I posted this thread on Twitter this morning:
The Bank of England began quantitative tightening yesterday. It sold £750 million of its supposed bond holding acquired during quantitative easing programmes back to financial markets. That is very bad news for ordinary people. A short(ish) thread...
First, quantitative easing (or QE) was used to fund government deficits after the 2008 financial crisis and during the Covid era. The government has never admitted that, but since when did a politician tell the truth?
In those periods the government created money, via the Bank of England, to pay for its spending. Then it issued bonds to supposedly reclaim that money from the financial markets. Then the Bank of England created more money to buy those bonds back from the financial markets.
It that seems a convoluted mechanism, it is, and that was deliberate. The whole thing was designed to pretend d that the Bank of England (BoE) can't create new money whenever it is desired for the government, when in fact it can and does so every day.
QE was always a con in that case: it was a sham to cover up the fact that the so-called magic money tree that politicians were desperate to claim did not exist was in use and was paying for government spending. Everything about QE has always been a lie.
The result of QE was not that government debt in terms of bonds in issue rose. The figures that suggested that was the case issued by the Office for National Statistics (ONS) were also a lie.
Since over 30% of the government debt they have said is owing is owned by the government now their claim was obviously not true: you cannot owe yourself money. The Whole of Government Accounts (which have not been issued since March 2020) prove this: QE is shown in them as cancelling debt.
The Whole of Government accounts say there were £1.1trn of gilts in issue in March 2020. The ONS reports a figure of more than £1.5trn. The difference was QE, which at that time was a bit over £400bn. Only one of these figures is right and it is not the ONS data: QE effectively cancelled gilts.
This did not mean debt went away: what it actually meant was that the amount of money owing to the UK's commercial banks had grown by near enough the value of QE, or over £400bn at that time. This increased to about £900bn after the Covid era.
The logic for this is easy to explain. If the BoE creates money as debt it has to be owed to someone. It was owed to the commercial banks, and not to itself as the owner of government bonds. It would have been so much easier to tell the truth.
So having covered the mechanics, why was QE done? 1) To fund the government when tax and borrowing could not 2) To keep interest rates low as a matter of policy 3) To recapitalise the banks after 2008 by placing lots of cash on their balance sheets (that £900bn, again).
Now the BoE has decided it wants high interest rates because a) it thinks this will control inflation, which it will not (see yesterday's thread) and b) it wants to trash the economy for reasons I have speculated on elsewhere.
To assist achievement of these goals it now wants to do QT. This involves it supposedly selling the bonds it had previously bought back to the financial markets. There is, as usual, a massive pretence (call it a lie) in this process.
The pretence is that it is these old bonds that are being sold. That is nonsense, of course. They have effectively been cancelled. I repeat: the government cannot owe itself money. It's a pretence that old bonds are being sold in the QT process.
What is actually happening is that, in effect, new bonds bearing the characteristics of the old bonds are being sold. Most people are being fooled by that, but we should not be: it is the substance that matters here, and the substance is that these are new bond issues.
So why is this being done? A) To use up market capacity to buy government bonds so that new bonds cannot be issued to supposedly finance current government spending, so reinforcing the policy of austerity B) To force up interest rates to support the policy of trashing the economy.
C) To reduce the size of the BoE balance sheet by reducing the amount of money on deposit with it held by the UK's commercial banks. The proceeds of these bond sales are not, in that case, being released for public benefit.
In other words, not only is the BiE trying to directly harm the well-being of individuals and companies within the economy by increasing interest rates, it is also seeking to undermine the possible use of bond sales by the government to prevent austerity.
The government then has the excuse that there is no market for selling its bonds and so it cannot use them to fund what it claims to be a black hole in its finances and so as a result it must impose both austerity and tax rises.
What can be concluded from this? First, that the Bank of England is not in any way operating independently of the government in pursuing these policies. It is clearly working very closely with the Treasury to create this artificial supposed public spending crisis.
Second, it is actively supporting penal government fiscal policy that involves austerity and tax increases by suggesting the capacity to sell bonds does not exist simply because it has already extinguished it by making wholly unnecessary bond sales.
Third, the unelected BoE is actively supporting the undermining of public services and public well-being as a result.
I would suggest that the BoE is partaking in a not terribly subtle, but largely unnoticed game of double bluff. The whole intention of its policy is to support the Treasury by saying it is impossible to fund public spending using bonds precisely because it is blocking the means to do so.
QT is not then about reducing the size of the BoE's balance sheet, as the Bank of England claims.
It is instead all about supporting a policy of undermining the public services whilst deliberately trashing the UK economy by creating a wholly unnecessary recession in which the conditions for mass privatisation of the public services are created.
In that case, no one should welcome quantitative tightening: it is a weapon being used by the Bank of England to harm the people of this country. Economics rarely comes much nastier or more deceitful than this.
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This is a horror story unfolding out of the eyes of the public, which should be exposed by proper journalists – that institution is so compromised now that truth is almost moribund as news, and client journos even on the supposed left parrot the same lines.
Totally accurate.
The manufacture of hopelessness – that’s all this is – leading to inevitability, itself manufactured.
