The FT has just reported in an email that:
The European Central Bank has called an unscheduled meeting of its governing council to discuss the recent sell-off in bond markets, raising the prospect it could announce a new tool to tackle surging borrowing costs in weaker eurozone economies.
I am unsurprised. Of course we have disorderly bond markets. They are the deliberate creation of central bankers, led by the Fed and the Bank of England, with the European Central Bank planning to follow suit.
And to compound issues we now have the Bank of England beginning quantitative tightening - or QT as it is called in the jargon. This is the policy of either selling back government bonds by the central bank bought during the QE programme to the financial markets, or the policy of not reinvesting proceeds in new bond acquisitions when bonds purchased under that programme are redeemed by the Treasury of the country that issued them.
More than £25 billion of QT has now happened in the UK, denying the government funds that it has instead sought to raise by increasing national insurance.
And as the FT reports this morning QT is now also starting in the US:
The mammoth task of shrinking the Federal Reserve's $9tn balance sheet has finally begun. On Wednesday, the US central bank will stop pumping the proceeds of an initial $15bn of maturing Treasuries back into the $23tn market for US government debt, the first time it has done so since it kicked off its bond-buying programme in the early days of the coronavirus pandemic.
But, in an article that is shockingly error-strewn as the nature of banking and money, what the FT also notes is that the last time the Fed tried to do this the policy led by 2019 to disaster, with overnight lending markets seized up, suggesting the Fed had pulled too much money out of the system.
That was before Covid, war, sanctions, recession, global supply chain chaos and more. Now we have all them. But the Fed is trying again.
So, of course markets are in chaos.
Of course there will be liquidity crises.
Of course countries who do not borrow in their own currencies will fail.
Of course recession will follow like night does day.
And all this because the central bankers want this to happen.
And then they are surprised. But that is because, as Prof Danny Blanchflower pointed out yesterday in the Evening Standard, that is because they appoint incompetent 'yes men and women' to central banks who will do the bidding of neoliberal governments.
We are in a deep economic mess that can only get worse, and that very largely is the fault of central bankers who want to turn a short term inflation into a long term stagflation, and who look like they might just succeed in doing so.
Oh, and for those who are wondering why they might want this, it's because the opportunity for making banking profit is much greater in unstable and chaotic markets than it is in stable ones. I cannot, barring ignorance of economics, find another explanation for what they are doing.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Yet again I’m indebted to you for offering a readable explanation of a situation that confounds me. I’m a historian, not an economist and the little I ever read about economics long ago is doubtless tragically out of date. Could you recommend some work that would help to bring me up to speed?
The best right now is Stephanie Kelton’s The Deficit Myth
Then Kate Raworth, Doughnut Economics
Much obliged….again.
Kate Raworth, for those who might know, is the sister of Sophie Raworth who is the presenter for the BBC Sunday Morning Live and newsreader.
So?
Those two certainly and I’d add Steve Keen’s The New Economics.
Agreed
It’s basically a back door method of compensating the rich for inflation isn’t it?
This is what more and more people need to realise. Hopefully one day, there will be enough that do.
I think that QT should come with two suffixes:
Soft QT – the policy of not reinvesting proceeds in new bond acquisitions when bonds purchased under that programme are redeemed by the Treasury of the country that issued them.
Hard QT – the policy selling back government bonds by the central bank bought during the QE programme to the financial markets
At the moment the UK has Soft QT, since last December iirc.
It would be quite remarkable to have the hard version at this stage as any interest rate offered wouldn’t be close to inflation. Also, the BoE does not have previous for running bond auctions afaik. But if inflation comes down closer to the interest rate one could offer then consideration for hard QT will be on the table. That’s not a reason to promote keeping inflation super high by the way!
Both produce a broadly similar outcome – and are deeply recessionary
Why do you want that?
I agree that Central Bankers are making things worse and that they are prisoners of their outdated way of thinking. However, fiscal policy failures are, in my view, more important when we are trying to identify the culprits.
At a political level, even ignoring all the nonsense surrounding Johnson, there is an unwillingness to level with the public that in the face of disease, war and climate change our living standards (measured in the trinkets that many hold central to “living standards”) must fall. Only with that acknowledgement can we decide where the burden should fall…. and that has not happened.
Take higher energy prices. The first response was “nothing to do with me, guv’ – it’s the market”; then “ooh, I know its hard but there is nothing we can do”; then “let’s throw a bit of cash to a few people to see if we can get it off the front page of the Daily Mail”. At no stage was there any thought of serious “burden sharing” between rich individuals/corporate energy sector and poor individuals. Only, in the face of an outcry did they bring in a windfall tax but even here, a look at the share prices of the energy companies tells you it was a mere gesture.
Our government would have us believe there is nothing else to be done but readers of this blog (and the Daily Mirror, too??) know that is not true.
