I received this email very recently, and share it with the author's permission:
Hi Richard,
Hope you're well. After reading some of your articles and watching one of your videos, I'm left with a question that I hoped you could answer.
The Bank of England holds lots of government debt. What happens when the bonds they hold mature? Doesn't the treasury need to pay the bank?
From what I understand, any interest earned on the bonds makes its way back to the treasury but what about the payment for the bond when it matures? Isn't that used to fund more purchases of bonds?
If the above is correct, isn't it right to say the debt remains a burden until the Bank of England forgive the treasury for the debt they hold and do not claim payments when the bonds mature?
I hope you don't mind me disturbing you over the bank holiday weekend and there's obviously no rush to reply.
All the best,
Etc.
Since this seems to be a recurring question I thought it worth replying on the blog.
First, it is true that interest is still paid on these bonds. This is deliberate. It is intended to perpetuate the deficit narrative. The claim is that the country is over-burdened by debt and that as a result the country cannot afford things like education.
What the government never makes clear in its own accounting is that this money comes straight back to it from the Bank of England, which it owns. The cost is not real as a result. Good accounting would require that the income and expense be offset against each other and that only the net cost of interest be shown. But that would not play into the hands of the debt fetishists so that does not happen.
Let's deal with the second issue then, of debt repayment when a bond comes to the end of its life, and most especially with regard to those bonds notionally held by the Bank of England. Note I say notionally, because actually they are entirely beneficially owned by the Treasury, but we can ignore that in what follows.
To make things easier let's assume the bond is for a total of £10 billion and lets assume the entire bond issue is held by the Bank. That does not happen in practice, but making the assumption just let's me ignore third party repayment in what follows, and does not alter the key explanation.
It's important to recall that the Treasury has no money as such. That is hardly surprising. The only tangible representations of money that we have are notes and coin, and these are not used to repay bonds. So, in other words all the Treasury does have are electronic bank balances, which are held with the Bank of England, the government's wholly owned bank.
In that case, when redemption is due to the Bank of England the Treasury asks the Bank to pay the Bank's subsidiary that owns the bonds £10 billion. And given that the Bank has to make any payment the Treasury asks it to do under the terms of the 1866 Exchequer and Audit Departments Act (last revised in 2000) that is exactly what the Treasury will do.
So now what has happened is that the Treasury no longer owes the Bank of England subsidiary in respect of a bond. It instead owes the Bank itself the same sum, but on its bank account. In other words, all that happened is that there has been an asset swap by the Bank and a liability swap by the Treasury.
The Bank's subsidiary did have a bond. Now the Bank itself has £10 billion owing to it on a bank account. The Treasury did owe the Bank's subsidiary for a bond. Now it owes the Bank on an overdraft. So, in effect, repayment means that nothing has changed. The Treasury stills owes its own bank exactly the same amount of money as it did before repayment was made. And the Bank is also no better off. Nor is it owed by anyone different to whom it was owed money before this swap took place.
But, as we know, the Treasury won't now run an overdraft with the Bank of England even though it is allowed to, and did so regularly until 2008. That means that in practice it will now issue a new bond for £10bn so that it can clear the overdraft. And since under current QE arrangements the Bank of England is effectively matching new bond issues by the Treasury with pound for pound new bond purchases this means that the Bank will, in effect (it's indirect, but the substance is what I am suggesting) buy that new bond issue. In the case of QE bond redemptions this has, incidentally, been true since 2009, so nothing has changed in 2020, just to avoid the suggestion that there is something unusual about this current arrangement.
The result is that the Bank will now pay the Treasury £10bn, whether directly or via the money markets, to buy that bond. In effect, the Bank will clear the Treasury's overdraft and say that it now owns a bond again in its place. The Treasury is entirely happy with this arrangement, however it is organised, because that is precisely what it intended should happen.
What this means is that we have now had a reverse asset and liability swap that puts both parties back in the position they were in when they both started. The Bank of England subsidiary now owns a bond again, the Treasury owes for it, and there is no overdraft. It is as if nothing happened.
So the question is, might this be onerous? My answer is straightforward. It is only onerous if doing the little bit of double entry book-keeping within the government's accounts that this requires is onerous, because that is all that really happens.
Throughout these transactions there is no real change to the economic substance of the relationship between the parties. The Treasury always appears to owe the Bank of England £10 billion at all times, but since the government controls them both this is anyway meaningless debt because in reality no third party is involved. There is no burden then.
