Mr Carney’s dilemma

Now he has the job, the new Governor in waiting for the Bank of England is letting it be known that there are limits to what a solitary Central Banker can achieve.

Mr Carney comes from the global establishment. Doubtless some of the new IMF fashion for more deficit stimulus is rubbing off on him. Doubtless the realisation that the UK is getting closer to an election will mean he wants a bit of room for political movement. After all, no-one wants this Coalition government to survive 2015.

The position he will inherit is not all bad, as some bloggers here suggest. It is interesting that when the UK suffered its first rating downgrade from AAA the cost of ten year borrowing was 2.1%. This week-end, with another agency downgrade just announced, the cost of ten year borrowing is under 1.7%.

There are three likely reasosn for this further fall in UK borrowing costs. The first is the UK authorities stand ready to buy more of their own debt. The second is they already own a large quantity. If they eventually decide to simply cancel the debt they now own, the UK state would have a relatively low outstanding debt. Many market participants are sceptical that the UK authorities will get around to selling this debt they own back to the private sector. The third is there are several Euro countries in a far worse plight than the UK, so the Uk is still to some a “safe haven” at a time of Euro trouble.

Any government would, however, be unwise to think there are no limits on how much it can borrow and print. The UK economy is being held back by a public sector that is both too large for the tax capacity of the current economy, and by a public sector that has not matched the best of the private sector in delivering quality and efficiency. Government does need to work away at bringing tax capacity and spending more into line. It also needs to relieve the 5 year squeeze on the private sector. Next week I will look again at ways to do just that. Some tax rates are too high, the state banks are wrongly structured and regulated, energy prices are too high, and infrastructure investment is too slow and too dependent on state finance.

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94 Comments

  1. lifelogic
    Posted April 21, 2013 at 6:08 am | Permalink

    Indeed.

    As you say:- “The UK economy is being held back by a public sector that is both too large for the tax capacity of the current economy, and by a public sector that has not matched the best of the private sector in delivering quality and efficiency.”

    A public sector where about 25% of their activity is completely negative in its effects, 25% merely pointless and the remaining partly useful circa 50% is done very inefficiently and with pay about 150% of private sector rates. Correct these and it could easily deliver, just the useful parts, with less than half of the tax payers cash and perhaps just 60% of the staff. But Cameron clearly likes a bloated incompetent state sector at local, UK and EU levels. Why else would we have Lord Patten and Hall at the BBC?

    Release these people to get a real job. Mugging motorists on hatched junctions and bus lanes in Hammersmith & Fulham and the likes, are not a real jobs – any more than mugging people in general is a real job. Even if you do get a better state pension.

    No vision, Ed Unison and Labour, in 2 years, expensive energy, a bloated incompetent state, absurd regulations at every level, expensive religious energy. What an appalling waste of the very real opportunity that Cameron should have grasped from the hapless Brown. Instead he handed power to the LibDems “thinkers” with his pro EU, fake green, over regulate, devalued currency, high tax, borrow and waste agenda.

    All that is needed is defence, law and order, a sound currency, fewer & better regulations, cheap energy and a state sector well under 30% of GDP – not nearly 50%.

    • Bazman
      Posted April 21, 2013 at 9:55 am | Permalink

      As much of the state sector has been put out to tender with the companies supplying the work/services charging the state exorbitant fees for often poor results, how does this fit into your free market dreamworld?

      • lifelogic
        Posted April 21, 2013 at 5:20 pm | Permalink

        Well that is clearly the incompetence of the state sector in they way the tender and buy good and services. When I buy something I make sure I get good value and service or I do not pay. Clearly some in the state sector do not care as it is not their money, or just do not do this.

        • Mark W
          Posted April 22, 2013 at 6:10 am | Permalink

          Brilliant rebuttal Lifelogic, and I’ve witnessed the truth of that up close too.

        • uanime5
          Posted April 22, 2013 at 3:16 pm | Permalink

          So you admit that the private sector is often less effective than the public sector. Remember if you want to claim that the private sector is always better than the public sector then outsourcing has to always be an improvement.

          • Edward2
            Posted April 23, 2013 at 12:20 pm | Permalink

            Uni,
            But Lifelogic never said what you claim.
            You make up statistics. You also make up words people have not said and you use phrases which put incorrect conclusions onto what people have actually said, eg “so you are saying…” or ” I expect you believe…”
            All together very tiresome.

      • Bazman
        Posted April 23, 2013 at 5:52 pm | Permalink

        What happened to my chums and dogma post?

    • Denis Cooper
      Posted April 21, 2013 at 10:30 am | Permalink

      Unfortunately it will take a long time for the private sector to create enough new real jobs for those released from the public sector, and it cannot be said that the government is helping the private sector to expand as required – the opposite, in fact. So releasing people from the public sector tends to shrink the economy and the tax base and grow the welfare bill, and if done too rapidly those effects will more than offset the benefits of growth in the private sector. You are after all talking about redeploying about a quarter of the workforce; the government can force that sort of thing to happen quickly during an existential war, a war which threatens the very survival of the country, but not in peacetime.

      • lifelogic
        Posted April 21, 2013 at 6:44 pm | Permalink

        You say “releasing people from the public sector tends to shrink the economy and the tax base and grow the welfare bill”.

        Well it is clearly better and cheaper to have them on welfare and looking for a real job rather than just inconveniencing the productive on a large salary and over generous pension.

        The state sector are not a tax base they are paid 100% from taxes and state borrowings. If they produce no useful output or worse then they are better at home looking for a real job.

        The private sector can grow just lower the state sector overhead that kills it, relax regulation, reduce taxes, lower energy cost and get some banking and confidence …………. it will then grow like mad. But we have Cameron and the Libdems alas.

        • Ben Kelly
          Posted April 21, 2013 at 8:12 pm | Permalink

          A tad simplistic I fear. You have not allowed for the recycling of the funds they spend within the economy.

          To write them off as merely an expense destroys your credibility unless you are claiming that every pound taxed to pay for them would be spent similarly. The rich who pay most tax also save most so it is unlikely.

          Borrowing to pay the public sector is therefore a form of stimulus, which kid of destroys MilliBalls’ argument I feel.

          • waramess
            Posted April 22, 2013 at 4:15 pm | Permalink

            Not true. The public sector obtain their funds from the private sector and in doing they have to accommodate collecting administering and spending. This all costs money and the net result is that the money available to spend within the economy is far less than they collected.

            You will of course tell me that the Civil Servants they pay to do these jobs also spend however, they are doing a non-job and they are a recessionary influence on the economy because whilst they are doing these non-jobs they are not part of the productive sector and, are consuming more resources than were they unemployed aand looking to become a part of the productive sector.

            When I spend my money I neeed no help; no collection, administration or spending costs so it is all reaching the productive part of the economy and has been generated from the productive part of the economy.

            The moral to this story is; if you leave me to spend my money I will have a greater impact on productivity than the State would.

        • Denis Cooper
          Posted April 22, 2013 at 9:15 am | Permalink

          For those public sector employees whose activities are genuinely non-productive or counter-productive it might be cheaper to have them unemployed. On the other hand if that was done too quickly then the rising unemployment levels and falling demand would further undermine confidence, including the confidence of those who might be contemplating investment in the private sector.

          • Bazman
            Posted April 22, 2013 at 5:03 pm | Permalink

            You are going to have to name some specific jobs that are counterproductive and think of the effects of abolishing them. This looking for a job might be for jobs that do not exist as well. loflogic idea of more careful buying is sensible, but often the reason for using the private sector is dogma and no matter how poor the service the often ex government person or chum of gets the contract and gets paid. The cost saving made by a race to the bottom and low wages except for the chums.

