite instructive. It gives us a measure of inflation and that they realise what it is. Let it go ahead but how can they tell anyone else that they must exercise restraint ?

      • APL
        Posted October 25, 2014 at 10:33 pm | Permalink

        Mondeo Man: “Let it go ahead but how can they tell anyone else that they must exercise restraint ?”

        But, but, but … we’re all in this together!”

  2. Gary
    Posted October 25, 2014 at 6:33 am | Permalink

    the central banks are backed into a corner. With about £400 bn on the balance sheet of the BoE and $3 or 4 trillion on the Fed, small rises in rates will decimate them. The money has not found it’s way into the economy, we have deflation and stagnation outside of the bond market. All spare cash has been sucked out of the economy and deployed in the bond trade, guaranteed by the central bank.

    Why loan to risky businesses if you have a sure profit in the bond market. They say that QE was not meant for the banks. Don’t believe them, believe your eyes, The City is booming and the rest of the country is dying.

    If they really unwind this trade, the bond speculation stops and all that money will look for another home. The bond market, including the mortgage bonds, will collapse and money will come flooding into commodities. That is when we will see rampant inflation and probably hyperinflation.

    • Denis Cooper
      Posted October 25, 2014 at 6:43 pm | Permalink

      If the Bank unwinds its trade, retiring from its present abnormal role as a captive investor in bonds issued by the Treasury, then the money that it created to fund its purchases will come back from the normal gilts investors and will be cancelled by the Bank. Or, at least some or almost all of it will come back to the Bank.

      • Gary
        Posted October 25, 2014 at 8:12 pm | Permalink

        The central bank only has to signal that it will stop underwriting the trade and there will be a stampede for the exits. Nevermind any unwinding. To unwind there must first be a cessation of guaranteed buybacks. There won’t be any unwinding, there will be a default.

        • Denis Cooper
          Posted October 26, 2014 at 8:05 am | Permalink

          The Bank hasn’t increased its total stock of gilts since November 1st 2012, as can be seen in the right hand column here:

          http://www.bankofengland.co.uk/boeapps/iadb/fromshowcolumns.asp?Travel=NIxSTxTDxSUx&FromSeries=1&ToSeries=50&DAT=RNG&FD=1&FM=Jan&FY=1963&TD=26&TM=Oct&TY=2014&VFD=Y&CSVF=TT&C=JPY&C=JPZ&Filter=N&html.x=11&html.y=17

          On that day a final purchase of £3,200 million of gilts took its total stock from £371,749 million to £374,949 million, now on October 23rd 2014 its stock is £374,911 million. There have been various adjustments and new purchases of gilts using the proceeds from maturing gilts in the stock, but no net increase in the stock.

          However I agree with you that if the Bank were to signal next week, or even next year, that it intended to sell large volumes of the gilts it holds back into the market then that could provoke a rush for the exit by normal investors, who are relying on the Treasury’s captive investor, the Bank, to keep those £375 billion of gilts out of the market for a very long time yet.

          Conceivably even until they had all matured, which in theory could be many decades hence given that the longest dated gilt now held by the Bank won’t mature until July 2068.

          • Posted October 27, 2014 at 4:21 am | Permalink

            Denis,

            If the BoE is independent of government, as we have been repeatedly assured it is, they presumably must have made a commercial decision to purchase an amount of Gilts (£375 billion worth) in the same way as the commercial banks who had previously owned them made a commercial decision when they purchased them.

            Or, doesn’t it work like that? 🙂

            Reply The Bank acted as the agent of government for this transaction and demanded an indemnity for the value of the gilts.

          • Denis Cooper
            Posted October 27, 2014 at 6:31 pm | Permalink

            Peter, you may recall that after sterling was ejected from the ERM the Chancellor at the time, Norman Lamont, was made to carry the can for that even though it was not he who had taken us into it, and he was replaced by Kenneth Clarke; and the new Chancellor set a new guiding principle for monetary policy, the control of retail price inflation, and he gathered a group of “wise men and women” around him to assist with that task, especially setting interest rates. And then Labour went further by insisting that the Bank of England should become operationally independent of government, like the Bundesbank and (therefore) the ECB, and the Chancellor should not sit on that group running the monetary policy, but instead should just give that group an inflation target which they should meet; and after Labour won the 1997 election they had Parliament put all that into law through the Bank of England Act 1998:

            http://www.legislation.gov.uk/ukpga/1998/11/contents

            So, yes, legally the Bank is supposed to be operationally independent of government as far as the conduct of monetary policy is concerned, unless Parliament agrees that the situation justifies the activation of reserve powers to allow the Treasury to resume control of monetary policy, under Section 19 of that Act; and as those reserve powers have never been activated, I do question the legality of Treasury actions with respect to the “unconventional monetary policy” which has been pursued and would very much like Darling and/or Osborne to be forced to explain the detailed legal basis for their interventions.

            Reply The government has the right to direct the Bank and change its targets as it sees fit, subject to the approval of Parliament. The government directed the Bank to assist with QE and Parliament did not object.

          • Denis Cooper
            Posted October 28, 2014 at 11:48 am | Permalink

            Well, JR, this is something else that gets my goat …

            I recall all the blather from Brown back in 1997, about the importance of enshrining the independence of the Bank of England in statute, so that politicians could no longer manipulate interest rates and other aspects of monetary policy for their electoral advantage, and that was done with the Treasury being EXPRESSLY FORBIDDEN from giving the Bank directions with respect to monetary policy:

            http://www.legislation.gov.uk/ukpga/1998/11/section/10

            “10 Operational responsibility.

            In section 4(1) of the Bank of England Act 1946 (power of the Treasury to give directions to the Bank), at the end there is inserted “ , except in relation to monetary policy ”. ”

            And yet 12 years later with Brown as Prime Minister his Chancellor Darling was writing letters to the Bank which amounted to giving it directions in relation to monetary policy, albeit “unconventional” monetary policy.

            He could have adjusted his inflation target, he had the legal power to do that, but he didn’t; and he could have asked Parliament to suspend the operational independence of the Bank through Section 19 of the Act, but he didn’t do that either, and nor did the opposition parties press him to do that to give himself a sound legal basis for his actions and promise their support if he introduced the order.

            What is the point of having laws if the government do not obey them, and what is the point of having a Ministerial Code saying that ministers must obey the law, and what is point of having an Official Opposition if they don’t keep the government up to the mark on obeying the law?

            Reply The Bank and the Treasury agreed between them that QE would need Chancellor sign off. Parliament agreed, so no-one wrote it all down in a new settlement.

  3. Steve Cox
    Posted October 25, 2014 at 6:37 am | Permalink

    I think most people tend to either expect too much from central bankers or else believe that they are some sort of magical geniuses who know and understand everything about the economy. The truth was revealed when Mervyn King admitted that the BoE had greatly underestimated the effect that the steep decline in Sterling would have on inflation. That’s actually a rather simple thing to estimate and yet the Bank admits that it got it hopelessly wrong. When they admit that the timing of any interest rate increase is almost completely dependent on their understanding of the output gap, something that is much, much harder (if not impossible) to calculate reliably, it’s easy to see that these highly paid, extremely clever and well educated people are basically just doing the same thing as any punter studying form in Ladbrookes. We should perhaps expect less of our central bankers and accept that forecasting the future is always going to be an inexact art.

  4. alan jutson
    Posted October 25, 2014 at 7:29 am | Permalink

    As usual the Government and Banks use a very complicated and involved system, to try and correct the simple error of spending/borrowing too much for too long.

    Rather than mess about with rates, the printing of more money, and adjustments on a keyboard from one account to another, why not just take direct action and stop borrowing and spending until you are in balance, like the majority of ordinary people in this Country have to do, week by week, month by month, year on year.

