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.
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…..