I received an email yesterday which said:
You must stop misleading the press and public about the so called Peoples QE. It is more borrowing and not as you describe.
My logic is below using your explanation of what Peoples QE means:
1. New Borrowing is issued by the Green Investment Banks, Local Authorities etc presumably for a variety of terms eg 3, 5 and longer terms.
2. This borrowing is then purchased by the Bank of England.
3. Unless this new borrowing at 1 is cancelled (and to the best of my knowledge none of the first QE debt has been cancelled)
then this new borrowing at 1 adds to the total of UK government debt.
4. The purchased debt at 2 sits on the Bank of England balance sheet and 2 is not set off against 1. UK accounting rules do not allow this
since the debt at 1 still exists. To argue than people will in practice set 1 and 2 off is naive and not in accordance with UK accounting rules.
5. The Bank of England, being independent, can sell 2 at any time as market conditions allow. There is no effect on 1.
This is a polite warning about the flaws in your Peoples QE claim before it comes under wider scrutiny.
So let me make clear why I am not misleading anyone with what I am proposing.
Step 1 as noted here is correct, although I suspect the terms will be a lot longer than noted: many will be for up to 25 years given this type of QE is suited to major projects.
Step 2 is wrong. Because of EU law the bonds have to be sold into the financial markets first, but there is no reason at all why this could not be for an agreed fee akin to underwriting, after which the bonds are, indeed purchased by the Bank of England.
Step 3 is where I begin to disagree with the logic. I have long argued that if a government owns its own debt then it is impossible to argue that the debt still exists in any meaningful way. If the public sector produced consolidated accounts (as would be required of a private sector entity) the Bank of England would be considered to be controlled by the government and the debt owing between the Treasury and Bank of England would fall out on consolidation meaning that no third party liability would be reported as owing. In that case to argue that the government has increased its borrowing when in fact this is just an internal financing arrangement is simply factually wrong even if the loan itself is not cancelled.
Step 4 is wrong. Of course the individual entities can record the assets and liabilities. But in a group consolidation UK accounting rules would most definitely require the offset of the two: that's precisely what group accounting is all about. It would be wrong not to offset the two. The claim made is factually inaccurate as a result.
Step 5 is wrong for political reasons. It is said that the Bank of England is independent. It is not in practice. Its head is appointed by the Chancellor and is answerable to him. Appointments to the MPC and other Boards are with Treasury consent. Whatever the law says this is de facto control, certainly for accounting substance over form purposes. And let's be quite blunt: if a government wanted to do People's QE and the Bank objected you can be sure the 1998 Act creating Bank of England independence would be repealed or modified very quickly indeed, as I am quite sure Mark Carney and his predecessors will all have known, as will his successors. So the claim is not politically sustainable.
In other words all these arguments fail to hold any water. I am happy for the wider scrutiny to come my way in other words.
And whilst we're about it let me deal with another issue raised by someone called Bill on the blog, who in a series of questions basically said that it could not be true that these bonds were interest free given that statutorily the Bank of England has to pay over only 25% of its profits to the Treasury and that it was also not true that these loans did not have to be repaid.
On the interest issue, first of all whether or not interest is paid is pretty academic. First, if it is then the government could simply increase the grant to the agencies paying it and in turn receive it back via the Bank of England. The sum involved and even the rate is irrelevant in that case. And Osborne proved when, in 2012 as I recall it, that he could make claim to all the profit made by the Bank of England on QE which then exceeded £30 billion that the over-ride to the Bank of England's right to retain profit which says words to the effect 'unless agreed otherwise by the Treasury and Bank of England' actually means 'unless agreed otherwise by the Treasury'.
As for loan repayment, this will, of course, have to happen. A loan without a repayment date is not a loan. But as I explained to Bill:
And as for repayment, suppose a 25 year bond comes to repayment day. The day before the borrower issues a new bond to a bank which then sells it to the Bank of England for almost the same price, and then the next day the borrower uses the proceeds to repay the Bank of England the original loan. Net consequence? Zilch. No effective repayment: the borrower still 'owes' the same sum, the BoE still owns the same effective asset and apart from an irritating small fee to a bank for effectively doing nothing no money really changes hands when all is done and dusted. And the new interest rate is irrelevant: it is still circular.
