The Labour Party issued the following press release yesterday for use by newspapers (and 0thers) this morning:
Britain paying £251 billion “Tory bond blackhole” as collapse in Treasury bond fund revealed
A Treasury fund originally designed to profit from the Bank of England's quantitative easing programme has turned from a £73.6 billion asset into a £177.6 billion liability in the space of just three years, shock new figures have revealed.
The black hole in the Treasury's bond fund began to appear during Rishi Sunak's term as Chancellor, but dramatically increased in size as a result of the economic crash triggered by last September's ‘Kamikaze Budget'.
According to the Treasury's latest statement of its ‘group financial position', the fund went from being the biggest asset on its balance sheet in March 2020 to its biggest liability at the end of March 2023, thanks to the £251 billion decline in its value.
That is equivalent to 10 per cent of the UK's gross domestic product in 2022, or the entire GDP of Scotland and Wales combined. In spending terms, it would pay for the running costs allocated by central government last year to every school and police force in England, every branch of the armed forces, and the whole of NHS England.
In terms of losses for the taxpayer, it represents a cost of £8,900 for every household in the UK and is 76 times the amount that was lost by a previous Tory government during the exchange rate chaos of Black Wednesday in 1992.
As a result of these losses, the Treasury's calculation of the returns that the taxpayer has made over the total lifetime of the fund has also shifted from a £128 billion net profit at the end of March 2021 to a £58.8 billion net loss at the end of March 2023.
As recently as July 2021, when Rishi Sunak was Chancellor, the Treasury's annual report for 2020/21 dismissed the prospect of the taxpayer facing a net loss over the lifetime of the Treasury's bond fund as a “remote possibility”.
The figures were slipped out in the Treasury's annual accounts for 2022/23, one of 108 ‘transparency' publications issued by the government on 20 July to coincide with the start of the Parliamentary recess and the three by-elections held on that day.
Rachel Reeves MP, Labour's Shadow Chancellor, said:
“Families are already feeling the squeeze from what feels like an endless Tory cost of living crisis. Now they face yet another hit thanks to the Conservatives' catastrophic mistakes in managing this fund. This Tory bond black hole will land working people with another astronomical bill for years to come.
“And it leaves them paying the price for the failings of successive Tory Chancellors: the hubris of George Osborne thinking this fund was a one-way bet, the complacency of Rishi Sunak ignoring the warning signs in the bond market, and the recklessness of Kwasi Kwarteng turning a crisis into a disaster.
“All of them are guilty of putting their short-term political ambitions ahead of the long-term economic interests of the country. That will only change when we have a Labour government in place, determined to rebuild the foundations of economic responsibility, and give Britain the more secure, more resilient economy it needs.”
I struggled to find an appropriate technical description for this press release and decided in the end that the word 'drivel' best fitted the bill, because that is what this is, from beginning to end. Even more worrying is the possibility that Reeves does not realise this.
If Reeves really understood what was going on in the accounts of the Treasury and the Bank of England then she would know three things.
The first is that there is no such thing as the fund she refers to. What she would instead acknowledge is that in reality the Bank of England does not, and never has, run the quantitative easing programme. That has always been a Treasury operation. There are two ways to know that. One is that there are letters between the BoE and the Treasury that confirm that all losses on quantitative easing operations would always be borne by the Treasury - meaning that they alone were always accountable for them. Second, the Bank of England does not consolidate its supposed QE operation into its own accounts precisely because it has no liability for them. So, what Reeves should be saying is that throughout its life QE has not been properly accounted for and it is now time that it was, within the accounts of HM Treasury and not within a supposed Bank of England subsidiary. However, since that would shatter the myth that she also promulgates that the Bank of England is independent of government she will not do that.
Second, Reeves should stop pretending that there is any black hole in the government's accounts as a result of it issuing its own bonds. There is not. There are, again, several reasons for saying so.
Of these, perhaps the most important is that the whole of this analysis is based on the logic of mark-to-market accounting. In other words, the report is based on the logic that the Treasury might immediately make the sale of its whole portfolio of bonds, issued by itself, under the quantitative tightening programme. This would undoubtedly give rise to a loss. However, the assumption is absurd. There is no need (literally none at all) for the Treasury or the Bank of England to sell these bonds. Logically they should all be held to redemption, at which point the loss would be vastly reduced. Reeves should have recommended that. But again, that would challenge the logic of Bank of England's independence and so she will not do that.