        • uanime5
          Posted April 22, 2013 at 3:20 pm | Permalink

          Well it is clearly better and cheaper to have them on welfare and looking for a real job rather than just inconveniencing the productive on a large salary and over generous pension.

          Given that they’ll be spending less in the local economy after losing their jobs this is actually bad for the private sector.

    • John McEvoy
      Posted April 21, 2013 at 11:55 am | Permalink

      Yes, but Dave is ‘delivering’ a ‘low carbon economy’ for us all to enjoy. Surely that is worth sacrificing private-sector economic competitiveness, prosperity, wealth, jobs and pensions for?

      • lifelogic
        Posted April 21, 2013 at 6:08 pm | Permalink

        Well low carbon dioxide actually except it will not be any lower as the UK’s human produced output is so very tiny in the overall C02 world output man made and natural.

        Anyway C02 is harmless plant and tree food and a bit warmer would clearly be better than a bid colder on balance. Even if it did ever make any difference.

        • Bazman
          Posted April 22, 2013 at 5:03 pm | Permalink

          More simplistic nonsense pretending to be science.

          • Edward2
            Posted April 23, 2013 at 12:27 pm | Permalink

            Just a shame for you that its simple but true Baz.
            1 The UK’s industrial and human output of CO2 is tiny in comparison to world output. Even if we were to reduce the UK’s output by 75% (ie back to pre industrial times) it would have litlle effect on the total due to India and China’s huge increases in CO2 output.
            2 The total amount of CO2 produced by man is also a very small percentage of total CO2 most is naturally ocurring by animal and plants etc
            3 Cold kills more than heat. eg 4000 more deaths than expected since January this year in the UK due to the much colder than average winter.

    • uanime5
      Posted April 21, 2013 at 12:08 pm | Permalink

      A public sector where about 25% of their activity is completely negative in its effects, 25% merely pointless and the remaining partly useful circa 50% is done very inefficiently and with pay about 150% of private sector rates.

      Got any evidence to back up any of these claims? Thought not.

      Release these people to get a real job. Mugging motorists on hatched junctions and bus lanes in Hammersmith & Fulham and the likes, are not a real jobs – any more than mugging people in general is a real job.

      So you don’t want the police to enforce the law.

      • lifelogic
        Posted April 21, 2013 at 5:27 pm | Permalink

        Well there is very, very,clear evidence for the 150% (when pensions are included), loads of things they do that just inconvenience the productive and many that are clearly totally pointless. The pointless wars as a good example of something damaging. The government PR propaganda as another.

        I want the police to enforce laws that are in the public’s interests to be enforced not use the law as a tool for mugging, tax raising and inconveniencing as is often the case.

        • uanime5
          Posted April 22, 2013 at 3:22 pm | Permalink

          Either provide evidence for this 150% figure or admit you made it up. I recommend using professions that have both public and private sector counterparts, such as teachers or doctors.

          Also enforcing traffic laws is in the public’s interest. The only people who don’t benefit are arrogant motorist who believe that they have a right to drive where they want.

      • Mark W
        Posted April 22, 2013 at 6:13 am | Permalink

        I wish I had the time to write up how a unitary had a threefold increase in staff from its inherited county council in one dept and the idle hands just wasted money on daft schemes til they were sensibly axed from 35 plus staff to about 8 in 2011.

    • nicol sinclair
      Posted April 21, 2013 at 1:23 pm | Permalink

      Lifelogic: “Instead he handed power to the LibDems “thinkers” with his pro EU, fake green, over regulate, devalued currency, high tax, borrow and waste agenda.”

      They are no more and no less than ‘tree huggers’. My view is to get them (well) out of the way well before the next election. They are both a menace and millstone round the British neck. I don’t want to be strangled by Cleggie et al.

      • lifelogic
        Posted April 21, 2013 at 6:01 pm | Permalink

        But is not Cameron just a Libdem, genetically and in his heart? Surely he is with all his husky photo shoots, his daft HS train schemes, his cycling with a car just behind him, his toy wind turbines in windless Notting Hill, his Carbon devil religion, his Heart and Soul pro EU drivel, his subsidy for environmentally worse electric cars, his failure to cut the state sector, his failure to incentive work, his countless tax increases, failure cut regulation and his daft loans to the PIGIS and the IMF?

        What is the difference? I would not be surprised if Cameron announced rent controls, some further more direct theft of bank depositors funds Cyprus style, a tobin tax, a wealth tax, exchange controls and some curfews on movements other than for state sector employees.

        Would anyone else? The man is simply not a conservative in any real sense.

  2. Andy Baxter
    Posted April 21, 2013 at 6:28 am | Permalink

    Central banks: all of them, not owned by the people of their respective nations but instead all in majority PRIVATE ownership with the sole purpose to create debt (and charge interest on such) out of thin air via ‘fractional reserve banking’

    look the term up it will astound you!

    also search for The Money Masters 1996 documentary (Youtube search) the best investment of 3 1/2 hours of your life you will ever make.

    We have become debt slaves: taxed and milked like cattle to feed the voracious appetite of Government (which is supposed to work for us) to satisfy the demands of interest (in excess of £50 Billions) on debt (issued by banks out of thin air) that is created for just such a purpose.

    If you or I were to create such debt out of thin air by obtaining signatures on a piece of paper we’d be arrested and charged with fraud. Yet banks can do it, nay they are licenced to do it for one purpose only, to enslave us in debt.

    It is self fulfilling and self sustaining and will never EVER cease until we the people take back control of our money supply and institute controls over Government and its agents on what they can raise in taxes and what they can spend it on and on how much they can borrow if indeed they ever should.

    “The bank hath benefit of interest on all moneys which it creates out of nothing.” William Paterson, founder of the Bank of England in 1694.

    “The modern theory of the perpetuation of debt has drenched the earth with blood, and crushed its inhabitants under burdens ever accumulating.” -Thomas Jefferson

    • Denis Cooper
      Posted April 21, 2013 at 10:50 am | Permalink

      In 1694 the Bank of England was privately owned, but it was nationalised in 1946 and it remains in public ownership to this day.

      Please do not refer me to any video where the US commentator traces the history of the Bank of England but stops short of its nationalisation in 1946.

      Please do not try to explain how the post-war nationalisations of the railways and the coal and steel industries were real nationalisations but the nationalisation of the Bank of England was a cunning deceit.

      Please do not repeat nonsense about how a wholly owned subsidiary of the Bank in some mysterious way actually owns the Bank, not the other way round, and is in its turn really owned by sinister shadowy figures who are running our affairs and syphoning off money for their own benefit.

      Just accept that the Bank of England is in fact publicly owned, but Parliament has taken some poor decisions about how it should be controlled.

      • Andy Baxter
        Posted April 22, 2013 at 9:37 am | Permalink

        And….next you’ll be telling me ‘fractional reserve banking’ doesn’t exist, is a fiction and that all money in circulation is ‘real’ and has intrinsic value based assets behind it!!

        So you don’t deny it was in majority private ownership from 1694 until 1946 when Atlee nationalised it? bBt what you omit to say is that in 1976 after the blight of 1974-76 (I remember it well) the UK economy was vulnerable and effectively bankrupt, with double digit annual inflation, 70% over 3 years, incessant strikes, the £ Sterling frequently suspended on international exchange markets, virtual parity with the US$, which created the ideal opportunity for the share holders to strike back and re-take the Bank of England.

