A number of people have asked me for evidence to support my suggestion that the UK government has not borrowed money during the course of this year to pay for the coronavirus crisis, so here is the evidence.
First, this is the latest data from the Office for National Statistics on UK borrowing during the course of the year to date, which covers the period to 31 August 2020:
The total borrowing to 31 August was £173.7bn.
The data on quantitative easing comes from the Bank of England. First, there is this announcement on 19 March:
At its special meeting on 19 March, the MPC judged that a further package of measures was warranted to meet its statutory objectives. It therefore voted unanimously to increase the Bank of England's holdings of UK government bonds and sterling non-financial investment-grade corporate bonds by £200 billion to a total of £645 billion, financed by the issuance of central bank reserves; and to reduce Bank Rate by 15 basis points to 0.1%.
I would argue that the Bank cannot create central bank reserves because they are the consequence of this action, and do not fund it, but what was clear was that £200 billion was to be spent on buying back government bonds, which means they are effectively cancelled. There is not the remotest chance that any of these rep[urcahsed gilts will ever be sold back to financial markets. Nor is there ever going to be reason why they need to be so.
By June it was necessary to announce this:
On 17 June the MPC voted for the Bank of England to continue with the existing programme of £200bn of UK government bond and sterling non-financial investment-grade corporate bond purchases, and to increase the stock of purchases of UK government bonds, financed by central bank reserves, by an additional £100bn, to take the total stock of asset purchases to £745bn.
£200 billion had been spent. By 30 June the spend had increased holdings as follows:
£176 billion had been spent on gilts - which was more than had been borrowed by 31 August.
Since then more gilts have been acquired. Details have not been published as yet. However, the margins are heavily in favour of gilt purchases still exceeding borrowing.
In other words, the government has not borrowed any new funds this year. Funding has instead been paid for with new Bank of England created money. And if in doubt that this is new money, the Bank of England says it is:
The aim of QE is simple: by creating this ‘new' money, we aim to boost spending and investment in the economy.
The argument that the taxpayer and bond markets are paying for the coronavirus crisis is wrong in that case. We are not borrowing. We are making new money to pay for the coronavirus crisis. And if it is said in that case that money is not available to pay for continuing support for those who are suffering as a result of this crisis that is untrue: instead a political decision has been taken to not create the money required to support them, or to borrow to do so. And deciding not to support people is not the same as being unable to support people. Government lies on this issue should not be accepted.
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Thanks for this – so the UK govt has created over £700 billion in new money to pay for the covid19 crisis?
No, it has created the increased sum
About £300 billion is planned
I strongly suspect it will increase
Great stuff thank you.
That report you covered last week from Citi bank also confirms what you are saying here. What I would love is someone from the BoE to clarify that this effectively what is happening.
I sat in on the BoE citizens panel last week (as an invited member). Someone(amazingly)was allowed to ask Andrew Bailey “was the BoE printing money”?
Bailey kind of laughed and said that “it wasn’t that simple” . He then went on to say that what the BoE had done was that is had actually “bought something” with that money ,presumably meaning that the bank now has some asset that it has matched its newly issued liability against ……so no flies on him!. So in his world that did not count as “money printing”…whatever he defines as money printing… he didn’t elaborate on that definition.
So the Governors double entries balance once again and he can carry on pretending that his bank is buying investment grade assets. Though of course this ignores the fact he will be returning all those assets to the Treasury at some point in future, along with all the interest paid on it, less deductions his very high salary of course.
This is in my view, highly disingenuous ,when a senior civil servant sees fit to obscure what they are doing from the public ,but with the history of secrecy at the BoE this should come as no surprise.
You are right…
And since the BoE web site says they are creating money (use that term, not printing) he was not telling the truth
Oh……………..and where is our media when you need them to report on this LYING. Because that’s what it is.
It seems to me that the Government deliberately closed down its offer mechanisms for selling its debt earlier this year did it not? I seem to remember it being mentioned previously here (forgive, I’ve been really busy at work).
It’s as though they have done this to artificially create a debt problem that they can use to limit the help they should be giving.
This seems like deliberate, pre-meditated effort to – well, not do something that they should be doing.
Helping people.
Helping us.
I admit I don’t recall that….
“I would argue that the Bank cannot create central bank reserves because they are the consequence of this action, and do not fund it”
You would argue, but you would still be wrong. Some asset is needed to purchase those Gilts from the open market via QE – which are those same central bank reserves, which would not have been created otherwise.
“which means they are effectively cancelled”
They are most definitely not cancelled. They sit on the BoE APF balance sheet. They require funding and still carry interest rate risk. This is very important to consider as when they mature, there can and probably will be large capital losses on many of these bonds. Which will need to be paid for by the BoE, and ultimately by government and the taxpayer. At best you can say the cost of those Gilts has been pushed into the future, as the BoE is still paying interest on the newly created reserves, and still has the maturity risk on those Gilts.
Either way, they are not “effectively cancelled”. They still sit on a balance sheet and still carry risk. Not cancelled. Clear?
“There is not the remotest chance that any of these rep[urcahsed gilts will ever be sold back to financial markets”
The FED had already started this process before Covid, and the BoE and even ECB was about to. To say this will never happen is just your opinion, but doesn’t tally up with reality. Interest rates are likely to rise again at some point, and this will cause higher costs on those new reserves created by QE and large losses on the APF balance sheet. Central Bank are well aware of the risks of QE and are keen to manage down the size of their balance sheets over time. If nothing else, they are keen to move policy rates higher when able to given them room to maneuver in another economic shock, because at the moment there is little or no space left to do so, as the ECB is so adequately proving. Even if the bonds aren’t actively re-sold onto the open market, redemption has exactly the same effect.
“In other words, the government has not borrowed any new funds this year.”
Yes it has. £173.7bn in fact. They tell you this quite clearly.
“We are not borrowing”
QE is still borrowing. All it does is change the maturity profile.
“We are making new money to pay for the coronavirus crisis”
QE is different to monetizing debt. The government and BoE aren’t simply printing money to spend on things. You can check this by looking at the money supply aggregates.
Not sure you really understand QE really, as what you have said is factually incorrect and drastically oversimplified.
Oh dear, you really do not understand what you are talking about
What buys those assets is money at the APF
That is created by a loan from the BoE
The money spent by the APF can then be redeposited as a central reserve balance with the BoE
And they are cancelled: look at the Whole of Government Accounts which clearly shows that they are. The APF is a subsidiary and does not give a true and fair view in itself
And there are no capital losses: the premium on purchase is adjusted over life as en effective interest charge by adjustment to market price. You really need to learn some accounting
And is a single penny of these gilts ever going to be resold when borrowing requirement is £100 bn plus for many years to come? No
So, substance River form rules: they are cancelled. That is the way accounting should work
And for the record, QE is not borrowing. See what happens if the banks and building societies all try to withdraw their central reserves. Maybe you could tell us what happens.
The errors are all yours.
Oh, and of the ONS
“What buys those assets is money at the APF
“That is created by a loan from the BoE”
So far so good. But then you make a blunder.
“The money spent by the APF can then be redeposited as a central reserve balance with the BoE”
Those newly created bank reserves aren’t owned by the BoE. Which means you can’t cancel them as you claim. They sit as a liability with the BoE, which the BoE pays interest on.
“And they are cancelled: look at the Whole of Government Accounts which clearly shows that they are”
No, they are not. All that happens in the Whole of Government accounts is that the bonds owned by the APF are substituted by central bank reserves, because as you point out, the APF is not consolidated into those accounts.
This is very different to those bonds being cancelled.
“And there are no capital losses: the premium on purchase is adjusted over life as en effective interest charge by adjustment to market price. You really need to learn some accounting”
Really? You sure? Because the Bank of England returned the (fairly large) profits made on the capital appreciation on the bonds it holds through the APF to government. So it would rather stand to reason that any capital losses would also be suffered by the APF, which in turn means the BoE, and therefore government.
You can also see this in the APF accounts, had you bothered to look. It suffered a loss of £2.87bn on Gilts it holds in the 2018/19 financial year. So you are simply totally wrong here.
“And is a single penny of these gilts ever going to be resold when borrowing requirement is £100 bn plus for many years to come? No”
Well, two points here. How may is many? To assume there will be no capital losses whatsoever you are assuming that interest rates will never rise for the total maturity of the APF book, plus the extended maturity of any bond rollovers (to replace maturing bonds). That is going to be of the order of 30 years. Are you going to claim you can foresee the future that far out and guarantee that rates won’t move higher in that time? Even if Gilts aren’t actively resold into the open market, maturity still has the same effect and the BoE can still suffer losses.
“So, substance River form rules: they are cancelled. That is the way accounting should work”
If we are talking about substance, then we should look at what actually happens. The substance bit, you know? And what actually happens is that bonds are bought by the BoE/APF which still carries the risk on those bonds. It is paid for by creating new bank reserves, which the BoE pays interest on. No bonds are cancelled and QE is not “free”.
That’s the substance of the situation, and I would have thought you would agree that the accounting of such should reflect that. Yet all of a sudden you want to change how things are accounted for to suit your claim that under QE bonds are cancelled. It really boggles the mind.
“And for the record, QE is not borrowing. See what happens if the banks and building societies all try to withdraw their central reserves. Maybe you could tell us what happens.”
OK, technically QE is not borrowing – I should have been more clear. Score one for you, but I’m quite a few ahead already, let’s face it. What I should have said, to be more clear, is that we are still borrowing even though the debt is bought by the BoE through QE. QE does not suddenly make borrowing free, which is the essence of your claim.
In regards to the second part – regarding banks and building societies withdrawing their reserves. What on earth are you talking about? Banks don’t need to withdraw their reserves. You seem to think that the banking system is like the customer of a retail bank, with a deposit account. The reality is that reserves are only placed with the BoE when there is an excess amount, and the BoE pays interest on those reserves to maintain their interest rate target of 0.1%. Even then, they are only placed at the BoE overnight typically.
It is pretty obvious you don’t really understand what and why the BoE are doing what they are doing. On the one hand, you don’t seem to understand that all these bank reserves are swapped for existing assets from the financial sector (Gilts), so there are no new net assets or value created, but on the other, what would be the point of QE (which is to boost liquidity and lower term rates) if all the newly created reserves were sucked straight back to the BoE – as well as the Gilts it also has purchased from the banks.
It would probably be worth you actually understanding the whole process and learning a bit about central banking mechanisms before you pontificate further on the subject. You might be able to get a few people with little knowledge of the subject to agree with you but the moment you come up against someone who actually knows what they are talking about, you are going to go down in flames – much as you are at the moment.
So you agree you got your double entry was wrong re cash creation.
Thank you.
Then you claim I suggest central bank reserves are owned by the BoE. How very bizarre, when they are liabilities of the BoE. I never said otherwise, or at least denied they are credits. So you got that wrong too.
As you do consolidation: the treatment is precisely as it is because for accounting the gilts are are cancelled. That is substance over form, and is right. And yes the reserves are substituted. Did I say otherwise? It’s a shame the ONS denies this then. But, you’re wrong about me, again.
As you are to claim that this does not prove cancellation. I assure you the accounting treatment proves otherwise, or it would be wrong.
Then you claim there are capital losses. But you are wrong again. This is the write off of pre-paid interest. That is not a capital loss. It is a revenue cost that should be recognised over the duration of the repurchased gilt. That would be the correct accounting treatment in the WGA in my opinion if the APF was consolidated. It isn’t, but that’s a fraudulent failure to account properly to prevent this happening. I can be sued on the fraud issue, but I would win.
The next but is a meaningless rant without apparent logic to it and repetitious as far as I can see.
Just as is your claim that there remains risk in a debt issued by the government and owned by it. Please, think before you make such an absurd claim. Have you heard of equal and opposite effects?
But yes, I do agree base rate is paid on central reserves. But that is by Bank of England choice, entirely, and nothing more. So QE is not free by choice, because this process lets the BoE entirely control short term interest rates if you had not noticed. Which makes most of your remaining comments meaningless.
As for your question “but on the other, what would be the point of QE (which is to boost liquidity and lower term rates) if all the newly created reserves were sucked straight back to the BoE — as well as the Gilts it also has purchased from the banks.” Please tell me, because I have done the research and that’s what happens. I know the theory, but it does not work. Hence why I long ago proposed Green QE precisely because I saw that it would not.
With respect, I understand what is happening here, including the fact that you are floundering to defend the indefensible claims you made.
I wouldn’t bother to reply. You don’t know enough to be published again, except about being rude.
May I raise a different issue that requires attention?
“QE is still borrowing. All it does is change the maturity profile.” (Steven)
“OK, technically QE is not borrowing — I should have been more clear. Score one for you, but I’m quite a few ahead already, let’s face it.” (Steven – who then goes on to claim it really is borrowing anyway).
Score? Game? This is not a game, there are no ‘winners’ from that kind of crackpot attitude, it offers nothing of value and it isn’t even funny.
Actually, some of the debate provided an opportunity for you to provide some useful exposition, Richard. It would be invaluable if there was a Blog with the ‘T’ accounts laid out.
The point I found most interesting was this: “As for your question ‘but on the other, what would be the point of QE (which is to boost liquidity and lower term rates) if all the newly created reserves were sucked straight back to the BoE — as well as the Gilts it also has purchased from the banks.’ Please tell me, because I have done the research and that’s what happens. I know the theory, but it does not work. Hence why I long ago proposed Green QE precisely because I saw that it would not.”
It might help if we all knew a great deal more about the precise detail surrounding the ‘who, why, where, when’ that is so easily condensed and packaged into the deliberately opaque and indecipherable ‘sterling non-financial investment-grade corporate bonds’. Incidentally, when did they first appear?
I am working on a blog….
I am not sure most people get T accounts now
Even accountants don’t usually do so now, it seems
But I will try plain English
Sorry I should clarify what I mean by my closing remark. The BofE, as I understand it began this process with the Corporate Bond Purchase Scheme (CBPS), which was launched in August 2016. Is this a discreet recognition that earlier phases of QE had failed to stimulate the economy?
Yes….and so too will this bond acquisition scheme, of course
The point of your article still stands, and you are absolutely right about the source of funds, and your conclusion that it is a government choice to withhold financial support. I just thought, for the purpose of fullness, I should mention the following…
The year to date borrowing figure, the PSNB(ex) is of course calculated on an accruals basis, in uncertain times such as these, the figures will be subject to change, the next release will alter the historic months, so August will no longer stand at £173.7bn. The Net Cash Requirement is a more stable measure here and shows the amount the government actually needed to borrow during the period, at the end of August this was £215.3bn.
This is a timely article that should at least inform some of the ‘where’s the magic money tree’ parrots that repeat the government line of financial support being unaffordable.
Thanks
I will update when the next QE data is out
What a corrupt and primitive society the UK is when the populace are denied understanding that money flows have to be expanded over time in normal circumstances, both temporarily and permanently, but when there are crises and the private sector cannot adequately participate in this the government must enlarge its flow creation role.
http://neweconomicperspectives.org/2013/02/real-dollars-and-funny-money.html
https://www.bankofengland.co.uk/-/media/boe/files/asset-purchase-facility/2020/annual-report-2020.pdf
Richard,
It seems that according to the BoE APF, the bonds are not canceled and Steven is correct when he says they carry risk.
Which makes what you are saying – that the government has not borrowed anything – false.
Do you think it advisable to make claims here which are not true?
The claim that the gilts are not cancelled is political, and nothing more.
Now tell me what the risk is? When the government is the sole party to all the risk where is it? Of course there is risk in the APF, but not to the government as a whole. So the claim, you are making is false at the macro level, which is what I am looking at.
And the claim that the binds are not cancelled is also false: the macro view of the Whole of Government Accounts, which shows them as cancelled proves that. The accounts would not be presented that way if it were not true.
So why are you making false claims?
And why don’t you spend some time learning how to look at things in the round whilst you are it? Even learning something about understanding accounts might help.
Isn’t your claim that the debt is cancelled nothing more than political as well?
According to the BoE and the APF, the bonds are not cancelled. They state as much in their accounts. It is also obvious they are not cancelled as the APF is making and losing money based on the capital value of those bonds, as Steven above says. Haivng looked at the ECB and FED, neither of them claim the debt is cancelled either.
Whole of Government accounts are prepared to IFRS standards, and they specifically say they do not consolidate the APF. Even then, the total liabilities of government don’t change overall, so all you have done is change the form of the debt on the government’s balance sheet. And as the APF accounts show, they are still running the risk of those bonds.
So the macro view looks like the bonds exist,the debt exists and it is not cancelled.
So I could ask you the same thing. Why are you making false claims?
It is really quite tedious to have to repeat what I have already said, but let me do it one last time.
Of course my comment is political: all of life is political, and all of accounting is political.
To a very large degree what is the Bank of England and the APF say on this issue is not relevant. In their own accounts they have to report the transactions that they have undertaken. If this requires the reporting of transactions relating to bonds that are actually wholly under the control of the Treasury, who also issued them, then so be it: they have to report the resulting transactions. Within their own, very limited confines, those accounts are true and fair, but that does not make them a proper representation of the transactions that have been undertaken. That proper representation would take place if the APF was consolidated in the Whole of Government accounts, but it is not. I consider that fundamental misaccounting. There is absolutely no way on earth that it should be excluded.
Despite that, the accounts do show that the gilts have been cancelled because that is the only true and fair representation that can be made of the transactions that have been undertaken by the government as a whole. Why any further discussion on this point is required as a consequence is hard to understand. It can only reveal that you do not understand accounts because you do not get this point.
And it is not true that the overall liabilities of the government do not change as a consequence of QE: As a matter of fact the central reserve balances of UK banks and building societies do not equate to the sums paid to them for QE bonds. However, it is appropriate that those liabilities be recorded. After all, they are real, unlike the claim that you make that there are liabilities with regard to gilts which do not exist. You can record one, or the other, but not both. It does not seem that you appreciate that.
But to claim that all credits on the balance sheet are the same in composition is quite ludicrous. Central reserve account balance has behaved quite differently from gilt balances, and for one thing they do not need to be repaid, and if they are it would be almost entirely at the option of the government. Again, then, your claim that there is a direct substitution is simply completely wrong.
And as for your claim that the APF still has risk on these bonds, of course it has, but it is exactly the opposite of the Treasury risk on the same bonds. It is only the artificial segregation of ownership (and it is artificial since the Treasury wholly underwrites the APF) that generates this entirely notional risk, But you are apparently entirely unable to identify that fact.
With respect, I think it time that you stopped revealing the limitations of your ability in a very great many areas.
You are claiming that it is OK for you to make claims based on politics, but not for the government? That in itslf seems very strange.
I also think it is strange that you think that what the BoE and APF say is irrelevant. I’m pretty sure they’ve taken plenty of legal and accounting advice, and for a fact they are following IFRS guidlines, exactly as the ECB and FED are doing.
So the accounts as they stand are a true and fair view of the positions the various entities hold. This is backed up by the fact that the APF has made capital gains and suffered capital losses on the bonds it holds, which also is evidence they are not cancelled.
They whole of government accounts specifically state that it doesn’t include the bonds on the APF, but the liability is represented by instead by central bank reserves. Once again, this doesn’t mean the debt is cancelled, and the total liabilities of government haven’t changed because of QE. At best you could say the liabilities have changed in nature, but at no point has debt been cancelled. You can clearly see this in the accounts.
When you say that the overall liabilities of government have changed because of QE, comparing the central reserve balances of UK banks placed at the BoE with overall government liabilities, you make a fundamental mistake. UK banks don’t place all their reserves with the BoE. They only place excess reserves. So the two will never match up exactly, or ever. Last week for example only £5bn of excess was placed back at the BoE. Are you saying that the government debt changes daily depending on the amount of financial reserves placed with the BoE? Or course it doesn’t. Putting this extra liquidity into the market is on of the aims of QE. At the same time, it doesn’t change total government liabilities.
You also miss the point that if the reserves of UK banks don’t equal the amount they received for the bonds they sold under QE, then there must be a profit and loss somewhere. Which again points to the fact that the bonds still carry risk and still exist.
Central bank reserves don’t need to be repaid, but they still carry interest. They are still debt. So once again, at best you could argue that QE has changed the structure of UK debt, but it hasn’t reduced it at all. The bonds which are the other side of those central bank reserves, and sit on the APF do need to be repaid though. And even if they are replaced on maturity, the APF can suffer capital losses during the process of owning and replacing the bonds. Which has to be covered by the government.
So if interest rates rise, the APF will lose money. Which means the government will need to pay for those losses.
It is pretty obvious that you are saying things which disagree fundamentally with the real world of central banking or the financial system operates. What you want to be true and what actually happens are different. This either means you don’t understand what actually happens, are actively lying about what happens or there is some grand global conspiracy amongst all the central banks, governments, accounting standards boards and accountants, banks and economists which only you and a handful of other people have seen through.
My gut feeling is it is a mixture of a very simplistic (mis)understanding of QE coupled with a desire to put forward to political argument that governments can spend as much as much as they like without having to worry about little things like debt, or how to pay for it. Also you are not accountable to anyone, so if anything goes wrong with the policy you put forward (which you seem to have done for an independent Scotland) it’s not your problem if it goes horribly wrong. Add it all together and I think it gives you license to spout whatever you like, however incorrect or outright false it might be.
I suggest you read the comment just made by Clive Parry
What he makes clear is that you do not want to understand something that is very obvious
There are two possible explanations for that
One is that you don’t want to understand
The other is that you don’t understand
Either way, please don’t call again: you are wasting my time.
And don’t bother to comment on MMT either: it’s clear you also do not understand that
I think I understand you now. Don’t actually engage with any points which disagree with you and certainly don’t engage with any which point out the errors you seem to habitually make. You did it with Steven and no are doing exactly the same with me.
Instead you pretend to be an expert in things which you clearly have no experience of, then claim other people (who happen to disagree with you) don’t understand.
Then block them.
I suppose this is why you are writing a blog rather, pretending to be a professor and scratching around for donations to fill your pockets rather than actually working in any meaningful sense in any of the industries you choose o spew forth your nonsense on. You’d get laughed out of the room, and that is before they found out about your delightful personality. You are a fantasist and narcissist, unable to admit mistakes or take any form of criticism. Also looking at some of your other pieces, more than a bit of a hypocrite as well.
So you are yet another troll engaged to write such drivel
You are indeed now ion the banned list
For trolling and getting everything you said wrong as well
Are you issued with a formula written four stage troll manual for appearing here? I can only presume so because hypocrisy always appears in post four
Yeshvier,
The BoE and any other central bank accounting is largely a farce that is of little concern to anyone outside a very small circle. This is pretend accounting, that makes BoE actions as if separate from the Government, as if the central banks are running their own independent private enterprise with their own funding. Which is ludicrous when you actually stop to think about it.
Besides on the very link you give to the BoE’s ARP accounts it says that the “company’s” operations are entirely indemnified by HM Treasury and as such is not exposed to any financial risk. To me then, this whole exercise seems to be an accounting process and not much else. As to risk, if you are saying that Treasury issued bonds are a risk ,well that is is a faint possibility, but that would mean the Treasury defaulting on the BoE which is actually owned by the government so we will be only defaulting on ourselves. These bonds will be most likely be left on the BoE’s books, so they will never have to be repaid unless there is a need, any interest paid is repaid at intervals back to the Treasury and the bonds will be simply returned to the Treasury on expiry…unpaid….via accounting processes that happen now and again. Which does rather question the point of all of this paperwork.
There are some small amount corporate bonds held that may be a risk, but it cost nothing to create the reserves to buy them, so what is the problem here? The gov backs the losses anyhow, a decision which it mandated to the BoE to take on its behalf. All in all I can’t see what petty point you are trying to make here
You understand this
Those who you are replying to can’t read accounts, or understand risk
Or are playing games
I have to say that Vince’s account here of the ‘actuals’ is exactly what I understood to be the case. As is Andrew’s latter one about ‘circularity’.
I would add that basically the Government – as a sovereign currency issuer – can’t really run out of money because it can make it whenever it likes or needs to (and of course needs to watch inflation). So, the risk is really more of a moral one – should it print it (for example to bail out the immoral debts of 2008 or print amounts into the private sector to deal with Covid without proper contracts, procurement etc., but leave the services it is responsible for underfunded?), not one like where households might incur debts that are higher than their income etc. The latter scenario can’t really happen to a currency issuer – (but to a currency user – yes).
My view is that as we are in the middle of a pandemic, the Government should print what is needed and keep doing so until we are safe – like they would in a war.
The other thing is the politics – Yeshvier’s needs to understand that what is happening here is politically motivated. The Government claims that it has limited means to create money to help everyone with claims about debt placed on future generations, running out of money and austerity and higher taxes – all of which are unnecessary when one has one’s own currency to print.
The ‘bad politics’ here is from this Government – in denial about what it can do because they are essentially a Government of anti-Statists formed to destroy what is left of post-war Britain who have been thrust into situation where we need them to help.
The job at hand is one that Boris & Co are ideologically incapable of doing – and that is going to have mega-tragic consequences. That is the political problem we face and everything – BREXIT, the fixed term parliament act, austerity-weakened public services – points towards the politics of the Tory party since 2010 and our nation’s inability to tackle it properly.
I am in debt to the tune of £10 million…. but I am not worried.
The debt is the result of a lost bet relating to a navigational error and is owed to my wife. We have a joint bank account so it does not matter (other than my humiliation).
It’s true for us and it is true for the BOE/Treasury. It is not hard to understand…… if you want to!
Precisely….
The asset purchase facility (APF) is operated by Bank of England Asset Purchase Facility Fund Limited, a wholly owned subsidiary of the Bank of England, and the Bank of England which is wholly owned by the Government. The gilts and bonds that BoEAPFFL acquires are certainly not legally cancelled – they continue to exist as assets held by the company – but you can see why they should be eliminated for accounting purposes on consolidation.
Its accounts are available from Companies House. https://find-and-update.company-information.service.gov.uk/company/06806063/filing-history The 2019 accounts make it clear that “The Company is fully indemnified by HM Treasury: that is, any financial losses as a result of asset purchases are borne by HM Treasury, and any gains are owed to HM Treasury.”
The APF is effectively a nominee for HM Treasury. All relevant gains and losses are returned directly to the Treasury. So remind me again, what risk is APF bearing?
Yeshiver says “Whole of Government accounts … specifically say they do not consolidate the APF.” Perhaps I am missing or misunderstanding something, but the 2018-19 WGA actually explain the difference in the accounting treatment of APF assets in the WGA versus the National Accounts – “Asset Purchase Facility – [WGA] Shows gilt purchases at fair value – [NA] Records the gilt purchases at nominal value”. See page 197. https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/902427/WGA_2018-19_Final_signed_21-07-20_for_APS.pdf
Yes, in formal terms, the debt payable liability and the debt receivable asset exist, but in substance the government owes money to a nominee for itself. It is completely circular.
Precisely
Richard,
Much of your analysis seems to rest on the assumption that bank reserves held at the BofE are not “real” liabilities, hence there is a free lunch when the government (via the BofE) purchases government debt and swaps “real” treasury liabilities for “money” liabilities in the form of bank reserves. Bank reserves are accounted for as liabilities for a reason…not because they are directly redeemable in specie like the good old days but because their value is ultimately (but obviously not linearly) determined by the assets that back them. I.e. if the value of the pound were to fall precipitously then the government/BofE will have to enter the market to give value to these liabilities by purchasing them with assets.
Your statement “The argument that the taxpayer and bond markets are paying for the coronavirus crisis is wrong in that case” is therefore misleading – any taxpayer that owns either cash balances or assets that promise to pay a fixed amount of pounds in the future is paying for this through a dilution in the value of their money. Creating money out of thin air to fund the government is not a free lunch – it is permanent taxation that hurts the poorest more so than the richest, not to mention the distortions caused by manipulations of the interest rate and other price signals.
What nonsense!
If the value of the pound fell so would the value of the central reserve balances
It could fall – but only because of the folly of Brexit
And I can assure you central reserve balances will not be adjusted for that
And no one in MMT is asking for money creation without a relationship to productive activity, so you are writing pure drivel (technical term) when making your claims
Why not engage with reality, including what the theory I use actually says instead of making up nonsense?
Richard,
Thanks for the patronising response. I am not the one talking nonsense.
No one is disputing your or the MMT crowd’s understanding of basic double entry bookkeeping, rather your understanding of basic economic fundamentals.
The government can only obtain resources three ways – taxation, borrowing (which is deferred taxation) or money creation (which is just another form of taxation).
When the government creates money out of thin air and uses it for current expenditure it is appropriating purchasing power from the existing holders of money. Period.
The “relationship to economic activity” comment is nonsense. Otherwise we could all pretend there is no such thing as taxation if we define all government expenditure as “productive activity”? Why does the government bother with taxation at all if it could just fund itself by buying its own bonds with money created out of thin air? Who would be funding the government then?
If had a printing press in my basement that could produce counterfeit bank notes and I went out and used them for “productive expenditure” (or I lent them to the government) would that be OK with you? We would all be better off?
It would be great if you could “engage with reality” and answer these fundamental criticisms of your theory (which as I am sure you know I have not just conjured up out of nowhere).
I note your deeply patronising tone. Please don’t be surprised if I treat your comments with the contempt they deserve.
And they do deserve contempt. For example, money creation is not a tax. Please explain if it is how £745bn has delivered inflation if that is the case.
And please explain why money creation to put people to work to deliver full employment when it does not exist is a tax, when what it actually does is generate value for society and tax revenue as a consequence?
Your problem is very apparent from your crass comment about you printing fake money. No money a government creates is fake. In fact, where else do you think money comes from?
I suggest you go and read Stephanie Kelton’s ‘The deficit myth’.
And as for your claim that you have not just conjured up your criticisms, let me be candid; yes you have. They are literally made up.
Richard,
I have responded here as there is no reply link against the latest comments.
I am very familiar with Stephanie Kelton’s book and a number of people have made exactly the same criticisms that I have against MMT, to which there have been no good responses. Here is an excellent review of her recent book – https://mises.org/wire/review-stephanie-keltons-deficit-myth which even though it disagrees with her theory is very complimentary of the thoroughness of the book (even though it is wrong).
To say that money creation is not a tax requires some serious mental gymnastics. My printing press example is not crass, it hits at exactly the point that MMT fails to explain away.
As to why QE has not created any “inflation” – you are confusing terms. Money creation IS inflation and one EFFECT of this is higher prices which the price indexes such as CPI attempt to measure, but do so badly and don’t even make any attempt to include ASSET prices which are equally as important as any other prices (most people want to save for retirement or buy a house).
I have not made this up – if you were to read pretty much any economic book other than MMT it would consider inflation a tax. The best ones are any by Hayek, Friedman, Mises or Rothbard – all thoroughly dismantle the arguments that you continue to make.
Sorry that you wont accept this.
Give a person a rope and they can rarely deny the invitation is they actually think they know anything.
