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Umm, matey?

Will it let them fall to a natural rate of 2% or less, which is what the economy clearly needs when inflationary pressure is over, which it will be within a couple of years at most?

Once again Spud is failing to distinguish between real and nominal interest rates.

It is true that there are estimates that the natural rate of interest for the UK is abut 2%. But that’s a real rate. We need to add the 2% inflation target to that to get nominal 4%…..

Third, if I was to get my wish on interest rates, then the current policy of the Bank of England, which is to sell as many of the gilts in its portfolio as it can at present values is a further example of its pure financial folly. That is because when interest rates are higher in the marketplace than when the gilt was issued, then the value of that gilt does, in current terms, fall. The eventual redemption value of the gilt does not, however, change. In other words, if the investor holds the gilt to the end of its life then they will get back exactly what they were promised. So if they don’t sell, they will not make these losses.

Crystalising a loss doesn’t cause the loss, fool. It merely reveals the loss already made.

As here. BoE is getting less than market coupon on its gilts holdings. That’s why they’re below market value. Whether they take the loss as less than market coupon or crystalise the capital loss makes no economic difference.

7 thoughts on “Umm, matey?”

  1. The Bank of England ‘losses’ are meaningless and should never be used to justify fiscal austerity

    We really get to see how absurd humanity can be when put in a neoliberal ideological straitjacket when we see serious discussion by serious and educated people about the government paying itself back for losses it makes by loaning itself currency that it issues as a monopolist. They conduct these conversations through the lens of complicated accounting structures that try to obscure what is actually going on and then invite political commentary from others that have no real idea of what is going on yet feel empowered or arrogant enough to offer all sorts of catastrophic scenarios about the consequences of what is essentially nothing at all. Once one sees through the nonsense it becomes clear that these ruses are just smokescreens for conservatives trying to cut fiscal spending and damage the prospects for those most in need of government support.

    The financial media has been going agog about the reports of growing Bank of England ‘losses’ on its balance sheet as a result of the declining market value of the government bonds it is holding after its bond-buying program.

    All sort of doomsayers are out in force predicting bad outcomes for ‘taxpayers’ in Britain.

    It is in fact a monumental farce but one that is being weaponised by the mainstream economists and politicians to provide another ‘justification’ for unwarranted fiscal cutbacks.


    So you get the picture:

    1. The Bank goes feral pushing up rates until it melts the economy down.

    2. That obsession reduces book values of government bonds it has on its balance sheets.

    3. The Bank insists on selling those assets at a ‘book’ loss even though it could just flick a computer key and write them off completely with no further consequence.

    4. As a result of those losses, and ‘agreements’ with itself (Bank as part of government with Treasury as part of government), the Treasury has to pay the Bank cash to cover the losses, even though the Bank can flick a key and come up with infinity-minus-a-penny in cash.

    5. Then the Treasury informs the British people that it is broke and has to cut welfare spending which damages real people who are already fragile.

    That is what is happening.


    Government bailing itself out.

    The currency-issuer bailing out the currency-issuer.

    Right-pocket getting help from left-pocket.

    The fact is that the Bank of England is not a private corporation that must operate under strict solvency rules.

    The Bank of England could operate into perpetuity with negative capital if it chose.

    The losses are meaningless from the perspective of the government being able to meet spending aspirations.

    There are no spending cutbacks that necessarily follow from these ‘book’ losses.


  2. Quoting Bill Mitchell at me – who I have indeed conversed with – doesn’t convince me of anything.

    How about something more simple. Government took the profits from QE and spent them. Well, now there are losses. Oh, gosh, well, but you decided how this works when you spent those profits. Tough, Matey.

  3. jgh – site is not available – I can’t be arsed to figure out why
    tMB – market yield, I imagine

  4. @ jgh
    I saw the graph – so what?
    When or where capital is scarce the average interest rate is higher. When the liquidity of the loaned capital is restricted, the interest rate should be higher.
    Traditionally it has been reported that the liquidity preference leads to a rate of interest on deposits/gilt-edged of 3%; in the nineteenth century (when a vast increase in wealth resulted from the industrial revolution) many people invested in 2.5% Consols
    None of that suggests that 5% is the *Natural* level for interst rates.
    Currently we have – like in the horrendous Wilson-Healey era – real interest rates of <0%

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