Readers will recall my post that published correspondence between Glynn Worthington, who reads this blog, and the Bank of England.
Based on my reply Glynn went back to the Bank of England, saying:
Dear Brendan,
I referred your email directly to Professor Richard Murphy, who, in his blog this week, says quite bluntly, that you are lying when you say that the Bank of England has not financed government by printing money.
As the Bank of England says on its own web site:
"Quantitative easing (QE) is an unconventional form of monetary policy where a Central Bank creates new money electronically to buy financial assets, like government bonds. This process aims to directly increase private sector spending in the economy and return inflation to target."
So new money is created. And this helps fund the government. Indeed the Bank of England returned the interest payments to the government! What is that unless funding government?
Might I say too that I fear you didn't answer my query concerning the order of things. I say that spending comes before taxation. What is the Bank's view, in simple English?
Kind Regards,
Glynn Worthington.
The questions were direct, appropriate and fair. Glynn has now shared the Bank's respone with me:
Dear Mr Worthington
Thank you for your further email of 15 September. Professor Murphy is entitled to his own view, but we at the Bank think differently about QE.
The reason for that, is because at some point in the future, the Bank will sell its government bond holdings back to private investors. And those bonds will then have to be repaid by the government as and when they mature - just as they would for any borrower.
I hope that you can see that this approach is rather different to simply printing money and giving it the government. That is not a policy which the Bank has undertaken and is not what we think of as QE.
Your question regarding the return of interest payments to the government is a very reasonable one. As the owner of government bonds, the Bank accumulates interest repayments paid by the government. We return those monies to the Treasury.
So, there is a portion of the stock of outstanding government bonds that the government effectively no longer pays interest on. You might think of it as a 0% loan. But it is still a loan. Again, I hope you can see that this is different to printing money and giving it to the government.
Regarding whether taxation is necessarily required to finance government spending, the answer is no, it is not. Along with raising money via taxation, governments can borrow money and they can create money outright.
Regarding money creation, we tend to think that while monetary policy (in general) might boost spending for a time, eventually it will push up on prices, and inflation, which brings 'real' spending power back to where it would have been without that stimulus.
I hope that answers your question.
Kind regards
Nicole
Public Enquiries | Communications
Bank of England |Threadneedle Street|London|EC2R 8AH|+44 20 3461 4878
That seems to require some unpacking.
First there is the quite extraordinary claim that the Bank will sell its bonds back to private investors. This has not happened yet. Mark Carney gave no hint that it might yesterday but was looking at the long term. And in other places where QE has been used this has not yet happened, although in fairness the US says it might try doing so, which might be useful to prove just why this is such a bad idea when new debt creation for public benefit is so much more useful. And when the only direction of travel so far has been literally trillions of pounds, euros, dollars or yen (it does not matter which currency you use) going into QE purchases and precisely none going the other way, to rely in this argument is, I would suggest, pretty desperate. To imply that all debt will be sold back is worse than that; it is right now an utterly implausible claim.
Adair Turner has argued that in practice it should be recognised that this debt has been monetised. I agree with him. In view of what Mark Carney said yesterday I think deep down he would also agree. There is no chance that all this debt will actually be resold to the public. To claim that it will be as if it is a fact in the way the BoE does here is wholly inappropriate. They have a duty to talk about the world as it is, and not about a fantasy that clearly does not exist.
Second it's curious that the BoE wants to pretend both that this debt exists and that there is no special relationship regarding it with the government when so obviously the interest waiver proves that this is not true. What that waiver proves is not that there is still the same debt as they claim, when that debt was characterised by the interest payment, but that the debt in question no longer exists because its terms have been waived. The original debt obligation has been cancelled in other words, whatever the BoE claim. That is the reality that needs to be faced. The question is what has replaced it. I return to that below.
Third, there's the oddity that it is claimed that these debts will be redeemed in due course. Technically, of course, some redemptions have already happened. And QE debt has been rolled over despite that technical redemption: new gilts were used to replace those redeemed. Again, reality has been suspended and the BoE needs to admit it.
Fourth, there is the curious issue of whether there is a new loan or not at zero interest rate. That's open to question for reasons already noted. What there undoubtedly is is a debt. And on this issue the BoE really should read its own bank notes. Money is a debt paying zero interest. That is one of its major characteristics. So the BoE is in this case party to a zero interest rate loan that it claims is not money because it claims it is a loan, when all money is a loan because all money is in reality debt that is ultimately underpinned by the government on the basis of its ability to raise future taxation revenue, which is what also underpins the value in this relationship. Far from the existence of this loan proving there is no money created in in this relationship I think it precisely proves it does create money, in precisely the usually accepted form that money has. The BoE has, I think really shot itself in the foot here.
But it is the fifth claim which is fascinating. To reiterate, the Bank says:
Regarding whether taxation is necessarily required to finance government spending, the answer is no, it is not. Along with raising money via taxation, governments can borrow money and they can create money outright.
