The Senior Lecturer admonishes us

Two comments on my letter concerning the use of People’s Quantitative Easing to buy out PFI (27 September) in your paper on 28 September require a response.

Martin Wheatcroft says that the Bank of England reserve deposits of our clearing banks, which is where most QE funds are now located, have interest paid on them, meaning that People’s QE is not costless, and that cost could rise, considerably. He makes three mistakes. First, interest is only paid by Bank of England discretion. It could withdraw or limit it. Second, he quotes nominal and not inflation-adjusted interest rates, and it is adjusted rates that matter overall for People’s QE because they indicate the real cost. Third, he assumes UK interest rates will rise without QE being unwound, and that is exceptionally unlikely.

Rilly?

The BoE isn’t going to raise interest rates? Without unwinding QE?

They’re not going to do what the Fed did, which is raise interest rates first?

Tim Worstall also makes a mistake. He says big business does not use gilts for cash management. That’s true if nominal ownership of long-term funds is taken into account. But that’s because big business only makes use of these gilts overnight, when the massive “repo” market, which places the cash of these companies on deposit while the world sleeps, makes extensive use of, and is entirely dependent upon, the availability of government-backed gilts to make that market work.

My critics are making use of highly selective and unrealistic evidence. I stand by my arguments.
Professor Richard Murphy
Professor of practice in international political economy, City, University of London; Director, Tax Research UK

Repo uses a lot of gilts, yes, but it’s not entirely dependent upon. Further, corporate treasuries are rather small players in this market – although it has indeed been growing since 2008. However, the claim that the repo market is about placing those corporate cash surpluses on deposit is simply wrong. That’s a small and very new part of the market. The major players are the central banks and then other financial sector companies.

If anyone can track down the actual figures would be most grateful…..

12 comments on “The Senior Lecturer admonishes us

  1. So who’s told Murphy about repo? Can’t imagine he got that himself. He must have someone who actually knows a bit about financial markets helping him respond to you.

  2. I might be out of my depth here, but intuitively the idea that big companies have so much cash sloshing around that they need another £40bn, or whatever figure he’s plucked out of the air, of Gilts to make it work doesn’t feel right.

  3. I would have thought the repo was just there to increase returns on cash that would otherwise just stay on the banks books, as a repurchase agreement (repo) is just lending cash against collateral which can be gilts on one side, and borrowing cash whilst pledging collateral, which again can be gilts, hence reducing funding costs for a trading activity. There are other positive aspects for balance sheets which I’m not too aware of.

    As a repo trader many moons ago, I wouldn’t have borrowed from companies directly anyway as you need legal agreements in place and credit line limits at the minimum. Very large companies at a stretch maybe.

  4. Does anyone believe that Snippa has even heard of the repo market? In any case, statistics are hard to find even in bankstats table 1.7.

    I checked the latest reports of BP and Rio Tinto and there is no hint of using the repo market. Someone is making this up

  5. ‘Second, your editorial also ignores the fact that there is enormous demand for government debt from the growing number of relatively (and I stress relatively) wealthy retirees needing a secure home for their money. The enormous cash piles of multinational corporations only adds to this demand. That demand proves that in fact those buying government debt are not doing the government a favour: it is instead doing them a favour by providing them with the secure savings opportunity that they crave’
    What he said 2 days ago. Strongly implies multinational companies are looking for longer term savings opportunities, not over night parking of their cash piles. Doesn’t even mention repo market. But today he dismisses the ‘nominal ownership of long term funds’ as unimportant, and anyway he didn’t really mean that, and your just wrong and he’s right so there.
    Cunt

  6. “What he said 2 days ago. Strongly implies multinational companies are looking for longer term savings opportunities, not over night parking of their cash piles. Doesn’t even mention repo market. But today he dismisses the ‘nominal ownership of long term funds’ as unimportant, and anyway he didn’t really mean that, and your just wrong and he’s right so there.”

    Good spot. The two posts are at total odds, one suggests companies are long term holders of gilts, the other agrees they aren’t but use them in short term swaps. The man has the intellectual consistency of a bowl of jelly, flopping this way and that, impossible to nail down. He also hasn’t got a fucking clue what he’s on about.

    Someone ought to write to the all FTSE100 companies and ask if they use the gilt repo market at all. I bet very few do.

  7. Perhaps he is thinking of investment trusts rather than industrial companies. You can imagine investment and indeed unit trusts tapping the repo market for short term gains but not miners, oil companies, supermarkets

  8. It’s truly sad that, rather than approaching this (and everything else) as a problem that we should solve collectively, he’s determined to put himself on one side and his “enemies” on the other. The world’s problems don’t have clean solutions and we shouldn’t expect them.

    It’s also quite funny, as he always manages to end up on the wrong side.

  9. Diogenes; fine, they might be, but how much do they have in total assets? And they are only going to be using a sliver of them in the repo market at any point. FWIW, I don’t recall seeing any investment company using the repo market, and s.842 investment trusts were/used to be at a tax disadvantage to unit trusts/oeics when investing in debt instruments.

    ’40 act US closed end fixed income funds might be using repos, but why would they prefer UK sovereigns over anything else, to the degree he seems to be claiming?

  10. Ducky you’re absolutely correct. It’s my fault for thinking that Snippa might be making a valid point. The default position – that he is ignorant and stupid – is always a better null hypothesis

  11. With interest rates at near enough zero, he asserts that interest rates are never going to rise. Time to invest in a floor safe and transfer my savings into pound notes.

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