Next Monday the Bank of England will dish out £38bn to the holders of 4.75 per cent UK Treasury 2015 stock as it matures. It will pay almost half of that to itself, before plunging into the market to buy more government debt with the cash.
The cash is recycled because the BoE has set its own rules for managing this monster programme, and with QE set at £375bn, it has pledged to keep buying to replace maturing issues.
In plain language right now the Bank of England owns a massive chunk of this 4.75% Treasury Stock that was issued by the government. And it has to be cancelled by repayment. This is as much true of the part owned by the Bank of England as it is of the part owned by other people. But, since the Treasury remains committed to quantitative easing the Bank of England has no choice but go back and buy new bonds to replace those that are being replaced. And that is precisely what it will do - to the tune of more than £15 billion.
Now, let's first of all think what this means. First, it means that the government still has an active quantitative easing programme. That needs to be said because no one else is doing it.
Second, what it means is that in effect the £375 billion is not being repaid: it is instead being rolled over. The paranoia about QE that it must be repaid is not happening in practice. When debt comes up for repayment it is simply being replaced. In other words, a lot of nonsense about the need to replace QE in times of growth (which it is claimed we are enjoying) is not being evidenced in practice. In practice we are still going ahead with QE in a supposed time of growth. Some honesty on this point would be very useful.
Third, given that People's Quantitative Easing and quantitative easing are the same in their financial functioning as both buy government issued bonds to be held for an indefinite period by the Bank of England there is no reason why the money to be reinvested next week could not be used for People's Quantitative Easing. In fact, George Osborne has already authorised this.
And, fourth, this is the one and only way the Bank of England has a chance of delivering on its inflation target right now.
So, when people ask me whether we need People's Quantitative Easing now the answer is yes because a) inflation policy demands it b) the investment need demands it c) QE monetary policy demands it and d) nothing could deliver real wage growth for real people - which is one of my central economic goals - quicker or better than this.
And what is more, this does not even threaten the hallowed Bank of England independence any more that it is compromised already.
It really is time for those to object to come up with some real arguments as to why it should not be done.
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A good blog. Highlighting these roll-overs helps explain that the People’s element of PQE is not about creating more money but about ensuring that the money created delivers growth and social benefits, not just inflated financial assets.
Why not ramp up PQE, for vital infrastructure renewal — Green housing, Green energy, electrification of railways and new rolling stock would be a useful start. It would be quite interesting if USA, Japan, UK and EU area used PQE in the same ratio as the employed QE! Estimated amount of QE ($) per capita (p.c.) per annum (p.a.), averaged arbitrarily over a 5 year spend, and GDP at 2010 is: USA : Japan : UK : Euro area = $2900:$1560:$1200:$600 p.c.pa., i.e. 1:0.61:0.52:0.26. USA being largest QE issuer, so who caused / required most assistance from the financial crash? New Labour’s muted non-challenging response allowed Osborne, Cameron, Cridland and Carney to build a rigged austerity consensus.
http://data.worldbank.org/indicator/NY.GDP.MKTP.CD
http://siteresources.worldbank.org/DATASTATISTICS/Resources/GDP.pdf
Richard is the FT right to say the BoE will be repaying £38 billion? I would think this is wrong. Surely under ‘ordinary’ QE the Bank holds the Treasury stock which it has ‘bought’ with its creation of electronic money, and the Debt Management Office, an Executive Agency of the Treasury, is responsible for paying out when bonds mature. The BoE is thus a recipient, to the extent it holds the stock at maturity. Or have I missed or misunderstood something in this conceptual morass?
You are right: the point they are making is the gov’t is paying the gov’t that will then use the cash the gov’t has given it to buy some more of the gov’t’s debt
Bleedign obvious, isn’t it?
Bleeding obvious indeed like everything to do with QE! Agreed, he was trying to point out the circularity, but I was surprised the FT’s writer was so off piste in explaining who actually ‘dishes out’ what to whom, given that the legal-conceptual separation between the BoE (sort of independent central bank) and Treasury (government) is supposed to exist and be formally respected!
Good, wasn’t it?
Bet they don’t understand it
Why has PQE not received more support before now? As a non economist it seems a sensible (if not straightforward to understand) mechanism to pump money into the country and not always rely on markets and private companies. Was PQE effectively what USA did after WW2 to boost infrastructure?
Not quite what US did
But in many ways, what everyone did after WW2, U.S. included
Why hasn’t it been done?