Incredibly importantly, the Bank admit that tax is not necessary for government spending. This is the admission of something I have long argued and proves that we do not have tax and spend in the UK (or elsewhere) but instead have spend and tax. The spend comes first and how to pay for it comes second. Borrowing is an alternative.
But what is most interesting is the admission right at the end of this paragraph, that the government can create money outright. This is, of course, a fact. The so-called 'Bradbury pounds' issued in World War I were Treasury created money that by-passed the Bank of England entirely and were completely accepted as currency (and why not; after all they too were backed by the promise of future tax revenue?). And the Bank is admitting here is that this is possible now. I suspect they had little choice but do so. After all, on their balance sheet they are holding £435 billion of government (or Treasury) promises to pay with no interest due on them. Or you might call it, Treasury created money as the residual balance sheet component of QE, in which the Bank have been an active and knowing participant. This is government created money used to cancel a liability - for the gilts that the BoE nominally holds but on which no interest is paid. Of course the BoE has to agree that the government can create money.
And that is precisely why it then goes into a vigorous defence of why it should not do so, saying:
Regarding money creation, we tend to think that while monetary policy (in general) might boost spending for a time, eventually it will push up on prices, and inflation, which brings 'real' spending power back to where it would have been without that stimulus.
This is farcical. £435 billion has failed to do deliver this outcome. Around the world trillions has failed to deliver much inflation. And when Brexit inflation falls out of the system (as it will if negotiations go well) then the need for more stimulus to create inflation in the UK will arise again, and with it demand for more QE. So the bogey of inflation can be ignored.
In that case what's left in the statement? Well, it's a simple admission that monetary policy - the whole raisin d'etre of the BoE - does not work. In other words, the whole farce of Bank of England independence has been a waste of time. What was always needed was, and is, fiscal policy. Or People's QE, I would suggest.
The reality is that the BoE has just made the most extraordinary series of admissions. They will require further thinking and comment. But as I now need to head for Holyrood I leave others to start that process.
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Delicious typo in penultimate paragraph! (putting the grape – raisin – at the heart of existence seems reasonable to me).
Autocorrect!
Richard’s just keeping up with currant affairs!
Richard,
How does the oddity that coins are issued by and are a debt of the Treasury whereas notes are a debt of the BoE play with this? Could the Treasury not just issue lots more coins bypassing the Bank of England? Or create very high value coins?
It could
Krugman argued that this should happen in the States – arguing for a trillion dollar coin
Hi Richard,
I’ve been reading your blog for a little while, and whilst it’s interesting stuff, there is an aspect of it that I don’t really agree with, and this post really sums it up. You seem to be saying, along with other proponents of MMT, that because the government could finance its spending through new money creation, it therefore is doing that – there is the muddling of the theoretically possible with the actual situation.
Whilst I completely agree that QE was of course new money creation, and indeed that it certainly indirectly supported the government finances, I’d have to agree with the respondent in the above letters – the QE money did not directly flow to the government.
Rightly or wrongly, the government balances its spending with taxation and borrowing. As long as it maintains a policy of doing that, I don’t see how you can argue that it spends money into existence – there is no new money created in the spending / taxing / borrowing process. Even if you take the view that taxation is money destruction, and spending is creation, the net creation is always going to be zero unless the government authorises new money to be created, QE style, for the express purpose of financing spending – overt monetary financing.
The only money creation mechanism, outside of QE, is of course banks issuing new loans. And whilst the government authorises that process, it cannot use that money for public spending unless it taxes it or borrows it.
Grateful for your thoughts
I think you are mistaken
It appears that government funds itself with tax and borrowing
But tax always lags spending (hence a deficit)
And borrowing plug saw the gap, but again after the spending has occurred
The government does not raise borrowing in anticipation of spending, it borrows to clear its account
QE is a convoluted way of circumventing this least process
I agree the net result is most money appears to be created by commercial banks, but all of that is entirely under licence and the reality is that gilts are quasi money
So I do not agree with you and suggest appearances are deceptive and you have been deceived
Thanks for the reply.
Do you have any evidence to support your suggestion that the spending happens first? My understanding was that the DMO’s job was to keep enough of a buffer in place to sustain the government’s spending needs – the government’s CF account is zero’d every day via a payment from the DMO (or to the DMO, if they are in surplus). But the DMO, as far as I know, aren’t allowed to run an overdraft with the BoE – they have to keep a positive balance, which they do by forecasting the deficit and issuing new debt accordingly.
I don’t see how your assertion that the government spends money into existence is compatible with the above process – the government is not creating any money. Even if you view gilts as quasi money, the money used to buy them comes from outside the government (ignoring QE, which is clearly a huge exception). And even if you view the banks as agents of the state, the money they create cannot be spent by the government until it has been received as tax or payments for bonds.
It comes back to my original point – the government may in theory not need to tax or borrow to fund spending, but under the current arrangement, it absolutely does.
My undertsanding is the reverse of yours
What evidence do you have?
Although I’d stress, this does not change my suggestion that the spend comes first – after all, cash settlement is only the fulfilment of the promise to pay, which comes first
After all, how else can the DMO predict settlement if the commitment is not already made?
