The Bank of England has just announced that:
At its meeting ending on 17 June 2020, the MPC voted unanimously to maintain Bank Rate at 0.1%.
The Committee voted unanimously for the Bank of England to continue with the existing programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves.
The Committee voted by a majority of 8-1 for the Bank of England to increase the target stock of purchased UK government bonds, financed by the issuance of central bank reserves, by an additional £100 billion, to take the total stock of asset purchases to £745 billion.
So QE is to increase by £100 billion, and the total corporate debt owned is to be left at £10 billion, meaning that the Bank of England will now own £735 billion of UK government debt.
To put that in context, even assuming £300 billion more debt will be issued this year (by no coincidence, the exact sum that the Bank has agreed to buy) this means that the Bank will now own more than a third of UK national debt.
And, as importantly, this also means that all the government deficit for this year will be funded by the Bank of England and none by private savers, which appears to be a quite extraordinary move when it would seem as if financial markets are anxious for that debt.
So what is happening here? First, there is direct monetary finance of the government by the Bank of England going on, whatever the Bank and the government might like to say.
Second, because quantitative easing is being used private markets are involved and a rake-off from the QE programme will go to the financial services sector, entirely unnecessarily.
Third, quantitative easing does have a history of inflating private sector asset prices, and so of massively contributing to growth in inequality in the last decade. This is likely to happen again.
Fourth, it would seem likely that there are now too few gilts in the market to meet private demand: that may leave private savers exposed to unnecessary risk right now.
Fifth, the charade that the government is not funding itself goes on, and so the pressure for austerity is wholly unnecessarily maintained.
Sixth, nothing in this programme requires that actual investment takes place: this is merely a money generation programme. That is, of course, what MMT says a government can do - albeit it would much prefer that it did not happen behind these sham arrangements and was instead out in the open for all to see - but what MMT also says is that such programmes need to be targetted to work. That means that they need to be designed to have an impact in the real world where people work, whoever their employer might be. And so far there appears to be no plan to back up this level of spend, which is what is troubling about it.
And that is why I think that QE is running out of road. I have used the word unnecessarily in this post a surprising number of times. That is because that is precisely what quantitative easing is: unnecessary.
What we need is an honest economic policy that explains precisely how in the current situation government is funded, so that people know the truth. And what people need to know is precisely how the government is going to spend to support them in the crisis that we are facing. QE lets the government hide from this degree of honesty, and that is unacceptable when very high trust is required right now.
QE has done its job.
Can we now have some honesty about how we move on from here?
And might we then talk about green QE and direct funding for the government? Because that way the government cannot hide from accountability for what it is doing.
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This is a great post.
But I am really effing annoyed because people will misinterpret what is going on and the old lie that we just can’t do enough of what we will need will soldier on. The misallocation (or using the wrong route) for the cash just creates confusion.
This is nothing but a Covid relief policy it seems to me for The City.
Poor, very poor and mendacious to boot.
Sorry Richard I just don’t get some of these points.
Firstly you say that the gov debt is been bought by the BoE(aka outright money printing) then go on to say that this involves the private sector,how can it be both?Then you say the private sector is crying out for UK gilts,but can’t get enough of them.
Seems to me that this is good use of QE in that it is funding the defecit directly and missing out the the usual route of primary dealers selling gov debt to the markets. Which as you rightly say is largely a waste of time.
The debt is sold into the market and then repurchased – as Clive Parry notes maybe at £20 million cost
And when repurchased they are nit then available to the market, which inflates asset prices, which is deliberate
Thanks for the explanation,
It does seem a convoluted way of doing this, is there some reason it is done this way? Possibly EU banning of direct funding of deficits rule?
I have always felt that the gov bond system was a job creation scheme for the City, this further proves it.
Entirely down to EU rules originally
Now I suspect it has become terribly convenient
As I mentioned before, it would be easy to avoid the Gilt dealers taking their cut by allowing the BoE to buy directly from the Treasury or at auction on a “non-comp” basis. For example, if the Government sells £10bn at auction and BoE wants £2bn of it then the auction is reduced to $8bn for the dealers and the BoE takes the remaining £2bn at whatever the average price paid is at the auction. No free money to the dealers and still a free market to allow ‘price discovery’ (if that matters to you).
But, in the big scheme of things, £100bn of QE is probably only worth about £20 million in profit for the financial sector so not a huge number. Indeed, with gilt yields so stable at low levels (which QE helps to deliver), profitablity of Gilt trading is not that great compared with with more volatile times.
As for honesty or a simple explanation of what QE is and does, the BBC news does not do a great job. I am always hoping that their economics correspondent will say “QE allows the Government to spend money without having to tax or borrow it”…. but I wait in vain.
As regards to asset price inflation, I fear it is probably inevitable because we seem to see QE as the last resort once rates have hit zero and is, by some, considered a tool to push long rates lower. The lower long rates are the more attractive other cash generating assets look so asset price goes up.
So, here is a thought…….we need to divorce the level of rates from QE.