So, how was that burden of debt that once existed to third parties removed? The answer is, of course, through quantitative easing (QE). QE creates new money. That new money cleared the government's debt when QE took place, replacing it with what is called ‘base money'. Unless you can figure out a way that base money can be repaid without the government deciding to cancel it, and no one has yet, that debt has been cancelled in that case by QE. The obligation to pay has gone.
So, there is no burden left after QE is my summary, and the notional maturing, repayment and reissue of debt between the Bank of England and Treasury is just economic game playing of no consequence at all in the real economy.
I hope that helps.
NB: I am open to answering questions, but I don't guarantee to do so.
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Very interesting. I won’t say ‘clear’ because understanding this is seriously complicated, but it helped a lot.
I’ve probably misunderstood, but does this mean that the debt doesn’t *really* exist, although the interest payments continue to be made? It’s basically book-keeping smoke and mirrors?
In which case, when Scotland and Cymru become independent, is there an argument that there is no actual debt for them to ‘inherit’ a share of?
To be clear, the debt really does not exist and it really does not need to be repaid, and could not be by Scotland so this does not need to be taken into account when any calculation of debt is done
When a certain amount of QE is announced it is implied that maturing bonds will be re-invested in new bonds. For example, here is a Newswire announcement from 19th February 2019 (before COVID QE and after financial crisis QE)…..
“LONDON (Reuters) – The Bank of England said on Thursday it will reinvest 20.6 billion pounds of proceeds from a maturing government bond held as part of its quantitative easing program.
The reverse auctions will start in the week beginning March 7, the BoE said in a statement.”
So, even though there was “no QE in 2019” the BoE bought £20bn in gilts to replace a maturing bond. It is done by asking dealers for offers in specific bonds it wants to buy and it then takes the cheapest offers (a reverse auction).
Is this an problem? No – for all the reasons Richard outlines.
Thanks
Hi Richard,
A model of clarity, which I am circulating to friends with functioning brains.
You also expose one other aspect of this discussion, the mystification of economics by the elite on behalf of the elite, ably supported by every monetarist on the planet.
Many thanks.
Paul
Thank you
Excellent analysis. Very informative. Thank you for clearing this up for me conclusively.
And of course the Treasury could default on its “debt” to BOE with no real consequences since it owes itself. The whole charade is a fiction.
But it does not need to default on its dent to the BoE because the BoE must always pay whoever the Treasury tells it to make payment to – including the BoE
You’ve gone into a great deal of detail about explaining this:
‘First, it is true that interest is still paid on these bonds……………………….What the government never makes clear in its own accounting is that this money comes straight back to it from the Bank of England, which it owns’.
If a Government owns the issuer of the cash and the interest charged against it, how can the situation be anything else other than what you describe? Further:
‘The Treasury always appears to owe the Bank of England £10 billion at all times, but since the government controls them both this is anyway meaningless debt because in reality no third party is involved. There is no burden then’.
Again – many debt hawks would be hard pressed to answer the question – who is this mythical third party that we apparently are in hock to? Hmm?
The problem is that the Government can do what it likes in this situation – it is sovereign. It can even treat all of this money and interest as a ledger record if it wanted to and ignore it. But also a Government with more mal-intent could also pretend that it was a problem and use it as a smoke screen to divest itself of its responsibilities and obligations.
Thank you for unpicking this.
[…] 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 […]
Hmmm…
https://wolfstreet.com/2021/04/02/qe-during-the-everything-mania-feds-assets-at-7-7-trillion-up-3-5-trillion-in-13-months/
The ‘we’re going to hell in a handcart’ brigade
You’ve written really long article when you could have just said that QE bonds when they mature get rolled over.
That of course makes one of your other claims – that they are cancelled – false. If those bonds didn’t exist they wouldn’t need to be rolled over.
You also seem to forget that QE doesn’t cancel interest payments. It just means interest is paid at the BoE rate rather than at the bond yields, which also acts to massively shorten the average maturity of the debt, and increase the cost.
Not to mention what is going to happen when interest rates go up – which they eventually will.
You also seem to be forgetting that the BoE mark QE bonds to market, as they should. Which again points to the fact that these bonds aren’t cancelled.
This is pretty basic stuff in the financial world. QE doesn’t cancel debt. It actively stores up problems for the future, . I guess it’s not surprising laymen like you get it wrong though. It is a complicated topic and it’s all to easy for people to make errors in simplifying it as you have done. There is no fre lunch and it’s a totally false narrative that you can keep monetizing debt ad infinitum as some sort of economic panacea for fiscal policy. It’s fool’s gold – and those who think that you can print money forever with no downside are exactly that.