I agree with the conclusions but have a slightly different narrative…
Whilst QE is a round-about way to achieve direct financing of government spending and unnecessary I do think it was the right way to go about directly financing government spending (which it surely does). At the time it first started we were in the EU and the Maastricht Treaty specifically forbade direct financing of government spending. The UK had “opt outs” for some of the Treaty but I can’t recall whether it included this provision. In any case, it would have created created more resistance and delay so the QE route (one that had already be well-trodden by Japan) was a sensible solution. It also pushed long term rates lower for all players which might not have happened if there was direct financing of spending on the government’s overdraft facility. (In fact, I would argue it pushed long rates too low and created a bubble for asset values (houses) and stored up problems for Pension Funds (that we are now seeing)… but that is another story).
It also had the merit of looking like any other open market operation that the BoE might engage in to add liquidity… just in bigger size and longer maturities.
Of course, that spending, if left un-drained from the monetary system, will trickle into reserve accounts held by clearing banks with the BoE. Where else could it go? However, this did NOT recapitalise the banks since, against these reserves they would have the liabilities to their customers/depositors but it DID liquify them and preserve the value of other asset values on their balance sheet that might have been damaged without QE. (ie. QE was a help to banks but not a capital injection).
Viewed this way, QT (the reversal of QE) is just the obvious way to drain reserves in order to achieve their policy of higher rates – nothing more, nothing less.
My point is that QT is neither here nor there in the story. The story is very simple – the BoE is raising rates when it should not be. It is, in a not very subtle way, using rates to force the government’s hand on fiscal policy. But in many ways this is what the government wants. “Please threaten me with higher rates so that I can blame someone else for cuts that secretly I really want to make anyway”.
Once again, responsibility lies with Government…. the BoE is just doing its master’s bidding.
Noted
Clive
Extremely very well put. If I did not know better, it’s as if you’d thought up the whole ruse yourself!
Thanks for your detailed analysis as usual Richard. Can I ask some quick Qs:
A few months back you said the 900bn ‘deposits’ of the commercial banks with the BoE were accumulating interest at the base rate, giving free money to the commercial banks. Does today’s news mean they are unwinding this? Isn’t this a good thing?
Just to clarify the point on rising rates. Are you saying the BoE is disguising these issues as being on the ‘2nd hand bond market’, and that the real impact is to increase the supply of UK gvt bonds on the market, which will push up yields if demand is exhausted?
Is it a bit early to be saying the BoE wants to work with the government to enforce austerity? Could they not be just unwinding the ridiculous arrangement you highlighted a few months back? Or do you think there was a better way for them to go about it?
a) I wanted the interest rate reduced on £900bn, not a reduction ion £900bn. This move is not a good thing
b) The aim is to push up yields, yes
c) I said QE was ridiculous, not BoE funding of the economy. They are tryng to unwind the latter in reality. QE as was can be left in place: the debt is already cancelled
Thanks for the response. Interesting month ahead.
Is £750M a significant sum in comparison to normal daily bond transactions?
I’m asking because I can’t tell if the predicted adverse consequences in your article will result, or it is just a sort of monetarist virtue signalling.
This was a test
To his great credit, Larry Elliot has this in the Guardian today, attacking the BoE move. A rare voice of challenge in the MSM to the official dsinformation. https://www.theguardian.com/commentisfree/2022/nov/02/the-uk-economy-is-about-to-be-thrown-into-a-black-hole-by-its-own-government
“First, that the Bank of England is not in any way operating independently of the government in pursuing these policies. It is clearly working very closely with the Treasury to create this artificial supposed public spending crisis.”
I am far from having your understanding of the way the money system and institutions work but that was my first thought on the BoE policies. It is transparently wicked.
It seems the Rishi has also learned from the LOTO: that you can ditch the pledges that got you into position.
What a gang of deceitful pretenders.
Off topic. I saw a British citizenship test in the Independent earlier. I got 5 wrong out of 24 and would have failed. Probably it would only have been 4 wrong had I been awake with my future depending on it as I misunderstood one question – after being a British ‘subject’ for over 80 years I would just scrape through. I think there should be an unannounced check of every MP on this test just to show how daft it is.
Agreed
Well said Richard.
As an observer with some insights, it makes me feel as if I’m watching a deliberate car crash. I can see the crash was initiated and deliberately caused, but most people, most media and most commentators either don’t see it or a lying about it.
They either lack the capacity to scrutinise, in which case they should get another job, or are deliberately conning most of the people most of the time.
I’m greatly troubled that, the Tories do actually understand the money system and so are conning people. Labour don’t understand the money system, so their trusted economists really should get another job.
Whether I’m right or wrong, my frustration and despair is palpable.
Hi Richard.
I use the content of your articles in my attempts to influence friends. I understand most of the points you make but could aid me and explain this please. In the article above, you say the 400/900 is owed to the commercial banks. I know this is financial shenanigans, but could the Commercial Banks call that money in? I guess they can’t otherwise it would be actual debt? Not quite sure I understand that bit. Thanks in advance. Kind regards Stuart
Stuart
They can’t call it in
It is in what are called central bank reserve accounts
They can pay it to another bank but it can never leave the central bank reserve accounts system
However, those balances can be reduced by gilt sales and tax payments in excess of spending
That’s it
Search central bank reserve accounts on this site for more…