    • Narrow Shoulders
      Posted October 26, 2014 at 10:01 pm | Permalink

      Unfortunately due to the fractional reserve banking system money needs to be continually created. If the banks aren’t doing it through lending then government must do it through borrowing and spending. How else will house prices continue to rise exponentially.

      To reboot the system and return to sound money too many rich people would lose too much. Many of us who live hand to mouth and those with a single asset such as a house would be fine and not notice much difference but the haves are being protected.

  5. Richard1
    Posted October 25, 2014 at 7:39 am | Permalink

    One thing that’s certain about QE is that investments are being made based on prices and assumptions about the cost of money which would not hold if this intervention had not happened. The question is what happens when it gets unwound. If there will not be re-sales of the bonds purchased as originally intended we should expect there will be inflation – so higher interest rates look a fairly sure bet.

  6. Ian wragg
    Posted October 25, 2014 at 7:43 am | Permalink

    Whatever they do you can be sure that the prudent will suffer with the bankers making a killing.

  7. formula57
    Posted October 25, 2014 at 8:00 am | Permalink

    The shifting ground that sees ever new explanations for important actions by the state is never good news, as we learned yet again in the case of the Iraq war. Do you think we have been lied to afresh perhaps? Maybe if Chilcot ever finishes his present enquiry, he could investigate the Bank of England’s QE?

    • Denis Cooper
      Posted October 25, 2014 at 6:37 pm | Permalink

      The Bank’s QE was authorised in writing by two successive Chancellors, and in theory MPs are there to hold those Chancellors to account, in the first instance through the Treasury Select Committee:

      http://www.parliament.uk/business/committees/committees-a-z/commons-select/treasury-committee/role/

      “The Treasury Committee is appointed by the House of Commons to examine the expenditure, administration and policy of HM Treasury, HM Revenue & Customs, and associated public bodies, including the Bank of England and the Financial Conduct Authority.”

      But, as readily acknowledged by our host, the fact is that those two Chancellors between them authorised £375 billion of QE without MPs as a whole ever being asked to approve any of it, not a single vote at any time.

  8. George
    Posted October 25, 2014 at 8:15 am | Permalink

    Looking forward to more QEs than Rocky Movies.

    Double or quits

    Double or quits.

  9. George
    Posted October 25, 2014 at 8:17 am | Permalink

    Today more people say the aim was merely to bring down longer term rates of interest, to make it cheaper to borrow long term.

    ==============

    QE – 375 bn. All of which has been loaned to the state and spent.

    QE was not about interest rates.

    QE was all about no one being prepared to willingly lend to the UK government. So either you printed overtly or you printed covertly. You choose the covert route.

    There won’t be an unwinding. You’ll just cancel the debt off the books. Net assets with liabilities and poof – QE is gone.

    • Denis Cooper
      Posted October 25, 2014 at 6:27 pm | Permalink

      The Bank couldn’t allow the Treasury to simply cancel the £375 billion of gilts that it now holds, that would mean that the Bank was agreeing to go bust.

      Reply Not so

      • Mark
        Posted October 25, 2014 at 10:47 pm | Permalink

        The Treasury is obligated to make good any losses the Bank incurs on QE. The Bank would thus remain solvent, but the Treasury might find it difficult to raise the funds to pay its other bills.

        • Denis Cooper
          Posted October 26, 2014 at 11:16 am | Permalink

          Cameron is complaining about the EU wanting an extra £1.7 billion at short notice, let alone the Treasury being able to find the £375 billion that it would need to meet its obligation and make good the Bank’s losses when its entire stock of gilts was rendered worthless; so I think we can assume that it won’t happen unless the Treasury is prepared to see its word also rendered worthless, and the Bank go bust, and then the commercial banks with deposits at the Bank follow suit, and consequently many of their depositors, in a cascade of bankruptcies devastating the whole economy …

          Reply The government/state owns the Bank of England so it owes the money to itself. It will not therefore go bankrupt!

          • Denis Cooper
            Posted October 27, 2014 at 7:18 pm | Permalink

            Once again you forget that it is NOT all internal to the UK state; the Bank has £334 billion on deposit from private companies and individuals, some of which are foreign, as well as other central banks, all of which are foreign, none of which are part of the UK state, plus there is the £55 billion on deposit from its own Issue Department which I presume roughly matches the value of banknotes in circulation.

      • Denis Cooper
        Posted October 26, 2014 at 8:50 am | Permalink

        Well, JR, how else would you describe a bank which had negative net assets to the tune of £372 billion, other than as “bust”?

        The Bank’s balance sheet on February 28th 2014 is on page 72 here:

        http://www.bankofengland.co.uk/publications/Documents/annualreport/2014/boeaccounts.pdf

        The Bank’s total assets were £399 billion while its total liabilities were £396 billion, so its net assets were £3 billion; cancel the gilts that it holds and that would instantly wipe £375 billion off its assets, leaving it with net assets of – £372 billion.

        I feel pretty sure that present UK primary law, and quite probably also international agreements to which the UK is a party, prohibit the Bank from operating with negative net assets.

        Of course Parliament is sovereign and could pass an Act saying:

        1. All the gilts owned by the Bank of England are hereby cancelled, and the Bank shall receive none of the future payments which were promised by the Treasury with respect to either the interest or the capital sums;

        2. The operation of the Bank as the central bank of the UK shall not be affected by the fact that it will have massively negative net assets.

        But would MPs be prepared to vote for that Bill?

        Would none of them recall that on January 29th 2009 the Chancellor Alistair Darling sent a letter to the Governor of the Bank, Mervyn King, pledging that the Bank would suffer no losses through its purchases of assets:

        http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/ck_letter_boe290109.pdf

        “The Government will indemnify the Bank and the fund specially created by the Bank of England to implement the facility from any losses arising out of or in connection with the facility.”

        So under that indemnity if the Bank did agree to write off its gilts portfolio the Treasury would have to immediately stump up about £375 billion to cover its losses, and does the Treasury have that kind of spare money lying around somewhere unused?

        And what would be the international repercussions if the UK central bank agreed to go bust but nevertheless carry on as usual?

        The problem is that while the Treasury and the Bank, two arms of the UK state, could agree to cancel the assets, the gilts issued by the former and owned by the latter, the corresponding liability of the money created to buy the gilts from investors is in private hands not just across the country but across the world and it would be neither feasible nor ethical to try to cancel it. That £375 billion can be gradually recovered by the Treasury, primarily through taxation, and then gradually returned to the Bank by the Treasury through the promised payments on the gilts owned by the Bank, but it cannot just be cancelled.

        Reply Of course they would cancel both sides of the balance sheet for the gilts!

        • acorn
          Posted October 26, 2014 at 10:58 am | Permalink

          There would not be any deposits across world cancelled. The APF is holding the GILTS it purchased with a loan from the BoE. That loan appears on the BoE Balance Sheet as an ASSET. The RESERVES created appear on the BoE Balance Sheet as a LIABILITY. Those RESERVES mirror exactly all the DEPOSITS that were made into the Bank Accounts of the Pension and Insurance Funds that sold the GILTS to the APF.

          If the APF had bought all the GILTS the Treasury had ever issued; OR, if the Treasury had never issued any GILTS / IOUs at all. (It doesn’t have to; it chooses to do so). All the Treasury net spending (the so called national debt) from day one, would appear as RESERVES at the BoE. Exactly mirroring all the SAVINGS of the private sector.

          The BoE can’t change the amount of “financial assets” in the economy,only swap them, only the Treasury can do that. When you pay your taxes out of your current account for instance, the exact same amount will be deducted from your banks reserve account. The two bits; when they get back to the Treasury; disappear into thin air from whence they came originally.