The bonds cease to exist – there is no third-party debt
If you wish to claim owing yourself money ios a debt please feel free to consult a therapist
And the interest is cancelled
There is a new liability – but nothing says interest has to be paid on these accounts or at what rate – so you are wrong on that
And please tell me how these debts will ever be cancelled by the banks who hold them? You do realise they are perpetual unless the government decides otherwise, don’t you? If you disagree spell out why in detail please?
And why will rates go up – the trend is still strongly downward – with only minor blips upwards. Why is a 500-year trend hoping to change? Please explain, precisely?
You are not saying basic stuff – you are spouting nonsense unless you can substantiate it. So, please do so. 700 words should do. Off you go….
I’m sorry Richard but what you have said here is totally wrong.
The bonds don’t cease to exist. They sit on the BoE balance sheet.
The reserves used to buy them pay interest.
The bonds themselves still pay interest, albeit that some (not all) of the payments are returned to the treasury.
The BoE has the interest rate risk of the Gilts it owns on it’s balance sheet.
All point to the fact that QE does not cancel Gilts.
The QE bonds owned by the BoE could in theory be rolled over in perpetuity. That again hasn’t cancelled any debt. All it has done is asset swap it into very short term debt: reserves. In the near term that has meant interest payments have reduced, but over time short term debt tends to be far more expensive than long longer maturities.
None of this should be in the least controversial.
However, I think that your argument is based partly through a lack of understanding of basic finance, and partly through an urge to promote your economic agenda which revolves around dramatic increases in spending. It is convenient for you to pretend that none of this extra spending needs to be paid for by taxpayers because the government can print money. Or that no other negative effects or costs would be imposed.
It is basically free lunch theory.
Which takes us nicely to inflation. Whilst it may be low now, that doesn’t not mean it will be low forever. Which in turn will force interest rates higher. One only has to look at Gilts yields this year to see how quickly they can move. Or US treasuries. If interest costs on governments are already massive at current abnormally low interest rates, it really doesn’t take much of a move higher in rates to cause major fiscal pain. Or even to push those costs to levels where failure is a possibility (just look at most of Southern Europe).
Pretending that debt is cancelled might suit you and the fantasy fiscal policy you have created, but it isn’t true. As I say, it is an easy mistake for those without any experience in economics and finance to make, so don’t feel too hard on yourself.
I have answered so much of this so often
But before I begin, please don’t patronise me by saying I don’t understand basic finance or accounting when I very definitely do
On the other hand you make a series of completely false claims
You say this risk is on the BoE balance sheet. It is not. The BoE is completely indemnified for all risk. It is on the Treasury balance sheet. Get that wrong, as you do, and everything els3 you say is wrong, and it is.
First, the debt is cancelled because quite literally it is the Treasury owing itself if the BoE is not the beneficial owner of the bonds – which it is nit and the Treasury is.
And in practice the rolling over, as I show, only impacts the internal accounting. It does not in any way impact the central bank reserve accounting. You clearly do not know double entry.
Then you claim there is risk in these balances. The risk would be that without then banking would have failed.I’m ask again, was that your aim? Do you know it would still fail without them. Again, is that your aim?
And you do know the BoE can pay any rate it likes on them? So, there need be nothing paid if it likes. And the banks can do nothing about it. This is base money, not bank created money. It is not in their control. You clearly do not know that.
Remonetisation creation, just read MMT please. Of course there are constraints. I know that. No one says there is a free lunch. But extra money pays until full employment is reached. Don’t you know that?
I very much doubt you do. Current 8nteteat costs overall are at recurs low rates. Why do you falsely claim otherwise?
And you know failure is impossible because it can always pay?
Why, in essence, are you blatantly lying instead of presenting facts?
Answer or be deleted, by the way. Those are the rules here.
That and no more lying.
I’ll be happy to answer.
“You say this risk is on the BoE balance sheet. It is not. ”
Technically speaking, the risk is on the Asset Purchase Facility balance sheet, but that is beside the point. Indemnity doesn’t mean the Treasury holds all the risk. It means should he BoE fail, the Treasury has to make good any shortfall on the BoE balance sheet. A technical accounting point, but an important one all the same.
