Andrew Bailey has said in a speech published this afternoon that:
Based on analysis conducted in conjunction with colleagues at the Debt Management Office, we are currently looking at a total reduction in the stock of gilts held by the APF, which covers both sales and gilt redemptions, of something in the region of £50‐100bn in the first year.
To reduce the Gollum-like nature of Bailey-speak to something approximating to plain English, what this means is that the Bank of England intends to reverse between £50 and £100 billion worth of quantitative easing in the next year, sucking this amount out of the economy as a result.
So, as we face a Bank of England-induced recession he wants to compound the suffering by sucking funding out of the financial markets that might have been available for productive investment to destroy it instead and put it beyond use, clearly with the intention of inducing recession which he thinks the condition for beating infaltion.
In the next year millions will face misery and financial destitution in this country and what the Governor of the Bank of England wants to talk about is making things very much worse.
How did we come to live in a society like this?
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My understanding (probably incomplete) is that QE involved buy-up of government bonds in the stock markets, releasing money that was presumably spent in the first instance on other stock market trades such as buying shares. Logically that could have the effect of increasing share prices, due to more money chasing the same amount of shares.
If QT is the opposite of QE then it will involve sale of those bought bonds on the same market, so presumably funded by traders selling other shares. Tending to depress share prices.
My question is whether a lowering of share prices will reduce the amount of money available for more productive spending in the economy? A few weeks ago you suggested the FTSE index is a poor indicator of economic health, which implies to me a change in share prices shouldn’t have much effect.
(To be fair, I can see it might depend how big any change in share prices is; I don’t have a sense of whether £100bn is large or small in relation to the annual trading being done. And I can see that changes in share prices might have second order effects on everyday money, when people or institutions realise whatever capital gains they have achieved to release money for other purposes – like pension funds taking money to pay pensions).
Any sucking of money out of markets right now reduces liquidity when it might be needed
The reversal of QE is necessary because it is a nonsense to have real interest rates at minus 7%. Either inflation has to come down or nominal rates are going up. Bond markets have been manipulated by central banks for 12yrs and the unabated growth in the money supply was always going to fuel inflation at some point it was just a matter of when. I am not surprised you completely failed to anticipate this bout of inflation as you fail to link the money supply as a cause.
So, prove why QE caused inflation when it did when it had not for 12 years beforehand, and then explain why supply chain interruption, war and profiteering did not
Please come back when you have the evidence
At the same time explain why you think V is a constant, as you obviously do
When you can do that you can have another go
My understanding of the situation is this..
The government needed money, quickly (and cheaply?), They issued a huge amount of gilts to the market
The market swooped in with its spare cash and bought those gilts, only to immediately sell them to the Boe which bought them using new money.
The government had the money it needed to spend, the market made a nice amount of commission for taking part in the transaction as a proxy. The market had spare money before and after the transaction.
The government spent the money or handed it to dubious parties who stashed it offshore.
At the moment, the government owes the money to itself (since it owns the Boe). Any payments to reduce the debt go to the Boe as does the interest, which eventually ends up being transferred back to the treasury. There’s no specific need to pay the Boe back, after all the government owns it.
When the Boe sells the gilts back to the market, the spare money gets tied up once again (helping to guarantee a recession?) Also, the government must pay the gilts and interest back, sucking money out of the economy, using taxation as the means to do so.
Sounds like economic suicide
All wrong
The Bank of England created money for the government
QE provided a cover for that use of the magic money tree
The private sector knew it was never being sold bonds, really, as it knew they were going to be bought back
I agree it took a commission. That was it. But QE was a sham. and youi’re assuming it was real when it was not
QT is money cancellation
Being absolutely horrified at the fires that are breaking out around the country due to the heat yesterday, anything that stops money circulating at the moment is just not what we require. We really should now be seeing ourselves in emergency measures because that is also part of being in a country like this.
No longer are we looking at other countries burning. We are too.
‘It’s coming home, it’s coming home, it’s coming – Global Warming’s coming home’. Sorry to sound churlish but you’ve been told over and over again.
How did this happen? Easy – money power buying up our political elite to run the world for minority vested interests. People who thrive on chaos just seeing this as a another opportunity to get rich. Naked greed.
