I have just posted these tweets:
They are a response to this Bank of England announcement:
This policy is backed by the Treasury. It is the most staggering admission of failure by a new government of the UK, probably ever, coming as it does three weeks after it assumed power.
I suspect the interventions will be for much longer than the BoE suggests.
I also suspect, very strongly, that quantitative tightening (the Bank selling bonds) that is now scheduled for November now will not happen: they can't buy bonds one month and sell them the next without adding to market confusion, although as yet they (as incoherently as Kwarteng in this regard) do not seem to have appreciated that.
This is a staggering shift in policy in such a short period of time. But as I said this morning, only government money creation can solve this problem now. I just think that the Bank has not realised how much is required.
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As gilt yields have gone up, the bonds will be cheaper for the BoE to buy! Who wants a bond with a coupon of say 1% when the market demands 4% or more? They can hold to redemption and make money on the deal. Everyone wins. Except those whose gilts have fallen in value. And those with mortgages. And anyone wanting to buy priced in dollars or euros or indeed anything from outside the UK. And, well, most of us.
Another shambolic government. It beggars belief…..,well actually it doesn’t as we already knew that the key players do not have the skills and relevant knowledge and experience to take the right pragmatic decisions. Hopefully opposition parties will pin Truss and Kwarteng to this debacle. We can only hope that the change of course will be sustained to avoid some of the catastrophic consequences for those most vulnerable.
I don’t think this was very quick and looks like the Chancellor didn’t talk to the Governor about what he was about to do as they should have been ready but instead looked surprised at the result.
Quote “The purchases will be unwound in a smooth and orderly fashion once the risks to market functioning are judged to have subsided.”
Has any of the existing QE been unwound?
£45 billion, but only by default
I laughed at that too 🙂
Yep – I noted it too – so reassuring for the poor darlings in the financial sector and in total contrast to their ‘F**k you buddy’ attitude when they are robbing working people of their wealth as they have done over the decades.
This sort of craven response to the markets is something I keep coming back to, however. It makes me worried how they would react to a REALLY courageous state. I’m sure there are more things to learn here than the obvious ones.
I suppose what Kwarteng and Truss have done is cut taxes without cutting expenditure yet so 4+4 = 5 so to speak (and I don’t want them to do that at all BTW) – all through the faulty lens anyway that taxes pay for stuff (which we know here at least that they don’t have to). And then the government going bankrupt narrative kicks in (more testicular material to play with).
But if a courageous state did MMT, then as we have learnt, progressive taxation would HAVE to come into play too. A courageous government would be seen to be ‘balancing its books’ whereas the real motive would be to combat the possible inflation spending would cause?
As I said I think that with the Kwarteng experiment/incompetence we have the opportunity to run some scenarios of our own for MMT and think about how a pro-active courageous state (that went beyond simple monetarism) would have to intervene in order to achieve its objectives.
I tell you what though – I get the feeling that it could not be through fiscal policy alone. The regulatory and legal frameworks would need to be uprated too.
A lot of work in other words, because the markets seem to me to be too powerful, with power based on fantasies that negate the sovereign currency issuing and legal power of the State. And that’s not good enough for me at least. This is the source of a lot of our problems. We need a root and branch reform in my view.
Welcome news.
However, can someone confirm if I’ve got this right ?
The rich get to keep their unfair tax cuts.
Just like the energy companies now have their profits guaranteed by government funding, rather than left to the ravages of the marketplace.
There are no other changes
If I’ve understood the line on this groups page (see here: https://www.socialistaction.net/2022/09/26/a-high-risk-gamble-for-these-tories-but-a-safer-one-for-their-project/) this is actually part of a “plan”, would you beleive – a plan that group spoke about here: https://www.socialistaction.net/2022/07/12/tory-leadership-contest-vicious-fighting-over-how-to-americanise-britain/ and have been remarkably prescient in many things over the years (I was a member of it a very long time ago – just to be transparent)
I think it is important to point out that the author of the second article, John Ross, is a full time member of a Chinese think tank situated in Beijing and has been there for some time. It does not seem to be unfair to assume that the article was written from a Chinese oriented perspective rather than from a more or less ‘independent’ one. Most of his work centers on China and issues related to China. His comments on the US are superficial. I would not be surprised if someone said to me that the article struck them as being written by a conspiracy theorist.
I get this needed to happen but at some point it’s going to go too far and QE is the basically the definition of inflation
Wromg
Sorry, but there is literally no eviemce for that
what no evidence that money printing causes inflation?
In an economy like the UYK, show it to me
Steve, please do not go down the Weimar route. Germany had just lost a World War, was davastated, lost its imperial constitution; and the government was trying to square enormous, insuperable internal and external political and economic pressures that were irreconciliable; and in a world economic depression. A dangerous soup, made from a recipe brewed for extermism, and extreme soutions; not for the rational balancing of superficial, conventional monetary wisdom (1930s or now).