“First, the debt is cancelled because quite literally it is the Treasury owing itself if the BoE is not the beneficial owner of the bonds”
I’ve been over this in my last post. If the bonds are still paying interest, still carry interest rate risk, redemption risk etc, and the funding for those bonds still carries risk, then the bonds still exist. QE has a cost and it is a dramatic oversimplification to say they don’t. What you are saying is categorically wrong.
“And in practice the rolling over, as I show, only impacts the internal accounting. It does not in any way impact the central bank reserve accounting. You clearly do not know double entry.”
Rolling over a maturing bond impacts more than internal accounting. A maturing bond will not be equal in value to a bond newly purchased by the BoE through QE. You can’t simply claim that you are replacing like for like.
“Then you claim there is risk in these balances. The risk would be that without then banking would have failed.”
You seem to be linking QE to commercial banking in terms of bank liquidity. This is not the purpose of QE, and QE doesn’t affect bank liquidity at all. Gilts and cash are totally interchangeable in terms of bank liquid assets, so replacing Gilts with reserves makes no difference whatsoever. QE is designed to lower long term rates. Bank liquidity post Lehmans was improved by other policies directed at short term lending and troubled asset relief.
Likewise, in the latest rounds of QE thanks to COVD, bank liquidity was never an issue. The financial system was not under extreme duress. You could actually say that QE is massively damaging for banking in general as it reduces the profitability of lending dramatically and removes any return on Tier 1 capital. European Banks especially have suffered hugely because of QE.
So I’m afraid your inexperience really shows here.
“And you do know the BoE can pay any rate it likes on them? So, there need be nothing paid if it likes. ”
It could pay nothing on reserves. That doesn’t make it a good idea. Unless you think the central bank losing control of monetary policy is a good idea. It’s very clear that short term interest rates will not sty at zero forever. You also don’t notice the huge damage zero interest rate policies have done.
This could be an extremely long topic, so I won’t go into it at length, but economies have become far more unstable and unbalanced thanks to these policies. Huge asset bubbles have been blown up. Savers and pensioners have been forced out of bonds to seek a return on investment. Some countries (Greece, Italy to name a couple) are now totally reliant on low rates for survival.
It’s not a good idea, though you seem to want more of it, in perpetuity. Which again points to your simplistic view of economics, which is why I can only assume you are not experienced in the subject.
“Remonetisation creation, just read MMT please. ”
MMT is not really a theory. It is a basic and incomplete interpretation of old economics, aimed at giving cover to a political view that governments should spend without real limit. In real life, inflation starts rearing it’s head far before full-employment (just look at inflation already rising at the moment) and government spending doesn’t always pay for itself (if it did, we wouldn’t have government debt to the scale we do). Those really are tired old tropes.
“I very much doubt you do. Current 8nteteat costs overall are at recurs low rates. Why do you falsely claim otherwise?”
I never said interest rates weren’t at record low rates. I said they won’t stay there. You seem to be arguing for rates to stay low forever, regardless of inflation, economic growth, etc.
“And you know failure is impossible because it can always pay?”
The old government can print money and never default one. You make me smile. You can print as much money as you want – doesn’t mean it is worth anything or people will hold it. Default can happen by an inability to pay, or by inflating away over time. The consequence is exactly the same.
“Why, in essence, are you blatantly lying instead of presenting facts?”
If lying means disagreeing with you and pointing out where you have gone wrong and made very clear errors, sure.
I could ask you why you are putting forward false information and presenting them as fact to your readers, if you are as knowledgeable and experienced as you say. I assumed simply, giving you the benefit of the doubt, that you simply didn’t know any better, as the people putting forward such views of QE as a panacea enabling ever increasing spending at no cost (basically debt monetization) are typically liars, frauds or plain old charlatans.
This was your last comment
No argument – just drivel. And factual error which shows you are the one with no knowledge
In March 2020 there was a massive crisis in the financial markets. Rates shot up because liquify was disappearing. £200bn of emergency QE was required to clear that, all well documented by the NoE but you claim there was no such event.
You are either ignorant or wilfully fraudulent in your claims but either way you have no place here
Been reading this with interest, but what you just said is not true Richard.
Rates didn’t shoot up dramatically in Mach 2020. There was a spike higher (but not above Jan/Feb levels), which lasted a few days, but that was AFTER the March 10th special MPC meeting.
No QE was announced during that meeting, and there was no liquidity issues in the market at that time. Banks had ample liquidity at the time. The BoE introduced the term funding scheme for small and medium term businesses, cut bank capital buffer costs from 1% to 0% (which makes almost no difference) and cut the overnight rate from 0.25% to 0.1%.