          • Denis Cooper
            Posted October 27, 2014 at 6:53 pm | Permalink

            I deliberately avoided bringing in the basically immaterial complication that the gilts were actually bought by a wholly owned subsidiary of the Bank using newly created money lent to it by the Bank, but as you insist – if the gilts were cancelled the APF would be unable to repay its loan from the Bank, so that £375 billion asset would disappear from the Bank’s balance sheet just as surely as if the Bank itself had been owning the gilts when they were cancelled, and likewise without any reduction at all in the liabilities of the Bank; of which liabilities by far the largest item, £319 billion, is labelled as “Deposits from commercial banks and other financial institutions” while another, £15 billion, is labelled as “Deposits from central banks”, and a third, £58 billion is labelled as “Other deposits”, of which £55 billion is according to Note 22 the deposit from the Issue Department of the Bank, presumably corresponding to the total value of the banknotes issued and in circulation. Stripped of £375 billion of assets through the cancellation of the gilts, the Bank would not be able to repay those depositors.

        • Denis Cooper
          Posted October 26, 2014 at 11:00 am | Permalink

          How could they cancel the Bank’s liabilities?

          Those liabilities on the Bank’s balance sheet are debts that the Bank owes, claims that others have against the Bank of which the lion’s share have arisen because the Bank created and gave out money when it bought the gilts from investors, which money has since been dispersed around the country and the world.

          A creditor can forgive a debtor his debt, that is a decision that the creditor can make unilaterally and the debtor will usually be very pleased to be relieved of that debt, but if a debtor says that he is not going to pay his debt without the consent of the creditor then that is a default.

          What would you do? Tell commercial banks that they thought they had such and such reserves on deposit with the Bank of England, but you’ve just cancelled most of them to cut the Bank’s liabilities down in line with its massive loss of assets when the gilts were cancelled? And then the commercial banks could tell all their customers that they’ve just lost a corresponding chunk of the money that they had on deposit? It’s nonsensical.

          • Posted October 27, 2014 at 4:44 am | Permalink

            Denis,

            The BoE has a liability due to having issued £375 billion of new money. On the other hand it has an asset of £375 billion due to holding Treasury gilts. Add them together and you have zero.So it’s not a problem for the bank.

            Is the £375 billion a problem for the Treasury? Not really. No more so than all the other gilts it has issued. The Treasury can only buy them all of them back by somehow taxing huge amounts of money away from the rest of us, and that includes foreign holders of gilts too. They don’t really want to do that because that would take away all our money and leave us penniless!

            I understand why, as an advocate of “sound money” you don’t like the idea of the treasury selling bonds to its central bank, but that’s the way things are in the modern era. There’s no gold, no silver any longer. If there were then governments could have defaulted. But as the £ is what it is and nothing more, the government can never involuntarily default on any loan it may make upon itself. The BoE can never go broke. It, and it alone, is the source of all ££.

            The one and only potential problem is that this kind of activity can cause high inflation. It can put too much money into the system for us to spend. If that happens then the government of some future day will need to increase taxes and cut spending to prevent that. But there’s no need right now.

            Reply It’s easier than that. The state has bought these gilts by issuing new money for them. It can simply cancel the gilts as it owes itself.

          • Denis Cooper
            Posted October 27, 2014 at 7:35 pm | Permalink

            Peter, it’s not a problem for the Bank while it (or to be more precise its wholly owned subsidiary) owns gilts worth £375 billion at market value. It would become a problem if those gilts were rendered worthless, either because Parliament legislated for them to be cancelled or because investors no longer wanted to have anything to do with them.

            JR, so far the Bank has indirectly LENT the Treasury £375 billion to help fund its budget deficit – as clearly evidenced by all those gilts now owned by the Bank, each saying that the Treasury owes the Bank money and promises to pay it – but what you are saying is that the Treasury may find it a bit difficult to repay that LOAN, so why not just convert it into a GRANT which the Treasury does not have to repay?

      • acorn
        Posted October 26, 2014 at 9:06 am | Permalink

        Double not so! The BoE can’t go bust in its own currency, neither can the Treasury. Exactly the same as the LEGO toy company, is never going to run out of those little plastic bricks for building a global LEGO economy!

        • Denis Cooper
          Posted October 26, 2014 at 11:02 am | Permalink

          I ask you the same question:

          “How else would you describe a bank which had negative net assets to the tune of £372 billion, other than as “bust”?”

          Reply That is not the position of the B of E which has net assets.

          • Denis Cooper
            Posted October 27, 2014 at 7:39 pm | Permalink

            The Bank has net assets of +£3 billion now, but if its stock of gilts was cancelled that would become -£372 billion.

            Reply It would be repaid!

          • Denis Cooper
            Posted October 28, 2014 at 9:54 am | Permalink

            How could the Treasury possibly pay the Bank the £375 billion needed to compensate it for the cancellation of its stock of gilts, except over a long period comparable to the terms of the gilts? The budget deficit has been reduced, but it is still a deficit with the Treasury having to borrow about a seventh of all the money the government is spending, going on for £100 billion a year being added to the cumulative debt, and we have the embarrassing spectacle of Cameron waxing indignant about having to find just £1.7 billion to fully pay the UK’s dues to the EU as recalculated. The only reason the Bank now owns those gilts is that in early 2009 the Treasury was running out of normal investors willing to lend it the huge sums needed to cover the budget deficit, and so it introduced the Bank into the gilts market as a new, abnormal, and very large scale, gilts investor to buy up the surplus gilts and store them away out of the market, just as the EEC Commission used to buy up surplus butter from the market and put it into cold storage. It may not take until July 2068 to completely empty the Bank’s vaults of all those gilts, it’s perfectly possible that the Bank could sell off the longest dated and wind up the APF much earlier than that, but it will still take very many years and there is no short cut because somehow the Bank has to recover all, or almost all, of the £375 billion of extra money that it issued to pay for them in the first place.

  10. Brian Tomkinson
    Posted October 25, 2014 at 8:20 am | Permalink

    Whilst Osborne is borrowing £2bn per week and rising I don’t see any chance of the BoE doing anything “to reduce the amount of bonds held”.
    Incidentally, I hope you haven’t fallen for Cameron’s faux outrage over the £1.7bn demand from the EU. His qualified statement that: “I am not paying that bill on December 1.” begs the question – what date do you intend to borrow the money to pay the EU? We know he will pay and so do you.

  11. Andyvan
    Posted October 25, 2014 at 8:42 am | Permalink

    The real reason we have QE is that it is necessary to keep the government/banks/Bank of England money-go-round spinning. If the BOE hadn’t printed money in the Weimar Republic manner that it has been the whole corrupt system would have collapsed. It is a testament to how many people can be fooled by financial waffle that the money markets have not realised the extent of the debt our parliament has run up in our name. Just the debt interest far exceeds our defence expenditure and is growing every single day. UK plc is broke, bankrupted by lying politicians buying votes with stolen and borrowed money. No QE would have meant the game would have been up and the reckoning day would have come. How long this illusion of fiscal solidity can continue in the money markets remains to be seen but normally this kind of financial incompetence is very harshly punished.

  12. John E
    Posted October 25, 2014 at 8:59 am | Permalink

    I attended a briefing at the local Chamber of Commerce in July 2009 given by the Deputy Governor of the Bank at the time, Charlie Bean. He was quite clear that they would look to raise interest rates to more normal levels first, then unwind QE later.

  13. acorn
    Posted October 25, 2014 at 9:17 am | Permalink

    May I suggest a read of (google it) “A General Analytical Framework for the Analysis of Currencies and Other Commodities”. It was written at the time of the Asian crisis. It describes the basics of “money” systems. Particularly the difference between vertical money the sovereign currency issuer provides, and horizontal money that commercial banks provide. The latter always sums to zero. That is, for every liability created (a deposit), there is an asset (a loan). The former comes from thin air when the government spends it into existence. It goes back to thin air when government recovers it all as taxes.