I formed that view from reading about the DMO – this sums it up quite well – http://www.dmo.gov.uk/docs/remit/drmr1718.pdf
There’s a section on the full funding rule from 2.12 onwards, as well as some stuff later on that shows how they maintain a buffer in their cash account to cater for a gap between the OBR’s debt requirements forecast and the actual need during the year. I should also say that the NS&I forms a fairly important part of the picture as well – not strictly bonds, but another form of government debt all the same.
As long as the government maintains the full funding rule, I don’t see how you can legitimately say that it ‘spends money into existence’, or that taxation is not done for funding purposes – under the current system, it most definitely is. If the government collects less in tax, it has to borrow more in order to maintain the full funding rule. Clearly, they could abolish that if they wished, but that is a separate discussion.
I will get back to you on this
But not today
I think you have missed the role of Treasury Bills
These are issued (and also withdrawn) weekly
They mop up the effective overdraft
They do not last more than six months. Many are shorter
You may say this means that an overdraft is not needed. I say this is exactly what they are.
Hi Richard
I look forward to your longer reply. In the mean time, I don’t follow your argument regarding treasury bills at all I’m afraid. Aside from being short term and zero coupon, they are exactly the same in terms of money flow as gilts – money created in the private sector (QE aside), flowing from the private sector into the government which then spends it on public services etc. Without the flow in, the government could not spend and follow the full funding rule. Whether it’s taxation or borrowing, the government needs the money, which it did not create, to fund the spending – as long as it follows the rule.
Whilst our debate on whether the government is ever overdrawn (and I don’t think it is, although I’m interested if you have evidence to the contrary) is certainly interesting, it’s somewhat irrelevant regarding my broader point – if taxation and borrowing are balanced by spending, then no money is being created, and the government needs the taxes to fund its spending.
You wholly miss the point
The government spends (spending is when the promise to pay arises, not when the cash is passed over) and then has a range of choices (tax, bills / bonds and money printing) to pay for it
But you think the spending is the money movement. That’s not true and is your error. Sorry – spending is the promise to pay and that creates the money. The tax / bond etc cancels it. Printing money records it more permanently : that’s the only difference
Sorry Richard, this just makes no sense at all:
“But you think the spending is the money movement. That’s not true and is your error. Sorry — spending is the promise to pay and that creates the money. The tax / bond etc cancels it. Printing money records it more permanently : that’s the only difference”
Yes, I would say that spending is the money movement – that’s what spending is, surely? When the doctor gets her salary paid into her account – that’s government spending. If the government pays that from its BoE account, funded with tax or borrowed money, then no money is being created, is it? If it gets the BoE to ‘print’ it, then that’s money creation – the money supply is being increased. That’s a massive difference.
Sorry – I think you really need to learn some accountancy and some economics
No one with any economic accounts for spending on a cash flow basis now and accountancy has not for a century or more
For heaven’s sake if your argument is based on a fallacy realise it is wrong
BK – you assert: the QE money did not directly flow to the government.
I didn’t think anyone had been saying – QE money directly flow to the government – as this would be against article 123 of the Lisbon Treaty.
The accusation is that QE money INDIRECTLY flowed to government – which would appear to be the case since the BoE have created £435 billion new money between 2019 and 2017, but all they currently have is a shed load of Gov bonds!
Precisely
Hi Martin
I think we’re all in broad agreement on QE.
The point I was trying to make was that Richard has said that the notion that the government needs taxes to fund spending is a myth – in my view this is not a myth at all. It is the absolute truth, as long as the government abides by the Lisbon treaty, as you rightly point out, and its own full funding rule. Spending has to be offset by taxation and borrowing – if there was less tax, there would be more borrowing.
To describe the government as ‘spending money into existence’ seems to be misleading – the money creation, leaving QE aside for the moment, is happening outside of the government. The government is therefore not the producer of the money – it needs to tax and borrow in order to spend.
That situation, of course, could be changed, but it is not the situation as it stands right now.
Again, I will get back to you on this – but not today
Martin Kilgariff is right ,of course, but I think that BK’s point stems from the notion that QE is a swap of bonds (and/or some other assets) in exchange for reserves. Hence the expansion of reserves.
One of the main problems with that notion is that which concerns the fate of those bonds, when they have reached maturity. Hence redemption and the effective cancellation of govt. debt etc. I won’t go on. You know the est.
As far as I know government funding is allocated to departments, agencies and NDPBs and spent. I take the spend to be instanced at the moment that a debt is created; in other words on an accrual and not a cash basis (as you will know accrual accounting is a recent development in government accounting which in parts is still cash based) and so your theory would have to apply across time to be valid. Further there are then a range of contingent liabilities and unanticipated overspends.
Surely money (the recognition of a debt in the books of the supplier) is created at the point of the supply (along with the VAT liabiltity) .
Your use of the word “buffer” recognises that money / debt creation precedes taxation / borrowing.
The extent to which this activity is cancelled out then arises. I would think that taxation does have this retrospective effect however given the complexity of the data and the poor quality of government reporting systems the balance on the DMO control account would always be a notional one.