Creating money doesn’t directly cause inflation. When it comes to core inflation (it excludes food and fuel), Paul Krugman wrote about it and said that business don’t put up their prices because they’re read about QE in the FT, WSJ or similar, and individuals don’t ask for pay rises because they’ve read that the Bank of England has expanded the money supply, but instead because there is more demand for goods and services so markups can be larger and jobs have become more available respectively. The UK also tends to borrow in its own currency, just as Japan, Singapore, the USA, Denmark, Norway and Sweden do. The Eurozone is a different matter
The word ‘staggering’ is most apt.
It goes to show that Truss and Kwarteng must have been as high as kites when they went for this.
And if they can QE into the bond market, they can QE into the NHS, education and anything else they’ve been de-funding recently as far as I am concerned.
The real question is not whether or not there is a magic money tree but who gets to pick the fruit.
Sorry Pilgrim, tut tut can’t do that mate. State money for bail out of Kwarteng and Truss, but private money needed for health care, social care and education. They’ll argue TINA. Where is Labour on this, they don’t talk about privatisation threats. How do we build a grand opposition when Labour won’t consider PR.
Yeah – sorry Tony B – I forgot about the Turd Way – silly me.
3 words:
Markets
Markets
Markets
.
Richard,
You must feel vindicated. On Sky they are trying to say it may look like QE but it isn’t; because it isn’t done as a ‘monetary objective”, but to “calm markets”. Do I hear a duck quacking and waddling, or not? The Conservatives cannpt call this a Government “policy”. As deliverd, it is pure panic, any dide up. Do I also detect here that what is imminently worrying the BofE here is the absolutely disastrous index-linked borrowing here? What a mess we are in. This appears to be a BofE/Treasury co-ordinated operation. Therfore, who precisely is in charge? Do we have two Governments? Are Truss and Kwarteng about to depart for exile (what a great idea – call it ‘garden leave’ if that covers the embarrassment!).
I hear excuses
It’s QE but not for the reasons it has previously been used
John asks “do we have two governments?” It certainly seems like that with BoE stepping in, apparently without co-ordination/agreement with UK Gov, to restore stability to the bond market. If this is so, it demonstrates vividly the weakness and incompetence of the Truss Gov in general and QQ in particular. Going forward, it will be interesting to watch how the BoE/Gov relationship works out. If BoE takes the leading role we have to ask why we are prepared to put up with an ineffective government. Or maybe Keir Starmer might consider taking this up on the public’s behalf?
The renewal/expansion of QE will further increase the reserve balances held by the commercial banks which (as you have pointed out Richard) attract interest at the base rate since the policy shift from zero rate around 2008/9. We will see yet more profit accruing to the banks unless the viable remedies of reducing the interest rates on such balances to zero or 0.1% are introduced. A while ago, Richard, I think you recommended the NEF paper on this matter and although they advocate a more limited reduction in interest on the reserve balances I found it a good explanatory read. For those whose memories are as bad as mine, the reference is “Between a Rock and a Hard Place; NEF, June 2022.
Becoming clearer that this is not a policy-driven decision. This is more to do with financial stability. It’s come from different BoE committees, not the MPC here.
Plenty of speculation that the BoE has become aware of problems with in pension fund industry re margin payments. That was the trigger to today’s announcement.
A few weeks ago, a poster commented that QE would restart soon and you quashed him/her stating that his/her assumption was wrong. Seems like a bit of both. The BoE has stepped in, but for different reasons.
When the Tories use this money creation it is always done without any reference to it. It’s more or less done behind the scenes with the Tories turning a blind eye to it and hoping that everyone else does as well. Now, if Labour did it, they would shout merry hell. If it does add up to £200 billion, the Tories will try to keep it quite and never admit to it as being their policy. Fortunately for the Tories no one is likely to question them (I doubt whether Labour will too much as they will probably do something similar if elected). I think that neither of them like to admit that QE is a viable policy choice. For a start it would blow the doors off what they consider to be “sound money”.
I had been expecting something like this, not quite so soon perhaps, but I don’t think the Truss government had much choice.
Well Richard, you and a number of contributors to Tax Research could see this coming and I wonder whose advice Ms Truss and K Kwarteng sought before they embarked upon their plan? They seemed to act without any understanding of how ruthless and manipulative the international financial players can be and they have now been challenged by the credit rating agencies, though it is worth asking who controls them.
Had they simply used the QE option from the outset in whichever form, all this could have been avoided.
I am finding it hard to accept this is welcome news. Granted it was the only solution but really the BoE is having to write a blank check for this governments’ error in determining that the super-rich get a tax cut. When really, they should have been using such ammunition for better causes. Of course I realise that the idea that the BoE is on any way independent is a fallacy, this case proves it beyond all doubt.
It’s not really a solution, it’s a used sticking plaster, whose adhesive properties have long since degraded.
When Andrew Bailey is the “adult in the room” we should be worried.
This is sensible action from the BoE to ensure “financial stability” – as I said yesterday the market long maturity gilts was more dysfunctional than it was over “Black Wednesday”.
