Snippa’s new one

So, what if interest rates rise?

That £800 billion on deposit from the banks at the Bank of England will now need to pay more than 0.1%. So, how do we stop that being necessary?

Just issue perpetuals, or 100 year bonds, to the bank ins exchange for their £800 billion. Job done.

There is a certain amount of glee with which he tells us that inflation will mean that £800 billion in a century is irrelevant. Which does sit oddly with his insistence that everyone should invest in bonds for their pensions.

It also sits oddly with his insistence that rational expectations is rubbish. Because the reason that one third of gilts are inflation linked is because they did that inflating out of debt to investors before and some of them at least have learned from this. They are, rationally, not willing to lend to government, long term, without inflation protection, as a result of their expectations.

But now think through this. The banks don’t own those reserves in the central bank account. Well, they perhaps do in one sense but not in the important one. These are deposits by customers of the banks that the banks are then parking there.

As a check on this – and I don’t know the answer – what is the capital base of the UK banking system? £800 billion? Would surprise the hell out of me if it were. So, it’s not actually “shareholder” money in the BoE. It’s depositor. And those depositors might like it back at some time. If it’s in a perpetual bond the banks cannot sell then they’re bust when everyone asks for it back.

So, perhaps bankrupting the banking system might not be a good idea.

OK, so perhaps they can sell them? Perpetuals at 0.1%.

Hmm. So, what happens then? Well, think what QE is. We invent money down in the basement of the BoE and go buy bonds with it. This increases the money supply and reduces the number of bonds floating around thereby reducing interest rates/increasing bonds prices/reducing yields.

The money so created ends up in the BoE in these reserve accounts.

Spud tells us that we need not, should not, cannot, reverse QE because this would destroy money.

So, instead, we’re going to change the new money created, now in the reserve accounts, for bonds which the banks will sell to the market. Which increases the number of bonds on the market, increases interest rates, lowers bond prices and raises bond yields. Oh, and what does the BoE do with the money that it now has instead of those bonds it’s just given to the banks? It destroys it of course.

Because, you know, if it sends it out again it just ends up in the reserve accounts again in the name of the banks.

That is, giving the banks saleable bonds instead of reserves is reversing QE. Exactly the thing that Snippa tells us need not be, should never be, done.

Oh. And if those bonds can be sold then they are part of the national debt and need to be counted as such. So Spud’s caterwauling about the size of the national debt is also wrong.

As to why he doesn’t already grasp these aspects of his plan it’s because he doesn’t grasp the subject he’s trying to talk about. But then there’s nothing new there, is there?

Giving the banks bonds for the QE money sitting in BoE reserve accounts is reversing QE. And it’s the man insisting we must never reverse QE who suggests giving the banks bonds.

BTW, this man teaches economics at a British university. Sigh.