Does borrowing, the issue of gilts, then cancel that excess of money/ debt created. The BoE seem to be saying that it does in the short term but not in the longer term. Not sure.
The accruals concept clearly rules here – you are right
The rest – I am working on, maybe tomorrow
And maybe not….the day job needs attention and the trip to Scotland was a bit of a distraction
Gov spending “nets to zero” (if there is a balanced budget), so that the spending cycle can continue, ad infinitum.
In reality some (around 10% pa) of government spending is saved (in Gilts) by the non-government sector (largely in private pensions, but also by corporations, banks, and foreign exporters to the UK).
This private (incl. external) sector savings equals the annual deficit, and accumulated national debt, pound for pound.
Once, if ever, it gets spent as opposed to saved, it will incur taxes on initial and subsequent transactions in the normal way, and the deficit, and perhaps eventually the debt, will be eroded as a result. But this would mean the total eradication of private sector savings, so be careful what you wish for!
The idea, however, is that the whole system continues – ideally forever, so imagining that there will be some future “Day of Reckoning” when all public debt must be repaid, is a neo-liberal inspired nonsense.
A government gilt is a form of money. The government creates them, and ‘asset swaps’ them for existing bank of england reserve currency.
Bank of England reserves can’t actually be used to buy anything directly (I don’t think). They just sit there on the BoE computer system… a certain amount registered against each private Bank, for both UK and foreign banks. Banks just transfer it to each other by informing the BoE an account to debit, and an account to credit, and the reserve money is moved. It never even physically leaves the country if foreign goods are purchased. The BoE just transfers it to a foreign banks account, held on the same Bank of England computer.
when you look at it this way, it’s clear the bank of england is just a big score keeper…. just keeping track, to the penny, of where all the money is.
So, when the government spend, the BoE creates NEW reserves against the private bank of the company it wishes to pay, and the private bank then adds bank credit to those accounts that need to be paid.
And when the government sells gilts, it removes those reserves to that value, and the private bank marks down the customer’s account who just bought them. Similar for when the government collects tax. The only difference is that when the gilt matures, the government adds back the reserves it removed, and a bit of interest, at this point. But reserves also command a tiny bit of interest anyway (.25% the base rate).
The only thing that by mandating that all spending is covered by tax’s and borrowing (gilt sales), is the amount of reserves is kept roughly constant, with gilt sales/tax removing reserves by the same amount government spending is adding them back.
Can you see how this is obviously sustainable…..100%. its never EVER going to be at the mercy of bond vigilantes.
The government creates gilts from nothing (money creation).
There will always be enough reserves to buy gilts….because the gov spent them into existence.
Government spending means that more reserves than needed will end up in the system.
SO, there will always be a market to buy gilts. Why would a bank sit on reserves its doing nothing with when it can get more return by exchanging them for gilts?
Tony
There are elements of truth in here
But not as such between reserves and gilts as I see it
Nor do I have time to address it: sorry
Richard
The bank’s original raison d’etre (I note you’re now making multilingual spelling errors :-)) was surely to replace gold as the currency everyone needed to trade with its own product, banknotes, supposedly gold-backed but in reality, obviously not. It’s always been a scam, one which from its very early days has been protected by government. Later, to increase demand for this product, tally-sticks were done away with, and the peasantry were forced off the land, away from peaceful bartering, and into the factories where they had to work to earn the bank’s product to exchange for the goods they’d formerly been able to provide themselves with from their land. Later this pattern was repeated abroad, it’s referred to as British Imperialism. Thus the world grew according to the needs of the bankers. I remain convinced the only real fix for this is for us to become the bankers ourselves, not in theory as now, but in reality with community banks available the length and breadth of the land.
Apple is making single language corrections of multilingual attempts!
I admit I think you punch logic further than it need to go
Bill Kruse, I think this was the dream of the cryptocurrency proponents. I suspect they will be thwarted by the establishment but they will leave Bitcoin etc. alone until they are ready to roll it up into the mainstream financial system.
I wouldn’t like to guess whether it really was originally a maverick application or a small scale field trial pretending to be alternative. No egg on establishment faces if the experiment proved to be impracticable.
The big boys (up to IMF level) have already adopted the blockchain idea to the extent of re-naming it DLT (Distributed Ledger Technology) presumably this gives them a feeling of ownership. Their current concern is working out precisely how they will be ensured of a good percentage on transactions I think. (cf the mobile phone industry. The clever part is the billing systems)
Many of those proposed aren’t actually distributed. They seem to be normal ledgers but sited on the internet as opposed to PCs. I call them mockchains, I hope for obvious reasons.
I am currently reading Werner’s ‘Princes of the Yen’.
The parallels with what is being said above are uncanny with Werner’s account of the behaviour of Bank of Japan after the credit bubble they created resulted in recession.
In all honesty not only is austerity the biggest lie but also the biggest rip off. It is credit and the misuse of money into assets (used to create more credit) that causes really damaging inflation – not creating money in order for people to live comfortably.
