Dear Mr Worthington
Thank you for your further email of 15 September. Professor Murphy is entitled to his own view, but we at the Bank think differently about QE.
The reason for that, is because at some point in the future, the Bank will sell its government bond holdings back to private investors. And those bonds will then have to be repaid by the government as and when they mature – just as they would for any borrower.
I hope that you can see that this approach is rather different to simply printing money and giving it the government. That is not a policy which the Bank has undertaken and is not what we think of as QE.
Your question regarding the return of interest payments to the government is a very reasonable one. As the owner of government bonds, the Bank accumulates interest repayments paid by the government. We return those monies to the Treasury.
So, there is a portion of the stock of outstanding government bonds that the government effectively no longer pays interest on. You might think of it as a 0% loan. But it is still a loan. Again, I hope you can see that this is different to printing money and giving it to the government.
Regarding whether taxation is necessarily required to finance government spending, the answer is no, it is not. Along with raising money via taxation, governments can borrow money and they can create money outright.
Regarding money creation, we tend to think that while monetary policy (in general) might boost spending for a time, eventually it will push up on prices, and inflation, which brings ‘real’ spending power back to where it would have been without that stimulus.
I hope that answers your question.
Kind regards
At which the Sage of Ely tells us:
First there is the quite extraordinary claim that the Bank will sell its bonds back to private investors. This has not happened yet. Mark Carney gave no hint that it might yesterday but was looking at the long term. And in other places where QE has been used this has not yet happened, although in fairness the US says it might try doing so, which might be useful to prove just why this is such a bad idea when new debt creation for public benefit is so much more useful. And when the only direction of travel so far has been literally trillions of pounds, euros, dollars or yen (it does not matter which currency you use) going into QE purchases and precisely none going the other way, to rely in this argument is, I would suggest, pretty desperate. To imply that all debt will be sold back is worse than that; it is right now an utterly implausible claim.
So, every central bank says it will be sold back (although a little twist, it’s far more likely to be not rolling over maturing debt, which has the same effect. Treasury must now issue new bonds to public to pay off those maturing bonds).
This is extraordinary and unthinkable because…..well, because the Senior Lecturer says so seems to be the argument there.
Adair Turner has argued that in practice it should be recognised that this debt has been monetised. I agree with him. In view of what Mark Carney said yesterday I think deep down he would also agree. There is no chance that all this debt will actually be resold to the public. To claim that it will be as if it is a fact in the way the BoE does here is wholly inappropriate. They have a duty to talk about the world as it is, and not about a fantasy that clearly does not exist.
We actually expect the Federal Reserve to announce its schedule for doing this tomorrow. This might be something of a shock to Snippa but there we are.
Second it’s curious that the BoE wants to pretend both that this debt exists and that there is no special relationship regarding it with the government when so obviously the interest waiver proves that this is not true. What that waiver proves is not that there is still the same debt as they claim, when that debt was characterised by the interest payment, but that the debt in question no longer exists because its terms have been waived. The original debt obligation has been cancelled in other words, whatever the BoE claim. That is the reality that needs to be faced. The question is what has replaced it. I return to that below.
Well, no, not really. They even point out that a loan at 0% interest is still a loan that needs to be repaid. They actually flat out say this. If I lend you £10 until tomorrow without charging interest you still owe me £10 tomorrow, no?
Third, there’s the oddity that it is claimed that these debts will be redeemed in due course. Technically, of course, some redemptions have already happened. And QE debt has been rolled over despite that technical redemption: new gilts were used to replace those redeemed. Again, reality has been suspended and the BoE needs to admit it.
No, everyone’s been very clear about this. As QE debt matures the Treasury repays it, the BoE uses that money to buy more debt to maintain the QE stock. There is no mystery here at all.
