In defence of People’s QE: my latest letter in the Guardian

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I have this letter in the Guardian this morning:

Two comments on my letter concerning the use of People’s Quantitative Easing to buy out PFI (27 September) in your paper on 28 September require a response.

Martin Wheatcroft says that the Bank of England reserve deposits of our clearing banks, which is where most QE funds are now located, have interest paid on them, meaning that People’s QE is not costless, and that cost could rise, considerably. He makes three mistakes. First, interest is only paid by Bank of England discretion. It could withdraw or limit it. Second, he quotes nominal and not inflation-adjusted interest rates, and it is adjusted rates that matter overall for People’s QE because they indicate the real cost. Third, he assumes UK interest rates will rise without QE being unwound, and that is exceptionally unlikely. His scenario will not come to pass: if rates were as high as he suggests there would be no QE-generated funds in the Bank of England on which interest would be due.

Tim Worstall also makes a mistake. He says big business does not use gilts for cash management. That’s true if nominal ownership of long-term funds is taken into account. But that’s because big business only makes use of these gilts overnight, when the massive “repo” market, which places the cash of these companies on deposit while the world sleeps, makes extensive use of, and is entirely dependent upon, the availability of government-backed gilts to make that market work.

My critics are making use of highly selective and unrealistic evidence. I stand by my arguments.

Professor Richard Murphy

Professor of practice in international political economy, City, University of London; Director, Tax Research UK

I think a few points of elaboration are worthwhile. First, with regard to Martin Wheatcroft, it is indisputable that the reserve deposits of our clearing banks held at the Bank of England have risen since QE, by almost the amount of QE. There is good reason for that: it is these reserves that are effectively used to guarantee that these banks clear funds against each other each night without the Bank of England taking risk during that process, which it had prior to 2008. Do they need to be in this amount? Maybe not. But whilst they are and whilst the Bank has been paying what has been, in effect, negative interest rates on the sums in question, that interest has been paid. But banks, including the BoE  can withdraw interest payments and that is possible on these reserves. If the cost became positive in a real sense I am sure that would happen.

Wheatcroft does anyway ignore the fact that there is no chance of real interest rates of 5%: such rates only reflect persistent higher inflation rates, as he also ignores the fact that unless QE was loosened considerably rates are unlikely to rise much, and if QE was loosened considerably then at least part of these reserves would disappear with the redeemed QE and no interest would be due as a result. I am afraid his attempt at point scoring showed a failure to think matters through properly.

As for Worstall, I am a little surprised by his comment. He should know how the repo market works and that this involves the technical sale by banks of gilts overnight and their repurchase with what appears to be interest credited in the morning, in this way providing the large customers making use of this facility for their cash piles with the deposit guarantee that they crave and which the government will not itself supply. The gilts remain legally in the possession of the banks and many of them will be in nominee names and some will be borrowed (this being a feature of euro repos now, I believe) but the fact that nominal ownership does not reflect beneficial ownership of use of an asset was something I thought he would be familiar with. Apparently not.

I am grateful to the Guardian for the right to reply.