I have noted the continuing questions being thrown at me for saying quantitative easing is not a simple asset swap.
I could respond to those questions in a number of relatively simplistic ways. For example, I could argue from the perspective of a government that initiates quantitive easing, this cannot be an asset swap, because both central bank reserve accounts and government bonds are liabilities on their balance sheets as things stand at present. Superficial as that sounds it is of considerable significance because within the context of political economy - which is one of the big issues that those within the modern monetary theory camp are ignoring here - power relationships matter, and the government is always in the driving seat on this issue. That is one of the key issues that I intend to address on this matter.
I could also respond by noting that the idea of an asset swap is extraordinarily limited in treating central bank reserve account and bond balances as if they are only stocks, with no associated flows when it is the latter which have as much impact upon society, and both can hold status as assets, liabilities and flows all at the same time because that is what double-entry permits, and much of this is about double entry.
Talking of double-entry, I could also very straightforwardly argue that the suggestion that there is an asset swap without ever considering the other sides of the entries in question, when it is impossible for a debit to be replaced by debit without at least two credit entries taking place in the books of the parties that are associated with the arrangement, is just wrong.
But, the truth is that I also want to address this issue at a more fundamental level, looking at what has actually happened to explain the very partial view implicit in the asset swap argument. I then hope to explain the phenomenon that we are actually observing within government financing. This is important, not least if modern monetary theory is to live up to its billing as the tool that describes how money works in an economy. That, however, requires me to take back into some old data sets that I've been assembling for a long period of time (up top 20 years), and to create some new ones, not just for this purpose, but for other goals that I have in mind, including that possible book on how money works. That will take time, and when it is delivered the answer will be, I hope, fairly comprehensive. But please don't push me for it in the meantime, because this will take some effort.
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Hi Richard
I will definitely look forward to the article when it comes. In the meantime, could you explain what it is that those who argue for QE as asset swap are seeking to establish?
Thanks
Peter
That Bill Mitchell is right, as far as I can work out
I have been told I may not disagree with him
QE – the open market purchase of gilts – is clearly not an asset swap (as the term is used in financial markets). That is just a simple statement of fact. Really. I say this as someone that has asset swapped government bonds (in Japan) and I really don’t understand why anyone would think it is.
Clearly, if one chooses to expand the definition of “asset swap” sufficiently widely then one can call anything an “asset swap”… but why would you?
So, I echo Peter Black’s question what are the “asset swappers” claiming and why is the use of this term part of this claim?
This is an issue I will seek to address – but the answer is very hard to find
I have just reread your demolition of the Dax article published in the Guardian. Did you ask them to publish a full rebuttal? Sorry of this is the wrong place to ask.
No…..
I’m sure a lot of your “lay” readers will welcome this Richard, as I for one thought I understood QE until this contretemps. It seems from the outside to be just an argument about definitions, but I think you are saying the focus should be on the effects, which is, of course, the MMT line. I hope though that, as you usually do, you will make your exposition of the nuts and bolts as simple as possible for us non-accountants to understand!
Maybe…
Hey!
I’m definitely not pushing. But still looking forward to it anyhow.
Can you recommend an introductory text on the theory of double-entry bookkeeping?
No
So I am also working on that
I agree that is something that would be appreciated. I am sure that I am not the only person reading your blog who has found himself having to understand accounts non-professionally (in my case as a charity trustee then as a school governor). While I find I can ask relevant questons, I am also aware of my shallowness.
A guide from someone who is themself an accountant, but one who is able to look more critically at accounts than it seems most do, would be very welcome.
That’s good, Richard. Thank you. Perhaps you need to work 24/7?
I do
But 36/7 would be better still
MartinD, Jonathan
the principals & practice of double-entry bookkeeping are the building bricks of financial accounting
It records a firms etc transactions e.g. paying bills selling goods & services, paying staff.
each transaction affects the firm in two ways- the firm receives value & correspondingly gives up value
( your bank statement is a copy of your banks double entry with you- actually it only shows your side of the transactions not the banks other side -if you see what I mean ! )
so each entry is shown twice & should therefore balance as each side records an identical amount
this gives rise to a trial balance & the balance sheet
as Tommy Cooper said about it -or something similar –
just like that
To be honest Im not sure how this works out in Government finances
back to Richard — but only when youre ready, Richard, were in no hurry
Actually, it shows their side of the transaction, not yours
So banks show deposits as credits – or an increase in their liability to repay you
You record them as debits – an increase in your asset
misunderstanding !
what i meant is that ” … it only shows your side of the transactions ( in the banks records ) ”
if we dont understand each other what chance of illuminating the non-accountants
Oh the joy of double-entry bookkeeping & the beauty of getting balance sheets to balance
will we ever get over a life in financial accounting
I agree QE is more than a simple asset swap. It is a way of boosting the demand for gilts, by adding an extra buyer into the market in the form of the Bank of England. This enables the government to sell bonds at a higher price than it would be able to otherwise.
This depresses yields and reduces interest rates too.
All true
Which is why the asset swap claim makes no sense – because it ignores that the assets swapped are not of the same sort, at all
I look forward to your discussion in full.
Double entry is simple to understand notionally, and when looking at simple company accounts. But then you write: “You record them (deposits) as debits”. I suppose you mean, that in my own accounts, I have lost – well, mislaid – a sum which I have put into the bank, and so it is a debit from my wallet or from credits elsewhere. (Of course, that may not be what you mean at all…) But it reminds me all too well of trying to learn physics and being told – with no explanation – that electricity flowed backwards, from negative to positive. I gave up at that point, and it was years before | got an electrical qualification.
ardj
” you record them as debits an increase in your assets ”
households rarely use double entry bookkeeping. our records are relatively few & straightforward
but the position when we rceive ,say, our salary into our bank accounts—— we would record the salary as an asset because it is an asset -money weve earned. Dont confuse your banks records with your own.You/we wont use double -entry
Some of us think double entry….