Of course, this is underwritten by UKT so will have had the sign-off from Kwarteng so should be seen as a direct acknowledgement by him of his foolishness. I hope the media pick up on this…. “Why did Mr. Kwarteng approve the intervention of the BoE in the Gilt Market?” (Either he admits his budget was a disaster or admits he agreed to something that was not needed).
How long the intervention lasts, I don’t know. On one hand it does prevent ruinous rises in mortgage rates but on the other it enables absurd fiscal policy choices by the government.
Money creation can be a good thing …. but the underlying assumption is that it is spent wisely.
This what happens when the only criteria for the approval of government policy becomes, is it right-wing enough?
For decades the Tories have been allowed to get away with incoherent, economic gibberish on exactly that basis.
God knows Truss and Kwarteng, Johnson, May, Cameron, Major and Thatcher should never be forgiven for what they have inflicted on Britain but surely, the British media has some very big questions to answer.
I’ve been wondering for a while how they would justify simultaneously raising interest and increasing QE and this little manufactured crisis seems to be the cover for it.
Your QE prediction fulfilled much quicker than expected. Maybe it had become inevitable – but no one had said so.
It is worth dwelling on this statement in the BofE release: “Were dysfunction in this (long-dated bond) market to continue or worsen, there would be a material risk to UK financial stability. This would lead to an unwarranted tightening of financing conditions and a reduction of the flow of credit to the real economy.”
I thought it might be index-linking that was the problem (another policy disaster), but it may be Pension Fund derivatives kicking in adversely as bond prices fall.
Either way this is a disaster. It is like a return to pre-Conservatism Toryism: Jacobitism and the free-wheeling approach of Charles II (the previous King Charles, ironically) to debt and stability; the under-considered ‘Stop the Exchequer’ by ecocomic historians and modern historians looking for precedents on interest rates and monetary policy that Truss-Kwarteng and the Conservatives have failed to learn.
It was derivatives
Have I got this right? Normally the “printing” of money is disguised by an expensive charade involving the issuing of bonds by the Bank of England. This has gone wrong, so the Bank is now buying back its bonds using freshly printed money. Although this temporarily solves a problem for pension funds, there is no indication that the freshly printed money will be used productively. The process will do nothing to stem the collapse of sterling and the resulting inflation.
This is just printed money to cover financial market losses
Like 2008
Sounds like a repeat of the ERM. The government thought it was bigger than the financial instituitions. It wasn’t.
Richard, your simple sentence raises a very important point.
You have always correctly pointed out the importance of tax in regulating the amount of money in the economy.
However, I have long suspected that as well as a Magic Money Tree, there is a Magic Money Pit, in which money turns back into “thin air”.
So, has the money lost by the financial markets disappeared into the Magic Money Pit?
Or is it still floating around somewhere else?
If the money has disappeared, then the BoE intervention is “printing money” to retain the “right” amount in circulation and prevent a needless recession.
If the money still exists, then the BoE will be putting too much money into circulation and replacing recession with inflation.
Not an easy question, but the answer is important.
I have written an amateur piece on this https://sussexbylines.co.uk/the-mysterious-case-of-the-burnt-banknote/
There is no magic money pit
The £65 billion has gone to those who did derivative contracts with pension funds – ba nks and hedge funds
A money pit is a technical impossibility
Richard, Is there not a contradiction between arguing that Quantitative Easing does not necessarily cause inflation (https://twitter.com/RichardJMurphy/status/1575386288303259648) and denying that the Magic Money Pit exists? It definitely does exist (the Bullingdon Club member burning a £50 note). The question is whether it is trivial, or whether it is a significant component of the money movement system. The Pit makes it far easier to see why QE would not necessarily cause inflation. I guess we will know in a few weeks. Either the BoE has printed £65 billion which will lead to rampant inflation or or a significant part of the £65 billion is replacing money that has been locked away or destroyed.
We have been here before
I am not going there again
Please learn how money works
Your claim tat money disappears the way you suggest makes no sense at all
Please don’t waste my time with it again
correct me if I am wrong,
but the government should be borrowing from it’s self (not private banks like the bank of England at interest) and paying it back with money generated by getting tax at point of exchange.
2. Private banks should not be able to inflate the prices in the shops banks or energy ect.
3.we need real wage prices increases and also for those on benefits especially for those on the lowest who should have their benefits quadrupled
4 without this is could be mass murder by this government. the government is meant to be their to serve the people
See a thread coming this morning
This is a genuine question for some time in the future when we have staggered through the present crisis. What would happen if nobody paid tax on the first £27,000. You would then pay 20% but on anything over £80,000 you’d pay 45%. I’m not an economist as will be blindingly obvious but could that work and would it not be a way of getting more money into the economy?
We would have too little money to manage the economy
Thank you. Pity!
David Byrne asks:
In the context of the HM Govt. fixation with fiscal matters, what will be impact on the economy when the private debt bubble bursts? Will it be recession or deep depression? I think the latter at this moment.
If it bursts – and it might – deep depression follows