In short, Central Bankers playing a bit part in this tragic drama – government is the lead actor.
The ECB does have a problem that the Fed and BoE does not face – Italian 10 year yields at 4% versus Germany at 1.75%. To be honest, I think that the ECB have done (and will keep going) what it can to prevent excessively high rates in Italy but the failure is political rather than anything else. To be fair to the ECB, they understand this and are trying to navigate a political tightrope as best they can.
I agree that government is failing – bit central bankers are willingly enabling that
Yes – because in order to have got the job in the first place they had to be part of this “groupthink”. And, if they deviated now, they would be replaced.
Bond markets have been manipulated since the introduction of QE.. so the reversal of QE is bringing some order. Of course long term rates will rise because it makes no sense for medium and long dated bonds to yield circa -7% or so. Cheap money has led to a boom in the money supply. Inflation and the price of goods is a combination of the supply of goods and at a given time the amount of money in circulation and the velocity of that money in circulation. Central banks can no longer print money to solve economic problems and the legacy of that policy over recent years is partly a reason for the inflation we have now. And bringing inflation under control is now an economic priority.
That is utterly incoherent
The yield on long-dated bonds is about 2.5%
And you have clearly not read what I wrote
Please do not waste my time again
Perhaps he meant that these bonds have a REAL rate of -7%?
The nominal 2.5% minus the 9.5% inflation?
I guess the theory is that pension funds can only tolerate a rate of -7% for a short period?
And how do you propose to address that, even if it is true?
We are back in similar territory to an earlier thread; because it is fundamental. I have hopes Richard’s ongoing work here will flush out some interesting lines of enquiry.
“The yield on long-dated bonds is about 2.5%”
nominal yields are 2.5% but real yields are circa -7% will inflation pushing 10%.
Nothing incoherent there. Long dated bonds have been ridiculously overpriced through QE and at a -7% real yield they remain so. I expect the yield curve to steepen both here in the US and in the Eurozone.
So you want low inflation and high rates
Utterly incoherent
Are so you now see the difference between minimal and real. Do you think current nominal yields are sustainable with inflation where it is? You would have to be economically illiterate to tie your money up for 5, 10, 20yrs or longer and lose 7% per annum. So inflation is forcing yields up. Inflation is causing damage all over the place and bringing it under control is a priority.. that is what i’m saying.
I don’ think we will have inflation for very long – and have explained why
The problem is all yours far assuming we will
Inflation disappears very rapidly in the Uk – and will this time – and not due to anything the BoE will do
So your assumptions are false
When it comes to government debt in the last twelve years it is the simple questions that still bother me.
For instance, although I believe I have a reasonable working knowledge of the difference between Government debt and budget deficits I am still puzzled how during the period 2010-2015 the Tories/Lib Dems managed to cut public spending by the largest amount ever seen but still increased the National Debt by the greatest amount ever seen in peace time. Where did all the money go? Was it all Tax cuts to themselves?
Similarly with QE. If for a moment we were to accept the government explanation of QE, what did they do with the near One Trillion Pounds that we apparently borrowed. If we put aside QE taken up by Covid that still leaves £500 billion that appears to have vanished with absolutely no benefit to this country.
It is an excellent question to which I do not have an excellent answer
I need to do more ion this – but government accounting makes it nigh on impossible to answer
Paul, they might have reduced the deficit a bit recently but there has been a deficit every year. I think the last time there was a surplus was in the late 1990s in the first year or two of Blair and Brown. The deficit got a lot bigger under Cameron because austerity crashed the economy and tax revenue fell even faster. So where did the money go? Essentially wasted on paying folk not to work, etc. Similar to what happened under Thatcher where the oil revenues were used to destroy much of British Industry in order to get at the trade unions.
It would have been much better after 2008 to have run a large deficit AND used it to invest in, for example, council houses, rail electrification throughout the network. The QE money could have been combined into that as well, for example as part of Richard’s Green New Deal. Such a totally wasted opportunity.
Many thanks. This ‘wasted opportunity’ reminds me a little of Joan Robinson’s famous remarks from 1973:
“The deficit country is absorbing more, taking consumption and investment together, than its own production; in this sense, its economy is drawing on saving made for it abroad. In return, it has a permanent obligation to pay interest or profits to the lender. Whether this is a good bargain or not depends on the nature of the use to which the funds are put. If they merely permit an excess of consumption over production, the economy is on the road to ruin.”
I wonder whether the ‘lost QE’ has been wasted/dissipated on the housing bubble (which creates a ‘wealth effect’ that sucks in imports), buy-backs, perpetuating zombie enterprises, etc., and generally underwriting the stagnating profitability of capital. Investment outside the non-productive housing sector has been anaemic, and the current account deficit is as bad as ever. It seems like the UK has been stuck in neutral for the last 15 or so years, with economic activity being sustained, regressively, by owner occupiers at the expense of everyone else. In this sense, it has perhaps been ‘on the road to ruin’.
