Quite so, quite so

The seed had nevertheless been sown for the later magic money tree, which duly blossomed in the madness of the pandemic; the always thin line that separates the legitimate pursuit of the inflation target from overt monetary financing of government deficits was deftly and massively breached.

There’s that element of the MMT argument which is true. Govt can print money to spend it. And as I’ve been saying for 15 years now, when it is printed to be spent then that’s when the problems start. MMT being one of those things that can be done but shouldn’t be.

In essence, QE is the financing of government bond purchases through the creation of short term central bank reserves. Investors swap their bonds for reserves. This works fine, and to the advantage of governments, as long as interest rates are falling, for what is basically happening is that expensive long term debt is being replaced with less costly short term debt. The resulting profit from the interest rate differential would then be transferred from the central bank to the sponsoring government. A recent Bank of England paper estimated these transfers at £123bn since the start of QE in 2009.

Unfortunately, the tables are now reversed. With the return of inflation, the interest rate on reserves has risen above that of the average in the Bank’s £847bn holding of government bonds. Having banked and spent the previous profits, governments are now being forced to finance the consequent losses.

This is also true and nicely put. And it does lead to an observation. Spud³ insists that the Bank should stop paying interest on reserves. Which seems to be a socialisation of the profits and a privatisation of the losses. For govt has collected and merrily spent that £123 billion already, hasn’t it?

2 thoughts on “Quite so, quite so”

  1. “the always thin line that separates the legitimate pursuit of the inflation target from overt monetary financing of government deficits was deftly and massively breached.”

    There is no line. QE is always monetary financing of government deficits, aka printing money and spending it. Its just that the consequences of that money printing vary depending on the economic circumstances in which you do it. There is no way the UK government could have spent as much money as it did during and after the GFC if there had not been QE. Gilt yields would have risen and a funding crisis would have ensued. Much as it has done this autumn. QE enabled the UK Government to keep spending like the archetypal sailor. Which is fine when you face a deflationary crash. QE1 definitely created inflation, you only have to look at the data – inflation was dropping rapidly through 2008 and 2009 but reversed rapidly in the opposite direction once the QE money hit the economy, reaching about 5% in 2012. So the idea that QE1 was not inflationary is for the birds. It did create inflation, the reason it was not as bad as today was that in its absence inflation would probably have gone negative, there would have been a Depression.

Leave a Reply

Your email address will not be published. Required fields are marked *