You’ve really got to ask your self ‘Who the hell is really in charge around here?’
Also look up Richard Koo’s talk at Acatis Konferenz 2016 on You Tube who explains precisely what the Japanese government did when it realised that QE wasn’t going to work, it used fiscal policy, surprise, surprise .
Of course….
Pilgrim SR, re ‘Austerity’ I have come across a number of commentators who maintain that there has been no austerity. Mostly they are coming from the finance sector where the sort of austerity that manifests in reduction and removal of benefits and the closing down of health and care provision does not register. For their own part they and their clients have money they don’t know what to do with and are seeking to make it safe.
Yanis Varoufakis refers to querying the point with George Osborne and getting a non-committal smile in return.
I hesitate to make a domestic budget parallel, but the notion that an individual with inadequate income can get out of poverty simply by spending even less is risible. To suggest such a course is a matter of political dogma and has no economic rationale.
I don’t know, technically, what would constitute a policy of austerity. The policy we have endured since 2008 seems to be based on misapplication of the biblical observation ‘To those that have shall be given and to those that have not even the little they have shall be taken away’ as if this was an instruction or policy recommendation.
Andy
In answer to what austerity looks like?
The austerity I have seen and endured in the public sector ranges from:
– having my wages cut
– receiving below inflation wage rises
– finding colleagues I was working with on beneficial projects disappear overnight (made
redundant) and the projects floundering
– seeing overpaid managers bribed by higher payments to do what is wrong to cut costs
– seeing investment and so called public money wasted as contracts are just severed by
budget cuts. We have a million pounds of IT equipment sitting in a warehouse doing nothing
that was the result of the Council cancelling the contracts in order to make cuts. The lie is that
such measures save money but a lot of it is wasted in the first year as contractual penalties are
paid for breaking contracts in the first place.
– The Council departments I work with now cannot recruit new people as the pay scales have
gone backwards. So everything (and I mean everything) is much slower and makes the public
sector look less effective. People are just leaving and cannot be replaced.
– those still here get more to do and some people eligible for retirement are told that they cannot
go especially if their role is statutory
– seeing more of our traditional face to face services being handed over to self service on the
internet or telephone when we know that these means of service access pose problems for
some groups such as the elderly and disabled.
I could go on. But that is enough. I’ve not even gone into what the people who depend on society to help them have gone through since 2010.
Pilgrim SR.
Yes, I get all that. That’s all symptomatic of implementation of a political assault on the public sector. An ongoing assault which started …forty(?) years ago and which I see as being almost entirely devoid of merit and has been extremely socially divisive and damaging.
I was musing about what an objective politically neutral economic austerity policy would look like,
and whether it would be defensible in objective economic terms.
The way austerity has been implemented in the aftermath of 2008 has been a travesty. I’m not sure that’s quite a strong enough word. Obscenity might be closer.
I’m sure your observations and experiences are familiar to anyone who has been employed in the public sector, and that it has been much (much) worse than it was during the nineties when I was employed in the NHS. And there was some pretty dubious stuff going on then.
What I find encouraging about Richard’s work is that he’s trying to instill some sanity and rationality into economic understanding, thinking and policy. He’s ploughing stoney ground, but he at least he isn’t a lone voice.
When politicians tell us that the economic reality is this or that or the other and imply they are speaking ‘common sense’ we have to remember that economics is not a discipline of common sense. From what I’ve read of their output many academic economists don’t understand the practicalities of their subject at all.
This reply really is all smoke and mirrors. When the BoE spokeperson writes:
The reason for that, is because at some point in the future, the Bank will sell its government bond holdings back to private investors. And those bonds will then have to be repaid by the government as and when they mature — just as they would for any borrower.
They are answering a question which has not been asked.
The reality is that at this very moment the BoE has financed much of the increase in the National debt. If the “printed money” is a gift or a loan, it’s still financing.
If a bank lends money to a business to expand, it’s financing it’s expansion, that the money will or will not later be repaid doesn’t effect the reality of it’s financial support.
This deserves a round of applause! And got for Glynn for keeping the conversation going. I can’t recommend Prof Richard Werner’s work highly enough – it is truly eye-opening. A good start is his book (along with Josh Ryan-Collins) ‘Where Does Money Come From?’.
*good for Glynn* not *got for Glynn*! my apologies
Shucks thanks! I started this off because I wanted to find a government source for the claims of economists like Richard Murphy. Linking to this blog, for example, can be dismissed by people and there was a black hole from official sources. Now we all have this admission!
Glynn,
Martina’s commendation endorsed over here aswell.
I cannot speak to the present conduct of the Bank of England, but it may be helpful to consider past experience; the one I know most about is Black Wednesday, the deepening shades of grey of the days which preceded it, and the angst which followed it.
When the Bank of England goes into the markets it does what everyone else does; it sets out what it believes to be the taxation status of the transaction it proposes. Unsurprisingly it called upon the services of the specialist technical advisors of what is now HMRC to confirm the advice given to it by other sources; perhaps more surprisingly to those unfamiliar with the financial markets that confirmation was frequently withheld, primarily because my colleagues and I did not wish to bankrupt our country.