Given that the UK is now a housing market with a large finance sector and smaller HE, pharma and defence sectors, and given that the retail banks’ collateral is now overwhelmingly denominated in housing equity, I would have thought it very unwise of the Bank to seek to erode that equity via high rates. If they are raised too high, then might it risk another banking crisis? There are perhaps other ways to cool house prices, by gradually rationing credit and/or taxing capital gains, although these are presumably options no political party is likely to contemplate.
The risk of another banking crisis is quite high – but remember rates are in real terms negative right now
It seems to have disappeared into the ether!
However, on a serious note – much of it disappeared onto Bank Balance Sheets in the ‘form of government bonds’ and was then reallocated, so the true beneficiaries of it were the large financial institutions (one reason why Richard is correct to call for windfall taxes on such institutions even leaving aside the current cost of living crisis)
As he mentions – Government accounting when it comes to QE is frankly a disgrace so it will be very challenging for him or indeed anyone to find out where all this money has gone – I’d hazard a good proportion of it has disappeared alongside a lot of other wealth that has been transferred offshore (Another area where Richard has been so assiduous in helping exposure)
I think I didn’t answer your second question about where did the £890 billion of QE money go. The answer to that one is nowhere as it is all still in the Bank of England in the Reserve Accounts of the commercial banks. The banks now have £952 billion in their Reserve Accounts (end of May 2022) and before 2008 it was usually less than £40 billion. QE creates new Base Money and that can never leave the BoE. It can only move around BoE accounts or be turned into BoE paper bank notes.
So if I withdraw notes from the bank then this reduces the bank’s CBRA, and the opposite happens if I deposit notes. However I get the impression from earlier discussions that coins are handled differently. What happens in this case?
Good question….
I have asked and cannot tell you because no one seemed able to tell me
Many years ago, at primary school, I had to write an essay called “A day in the life of a penny.” It was easy enough to make an entertaining story of how a penny could start in my pocket and be spent by various people throughout a day, Those were the days when you could by an ice lolly for a farthing or get five for a penny. However what I couldn’t figure out was how the penny could have got from the Royal Mint to my, or anyone else’s, pocket in the first place, and no one seemed to be able to tell me.
After some 65 years it’s still a puzzle.
Practically the penny would have been minted at the royal mint and I assume sent to a bank for issue, when someone wanted cash. If this new penny replaced an old one it can be accounted for, but if the number of pennies in circulation needs to be increased (not a replacement), how a newly minted penny is accounted for?
As I explained on Monday
They would be sold to the commercial banks, post office etc by the Royal Mint. If the BoE wanted any coins (which it probably would not) then it would buy them from the Mint.
Not true Tim
They are all issued by the BoE and as far as I can see the Treasury takes the profit on minting them
But the accounting for this is very opaque
I am pursuing it
[…] Cross-posted from Tax Research UK […]
Thankfully I see modicums of common sense from people like Jan Hatzius that we risk overshooting interest rate increases. The financial media is totally clueless on the issue as they are not paying attention to the downturn in Services PMI, consumer confidence. One thing that never gets reported is disposable incomes and mortgage rates are about to savage these figures. They seem to pay more attention to yield curve inversions than hard economic data
The way I see it is that central bankers suffer from a form of Volcker blindness. For a banker at the top of his/her trade today, who would have been young in the 1980s, Volcker’s reputation retains a godlike aura, whilst Greenspan has been exposed as a fallen idol with feet of clay.
The chief culprit seems to be Powell, upon whom Volcker must have made a great impression. Under Trump, Powell was acting like Arthur Burns, doing his master’s bidding, and whilst that didn’t help Trump get re-elected it might have helped him to pile up many more votes that his appalling record warranted. Now that Powell is under a Democratic administration, he has undergone a Damascene conversion from being a dove on interest rates (as Trump wanted him to be) to being a hawk. He won’t need to be anything like as extreme as Volcker in order to ravage the fragile political economy of the US, because household and corporate debt burdens are far greater than they were in 1980-81, so even fairly modest rate rises could have a disproportionate impact.
Similarly, the UK under Barber is frequently criticised for having lost control of the money supply in 1971-72, leading to a massive overshoot in 1973-75, and the [false?] narrative is that Howe’s ultra-high rates in 1980-83 were necessary to tame inflation.
According to the stock neoliberal narrative Volcker and Howe made the Reagan/Thatcher boom possible (although with disastrous and enduring social costs). It seems that some central bankers, who as a profession are very susceptible to economic fashions, especially fashions emanating from the Right of the political/economic spectrum, believe that they can somehow resuscitate the largely ersatz ‘prosperity’ of the 1980s only if they tame inflation now. Whereas probably what will happen is that they will cause a massive solvency crisis, and an enduring depression.