Because, to be blunt, an elite do not want it
QE has suited then very well, making them very much richer at cost to everyone else
thanks Richard.
Would I be correct in saying that Yvette Cooper’s assertion that PQE is PFI on steroids is inconsistent with the fact that the interest paid back on bonds issued by National Investment Bank would be significantly lower than any repayment via PFI?
Totally
I stress this is not personal, but Yvette has quite emphatically got this wrong
The US massively reduced government spending after WW2 and ran a large surplus for a few years.
We spent a great deal and reduced debt
That’s the advantage of spending a lot – it produces surpluses
Thanks for writing this Richard, I’ve been saying this since 2009, I assume the real reason for austerity was to prevent inflation, it’s kind of a Monetarist’s QE, ie you’re not allowed to increase the money supply because inflation, but Freedman’s theories failed so we’re going to have to increase the money supply to stop the markets seizing up, but hey if we cut the public sector wage bill then that will stifle inflation, and the richest will stuff the new money straight into their offshores, it will never get spent and it won’t be taxed back, the only problem is that, it will eventually cause a huge crisis.
..Thomas Edison and Henry Ford were asked about the financing of a large infrastructure project at Muscle Shoals. Edison’s answer, as it appeared in the New York Times on December 6, 1921
“….“Then you see no difference between currency and Government bonds? “Mr. Edison was asked.
“Yes, there is a difference, but it is neither the likeness nor the difference that will determine the matter; the attack will be directed against thinking of bonds and currency together and comparing them. If people ever get to thinking of bonds and bills at the same time, the game is up.
“Now, here is Ford proposing to finance Muscle Shoals by an issue of currency. Very will, let us suppose for a moment that Congress follows his proposal. Personally, I don’t think Congress has imagination enough to do it, but let us suppose that it does. The required sum is authorized —say $30,000,000. The bills are issued directly by the Government as all money ought to be. When the workmen are paid off they receive these United States bills. When the material is bought it is paid in these United States bills. Except that perhaps the bills may have the engraving of the water dam, instead of a railroad train and a ship, as some of the Federal Reserve notes have. They will be the same as any other currency put out by the Government: that is, they will be money. They will be based on the public wealth already in Muscle Shoals, and their circulation will increase that public wealth, not only the public money but the public wealth–real wealth.
“When these bills have answered the purpose of building and completing Muscle Shoals, they will be retired by the earnings of the power dam. That is, the people of the United States will have all that they put into Muscle Shoals and all that they can take out for centuries–the endless wealth-making water power of that great Tennessee River–with no tax and no increase of the national debt.”
“But suppose Congress does not see this, what then?” Mr. Edison was asked.
“Well, Congress must fall back on the old way of doing business. It must authorize an issue of bonds. That is it must go out to the money brokers and borrow enough of our own national currency to complete great national resources, and we then must pay interest to the money brokers for the use of our own money.
Old Way Adds to Public Debt.
“That is to say, under the old way any time we wish to add to the national wealth we are compelled to add to the national debt.
“Now, that is what Henry Ford wants to prevent. He thinks it is stupid, and so do I, that for the loan of $30,000,000 of their own money the people of the United States should be compelled to pay $66,000,000–that is what it amounts to, with interest. People who will not turn a shovelful of dirt nor contribute a pound of material will collect more money from the United States than will the people who supply the material and do the work. That is terrible the terrible thing about interest. In all our great bond issues the interest is always greater than the principal. All of the great public works cost more than twice the actual cost on that account. Under the present system of doing business we simply add 120 to 150 per cent. to the stated cost.
“But here is the point: If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good also. The difference between the bond and the bill is that the bond lets the money brokers collect twice the amount of the bond and an additional 20 per cent., whereas the currency pays nobody but those who directly contribute to Muscle Shoals in some useful way.
“If the Government issues bonds it simply induces the money brokers to draw $30,000,000 out of the other channels of trade and turn it into Muscle Shoals: if the Government issues currency, it provides itself with enough to increase the national wealth at Muscle Shoals without disturbing the business of the rest of the country. And in doing this it increase its income without adding a penny to its debt.
“It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay: but one promise fattens the usurer, and the other helps the people.
If the currency issued by the Government were no good, then the bonds issued would be no good either. It is a terrible situation when the Government, to increase the national wealth, must go into debt and submit to ruinous interest charges at the hands of men who control the fictitious values of gold.