If the Bank of England enters into tax avoidance transactions to reduce its costs of borrowing then every other player in the market can use the same devices: the law does not permit one rule for the Bank of England and another for everybody else, no matter how much the BoE would like that to be the case, and no matter how much it wanted to ignore that inconvenient fact.
That is where the bankruptcy bit comes in; the ship of state sailed serenely on, we lost a few billions when Lamont finally threw in the towel, but the poor bloody infantry were able to console ourselves with the fact that we had staved off tax losses of a great deal more than a few billion.
It may be that the culture of the Bank of England has changed, and that it can look beyond what’s happening now to the long term consequences of its actions. I have yet to see any evidence of that, but hope springs eternal…
“Thank you for your further email of 15 September. Professor Murphy is entitled to his own view, but we at the Bank think differently about QE.”
Richard, you should be furious at this. You didn’t mention this sentence in your blog for some reason, but basically the BoE have said you are wrong, should sod off and be ignored and they are the ones that know what’s right. I hope you will engage with them directly and correct them on their misunderstanding.
I very strongly suspect they read this blog
Perhaps where the trolls come from!
Keith
Why are you sometimes Crainshaw and others Crainshraw
And I’m sure you know of your hero status on the Worst of all blog.
The BoE says “we tend” (they’re none too certain!) “to think that while monetary policy (in general) might boost spending for a time, eventually it will push up on prices, and inflation, which brings ‘real’ spending power back to where it would have been without that stimulus.”
You may or may not get inflation but what your spending boost would definitely get you is a new railway or hospital or housing. That would be for life and less inflationary than leasing it from some PFI sham.
They have already admitted in their well known quarterly bulletin that private banks create much of the money supply. So they seem to be saying in effect they’d rather money was issued as debt rather than created directly. They don’t explain why one is inflationary “bringing real spending power to where it would have been” and the other isn’t. And this issuance of private debt isn’t going well according to the FCA (what a surprise) https://www.theguardian.com/business/2017/sep/18/britain-debt-timebomb-fca-chief-crisis
Very good point Peter
Peter
Given that the person drafting the letter from the Bank of England apparently doesn’t understand the difference between a loan and a debt, I am unsurprised that the FCA is worried by the Bank’s insouciance on this issue. Dispirited, but unsurprised…
Peter May,
Like all central banks, the BoE think that the normal conduct of modern monetary policy (inflation/interest rate targeting) through control of the overnight cash rate / open market operations IS variously inflationary or contractionary and that they are conducting those operations deliberately to maintain stability at a level they believe to be appropriate.
That’s what they think and that’s how they would answer your question. Mind you, before Brexit, inflation (the real, demand-pull inflation) remained well below their ‘target rate’ for quite a long time. I think that they are mindful of that. Hence the guarded (“we tend to”) answer.
To Richard and Glyn W,
It would be wise to exercise extreme caution before accusing anyone of lying, or being a liar.
Looking at Craig Murray’s blog recently, it would appear that he is facing potential bankruptcy due to legal action as a result of an alleged defamation along those lines.
It is not possible to libel the state and its agent organisations
I have made a suggestion with care
Ok.
But GW’s letter states the following:
“Dear Brendan,
I referred your email directly to Professor Richard Murphy, who, in his blog this week, says quite bluntly, that *you are lying*…”
My emphasis.
I’m not a lawyer, nor do I play one on TV, and perhaps GW is putting words in your mouth, but if I were Brendan Whastsisname, I’d be thinking I might be entitled to consult m’learned friends!
I just wouldn’t want Craig Murray’s predicament to befall you, or your blog, that’s all.
Fair comment
Thanks
“The original debt obligation has been cancelled in other words, whatever the BoE claim. That is the reality that needs to be faced. ” At present and historically, what keeps us working largely for the benefit of the banks is usury. Banks create money as credit, something they can’t do without our participation, then suggest we’re being loaned existing money and demand interest accordingly. This is a scam. In order to finance that imaginary debt interest, we have to keep going back to the banks for more money/credit, which they will again characterise as an interest-occurring loan etc etc ad almost infinitum. If Carney or the BofE freely admit this process to be unnecessary, that money may be effectively created without anyone owing anyone else interest, well, that’s the end of the bankers’ centuries-old usury scam. Hardly surprising the BofE and Carney find this reality difficult to face up to then.
Superficially trivial observation : why does somebody acting for and on behalf of and as a policy communications
ambassador ( ambassatrice?) for the central bank of a major trading currency first world jurisdiction sign herself as ” Nicole”? Nicole Kidman? Nicole in the 80s Renault advert?
No surname, no title, no indivudual job designation ( apart from general departmental data).
Is this how ( albeit email ) communicatiobs are signed off these days even on missives relaying such nationally influential policy advice? We obviously all now live in a first name happy clappy world where even the most formal pieces of information are imparted
as ” between mates”
Oh for the halcyon days of,
Your Obedient Servant.
