Well, doesn’t this piss on Ritchie’s chips?

Bank of England governor Mark Carney yesterday implied that talks of a cut in interest rates nearer to zero were overblown.

He also ruled out cancelling government debt held by the Bank to reduce the headline figure.

You know, Ritchie’s idea that the national debt just isn’t as large as it is said to be because the Bank owns the government debt and it can just be cancelled?

Carney also dismissed an enquiry from former chancellor Nigel – now Lord – Lawson, who asked whether the Bank could write off the £375bn of government debt it owns as a result of its past quantitative easing programme. Such accounting wizardry would wipe a third off of the UK’s national debt.

The Bank is owned by the government, so its holding of government debt is essentially the state holding its own debt.

But Carney said that extra bank reserves had been created to purchase the debt it holds, and these reserves may need to be reeled in again. To do this, it would sell the bonds for reserves, and then erase the reserves – they are mostly electronic.

That was more of a soft lob from Lawson to get Carney’s reaction on record.

It also, of course, entirely rules out that Green QE that Ritchie and Colin Hines are so keen on. The bank isn’t about to start spending base money directly into the economy,. On exactly the basis that I’ve been pointing out all along. It’s not reversible when you do that. So they’re not going to do it.

Odd he doesn’t mention that today really, isn’t it?

26 thoughts on “Well, doesn’t this piss on Ritchie’s chips?”

  1. Of course it’s reversible – it’s fairly easy to take cash out of circulation. Just burn some of the notes.

  2. John

    reserves are what money in the narrow sense of notes and coins looks like when held by central banks. Except they don’t always bother to physically print them up if not going to be released into circulation. But reserves are lent to commercial banks, I think, in electronic form.

    so he’s basically saying we had to print money to buy those bonds, and when we want to withdraw that money again we’ll do so by selling those bonds

  3. “and these reserves may need to be reeled in again”

    Everyone knows that’s never going to happen.

  4. “Writing off” that £375bn has zero economic significance: it’s just a book-keeping entry. Carney’s claim that the reserves “may need to be reeled in again” is a point of sorts, but not a brilliant one.

    That is, if the debt WAS written off, there’s nothing to stop a central bank subsequently wading into the market and offering above the going rate of interest for near risk free loans. That would withdraw bank reserves, which is the object of the exercise. Of course that particular ploy may not be LEGAL in some jurisdictions, but that’s just a legal technicality. The law could be changed.

    Re Tim Worstall’s point about green QE at the end of his above post, strikes me that the decision to implement green QE is entirely separate from the decision as to whether to do the above book-keeping entry. Thus Tim’s claim that not doing the book-keeping entry “entirely rules out” green QE does not hold.

  5. Ralph,

    that’s just a legal technicality, the law could be changed

    You are Richard Murphy and I claim my £5.

  6. @ Ralph

    The point Carney is trying to make is the difference between QE and monetisation.

    QE works by swapping short term assets (cash) for long term liabilities (debt) – but is net neutral for the BoE’s balance sheet (hence the “book keeping” entry). No new “money” or “wealth” to pay for Ritchie’s green QE etc. Likewise, banks don’t get free money either – the get cash for bonds – balance sheet (and Tier 1 capital) neutral.

    It lowers long term interest rates and therefore hopes to promote credit growth. To not be inflationary, it relies on the idea of reversibility – the reeling in bit Carney talks about.

    What Murphy et al are suggesting, through a wilful misunderstanding of what “printing money” via QE means, is that the BoE simply prints more money, Zimbabwe style. Sure, if you do that, you can “cancel” debt and do Green QE (why stop there – why not pay for everything we ever need and eliminate the need for tax as well – which gets Ritchie and his high tax demands in complete knots).

    But that would be at the cost of massive devaluation of the currency (massive supply of it, plus people would lose faith in it as they would a new Greek Drachma) and cause inflation to spike.

    He’s essentially saying that we can conjure money out of thin air, which we can use to pay for real assets. Not exactly a stance which stands up to real world scrutiny.

  7. You can remove base money from the economy by taxing and not spending it, which is sort of what Keynes proposed during the Boom Years. Except that in practice, they never dare cut spending during the Boom Years, which is why even if Keynesian was a correct economic theory, which it isn’t, it would never be implemented.

