I am staggered by the commentary being reproduced in all our supposedly informed media about the increase in interest rate costs being suffered by the UK government.
They all know that the UK is not alone in suffering this increase. They correctly note that the same phenomenon is being seen in the USA.
However, what, without exception, they fail to note is that the Bank of England is creating much, if not most, of this turmoil in this country as a consequence of its aggressive policy of quantitative tightening, to which I referred yesterday on this blog.
How is it possible that these supposedly informed people can discuss an interest rate, supposedly created by market forces, and not notice that the Bank of England is pursuing a policy undertaken at considerable cost to the UK government, and with a £100 billion a year impact on financial markets, that has as its sole intention the reduction of growth in the UK economy plus the maintenance of high interest rates, all with the supposed goal of keeping inflation under control, when that policy can have no possible impact on our inflation rate for reasons I have discussed here often?
Is this a deliberate conspiracy of silence? Alternatively, does it suggest some degree of ignorance? Or is it just plain oversight on a massive, collective scale, which indicates just how little original thought actually takes place in our mainstream media as each commentator copies the one who has come just before them? My suspicion is that it is a combination of all three.
To compound this, there has also been literally no discussion as to the control that Rachel Reeves could have over interest rates if she so wished. She could, for example, tell the Bank of England to cut its base rate. It is within her power to do so.
Alternatively, she could introduce a tiered system of interest payments on central bank reserve accounts, providing, for example, that the full bank base rate be paid on the first £100 billion of such reserves, with the rate falling away to 0.1% on reserves over, say, £300 billion. The precedent exists in the Eurozone and Japan. No one can say that this is impossible, or even undesirable, because both those monetary areas have proved that it is entirely feasible. This would then massively reduce pressure on UK interest rates, which would very definitely fall as a result, with considerable benefit for the government, the UK economy, and everybody who borrows within it. But none of this is mentioned, and so no pressure is brought to bear on Rachel Reeves to do such a massively useful thing.
Why is it that such commentary is not taking place? It is most certainly not because every commentator is on Rachel Reeves' side. That is very obviously not the case. As a result, the only obvious explanation is that every one of these commentators believes that Rachel Reeves is solely subject to the whims of the market and that there is nothing that she can do about that, which belief she might share. The possibility that she might actually be able to change the rules by which the market operates appears to be beyond the comprehension of our mainstream economic commentators, so deeply mired in neoliberal thinking are they. She could, however, do that.
Our whole current economic malaise is down to the fact that it appears that no one now thinks that government can change the economic rules of this country, when it can. No wonder we are in trouble.
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The main problem with QT (as currently structured) is the same as it was with QE – it is the “Q”. It is the fact that a fixed Quantity of bonds will be sold on a fixed schedule without regard to price/yield. What might have (might have, not did) made sense at 4.25% ( where yields were a year ago) does not make sense at 5.25% today. On what basis does the BoE think that policy should be tighter today than a year ago? Sales (or, indeed purchases) of gilts should pay some attention to price.
Now, every sale of a gilt by government (whether BoE or DMO) reduces the aggregate balance of CBRAs so, on the surface, interest costs don’t appear to change by selling gilts – you pay interest at the gilt coupon rate rather than the Base Rate. However, two things; first, issuance of gilts means you are “locked in” to the rate for the entire life of the gilt (perhaps 7 to 10 years on average) and second, paying interest on the full CBRA balances for banks is NOT required. Richard has made this point several times on this blog and although I have challenged him on several technical (important) detail I am content that is current proposals do make practical sense.
Thanks Clive
I should add that at the heart of the matter, the BoE thinks higher rates are a necessary thing. Until they change their view issues like QT are “tinkering at the edges”.
And finally, I wonder whether the Musk Factor is at work in UK financial markets. Sterling has been very weak in the last two or three days coinciding with his interventions in UK politics. His views are quite influential in some investment circles in the US.
I agree
And it won’t last
Nor will Musk’s influence
“CBRA”?
Acronyms!
Duckduckgo doesn’t help me much.
Central bank reserve accounts
Sorry – CBRA is Central Bank Reserve Account. Just as we might have a current account with a UK High Street bank, those High Street banks each have a “current account” with the Bank of England. That account is a CBRA
Might we begin by challenging the Overton Windows of ourselves, those of the people in the main stream media and those in our rulers and would be rulers?
Overton windows are our windows on our world as it currently is, how it could be made yet worse, and how it could be improved,
Make them bigger, facing in other directions and scrub them off or the possibilities for harm reduction and real improvement won’t become visible.
Be resilient and creative enough to perceive, communicate and act with fairness and determination. (From Alan Alda)
“Alternatively, she could introduce a tiered system of interest payments on central bank reserve accounts, providing, for example, that the full bank base rate be paid on the first £100 billion of such reserves, with the rate falling away to 0.1% on reserves over, say, £300 billion.”