Broderick,
You are not alone. I found that to be quite curious as well. Even the customer service clerks at my local council use their full name in signing-off on correspondence.
I suppose that the BoE are allowing their “Public enquiries / Communications” people the luxury (?) of anonymity for some reason.
You did use the word ‘lying’ in response to correspondence signed off by a named individual. You were clearly said he (as the signatory and presumed author of the piece) was lying – dishonest, not simply mistaken or of a different opinion.
Serious slur at someone just doing his job, probably not being paid megabucks, but who depends on his good name for his livelihood.
I’m a local authority worker – we get this kind of stuff all the time. We get weary of it. We feel like punching bags.
Disappointing to see it come from someone who should know better. It’s totally unacceptable and I sympathise with Brendan Manning, whom I do not know.
An apology sent to Brendan Manning personally and reproduced on this blog should be a minimum response.
He was replying in an official capacity for the BoE and the answer was not true in my opinion
But I will use more parliamentary language in future
There is no such thing as ‘official capacity’ in this context. You’ve made that up.
If an individual does some work and has his or her name on it, any aspersions cast relating to honesty of that work go back to that individual. The Bank of England can never lie. Only the people who work there can lie.
I am disappointed and frankly angry with this casual reply about the regular abuse public sector workers get. It can be perhaps excused when dished out by those who don’t know better. You should know better. You are not setting a good example.
An public apology is necessary.
Let’s get back to what this is about
An official at the BoE said it was illegal for the BoE to finance government spending and quoted a provision that he said dictated that
I quoted direct evidence from the BoE that it created new money (financing) to buy government bonds
The provision quoted only prevents direct funding. It does nor prevent indirect funding I.e. QE
And QE has funded government debt – about 25% of it right now – which indisputably funds government spending
So the claim made was untrue
And since the BoE should know what it is doing I think that should have been known
In which case my suggestion follows
If, however, the BoE does not know what it is doing clearly I should apologise and if that is your assumption I.e. that the person tasked with writing on behalf of the BoE does not know what it does, and may do, with what consequence, then I accept an apology is due and I offer it. I am genuinely sorry if they have been put in this invidious position
I hope that Tom is not from the Tim Worstall site. If he is it would seem that they are getting more sophisticated.
A lot have arrived here of late
It looks like they have nothing better to do
[…] The Bank of England admits monetary policy does not work http://www.taxresearch.org.uk/Blog/2017/09/19/the-bank-of-england-admits-monetary-policy-does-not-wo… […]
Amazing how indoctrinated even supposedly clued up people are about the nature of money, to wit…
If Labour announced a plan to have the BOE create £435 billion of new central bank money to fund a variety of government spending, the press would explode in a frenzy of condemnation. Yet when the BOE buys back historic government debt which was created to fund government spending, for the most part it is accepted; even when the treasury takes the further step of paying itself interest on the debt which the state now owns.
Is my recollection faulty?
I thought/think the QE process was started or at least proposed by Gordon Brown/Alistair Darling. Or am I confusing that with bank bailout measures and QE came later?
Darling started it….
Mr Brendan of the BoE fails to apply any logic to the absurd conundrum of the situation. If it is ultra vires for the Treasury to directly create money from nothing then so must it be so for the BoE since the BoE is nationalised and therefore a departmental part of central government just like the Treasury.
I am not a lawyer but clearly the law must provide a rational answer to resolve this absurd conundrum in the form of who does and who should have the power to create money from nothing. If the governor of the Bank of England doesn’t have this power clearly enshrined in law then his use of QE is counter-feiting and technically he could be put in jail although he can point to George Osborne’s written letters of approval to QE in mitigation.
If Mr Brendan responds to a further question from Glynn Worthington or Richard Murphy requesting proof of the BoE’s legal right as part of government to engage in QE money creation from nothing he is between a rock and a hard place. If he denies the BoE has the legal right it has clearly acted ultra vires in regard to QE. This would mean by implication that only the commercial banks can create their own reserves and the American control fraud expert Professor Bill Black would quickly tell Mr Brendan the commercial banks would have a green flag to engage in massive control fraud.
If Mr Brendan does point to the legal right of the BoE to create money from nothing it can simply be put to him why the Treasury should not have it and indeed why the right should not be taken away from the BoE so that it can concentrate on monitoring the financial sectors compliance with laws and regulations.
As a further comment I would add that what is critical for this country is for the legal powers to create money to be identified and made public. It is surely not rational or moral that the creation of money for collective, public or social (however you want to label it) supply of goods and services should be subject to rent seeking or a tithe. So we need to know the money creation powers or non-powers of central government. Where, for example, does the law lay down that the BoE must sell Treasury bonds back to the private sector from money it has created from nothing and on what limited frame time does it have to do this if at all? Mr Brendan as a public servant needs to answer these questions.