How about setting rates at 1% overnight and long dated gilt yields at 2%. This would take the heat out of asset markets and offer a reasonable return to those seeking safe long-term investments. Of course, this would require greater gilt issuance and greater government spending…….and looks rather like a Green Deal would fit the bill! But we know that already.
Clive
I have suggested this rate differential approach for green QE
I think it would work
Richard
The BBC just announced a £1bn cash injection on both Radio 4 PM programme and BBC1 six o’clock news – out by 2 orders of magnitude!
Oops
And Channel 4 completely failed to explain what is really happening
The chart is fascinating, qe reduces interest rates apparently. not yields
https://www.bbc.co.uk/news/uk-53093127?fbclid=IwAR1eEB418XkwASo51iCRhIVz3yB1Mkx7hU3BytnT05HTLEwOvm75L0bJ_Qc
What chart did I miss?
Lol they removed it, presumably someone realised it was wrong. In the same article they refer to interest rates being held. The graphic was “qe the theory” it showed the Boe buying bonds from the market, the resulting drop in interest rates made business and consumers borrow more money……
I’ll have a scan of my cache to see if I still have it.
Here
https://images.app.goo.gl/HreyHvWTQekk5RUT6
Sorry – still not working for me – apologies
Yes. There is nothing to stop the additional credit washing into land and equity values, perhaps that is the intention, to shore up “house prices” and the stock market. Rather than using the credit creation power to strategically guide economic activity to productive and pro social purposes. “socialism for the rich” anyone?
The true reality is that this so-called British Exceptionalism is really a mask for Exceptional Corruption. It’s only able to flourish because many of the electorate are poorly informed in regard to how the country finances itself. The FPTP electoral system gives the two main political parties little incentive to make the electorate better informed and so the country’s decay continues.
“the charade that the government is not funding itself goes on, and so the pressure for austerity is wholly unnecessarily maintained”
Austerity suggests and requires that there is too much debt.
Surely, irrefutably, that in turn suggests that there is too much saving.
So if there is too much – or at the very least a major appetite for – saving the austerians have to indicate who these savers are.
And when it turns out that it is our very own Bank of England which is ‘saving’ doesn’t that begin to suggest what the BoE is for?
The BoE has been doing this for more than 10 years and ‘we’ haven’t gone bust.
I throw this in as an effort towards myth busting…
Spot on re too much saving Peter
This is on my agenda
[…] And yesterday I noted that the Bank of England has announced £300 billion of QE now. […]
The bit I struggle with is that gov’n assume businesses will borrow this newly injected money into the banking system. Some may do but many small businesses I would have thought won’t in these uncertain times either preferring to scale down their operation or they simply can’t afford to take on any more additional debt. The banks therefore become awash with money they can’t lend and intended outcomes aren’t met.
Most small businesses have taken government loans now
They will not be able to borrow again
The terms will be too harsh for a start
And banks won’t be lending
So, instead of using QE to improve the sustainable productive capacity of our country we are further increasing the value of art, land, housing and old cars.
Are we further widening wealth inequality to approach that of Sweden and Denmark?
We are widening wealth inequality
Thanks for explaining. Qe is then a ruse to boost asset prices and at the same time remove an amount of low risk gov securities from the market which will impact pension fund risk profiles.
yes
Trying to get my head around MMT.
If money created , by a keystroke of a central bank, and given to the treasury for the government to ‘distribute’ into the economy via their policy decisions; and that money is ‘destroyed ‘ via tax collection and the action of creation and destruction of money is key to maintaining the value of money in the economy…
then could you say that paying tax is key to maintaining the value of your assets.
is that to simple/incorrect or am i not understanding MMT
thanks
That is true – paying tax makes sure your money has value
Richard, in 2013 i was lying in the Royal Free hospital waiting for an operation on a broken arm. Due to the care I was receiving I wanted to learn more about tax and landed on your page. Lying in my bed I emailed you and you replied back in a few minutes to explain my question. I then subscribed to Tax Research and have read your morning email each day.
forgive my slowness in understanding MMt but this week I was doing research on MMT(I am not in economist at all, I paint and deliver food for UberEats) and discovered Abba Lerner and his Functional Finance paper. Now everything makes sense. I honestly believe that our complex relationship with money prevents us understanding how simple, and elegant MMT is. Money has a life cycle and spending is the product of the creation of money. How we, or a government chooses to spend that money, is the question. Like salmon, money has to return home to live again.
I am gonna challenge people I meet from now on and ask ‘why is that £10 in your hand worth £10?’
it may only be a small part to play but this idea has to be understood to realise the powerful tool money is to create what sits around us.
Thanks you for responding 7 years back. I will continue to read your email and argue and explain with those I meet to get them to understand how to view the world around them.
ps I think we should call this Functional Finance rather than MMt. Modern makes it seem to new and can’t be yet trusted(i think people do like the sense of stability with money and modern seems untested, as though still to gain acceptance )
Thanks
I just looked up your mail – I still have it, of course
Building MMT into our own narratives is important
Good luck and I hope the arm repaired well
[…] By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK […]