Quantitative easing is not widely understood, but sometime soon will have funded (albeit, indirectly) almost £900 billion of government spending.
It will have done so as a result of the UK Treasury having, in effect, reacquired its own bonds from the financial markets. It will have done so using money created, out of thin air, for that purpose by the Bank of England.
The question is, in that case, whether these bonds are effectively cancelled or not. That's what I discuss here:
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Hi Richard,
Thanks for posting this.
I followed along OK for most of it, but have a question at 5mins30 where you mention that “banks are the mechanism for selling bonds back”.
Is it therefore correct that this mechanism will therefore never be used because these QE issued bonds will never be sold back to the market ?
And would an analogy be that these central bank reserve accounts are effectively the govt’s bank accounts that they use to spend money from ?
You have worked out what I mean – although in short hand
Well of course these gilts exist. But at regular intervals on expiry, they are cancelled by the back door and “payed” it back to the govt. Oddly though no one in the media seems to ever notice or comment that much. This is usually portrayed by the BoE to enquiring minds at media offices as a mere paperwork equalling exercise between the BoE and Treasury…which it is.
One does however wonder at the massive fanfare we get when the govt raises money via QE or issues bonds to “fund” the deficit, compared to when these same funds come to the end of their use(and get cancelled) when they go out with hardly a whimper.
…. beacuse the proceeds from maturing bonds are re-invested. Gross purchases of Gilts in the market are the sum of “new” QE plus re-investment.
“Quantitative easing is not widely understood”… by the current moron that is Chancellor…. or he is a lying tory-toerag – take a look at this vid (it’s only 2 minutes) & make your own mind up, tories lying about gov money & taxes to UK serfs just like Thatcher did – & the UK serfs seem to lap it up – judging by the comments underneath
https://twitter.com/RishiSunak/status/1321802739320500224
I commented on it here a couple of weeks ago
He is lying through his proverbial
Hi Richard
Have asked this before but still not sure.
Are the bonds repurchased bonds knocked off the national debt or is £900bn of the National debt owed to ourselves and could it be knocked off the debt.
Cheers
db
The figures are effectively the same these days….but the issue is more complex than this
It has been an issue I have been working on to the point of exhaustion for two months
Let me do an update on this, maybe tomorrow
Nice one. I’m enjoying your videos (and not just because you are saying out loud what I’ve been telling people for ages). The Government (or at least some of them) realise exactly what is going on. But they keep this quiet in case people (as they would) start foolishly talking about Venezuela and Zimbabwe.
One question though. What happens when the bonds purchased through QE mature? Am I right in thinking that quietly, without any fuss they are taken off the books?
Keep up the good work, Richard.
Let’s suppose a holding of £25 million comes to maturity
The Treasury redeems the bond. The APF, which is notionally owned by the BoE but is actually 100% the agent for the Treasury, receives the redemption money. In practice no funds have in effect changed hands.
The APF uses the £25m to but replacement gilts, filling gaps in the buying programme to overall balance the age profile of the required portfolio
That’s it
A gilt is replaced by another gilt
Of course, for the part of the gilt in the market the same thing happens. They are redeemed and the Debt Management Office issues a replacement bond to recoup the cash with a new term and interest rate
Nice work Richard. We can always rely on you for a well constructed analysis.
If the bonds are retired, would you say QE is a form of stealth tax?
If they are not retired, would you say the value ends up in monopoly profits (location value in the most part) rather than inflation of goods and services prices?
As always, yours
Robin Smith
The Systemic Fiscal Reform Group
Cambridge UK
The bonds are not retired as such, so this is not a stealth tax
There is clear evidence that QE has driven up asset prices by encouraging asset backed specualtion
Thank you for the clarification.
Would a tax of 100% of the monopoly profits of these assets(at a rate of 5%) not be an ideal one, given they are ‘unearned’ and thus unjust?
It would seem they are the most unjust incomes, particularly those on the present increase in value of real estate at 8% y/y.
If you take the total value of UK real estate to be about £10Tr, that would amount to about £500Bn, close to the current revenue.
Or you could asses it from mortgages(which it seems most of the QE is being ‘loaned’ for, I may be wrong) which are about half of all 27 million UK properties.
I realise this will never happen because there are usually 2 votes in each of those homes.
And that makes for an excellent exposition for those not yet aware of it.
See my proposals on taxing wealth and you will find I have answered this
I will look at your tax proposals with interest.
Can you define what you mean by “wealth” please?
This may sound like a daft question. But I’ve been amazed at how people often use the term and interchange their meaning of it from sentence to sentence to suit a political agenda, or beg the question(present company excluded).
It’s all in the Tax After Coronavirus series
I’ m thinking there is a difference to this latest rounds of QE. For sure, past QE since 2008 has had inflationary effects on property and share markets because with low interest rates that form of speculation has become more lucrative. But this years QE is different. It is being used directly to fund govt spending, rather than being given to financial markets to reinvest in those areas.
No it isn’t…..
Are you sure it was a banking crisis, and not a housing crisis?
It seems to have been triggered and reinforced by mortgages – loans, secured against the value of locations.
Is it splitting hairs to suggest scrutiny of the idea?
It depends on where you feel is the root of it all. And that will depend on ones world view, not fact.
If you feel the root is money, a price for wealth, then you will call it a financial crisis. If land values, a housing crisis. Or whatever is the ideology informing your thought, and its own root.
70% of the value of any nation is location value. Yet it’s largely untaxed. And the incone stream in rents, is unearned.
Thoughts?
Location value is not 70% of wealth
And it has no monetary value excepting bankers willingness to lend against it