The Bank of England is selling about £100 billion a year of government bonds it bought during the Covid crisis back into City financial markets. There's no need to. It's making massive losses doing so. But worst of all, that £100 billion is preventing the government from spending on the investment in the real economy we really need. QT has to stop now.
This is the audio version:
The transcript is:
There is lots of debate about how Rachel Reeves can find the money that she needs to invest in the UK economy. I'm pleased about that because I know that there is an enormous need for investment in the UK economy.
In the alternative Labour Party leader speech that I offered last week, I explained how I would find this money by making changes to ISA and pension tax reliefs in the UK and redirecting the money that is currently wasted in the City of London towards productive capital investment in our economy for the benefit of everyone. I stand by the conviction that underpinned that presentation. I think that is the way in which Rachel Reeves should go. We need to reconnect people's savings with productive capital in this country. But I'm also realistic. I don't think Rachel Reeves is going to do that, however good an idea it is.
And instead, I hear some very strange opinion being offered about how she might change fiscal rules and how she might fiddle with the way in which Bank of England debt is accounted for, and various other things to give her more leeway to perpetuate the status quo which pretends that the City of London lends money to the government so that it might invest, when in fact the money that is deposited by the City of London with the government was created by the government in the first place.
So let's talk about another way in which Rachel Reeves could solve this dilemma. She could tell the Bank of England to stop the process called quantitative tightening.
Quantitative tightening - which has far too many Ts in it for comfort when being said into a camera lens - is a process which involves the Bank of England selling the bonds that were bought during the quantitative easing process that began in 2009 and ended in 2021 back into the City financial markets.
£895 billion worth of such bonds were acquired by the Bank of England. Around £660 billion worth of them are at present still in the ownership of the Bank of England. And there is a plan that in the next year at least another £100 billion worth of those bonds should be sold back into financial markets.
What does this mean? Well, I'm not going to go through the whole QE - Quantitative Easing process - again. I did make a video on it. I explained that it was wholly unnecessary. It was a sham to disguise the fact that it was, under EU rules, illegal for the Bank of England to lend the money directly to the government that owned it, and that as a consequence the whole QE process was put in place to try and cover up, by way of a sham, that process. But reversing that process of QE, the quantitative tightening process, is not the complete inverse of the original arrangement.
The original arrangement regarding QE was actually designed to cover up the fact that the government was injecting new money into the economy to save it from destruction as a consequence of the failure of banks in 2008, and as a consequence of the failure of the economy in the face of the COVID crisis in 2020 and 2021.
That money was injected to make sure that there was a continuing money supply to deliver public services and to save the banking system from collapse because there could have been a failure of liquidity and, therefore, of those banks within our society. We couldn't afford that failure. The government created money to cover it, and that was vital.
QE was simply a sham, as I said. Bonds were issued and reacquired by the Bank of England, but there was no need for that process at all. The £895 billion could simply have been left on overdraft between the Bank of England and the government and all might have been well. But now, under the quantitative tightening process, those bonds are being sold back into financial markets.
Why? Largely to make sure that interest rates remain high. That is the fundamental purpose of the sale.
Why do we want to keep interest rates high? You tell me, because I don't know. I don't want them high. I want them to go right down again. Because we know that low interest rates encourage investment in the economy and make it easier for households to make ends meet and to afford their mortgages, and when interest rates are low, rents go down, which makes people in the rental market sector very much more comfortable.
So, I want low interest rates. The Bank of England wants high interest rates. It's selling these bonds to keep interest rates high.
Why does that keep interest rates high? Because selling the bonds keeps the price of government bonds low.
The rate of interest paid on government bonds is actually fixed. But if their price goes down, the relative value of that interest payment goes up and therefore interest rates appear to be high, even though the actual amount paid by the government doesn't change.
So that's what the Bank of England is doing. But what I have to stress is this is not a reverse of the QE process because the QE process ended up putting more money into the economy. The quantitative tightening process is not directly taking money out of the economy, but it is reducing the capacity of the City of London to buy new government bonds because it's having to buy the ones sold by the Bank of England under the QT, quantitative tightening process.
So, the side effect of the QT process is not to directly limit the capacity of the government to spend, which would be the case if it was the reverse of the QE process, but to indirectly create that incapacity of the government to spend because the City has not got sufficient money to both buy the bonds issued under the quantitative tightening program and those that need to be issued by the government to cover its investment programme.