    Keep in mind that the government’s Treasury and its wholly owned Central Bank are one and the same. If the Central Bank buys a Treasury Gilt (IOU), it is the same as if that IOU had never been issued, by the Treasury, in the first instance.

    The initial spend of new money, into the private sector, by the Treasury, say, was used to buy a Treasury IOU by the someone in the private sector who got the money. When that someone cashes in the Gilt it gets re-created as deposit in that private sector someone’s current account and an equivalent amount of “reserves” at the Central Bank.

    Hence, there is a very large pile of reserves on the BoE Balance Sheet at the moment, thanks to the very ineffective Q.E. process. The QE “moneytary” process, is desperately trying to compensate for “fiscal austerity” process. The techies at the BoE know this, legacy politicians don’t.

    • acorn
      Posted October 25, 2014 at 10:25 am | Permalink

      There is talk in the US again about HELICOPTER DROPS!! A Central Bank “prints money” and drops it on the private sector, (direct fiscal stimulus). Someone on the ground would have to throw an asset back into the helicopter; it would have to be a swap job. The Central Bank operates with a Balance Sheet, by law. It can’t create a liability without having an asset to balance it out.

      Only the Treasury (the sovereign fiat currency issuer) can “helicopter drop” new financial assets into the private sector. The Treasury does not have a Balance sheet; that’s the pure beauty of being a sovereign FIAT currency ISSUER.

      It could do it with Pound coins from its own Mint. It would more likely drop IOUs with a pictures of Mr Osborne on them and tell you to go to your nearest Commercial Bank and convert them into IOUs with pictures of our Queen on them. The Central Bank will supply as many of the latter notes as are needed. Actually, the Treasury has a bottomless pit of them mandates its Central Bank to give physical form to them in various sizes and colours.

      Now your bank has given you a Treasury cash asset and it has got an IOU asset from the Treasury. The IOU doesn’t pay interest so it will get the Central Bank to convert it to a “reserves” asset, which (currently) does pay interest.

      You might run round to your kids Bank and deposit the CASH you just got, into your kids DEPOSIT account. Your kids Bank could deposit the CASH you just gave it into its account at the BoE, if it’s got more of the stuff than it needs and it doesn’t pay interest. The BoE would shred the cash and replace it in your Banks account with “RESERVES”.

      At the end of the business day, the Central Bank will be shifting “RESERVES” between all its Commercial Banks. They make payments to other banks as deposits move into the payments system etc. Individual Banks Balance Sheets; balance again.

      Banks don’t lend “RESERVES”; except to other banks that have accounts at the Central Bank. It’s where the Deposits go that decides the need for and where the “reserves” go. If Banks are caught short of reserves, they will borrow them at LIBOR rate from other banks or from the Central Bank.

      Short term (policy) interest rates are set by the Central Bank for its own currency. It can control any long term interest rate (in its own currency) if it sees an economic need to by threatening to buy or sell unlimited quantities of an IOU at some yield rate.

    • Denis Cooper
      Posted October 25, 2014 at 6:24 pm | Permalink

      By law the Bank and the Treasury are not one and the same, despite the former being wholly owned by the latter.

      If the Bank electronically creates £375 billion of new money and passes it to the Treasury via the gilts market, with gilts migrating in the opposite direction, and the Treasury uses it to help pay the government’s bills, then inevitably almost all of that money will end up on deposit in myriad bank accounts.

      Where else could it be, after it has been credited to the accounts of all those who are due payments from the government, and then some kept on deposit by the original recipients and some passed on to the accounts of others when it is used for purchases, the new money being initially paid out widely across the economy and then circulated around virtually everywhere?

      Even if somebody decides that they want to hold some of their money in physical form as a store of banknotes under their mattress, in the first place the electronic money only gets transferred to an account of the High Street bank which pays out those banknotes and makes a corresponding debit from the customer’s account, and it will only be given back to the Bank of England if the bank later decides it needs to buy more banknotes for the convenience of its customers.

      If only we lived in a country where all financial transactions involved handing over banknotes and coins, and the central bank had helpfully printed “QE” on all the new banknotes it had created to buy up bonds issued by the government to fund its budget deficit, then we would have seen those marked notes being paid out by the government and coming into general circulation; but because it is almost all electronic it goes unnoticed and hardly anybody understands it.

      • Posted October 26, 2014 at 3:44 am | Permalink

        The electronic money in circulation is largely the IOUs of the commercial banks who’ve created it. You might want to Google the phrase “banks create money from thin air”. You’ll see claims that 97% of all money consists of the liabilities of commercial banks.

        There is a tendency to take the meaning of this much too far. The banks have to guarantee their liabilities against BoE liabilities and these liabilities are inevitably converted when taxes have to be paid.
        Nevertheless when banks create loans they issue new money which stimulates the economy enormously when the lending is occurring.

        However, when it stops the economy grinds to a halt due to the build up of debt in the private sector which forces government to try to rescue us all by taking unconventional measures such as QE.

        So its the stop-start nature of private bank lending which is the real problem!

        You might want also to look at how sectoral balances work in the economy. That’s a very important concept which explains a lot!

        • Denis Cooper
          Posted October 26, 2014 at 11:48 am | Permalink

          The facts remain that the Bank issued £375 billion of new money to pay for the previously issued gilts that it bought up from investors, and it did that primarily to ensure that the government would be able to sell enough new gilts to fund its budget deficit. Within just a few weeks in early 2009 what had started out as the Treasury lending the Bank existing money to buy up corporate bonds and commercial paper and other private sector assets, supposedly to help unfreeze the markets for those assets, morphed into a massive programme of the Bank creating new money and using it to buy up previously issued gilts to make sure that the Labour government could fund its budget deficit; with the result that at the end of the year the Treasury was hardly any more indebted to normal private gilts investors than it had been at the start of the year, but it owed a new and heavy debt to the Bank of England. And in large measure thanks to this ploy not being exposed and explained to the voters before the general election, the Labour party escaped annihilation while the Tory party failed to get an overall majority.

  14. william
    Posted October 25, 2014 at 9:29 am | Permalink

    Approximately half of HMG’s annual issue of gilts is funded by Bank purchases using electronically created money,in the style of a true banana republic.Were base rate to be a’normal’ 2.5 percent (a little over RPI inflation), HMG would be forced into either or both of large tax increases or real cuts in expenditure. The economic policies of the Oxford PPE crowd have been an unmitigated disaster. This government’s principal achievement has been to pump up house prices, which is conveniently outside their definition of inflation.

    • Mark
      Posted October 25, 2014 at 11:08 pm | Permalink

      Higher house prices lead to more borrowing abroad through the banking system to fund mortgages.

  15. agricola
    Posted October 25, 2014 at 9:43 am | Permalink

    All rather boring. Whatever way you look at it , it is monopoly money with no sound basis for support. As individuals we might be better off buying vintage automobiles.

  16. Javelin
    Posted October 25, 2014 at 9:45 am | Permalink

    QE is Keynesianism by the back door – via the banks for equity purchases. Cash in the door via carry trades and then fund equities in the short term. Seen it first hand. It’s a very clever way to support banks and corporate funding without raising the money supply.

    You make a very good point on unwinding the position on the sale of the bonds used to fund QE. I think it is very important that the finance committee discuss this publiclly before it happens.

  17. agricola
    Posted October 25, 2014 at 9:47 am | Permalink

    Put another way QE is financial flatulence with the population in a lift going down but having to enjoy the benefit thereof.

  18. Richard1
    Posted October 25, 2014 at 10:08 am | Permalink

    I see UKIP are moving to the populist left as they develop their policies:-

    – UKIP now agree with Labour (but not Labour when in govt) that there must be no ‘privatization’ of the NHS. The NHS in the UKIP-Labour view must be preserved in soviet-style aspic with no non-public sector provision;
    – UKIP are against the transatlantic free trade deal. Why? They think it might mean ‘American corporations’ competing with our public services, using the demonic language of the social democrat/green left. As a consumer of public services and as a taxpayer who pays for them, I would rather we get services from the most cost effective possible providers;
    – UKIP no longer favour their erstwhile sensible flat tax policy.