Politically, the Tory party talks about being ‘honest’ with people – yet it’s always about what they say they can’t do – not what they can they do. Labour and the wimpy do-gooders in the Greens who have no technical grasp of fiscal reality are much the same I’m afraid. The Lib-Dems live in an existential ideological crisis all of their own.The default position will Fascism won’t it – the one we all run to when we are really scared. That’s my worry now – Russians, Chinese and anyone else we don’t want to understand will be made the bogeymen when in fact it is global warming and climate change – man and market made – that is the biggest existential threat now.
All I see is a methodology of murder. There will be no money to stop rising sea levels, no money to help people relocate, mass migrations, famine and misery.
And all we can do as a species is pull up the drawbridges, start wars based on cold war attitudes, bitch about identity politics, compete with each other for finite resources – anything but face the reality of the situation we are in which will require us to work together.
Imagine that – mankind working together to survive!
Ha!
In an age of hyper-individualisation and customer ‘fulfilment’ as measures of quality of life.
Hi Pilgrim,
While I almost always concur with your take on the world – and now is no exception, I thought I might help you join me in a smile for a second or two.
I have just finished Richard’s Joy of Tax, which I enjoyed rather more than I imagined I would, only expecting to be informed but I was also inspired.
The smile to which I refer is in trying to stretch my inspiration from the book to an imagined world where the words the professor puts in the mouth of the Chancellor in the last chapter would be spoken by Nadhim Zahawi.
I failed.
🙂
Who will buy the 100£b of bonds what coupon will they attract? If it is high is this just another way to allow the very rich to park their money, safely, and make more money?
They are trying to such money from stock markets
No harm to some degree
But this will fund nothing at all – it is pure financial engineering and meanwhile if stock markets sell to fund this the message will be a declining confidence in the market
The messaging coming out of the BoE is all over the place. Private sector debt levels and a housing boom of 14 years mean that interest rates have a lower low bound. The BoE needs to hold rates here and pass the buck back to politicians. They caused supply side inflation from their covid policies. Now own up to it and admit it to the population instead of pressuring central banks to cause a hard landing
I don’t understand, all QE did was inflate asset prices and make the neoliberal bankers richer… that is what you told us Richard…So how can it all suddenly become productive investment when you reverse it?
Or do you just make a story up to suit your political agenda?
I sis this was about reducing the money supply by extracting funds from financial markets that will reduce liquidity
I have no idea how you reached the claim you’ve made
Thinking about trying to run things more sensibly, I see that Belgium has a price-salary index system, which reduces the pain for employees. It has built-in delays, and is not fully compensatory, but on the whole it works pretty well.
Moreover, by restricting profiteering, or to look at it another way, not making the consumer bear the burden of inflation, it forces a genuine search for productivity improvements. Eurostat figures for the nominal costs of labour show that of Belgium rose by 40.3% between Q4 of 2002 and Q4 of 2021. This compares with 36.8% in Germany (where labour costs have been held down) but higher figures in France (43.3%) and the Netherlands (59%), all countries without indexation. A 2012 study by the Belgium National Bank argued that indexation “ne donne pas nécessairement lieu à long terme à une évolution nominale plus rapide des coûts salariaux.“
Certainly, at the moment, Belgian inflation at 9.7% p.a. is higher than French inflation at 5.4% p.a., thanks to higher energy price growth. But stripping out food, tobacco and energy, the underlying price increases are much closer: Belgium 5.1% and France 3.7%. And on the two sides of the Lys, the situations are very different: French inflation is relatively low chiefly because of the fall in real salaries, and a consequent drop in consumption (GDP -0.2% in Q1) Belgian GDP growth by contrast has been +0.5%.
So the point I am trying to make is that favouring a low inflation at the price of a fall in real wages is a choice of the division between capital and labour. Certainly employers in Belgium never cease to rail against the indexation system, limiting as it does the opportunities for profiteering and dividend enhancement. But the Bank has steadfastly defended the system, as a source of stability (as, more surprisingly, has the Belgian L’Écho).
Indexation is not a panacea: the catch-up in salary is belated and incomplete; and it is only a minimal guarantee. But such a system, in the UK would prevent idiocies such as those mouthed by Bailey of the BoE and others of his ilk.
P.S. Sorry for this tardy response: Covid has restricted my usual , er, ebullience