The consequence is that, in effect, no real repayment is ever needed.
Or, to put it another way, People's QE works.
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It is at step you and PQE go wrong as the BoE’s balance sheet will not match assets with liabilities.
After step 2 the BoE has an asset (bonds) and a matching liability (cash).
In step 3 you simply remove the bonds from the BoE balance sheet – saying they can be cancelled at no cost. The net effect of this means that the government has to make the BoE balance sheet whole. This can either be done by giving cash to the BoE (which the govt must get from taxes or new, non-QE debt) or by printing new money.
The former option negates the extra cash created by PQE. The latter is simply Zimbabwe style money printing.
So what you are really suggesting with PQE is monetarism, not QE. QE works by lowering rates and increasing the amount of base money through exchange for other existing assets (normally debt). PQE gives you lots of extra cash to spend by simply printing it. You’ve tried to disguise what PQE really is but a quick look at the process you describe through simple accounting practices exposes it for what it truly is.
Unfortunately, it’s been tried many times before, and has always been a failure. Fiat currency is a store of value – but PQE is not creating any extra value. It is simply increasing the amount of fiat currency in circulation, which historically has only served to debase the fiat currency.
Double entry is not your strong point, is it?
Or logic come to that
I have not send the bonds are cancelled in law, although economically de facto they are, which is what matters, so the balance sheet will balance
Which it could if they were cancelled by the way: the double entry is to reserves
And no, this is not monetarism. I would argue QE is just that. PQE is fiscalism using the right to seignorage
Actually the BoE is pretty specific when it comes to QE – and even have a helpful guide to the double entry book keeping and balance sheet accounting.
Your mistake is that you think you can “cancel” the debt, which removes the asset side of the BoE balance sheet, and create new, unencumbered assets by doing this.
Of course, what you are really doing (as had been pointed out by other both on this blog and others) is simply printing money to fill the hole left by the “cancelled” debt.
PQE is monetarism, not fiscalism, and the seignorage you refer to implicitly only is profitable for the government in the sums you descibe through the action on significant inflation. It’s not creating any new value, it is simply destroying the face value of the fiat currency.
As with others, it is now clear you are not here to add value
That was your last post
I have already dealt with all the issues you have raised
Maybe you should read this:
Quantitative easing has been nicknamed “printing money” by some members of the media, central bankers, and financial analysts. The term printing money usually implies that newly created money is used to directly finance government deficits or pay off government debt (also known as monetizing the government debt). However, with QE, the newly created money is used to buy government bonds or other financial assets, Central banks in most developed nations (e.g., the United Kingdom, the United States, Japan, and the EU) are prohibited from buying government debt directly from the government and must instead buy it from the secondary market. This two-step process, where the government sells bonds to private entities that in turn sell them to the central bank, has been called “monetizing the debt” by many analysts. The distinguishing characteristic between QE and monetizing debt is that with the former, the central bank creates money to stimulate the economy, not to finance government spending. Also, the central bank has the stated intention of reversing the QE when the economy has recovered (by selling the government bonds and other financial assets back into the market). The only effective way to determine whether a central bank has monetized debt is to compare its performance relative to its stated objectives. Many central banks have adopted an inflation target. It is likely that a central bank is monetizing the debt if it continues to buy government debt when inflation is above target and if the government has problems with debt financing.
Note:
The distinguishing characteristic between QE and monetizing debt is that with the former, the central bank creates money to stimulate the economy, not to finance government spending.
Exactly why people’s QE is QE
And why the first QE failed as it simply financed government debt i.e. State spending
I rest my case
You have none to make
So stop wasting my time
How much of the national debt has been paid off?
Answer: None.
How do you suppose banks lend money? House prices are at an all-time high, and the stock market is at record highs because of all the virtually interest-free money the government throws at the banks. This inflation is apparently OK, though.
Can you tell me why it is OK for private corporations to pocket the gains of money creation but not governments? Why do we have to go through the pretence of borrowing when it is in reality re-mortgaging and rolling over previous debt by issuing new debt?
Technically, it is borrowing but the national debt simply grows. It is an unpayable debt.