  8. Brilliant from Ritchie today:

    GPs’ high pay is fine as it has to be set with reference to the market.

    Premiership footballers and bankers are however engaging in rent-seeking.

    “Rent seeking” is his latest favourite phrase. I think he must have discovered it recently and decided to use it as often as he can.

  9. not quite Ian B, the govt can run a surplus without necessarily reducing the size of the CB balance sheet. In fact you could decides to run a surplus at the same time as the CB decides to expand money through buying bonds more quickly than government pays off its debts. I think some MMTers have in mind an arrangement wherein the central bank balance sheet shrinks or rises one-for-one with government deficit / surplus, but that ain’t how things work/

  10. Where does he say that??

    Like it or not, top footerists are one of the few groups who genuinely get paid what they should.

    I do note that Dickie has also stated that accountability is Public Sector only these days, a la Hodge.

  11. @Luis Enrique: “so he’s basically saying we had to print money to buy those bonds, and when we want to withdraw that money again we’ll do so by selling those bonds”

    Luis, you talked in banker speech. Which is the opposite of how normal people think and talk about money. I remember the days when you simplicated stuff like this.

    When the Bank of England buys bonds, it is taking out a loan.

    When the Bank of England sells bonds, it pays off the debt and interest, or negotiates a new loan on different terms.

  12. Charleyman

    “When the Bank of England sells bonds, it pays off the debt and interest, or negotiates a new loan on different terms.”

    Eh? When the BofE sells me a bond, isn’t it borrowing from me? Or are you talking about weird QE stuff?

  13. Charlieman

    er … who is the bank of england taking out a loan from when it buys bonds? The BoE not *issuing* bonds, it is dealing in already existing government debt.

    Suppose I own a bond. The BoE prints some money uses it to buy the bond from me. That’s QE.

    If the BoE then decides to sell that bond back to me, I hand over the money and receive a bond in return. That’s how QE will be reversed. It doesn’t pay off the bond, or interest or negotiate a new loan or any of that.

  14. GlenDorran

    His replies are a prime example of rent-seeking! Really has lost even the vestige of the plot he had previously…..

  15. He and Colin Hines are speaking in Edinburgh tonight.
    No doubt Green QE and evasion will be on the agenda.
    Will there be a prize for who first uses rent seeking?

  16. I suspect that where you have a fiat currency, it is only a matter of time before they do just monetise the debt for good. May not happen now, but it seems inevitable over time that it will happen. Give a politician a loaded gun and eventually he’ll shoot his nose off with it.

  17. The money quote (pun intended)

    The Bank is owned by the government, so its holding of government debt is essentially the state holding its own debt.

    These entities are not some invisible monsters fighting over imaginary cash, the root of “the bank” and “the government” and “the state” … is people.

    The fist red flag of any leftist claptrap is assigning separate existence to entities and thinking they can be independent of humans.

    In any case, as “the state” can effectively set the interest rate on its own debt, we are pretty much screwed to begin with.

  18. Rather more interesting is that what Carney said looks like a threat. The BoE wants its money back. If the government hasn’t got it, the BoE will sell off its bonds. If that happens, it will be more difficult for the government raise additional money by selling bonds in to a market already awash with them. Furthermore, the government doesn’t (effectively) pay interest on bonds held by the BoE but would obviously have to if the BoE sold them. What’s the thinking, Mark?

    And of course, sucking 375bn out of the economy and chucking it back into the magic cauldron would be nuts. As von Mises said, it’s like reversing back over someone you just ran down. The desirable property of a currency is stability. Rapid contraction is as undesirable as rapid expansion.

  19. @Rob & Glen Dorran

    Apparently Mrs Murphy is a GP who has been too ill to work for the last two years. Stress perhaps?

    She is also a partner in Tax Research LLP but only gets 1% of the allocated profits.

    If I was an HMRC inspector I might have a look at the ‘grants’ the LLP gets from the Joseph Rowntree Foundation apparently for nothing and so not taxable.

    Which raises an interersteing ethical point. If the grants really are for nothing, Why is Murphy accepting them from a charity set up to fight poverty? The c£35k he accepts would surely be better spent on someone poor.

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