Some of my infographics are relatively easy to write. This one took many drafts, even before the drawing began, and several more after that. I hope it is good enough, especially now a typo has been corrected:
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Thanks again to all for a fine contribution to better citizenry socio-economics understanding!
Might a book of your infographics be worth considering?
Who appoints which classifications of people to run central banks?
Let me create enough, but I am not working to a structure.
Very good.
Thanks.
It took a long time!
This is great, Richard. Getting all this information on one page is really helpful.
Well worth the effort.
Box 9, bullet 3, a typo? “coaf” for ? “of”
A great resource.
I will edit it.
Very good on a tricky topic.
Your introduction suggests that you might not see this as the “finished article”. So, in that spirit may I suggest the following changes for your consideration. Accept, reject or modify as you see fit.
Box 1 – No changes
Box 2 Bullet point 1 should be slid down to be bullet point 3. Last bullet point should read “It decides on and conducts monetary policy” (What it does/is for comes in a later box).
Box 7 should become Box 4….. others shuffled along.
“Old” Box 5 (now Box 6) should be “What is monetary policy?” and should say something about controlling interest rates by a) borrowing or lending to banks to keep the rates that they boroow/lend at close to the chosen level. b) Buying (QE) or selling (QT) long term government bonds to influence long term interest rates.
The QE/QT box can now be (roughly) what is what is in box 5 (how interest rates impact the real economy).
Box 9 raises important points but the title personalises things and it immediately makes the reader wonder if all the preceding is “fact” (it is) or “opinion”. I would title it “Questions” and run something like….
Should there be greater democratic control of Central banks?
Should inflation be their sole focus?
Are interest rates the only way to control inflation?
How should Monetary and Fiscal policy be co-ordinated?
As I say, use or discard as you see fit.
All noted and appeciated Clive
I thought abour amneding – and may if this moves on to be in a publication. But left for today – but Box 9 point in particular noted.
Bullet point 3 in number 9 looks odd, there is a word between “goal” and “central” that I can’t make sense of. “of” actually would make sense here, but to me it looks like “coaf”?
I will deal with it!
Just on the point about creating new money. Whilst commercial banks do create money, unlike central bank money, that money comes with a liability for a private household or business. That liability will come with interest, so essentially this money creation is a way to funnel existing central bank money to the commercial banks. If a central bank fails to create enough money to match the growth of an economy, the commercial banks will have to create the money, which leads to private sector debt…which is a genuine problem unlike government “debt”. Over the last 40 years, private sector debts have ballooned essentially to finance the shortfall in central bank money creation, meaning huge amounts of people’s money is now spent on directly or indirectly servicing that debt, directly leading to the cost of living crisis, which whilst often described in the media as an issue with high costs, is more an issue of not enough money.
Just thought it important to point out the difference and consequences of each type of money creation. But it’s not like you weren’t cramming enough really useful information in there! Thanks.
Thank you
Is crypto-currency on the list?
I distrust it but am hazy on its structure.
It is….
Perhaps for a small text rich image it may be better to up the resolution a little (for my old eyes:) eg 150dpi and certainly more if it will be printed eg 300dpi.
How?
A difficult one to produce I suspect without posing lots of questions at the same time. I’m with Clive
Bonds, QT and QE
I’m still confused. You say a bond is a fixed sum of money with a fixed interest rate for a fixed term and bought by banks etc to store money. So why are they traded on the open market? Those trades seem to affect interest rates. How can they? Because when the bond matures the sum of capital plus interest repaid is fixed regardless of who owns the bond at maturity or how much they paid for it.
When the Govt brings in QE and buys back the bonds on the open market why don’t the institutions that have just sold the bonds not simply use the money to buy more bonds to store the new surplus of money?
Since QT is the opposite of QE what is the difference between QT and a standard bond issue?
Then there is the bank reserve account which it holds with the central bank and uses to settle its debts with other banks. Is this the central clearing system or is that an entirely different thing? How does this then work?
Sorry if I’m being a bit dense but I really do want to understand this.
PART 1
You’re not being dense at all. These are good questions, and they go to the heart of how the system works.
On bond prices and interest rates, you are right that the amount repaid at maturity never changes. What changes is the price someone is willing to pay for the bond today. If a bond paying a fixed £50 a year can only be sold for £900 instead of £1,000, the effective yield to the buyer is higher. That is why bond prices and market yields move in opposite directions.
On QE, you ask why investors do not simply buy more government bonds after selling them to the Bank of England. Sometimes they would like to, but there are no additional bonds available to buy. QE does not create new government debt; it changes who holds the existing debt. The Bank of England buys bonds that already exist and replaces them with reserve balances. The private sector cannot, as a whole, swap those reserves back into gilts unless the government or the Bank issues or sells more gilts.
QT is different because the Bank is reversing that process. It either sells bonds back into the market or lets them mature without replacing them. The result is that reserve balances are reduced and more gilts are held by the private sector.
PART 2
A standard gilt issue is different again. That will follow, in current rules, new government spending and creates what is technically an additional government liability. QT changes the composition of existing liabilities. New gilt issues accompany new fiscal operations.
As for reserves, yes, they are the means by which banks settle with each other. If you pay someone who banks elsewhere, your bank transfers reserves to the other bank through the Bank of England’s settlement system. Those reserve accounts are held at the Bank of England and are the foundation of the UK’s interbank payment system. They are distinct from the payment messages sent through systems such as CHAPS or Faster Payments. Those systems communicate the payments; reserves provide the final settlement between banks.
There is a lot to absorb here, but once you see that there are really three different things involved – bank deposits, reserves and government bonds – each with a different purpose, the system starts to become much easier to understand.
I am planning infographics on these issues.
Thank you Richard that helps a lot. One last question though I can’t understand why the holder of a gilt would sell it at a loss. Surely they would only buy if their institution had surplus cash to use up and their annual flow projections showed healthy balances. Is it cash flow problems that initiate gilt sales or something else?
Most gilts are not sold at a loss. Remember market prices only reflect those bought and sold – and there are traders who just use them for speculation, so they set the price. Most of them sit stably in portfolios for years. If 98% are never bought and sold the 2% that are set the declared price.
Thank you Richard.
The commercial banks operate trans-nationally and I guess are either wholly British owned, partly British owned and entirely owned by foreigners? Does this make any difference?
Also when a country is in the Eurozone its Central Bank is the shared European Central Bank. Is that it?, or is there a kind of shadowy national central bank between it and the many commercial banks.
The ownership of commercial banks makes surprisingly little difference to the process of money creation. Whether a bank is British-owned or foreign-owned, if it is licensed to operate in the UK and make sterling loans, it can create sterling bank deposits in exactly the same way. Ownership affects where profits ultimately go and who controls the bank, but not its ability to create money.
The eurozone is different because its member states no longer issue their own currencies. The European Central Bank is responsible for the euro, but each member state also has its own national central bank. Those national central banks are part of the Eurosystem and carry out many day-to-day operations within their own countries, including working with commercial banks, implementing ECB policy and providing reserves.
The crucial difference is that, unlike the Bank of England, a national central bank in the eurozone does not ultimately answer to its own government on monetary policy. That is why countries such as Greece found themselves in such difficulty after 2008. They had effectively become users of the euro rather than issuers of their own currency.
That is one of the fundamental distinctions between the UK and the eurozone, and why the economics of the two cannot be analysed in quite the same way.