        SO tell me? Is this WHY, on the 6th April 1977 the Bank of England formed the BANK OF ENGLAND NOMINEES LIMITED, (BOEN), a wholly owned subsidiary private limited company, no: 1307478, with 2 of its 100 £1 shares issued and its Memorandum & Articles of Association’s Objectives are;-

        “To act as Nominee or agent or attorney either solely or jointly with others, for any person or persons, partnership, company, corporation, government, state, organisation, sovereign, province, authority, or public body, or any group or association of them….”

        MELANIE JOHNSON MP, Minister for the Treasury, has confirmed and is on record as saying that “BOEN is a wholly owned subsidiary of BOE, which was granted an exemption by the Minister of State for Trade from the disclosure requirements under Section 27(9) of the Companies Act 1976 , because;

        “it was considered undesirable that the disclosure requirements should apply to certain categories of shareholders”.

        hmmm….interesting no?

        BOEN with its Royal Charter Status and Official Secrets Act, has more confidentiality and security than the MoD and is even immune from questions being asked in the House of Commons. So why form a wholly owned ‘NOMINEE’ COMPANY which in 36 years HAS NEVER TRADED and only lodges ‘Short Form’ un-audited accounts ?

        Even FOI requests to BOEN elicit the reply that it is and I quote “BOEN is not a PUBLIC AUTHORITY within the meaning of the FOI Act and accordingly is not subject to the Act” and BOEN “is a private limited company, incorporated in England and Wales in 1977”

        This is a fact:

        Share holders appoint directors, look who makes up the ‘Court’ of Directors of The Bank of England, bringing one to the only conclusion that the Bank of England is owned covertly, if not by the banks, then by a higher banking entity which has the interests of the banks at heart not the public interest as we are continually misled to believe

        Reply The Bank of England is owned by the state,and can be guided or changed by Parliament

        • Denis Cooper
          Posted April 24, 2013 at 2:10 pm | Permalink

          Please do try to get your head straight and understand that:

          “BOEN is a wholly owned subsidiary of BOE”

          means that the Bank owns BOEN, not the other way round.

          And in its turn the parent company, the Bank, is wholly owned by the Treasury, as stated in its Annual Accounts:

          “The entire equity capital comprising £14,553,000 of Bank Stock is held by the Treasury Solicitor on behalf of HM Treasury.”

          Which basic fact was confirmed by the Office of the Treasury Solicitor when I emailed to check whether it was still the case; so if you’re determined to disbelieve the simple truth why don’t you do the same?

          As I said below, this is “just a timewasting distraction from the real problems”.

        • Denis Cooper
          Posted April 24, 2013 at 2:21 pm | Permalink

          Why not quote other parts of the response to that FOI request?

          https://www.whatdotheyknow.com/request/28738/response/74019/attach/2/D.pdf

          “Subject to this, I can provide the following information in response to your questions. BOEN acts as a nominee company to hold securities on behalf of certain customers. It is a private limited
          company, incorporated in England and Wales in 1977, and is a wholly-owned subsidiary of the Bank. The shareholders are the Bank and John Footman, who holds his share as nominee on behalf of the Bank.”

          So it does not own the Bank but instead is itself “a wholly-owned subsidiary of the Bank”; which acts as “a nominee company to hold securities on behalf of certain customers”, special customers not you or me; and we know for sure that those “securities” held in BOEN cannot include any shares in the Bank of England because they are all held by the Treasury Solicitor on behalf of the Treasury.

      • sm
        Posted April 22, 2013 at 11:19 pm | Permalink

        …how it should be controlled? Indeed.

        I still don’t see the public need for the BOEN.It wasn’t always there.

        The thing is Trust requires transparency a nominee company does not provide transparency.

        • Denis Cooper
          Posted April 23, 2013 at 9:27 am | Permalink

          There was no general public need for BOEN, as it was intended to provide privacy only for special customers such as Heads of State, presumably including the Queen, and it was transparent that it was not intended that the transactions it carried out on behalf of those customers would themselves be transparent.

          I doubt that you or I would have been allowed to make use of its nominee services, we would have to go to a commercial bank that offered similar services,

          If people start out with the conviction that all central banks including the Bank of England are really privately owned banks, a conspiracy theory propagated by some US commentators to try to lay the blame for all the world’s troubles (on this-ed), then they will obstinately ignore the plain truth that the Bank of England is publicly owned and instead search around for hints that they think confirm their belief.

          It is even gets down to ridiculous levels such as the insistence that the Bank of England must really be a private company because its website address ends with .co.uk, as if its secret masters would not have realised that this might give the game away.

          It’s just a timewasting distraction from the real problems.

    • Anthem
      Posted April 21, 2013 at 1:05 pm | Permalink

      What a coincidence! Andy Baxter is MY real name but I didn’t write that! What are the chances?

      • margaret brandreth-j
        Posted April 21, 2013 at 6:28 pm | Permalink

        The duality continues.. and is how money was syphoned from myself along with other organised factors.

  3. Brian Tomkinson
    Posted April 21, 2013 at 7:13 am | Permalink

    JR: ” After all, no-one wants this Coalition government to survive 2015.”
    I diasagree; I think Cameron would be delighted with such a continuation.
    The parlous state of the economy, as you have again described it, shows the degree of the failure of this government to tackle the basic problems and illustrates that the three main parties in parliament all offer the same economic manifesto – tax, borrow, spend and waste. None of them is worthy of support.

    • behindthefrogs
      Posted April 21, 2013 at 9:47 am | Permalink

      There are large numbers of the general public who see a continuation of the coalition as being hugely preferable to any of the major parties having sole power.

      There are many electors who will not forgive your party for letting down the coalition on numerous important subjects like reducing the number of constituencies.

      • Chris S
        Posted April 21, 2013 at 4:32 pm | Permalink

        behindthefrogs, you are right to make the point about the failure to reduce the number of constituencies

        What many of us don’t understand is why the Lib Dems were allowed to get away with reneging on their coalition commitment to vote for boundary changes.

        The excuse they used was false because the coalition agreement did not include a requirement to vote for Lords reform, just to consider and bring forward proposals.

        If I had been David Cameron I would have introduced the boundary changes bill and I would have made it clear that any LibDem minister who failed to support this Government Policy in the lobby would be sacked.

        After all, that’s what usually happens to ministers who don’t support Government policy.

        Surely the LibDems would have blinked first because they are terrified of an early election ?

        Why did David Cameron not follow through ?
        Was it cowardice or did he have a valid reason ?

        Could you offer an explanation, John ?

        Reply They did bring forward the boundary proposals, and they were voted down in the Lords.

        • Chris S
          Posted April 21, 2013 at 7:49 pm | Permalink

          Thank you for the explanation, John. I must have missed it going to the Lords first.

          Would I be right in thinking that if the measure had been voted through in the Commons first, the convention would have applied that the Lords does not then vote to subvert the will of the elected Chamber ?

          If that was the case, surely sending it to the lords first was just a way of getting the coalition off the hook ?

          Reply The Lords is always free to express its own view on non financial matters. There is no majority for boundary changes in the Commons now Lib Dems refuse to vote for it, so the two Houses have the same view on this matter anyway.

        • behindthefrogs
          Posted April 21, 2013 at 10:49 pm | Permalink

          They were voted down in the Lords because the Tories refused to support them there.

          • Chris S
            Posted April 22, 2013 at 10:51 pm | Permalink

            If the Conservatives in the Lords didn’t support government policy it surely must have been because they must have been told not to.

            This appears to makes it look even more likely that the Conservative front bench backed down rather than confront the LibDems.