    UKIP do still have some other sensible policies but the direction of travel is populist-leftward. Those who think of themselves as being on the free market centre right might want to rethink their support for UKIP.

    • Brian Tomkinson
      Posted October 25, 2014 at 3:37 pm | Permalink

      Richard1,
      Still trying your best to knock UKIP and support the Conservatives. At least you are not writing vote UKIP get Miliband.

      • Richard1
        Posted October 25, 2014 at 8:59 pm | Permalink

        Yes I certainly would say vote UKIP get Miliband, at least in seats where Conservatives have a chance. I do support the Conservatives as I think that offers by far the best chance of a broadly free market low tax govt, and of course a renegotiation and referendum on the EU. Looking at the way UKIPs policies are developing I would have thought they are beginning to hold much less appeal for former Conservatives?

    • Lifelogic
      Posted October 25, 2014 at 3:46 pm | Permalink

      “Those who think of themselves as being on the free market centre right might want to rethink their support for UKIP.”

      Well perhaps, but where would they go? Certainly not to the son of Bliar, Dave Cameron – whose very DNA is pro EU, over regulate, fake green, high tax, borrow and waste. Worse still while pretending to be the opposite in his worthless words.

      • Richard1
        Posted October 25, 2014 at 9:11 pm | Permalink

        Well its not perfect I agree. But the reality at the next election is a Labour or Conservative led govt. Cameron has made some headway in educational and health reform. Albeit at least in part due to political pressure he has now got a sensible EU policy and when did you last hear him utter the phrase ‘global warming’ or even ‘climate change’? Green crap could be the next policy area due for a U or at least an L-turn.

    • Iain Gill
      Posted October 25, 2014 at 4:15 pm | Permalink

      UKIP will win lots of votes because they are the only ones prepared to cut back on immigration. On that they are off track too, wanting to cut back on European immigration but leaving the doors open to much of the Commonwealth, my own view is we need to cut back across the board.
      They will win lots of votes as Europe is so obviously an expensive mess.
      The NHS is a shambles, and until some politicians are prepared to say that, and hand buying power over to patients, and introduce the normal feedback cycle of crap service leads to customers going elsewhere and providers failing and being replaced then we are doomed. But sadly the whole establishment perpetuates the myth that the NHS is somehow good, when those of us that travel can see veery well how rubbish it is compared to the rest of the developed world.

      • Richard1
        Posted October 25, 2014 at 9:01 pm | Permalink

        UKIP seem to be right up there with Labour in viewing the NHS as an untouchable sacred cow.

    • forthurst
      Posted October 25, 2014 at 6:38 pm | Permalink

      “UKIP are against the transatlantic free trade deal. Why?”

      It is simply not acceptable that US Corporations should be to able trade in our country on their terms and with the potential ability to use special judicial procedures outside our normal court system to determine financial penalties to be rendered against our government or individuals for obstructing their activies and thereby subjecting them to loss of profits, nor is it acceptable for the EU Commission to negotiate with the US in secret concerning such an agreement.
      If if US Corporations were all essentially benigh, which they most certainly not, the principles on which they are proposing to trade are an affront to democracy.

      As to the NHS, the USA is the country in which the medical profession practices ‘drive-by doctoring’ of which if you have not heard, there is plenty on the web.

      I cannot see that one would need to be a UKIP supporter to have misgivings.

      • Richard1
        Posted October 25, 2014 at 9:07 pm | Permalink

        I fear you have been got at by the flood of campaigning by online leftwing mobs such as sumofus, 38 degrees and 350.org. Arbitration has been a feature of trade agreements for decades, as indeed it is in all sorts of commercial agreements. There’s nothing undemocratic about it. Govts can pass what laws they like, but if they expropriate property they must expect to pay compensation. There cannot be an effective interational trade regime without arbitration, so it needs to exist in this new agreement also. Personally I don’t have any problem with receiving services from a company of any nationality if it provides a good and cost effective service. The more choice and competition the better.

        • forthurst
          Posted October 26, 2014 at 10:32 am | Permalink

          “Personally I don’t have any problem with receiving services from a company of any nationality if it provides a good and cost effective service. The more choice and competition the better.”

          Does anybody? If the EU is negotiating for the supply of goods and services which we would regard as of merchantible quality, why is there no effective democratic oversight of the negotiations?

          Unfortunately, in some product and service areas in the USA, the relevant legislation passed by Congress regarding safety, merchantibility and consumer recourse has been written by the corporations to their own advantage and the relevant supervisory bodies have become dominated by corporate placemen, therefore there is no guarantee that we will get what you imagine. As to 38 degrees and 350.org, I have never heard of them.

      • Iain Gill
        Posted October 25, 2014 at 10:03 pm | Permalink

        The trade deals with other places like India are equally dodgy. There is little democracy evident in the way the EU is able to hand India what it wants, in the form of unrestricted work visas, tax shelter arrangements, and so on, all very much against the interests of the people.

  19. Denis Cooper
    Posted October 25, 2014 at 10:20 am | Permalink

    I don’t imagine that the Bank will ever publicise the real primary motivation for QE as practised in the UK, which was to make sure that the Treasury didn’t run out of money to pay all the government’s bills on time and in full, without the need to make drastic, and economically damaging, cuts in public spending as befell some other countries.

    Let us conduct a small thought experiment, in which it is February 2009 and Chancellor Darling proposes to Governor King that the Bank of England should create large sums of new money and use it to buy up previously issued gilts from investors, but King refuses to play ball on that. His reasons may be that this would be rigging the gilts market, and so wrong as well as illegal under present law, or that by law the Bank of England is an independent central bank insofar as the Treasury is not permitted to give it directions with respect to monetary policy unless both Houses of Parliament have agreed to the activation of Treasury reserve powers, which has not been done, or that while Darling’s proposal may conform to the letter of the restrictions agreed through the EU treaties – no purchases of national government bonds by the national central bank DIRECTLY from the national government – it is still contrary to the spirit of EU law.

    It doesn’t really matter why King refuses to do as Darling suggests, use large sums of newly created money to buy up surplus gilts from the market; the reality is that Darling needs to borrow a quarter of all the money that the government is spending, and it is becoming increasingly difficult to do that as investors start looking at their cumulative exposure to bonds issued by the UK Treasury, and the attendant risks, and deciding that they really don’t want to buy any more of those gilts unless Darling offers them higher interest rates to compensate for the higher risk, and eventually many of them decide that they just don’t want to buy any more gilts at all at any interest rate and even start cutting their losses by selling off some of those they had bought previously, .

    The government of the UK is now in the same position as the government of Greece, it has run out of money to pay its bills and there is no prospect of help from its national central bank, but with the added factor that there is no prospect of help from the EU’s central bank either. The ECB is doing for the government of Greece what the Bank of England is refusing to do for the government of the UK, using newly created money to buy up surplus government bonds on the secondary market, but the ECB is not willing to extend the same, arguably illegal, favour to the UK government.

    So now as we go through 2009, coincidentally the year leading up to a general election, Chancellor Darling has no choice but to make sudden and deep cuts in government spending, sacking tens of thousands of public sector workers – teachers, nurses and doctors as well as less useful civil servants – and imposing sharp pay cuts on the rest, cutting social security benefits including old age pensions, failing to pay the invoices from its suppliers and contractors, including those from pharmaceutical companies supplying medicines to the health service, and cancelling existing contracts as well as holding back from any new contracts. And as purchasing power in the economy contracts, so does the economy, and so do the government’s tax revenues, making it an uphill struggle to shrink its budget deficit even with drastic cuts in its spending.