“Look at it another way. If the Government issues bonds, the brokers will sell them. The bonds will be negotiable: they will be considered as gilt-edged paper. Why? Because the Government is behind them, but who is behind the Government? The people. Therefore it is the people who constitute the basis of Government credit. Why then cannot the people have the benefit of their own gilt-edged credit by receiving non-interest bearing currency on the Muscle Shoals instead of the bankers receiving the benefit of the people’s credit in interest-bearing bonds?”
Says People Must Pay Anyway.
“The people must pay any way: why should they be compelled to pay twice as the bond system compels them to pay? The people of the United States always accept their Government’s currency. If the United States Government will adopt this policy of increasing its national wealth without contributing to the interest collector–for the whole national debt is made up of the interest charges–then you will see an era of progress and prosperity in this country such as could never have come otherwise….”
If a country can issue a bond it can issue a bill. What makes the bond good makes the bill also. One fattens via usury, the other for the people.
Very good, Bob.
Can you give us a link to that?
Overall, the question of whether monetisation, or monetary financing is viable – or legal, is now fully settled. In effect, it is already being done. The public needs to know that.
In which case the remaining question concerns the most constructive and effective way of doing it. PQE seems to have the best answer that has been offered thus far.
To that end (if I may digress slightly)I stumbled across something interesting today and I am wondering if anyone else has heard of the “red pill” metaphor. Maybe you have and I’m obviously a bit new to this area.
The following is an excerpt from Business Insider Australia article from 2012. I found it from a link inside an F.T. Alphaville article from the same year:
“On Saturday, we wrote that more and more people are starting to wonder if central banks like the Bank of England and The Fed can just “rip up” the debt that they’ve bought via Quantitative Easing, and reduce the national debt of these countries with the stroke of a key. Asking this question, and thinking about the implications of it, is the equivalent of taking the ‘Red Pill’ of economics. The Red Pill, of course, is what Neo took in the Matrix, and it exposed his mind to an entirely different view of the world that was far less comfortable than the one he inhabited. If you start thinking about the possibility that the central bank could just rip up a government’s debt, with few negative ramifications, then you might start thinking about government finances in a totally new way that makes you uncomfortable.
You might start to realise that this whole construct of a broke government, deeply in hock to the Chinese (and everyone else) is an illusion, that completely distorts the realities of sovereign finance.”
The article then goes on to cite a couple of very serious people (Grice & Marcusen)who invoke the usual Weimar/Zimbabwe demons, but it ends by saying:
“We’re not sure if Marcusen’s stance is right, but the point is clear, just based on the fact that this is the top client question right now: more and more people are escaping the prison of their minds!”
http://www.businessinsider.com.au/top-client-question-can-central-banks-just-cancel-sovereign-debt-2012-10
I like that, a lot
Here’s a tongue in cheek use of QE.
PFIQE.
1/ Use QE to buy PFI debt…
2/ ….errrr…cancel the debt.
Result is increased reserves paying 0.5% pa IOR.
Which colossally reduces funding costs. It’s essentially a sort of debt/equity swap.
Chris
Have already suggested it
I agree!
Richard
Warren Mosler used the red pill analogy in his 7 deadly innocent frauds book. And, of course, it is just that!
“£38bn to the holders of 4.75 per cent UK Treasury 2015 stock as it matures. It will pay almost half of that to itself, before plunging into the market to buy more government debt with the cash.”
I struggle to think of less value added uses of human endeavour than this circus.
Some technical points.
Rolling over existing holdings of government debt as they mature is not the same as active QE, which involves the Bank of England increasing its asset holdings. Rollovers simply aim to maintain asset purchases at their existing level. The Bank has already explained that it would unwind QE by ceasing to roll over gilt holdings as they mature.
However, rollovers do have a slight easing effect, because they increase the duration of the Bank of England’s asset holdings. It’s the same as a very small Operation Twist.
If we had a National Investment Bank, it would be possible to replace matured gilts within the Bank’s holdings with NIB bonds, since these would simply be another form of government debt. However, they would be bought instead of the equivalent gilts, and gilts of course represent other forms of government spending – including the little investment spending currently being done. So unless the Bank actually increased its purchases, the effect is a wash.
We do actually have an active QE programme at the moment, but it doesn’t buy government bonds. Funding For Lending is a form of QE.
As usual we have technical disagreements
In this case it is for the obvious reason that there is at present no NIB debt, so of course the impact would be different
‘Real arguments’!!?
That’ll be the day!