  4. margaret brandreth-j
    Posted April 21, 2013 at 8:05 am | Permalink

    The three parties do not want the coalition to continue ,they all want to push through their own agendas, but are you sure that the public cannot see a future in compromise. Politicians have a way of telling the public what they think and it is not always correct, for example ‘the public want this or the public don’t believe this or the other’ I am not convinced that they are truly representative of opinions.
    The balance between state and private I believe must continue. I have seen the damage done by UK PLC”s and smaller private companies, I have seen the damage done by the NHS due to intervention of private investors.
    Any industry is as good as the people who work in it , not only the people who control it. For example again in the staff are being picked according to the letters they have accumulated on a computer and it is falsely believed that they can execute their jobs on the basis of academic achievement or what they say they can do.
    Productivity will not increase in an environment where private companies have an interest to produce at the expense of the employers expertise, it will never work.

  5. margaret brandreth-j
    Posted April 21, 2013 at 8:08 am | Permalink

    Sorry re the incoherence or the sentence commencing” For example” , I edited it myself and forgot to restructure the sentence.

  6. JimF
    Posted April 21, 2013 at 8:11 am | Permalink

    “there are limits to what a solitary Central Banker can achieve.”
    Indeed there are. His actions should really be of a second order to those of the government, who SHOULD be setting the scene in terms of supply side measures (taxes, employment regulation, etc) and public sector size and spending. Given the lack of success by the governemnt in both these areas, it would indeed be remarkable if a Central Banker were able to take actions which offset these failures without even more adverse consequences.

    • nicol sinclair
      Posted April 21, 2013 at 1:25 pm | Permalink

      Jim: I totally agree with your sentiment.

  7. Andyvan
    Posted April 21, 2013 at 8:31 am | Permalink

    But Mr Carney is not a single central banker. He is part of the (ex Investment banks employees group -ed) that has done so much (that critics say has weakened the world economy-ed). (Raises issues about role of investment banks and ex investment bankers in sub prime, excess leverage etc-ed)
    But Mr Carney is one of the elite (words left out-ed). I am completely confident that he, in concert with his brothers, will be able to manipulate the economy to make things far worse that Merv the Swerve ever managed. Merv on speed so to speak. Look out for years of disastrous money printing, (damage to-ed) savings by interest rate and continuous inflation.

  8. oldtimer
    Posted April 21, 2013 at 8:51 am | Permalink

    It sounds from your reference, once again, as though the political establishment (on behalf of the UK state) is preparing the ground to cancel the debt it now owns. In one bound they are free! Presumably this must be high on Mr Miliband`s agenda and behind his promise to outspend the Tories. Of course such a step would not deal with the fundamental problem that political profligacy is outspending the taxable capacity of the economy year after year.

    • Denis Cooper
      Posted April 21, 2013 at 11:11 am | Permalink

      In 2009 I mooted that eventually the gilts being purchased by the Bank might end up being cancelled, until I realised that to do so would endanger the position of the Bank itself. I doubt that existing law would even permit the Treasury to pay out as promised on the gilts owned by normal investors but not on other gilts of the same class owned by the Bank; I doubt that the Governor would willingly agree to the Bank being arbitrarily deprived of £375 billion of its assets, and would willingly accept the withdrawal of the Treasury indemnity against any losses made in connection with its purchases of gilts, and if necessary he could take the Treasury to court over it; and I question whether under present law it would even be legal for the Bank to continue to operate with negative net assets, which would be the inevitable consequence if the £375 billion of gilts it owns were simply cancelled, in which case it would probably need a change of law through an Act of Parliament rather an executive decision by the Chancellor.

      For reference the Treasury indemnity to the Bank was given through this letter from Alistair Darling to Mervyn King dated January 29th 2009:

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

      While that indemnity remains in place it would be pointless to get the Bank to agree to the cancellation of the gilts it owns, as the Treasury would then have to make a massive payment to the Bank to make up its losses.

      • oldtimer
        Posted April 22, 2013 at 8:47 am | Permalink

        Thank you for the links and your comments. Nevertheless I remain suspicious of the political class – all it needs is another consensus among MPs and they are quite capable of changing laws, rules and regulations to suit themselves. As you have pointed out on other issues, politicians here and in the EU are more than capable of ignoring or changing the laws they have passed.

    • Denis Cooper
      Posted April 21, 2013 at 11:57 am | Permalink

      Here are a couple of references about the recycling of interest payments back to the Treasury.

      The first is a House of Commons Library Briefing Paper, dated November 30th 2012, which may be found here:

      http://www.parliament.uk/briefing-papers/SN06488

      It says inter alia:

      “Quantitative Easing (QE) in the UK was originally authorised by the then Chancellor Alistair Darling in January 2009 and is carried out through the Asset Purchase Facility (APF). The majority of assets purchased have been Treasury Bonds (Gilits).

      APF transactions are undertaken by a subsidiary company of the Bank of England, the Bank of England Asset Purchase Facility Fund Limited (BEAPFF). The BEAPFF borrows from the Bank to pay for the purchases it makes (at the Bank’s base rate, currently 0.5%).

      Lending to the BEAPFF appears on the Bank’s balance sheet as an asset. The liability corresponding to this asset depends upon how it has been funded. Where purchases by the BEAPFF have been made as part of the QE programme, the Bank finances the loan by creating central bank reserves (by printing ‘electronic money’). This is reflected in an increase in the level of the Bank’s Reserves Balances. When QE is “paused” the lending appears under ‘Other liabilities’ (financed via a deposit from the UK Debt Management Office (DMO).

      Any losses made from the operation of the APF are indemnified (paid) by the Government. As the Letter from the Chancellor to the Governor authorising the APF in 2009 stated … ”

      The second is a more recent ONS note on how the recycled the interest payments will be treated for the purposes of national statistics:

      http://www.ons.gov.uk/ons/media-centre/statements/treatment-in-official-statistics-of-the-cash-transfers/index.html

      Which is complex and partly conditioned by EU requirements, but inter alia again:

      “The activities of the BEAPFF are indemnified by the Treasury, so the Treasury would benefit from any BEAPFF profits, but would have to cover any BEAPFF losses.”

      Reply The potential losses referred to are the premium over par paid for the gilts, not the sum total of gilts bought. If they are held to redepmtion the BEAPFF will lose the premium. It may lose if sold prior to redemptionp, depending on the then market price. This is nothing like losing the sum total, as most of it is financed by creating new money.

      • Denis Cooper
        Posted April 21, 2013 at 6:02 pm | Permalink

        But if the gilts were cancelled tomorrow then the losses would be almost total. There would no further payments of either interest or capital, so the losses would approximate to the £375 billion spent on buying the gilts minus the relatively small sums of interest already paid.

        The Commons Library Note actually quotes the relevant sentence from Alistair Darling’s letter of January 29th 2009:

        “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.”

        That is “any losses”; at some point in the future when the APF no longer possesses any gilts or other assets and it can be finally wound up, if overall it has made a loss then the Treasury must make that good.

      • margaret brandreth-j
        Posted April 21, 2013 at 6:33 pm | Permalink

        Nevertheless Mr Cooper you along with JRs replies are giving me a greater insight into economics…perhaps you can explain MY ISA’s and what happens if I withdraw prior to redemption.

      • Mark
        Posted April 21, 2013 at 6:53 pm | Permalink

        I am still awaiting a reply from the Treasury to my queries on this topic: as they have been so lazy (not so much as an acknowledgement, despite several reminders), I’m considering seeking the support of an MP to get some answers from them.