Thanks, Richard.
Surely the other thing to say here is that, as the original QE showed, the government is perfectly willing to use QE when it suits it. Original QE was supposed to ensure that the banks funnelled money to the real economy, on which score it has been an almost total failure.
This is purely a question of political priority – if the government wants to get the money to the real economy more directly, People’s QE would be a much more efficient way to do it, with the added bonus that it’s also much easier for the government to control than essentially giving the banks a massive boost and crossing their fingers that the banks will do the right thing (as if).
I am amazed by all those commentators who have been saying “but it’ll lead to inflation” – nobody said this when original QE was being rolled out.
Nor do they say it about commercial banks extending loans to private individuals and companies which has exactly the same economic impact
“Original QE was supposed to ensure that the banks funnelled money to the real economy”
This is where you, Richard and others are so wrong. This was not the aim of original QE.
The aim of original QE was to reduce yields to keep interest rates down.
I agree the interest rate objective
But you also ignore the fact that this was to be achieved by creating new interest free money to be pumped into the real economy
Stating half a proposition is not the real thing
The same result would be achieved by printing money and handing it to the local authorities for them to spend. This, economically, is exactly what is happening.
Why go through the rigmarole of getting local authorities to issue bonds, having them sold to banks (who will no doubt take a nice cut themselves through underwriting), then having them bought back by the BoE? You can cut out all that palaver by simply turning on the printing presses and giving it to the department of health, education, transport or whichever runs your pet project.
This is why I say that PQE is nothing more than printing money to finance government expenditure. You have somehow managed to make it sound far more interesting, complicated and novel than it actually is, whilst raising your profile massively at the same time. And for that I suppose one has to applaud you.
If you want to be profligate without proper governance and accountability structures please say so
I don’t
Well, I suppose you have a point.
We can be profligate without proper governance and accountability structures.
Or we can be profligate with proper governance and accountability structures.
At least with the latter you give PQE a veneer of respectability. But, either way, you’re admitting you’re profligate.
I did no such thing
But it is clear you are only here to troll
So that was your last post
I set out a possible architecture over 5 years ago on Labour List
http://labourlist.org/2010/02/qe-or-not-qe/
Basically Treasury Branches (the name survives in Alberta from their social credit experiment) would create the necessary £ credits directly under the management of service-providers-formerly-known-as-banks who cover agreed costs and have a stake in the outcome.
A Monetary-Authority-formerly-known-as-a Central-Bank would supervise the process and set parameters.
Government would decide the areas for investment, which would of course focus on productive people and productive assets, notably genuinely affordable housing and massive investment in energy efficiency in particular.
This revolving pool of credit would be used for financing development: the productive assets created would then form the perfect vehicle for investment of gazillions existing £ currently earning negative real returns.
The fiscal question of pre-distribution of existing wealth via levies on privileged property rights is another story.
Mr Murphy,
My email to you was a polite private email and was not intended to be published on your blog. It is discourteous to describe me as “someone called..” when my comments were submitted to you in goodwill. I hope you publish this reply.
David Gow
The copyright in an email, like a letter, belongs to the recipient
I used my right to publish it
In goodwill
“The copyright in an email, like a letter, belongs to the recipient”
Wrong.
Source?
It is normal to seek the agreement of the sender of the email before the email is published by the recipient. You did not seek my consent.
No
I could see no reason to do so
And still can’t
The copyright in an email, like a letter, belongs to the AUTHOR, not the recipient.
Therefore you actually have no right to publish it without the original author’s consent.
The question looks unresolved in UK law to me
In US law it requires copyright to be claimed
And I treated the mail like a comment on this blog, which to me seemed entirely fair
But I have removed the authors name which should resolve this, I hope
“And I treated the mail like a comment on this blog, which to me seemed entirely fair”
Don’t you think that if he had intended it as a comment on the blog, he would have posted a comment on the blog, and not sent you a private email?
I think you are flogging a dead horse
Debate over
Again I see my post has been blocked or deleted.
UK and US copyright law is essentially the same. WTO TRIPS 1995.
The author holds the copyright, not the recipient.
Unless the authoor consents to publishing, or posts in a public forum himself copyright is breached.