In the meeting minutes they actually said that UK banks had £1trn of high quality liquid assets and there were no concerns about bank or financial market liquidity.
The sell-off was really caused by a combination of profit taking at super low yields and expectations that the Covid induced crisis would be over quickly.
Yields then quickly came back down as lockdown was implemented. By the time of the March 25th MPC meeting where new QE was announced, they were only a few basis points above the previous lows and in all the months since barely managed to move any lower. The new £200bn of QE moved rates down a few basis points, but basically had very little effect.
So what you are saying is not true. Liquidity in the financial markets has not been an issue in this crisis, because frankly the world has been awash with cheap cash for a very long time already. A bit more doesn’t change anything. QE wasn’t done for that reason and to be honest, hasn’t had much of an effect in moving rates lower. I suppose you could argue it stopped rates going higher for a short period of time, when the government had to borrow so heavily.
Hasn’t lasted though has it, because this year yields really have shot up as people price in growth and much higher inflation.
With the very greatest of respect, it is very hard to believe someone can right such a pack of lies
There was a liquidity crisis
The Bank had to intervene to address it, and did
https://www.independent.co.uk/news/business/news/bank-england-insolvency-coronavirus-andrew-bailey-a9579216.html
And yes it was after the NPC meeting. So? It still happened. Crises develop quickly
After the event lying takes time to coordinate but it seems the trolls are out doing it now
You are one of them
And there is neither inflation or much higher growth – simply some recovery.
Please don’t call again
I still do not understand why the debt is not “real”. BoE has its own balance sheet i.e. assets and liabilities. If BoE buys gilts it uses its assets to purchase the gilts which then appear on its balance sheet as an asset. It earns interest on that asset. The treasury uses the funds received to finance government expenditure. On the treasury balance sheet it has received funds from BoE but now has a liability on which it must pay interest as the gilts will have a maturity date. I.e.it has a debt which must be repaid either by transferring funds or more likely by issuing more gilts. QE involves the BoE buying gilts or corp bonds with funds it doesn’t actually have i.e. it expands its balance sheet. This expansion must be reversed at some point to maintain the value of the currency.
Three points
Inside a group of comp[anies each company has its own balance sheet
There is also a consolidated balance sheet
That is created because it is the only one that shows the true position of the group
Intra-group liabilities disappear from view in the consolidation because they are not external
The government is a group. The intra-group debt is not real
So that’s point one – there is no debt
Point 2 is only buying external bonds expands the balance sheet – it has been expanded by about £20 billion for that reason
Point 3 is that the rest of what you call balance sheet expansion is money creation n to substitute for the lack of money creation by private banks in the last year /decade
Without that the economy would have collapsed
Please tell me why you want to withdraw the money that keeps our economy functioning and our banks solvent? what economic death wish do you have that suggests this appropriate?
Thank you for the response. You are correct in saying that inter-co balances eliminate on consolidation. However groups are not legal entities individual companies are. The directors of a company cannot sign its accounts if there is an interco balance that cannot be realised even if the net group position is zero. However I’m not sure if this is an appropriate analogy. Whether BoE purchases gilts or corporate bonds has the same effect as it puts money into the economy which is what happened in 2008 to overcome the credit squeeze. Expanding the BoE balance sheet is the equivalent of printing money. The consequences of that can be serious. Eg inflation, asset bubbles, low gilt yields which many people retiring were forced to accept when purchasing annuities. My point is that government debt is real whether it is owed to the BoE or the money market generally. Eventually the £675bn that is currently circulating will disappear when the bonds purchased mature. The government can control how this will happen by issuing new gilts or not depending on the circumstances at the time.
First, there is a group. That is the basis of the Whole of Government Accounts. You are wrong.
There is no interest rate risk on the BoE balance sheet at all. If you knew what you were talking about (and you don’t) you would know the BoE is wholly indemnified by the Treasury for this activity. It should actually be on the Treasury balance sheet as a result.
And none of the £675bn will disappear when the bonds mature. The money creation is in central bank reserve accounts which are wholly unaffected by redemption between the BoE and Treasury, for reasons noted.
But you are right – there are asset bubbles, which have massively helped pensioners. And now we need serious taxation on wealth to redress the resulting inequality.
I presume you would approve as that is the only thing you have got right?
If there is no interest rate risk, why does the BOE show a PNL on the bonds it has on the APF?
You can check the APF accounts if you like.