        I had a late an ineffectual reply from the OBR on their treatment. The Bank of England and ONS treatments are mutually inconsistent. The BoE applies any coupon income from a gilt against any loss between purchase and redemption or sale before determining that there is a loss on that gilt: this accounting is applied gilt by gilt, not across the portfolio as a whole. Of course, such use of coupon income precludes it being drawn down by the Treasury.

  9. alan jutson
    Posted April 21, 2013 at 8:59 am | Permalink

    I guess Mr Carney was offered the position because he had a good track record of performance.

    If the above is true, why not simply let him get on with it.

    If the above is not true, why was he offered the job !

    Has Mr Carney put forward any plans/proposals so far ?
    If not, why not wait until he has done so.

    I only hope Mr Carney is given an open brief to ask whatever questions he wants, and is given factual information, and not Government spun figures for his homework.

    I guess time will tell if he is the right man with the right ideas, but then it must be remembered that he was chosen by the present band of politicians, who seem to be failing the Country themselves.

  10. MajorFrustration
    Posted April 21, 2013 at 9:00 am | Permalink

    JR – you have been banging on about the public sector for ages. Its not that I dont agree with your views but where has it got us. Rather than looking next week at tax rates and bank struction – all of which are worthwhile- could you provide a sort of “state of the nation” report as to what you feel you have achieved given the views you hold. I rather get the feel that the front bench will carry on regardless until Labour take over.

    Reply – referendum promise, new attitude to EU, no Lords reform, lower EU budget etc etc – all done by Parliamentary votes

    • Pleb
      Posted April 21, 2013 at 12:44 pm | Permalink

      2 years till the next labour gov.
      This Mays local elections will be interesting.

  11. M Davis
    Posted April 21, 2013 at 10:04 am | Permalink

    Harriet Alexander, DT: – … on Monday, 15,000 public sector workers are set to be made redundant …

    UK? If only!

  12. Denis Cooper
    Posted April 21, 2013 at 10:06 am | Permalink

    “If they eventually decide to simply cancel the debt they now own, the UK state would have a relatively low outstanding debt. Many market participants are sceptical that the UK authorities will get around to selling this debt they own back to the private sector.”

    Firstly, it would not be necessary for the Bank of England to sell its £375 billion stock of gilts back to private investors; instead it could continue to hold them all to maturity, so that the Treasury completely repaid the Bank but gradually over a long period, maybe twenty years; if at some point the Treasury was short of cash to redeem some of the gilts they could be swapped for gilts of a longer maturity, possibly through a direct swap or more likely indirectly through the Treasury selling new gilts to investors and using some of the proceeds to redeem the maturing gilts held by the Bank, and the Bank then using that money to buy some of the new gilts from investors.

    Secondly, if the gilts held by the Bank were simply cancelled then the Treasury indemnity would kick in and the Treasury would have to compensate the Bank for its losses, which at present would be close to that £375 billion, and if the Treasury indemnity was withdrawn then the Bank of England would be bust once it had been deprived of £375 billion of its assets.

    (The detailed financial mechanics are that the Bank has lent money to its subsidiary, the Bank of England Asset Purchase Facility Fund Limited, to fund purchases of gilts by the latter, and if the gilts were simply cancelled then the Fund would be well and truly bust and the Bank would not be repaid on its loan, and in the absence of compensation from the Treaury the Bank would also be well and truly bust.)

    We have already entered dangerous waters with two successive Chancellors authorising the Bank to create vast sums of new money for them to indirectly borrow and spend, without any proper Parliamentary debate let alone approval by a vote of MPs, and to go further by breaking the Bank of England would be madness.

    • oldtimer
      Posted April 22, 2013 at 8:51 am | Permalink

      Holding to maturity is probably their preferred option – inflation will have taken care of part of the problem by then. It would be regarded as a sleeping dog best left to sleep on.

  13. waramess
    Posted April 21, 2013 at 10:27 am | Permalink

    Hard to understand why gilts purchased by the Bank of England have not been cancelled. They are old money, so to speak, purchased with new money, printed of course and the “cost” of cancellation has already been “paid for” by the introduction of the new money, by the devaluation of the existing money in circulation.

    To not cancel seems to be a bit of double counting.

    Hard also to understand Osbornes strategy of (non) austerity. Should he not be cutting back rigorously on government spending and passing on the savings through tax cuts in order to get some growth in the private sector?

    It really is little wonder that few understand why Osborne thinks his plan of “austerity” should be working when everything he does millitates against growth in the private sector.

    Carey has a pretty unenviable task ahead if he is supposed to make a difference when the government itself seems predisposed not to.

    • Denis Cooper
      Posted April 21, 2013 at 6:59 pm | Permalink

      The gilts bought by the Bank of England are not “old money”, or indeed “money” of any kind. If gilts could be considered as kind of a kind of “money”, how does it come about that investors buy and sell them for actual money every working day, not at fixed prices but at variable prices determined by the balance of supply and demand in the market?

      Although the Bank of England is owned by the Treasury they are still separate arms of the state apparatus with different functions. The Treasury issues IOUs known as gilts, but money is IOUs issued by the Bank; the primary purpose of QE has been to enable the two bodies to indirectly swap their respective IOUs, with the Treasury getting the Bank’s IOUs, money, to help fund public spending, and Bank getting the Treasuries, IOUs gilts, in exchange. Gilts are of no use to the Treasury when it comes to make the payments due from the government, because those who are due to receive sums of money from the government naturally expect to be paid in money, not in gilts, or for that matter in National Savings certificates.

      Unless one is happy for the Bank to go bust one cannot cancel the Treasury’s IOUs, gilts, owned by the Bank without also cancelling the corresponding IOUs issued by the Bank to buy those gilts; and the £375 billion of money, IOUs issued by the Bank for that purpose, has been put into circulation and cannot be cancelled.

      Reply Money is mainly an electronic register in a bank account. The Bank can create it any time they like.

      • Denis Cooper
        Posted April 22, 2013 at 10:13 am | Permalink

        The Bank can, but the Treasury cannot.

        That is the whole point of the scheme for the Bank to exercise its power to create money, and the Treasury to exercise its power to create gilts, and for the two different kinds of IOUs to be swapped; which under the EU treaties cannot be done directly, but has to be done indirectly through the Bank buying previously issued gilts from investors while the Treasury sells new gilts to much the same set of investors at much the same rate.

        If the Bank was intransigent and refused to play its part in that scheme, and if the Treasury was no longer able to borrow enough previously created money from investors, then the Treasury would be unable to make all the payments of money due from the government.

        I suppose that some of the government’s larger creditors might willingly agree to be paid in gilts rather than in money, but the normal run of things is that those who are due payments in money expect to be paid in money.

        Morever they normally have a legal right to demand payment in money, even if that is now usually mediated by an entry in their bank account which entitles them to withdraw legal tender, banknotes and coins issued by the Bank of England, which they can use for their purchases.

        Can you imagine the public reaction if the Treasury ran out of money and millions of letters had to be sent to public sector employees and recipients of state pensions and welfare benefits, saying that there was only enough money to pay them half of what was due to them that month, and enclosing a gilts certificate in lieu of the remainder?

        And the same with private sector suppliers and contractors to the public sector, and so through to their suppliers and contractors, and through to all those private sector employees.

        What use would a gilts certificate be at the supermarket checkout? None, at least until they had set up their system to accept them at a discount, which would widen as the Treasury’s financial position worsened.

        • sm
          Posted April 23, 2013 at 10:50 am | Permalink

          In the past ’emergencies’ the treasury issued its own cash the bradbury treasury note, it was debt and interest free paper circulating and accepted as cash.

          Any reason why this is not pursued? to stimulate demand and also resolve the banks.