It is clear the author did not consent. It seems Richard Murphy is very much in the wrong on this one – but seems unwilling to post an apology.
I have deleted the name
And you are wrong on US law
The author has to make clear they are claiming copyright
And I am deleting your comments in general because they breach my comments policy
Tedious repetition is not debate but it what you are offering
Richard
You are a little out of date on US law. In the past there were situations where it was necessary to claim copyright in the US but the US signed up to the Berne convention in 1989 and since then there is no requirement that copyright be claimed in order for it to exist.
Others on here have accurately stated the UK position which is that the author of a work (including a humble email) is the owner of the copyright. You say that you think the position is unresolved in UK law. I suggest a brief chat with a suitably experienced lawyer would be of use in improving your understanding of the subject.
The issue is resolved
I amended the blog
Now you are just time wasting
Something I note you are good at when it comes to the level of pedantry and missing anything approaching the big picture
Since you’re happy for wider scrutiny to come your way here’s another one for you. In The Independent yesterday Andrew Grice wrote an article about Corbyn allies accusing Chris Leslie of deliberately misrepresenting some of Corbyn’s policies. The article includes a few quotes from you. Attached to the end of the Grice article is an “analysis” piece by Ben Chu where he isn’t too keen on PQE.
http://www.independent.co.uk/news/uk/politics/jeremy-corbyn-allies-accuse-chris-leslie-of-deliberately-misrepresenting-labour-leader-contenders-economic-policies-10436258.html
It basically goes that as the economy is growing the Bank of England is no longer engaging QE. Corbyn wants to reactivate QE for investment but it’s not clear why he doesn’t just borrow from the markets instead as “there don’t seem to be any advantages of using the Bank of England as an agent” and there are “significant potential drawbacks”. PQE might raise inflation and the Bank might be perceived to have lost its independence. The main argument seems to be that we’d better off just borrowing the money.
He also mentions Corbyn hasn’t acknowledged that removing the £93bn subsidies might have some costs to the public, although as far as I’m aware Corbyn hasn’t said he’ll remove every single pound out of the £93bn and I’m sure he would look carefully at each component.
There isn’t any criticism in the analysis that you haven’t already covered before. What surprised me about this piece was that it was an “analysis” and not an “opinion” piece. In his analyses of areas of dispute Chu tends to present both sides of the argument, but he surprisingly didn’t do that here. It’s rather odd that you are quoted in the Grice article as saying there is “no chance whatsoever” that PQE would cause inflation that Chu doesn’t address your arguments on this. And from his previous writing I would say Chu isn’t a fan of Osbornomics, so it’s not that he’s got political bias against PQE.
Will be dealing with this soon
What you are suggesting is Zimbabwe-style money printing.
QE is really very different. It takes a long term liability in the form of government debt and replaces it with short term liabilities in the form of cash. The liability side of the balance sheet stays exactly the same. QE works by injecting short term cash, or “liquidity” into the banking system whilst at the same time reducing long term interest rates through the purchase of said government debt. The aim is to spur the economy through the effects of lower rates when short term interest rates are already near or at zero.
What QE isn’t is money created out of thin air. What you label “green QE” or “people’s QE” most definitely is money created out of thin air.
Finally, ask yourself this question: If GQE/PQE really was a viable policy option, why hasn’t it been utilised by any respectable government? Surely any politician who could promise us near unlimited government spending with no negative consequences would win quite a few elections whilst showering the country with gifts of increased spending on everything. He could even cut taxes at the same time…
Since the BoE say QE is money created out of thin air I suggest all else you say is also wrong
But why trouble yourself with that?
Or trouble asking why it is so OK for all commercial banks to create money out of thin air but not the government? Because that is how all lending occurs
But I suspect you do not know that
Sounds as though we are about to disappear into the mazy folds of fractional reserve banking again.
One counterbalance to the apparent fear that people seem to have of inflation caused by PQE could be that the government simultaneously puts a stringent cap on how much leverage the banks can create for themselves? Lest we forget, if you deposit £100 with a bank then within seconds they can, under the Basel rules, turn it into much more. 8% capital requirements means that, by the time that £100 has been lent on five times, it’s magically turned into £393 in circulation (£100 in; bank 1 lends £92, bank 2 lends £85, bank 3 lends £78, bank 4 lends £72, bank 5 lends £66).