Absolutely spot on. Fourteen years out of power to study how the UK’s monetary system really works yet the Labour Party is still operating at the primary school grade! All Britain’s political parties are a joke because of their pretentious arrogance they have a clear understanding on monetary and trade systems functioning! Of course the mainstream media is just as bad with journalists making little effort to do the homework!
Oh look a fight in the primary school playground brewing!
https://www.independent.co.uk/news/uk/politics/liz-truss-keir-starmer-legal-letter-b2676352.html
Very amusing
Didn’t you do a blog about who/what crashed the economy at that time? You said it wasn’t Kwarteng’s budget, but pre-existing issues around bonds and pensions, I can’t remember the details.
Another opportunity to get air time when its legally possible. Take the line “well, she”s right in a way” – that should get a few interviews.
I did.
There will be another soon.
To be fair, this was never an issue until 2022. Until the start of QE, Reserves were nearly always in short supply meaning that banks had to borrow from the BoE (at the Base Rate). QE introduced a new paradigm where there were huge quantities of excess Reserves in the system (banks receiving interest on balances at the Base Rate) – but this started when rates were virtually zero so the sums involved were trivial.
The general assumption was that, just as QE only happened once rates had hit rock bottom, then rates would not be hiked until after QT had withdrawn the excess Reserves. However, COVID and the war in Ukraine messed up this idea as the BoE thought it essential to act on rates in response to these outside shocks to the system. Was it essential, was it effective to do it this way? Well, I (and Richard) would argue no and no to those questions…. but that is another story
But, to the original question… it is not reasonable to expect Labour to have the answer all ready to go once in power – nobody did. What is not acceptable is that lack of an enquiring mind once presented with the problem.
Agreed
An “enquiring mind” in British politics? Currently a lot like looking for a unicorn! If its “disinformation” you’re looking for the country’s positively wallowing in it! The United States is even worse under Trump and Musk!
Mainstream media writes and broadcasts what the editors are told, and they are complicit.
The establishment has the interests of the well-off.
Profits before people.
The big question is whether there will be sufficient people who understand we can avoid being a “blind alley” species by implementing fitness for all rather than the few. To do this by way of changing the economic and monetary theoretical or rather should I say the “shallow conjectural” knowledge environment we live in.
Our media has failed us in exposing Reeves adherence to the orthodox suffocation of novel ideas to encourage investment. It is as if here has been a coup – Reeves is just doing as she is being told – or should we say ‘ advised’.
I don’t want to get shot at here, but higher bond yields do mean higher Lifetime Annuity rates! Noticeably so – Canada Life and Legal & General have just increased rates.
Maybe I should buy one… 🙂
Well, people are buying them. Many IFA’s dislike annuities as they are “once and done”, so no ongoing fees. They are not “investments”, per se, they are “longevity insurance” – converting capital into a guaranteed lifetime income stream. You have to get the annuity structure right at outset (single or joint life, increasing payments, other death benefits) as they can’t be changed once set up. I see them in the context of providing rock-solid “essential expenditure” income, especially where RPI-linking is chosen, along with any DB and state pension income. Many wealthier people get to the point where no further annuities are required (well, probably).
And once you have all your income needs settled and keep sufficient savings as a contingency fund, you might even give the rest of your money away (not a personal comment, of course).
Sound advice
Nicky Campbell has had an hour of neoliberal drivel (challenging Reeves drivel), without, I think, once mentioning the BoE. What was worse, there was more of the burn the Red Tape obsession. We wouldn’t need very much Red Tape if the world did not have a surfeit of crooks, cheats and frauds (including in businesses of all sizes, all kinds). And you have Red Tape for this reason. You do not want contaminated blood transfusions. You do not want to have to live in a fire hazard. You do not want the standards of management set by the Post Office. Citizen’s Advice estimates around 9m people in Britain fell to financial scams in the last year; of course we don’t want Red Tape. Britain did well when there was no Red Tape. We had a spectacularly successful slave economy, strategically placed round the world, and out of sight. Today we have people trafficking; and we still have slavery. Without Red Tape we can have much more.
I have nothing to add to Richard and Mr Parry’s telling observations (save to say that we still do not have tiered bank reserves – and that is another cost of high interest rates).
Richard, spot on.
Sorry to be negative, but Reeves goes. So far there is nothing to suggest that there is anyone in the Labour leadership who has any idea/grasp of how the real world ( especially money creation etc) actually works.
We are back where we started. Which makes your education programme even more vital.
Ordinary people need the confidence to challenge the economic orthodoxy, gently putting forward the how it actually works.
Thanks to your blog, when talking to a mate, who worked in New York as a trader and has
recently retired from a university teaching business position, he was surprised when I told him that the government can use the Bank of England Act to order the Bank of England to cut interest rates and print money.
What would be great for someone like me is a series of revision cards setting out your core points. Then everything is one place.
