As I have noted this morning, the Bank of England is now reporting that it might make a loss of £150 billion on the disposal of its stock of government gilts or bonds acquired under the quantitative easing programme.
As I noted at the same time, there is no reason for the Bank of England to make most of this loss because much of it will arise because it wishes to sell the bonds that it holds before their due redemption date when the value of the bond is repaid to its last owner by HM Treasury.
The question does, then, have to be asked as to why the Bank of England pursuing this policy? I think that there are a number of possible explanations.
First, I have to make clear that this policy is a matter of choice and not necessity. The Bank of England is the only central bank in the world that is selling bonds as aggressively as it is doing. No one else has a quantitative tightening programme anything like as extreme as that of the Bank of England. We do, therefore, have to presume that there is a deliberate policy choice behind this exercise.
Second, given that the Bank of England is forecasting that selling bonds at their current prices might give rise to a loss of £150 billion, we have to presume that they are making the choice to sell bonds at those prices precisely because they want to realise these losses, which is a voluntary exercise on their part. They do not need to make those sales. They do not need to make those losses. They must, therefore, have a reason to do so.
So, third, what is that reason? This is where I begin to struggle. It is not as if there is a shortage of funds available to buy: the government is currently running a deficit and is likely to do so for years, if not decades, to come. As such, there is already a regular supply of bonds to the market. There is no reason whatsoever for the Bank of England to meet an unmet demand for bonds.
The justification has, then, to be based upon a policy decision. Given the remit of the Bank of England, the only legal justification that there can be is that the sale of these bonds will, somehow, assist the goal of reducing the rate of inflation. And, given that, as far as the Bank of England is concerned, the only economic tool that impacts upon that rate of inflation is the base interest rate and its impact in the market to force general interest rates upwards, thereby withdrawing funds from circulation within the economy so reducing demand for goods and services, and so in turn, supposedly reducing the overall rate of inflation, then the sale of these bonds must be linked to that objective.
The logic implicit in this is that the more government bonds that there are available to the market then the more saturated that market will be, meaning that unless the interest rate on offer is increased then those bonds will not find a purchaser. As a consequence, what the Bank of England is seeking to do by putting bonds that need not be sold on sale is to force down the price of government bonds in the market, which has the inverse consequence of increasing the effective net interest rate earned upon them by those who will buy them. But, of course, given that the Bank of England acquired these bonds as a result of the quantitative easing programme at much higher prices than they are being sold at because interest rates were then being forced downwards, with bond prices being consequently high, what the Bank of England policy now necessarily means is that losses on the sale of these bonds is a deliberate policy decision which it seems that the Bank of England thinks that it can take without having to refer to any other authority.
As a matter of fact, it is, however, the case that the loss that the Bank of England will incur will necessarily, be suffered by HM Treasury and not by the Bank itself. That is because, as its accounts make clear, the Bank of England's transactions with regard to all aspects of quantitative easing and tightening are underwritten by the Treasury. In that case, the Bank of England either thinks that it has the right to incur a cost of £150 billion when making losses to artificially increase the rate of interest within the UK economy at cost to the people of this country whilst enhancing the well-being of those who happen to acquire the bonds that they sell at an undervalue, or they are doing so with the permission of HM Treasury which is knowingly suffering that cost without disclosing the fact.
In that case, the real question to ask here is to what degree is the Bank of England undertaking this activity at a significant cost of the government with the knowing connivance of the Chancellor of the Exchequer? And is that connivance intended to cover up the fact that the government is knowingly doing four things?
The first is, is it deliberately selling assets at an undervalue, the consequence of which will be to inevitably enhance the wealth of the acquires at some time in the future?
The second is to ask whether this is part of a deliberate program of expenditure incurred by the government with the intention of creating a recession.
The third is to ask whether this spending is being deliberately incurred to drive those with mortgages, businesses with loans, and others with liabilities linked to the Bank of England base rate into varying degrees of financial stress or even bankruptcy.
Fourth, of course, is to ask whether this policy has been deliberately promoted with the intention of creating austerity in government expenditure.
I apologise for the rambling nature of this particular blog post. Unusually, it has been written over a period of several hours as I have struggled to come to terms with a policy decision that is so incoherent but for which there must, however, be a justification.
As is apparent, every potential possible explanation appears to me to be malevolent. There appears to be a deliberate policy of undermining the value of government assets. That is associated with a deliberate policy of increasing the wealth of a select part of society that happens to benefit from this.
Simultaneously, the government appears to be using the Bank of England as cover for policy of spending to deliberately create stress that will lead to a recession within the economy, for which it does not wish to accept responsibility but for which it will, nonetheless, necessarily suffer the cost.