So: bank pays (at most) 1% interest; banks charge (at least) 6%. Interest charged = £23.58; interest paid = £1. Nice little earner.
And if magically quadrupling the amount deposited (which, with interbank loans, can happen within seconds) isn’t creating money out of thin air with all the consequent inflationary pressures (but which benefits nobody but the banks involved), I don’t know what is. Not a new issue; Jefferson famously said that, if you showed him who controls a country’s money supply, he didn’t care who made its laws.
People’s QE would be a very useful weapon in trying to combat this.
That banking logic is wrong
The BoE said so in April 2014 Quarterly Bulletin
Bank lending is wholly independent of bank borrowing
Zimbabwe’s problem was not printing money. It was the destruction of the tax base (mainly productive land in their case) which underpinned their money.
Having been in Zim at the time of hyperinflation (and paying for dinner in “bricks” of random Zim dollar notes – weighed not counted), I can tell you for free that the destruction of the tax base was the start of the problem but as the economy collapsed the government simply resorted to printing money in ever larger amounts to pay government employees, the army and to fund their excursion into the DRC. Confidence in the currency collapsed and the government simply printed more notes of higher denominations. Etc.
Until of course, the ink ran out. Literally.
But to suggest we are anywhere near such a situation is just ludicrous
Where did I suggest that?
But it looks to me like printing money Zimbabwe style as you are suggesting is a very bad idea.
If this is your understanding of what I ma saying you are wasting my time – and I will treat your comments as such
“If GQE/PQE really was a viable policy option, why hasn’t it been utilised by any respectable government?”
It hasn’t had the chance. When we get a respectable government, it will be.
“Since the BoE say QE is money created out of thin air”
Where do they say that?
“Or trouble asking why it is so OK for all commercial banks to create money out of thin air but not the government?”
Because historically the latter has been shown to be far more inflationary than the former. You don’t need me to give examples, you know them.
April 2014 BoE Quarterly Bulletin
And there is no evidence of that at all
I’ve just read this.
The BoE says QE money is not created out of thin air.
‘Although commercial banks create money through lending, they cannot do so freely without limit.’
‘As a by-product of QE, new central bank reserves are
created. But these are not an important part of the
transmission mechanism. This article explains how, just as in
normal times, these reserves cannot be multiplied into more
loans and deposits and how these reserves do not represent
‘free money’ for banks.’
OK, so where did the £375 billion come from?
Nicholas says
“I’ve just read this. The BoE says QE money is not created out of thin air.
‘Although commercial banks create money through lending, they cannot do so freely without limit.’ ”
But Nicholas… money is created out of lending. Which is a concept, not a thing. That’s entries in a ledger, not actual stuff. Not anything. No thing. NOTHING. So, the money is created out of nothing. Just in case anyone is still failing to grasp this, “out of thin air” is another way of saying “from nothing”. Just clearing that up, for the hard of thinking.
All this quote states is that there is a limit to how much money the banks can create. You know… Basel regulations… tier 1 capital… all that malarkey? Those restrictions mean commercial banks can’t create endless amounts of money by issuing endless loans. That doesn’t change the fact that they create it – yes – out of thin air.
Please tell me this is getting through.
Bank makes loan = money is created
Debtor repays loan = money is destroyed
People still clinging on to the idea that banks lend from deposits taken = my head hurting from ever harder beating against walls
Not really rocket science, is it?
Not rocket science
But the vast majority do not get it
The reason that money created by commercial banks tends to be deflationary rather than inflationary is simply because it is created as debt. Such a system is ultimately unsustainable as eventually the debt extrapolates exponentially and we are approaching that situation globally – Greece is already there!
Printing money per se is not inflationary nor does it lead to a Zimbabwean style collapse in the value of money. It’s the amount of money in circulation in relation to the requirements of the economy that matters and obviously if printing money takes you into that realm then the result is only to be expected… but it is not due to the source of the money.
