This is what the Bank of England once said on its website (recovered via Way Back Machine, thanks to blog reader Bill Kruse:
When the global recession took hold in late 2008, we quickly lowered Bank Rate from 5% to 0.5% to support the UK's economic recovery. Lower interest rates mean it's cheaper for households and businesses to borrow money – which encourages them to spend and invest, whether that's a family buying a new car or a company wanting to build a new factory.
But there's a limit to how low interest rates can go. So when we needed to act to boost the economy, we turned to another method of doing so: we introduced quantitative easing.
In other words, the Bank of England used quantitative easing to do what the government would not do from 2010 onwards when the government was running an austerity policy, and that was to run a stimulus policy. They boosted the economy, whilst the government sought to actively crash it. And they knew what they were doing: they refer to boosting the economy.
Now, they are doing the opposite. The Bank of England now says this on its website:
The money we used to buy bonds when we were doing QE did not come from government taxation or borrowing. Instead, like other central banks, we can create money digitally in the form of ‘central bank reserves'.
We use these reserves to buy bonds. Bonds are essentially IOUs issued by the government and businesses as a means of borrowing money.
Now that we are reversing QE, some of those bonds will mature and we are selling others to investors. When that happens, the money we created to buy the bonds disappears and the overall amount of money in the economy will go down.
They are deliberately taking money out of the economy. They know that will shrink it. That is their deliberate goal. They are pursuing this in the vain hope that this will control inflation that was created by reasons way beyond their control, which reasons have gone away. The way they will achieve that is by shrinking the economy i.e. by creating a recession.
The admission of this truth came in a Guardian article yesterday, which said:
The Bank of England needs to “stop squeezing living standards” and cut interest rates, a senior policymaker has said.
Swati Dhingra, a member of the central bank's monetary policy committee (MPC), said official borrowing costs should be cut at its next meeting on 1 August to ease pressure on households and businesses.
“Now is the time to start normalising [interest rates], so that we can then finally stop squeezing living standards the way we have been to try and get inflation down,” Dhingra told the Rest is Money podcast. “We are weighing on living standards and that cost does not need to be paid.”
So, we have an admission here from a person who definitely knows that the Bank of England is now deliberately crushing the economy.
But, at the same time, as the FT has noted in a preview of this week's King's Speech:
In other words, law will be passed to effectively impose the balanced budget rule to which Rachel Reeves is dedicated and which already guarantees the perpetuation of child poverty, the continuation of austerity, and recession, whatever Reeves says.
What the Bank is up to is clear from what it is saying. Those who understand what it is saying know that it is consciously trying to deflate the economy. At the same time, everything Rachel Reeves is doing will deliver the same outcome. And yet Reeves apparently believes she can deliver growth, which in this situation makes absolutely no sense at all. I can only conclude that Rachel Reeves is not aware of how the economy works, and what the Bank is doing. I cannot see another option
In that case, welcome to what happens when incompetent Chancellors (most especially Osborne and Kwarteng, who are now joined by Reeves) are unable to read the runes and the Bank runs economic policy. From 2010 to 2021 this saved us. Now, it will be our ruin.
For a long time we had policy where the Bank and Treasury have had their feet on different pedals - one on the accelerator and the other on the brake. Unless either changes, now both will be on the brake. The outcome is inevitable. You have been warned.
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This commentary should be in the inbox of every MP, I will be in touch with with my newly elected MP and ask her if she can contradict your opinion. w The new government failure to remedy a massive contributory factor in child poverty , the 2 child cap on benefits, is said to be unaffordable.
Patently nonsense like so much pusillanimous talk from Rachel Reeves
Thanks
These are some of the quotes I dug out from the Bank of England’s ever-changing “Quantitative Easing” article:-
“Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy.” (5th November 2020):-
https://web.archive.org/web/20201231204642/https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
“But there’s a limit to how low interest rates can go. So when we needed to act to boost the economy, we turned to another method of doing so: we introduced quantitative easing.” (5th November 2020):-
https://web.archive.org/web/20201231204642/https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
“The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy.” (5th November 2020):-
https://web.archive.org/web/20201231204642/https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
“Now that we are reversing QE, some of those bonds will mature and we are selling others to investors. When that happens, the money we created to buy the bonds disappears and the overall amount of money in the economy will go down.” (10th May 2024):-
https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
What struck me was they acknowledge that both Quantitative Easing and Tightening are base rate manipulation tools that can be used to regulate the national economy but no acknowledgement that there should be proper democratic accountability. Clearly Gordon Brown, so-called democratic socialist, was responsible for separating out these main national economy regulating “tools” from the other main ones of taxation, and fiscal spending adjustments. He failed to see, or deliberately failed to see that all these tools should be under the control of one democratically accountable body the elected government. Either way it should be very clear you can no longer trust the Labour Party to act in the interests of the many!