You have not resisted
So, you’re an Austrian
An advocate of far right economics that things the preservation of monetary wealth the issue of highest order
Those who pursue MMT, in the other hand, were born with both empathy and a concern for the creation of value rather the preservation of monetary wealth
Of course MMT does not work as far as you are concerned, and that’s because it was not intended to preserve the gated compound wealth of a few at cost to all else in society, which you would not recognise, which is your aim
I am in fact delighted MMT does not work for you. If it did it would be clear evidence that there was something wrong with it
As it is it does maximise employment for the many, and wealth spread across society and is willing to take a limited risk with inflation rather than sacrifice people
You and I are on different planets
I despise your planet
You despise people
Wow – we get to the heart of your argument – rather than engage with criticisms of MMT (there are plenty as you are well aware) you resort to the usual cries of “far right” and an accusation that I “despise people”! Great argument!
You say that I think “ the preservation of monetary wealth the issue of highest order” – No that is not at all what the Austrians think…in fact they think that money printing helps exacerbate wealth inequalities as it inflates asset prices, benefitting those who already have wealth whilst making it more difficult for those starting at the bottom to get on the ladder. When you have put down Kelton’s book maybe you could do some more reading around the subject?
“[MMT] was not intended to preserve the gated compound wealth of a few at cost to all else in society, which you would not recognise, which is your aim” – thanks very much for letting me know what my aim is. How evil of me! You are quite the conspiracy theorist!
Has it not occurred to you that your critics may also be trying to help society but simply think that your proposals wouldn’t work? If your proposals actually would create wealth for everyone then of course of that would be great!
Who is more likely to be right? Those who engage in the debate and try to persuade people of why they are right, or those who project evil motives onto their critics and plough on with their fanatical schemes anyway?
I would implore anyone reading this thread to do some of their own research and read some honest criticisms of MMT – it is plainly nonsense dressed up in accounting tautologies.
So you agree we have the accounting right
Now I have posted a whole blog so you can tell me what w get factually wrong
Have a go. tell us what is wrong. I doubt you can.
Rob,
That Mises article you posted is terribly poor. Probably one of the worst critique of MMT I have seen, is that your best example?
You make better points yourself so I’d stick to you own ideas rather than using that as a source. I personally think MMT is very good but not infallible and can only help where it can help. MMT is good at times when we are in a bit of a hole. I don’t see it as something that we need to use all the time. It is just a guide as to how we can adapt money creation to help out when the past usual methods have run against a brick wall…like right now. All MMT followers want to do is guide us back to safer economic ground without making everyone life even harder.
As to inflation of assets that was initially caused by private bank money creation not public money creation, which was then compounded by following rounds of QE. The recent QE we have seen since March is a altogether different type of QE, this QE is being used to allow the gov to spend directly into the economy. It has bypassed the usual channels that did indeed further cause asset inflation(in shares and property). This is the kind of QE we do need, with inflation now running around 0.5% there is room to do this.
Vince
MMT is not something we use
It is something that is – it simply says how the economy actually works
There are policies that flow from it, e.g. the job guarantee
Clearly these look meaningless at full employment
But that does not mean MMT is not working
That is why I make that point in another article today
“There is not the remotest chance that any of these rep[urcahsed gilts will ever be sold back to financial markets. Nor is there ever going to be reason why they need to be so.“..
Well. Even MMT would say that if we get to full employment there is a chance that the increased money supply will lead to inflation. Something that is solved by reducing the money supply. Which could — not necessarily will but could — o done by selling the gilts back into the market.
You know, the same way the Federal Reserve shrank its balance sheet?
So then there should be tax increases
And the Fed action was minuscule in the grand scheme of things
‘And the Fed action was minuscule in the grand scheme of things‘
Minuscule, or non existent ?
Minuscule
Thank you to all the contributors to this ding dong debate, as a result of which I am learning a great deal about how the government uses Chinese Walls, smoke and mirrors to obfuscate and deny what is actually happening in these transactions. Thank you for this elucidation Richard, and please carry on calling them out.
There is a blog summarising this on its way
I am bored the nonsense being written here
Hi Richard
Have been following this thread and follow thwe logic but how do you respond to the Government announcement on borrowing this morning that it is at an all time high and them coomentator from HSBC on the Today programme criticising excessive Government borrowing.
Cheers
db
As I have pointed out on Twitter, givernment borrowing has gone down this year
£200bn debt issued
£250bn or more repurchased
So less debt in issue
They’re lying
I have more to come on this…..
Cheers. Keep up the good work.
I suppose the next question is why are they showing the National Debt increasing or is it money notionally owed to the Bof E