Fourth, there is the curious issue of whether there is a new loan or not at zero interest rate. That’s open to question for reasons already noted. What there undoubtedly is is a debt. And on this issue the BoE really should read its own bank notes. Money is a debt paying zero interest. That is one of its major characteristics. So the BoE is in this case party to a zero interest rate loan that it claims is not money because it claims it is a loan, when all money is a loan because all money is in reality debt that is ultimately underpinned by the government on the basis of its ability to raise future taxation revenue, which is what also underpins the value in this relationship. Far from the existence of this loan proving there is no money created in in this relationship I think it precisely proves it does create money, in precisely the usually accepted form that money has. The BoE has, I think really shot itself in the foot here.
But everyone agrees that the BoE has been creating money. That’s why the measures of the money supply have been shooting up. All of that QE is in the M0 and M1 measures of the narrow money supply. They’re flat out insisting that they’ve been creating money, that’s what QE is! Here is the narrow money supply (slightly different from M0 but not very).
Monthly average of
amounts outstanding
(on Wednesdays) of
Bank of England
Banking Department
sterling reserves
balance liabilities
(in sterling
millions) not
seasonally adjusted
LPMBL22
[a]
31 May 06 24408
30 Jun 06 22089
31 Jul 06 20009
31 Aug 06 19374
30 Sep 06 18651
31 Oct 06 18725
30 Nov 06 17698
31 Dec 06 20205
31 Jan 07 18765
28 Feb 07 17671
31 Mar 07 17687
30 Apr 07 18148
31 May 07 17543
30 Jun 07 17940
31 Jul 07 22280
31 Aug 07 18339
30 Sep 07 24661
31 Oct 07 22706
30 Nov 07 23258
31 Dec 07 23868
31 Jan 08 23779
29 Feb 08 22801
31 Mar 08 25688
30 Apr 08 26647
31 May 08 27511
30 Jun 08 28319
31 Jul 08 27942
31 Aug 08 28696
30 Sep 08 36309
31 Oct 08 48367
30 Nov 08 45621
31 Dec 08 43098
31 Jan 09 40425
28 Feb 09 39467
31 Mar 09 40758
30 Apr 09 71314
31 May 09 98689
30 Jun 09 125383
31 Jul 09 152083
31 Aug 09 142932
30 Sep 09 137382
31 Oct 09 143626
30 Nov 09 148830
31 Dec 09 145830
31 Jan 10 153796
28 Feb 10 156405
31 Mar 10 152275
30 Apr 10 151883
31 May 10 150950
30 Jun 10 149737
31 Jul 10 150051
31 Aug 10 150370
30 Sep 10 144380
31 Oct 10 143153
30 Nov 10 143494
31 Dec 10 139953
31 Jan 11 139245
28 Feb 11 138500
31 Mar 11 135420
30 Apr 11 132537
31 May 11 131523
30 Jun 11 128903
31 Jul 11 127196
31 Aug 11 127632
30 Sep 11 124730
31 Oct 11 131759
30 Nov 11 151509
31 Dec 11 163905
31 Jan 12 173512
29 Feb 12 189319
31 Mar 12 202273
30 Apr 12 218099
31 May 12 230390
30 Jun 12 228207
31 Jul 12 235349
31 Aug 12 251655
30 Sep 12 262294
31 Oct 12 274873
30 Nov 12 281259
31 Dec 12 275684
31 Jan 13 274377
28 Feb 13 277302
31 Mar 13 278693
30 Apr 13 285130
31 May 13 288784
30 Jun 13 289740
31 Jul 13 293575
31 Aug 13 296482
30 Sep 13 295104
31 Oct 13 299561
30 Nov 13 302225
31 Dec 13 298828
31 Jan 14 300032
28 Feb 14 304469
31 Mar 14 300341
30 Apr 14 301449
31 May 14 304891
30 Jun 14 304105
31 Jul 14 303621
31 Aug 14 303570
30 Sep 14 292432
31 Oct 14 299984
30 Nov 14 304391
31 Dec 14 300587
31 Jan 15 303573
28 Feb 15 306701
31 Mar 15 305112
30 Apr 15 308012
31 May 15 315381
30 Jun 15 315525
31 Jul 15 316355
31 Aug 15 317491
30 Sep 15 308627
31 Oct 15 315244
30 Nov 15 315332
31 Dec 15 305858
31 Jan 16 313494
29 Feb 16 315819
31 Mar 16 314101
30 Apr 16 318432
31 May 16 317832
30 Jun 16 316133
31 Jul 16 318926
31 Aug 16 325692
30 Sep 16 320935
31 Oct 16 336625
30 Nov 16 352619
31 Dec 16 367544
31 Jan 17 380671
28 Feb 17 399476
31 Mar 17 415059
30 Apr 17 431208
31 May 17 437395
30 Jun 17 439982
31 Jul 17 446961
31 Aug 17 447672
Now, does that look to you like the BoE is denying that QE has created money? No, me neither.