What Reeves should also be doing is asking why on earth it is that the Treasury is preparing its accounts on the basis of International Financial Reporting Standard accounting standards. As the IFRS Foundation says:
The objective of general purpose financial reporting1 is to provide financial information about the reporting entity that is useful to existing and potential investors, lenders and other creditors in making decisions relating to providing resources to the entity.Those decisions involve decisions about:
(a) buying, selling or holding equity and debt instruments;
(b) providing or settling loans and other forms of credit; or
(c) exercising rights to vote on, or otherwise influence, management's actions that affect the use of the entity's economic resources.
In other words, accounts prepared on this basis are prepared on the assumption that users are going to buy or sell shares in the entity preparing the accounts, or might have doubts about its commercial creditworthiness. This makes the standard wholly unsuitable for use by a government that a) has no shareholders and b) is the ultimate credit-worthy organisation as it is the ultimate creator of all money. Reeves should be saying this and suggesting alternative government accounting be used, but she is not.
My third concern is that Reeves should be saying that this issue has arisen solely and only because of increases in Bank of England interest rates. That is the precise reason why the value of the binds in the QE programme has fallen. There is no more to it than that. To claim anything else is wrong. But she supports those interest rate rises. She should not for reasons I note elsewhere today, but she does, and so she is as much responsible for this situation by saying she would do nothing to change those rates or by removing the Bank of England's power to set them as the government is.
In summary, unless Reeves is willing to both understand an issue and then say how she might address it, I cannot see what she is doing issuing utterly meaningless press releases that do not address any of the issues that she claims to be talking about or even indicate that she understands them.
It really is time that Labour got its economic act together, but this press release suggests it has no clue how to do so.
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It’s just Labour’s equivalent of the Tory nonsense blaming Gordon Brown for making a ‘loss’ selling off our bullion before prices rocketed following the financial crisis in 2008. Say something nonsensical, put a big number on it and get the press to report it.
The worrying thing is that, with so much failing in the country after 13 years of Tory rule, this is the best their tiny minds can come up with.
We’re governed by inept idiots and another bunch of inept idiots are jockeying to take over the role. I suppose it could lead to my hoped-for hung parliament at the next election so electoral reform can be forced through, but I have to admit that I don’t have any confidence that Starmer and Co would have the wit to agree to form a coalition if necessary. Much more likely to try and push on as a minority government.
Starmer has so much arrogance in him I’m sure he’d try that one on, a minority government! I do so despise him but then he’s one of many arrogant know-nothings in this country voters included!
Reeves is hopeless – she’s just an HMV – Her Master’s Voice.
Obviously she thinks she’s being well paid to talk nonsense like this like so many of them do.
Stephanie Kelton for Chancellor of Exchequer please – that’s the woman for me.
With Richard as PM!
Save me…
How would I find time to post here?
Or have a life?
To paraphrase Nye Bevan (on Eden)…..
Either she is too stupid or too dishonest to be Shadow Chancellor.
From Wikipedia: “Reeves studied at New College, Oxford and the London School of Economics before working as an economist at the Bank of England”. She should know better, so we have to conclude that she is being deliberately misleading, unless that education was completely wasted. Either way, gawd help us!
I suspect that her education and experience explains everything about why RR thinks as she does. She has been through the standard orthodox economics madrasa system and knows nothing else.
I suppose you could argue that the rhetoric, however ill-founded, hammers home the point that the Tories are incompetent. Afterall, most voters won’t know what QE is. But the error in believing there is some sort of fund is not to be forgiven. It tells us Reeves has in her mind a closed system, into which money goes in and then comes out. The funding of furlough payments and other COVID expenses, including corruption, would not have been possible were this the case. So, for short term rhetorical gain she sacrifices the real explanation, which would have allowed her much needed policy space to spend on rebuilding public services and a green, sustainable future.
Agreed
Richard, you are “on a roll”!
AFP, CBRAs …. the whole mess is coming home to roost; unfortunately the British public still understands nothing about it, except the words “black hole”, which portends vague connotations of disaster. The public media and political discussion of this issue is embarrassing in its utter stupidity……
My favourite line is the Conservative response to the Labour press release reported by Sky News; which is frankly embarrassing (well. it should be, but he is a Conservative), incompetent, irrelevant and grotesquely misleading, but is absurd and funny in the way of an unconscious blunder by a ‘grand fou’:
“economic secretary to the Treasury Andrew Griffith said: “The only black hole facing the British people is the £90bn unfunded spending splurge that Labour would slap on families across the country.