    One can argue whether or not it was economically correct for Chancellor Darling to get the Bank of England to create large sums of new money and use it to massively rig the market in the bonds issued by the Treasury over which he presided, but it is clear that if Governor King hadn’t agreed to do that during 2009 then the Labour party would have faced not just defeat, but virtual annihilation, at the May 2010 general election.

  20. Posted October 25, 2014 at 10:30 am | Permalink

    QE in the EU is blocked by the German refusal to allow their wealth balance to be used as a hedge to the funds the ECB wish to release . Is this not a case for a fine ? . The IMF have urged the EU to do more to stimulate its stagnating economy and praised this country for adopting stringent controls . The results have shown us emerging from a severe downturn more quickly and this relative success has resulted in the EU imposing a monumental fine ; this is akin to sending a model citizen to jail !! . The hypocrisy of the EU could not be better exposed ; it has given UKIP an enormous boost in its campaign for support ; it has also shown that every penny sent to the EU is a penny wasted . QE used wisely and at the right time has its merits , however , its monitoring and controls has to be in a safe pair of hands .

    • Denis Cooper
      Posted October 25, 2014 at 5:48 pm | Permalink

      But the ECB has been intervening in the secondary markets for the bonds issued by the governments of distressed eurozone states, buying up those bonds but like the Bank of England with gilts doing it indirectly rather than buying the bonds direct from the governments, that being prohibited by Article 123 TFEU, see my comment below quoting the text. Whether it has always created new euros to fund its bond purchases I’m not sure, but when it has done so that has been QE and the Bundesbank has not been able to stop it.

  21. Denis Cooper
    Posted October 25, 2014 at 12:07 pm | Permalink

    Briefly off-topic: largely obscured from public view in the UK by the thick clouds of steam rising from the vigorously boiling EU budget pot,

    http://www.european-council.europa.eu/council-meetings?meeting=f02588fd-757c-4697-a2cc-8af00f65ff7c&lang=en&type=EuropeanCouncil

    “On 24 October, EU leaders agreed to the world’s most ambitious 2030 climate energy policy.”

    The cost to the UK of the “surprise” extra EU budget bill presented to Cameron, greeted with a show of indignation and determination not to pay (or at least, determination not to pay the stated sum in full by the stated date) will no doubt pale into insignificance compared to the longer term costs to the UK economy and therefore the UK government of that “world’s most ambitious” EU climate energy policy, as agreed by the EU leaders including the outraged Cameron.

    • Brian Tomkinson
      Posted October 25, 2014 at 4:09 pm | Permalink

      Denis,
      More of the political conjurers’ slight of hand at its dastardly work.
      Cameron was so “surprised” yesterday about the £1.7bn bill and yet the EU website tells us that: “This year, member States were informed of the budgetary impact of the new data on 17 October.” So he had a week to work on his faux surprise and outrage. Just when did our host find out I wonder?

  22. Posted October 25, 2014 at 1:38 pm | Permalink

    There seems to be two theories on the nature of QE. The first explanation seems to point to QE being a cover to allow the central bank (the BoE) to buy Treasury bonds by proxy. ie what is known as money printing. That gives the Treasury more money to spend to cover its bills.

    The second is that QE is just an asset swap. The BoE buys bonds back from the commercial banks, and other financial institutions. The intention being to force down longer term interest rates.

    I would expect there is a mixture of both. Just what that mixture might be is probably only known to an inner circle of magicians at both the Treasury and the BoE. There’s smoke and mirrors involved here which would seem to be designed to obscure the true picture.

    When the BoE prints, or creates currency digitally, this isn’t included in the National debt. Why not? Is this just an arbitrary decision? However, when the Treasury sells bonds it is included. So theoretically the National debt could be ‘repaid’ simply by a massive program of QE which would see the BoE creating money to buy back all bonds. Does this make any sense?

    If the Treasury needs money then why can’t it get it from the BoE? Why the subterfuge? Indeed why is the BoE considered to be separate from Treasury? Effectively they function openly as one when there is a crisis, as after the GFC, so why the pretense that the BoE is somehow separate from Government? Does that really fool anyone? I’m not normally into conspiracy theories but in this case there does seem to be a concerted effort to keep the general public in the dark about how our financial system really works.

    Of course, if government creates too much money, then we have high inflation. We all know that. But, the only way to understand money is that it is a creation of government. It is their written IOU, so it has to come from somewhere. Let’s not kid ourselves that governments can always ‘borrow’ what they need when they are short. Sometimes new IOUs do have to be written.

    • Denis Cooper
      Posted October 25, 2014 at 4:57 pm | Permalink

      “I would expect there is a mixture of both.”

      During periods of QE as practised in the UK there is a “mixture” of both the Bank of England BUYING previously issued gilts from normal gilts investors and the Treasury SELLING new gilts to normal gilts investors in parallel, at the same time insofar as the Bank might buy on two days in a week and the Treasury might sell on another two days in the same week.

      “Just what that mixture might be is probably only known to an inner circle of magicians at both the Treasury and the BoE.”

      The Bank published details of its purchases of previously issued gilts from normal gilts investors each time that it held a “reverse auction”, listed here:

      http://www.bankofengland.co.uk/markets/Pages/apf/gilts/results.aspx

      and as it always does the Treasury’s Debt Management Office published details of its sales of new gilts to normal gilts investors; in those terms there was nothing particularly secret about either step of the process of indirectly transferring new money transferred from the Bank to the Treasury, you could watch it happening each week, week after week, and I posted quite a few weekly reports here.

    • Denis Cooper
      Posted October 25, 2014 at 5:10 pm | Permalink

      “If the Treasury needs money then why can’t it get it from the BoE? Why the
      subterfuge? Indeed why is the BoE considered to be separate from Treasury?”

      1. Even though the UK is not in the euro, under its opt-out protocol it is still subject to Article 123 of the Treaty on the Functioning of the European Union:

      http://eur-lex.europa.eu/legal-content/EN/TXT/?uri=uriserv:OJ.C_.2010.083.01.0001.01.ENG#C_2010083EN.01004701

      “Overdraft facilities or any other type of credit facility with the European Central Bank or with the central banks of the Member States (hereinafter referred to as ‘national central banks’) in favour of Union institutions, bodies, offices or agencies, central governments, regional, local or other public authorities, other bodies governed by public law, or public undertakings of Member States shall be prohibited, as shall the purchase directly from them by the European Central Bank or national central banks of debt instruments.”

      2. If you were a Labour Chancellor with just over a year to go to the next general election, and you’d got the public finances in such an appalling state that your only recourse was to induce the Bank of England to create new money and pass it to you to cover your yawning budget deficit, would you really want to do that openly by transfers of the new money direct from the Bank to the Treasury, or would you prefer the subterfuge of getting it transferred indirectly through the gilts market? Which worked well then, confusing and deceiving the public, and is still working well now over five years later.

      • Posted October 25, 2014 at 8:34 pm | Permalink

        Denis,

        The private domestic sectors worldwide largely froze their discretionary spending in response to the financial shock of 2008 GFC. That was only a natural reaction. Consequently demand fell. Taxation revenue plummeted. In other words the PDS net saved. On an accounting basis, for every $ or £ which is saved, another $ or £ has to be borrowed.

        In such a circumstance, inflation is the last possible danger facing any economy. Therefore it makes perfect sense for the Central Bank/Treasury to issue new money to keep the economy moving. There’s no point the EU passing laws or regulations saying there shouldn’t be any direct financial dealings between Treasuries and Central Banks. For one thing there is an easy work around using a private bank, which inevitably involves paying the private bank money for doing next to nothing. For another, when the financial system needs something to happen, then it has to happen. The legalities can be argued later.

        Governments can be criticised for letting inflation get out of control. That’s fair enough. But is anyone criticising Governments worldwide, who have resorted to QE, for too much inflation? The downside to government issuing too much money is too much inflation. So, therefore, if there isn’t too much inflation they cannot be criticised for issuing too much money, whether or not you want to call that QE.