Sad, but true
Dear Mr Gray
Thank you for trying to help. Unfortunately what Professor Murphy wrote was “You record them as debits”, referring to making deposits into one’s bank (again – at least I think that was what he was referring to)
I agree with you, to the extent that I rarely have occasion to consider my household accounts from a double-entry perspective. But I remain puzzled by the statement cited.
Increases in your bank account are always debits in your books
So the bank thinks them a credit
I think you consistently underrate the difficulties here. You have a fair number of followers with relevant professional/academic expertise, but you have far more like me with irrelevant expertise, in my case a retired lawyer with a background in both practice and academe. Intellectually, therefore, we do not struggle with the basics, but understand the limits of that, particularly when discussing with non believers. So, I have to look up more than once what an asset swap actually is; then I have to look up Libor and other related concepts and terminology that are outside my own discipline’s glossary. I don’t resent that and of course comprehend that it’s the price of taking this further, but the level you pitch your publications is really important here. No I’m not seeking a dumbing down, but the ‘pure accounting’ issues pose a particular difficulty, even after the Law Society finals paper on solicitors accounts!
There are two ways of doing this – in the detail you suggest and by standing back and asking what it is that we are actually observing
Both matter, but the second more so
Completely agree – big picture understanding matters most ……(and that comes from someone that does know all the technical stuff from a market practitioner perspective).
I may be wrong but the claim that “it’s just an asset swap” seems to perform two functions. First, it turns off people that don’t know what a swap is and prevents them from challenging what follows. Second, “what follows” is (I think, but am not sure) an assertion that because it is “just a swap” that it doesn’t make any difference.
But the “Cash or Gilts – it does not make a difference” assertion is nonsense. Sure, cash can always be obtained if you have gilts in the repo market – but that is not the same as having cash. Selling my house and get £100,000 is different from re-mortgaging to get £100,000 and I will spend that money differently.
You get it, entirely
QE makes a massive difference
I ma grinding through data to do this and other things right now – which is asking lost of questions of me along the way
I look forward to this one… there’s a dearth of accessible explanations to resolve the moneyprinting debate.
As paulhenry seems to imply – pictures might be nice, even if just photos of pencil diagrams, and comparisons with non-UK QE. BTW… When you lot say MMT, are you referring to ideas of people like Prof Steve Keen?
Try Stephanie Kelton
Hi – I think maybe this got lost – interested in your thoughts Richard.
Recent rounds of QE over the last 18+ months have closely matched government borrowing (eg see https://www.ft.com/content/f92b6c67-15ef-460f-8655-e458f2fe2487 and also the House of Lords report late last year https://committees.parliament.uk/publications/6725/documents/71894/default/).
The BoE say this is a coincidence.
Regardless of whether that is true and to me it seems unlikely they would lie, this means the private sector has not increased its *net* holdings of gilts (at least in the UK – the USA is different) – ie the private sector has NOT “funded” (in conventional monetary language) the government at all (and the government has not borrowed any money at all in this instance) – as MMT describes, the government has simply created the “money” by its spending – QE here in the UK is a sideshow this time round and perhaps at best is one way of keeping track of the extra “money” thereby created (given that no-one believes the BofE will ever sell back £875bn of gilts to the market, or receive £875bn from the Government when they mature – also note that the £875bn is a self-imposed ceiling now reached in December 2021- will it be extended? If not what will happen next in the gilt market…if interest rates are really going to rise why would the private sector increase its net holdings of gilts when the BoE is signalling that their prices will fall in the future (due to interest rate increase)? ).
What *has* happened is that the average maturity of the gilts held by the private sector has increased. That’s an asset swap isn’t it? Put simply, if the private sector has £20bn of shorter-dated gilts already and buys £20bn of newly issued longer dated gilts from HM Treasury and then sells the £20bn of shorter-dated gilts to the BoE shortly afterwards the only thing that has changed in the private sector is the maturity level (i think the average maturity is now 15 years, an increase – good for pension funds). This also shows that government spending during the pandemic has put money into the non-banking private sector – eg through furlough, business loans, public sector salaries etc contrary to what many people say about it fuelling those nasty capitalist banks cashing in gilts and firing up asset prices in exchange. You can also see that if the BoE were to sell £875bn of gilts to the private sector, then subsequently on maturity, HM Treasury would have to then come up with £875bn (plus interest) to redeem them, so the newly created money is back in the economy (Another asset swap). Only taxation destroys the money (MMT).
Interested in your thoughts, perhaps I have this all wrong but I would like to understand why!
Apologies – sometimes a comment takes a while to get out because I do not have the time to respond, as requested.
In this case a number of responses are appropriate. The first one is to say that the Bank of England is simply not telling the truth. I think that that is glaringly obvious.
Second, as you know, neither taxpayers (whatever that means) have funded the Covid crisis: government money creation has, and anyone seeking to argue anything else is ignoring the realities within the data.
Third, the Bank of England indicating that it might sell net bonds again is an indication that they do want interest rates to rise because that is the inevitable consequence. When everything else is under price pressure, why they would wish to do this is the real question. They can achieve it, but at what price?
Fourth, I am not sure that the overall average maturity of gilts has risen by much, but I will check this point. I thought it was already 14 years. I am not sure that 15 years makes a lot of difference to that. I am really not sure I follow your assets swap argument in that case.
Fifth, your argument that the government spent into the non-financial sector and that it could not as a consequence have invested in the financial sector is, I am afraid, wrong. It’s true that the money went into the non-financial sector as a flow but it ended up in the financial sector as a stock. Both can be true simultaneously and that is the problem that we are facing.