No possible explanation for this policy is, therefore, available that might explain why this policy might be beneficial to society at large when it is also apparent that raising interest rates is having little or no effect on the rate of inflation.
I am usually reluctant to condone conspiracy theories. In this case, however, I do not think there is a conspiracy theory. I simply think that there is a conspiracy against the interests of the people of this country and that stinks.
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To make the government/state apparatus look weak.
To deny people hope – including politicians.
To make markets look strong – only they are wise enough to value anything (they are ‘wise’ – they buy cheap to sell high).
To look after their paymasters in the private sector and enable their continuing self-serving leverage over monetary policy.
We appear to be witnessing looting on an unprecedented scale with a great deal more to come. These are astounding times.
Interested to read this explanation. Has the B of E published it’s explanation?
Opaquely, in August 2021. I don’t believe them.
“[T]he loss that the Bank of England will incur will necessarily, be suffered by HM Treasury and not by the Bank itself. That is because, as its accounts make clear, the Bank of England’s transactions with regard to all aspects of quantitative easing and tightening are underwritten by the Treasury. In that case, the Bank of England either thinks that it has the right to incur a cost of £150 billion when making losses to artificially increase the rate of interest within the UK economy at cost to the people of this country whilst enhancing the well-being of those who happen to acquire the bonds that they sell at an undervalue, or they are doing so with the permission of HM Treasury which is knowingly suffering that cost without disclosing the fact.”
Two conclusins that may be drawn. First, the BoE is indeed “independent” of Government, but that independence is much wider in scope, ‘de facto’ than the public realm seems ever to have understood (even if never acknowledged ‘de jure’ by Government, Parliamant or anyone; presumably, then by Crown Prerogative).
A commitment of £150Bn expenditure free of Government oversight or approval, to provide some real life context is extraordinary. Allow me to surmise; if for example the Scottish government overspent its rigid Westminster Budget by £150Bn ….. or even <£100m (think ferries et al, they were contained in the overall Budget; hell was raised and the Conservatives found a way to use reserved legislation to undercut and overule devolved legislation, and paralyse Holyrood). A serious overspend would no doubt lead Holyrood to be effectively legislated out of existence; beyond monitoring dustbin collection. This form of "independence" just doesn't happen in Britain. Like virtually the whole Empire (save Scotland), all you can do – is leave.
The alternative explanation, much more plausible, is that Central Bank Indpendence, is a fiction. The BoE does what it is sanctioned to do by the Treasury; quite possible to excute policies that it is not equipped with the right tools to execute them. This is much more likely, a polict ill conceived and ill thought through; after all, we are dealing with a Neoliberal Conservatives Government of double-talking, profligate incompetents.
Well put John
Could it be that the Tories now expect to be trounced in the 2024 General Election and are setting out to devastatingly weaken the economy ahead of Labour coming to power? They (Conservative Party) have not governed in the UK public’s interests in the last 40-50 years, so it should come as no surprise that they might try this in order to wreck Labour’s chances of governing successfuly and hasten their own return to power in 2019. It all smells of childish, petulant behaviour, but there are plenty examples of them doing exactly that.
People must eat or die, must heat or die and must travel to work or throw themselves on the pitiless mercy of the State. Inflation at whatever level leaves little choice once they have been reduced to the necessities.
There seems to be a cruelty present in many figures of authority that allows them to ignore the, to me, obvious remedies like clawing back enormous recent windfall profits and, instead, punishing ordinary people.
Sadly, I conclude that many years of Tory Government have allowed, even encouraged, that cruel streak, and the Labour Party seems keen to inheret that mantle.
Maybe the Charter Island concept, first voiced by the Baker St Herald and lately by European Powell, is starting to make sense. One thing Bailey’s actions will do, or appear to do to the uninitiated, is justify reducing govt funding of local councils forcing them into bankruptcy or their equivalent, as Powell observes here https://threadreaderapp.com/thread/1684895534169939968.html
Dearie me 🙁
I am still not wholly convinced but I get your point
Back in 1980/81 – when Dead-Sheep-Howe had cranked rates to 16% (or whatever) everybody could see they would come down – I did a nice number buying gov bonds shortly before interest cut-off (paid twice per year) trousered the interest and hung on for a month, interest rates dropped, value of the gov bond recovered nicely (they tend to drop in value the day after the cut off foir interest) and I moved on to the next one having recovered my capital. Do that 12 times a year and you are looking at very very serious gains.