        On the contrary, it is governments who haven’t used QE when it should have been used who should bear that criticism. Would the EZ be in quite such a mess if they had followed more the US approach of letting the automatic stabilisers automatically stabilise?

        • Denis Cooper
          Posted October 26, 2014 at 10:00 am | Permalink

          The EU didn’t just pass “laws or regulations”, secondary legislation, prohibiting any financing of government deficits by central banks; those who drafted the Maastricht Treaty were so concerned that it should never be allowed to happen that they wrote the prohibition into what is considered by the EU to be its primary law, as it has since been renumbered Article 123 in that treaty; which was then agreed by the governments of all the EU member states, including that of the UK led by John Major, and approved by the Parliaments of all the EU member states, including that of the UK where Major resorted to making the crucial Commons vote a confidence vote to force rebel Tory MPs into line.

          I presume that those who wanted this prohibition enshrined in the EU treaties were the same people who wanted to be sure that the ECB and the national central banks would be legally independent of governments and would always give top priority to the control of inflation, and it was because they were still haunted by visions of Germans pushing around wheelbarrows of Reichmarks; however at some point somebody got that crucial word “directly” inserted, possibly wanting to leave central banks some scope for minor interventions in bond markets to adjust the yield curve or whatever, and not anticipating the sheer scale of the indirect purchases which have been made using newly created money in recent years and justified in legal terms by the presence of that word in the treaty text.

          It would have been good if Brown or Darling had followed Wilson’s 1967 precedent when he went on television and radio to explain to the people why the pound was being devalued, and either of them had told it straight:

          “I have to tell you that your government is spending far more than it is getting in as revenue, in fact we are having to borrow a quarter of all the money we pay out, for example for social security benefits and old age pensions, and we are beginning to find it more difficult to borrow enough money from normal sources. Therefore I have arranged for the Bank of England to create £200 billion of new money which it will indirectly lend to the government, which should be enough to tide us over and ensure that we can meet all our financial commitments over the coming year up to the general election, without having to slash benefits and the salaries of our valuable hardworking public servants. Of course this step will not effect the value of the existing money in your pocket or purse or in your bank.”

          If only.

          • Posted October 28, 2014 at 12:49 am | Permalink

            Denis,

            The situation now is quite different from what it was in 1967. Then the £ was pegged to the US$ at a fixed exchange rate. That enormously constrained Government’s freedom of movement. Now the £ can float freely so there’s no real need to worry about what its level might be other than the effect it may have on inflation. Then, measures like QE wouldn’t have been possible.

            The pound floated freely in 1976 too but the Labour government were still locked into fixed exchange rate thinking. The started to panic when the £ fell below the $2 mark and called in the IMF to arrange a foreign currency loan when there was no need.

            The Tories in the early 80’s were much smarter. At one point the £ fell to almost parity with the $ and life went on as normal. Hardly anyone remembers that now and there was no crisis. The speculators would have had their fingers badly burned if they’d gambled on the UK government intervening.

            It’s a pity they forgot at that a decade later by pegging the £ to the DM. That was a big mistake which cost billions and made some speculators very wealthy!

          • Denis Cooper
            Posted October 28, 2014 at 10:52 am | Permalink

            The situation was quite different insofar as neither Brown nor Darling saw fit to address the people directly through television and radio and explain what they were doing and why, even if in a slightly misleading way.

            And nor did the main opposition parties want to explain it, they preferred to join with the government in what became effectively a conspiracy to deceive the public.

            After his (actually premature) outburst in January 2009:

            http://news.bbc.co.uk/1/hi/uk_politics/7817623.stm

            “Printing money is the last resort of desperate governments when all other policies have failed.”

            Osborne fell silent and allowed the Labour government off the hook of its gross financial incompetence; as I have said before on a number of occasions, in my view that was the biggest single reason why the Tories failed to get an overall Commons majority in May 2010, with the consequence that their perfidious coalition partners could block the proposed changes to the constituencies and so they are unlikely to get an overall majority next year either.

            I find that I was sounding the alarm about the potential political as well as economic implications on this blog as early as March 13th 2009:

            http://johnredwoodsdiary.com/2009/03/13/what-the-regulator-should-say-today/

            “Shouldn’t the FSA have a view on the government rigging the market in its own bonds?

            And shouldn’t the Official Opposition also have, and forcibly express, a view on that?

            Mondays and Wednesdays, Bank of England uses newly created money to buy existing gilts and remove them from circulation.

            Tuesdays and Thursdays, Treasury’s Debt Management Office sells new gilts to help fund the government’s budget deficit.

            Nothing peculiar about that? And no political or electoral implications worthy of note by the Official Opposition?”

            And repeated throughout 2009, but falling on deaf ears.

      • Posted October 25, 2014 at 9:30 pm | Permalink

        It might also be useful to define exactly what QE might mean.

        Governments will have always used the work around of involving a private bank to enable the Treasury to sell bonds to a Central Bank if there is any law or regulation in place to try to prevent that. Has this ever been previously, ie prior to the 2008 GFC, been referred to as QE?

        Then there is the process of a central bank buying up securities from the private financial sector. This is certainly known as QE. This can, of course, be used as a means of giving the private banks more liquidity so they can participate in the above which may be quite new. But if this definition is just taken at face value, then QE in itself cannot be referred to a ‘money printing’. Literally it is just an asset swap.

        • Denis Cooper
          Posted October 26, 2014 at 10:31 am | Permalink

          Before the Bank of England was enlisted as a captive gilts investor by Darling it held hardly any gilts; over the course of a year it went from being an insignificant player in the gilts market to being the largest single gilts investor by far.

          There is no way that this can be presented as just being part of the normal situation; on the contrary it is highly abnormal by past standards, although it could now be the new normal.

          showing the % of gilts in issue which are held by different types of investor, going back to 2007; the line for the Bank of England is only there because after running along at zero it started to lift off in the first quarter of 2009, and by September 2012 it was up to about 26%; and according to Chart A.4 in this report from March:

          https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/293078/debt_and_reserves_management_report_2014-15.pdf

          it was still up at 27% a year later, the same as all the insurance companies and pension funds put together, the total share for those normal gilts investors having dropped from 48% in 2007 while the Bank’s share had risen from zero to 27%.

          How has the Bank funded these unprecedented, massive purchases of gilts? By creating new money, £375 billion, even though it has not been literally “printed” as it would have been in the past.

    • Gary
      Posted October 27, 2014 at 9:59 am | Permalink

      “If the Treasury needs money then why can’t it get it from the BoE? Why the subterfuge?”

      Because the dirty little secret is that a central bank is not required. The central bank is a backup construct to tax the populace to support a morally hazardous payout to a fractional reserve banking system that will ALWAYS end up in a bank run when x+1 deposits are simultaneously demanded for withdrawal from a x% fractional reserves banking system. And that has a probability of happening of 1, eventually.

      A govt can setup a system whereby it just issues money directly from the treasury on whatever ad hoc basis it chooses , without the convoluted central bank subterfuge. Lincoln did that with the Greenbacks and some say they killed him for it. If the central bank is part of the govt , then why the obsfucation ? Not one person seemingly can tell you how the money system works, it is not formally taught anywhere, why not ? Just the print the money at the treasury and issue it into circulation !

  23. Iain Gill
    Posted October 25, 2014 at 2:00 pm | Permalink

    If you are looking for a popular cheap extra policy to add to the manifesto I’ve got one…
    Give the telephone preference service some teeth. My vulnerable relative despite being opted out of all sales and marketing calls is still bombarded with sales calls from all sorts of organisations.
    Surely this is a simple quick cheap one to fix?