But it is the fifth claim which is fascinating. To reiterate, the Bank says:
Regarding whether taxation is necessarily required to finance government spending, the answer is no, it is not. Along with raising money via taxation, governments can borrow money and they can create money outright.
Incredibly importantly, the Bank admit that tax is not necessary for government spending. This is the admission of something I have long argued and proves that we do not have tax and spend in the UK (or elsewhere) but instead have spend and tax. The spend comes first and how to pay for it comes second. Borrowing is an alternative.
No, we all agree that spending can be financed by monetising it. We just don’t think it’s a very good idea. Henry VIII proved that one some time ago.
But what is most interesting is the admission right at the end of this paragraph, that the government can create money outright. This is, of course, a fact. The so-called ‘Bradbury pounds’ issued in World War I were Treasury created money that by-passed the Bank of England entirely and were completely accepted as currency (and why not; after all they too were backed by the promise of future tax revenue?). And the Bank is admitting here is that this is possible now. I suspect they had little choice but do so. After all, on their balance sheet they are holding £435 billion of government (or Treasury) promises to pay with no interest due on them. Or you might call it, Treasury created money as the residual balance sheet component of QE, in which the Bank have been an active and knowing participant. This is government created money used to cancel a liability – for the gilts that the BoE nominally holds but on which no interest is paid. Of course the BoE has to agree that the government can create money.
No one has ever denied that the government, or the BoE, can create money. As our narrow money numbers show. We’re all entirely clear and out in the open here. QE is the BoE inventing money. We’ve all been saying so too.
And that is precisely why it then goes into a vigorous defence of why it should not do so, saying:
Regarding money creation, we tend to think that while monetary policy (in general) might boost spending for a time, eventually it will push up on prices, and inflation, which brings ‘real’ spending power back to where it would have been without that stimulus.
This is farcical. £435 billion has failed to do deliver this outcome. Around the world trillions has failed to deliver much inflation. And when Brexit inflation falls out of the system (as it will if negotiations go well) then the need for more stimulus to create inflation in the UK will arise again, and with it demand for more QE. So the bogey of inflation can be ignored.
The farce is in Ritchie’s claim. We’ve increased narrow money from £20 odd billion to £450 odd billion. And this is never, even once the velocity of circulation returns to something like normal, going to create inflation? To put it very mildly indeed I think you’d have difficulty in getting any actual economist on the planet to sign up to that idea.
In that case what’s left in the statement? Well, it’s a simple admission that monetary policy – the whole raisin d’etre of the BoE – does not work. In other words, the whole farce of Bank of England independence has been a waste of time. What was always needed was, and is, fiscal policy. Or People’s QE, I would suggest.
Or, as we might put it, Richard J Murphy’s plans are correct simply because Richard J Murphy has entirely misunderstood absolutely everything that everyone else is saying.
The reality is that the BoE has just made the most extraordinary series of admissions. They will require further thinking and comment. But as I now need to head for Holyrood I leave others to start that process.
Aren’t Scotland the lucky ones.