If we believe that the government's books do have to be balanced without a Bank of England overdraft being permitted to the government itself - therefore, within the assumed fiscal constraints that operate - quantitative tightening does actually limit the government's ability to borrow, and at the same time it also limits the amount of money available for the government to invest.
It is vital that that is understood. QT, run by the Bank of England, is directly limiting the capacity of our government to invest in the necessary process of change that climate change requires, in the hospitals that are falling down around the country because of poor concrete, in the schools that need renovation, in the energy systems that we require, and on, and on, and on. Because they're playing financial games, we can't have what we need.
So, how do we solve this problem? It's really, really straightforward. If there is capacity for the City of London to buy £100bn of government debt in the next year, to simply write down the holding of government bonds owned by the Bank of England, then there is a hundred billion pound capacity in the City of London to instead buy bonds that could be directly used to fund this essential capital investment that the country requires.
We can't do both, but if we have a choice, and we do have a choice, there is only one choice that should be made, and that is to cancel QT and invest in what this country is capable of doing.
Rachel Reeves has that choice to make, but I don't believe she has told the Bank to constrain its quantitative tightening activities.
Indeed, we know that in September 2024 they have reconfirmed they will sell that £100bn worth of bonds in the next year. And we can only presume that she gave that programme the nod.
As a consequence, she has decided to make it very hard for herself to raise the funds she needs to do what is essential for the future of this country.
At any time, a Chancellor can decide to do one of two things. They can keep people happy, or they can keep the financial markets happy. Financial markets don't vote for her, but they do offer her the chance of very highly remunerated employment when she ceases to be Chancellor. On the other hand, the country offers her the chance to continue as Chancellor, by being re-elected to office.
It appears that she's putting more value on her own prospects than those of the country by opting to let the Bank of England use QT - quantitative tightening - ignoring the fact that we need the investment.
She's making the wrong decision.
She should change her mind.
She should tell Andrew Bailey and the Bank of England to stop quantitative tightening and then there would be no problem at all in her raising the funds that are required to deliver the investment that we all need.
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Under double-entry accounting the loss the government is making in allowing the Bank of England to sell its bonds back into the market translates as a gain for the wealthy who trade in this market. Given the obvious corruption in the Labour Party why would they stop it?
Is Lord Alli giving personal investment advice to some members of this Labour government?
“His second job – as an investment banker for Save & Prosper – eventually saw him able to charge £1,000 a day as a City consultant.”
https://news.sky.com/story/lord-waheed-alli-who-is-the-labour-peer-behind-sir-keir-starmers-donation-row-13221243
Do we have the right to know?
The thing is, making a believable case to the British public about what is going on in their politics.
It seems so obvious to me that uncollected tax from the wealthy – which adds to their wealth – finds its way back into the political system as party funding. And this is a major lever of political corruption and lethal to democracy.
But, looking at this another way, that might be a view I hold because of bias.
So is the assertion that uncollected taxes end up as party funding one of substance? Does it stand it up scrutiny? Is it reasonable?
If so, I just think that we should make more of it – that’s all.
We have to keep making nails for the Neo-lib coffin.
I am not sure the link is anything like as clear as you suggest
But then, the ‘wise’ rich make sure they di not ower tax in the first place. Then the suggestion makes more sesne.
I love this blog: Richard’s – and some of his family’s – dedication, intelligence, insight … numerous affirmations. Other contributors also deserve commendation.
Yet many (most?) MPs make huge sacrifices and work with dedication and integrity.
Most newly elected MPs suddenly need to find a second home in London, set up and staff an office while also dealing with political associates like whips – whose job is to support and, it seems, sometimes to manipulate. Meanwhile the old life of friends and supporters, but particularly of family, is suddenly deprived of huge amounts of time and participation in life together.
MPs need to be obsessive about voters. Local clubs of all kinds want their MP’s support and offer free tickets. It’s easy for pundits to assert ‘Buy your own tickets!’ … but politicians must constantly assess what is necessary or what is a temptation to be ‘bought’.
So, yes Schofield, there is some corruption in politics (and much else). And, I agree, Richard, some ministers have taken ‘very highly remunerated employment’ on retirement. I share your frustration with the lack of acceptance of compelling logic but they are not all the same … a bit more understanding and compassion maybe.