Who are the replacements? Darren Jones? Torsten Bell? Neither cut it.
If I have money and my country wants to borrow some of it how much would I charge; would I insist upon receipt of a rate that would bring my country to its knees?
If I would so insist then I would make plans to ensure that all of my wealth was protected, perhaps by transferring it to a safe haven.
If I am the Leader of such a country and know that the health of the people I lead is determined by those whose health and wealth are not dependent upon the interest rates they insist upon receiving, surely I would want to know if there was any other way forward.
Some times there is tendency to be too clever. Now, with the advent of Trump and Netanyahu, I feel it is a time to ask very simple questions.
The media is awash with careerists, as is the BoE. It is very difficult to question why you are doing something if your wealth and position in society has been created by doing it.
What to do? I cant even extract a response from my MP that is ot cliche ridden.
Any upcoming discussion on @BBC R4 or Newsnight is so predictable – you know there will be not even a glimmer of journalistic curiosity as to ‘is there really no money?’. or ‘is there any way the govt could make interest rates come down?’
I dont think its laziness. Without wanting to push conspiracies – this surely comes from the top. The beeb is spoken to every day y by govt.
Their ‘editorial guidelines ‘not to mislead’ ‘to hold power to account’ etc are broken every day.
What they really have is ‘editorial tramlines’ – within which , as Chomsky said – the discussion/questioning can sound quite challenging and forensic – but but but must stay within the lines. The lines are that ‘the market’ is supreme, ‘the market decides’ – ‘borrowing costs too high’ ‘spending cuts inevitable’ etc.
(And with foreign policy- you knew the interviewer of Lammy this morning when he said they had been calling for a Gaza ceasfire for months – he woudnt be asked why we are still supplying arms to a prime minister who has an international arrest warrant out for him.)
It seems that what you are seeking is an informed electorate with the critical analysis required to see through BS and propaganda.
I wonder what the Bank of England would do if the Government declared that ‘growth’ was not sustainable, it would no longer be measured, and a new measure based on the happiness of the people living in the UK would be used instead.
I am working on that idea.
How many times has the idiocy of paying interest on all CBRAs have to be raised in each money market wobble (on this Blog, endlessly), without any politicians, central bankers, economists, corporate business, or financial or political journalists ever, ever, ever even raising the issue or discussing it?
There are £Billions of public money being washed down the drain, from public to private – for precisely nothing (correction; we are effectively bribing banks not to crash the financial system – with the public’s money: a gift to commercial banks).
Intellectually, rationally what we are doing is absurd.
Agreed
Just a few questions Richard , probably a layman queries : Who benefits from interest rate spikes at this scale? I’m asking because I don’t know. As a common man, I don’t see any benefits. My mortgage rate is up, car finance is up, my credit card bill is up, anxiety is up, tax is up, insurance is up, my broadband bill is up, and I have no disposable income. I’m not receiving any proportional or equivalent benefits as inflation reduces. I think the banks and institutional investors are benefiting as they get higher yields on the bonds and every dip is an investment opportunity for them. Since 2008, the world should have done calibration and defragmentation of the economy, not everything all of a sudden like this, as people are just getting up after COVID and geopolitical tensions. In the last but not least, is there any chance to impose a windfall tax on those benefiting from this, such as banks? Also, in my understanding, we are seeing higher prices because of these factors: Food prices are up due to less production as farmers are sick across the world post-COVID, and farm productivity is not as high as it was before, also because of climate change. This is the situation all over the world, even in developing countries, as farm productivity is lower compared to before. The oil price: I think it is due to war across the major oil and gas producers, which spiked the price. In my view, scarcity of materials increases demand across the spectrum. I think inflation is the byproduct of low productivity. I don’t think farmers will reduce prices even if inflation reduces, as they need to balance the last budget burden. I just learned how QE and QT is for the controlling the money flow but don’t we have any other tools other than blanket killing everyone.
There is no benefit to from higher rates, as you have noted.
The benefit is only to the well off, who are claiming they face more risk. But they don’t. They will be repaid, in full. So what is this all about? It is another example of financial engineering extracting value from people without the means to pay.
Where there are “spikes”, then there can be “spikeulation” (see what I did there?!)
If you can cause the spike, with either your money (remember George Soros?) or your political power (Trump) or headline-hogging (Fa***e), then you or your well informed friends can profit from it, with greater or lesser degrees of legality by trading various products whose price is predictably linked to it.
Hence the coincidence of Fa***e’s gold interests and 4 Reform MPs & 1 TUV MP (but not Farage) promoting gold and getting “buy gold/economic collapse of fiat currencies imminent” headlines (all perfectly innocent and coincidental of course – “for these are ALL honourable men…”).
I looked up the TUV MP behind the Gold/QE bill, quite a background…
https://en.wikipedia.org/wiki/Jim_Allister