          • Denis Cooper
            Posted April 24, 2013 at 9:10 pm | Permalink

            I asked in Tesco about Bradbury pounds and the lady on the checkout said “What’s that? Never heard of them.”

            So instead I offered to pay in Scottish banknotes, whereupon she called for the manager to check whether she should take them.

            The manager said that he would accept the Scottish notes, but really Tesco branches in England preferred to be paid in the familiar everyday money which is current in England, banknotes issued by the Bank of England, or alternatively they would accept an electronic credit transfer denominated in that normal Bank of England currency.

            If you have a central bank owned by the Treasury which is willing to oblige the Treasury by lending it sums of the usual money as routinely issued by the central bank, at what is effectively a zero interest rate because as its owner the Treasury is entitled to all the profits of the central bank, then there is really little point in the Treasury starting to issue its own currency for everyday use and to do so would merely cause confusion, disruption and alarm.

  14. Gary
    Posted April 21, 2013 at 10:47 am | Permalink

    If govt cancels the debt, I reckon we get almost instant hyperinflation.

    All the QE money, plus all the money printed by the banks for mortgages(underwritten by the govt) has to go somewhere and currently it mostly going into those bond markets. Bond prices are in a bubble. Remove the bond demand and the money has to go somewhere else, probably into general prices. Huge inflation in general prices. Interest rates will probably go through the roof, and then the mortgage market defaults.

    Money printing to create a debt monster is a one way bet. Once you go down that route there is no turning back without collapse. There is no long term benefit, except to the bankers.

    • Acorn
      Posted April 21, 2013 at 6:00 pm | Permalink

      Why would a nation that issues its own currency, want to risk its reputation by “cancelling” its own debt. It can “print” enough money at any time to “redeem” any debt it has issued in Stirling (UK); presented to it at the scheduled redemption date.

      Greece et al, could not do this because they can’t print a “foreign” currency issued by a foreign central bank, the ECB in their case.

      BTW. Inflation occurs when there is chronic excess demand relative to the real capacity of the economy to produce; and/or, an external price shock for some commodity. (Google: Modern monetary theory and inflation – Part 1)

    • Denis Cooper
      Posted April 21, 2013 at 6:33 pm | Permalink

      The QE money was passed to the Treasury through the gilts market, it was then used to help the government pay its bills, mainly being spent into the economy, and it has already had inflationary effect.

      • waramess
        Posted April 22, 2013 at 9:19 am | Permalink

        Denis Cooper, “The QE money was passed to the Treasury through the gilts market, it was then used to help the government pay its bills, mainly being spent into the economy, and it has already had inflationary effect.”

        This was the point I was making. The money has indeed already had an inflationary effect and has had much the same effect as a new tax. As a result it is not money printed from nowhere, even though it has expanded the stock of money; it is money real that has purchased the old gilts.

        The foolishness of keeping the Bank of England as a separate entity when clearly it is not must be for the government to resolve and, in much the same way that if a subsidiary of a private sector company buys the debt of its parent then the debt disappears on consolidation the government should reorganise the Bank in order to reflect its true status.

        • Denis Cooper
          Posted April 22, 2013 at 11:02 am | Permalink

          Firstly, it is for Parliament to decide on the relationship between the government and the Bank, not for the government to decide; and through its past Acts Parliament has decided that the Treasury shall own the Bank but nonetheless it shall be operated independently with respect to monetary policy, unless Parliament explicitly agrees to the Treasury exercising reserve powers and taking direct control – and that provision in the Bank of England Act 1998 has not been invoked by either Darling or Osborne.

          Secondly, the idea that a single politician who had worked his way into the position of Chancellor could then have the unrestricted power to order the creation of as much money as he wanted to spend should send a shudder down the spine of every sensible person.

          Thirdly, consolidating the accounts of the Bank and the Treasury would cancel out the intra-state debts but it would not cancel any of the state’s external debts, and in this particular case the state would still have the liability of the £375 billion of new money which has been put into circulation.

          • waramess
            Posted April 22, 2013 at 5:22 pm | Permalink

            You are of course entirely correct however it is the logic of a madhouse.

            Consider the fact that the government has bought back it’s own debt but is not able to cancel it because of the way the relationship between the government and its wholly owned subsidiary is structured.

            Whoever believes the original motives of the Bank in starting QE? I think few now believe they were trying to bring down long term interest rates. More likely they were funding a government whose coffers were bare.

            And, should the fact that a chancellor with the ability to print money send shivers down your spine, be even more frightened at the Governor of the Bank of England being happy to do the bidding of the Chancellor in such matters. They all want an honour at the end of their tenure.

            There can be absolutely no logic to the non-cancellation of the purchased gilts but parliament would need to sort out the relationship between the Bank and the Treasury and, of course with the EU

  15. forthurst
    Posted April 21, 2013 at 12:29 pm | Permalink

    “there are limits to what a solitary Central Banker can achieve.”

    (Bizarre allegations about Fed deleted -ed)
    The potential achievements of Central Bankers are uniformly negative. The reason for this is that private enterprise has the propensity to flourish naturally to which our own history will testify, but it can easily be inhibited by poor economic management which drains capital from the productive private sector either by inhibiting the supply of investment capital or by encouraging malinvestment into property bubbles etc. A good central banker is one who ensures his policies do not have negative consequences. The same could be said for the fiscal management of the economy. Even if Carney were to be a ‘good’ central banker, his efforts would be set at nought by a bad Chancellor, refusing to face up to the issues under his control which were holding the economy back, for which no gimmicks like taxpayer underwriting of home loans or BoE specific support for SMEs would adequately replace, all whilst the state own banks were much as bequeathed by Labour and the size of the state sector, likewise.

  16. Richard1
    Posted April 21, 2013 at 12:49 pm | Permalink

    I am doubtful about the govt thinking cancellation of the debt held by the bank of england is any kind of free pass. We haven’t seen much inflationary effect from QE yet due to the anemic pace of recovery, but if the artificial boost to the money supply is made permanent by cancellation of the state-held debt, surely we will see inflationary consequences in years to come.

    • Duncan
      Posted April 22, 2013 at 6:19 am | Permalink

      We have not seen inflation – yet – because the QE money has mostly gone to address VAST off-balance-sheet debt (of banks). However, it will work its way into the system – at which stage inflation will appear, and grow, and grow, and grow.

      We have the mother of all inflationary periods ahead of us – beginning in two years or so.

      • Richard1
        Posted April 22, 2013 at 9:34 am | Permalink

        I agree this is a significant risk. If that view is accepted, the right policy course is much more rigorous deficit reduction, and generation of growth through tax cuts. We will need confidence in sterling and confidence in a real, private sector led, recovery in order to have a chance of the right market conditions for the Bank of England to sell these gilts.

        A good start would be removal of all renewable energy subsidies and abolition of all quangos associated with proselytizing about global warming, especially as it is becoming increasingly clear the country faces an energy supply crisis due to the green madness of recent years.

        • uanime5
          Posted April 22, 2013 at 3:45 pm | Permalink

          Firstly unless the direct effect of these tax cuts is that the average person has more money there won’t be a private sector recovery or growth. So these tax cuts not only have to benefit those on low salaries but also the unemployed.

          Secondly all the scientific evidence shows that global warming is real.

          Thirdly the UK faces an energy crisis because not enough power plants have been built. I guess privatisation doesn’t guarantee enough power will be produced.

          • Edward2
            Posted April 23, 2013 at 8:38 am | Permalink

            Firstly, tax cuts for the average person will stimulate the economy as there are a lot of average people and the extra spending by these average people may help create jobs for the unemployed you mention.