Well, that ‘s fair enough Richard, I’m sure that you have your justifications.
Agree 100% PSR. It’s quite clear that in the UK, as in the US, big money has bought and paid for political influence, whether directly via massive corporate or individual donations to politicians, or via control of the news media. it matterns not exactly how the money flows, or the influence is peddled, but for anyone with eyes to see, our system has been hijacked by the interests of the few, at the expense of the rest of us, and the rest of the impoverished world.
QT or not QT (whether to sell gilts from the BoE portfolio or not) is of little consequence in face of a BoE that leaves interest rates at too high a level and a government that makes up arbitrary rules that then deliver austerity. Yes, at the margin it raises gilt yields and potentially “crowds out” sales of “new” gilts by the DMO but the whole process is misconceived.
We need
(1) to recognise that there are certain spending needs that are “must do”… and then just do it. Market participants made it clear before the election that they were hankering for more investment. Business can’t operate without functioning public services, healthy/educated staff – they are just as keen as ordinary folk are to see the investment being made. Besides, business owners/managers are (to a large extent) “ordinary folk”, too.
(2) Cut interest rates. Everyone agrees the UK needs investment – so why make the real interest rate (rate above expected inflation) 3%. It’s mad.
There are many who apparently support QT and/or reducing the national debt.
They could help this process by burning the notes in their wallets! Yes, as Richard reminds us, that currency is part of the national debt, which each note says is a promise to pay.
A moment’s reflection might suggest that such patriotic actions would sharply reduce their own liquidity. Why oh why would they do that?
Are they all just as silly as the Treasury, the BoE and the government?
That oblique attack on our economy by QT is having a direct effect on our households and businesses. And, again as Richard rightly emphasises, maintains high interest rates.
This policy might have the benefit, at the margins, of eliminating some of the more ill-advised investment decisions by state and private sectors. But it also wondrously advantages the already-rich, in the City and elsewhere.
When Mile End Road had only a few hundred residents, the government could ignore or suppress them. Now, the overwhelming majority of us live in Mile End Road.
Or is it Dead End Road?
Thanks
As the quasi independent BoE is both following the deflationary policy of sustaining overly high interest rates and, through QT, limiting Labour’s ability for much a needed investment programme then both BoE actions are deliberately undermining sensible macroeconomics from a Labour government. It is calculated.
Bailey needs sacking as he, and his cronies, are clearly aiming to sabotage the Labour government.
I suspect he has sided with broader conservative capital interests to show Labour that they can only work within the confines set by the corporate finance sector.
So it is a power struggle to decide who runs Britain, reflecting the money vs worker schism of the old class struggle, and entrenching neoliberalism is his goal as finance technocrat.
Screw democracy – this is really about ultimate City power and control of UK politics.
Mervyn King on R4 Broadcasting House didnt mention QT, and wasnt asked about it by Paddy Oconnell – who was trying to understand whether interest rates were too high or too low and what Reeves could and should do in the budget.
They did get to the point that all public services need ‘investment’ and that ‘she will have to find some way to invest’ – but King didn’t want much tinkering with fiscal rules, and no real admission that the rules are arbitrary and politically set .
King did say that the Tory reduction of tax ad NI pre election was wrong and Labour wrong not to reverse it.
He resolved the implied contradiction – (where are the doctors, nurses, teachers, etc coming from ?) vs. ‘no use just throwing money at them’ (the servcies) by intoning ‘they will have to reform’.
Again not addressing the lessons from the last 14 years – and he seemd relaxed about continuing austerity.
The great majority of the country – knows absolutely nothing about QT and the effects its having.
Will the understanding of QT ever break out from your blog?
King is a very right wing economist of very little brain, with no liking of government or most people – who are mere economic agents in this schema. I really think he should be ignored.
And Paddy O’Connell didn’t help much by talking about ‘the need for the Government to balance the books’, geezo how ignorant are these people?!
“…And we can only presume that she [Rachel Reeves] gave that programme the nod.”
Do you actually think she knows that she could decline to allow this BofE policy? I have my doubts.
And that’s before we even consider the relationship between a BofE governor and a former underling.
I think that is an interesting question
“…She should tell Andrew Bailey and the Bank of England to stop quantitative tightening ”
She shouldn’t be talking to him at all. She should have sacked him on day one of her chancellorship.
She didn’t. So we know what to expect.