As the FT notes this morning:
The Bank of England is expected to increase its asset purchase programme by at least £100bn on Thursday in a bid to ensure stability of financial markets at a time of huge government borrowing.
Economists are almost unanimous in predicting the bank's Monetary Policy Committee will keep the benchmark rate unchanged at 0.1 per cent but extend its quantitative easing programme, in which it creates money to purchase government bonds in large quantities alongside a much smaller amount of corporate debt.
I note this to make three points.
First, this is the second instalment of QE this year, bringing the total to £300 billion.
Second, as with the first instalment of £200 billion this one is being created before large issues of government debt take place as a result of the deficit that the coronavirus is creating.
Third, the sequencing is the key issue here. In effect the Bank of England is deliberately injecting the funds required to buy new debt issues into the market in advance of those debt issues taking place to guarantee an increase in demand for gilts by doing so, and in the process is ensuring all new debt issues will be fully subscribed.
What this means is that the government is in effect using the Bank of England to fully fund the coronavirus deficits, but is not admitting to the fact whilst happily letting discussion continue on 'where's the money going to come from?' when that issue has already been resolved because the answer is 'from itself' because it's already created all the necessary money in question, whilst also giving markets a wholly unnecessary cut, as usual.
What we're seeing going on then is a mighty silly game of charades so that the government can continue to claim that pressure from the markets means it is constrained in what it can do, when that is simply untrue; the Bank of England can claim it is independent when it very obviously is not; and the narrative that government must be shrunk because the amount of debt that can be issued is limited when so far this year no new debt will have been issued at all can be kept in place by the Austerians.
A little fiscal honesty would help enormously.
Let me provide it.
The Bank of England is currently entirely funding the government's deficit by new money creation and that is likely to remain the case for some time to come, meaning that no one need worry about whether the money to fund a recovery is available or not, because it is.
Now, was it that hard to say?
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All government ministers, HM Treasury staff, Bank of England officials, Financial Times and other newspaper and media business/ finance/political correspondents should have your chart on your 15 June blog: ‘Spend and tax, not tax and spend’ displayed prominently in their offices. Everyone would then be very clear about how the system works and comment and act accordingly.
🙂
I’d really rather you called it “Overt Money Financing” rather than “QE”.
Yes, I get that OMF is a form of QE but QE has come to mean the BOE buying private sector bonds.
“There are subtle differences between this deficit-funding operation and normal quantitative easing. First, central banks decide when to do quantitative easing and how much, while an overt monetary finance would be a joint decision with the government. This raises issues of central-bank independence: the ability to say ‘no’ to government requests for funding is an important discipline on budget expenditures. ”
Grenville 2013
The critical area is “central bank independence”. Or, more accurately, the myth of “central bank independence”.
QE has not come to mean buying private sector bonds, at least not in the UK, where it has hardly happened (thankfully)
And as I have shown time and again, QE is always a government decision in practice in the UK, done on Treasury instruction and with Treasury indemnity
As you say this is “giving markets a wholly unnecessary cut, as usual”. Isn’t it even worse that that because the purchases include corporate bonds as well?
There aren’t many corporate bonds in the mix
£15bn ?
A billion here, a billion there.. pretty soon we’re talking real money.
I have no clue what your logic is
Quick question with MMT and inflation. When the point is reached that tax rises are necessary to control inflation, and those tax rises will be broad based in the sense they will affect all the population and not just the wealthy..given that many families particularly with children will be stretched and basically spend what they earn.. with the shortfall with increased tax won’t they just take on more personal debt , especially if interest rates are zero or close to (as prescribed by MMT…then when household debt can’t be paid off then a jubilee or write off is inevitable? The point being I’m not sure tax increases will work if the cost of getting loans is zero and repayment of those loans is not enforced?
This is why I want taxes that can be much more progressively scaled for this purpose
I will do a post on this
The Bank of England is a dishonest enterprise. That wasn’t hard to say after so many centuries of its abuse of democracy by failing to be open about its activities and role.
A couple of thoughts.
I’d like to think that Government bond traders do serve a purpose. Private sector buyers and sellers of gilts need somewhere to go to deal and that is what we offer. The market is pretty competitive and transparent and most users are reasonably content with the current set up.
However, it is unclear to me what purpose we serve trying to intermediate between two branches of Government (Treasury and BoE).
It is also unclear to me that the BoE has to go through the QE charade at all but if that is what it takes to get a broad acceptance of direct financing of the deficit by the BoE then I won’t quibble. But surely the obvious route is for the Treasury to trade directly with the BoE. At what price? That is easy, just get the BoE to participate in Gilt auctions on a “non-comp” basis. Saves the costs of selling then buying in the market and does not interfere with the price discovery mechanism that some feel is important.
There is also a secondary purpose to doing QE in the open market. It can be used to prevent disorderly markets that act against the interests of all users. The BoE should retain this right to act if required but do the bulk of its purchases in the auctions.
The buying of corporate bonds by the BoE (and the NY Fed in the US) is quite a different prospect. QE with gilts is just bookkeeping between two arms of a single currency ISSUING organisation. Buying Corporate bonds is the government lending directly to private borrowers and this is entirely different and it is fraught with difficulty. I understand the desire to keep credit markets orderly and open to borrowers but the US programme now goes well beyond that. Once there are more defaults in the corporate bond market the fingers will point “why did you lend to them and not me?” etc.. If Government wants to lend to private companies then it needs to be open and honest about it…. which I feel is not the case at present.
Clive
I wish we would not agree 🙂
Re gilts, a great proposal and wholly possible post 31/12/20 as far as I am aware
Re corporate bonds, just don’t do it: that requires a separate investment bank and that’s a very different beast
Richard
I am over-commenting far too much just now, but this is very interesting; and the times are exceptional. I take your point about the artificiality of QE and it has always perplexed me about it; but your comment (if I understand it) suddenly made me wonder whether a bond trader as intermediary did not offer an element of independence and more critical, transparency to the transaction. My thought may be completely wrong, but you raise such a fundamental point, and clearly the answer is not completely obvious.
Help me out Richard. Why on the BoE’s website does it say £645 billion for Q/E for March? Thanks.
Tyrone.
The £645 billion includes £10bn of corporate bonds bought some time ago
I ignore these as they have a very different behavioural consequence
Gov’t bonds is £635 bn
It is expected to go to £735 bn
Mr Logan,
What is quantitative easing?
“Large-scale purchases of government bonds lower the interest rates or ‘yields’ on those bonds (the investopedia website explains more about bond yields). This pushes down on the interest rates offered on loans (eg mortgages or business loans) because rates on government bonds tend to affect other interest rates in the economy.”
QE purchases are of Government bonds. The source of the quote is the Bank of England, it isn’t difficult, here: https://www.bankofengland.co.uk/monetary-policy/quantitative-easing
The BofE describes it in this way: “Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy ….. The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy.”
Quite so….
But making up stories to support your case is the modern way…
Telling such truth would give us the something this Government does not want us to have: Hope.
What really grinds my gears about this is that it’s just been announced that inflation is at a 4-year LOW, and yet still everyone persists in the belief that ‘printing money’ will always cause inflation.
Indeed….
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