To help the layman interpret – the chart is telling us that the Treasury now has to bail out the Bank to the tune of around £188bn at today’s 3.5pc 15-year gilt rates.
This is a volatile rate, but there is every chance that it will go up, not down, as the efforts to control inflation are redoubled, and the gilts market itself recognises the very severe fiscal crunch that the UK Government is facing. If gilt rates go up, the bail-out rises.
£188bn is a truly enormous amount of money – dwarfing the Energy Price Cap cost.
The Treasury won’t have to produce the cash immediately, but it will be required to in due course as the QE gilts mature or are sold. What it will have to do immediately is to recognise this bail-out cost in its liabilities – further stretching the already fully-stretched Government finances.
If you intend to hold to maturity it’s normal that you don’t have to mark to market. The most likely run off of these gilts is that they do mature and they’re not rebought. So, crystalising the loss isn’t, in fact, required.
The loss is the loss, of course. But by holding to maturity it becomes more of an opportunity cost loss than one that’s crystallised out…..we;;, that plus the interest differential.
“£188bn is a truly enormous amount of money”
For an individual, certainly – bigger than my heating bill for the quarter is going to be. But it’s less than a tenth of annual GDP, less than 1% of GDP over the 15 years gilt duration.
This paragraph is undoubtedly correct even Tim if I agree the £188bn is a ‘point in time’ calculation
They allowed themselves to be persuaded by radical economists who peddled a strange theory called ‘Modern Monetary Theory’ (MMT). The politicians didn’t understand the theory, but they liked the idea that they could spend money without taxing their electorate, and without raising interest rates.
It’s absolutely vital that MMT is exposed as the snake oil it is. Future prosperity depends on it. So to that end this article is welcome
they liked the idea that they could spend money without taxing their electorate, and without raising interest rates.
To my mind, money is purchasing power. And thus the amount of money in circulation is just a reflection of the volume of goods & services currently available to purchase.That’s ultimately what we use money for, isn’t it? to consume goods & services. One can ignore assets because the money (purchasing power) that is used to purchase an asset ends up with the seller. It doesn’t disappear. So how can anyone think that could possibly work? It just changes the purchasing power of each monetary token. It may change the distribution of goods & services. But it doesn’t create any.
“The politicians didn’t understand the theory, but they liked the idea”
Which again brings us to “the mess we’re in now.”
Shirley the Treasury ( which as we know is all powerful) and the Bank had sufficient “clever people” to explain that MMT was a Weimar-lite solution ?
It is the same sort of groupthink that gives us NetZero and the possibility of the lights going out.
What we need is a FFT – Feline Feeding Theory.