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What was never going to happen

The Bank of England began quantitative tightening yesterday. It sold £750 million of its supposed bond holding acquired during quantitative easing programmes back to financial markets.

You recall how we’ve been told for a decade that this would never happen? That, in fact, the debt was not in fact debt?

Which is why the Tuberous One is so frantic about it happening. Because it kills off a very large part of his insistences over the past decade. If that debt is sold into the markets, if the position is unwound, then the debt is real.

So why is this being done? A) To use up market capacity to buy government bonds so that new bonds cannot be issued to supposedly finance current government spending, so reinforcing the policy of austerity B) To force up interest rates to support the policy of trashing the economy.

C) To reduce the size of the BoE balance sheet by reducing the amount of money on deposit with it held by the UK’s commercial banks. The proceeds of these bond sales are not, in that case, being released for public benefit.

Or, you know, we could look at what people say they’re doing which is reducing the money supply in the face of high inflation. Might even be right too.

10 thoughts on “What was never going to happen”

  1. Can anyone explain how the process of selling bonds into the markets acts to reduce commercial bank deposits/balances at the BoE?

  2. Its started, how long is it going to go on for? According to their timetable they’re going to sell £80bn/yr for years to come. How likely is that when we’re about to enter a serious recession? Indeed given they splurged printed cash into the economy cash on average about every 2-3 years between the GFC and now, how likely is it they will be able to continue QT for the decades they have proposed (I think 2050 is the final supposed end date to have unwound al of it completely) without hitting another load of ‘crises’ that just happen to demand some more printed money?

    In 6 months time when the economy is deep in recession, inflation is still way above target and the politicians are screaming blue murder, lets see how ‘independent’ the BoE is then.

    Incidentally there’s also the point that they aren’t taking out of the economy as much as they put in – prices have dropped since they bought their gilts so what they get now is less than they injected into the economy in the first place. Therefore QE can never be fully unwound as they have made losses on what they bought.

  3. Can I write stupid comments and contribute nothing to the debate?

    Isn’t there no limit to government expenditure or bond issuance barring that which the markets and neoliberal ideology artifically impose?

  4. Hmm, I feel like a dog looking at an aeroplane when it comes to this stuff, but £750m sounds like a toe in the water.

    Might be good to test the waters, as I’m not sure they’re the financial masters of the universe they think they are, or we wouldn’t be in this horrible, shitty, wealth destroying mess the Bank of England to a large extent created in the first.

    My medium term outlook for the economy is still pyramids of skulls. Not sure it matters very much at all which knobs and levers they fiddle at this point, now that we’ve always been at war with cheap hydrocarbons.

  5. Isn’t it a rule of thumb that it takes about 18 months for an interest rate rise to work through the economy? If so, the outlook is bleak. The Euro zone pmi has been under 50 for 4months now. From the Business Times:

    “NEARLY a fifth of companies in the German industry sector have responded to the energy crisis by scaling back production, found the latest DIHK business survey of 24,000 companies on Tuesday (Nov 1).

    In total, 14 per cent of all firms surveyed said they would reduce their production or offerings in the face of skyrocketing energy costs, with 17 per cent of industry-sector firms planning such a move.

    Energy-intensive manufacturers were particularly affected, with 27 per cent of those in the chemical industry and 30 per cent in the glass, ceramic and stone processing industries saying they scaled down.

    The survey also found that about every 12th industrial company – 8 per cent – plans to shift production due to the rising costs, particularly those that manufacture vehicles, at 17 per cent.”

    Where are the Eurozone fanboys today?

  6. Dio, I think the Danish geezer, Rangvid, wrote about QE and gilt market liquidity recently – IIRC, yer answer is in that piece.

  7. Dio – Where are the Eurozone fanboys today?

    Apparently respectable opinion is OK with promising your children a worse tomorrow.

    Germany has it worse (but I suppose it’s not entirely their fault they haven’t been an independent country since 1945), but we also have it bad. British pols appear to be currently congratulating themselves on energy prices “only” being ruinously expensive, as opposed to laughably ruinously expensive.

    Nobody is winning as a result of this, except maybe BP and China.

  8. ” I’m not sure they’re the financial masters of the universe they think they are, or we wouldn’t be in this horrible, shitty, wealth destroying mess the Bank of England to a large extent created in the first.”
    The frightening thing is that these are people who are in charge of the mess now. And there’s absolutely no sign of a change of management coming along. We saw what happened when there was an attempt.

  9. “And there’s absolutely no sign of a change of management coming along.”

    There was a brief glimpse of a change of management a few weeks ago, but it was snuffed out pretty sharpish.

  10. Is the debate about inflation moronically stupid in the first place because you all willfully ignore the obvious solution, indexation, in the same kind of mass hysteria that led to the gold standard being (nominally) defended for decades after the Greenback Party proposed ending it?

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