I know them very well
I think you ask a very good question. I consider it perfectly logical, but what I also suggest you note it us not consolidated in the BoE
It should be in the Treasury
You do need to read some more
I promise you, I have
I support what you say on asset purchase of government bonds, but is there something more going on with Quantitative easing?
Is the Bank Of England buying commercial bonds held by commercial banks at full price and incorporating them within the national debt as though they were the equivalent of government bonds.
My fear is that the banks are dumping their bad debts.
Can you reassure me that is not what is really happening with QE?
I ask because I genuinely don’t know.
£20 billion of corporate debts have been acquired
I see no logic to this of any sort
https://www.bankofengland.co.uk/asset-purchase-facility/2020/2020-q4
I see you got the second answer on a guardian question about who is lending the government all the money during covid. It’s good to see.
https://www.theguardian.com/lifeandstyle/2021/apr/04/readers-reply-who-is-lending-the-british-government-all-this-money
Thanks
I had not noticed…..
I don’t want to encourage the trolls but I think the nature of the crisis in early spring 2020 was different from previous crises and it is worth unpicking this.
First, and most importantly, there WAS a crisis – to deny this would be absurd. Second, it was Government intervention that prevented things spiralling out of control. Third, getting the detail correct on how this panned out is important to prevent a wrong narrative developing — a narrative that denies the essential involvement of Government.
So, in detail, what really happened?…. and we need to be global here.
In January 2020 USD 3 month LIBOR was about 1.80% and the o/n rate about 1.55%. By April the 3 month rates was 1.40% with o/n rates at 0.10%…. no spikes, no dramas…… or so it appears from the data. In practice, things were a bit more interesting. First, very little term, unsecured interbank lending happens LIBOR is no longer where the action is. Second, the LIBOR rate is the answer to the question ”at what rate could you borrow in the interbank market?” and unsurprisingly JP Morgan gives a pretty low rate because everyone is keen to deposit there…. as do most of the banks on the LIBOR panel because they are the biggest/best banks. But this is NOT where most banks can borrow…. and in March 2020 despite LIBOR rates remaining stable many banks could not borrow dollars at all! Third, there WAS considerable stress in the interbank market and this can be seen in the SPREAD between the o/n and 3 month rate that went from 25/30bp to 130bp. Fourth, the level of excess reserves is a poor indicator of liquidity as they can’t be deployed in support of lending or buying assets (due to regulation).
So, if the crisis is not apparent in the historical LIBOR or reserves data where is it apparent?
FX (spot, swap and Cross currency basis swap) markets, US Treasury market, Credit spreads — and in each of these three key areas the Fed intervened decisively….. with other Central Banks doing their bit, too.
In a crisis people hoard cash so cash needed to be injected by the Fed — and they did. But non-US banks were virtually unable to borrow USD at any price (whatever the LIBOR data said) and did not have access to the Fed. So, what they did was borrow in their local currency (from their local CB) and swap using the FX swap and Cross Currency basis swap markets…. but these markets were overwhelmed and spilled over into outright purchases of USD and in the space of just over a week starting March 9th GBPUSD fell from 1.30 to 1.15 — a really massive move in such a short space of time. The Fed responded by offering FX swap lines to other Central Banks — in effect enabling the BoE to lend USD to UK banks. GBPUSD then recovered quite quickly.
As it became apparent that economic prospects were getting grimmer by the day we saw (as one might expect) US Treasury bond prices rise as investors sought a safe haven…. until suddenly they collapsed and the market became illiquid and this really spooked the Fed. All of a sudden, people were liquidating “safe” assets like US Treasuries and the dealer community could not handle it. The Fed stepped in to buy and announce additional QE that gave the system the confidence to hold and trade US Treasuries.
Corporate Credit Spreads also ballooned up. Indeed, there was virtually no bid for high yield corporate credit and this could have had a profound impact on the ability of companies to survive… which in turn would have raised questions about the ability of Banks to survive. So, the Fed intervened to buy corporate Credit and stabilise this important market.
So, in summary, there WAS a crisis but it manifested itself in a different way that 2008. Central Banks understood this and intervened in different ways – including more QE – to prevent the crisis developing further.
Thank you
Appreciated
Clive Parry
Chapeau! Thanks for such a concise explanation. Seems like the bods at the BoE and the Fed know what they’re doing sometimes.
You may find the following article of interest:
Central Bank Money: Liability, Asset, or Equity of the Nation?
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3730608
I scanned it
I must finish my own paper on these themes
There are overlaps, but differences too