It is certain that BoE and financial markets are in cahoots – with the latter influencing the former to crank up rates – off-load bonds cheap & then as rates decline (as they will) – bingo, markets make a nice little earner, just like I did all those years ago. I’d hazard a guess that the people in the BoE that are responsible for this, will have had nods & winks from assorted financial institutions for when they depart Threadneedle Street and move onwards (& upwards?).
We know for sure that large parts of gov are corrupt. The recent HoC select committee’s questioning of Thames Water showed the depths of this corruption. Why would the BoE not also be corrupt? As the HoC select committee showed, money & the finance industry corrupted the operation of Thames Water, one can assume that the same has happened at the BoE. Given current actions it would seem corrupt to the very core – & they are laughing at us, because we can do exactly…………….nothing. We are powerless.
Sunak, will soon be looking for a job , thus one could charactise the £150bn off-load as positioning/lining up the skittles/I scratch your back etc before departure (& one could imagine a couple of other departures from the BoE). Corruption & position seeking.
There’s perhaps another reason but you would have to break down the sales figures between domestic and foreign purchases of the treasury bonds the BoE is now offering for sale. The argument runs like this the GFC was caused by the finance sector trying to respond to the world wide demand for safe savings vehicles which governments were supplying an insufficient number of in the form of treasury bonds. The “safe savings vehicles (SSV)” the finance sector came up with was the securitised mortgage bond. So assuming demand for SSV’s still remains high, particularly after Covid, the BoE knows it can attract foreign demand for its stock of treasury bonds this in turn will help push up the value of the pound. It’s the same trick sort of as Chinese currency rigging resulting in pushing up the value of the US dollar all to buy more “under-valued” Chinese exports!
Maybe….
Isn’t this another of those cases of govt transfers from left pocket to right pocket? If so, does it matter?
It matters because the reality is that this transferring value to those with wealth.
A key policy of all Tory governments from 1980 onwards has been to sell-off publicly owned assets at fire sale prices. Is this a case of, here we go again?
In the 1980s the funds that they gained were used as election bribes.
As the media are overwhelmingly Tory, they were never held accountable for the losses incurred and the use of public money for the benefit of the Tory party and their wealthy supporters.
The fire sale is happening
Richard, a couple of questions:
Can some of these bonds be purchased by central banks using funds held in the central reserve accounts (which is how the BoE funded the gilt purchase by the APF in the first place, if I understand correctly)? If so, there might be a secondary motivation for the treasury in doing this, to reduce interest payments on the CBRAs (although as you have noted elsewhere, this could be done by more easily by reducing the interest rate on parts of those accounts).
What happens to the funds received by APF on sale of the bonds?
Thanks.
Hi
I think you are misunderstanding CBRAs
They are not BoE property, they belong to commercial banks.
The APF is a sham: the loans should have been from the BoE to the Treasury. If so this would never have happened.
The sale of bonds will reduce CBRAs but I doubt that is the motivation.
Banking and the City has dominated the politics of this country for a hundred years. Protecting the gold standard or the London deposits by foreign depositors by high interest rates -as in the 1950s and 60s-and monetarism and ERM fiasco, were all financial rather than industrial policies.
A lot of people here say much-not all-of what is taught as economics is somewhat remote from the real world. It has a lot in common with Psychotherapy and Theology where the founding principles of the schools of thought cannot be proven as they can in Physics (probably).
There is a type of personality I have encountered in all three areas where a rigid adherence to the framework is felt as virtuous ( see Hunt talking about ‘sound money’. He makes seem like a sermon ) and people tend to be more driven by emotion than logic. They like to feel good. Evil can be done by people thinking are on the side of the angels.
PSR critiqued this view and I think his point also has validity. People are are also driven by ego and greed.
The most likely motivation, it seems to me, is this. With the economics of Sunak (and Starmer) there is no consideration of the concept of a multiplier. Take this into account and the figures look different, If enacted it would also show the power of the state to make a real difference in people’s lives and, to echo one of your points, show the power of the state to grow the economy. This opposes their ‘free market’ , neo-liberal doctrines.
It is possible they would prefer to have a recession and unemployment rather than allow an opportunity for this to occur. It is in keeping with much of the practice of the last 100 years.
Your examples of belief systems such as Psychotherapy and Theology are interesting for their similarities and their differences
As far as I am aware anybody disputing the ideas of Freud, Jung or their modern counterparts might be subject to academic or professional animosity but nobody dies.
Religion on the other hand ……….
I wonder where each of us would place on a sliding scale of 10 between the two, belief in current Financial orthodoxies?
Personally, given the appalling harm they are doing to this planet and the people that live on it I would have current Financial orthodoxies well up the scale towards the religious end.