The current on-going depression is a result of too little debt-free sovereign money in the financial system – in the UK’s case less than 3% – down from 50% in 1970 when there was a 50:50 balance of sovereign and commercial bank debt based money at £50bn of each. Now there is £100bn sovereign money – or £475bn if you include £375bn QE. But since 1970 the banks have created £1,850bn [£1.85 trillion!] – or a mere £1,475bn, if you reduce it by the amount QE has replaced.
As the above debate/argument shows one of the problems is the failure of accounting practices to cope with acquired assets or gifts since it seeks to allocate a creditor to balance the asset. I wonder how the Pilgrim Fathers showed a creditor in their accounts for the debt they incurred in acquiring all that virgin land – it certainly wasn’t
to the Native Indian Americans!
In the end this argument is the result of [a] an accounting system that is dysfunctional in relation to sovereign money [b] a lack of appreciation that economies require an amount of money appropriate to their level of activity [c] a failure to realise that the more money that has been supplied as debt the more will be required in total as the debt sucks the economy dry.
Adair Turner and Michael Kumhof [IMF] understand what needs to be done: progressively hike up commercial bank capital reserve requirements to 30%! At the same time progressively introduce new debt-free sovereign money as infrastructure spending: transport, education, health – i.e roads, railways, schools, hospitals ….estuary airports, estuary barrages for tidal power etc i.e. People’s QE? and no more ludicrous PFI. It’s all here:
http://www.positivemoney.org/2013/04/...
although I don’t support Positive Money’s total ban on commercial bank created debt money – less than 50% is perhaps OK!
I do wonder if Ed Balls knew what needed to be done but was frightened to elaborate:
http://www.3spoken.co.uk/2014/12/how-to-eliminate-uk-deficit-trick.html
though I don’t know how this squares with his wife’s dismissal of Corbynomics – but maybe that’s just the cut and thrust of an election battle!
“If the public sector produced consolidated accounts”
You mean these Richard.
https://www.gov.uk/government/collections/whole-of-government-accounts
Do you want a job as my research assistant?
I should have looked at these before…have been in my inbox for weeks
On p112 of the WGA 2012-2013 it states the following: “Gilts held by public sector entities are eliminated on consolidation and removed from the balance above, with the exception of gilts held by funded public sector pension schemes.”
However, on my understanding, the BofE isn’t considered to be included in the constellation of public sector entities for the purposes of this report. Please correct me if I’ve read this wrongly. However, a swift use of the provisions of the 1998 Banking Act regarding government intervention and mentioned elsewhere on your blog comments could easily change this – or, more directly, a revision of basic legislation.
It is definitely consolidated – notes make it clear it must be
But thanks for looking
Having now read your later posting, which I hadn’t seen because of reading the WGA, I’ll just say “you beat me to it!”. However, I can’t find the BofE in Annex 1 of the list of entities consolidated under WGA 2012-2013.
Interesting – because I looked too
But it clearly is
“And let’s be quite blunt: if a government wanted to do People’s QE and the Bank objected you can be sure the 1998 Act creating Bank of England independence would be repealed or modified very quickly indeed ”
Doesn’t need to. It’s already there is you know where to look.
Like a lot of New Labour legislation the ‘independence’ of the Bank of England is a bit of a smoke and mirrors act.
§19 of the Bank of England Act 1998 refers:
http://www.legislation.gov.uk/ukpga/1998/11/section/19
Thanks
Amused
Thought I was right. Had not had time to check
I have a question regarding your statement: “Of course the individual entities can record the assets and liabilities. But in a group consolidation UK accounting rules would most definitely require the offset of the two: that’s precisely what group accounting is all about. It would be wrong not to offset the two.”
Why are you not also offsetting the deposit asset/liability?
Please correct my logic if I’m wrong, but my understanding is..
Government issues a bond. It gains the bond as an asset, and the corresponding liability of bond repayment.
The BoE buys the bond, gaining the bond as an asset and creating a deposit liability. In non-consolidated accounts the government account loses the bond asset and gains the deposit asset.
If we consolidate the accounts, then the combined entity has a matching bond asset and liability and a matching deposit asset and liability.
I understand your point about netting the bond asset/liability, but don’t understand why you don’t also net the deposit asset/liability. What am I missing?