There’s a world of difference between movements in a long-term bond portfolio versus the certainty of a Labour government spending other people’s money until there is no money left.
Meanwhile, we are making progress on the British people’s priorities – halving inflation, growing our economy, and reducing debt.”
Thus are we governed (allow me to transcribe Griffith’s words free of the theatrics or political slapstick). The Government is not actually in government. We don’t understand money. Okay, this is a disaster, but nuthin’ to do with me Guv. I’m in the Treasury; what do I know? Nuthin’. Ask Labour. It’s their fault; they are the Opposition. Their mess. They are hopeless too; so there.
Beam me up Scotty.
Wow, that is bad….
The idiocy follows inevitably from the ‘household budget – there is no money’ narrative; it is a direct consequence. This is a Conservative creation (helped by Labour at the end of the Brown era). The problem is, the more bizarre the financial outcomes around QE become, the more people will eventually ask for a reconciliation of the outcomes with something like their plain understanding of a set of books; then the whole stupid narrative must collapse, because it cannot be explained away; and off we go on ‘Labour are worse than us’, but we are just the Government, we don’t know. The BoE is independent…. don’t ask me.
Lard for brains and what’s even worse millions will vote for this nonsense whether its Conservative or Labour! Then they have the temerity to sound off that the country’s in decline! A very sorry tale to be found everywhere you look in this country! Hardly anybody prepared to work at understanding how economic and monetary systems work!
This may be off topic, but I think it may be a similar story. I was surprised by a tweet from Dan Neidle, where he argues that the windfall tax on Italian banks would only raise €2-3 billion, but had already cost shareholders €10 billion.
https://twitter.com/DanNeidle/status/1688934938421211137
I thought, this is wrong-headed.
The €2-3 billion raised through the windfall tax will improve the quality of life for Italians. As it is used it will circulate through the economy, allowing personal spending and creating jobs. Better still, at each cycle it will gradually come back to the Italian Government as tax. On this analysis, the €2-3 billion is worth far more.
In contrast, only a fraction of shares in a bank are traded each day. The price of the shares that are just sitting there is deemed to be the price of the shares that are traded. The €10 billion loss is purely nominal, it relates to shares have not moved or done anything. It is not removing €10 billion activity from the real economy.
As George Orwell so nearly said, “All euros are equal, but some are more equal than others.”
I wish there was an A level in understanding money and the economy.
There is an A Level and it’s right here.
They just have not got around to formalising yet.
I’ve been taken back to school so many times here and it’s the place for me.
Now, how’s that for challenge Richard – creating a curriculum for ‘omnibus/real economics’?
(Just joking – you’ve enough on).
Wow, I’ll need to retire to do that
I did discuss retirement yesterday with a friend. I gave my reason for doing so – and I gradually expect to end my various formal funding arrangements over the next few years – as being to provide the freedom to do exactly what I want without the need to report back on progress against goals that I am not entirely in charge of.
The Post Crash Economics team’s book (Econocracy) was the eye opener for me. Having studied development and worked with and around economists, the alarm bells were already going off. There were just too many assumptions and assertions that made no sense. Econocracy laid bare how economists are taught the one true belief with no room for alternatives. Like studying religion but only studying one actual religion.
Then reading the likes of Kelton, Keen et al and of course the esteemed Prof Murphy. See also the work of Sante Fe institute on complexity that exposes how the maths that most economists base their work on is outdated and inappropriate
However as suggested here, progress in the discipline mostly means adhering to the prevailing dogma. Tinkering at the edges perhaps but nothing too challenging. Hence people like Steve Keen end up operating completely outside the ‘system’. The voices we do hear from overwhelmingly tell us the ‘approved’ story.
Now realise that I’m sounding like a Trumpy conspiracy theorist!
Thanks
It always seems strange to me that economists such as Richard and Stephanie and Steve etc must also have been taught this standard view of economics in the past but had the intelligence to see that there really IS a better way of looking at today’s economy. Why are so many of them so blinkered to how things actually ARE.
Is it because their income and standing depend on it?
Yes, in a word
I suspect that for qualified economists, the three main area of opportunity are in financial services, politics/civil service or academia. In each of those following the orthodox ‘party line’ is pretty much essential if you want to get on – or even just get in. The dissenting voices tend to be in think tanks or NGOs – or independent like Richard and Steve.
True