            Secondly, there you go again Uni,
            Meaningless statement alert:- “global warming is real”
            Who is denying this?

            Thirdly its up to Government to plan the country’s long term energy requirements and despite numerous proposals from the energy companies they have put off planning decisions on energy strategy for over 25 years.

          • Richard1
            Posted April 23, 2013 at 9:03 am | Permalink

            Tax cuts incentivise economic activity at many levels – on the low paid by raising thresholds, on investors and corporations by cutting CGT, Corp tax and inheritance tax, on consumers by cutting indirect taxes such as green taxes. etc

            There is no dispute that CO2 is a greenhouse gas and causes warming, but there is considerable dispute as to how much. The evidence, which many scientists support, is that the forecasts made in the 80s and early 90s, upon which green legislation is based have been greatly exaggerated.

            Our energy crisis is due to successive govts postponing decisions on new nuclear power until it is enormously expensive and to an obsession with green power. (Milliband was the worst in this regard).

  17. Acorn
    Posted April 21, 2013 at 1:03 pm | Permalink

    I hope he has read http://www.bankofengland.co.uk/publications/Documents/other/monetary/bls/bls13q1.pdf . Which will tell him that nobody has any plans to start spending, they are all saving for the end of the world. For instance:-

    ” The reported rise in the volume of retail funding and fall in retail deposit spreads was consistent with the significant reported rise in the supply of deposits from households and firms (PNFCs) (Chart 3). This supply of deposits was expected to rise significantly further in Q2. Lenders commented that subdued consumer spending and a preference for low-risk, liquid savings structures were contributing to the growth in supply of household deposits.”

    Have you ever wondered what “other assets” means on the BoE Balance Sheet? I think it is basically all the money (£375 b) the BoE key stroked into the Asset Purchase Facility to buy government and corporate IOUs. You will see there ain’t a lot of corporate stuff in it. http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/apfquarterlyreport1301.pdf . Merv don’t believe a central bank should buy anything except the currency issuing governments’ IOUs, in case he has to swap IOUs with the banks to pull commercial bank money (credit), out of the economy if inflation is sighted ahead.

    Will Mr Carney play a similar hand, or will he insist that Osbo get his fiscal stimulating finger out of his rectum and put monetary policy in the back office on stand-by for a while?

  18. Ralph Musgrave
    Posted April 21, 2013 at 1:54 pm | Permalink

    As JR says, a country that issues its own currency can simply print money and buy back its own debt anytime. That’s why the debt and deficit are complete non-problems: the constraint on boosting the economy is inflation, not the debt or deficit.

    As to the idea that printing money and buying back debt will be inflationary, the latter “buy back” policy is exactly what QE consists of, and there is not evidence that QE has had a big inflationary effect.

    But if the policy were to prove inflationary, that’s easily countered by raising taxes and/or cutting public spending. The latter might be a POLITICAL problem, but there is no strictly economic problem there. As long as the stimulatory / inflationary effect of that QE equals the deflationary effect of the increased tax or cut in public spending, there is no net effect on GDP or employment or anything much.

    • Denis Cooper
      Posted April 21, 2013 at 6:26 pm | Permalink

      One study by the Bank of England produced a central estimate that the first £200 billion of QE had added 1% to CPI:

      http://www.bankofengland.co.uk/publications/Documents/workingpapers/wp442.pdf

      But it could have been 2%, and presumably with £375 billion of QE it would have been even closer to 2% on the preferred model.

      A 2% increase in consumer prices may not seem that much but it represents a permanent reduction in the purchasing power of any given sum of money, for example an annual salary, so it is not a cost free option for the population as a whole.

      Eventually if QE was continued then it would start to impact on the external value of sterling, which it has not done so far, and that devaluation of sterling against other currencies would lead to higher import prices and more inflation.

      • Mark
        Posted April 22, 2013 at 3:58 pm | Permalink

        I think that QE did have an impact on the exchange rate. Although the policy wasn’t formally announced until January 2009, the exchange rate had fallen in anticipation over 2008 from ~100 at the beginning to ~77 on a trade weighted basis, when its precursors were already in operation (the Special Liquidity Scheme and the Credit Guarantee Scheme have essentially been repaid out of QE cash deposited with the banks). QE was widely anticipated – and indeed, some city banks were involved in the design of the scheme.

        • Denis Cooper
          Posted April 23, 2013 at 10:47 am | Permalink

          Well, the all-time high of the sterling trade weighted index was 106.8 on January 23rd 2007, a year later on January 23rd 2008 it was already down to 96.3268, and then it fell during the rest of 2008 to an all-time low of 73.8 on December 30th 2008 before bouncing back up towards the high 70’s.

          Nobody was talking about printing money during 2007 or most of 2008, and even as late as January 19th 2009 Darling correctly told Osborne that as then proposed the APF scheme did not involve the creation of more money, although that was a possibility for the future:

          http://www.publications.parliament.uk/pa/cm200809/cmhansrd/cm090119/debtext/90119-0005.htm

          “The last thing about which the hon. Gentleman asked was the question of monetary policy and quantitative easing, which I mentioned quite deliberately in my statement, because I wanted to tell the House exactly what we are doing. Under the scheme that we are proposing, there would be no increase in the amount of money going into the economy, because for any additional money that the Bank of England puts in through normal market operations, an equivalent sum will be taken out, so that it will not affect the quantity of money in the economy.

          I did say, however, that by having this mechanism it is possible that if, at some point in the future, we wanted to use it for monetary purposes, it could be so used, but that is not what we are doing at the moment. I shall repeat to the House what I said this morning: if that policy changes, I shall tell the House.”

          And at that point, when the APF was to be funded by the Treasury using existing money and not by the Bank creating new money, the maximum involved was only £50 billion, not £375 billion.

          With so much else going on in the country and around the world all the time I’m wary about over-interpreting relatively small short term fluctuations of the sterling index, but while there may well have been some forerunning in late 2008 it seems that if the successive tranches of quantitative easing have had any effects on the external value of sterling then so far they have been mildly positive rather than negative.

          The broad brush picture is that since the end of February 2009 we have gone from the APF owning zero gilts to now owning about £375 billion of gilts, all bought with newly created money lent to it by the Bank, and there has been no clear effect of the sterling index: it was about 79 then, it has cycled up to the low 80’s and back down again more than once, and now it happens to be very close to 80.

          Reply Which is why the government could repay the gilts and the loan buying them in the Asset Purchase Facility Co, endorsing the creation of the new money that was used to buy the bonds so there is no hole to fill.

  19. margaret brandreth-j
    Posted April 21, 2013 at 1:57 pm | Permalink

    I actually want the same as JR., yet instinctively I am scared. I feel as though at this stage there is a wide gap between stand alone UK political reality and desire.

  20. Gary
    Posted April 21, 2013 at 6:19 pm | Permalink

    By all accounts last week’s take down of the paper price of gold has caused a stampede of demand for the physical metal. Completely counter intuitive to the intentions of the paper money Lords. The intention was to get people to dump their gold and move into paper currencies, but the opposite occurred. The reason is that now there has been created a bargain knock down price of physical gold, with speculators using the hammered down paper price to acquire physical gold via taking delivery of future contracts for gold.

    The unintended consequence is to hasten the demise of the paper currencies. Management of the economy by Politiburo is starting to inevitably resemble management by Keystone Cops.