What is left is an asset i.e. what is invested in, and a liability – which for the government is what is cash is as they promise to repay it
From http://www.taxresearch.org.uk/Blog/2015/08/03/chris-leslie-has-got-corbynomics-wrong/:
“Richard Murphy says:
August 7 2015 at 8:14 pm
I accept all you say re QE Tim
But where is the bank deposit with a private sector bank created in PQE?
I am genuinely interested to know: their only role is as a temporary intermediary so how is the interest bearing reserve created?”
OK Richard, I will pick this up here as it seems the most appropriate of your subsequent posts.
You misunderstood David Gow’s email. By “issued”, he means that the Green Investment Bank (GIB) bonds are sold into the financial market. And then as you agree, they are bought by the BoE. It is that purchase which, assuming that the temporary holder is a non-bank like a pension fund, creates a private sector bank deposit. When the BoE pays for the bonds, it effectively writes the pension fund a cheque. When the pension fund pays this into their bank, their bank credits their account, presents the cheque to the BoE and is paid in the form of credit in the bank’s current account – in other words, its reserve account – at the BoE. A base money deposit (ie owned by a private sector bank) and a private sector bank deposit (ie owed by a private sector bank) of equal value have been created.
Now let’s leave aside what happens to the pension fund’s bank deposit – whether they retain it, transfer it or pay down a loan (in which case deposit money is eliminated). What is of key interest here is that a private sector deposit at the BoE has been created, and this bears interest at the BoE repo rate. This is not eliminated until either the government taxes or borrows money and deposits the proceeds in the BoE, or the BoE issues another form of its own debt, which drain the reserves.
Whether you cancel the GIB bonds held by the BoE is irrelevant. The BoE must keep paying the BoE repo rate on the reserve deposits created when the GIB bonds are bought.
And since the BoE remits its net profit to the government, any interest expenses it pays reduces that flow to the government and therefore requires the government to raise more revenue than otherwise from taxes or borrowing.
As I said in my first comment on the other post, the bottom line is that the GIB may as well be funded by issuing floating rate bonds to the private sector, and leaving the BoE out of it. But given that the returns on the GIB’s projects are more likely to be of a steady nature, that would represent a punt on interest rates staying low, and given the historically low level of long-term interest rates, could come to look like an unwise decision. Better to just set up a GIB and get it to issue its own long-term bonds to fund itself.
I can imagine that you find such facts hard to accept, but there is no point misleading people. I am in the Green Party myself, so I am used to disappointing such proposals!
This is really bizarre logic
No pension fund will be involved
This will be a back to back transaction through a bank
Tell me how that creates a long term liability at the BoE when barring the EU there would be no need for it at all
You have inserted wholly unnecessary assumptions to make your claim
Now can you explain your claim based on what I wrote?
I was not sure what you meant by a “deposit with a private sector bank”, so I gave the example of a non-bank temporary buyer of the GIB bonds. In practice, the buyer would be something like a bond dealer like an investment bank, which may or may not also be a commercial bank with a reserves account at the BoE. If you assume that the GIB bonds are temporarily bought by a bank with a reserve account, then the logic becomes simpler. The BoE is able to pay the seller in reserves directly into its own current account at the BoE. I would describe reserves as a “private sector bank deposit with the central bank”, and in that case there never need be a “deposit with a private sector bank”.
Reserves are also a long-term (actually indefinite) liability of the BoE, if that is what you mean by a “long-term liability at the BoE”.
Please understand that, when you insist on moderating comments, the back and forth is slowed down, so you need to be very precise about the terms you use, or accept that the argument might get a little more convoluted because your commenter may try to cover several interpretations of what you might mean with one comment.
But all this is just semantics. The point is that the money that finances PQE is reserves, and reserves bear floating rate interest at the BoE repo rate.
Sorry Tim
A private bank has a momentary involvement in PQE: the transaction is cancelling
Now tell me where the reserves that require interest to be paid come from
You have not
You agree that PQE is funded by money creation, right?
(by the way, your best description of PQE seems to be this: http://www.taxresearch.org.uk/Blog/2015/03/12/how-green-infrastructure-quantitative-easing-would-work/ )
What form of money do you think is created?
What is your answer?
Genuine question: I need to know where you are on the issue