I think the “loss” is a complete red herring the real issue is “is the BoE running an appropriate monetary policy” – ie. is it sensible to be draining reserves by bond sales (over and above HMT gilt sales which, by and large, are “reserves neutral”) and at what interest rate? The answer is, of course, NO ….. but that NO has got nothing to do with the price at which they originally bought the gilts or are selling them now.
To be fair to the BoE they responded to the pandemic reasonably swiftly on short rates and then with QE to bring down long term rates. The problem is that, having to tied themselves to a fixed quantity of gilt purchases (that is where the Q comes in in QE), yields collapsed to very low levels – so low that they were way below any level required to encourage economic activity and down to levels that were storing up problems for “forced buyers” during that period, later on.
Far better would have been to do “yield curve control” where open market trades would have been judiciously conducted to keep yields close to target. Unfortunately, the market fetishists could not deal with the idea of controlling price like that and insisted that the BoE announce a programme of purchases done at “market prices”. A sensible policy might have been to keep yields at 2% by buying or selling as required.
Equally, the BoE should now be selling gilts as required to achieve yields consistent with their idea of what gilt yields should be…. NOT a fixed amount being sold at any price.
But frankly, the ins/outs of QE/QT and the P/L on the BoE gilt portfolio are dwarfed by two failures (1) rates (across the yield curve) are too high (2) fiscal (tax) policy should be used more actively.
I agree with your conclusion but doubt interest rates can ever be too low as they are always a burden on real economic activity.
No; for example, if rates are too low we get asset price inflation. My point is that policy is a complex mix fiscal and monetary policy.
Within fiscal policy we need to balance how/where we tax. In monetary policy we need to “pick up the slack” from fiscal policy…. but within monetary policy we should look at credit controls etc and not just the price/quantity of reserves.
Even within the narrow area of reserves we need to control “price not quantity”.
Asset price inflation happened because funding was deliberately supplied to inflate them. Well over £100bn was supplied for that purpose. That was not QE or interest rate policy.
I agree that credit controls are certainly something that should be used to direct financing to productive areas of the economy…. but “price” still has to be part of the policy mix; savers should get some return. I think “doubt rates can ever be too low” rather over states things.
Given our demographic position (getting older with increasing saving) it might be reasonable to have, on average, over the cycle, slightly negative real short term rates. Longer term gilt rates should offer, on average maybe 2 to 3% yields
2.5% would be ok for me
I think I understand your point that draining reserves in monetary policy is to be distinguished from the ‘price and loss’ issue; but all that surely serves to acknowledge we have two problems here, rather than just one. I also start to lose the thread of the argument, when you propose that the problem with a ‘yield curve control’ model was “the market fetishists could not deal with the idea of controlling price like that and insisted that the BoE announce a programme of purchases done at ‘market prices’”. Where does that take us? How is that fixed? The fetishists (in the commercial banks, or central banks, or both?) are all presumably still there, influencing policy or counting bonuses, and fetishing merrily as they go.
What I mean is that rather than saying “I will but GBP 500mm or gilts at whatever the prevailing price” they should have said “we will buy (or sell) whatever it takes to keep yields within target range”
I must confess,, I don’t understand the problem but for some reason ( I don’t get) specifying the quantity is seen as “ok” but specifying the price is not OK.
… and you are right, the fools that obsess over this are still running the show. I am at a loss as to how we displace them.
Hmm. I understand your point on price/quantity; it is well made. But the conclusion you draw is even more unsettling. What are we supposed to make of it? That the fetishists are also freakish?
…His Majesty’s Government in cahoots with the Bank of England to exploit and devour the British citizens! Gosh!….whatever next?!
Hasn’t this happened before…?
I’m pretty naïve about monetary policy but could this, at least in part, just be political – to avoid explaining to the general public what would happen if the gilts were held to maturity?
When HMT have to pay the bond holder at maturity don’t they effectively tell the BoE to make the payment – in this case to the BoE? And won’t it reduce the national debt at a stroke? Maybe politicians, of whatever colour, just wouldn’t fancy talking about that on the TV, and trying to justify higher taxation or spending restrictions because of the size of the debt or how much of the deficit is interest payments on gilts held by the BoE.
Gilts have been held to maturity. They have been redeemed. Billions of them. And the proceeds were reinvested.
This may be a stupid question and you can delete if it is so. But doesn’t this increase economic activity and adds to GDP? Given reason to this action.
This takes money out of the economy and so reduces GDP. It is recessionary.
This might be another stupid question, but rather than selling these off and incurring a loss, would it not be better for the BoE to give the UK Government a loan, spread over 100 years at say 0.5% to pay off all of its loans from other sources?
Yes