    • Mark
      Posted April 22, 2013 at 4:14 pm | Permalink

      The evidence suggests strong flows out of “paper” commodities (i.e. futures, CFDs etc.) into gilts and treasuries as a temporary safe haven. This is of course hot money, which will seek a safer home before governments get the idea of partial default as a way of avoiding the consequences of a selloff. It’ll be like Nancy and the Artful Dodger in Oliver! “I’ll go first” “No, I’ll go first”.

  21. Mark
    Posted April 21, 2013 at 6:37 pm | Permalink

    The reason for the collapse in gilt yields is not hard to discern: with the tree being shaken on investment in commodities, money flowing out of those markets is going into gilts as a temporary safe haven – safer than stuck in a bank account for now.

    That may not look so smart if the state does decide to repudiate its debts, even if only to the Bank of England at first – which would bankrupt it. The UK would be wise to see what happens somewhere else with an attempt to do something similar. The historical precedents are not good. Repudiation of debt makes all lenders unwilling to lend. That would mean no deficit spending at all: state employees perhaps not being paid on time, and salaries and welfare sharply cut. We’d soon look like Greece or Cyprus.

    Reply It would not repudiate its debts to Bank of England – the state has already bought up this debt so it owes it to itself!

    • Denis Cooper
      Posted April 22, 2013 at 11:14 am | Permalink

      JR, the Bank and government are two separate arms of the state; through its APF subsidiary the Bank has bought some of the debts of the government, to the value of abour £375 billion, and cancellation of those gilts now legally owned by the APF would be a government repudiation of its debts to the APF; the APF would then be unable to repay the Bank the money lent to buy the gilts, and the Bank would then be bankrupt, ie it would have negative net assets.

      Reply You could cancel both sides of the account.

      • Denis Cooper
        Posted April 22, 2013 at 6:17 pm | Permalink

        I’m looking at page 54 in the last Annual Accounts of the Bank of England:

        http://www.bankofengland.co.uk/publications/Documents/annualreport/2012/2012account.pdf

        On February 29th 2012 the Bank’s total liabilities were £312 billion while its total assets were £315 billion, but of that £315 billion of assets by far the greatest part, £287 billion, is described as “Other loans and advances”, and Note 11 the accounts explains that this is almost entirely “Loan to the Bank of England Asset Purchase Facility Fund Ltd”.

        If the gilts that the Bank of England Asset Purchase Facility Fund Ltd had bought with that loan had been cancelled on March 1st 2012 then it would not have been able to repay the Bank, and that £287 billion of assets on the Bank’s balance sheet would have instantly evaporated, and instead of having a £3 billion surplus of assets over liabilities it would have been bust with negative net assets of about £284 billion.

        Reply You cancel both sides of the books, the asset and the liability. The Treasury/Bank/Fund just put through the necessary book entries.

        • Denis Cooper
          Posted April 23, 2013 at 8:22 am | Permalink

          Which liabilities on the Bank’s balance sheet could be cancelled?

          As the creditor to the Treasury the Bank could forgive the Treasury its debt and so sacrifice that asset, but as the debtor the Bank could not unilaterally cancel liabilities without the consent of its creditors.

          Comparing the balance sheet for February 29th 2012 with that for February 28th 2009:

          http://www.bankofengland.co.uk/publications/Documents/annualreport/2009/2009accounts.pdf

          which was just before the first purchases of gilts were made on March 3rd 2009, the great expansion of the assets has been the loan to the BEAPFF, while the great expansion of the liabilities has been in two kinds of deposits.

          Mostly “Deposits from banks and other financial institutions”, up from £42 billion to £218 billion, but also “Other deposits”, up from £32 billion to £70 billion, in combination an increase of £204 billion from £74 billion to £288 billion.

          Cancellation of those £288 billion of liabilities would mean telling the depositors that they’re not going to get their money back.

        • Mark
          Posted April 23, 2013 at 9:41 am | Permalink

          Let’s put this another way:

          the only reasons there isn’t a massive selloff in gilts are:

          gilt holders believe that the BoE will probably continue to pay silly prices for more gilts for a while yet before the Emperor’s lack of clothes is exposed;

          everyone likes to pretend that there are “new clothes” – i.e. that gilts will be repaid out of taxes in due course, for fear of the consequences should someone call time on the reality that the cupboard is bare;

          perhaps some credibility might attach to the potential for new hydrocarbon resources to bail us out, but government policy is hardly supportive, and nor is the BBC – Roger Harrabin was trying to suggest that companies with hydrocarbon assets are overvalued because they wouldn’t be allowed to extract them in future (I think he should worry more about the financial soundness of windmill companies).

          • Denis Cooper
            Posted April 23, 2013 at 11:08 am | Permalink

            It’s buying time, with the average maturity of all the gilts in issue being about 14 years as I have read. And even if the average maturity of the gilts now held by the Bank is shorter than that, the Treasury could always arrange for its debts to the Bank to be rolled over by swapping them for longer dated gilts. Something it can also do with private gilts investors, but they have to be willing to do it whereas the Bank is a kind of captive gilts investor and far less likely to decline to reinvest the redemption proceeds in new gilts.

    • Mark
      Posted April 22, 2013 at 12:38 pm | Permalink

      The state is already virtually bankrupt. It is using the BEAPFF as a SPV to hide that off balance sheet, in much the same way as Enron used some subsidiaries to hide the extent of their real losses.

      L’État, c’est moi. “lending” to yourself to pay bills isn’t lending: if it is accepted by the payees then they will find that the payment turns out to be counterfeit – not backed by a stream of real revenues that would allow proper payment.

  22. forthurst
    Posted April 21, 2013 at 8:36 pm | Permalink

    In Episode 434 of the Keiser Report on RT:

    “Max Keiser and Stacy Herbert discuss Reinhart and Rogoff, Excel errors, correlation and causation and the gold selloff being a bonus for ‘activist central bankers’ who can now claim ‘hyperinflation no longer a threat.’ In the second half of the show, they talk to Dr. Paul Craig Roberts about the smackdown in gold and the failure of ‘laissez-faire capitalism’.”

    Dr Roberts also discusses the likely consequences of the Fed following through on its purported intention to go cold turkey on QE.

  23. Duncan
    Posted April 22, 2013 at 6:13 am | Permalink

    QE has been a travesty. It has been used to shore up balance sheets of banks that should have been allowed to fail (and banksters jailed). Instead, the money should have been lent directly to small and medium businesses and for public projects – e.g. infrastructure spending.

  24. Tony Houghton
    Posted April 22, 2013 at 10:20 am | Permalink

    Is it not time for comments on John’s Blog to be more positive in nature. We are all frustrated by the way our leaders are not leading and not tackling properly the economic crisis that we live with. Now is the time to construct a manifesto for the next Parliament. I believe have the skills and brains within this blog’s commentators to build such a manifesto.

    Perhaps John you would guide us positively towards this goal?

    Reply As Chairman of the Conservative Economic Affairs Committee I am just starting work with colleagues on ideas for the next Manifesto. I will consult through this website and elsewhere as we go along, and welcome positive contributions at any time.

  25. Lindsay McDougall
    Posted April 25, 2013 at 3:53 pm | Permalink

    I understand that 1.7% is the rate being charged on NEW 10 year borrowing. In 2012, government debt was £1039 billion and debt interest was £47.2 billion, about 4.5%. The explanation is that much of the £1039 billion was borrowed in the past, when interest rates were higher. From 1999 to 2008, base rate ranged between 4% and 6%. Since 2009, it has been 0.5%.

    Allowing for this averaging effect, it would appear that raising base rate to 3% would not have a catastrophic effect on the state’s annual debt interest rate. If we also carried on reducing the annual state deficit, all would be well.

  • About John Redwood


    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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