Thanks
And hey look! This just in;
“The self-financing state: an institutional analysis of government expenditure, revenue collection and debt issuance operations in the United Kingdom”
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4890683
Thanks
It looks like a consolidation of earlier work
The last paragraph (with allowance for typos) hits the nail in the head.
“Unless either changes, then both will be on the brake. The outcome is inevitable. You have been warned.”
The way things are set up at present, fiscal policy is decided by HMT…. and then the BoE takes that into account when setting interest rates. The problem is that the tight fiscal stance has an impact here and now whereas a reduction of interest rates, when it eventually comes will not have an impact until 2025 and 20026. So, the burden is on Government to do the right thing… and do it now.
I should read my final afterthought edits with more care.
But we still agreed
Richard, sometimes I wonder if you are far too generous a character, or seek to be.
” I can only conclude that Rachel Reeves is not aware of how the economy works, and what the Bank is doing. I cannot see another option”
I have no trouble whatsoever in envisaging the ‘other’ option that adequately describes what will come to pass.
given either 1) Rachel Reeves is not particularly intelligent or intellectually curious, but is a very ambitious politician
or that
2) Rachel Reeves is not particularly intelligent or intellectually curious, but is a very ambitious politician, and is quite happy to continue with the system that is endemic in the United Kingdom, that even when the Tories are voted out the (Tory) English Establishment remains firmly in control.
As Margaret Thatchers writers articulated so succinctly, there will not be a recognition that other choices are possible, simply put ‘There Is No Alternative’.
The system will not be deviated from one which privileges those with wealth and power, and if this harms everyone else, then so be it.
The City of London must be paramount and the current mainstream ‘orthodoxy’ of Neoliberal financialisation is the only game in town.
Either Rachel Reeves is a stupid person or she is craven in her service of The Establishment.
You might think I imagine harshly? You might be right.
but I certainly allow that BOTH possibilities might be equally applicable:
Rachel Reeves may indeed be both be stupid AND craven.
I see both. Others may find themselves more generous in judgement than I!
I have engaged with friends many times in speculation with regard to Rachel Reeves along the lines of is she wilfully ignorant of how the economy works or is she just very stupid. One of us lives in her constituency so has observed her over a number of years. We don’t understand why she is so keen to flaunt her ignorance/stupidity, as the consequences will not take long to manifest themselves. We’re tending towards stupidity plus a large deficit in her humanity. We note too that she’s married to the chief finance officer of the DWP, which is puzzling because boosting the economy with public spending now would surely reduce the demands on the welfare budget?
I wonder, has there been any academic work on the impact of QE? If rates were quickly lowered from 5% to c.zero, how confident are we that QE was a major factor in supporting the economy post-GFC? Maybe low rates did all the heavy lifting?
I’ll theorise that QE’s main impact was to redistribute wealth upwards via asset-price inflation. This may have more than offset the downwards redistribution effects of zero interest rates.
If I’m right, logically QT could be a good thing. But I wonder. Given the ample signalling of the BoE and other central banks, wealth may just shift into cash, leaving us plebs with devaluing assets at the same time the economy is being deliberately constrained by monetary policy. So QE/QT just acts as a ratcheting mechanism to keep shifting wealth upwards!
Funny if it wasn’t tragic. Modern central banks have 2 levers (interest rates and QE) and so 4 directions to pull….. but I’m suggesting 3 of those directions lead to increasing inequality.
Part of my job is to monitor and comment on macro (in a very simplistic way). I’ve been mightily impressed by the CB’s increasing desperation to maintain high interest rates (the one thing that unequivocally transfers wealth downwards). The latest – the Fed acknowledges inflation is heading rapidly back towards 2% so now their cronies are saying they need to wait for the election in case a Trump presidency causes an economic big bang!
If you did a literature review you would conclude that the jury is still out, and there is serious difference of opinion.