I believe the criteria for the pursuance of QE was laid down by the initial exchange of letters between Alistair Darling the then Chancellor and Mervyn King the then Governor of the BoF
– http://webarchive.nationalarchives.gov.uk/+/http:/www.hm-treasury.gov.uk/d/ck_letter_boe290109.pdf
– http://www.bankofengland.co.uk/monetarypolicy/Documents/pdf/govletter090305.pdf
Initially Gov gilt were not included in the asset classes for QE, and they were to be financed by Treasury Bills rather then Central bank Reserves, but the BoE via the MPC requested that Gov gilts be included and that Central bank Reserves rather than Treasury bills be used to finance their purchase. Since the Gov is indemnifying the BoE against any loss from the QE purchases, the BoE has to request permission from the Chancellor to extend QE.
I’m not sure what the mechanism and permission requirements are to wind it back.
You re correct
Martin
It does help to recognise the historical origins of the scheme; it was set up at a time when banks wouldn’t lend to other banks, much less to businesses, because nobody knew what horrors were lurking in the metaphorical vaults of their own bank, much less what was lurking in the metaphorical vaults of other banks.
The purpose was to offer finance to bona fide businesses who desperately needed it to do exotic things like paying their employees but couldn’t get it because the banks were frozen; one does not need to be a financial specialist to recognise that total gridlock in the banking sector has catastrophic consequences. I don’t believe that ‘quantitive easing’ is an accurate description of the original purpose; the Bank of England is the lender of last resort, and we were at the last resort viz. the death spiral of the global financial markets.
Richard will no doubt correct me if I am wrong but I don’t believe that his, or your, concerns are predicated on the belief that there was no gridlock and everything would have turned out fine without this intervention. It is the way in which it developed that he is tackling, and, whilst I don’t agree with all his views, I entirely concur that the apparent complacency of the Bank of England is likely to result in another financial crisis sooner rather than later. This is not a cheering thought…
Stevie says ” banks wouldn’t lend to other banks, much less to businesses, because nobody knew what horrors were lurking in the metaphorical vaults of their own bank, much less what was lurking in the metaphorical vaults of other banks.” Indeed. Where did all those toxic horrors go? It has been my understanding that the BofE swapped them for sound money, at mark-to-fantasy values too, yet Richard insists I’m wrong. Which route did those shadowy horrors take away from balance sheets then, if not via QE, now that the subject’s come up again?
The reserves system now covers that
But the short term situations have largely unwound now
Quite a dialogue you’ve got going, albeit indirectly, with the BoE…!
Bill Kruse
Richard is perfectly correct in stating that the Bank of England did not swap the toxic horrors for good money; there were a number of different pathways in dealing with them. One example is UKAR, the ‘bad bank’ which took over the Bradford and Bingley and Northern Rock nasties, and is still in the process of extracting what it can for them in the markets.
I’m not sure why you are convinced otherwise, though your belief that such instruments would be on the balance sheets in the first place suggests that you are not familiar with what actually happened. People go to a great deal of trouble to try and keep debts off their balance sheets, and senior managers in financial institutions were literally ignorant of the terms of the instruments which had been created, sold or bought. So were many of the people buying and selling them; apply the magic Triple A rating and straw is turned into gold, until it becomes apparent that it isn’t even straw, at which point it’s ‘hello financial Armageddon’.
The Babylonians had a robust approach to interest rates, imposing those verging on the downright punitive, to deter people from doing this sort of thing; thousands of years later, in the 12th century, the people of Pisa executed a banker in the town square to encourage other bankers to be more careful. Obviously this is inappropriate today but we haven’t sunk to the level of expecting the taxpayer to foot the bill for all those losses…
“Obviously this is inappropriate today…”
Only just!
Andy
Not least because we’d need a much larger town square.
People get immensely confused by all of this; it helps if you keep the sequence of events in mind. At the time Gordon Brown decided upon his policy – and it was Gordon Brown, not Darling – the world was staring down the double barrels of the biggest shotgun in history, locked and loaded; there was no precedent for it. The size of the global financial markets vastly exceeded anything we had ever seen in the past; you could put every broken bubble ever experienced together and the total would come nowhere near that.
It wasn’t about the UK’s economy; that came later. It was about the collapse of every country in the world which had entered the global financial markets, believing Greenspan when he told them that the markets had created financial instruments which eliminated risk. You could argue that anyone foolish enough to believe such patent nonsense deserves all they get but Gordon Brown’s son of the Manse streak would never accept Neo-Social Darwinism of that nature.
The Bank of England has a vested interest in trying to present its actions as a seamless, ordered and coherent response to events; in reality when it all went pearshaped the BoE was running around like a headless chicken since many of the people working there had bought into Greenspan’s risk free markets thesis, and were distraught to discover that the instruments had instead massively increased risk.
You could, perfectly truthfully, point out than anyone slightly more cynical than the average toddler would recognise that hedging instruments are created to make money for the financial institutions creating them, not for the benefit of the poor suckers buying them; alas, there were a lot of toddlers buying them, and a lot of credit rating agencies failing to notice that they were giving Triple A ratings to instruments which were, for all practical purposes, worthless.
This is not to say that quantitative easement didn’t happen; it did and still is. But it was after Brown’s successful intervention to break the gridlock of the banks; without that there would not have been anything to ease…