  24. CHRISTOPHER HOUSTON
    Posted October 25, 2014 at 3:37 pm | Permalink

    Quantative Easing has depleted the supply of ink in the short term but increased the availability of it in the medium to long-term though online paperless and TV discussions as to the true definition of QE may also have allowed traditional newspapers to catch up on supplies for its business pages.

    Vince Cable if I am not mistaken did use the term QE in connection with an increase in money supply…though not actually the printing of money which, he saw as part and parcel of getting the banks to build up a pot of money in case history repeated itself and they did not have liquidity. Shortly afterwards, a matter of months, he changed tack and made a great cry that the banks were not lending money. He somehow wished the banks to hold on to money and lend it simultaneously but obviously they did not have that pot of money even in part so they were unable to do so,- that is what they said.
    They also insisted that they had been told by government to avoid irresponsible lending, again a point which had previously been made by Mr Cable. Their argument was that the lending they were asked to make would in fact be on a par with sub-prime lending. He did not appear to answer their argument.

    In America where QE appears to be viewed in some political circles as necessary as food banks, the sub-prime aspect to the use of the “printed” money has re-surfaced in the guise of student loans and indeed mortgages. Cars loans, so necessary for commuting particularly in a country like America with relatively low public transport infrastructure, has now entered Alice in Wonderland proportions of sub-prime loans. And now, some leading political figures there are spouting that a person who one wouldn’t so much as lend an ear to, let alone money, should be given ” a second chance ” and so get a car, get a job, pay the loan etc etc etc.

    So, I would define QE as the policy enacted by politicians who cannot understand that when a man has become bankrupt and yet still owes money which he needs to pay; who has lost his home and now rents at a considerably higher rate, who has lost his wife and family because of economic /emotional reasons yet still has to pay money to them, somehow, is given even more money with “HOPE” stamped back and front in red letters on the banknotes.
    Just as QE is a gross exaggeration of what could be done sensibly, I should say the HOPE banknotes can be likened to when priests gave the Great Plague victims squares of paper to swallow on which was written the Lord’s Prayer.

    • Denis Cooper
      Posted October 25, 2014 at 5:40 pm | Permalink

      Well, if the Bank of England had literally printed the £375 billion of QE money as £50 notes they would have more or less filled four Olympic swimming pools; and if suitcases of those new banknotes had been taken by couriers from the Bank’s premises in Threadneedle Street to the offices of various pension and insurance and other investment companies and commercial banks and swapped for paper certificates of some of the gilts, UK government bonds, which they had previously bought; and then after those financial bodies had abstracted a few bundles of notes as their sweeteners those suitcases of new banknotes were taken along to the premises of the Treasury’s Debt Management Office in Philpot Lane, where they were swapped for paper certificates for new gilts to replace those sold to the Bank; and if the government was paying all its bills in notes and coin, including those new £50 notes, then those receiving payments may have noticed that they were getting an abnormally high proportion of crisp new £50 notes. But because now it is almost all electronic, nobody would have any inkling that part of the money paid into their account by the government or some public body had only recently been created by the Bank of England under QE.

  25. Leslie Singleton
    Posted October 25, 2014 at 5:40 pm | Permalink

    I used to think that QE was easy enough to understand along the lines of people cannot spend assets, so the Government buys assets for cash, necessarily printed for the purpose, the people then have the cash and Bob’s your Auntie; but to read yours of today I clearly haven’t grasped it fully or perhaps at all. My pea brain keeps wanting to ask whether the Quantity of Money at any time is or is not supposed to stay in line with the Assets it represents. Many many decades ago I had a letter in The Times on Viking, I think it was, putatively discovering that Martians use Marbles as their currency and that the Quantity of Marbles was fixed. In those days addresses were published and I received all manner of (letter) replies to my home address, many taking in to account Velocity of Circulation of course, though as regards the latter not in any way of the smallest use in real life, as I saw it, asking whether Inflation would or would not be possible on Mars; and could Economists please answer answer Yes or No? I forget how many replies just said, “Yes or No”. Quantitative Easing seems a daft name to me. Mind you Open Market Operations wasn’t much better.

  26. Posted October 25, 2014 at 9:28 pm | Permalink

    And being gullible I thought it went to pay of some debts.

  27. Posted October 25, 2014 at 9:57 pm | Permalink

    I have just read that this may be the last time we put the clocks back in the UK . The future is EU time which means we will not have that extra hour of light in the coming darker hours. Are we going to accept it or rage , rage, against the dying of the light.

  28. Mark
    Posted October 26, 2014 at 12:39 am | Permalink

    In its BEQB article examining the impact of liquidating the QE portfolio, the Bank acknowledged that the consequent increase in gilt supply would push yields sharply higher, inevitably invoking the Treasury Guarantee against losses it has entered into. It’s available here, along with an updated spreadsheet reflecting the current BEAPFF position and market data:

    http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2013/f13.aspx

    A quick play with the numbers suggests coupon income would be insufficient to cover capital losses if selloff results in more than a 400 basis point hit to yields – but the Treasury would be refunding the BEAPFF coupon income it has “raided” to help fund its spending (some £34.7bn to date). Any net losses are for Treasury (and hence taxpayer) account.

    David Miles addressed the issue in his 2012 speech here:

    http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech598.pdf

    He was clear that rates would rise in advance of portfolio liquidation, and gave a good logic for that. Obviously, ongoing borrowing at high levels precludes starting to unwind the portfolio just yet, because it is hard enough for the DMO to meet its mandate to refinance maturing gilts and the deficit without adding another substantial tranche of sales. He also implies that we may return to a higher level of permanent deposits by banks at the BoE in order to reduce their gearing (perhaps he had the old eligible liabilities system and the corset in mind), which would mean that not all the gilts would be sold to third parties.

    Of course, part of the question is who might buy the BEAPFF gilts. The history of holdings is available from the DMO here:

    http://www.dmo.gov.uk/docs/publications/quarterly/gilt-holdings-data-historical.xls

    A more recent number for overseas holdings shows that foreigners have net sold gilts in the last quarter, possibly ahead of next year’s election with its risk of a Labour dominated government. If the UK economy is not to suffer indigestion we will need to sell gilts abroad – but that will mean the coupon payments also go abroad afterwards, and our international debt will struggle to come down.

    The main suspicion must be that nothing much will happen until we have had a bout of severe price inflation much as in the 1970s – with some much higher nominal interest rates that will shake out the overborrowed, followed by positive real rates that will force investment to be profitable rather than profligate.

    • Denis Cooper
      Posted October 27, 2014 at 7:54 pm | Permalink

      If you look at Columns L, “Monetary Financial Institutions”, and M, “Of which Bank of England”, you can see that at the end of 2008 the banks and building societies simply did not hold anything like enough gilts to satisfy the demand from the Bank when it entered the market, and in fact as the Bank started to buy up gilts from larger holders, especially insurance companies and pension funds, the commercial banks also started to increase their holdings.

  29. Terry
    Posted October 26, 2014 at 11:05 am | Permalink

    Perhaps someone can explain.

    Why is QE preferable to huge tax cuts? £375 Billions worth of tax cuts for small biz and ALL workers, would have worked wonders in the high street as the consumer provides some 60% of GDP.
    Furthermore, most purchases would have carried a 20%VAT levy so the Treasury would have got some of it back. What did we gain from QE? Nowt.

    So who actually benefits from QE the defamation of our sovereign currency?
    The BoE prints £375 Billions to buy Gilts which drives their yields to the floor = Low interest rates. High Street Lenders can borrow from the BoE at 0.5% and then with the cash immediately buy more Gilts yielding 1.5% and better, creating a sitting profit of 200% of the cost price. Is it any wonder the Banks are booming and the Debtors are laughing while the Savers pull their hair out in bewilderment?

    And when the top inevitably blows it will be the man in the street who suffers the most. Again. I fear its deja vu 1929 but on a much grander scale.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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