Saying so, they note the chilling effect of the Bank of England and its policy of quantitative tightening on the economy. Not only is this intended to keep interest rates well above their natural rate by oversupplying the market with gilts, which keeps their price artificially low, keeping the interest rate paid on them high, but it also has another effect.
What?
QE was the intervention. To deliberately, specifically, lower long term interest rates (and thus push yield seeking investors out along the risk curve). QT is the reversal of this process, returning interest rates to their natural level. There is a time value to money, real interest rates are still around 1% or a tad under, they’re almost certainly still below that time value of money.
But Spud is insisting that reversing the interest rate lowering intervention – to below the natural rate – is in fact a new intervention to increase interest rates above the natural rate.
Man’s, umm, odd.
That other effect is to realise what seem to be losses on the resale of gilts purchased in the past by the Bank of England. In my opinion, there are no such losses: the purchases and sales are, in fact, unrelated policy decisions. That, however, is not how the Bank sees it, and nor does the Treasury, because they view these issues as if they are microeconomic concerns of separate entities and not and not macroeconomic management issues of a single entity called the government. The result is that the Bank puts pressure on the government to reduce its spending by creating supposedly realised losses that it must account for, reducing its capacity to spend elsewhere.
Wishful thinking, obviously enough. He was perfecctly happy to support government spending the shit out of the QE profit. Well, turn and turn about does happen. Here are the losses, they go onto the same books as the profits.
But because this is Smurf yes, there is another stage of idiocy:
This is the dead hand of neoclassical/ neoliberal economic thinking that fails to take into consideration accounting reality. The consequence is the deliberate creation of an environment where austerity can be demanded where none is required, and to do so is utterly counterproductive to the well-being of the country.
Reeves very clearly has no intention of challenging the quantitative tightening bind sales that are planned at about £100 billion a year, not a penny of which will be used for any constructive economic purpose. If she does not, whatever else she says is meaningless. This policy is intended to thwart any ambition she has and will do so unless she challenges it head on.
Now what is one of the things Murphy continually complains about? That the BoE is paying interest – at 5.25% – on those central bank reserves of the commercial banks. Those reserves, in total at least, are not under the control of the commercial banks. They’re a result of QE in fact. This is what is engendering the loss of course – the gilts that were bought with the newly created money pay 1% (say) to the BoE but the BoE is now paying 5,25% on the other leg of the transaction – the central bank reserves of the commercial banks that were created by QE. That’s a loss. Whether it gets crystalised by gilts sales or just paid out over the life of the bonds makes little difference overall. It’s a loss.
But now think just one more stage. The gilts are sold to the market. The money that QE created now flows back to hte BoE where it is destroyed. That means the central bank reserves fall. So, that means the BoE is now paying 5,25% on a smaller sum of money. The process reduces the interest outflow at the cost of the capital loss.
We’re reducing the interest payment to hte commercial banks. As Smurf demands we do. And Smurf is complaining?
Absolute gem of a reply by the potato in the comments…
I am clearly disagreeing with the BoE. So you can’t say I am wrong beause you think they would think so. You have to argue with what I said – showing it to be wrong. You have not. Why not?
What does that even mean? It seems the sun is over the yardarm very early in Ely this morning
That was my post and he obviously wont publish my reply either.
The man’s a dangerous, ignorant nut job.
This is the dangerous territory you get into once you start sh*t like QE. Its all very well at the start saying ‘Well we agree to do QE, and that the profits will go to the government, but if there’s any losses later on when we unwind it all the government will have to pay’ because the people doing the agreeing at the start (and who get the main benefit from the whole process) aren’t the same people who will get the shaft at the end. And economics being a version of politics for autistic types (who think the individual actions of billions of people can be reduced to numbers and rules) no-one ever considers that the people at the end might not consent to take the shaft they never agreed to in the first place, and that they might do something to stop it. Which they are perfectly entitled to do, as one Parliament cannot bind another. If the government of the day chooses to it can instruct the BoE to do whatever it likes, including ending QT, stopping paying interest on reserves, and indeed not making good the BoE losses if it feels like it.
QE is just another version of MMT – government of the economy over long periods by technocrat. MMT won’t work because of human nature, and as we see with the likes of Spud complaining about it, neither will QE, because at some point someone in government is going to agree with him and say ‘We didn’t agree to all this sh*t, fuck them’ and end it.
Trying to understand the whole process of QE and QT reminds me of how I feel when I try to understand Relativity. I can follow the individual aspects – that bit makes sense, this bit I can comprehend – but put it all together, and it’s ridiculous. This is simply not how the universe or the pound in my pocket works.
I mean, I can follow Tim’s explanations of each individual decision to buy or sell gilts in this post. Each of them makes sense in isolation. But at the end of it, I’m as baffled as to what the whole thing was meant to achieve as I ever was. That the state or central bank would ever borrow money to purchase its own debt is ultimately as absurd to me as the notion that time is not a constant.
Interesting that he appears to admire the Al Qaeda agent Mehdi Hasan and continues to support an overtly fascist organization in the form of Hamas.
Further to Stuart’s earlier contribution – I’ll memorialize it here:
The constructive economic purpose is to reduce the money supply that was increased during COVID times. As we know the relationship between the money supply and inflation.
But this was always planned as a fundamental part of QE, and why QE was carried out as it was, so that it could be reversed when the time was right. This was clearly signposted by the Bank of England at the start and been confirmed at regular intervals since, although you frequently denied it would ever happen.
It’s therefore no surprise that you are still pretending that there’s no reason for it – you didn’t understand then, so why would you understand now?
+1
Reply
Richard Murphy says:
May 8 2024 at 9:18 am
What do you not understand about what I said?
I am clearly disagreeing with the BoE. So you can’t say I am wrong beause you think they would think so. You have to argue with what I said – showing it to be wrong. You have not. Why not?
I described him as the most dangerous man in Britain – I’d probably row back on that statement now as his evident stupidity is becoming clearer by the day and his inability to realise his ignorance as well as an ability to get into fights in a phone booth would seem to have put the kybosh on his political ambitions, but his fundamental ignorance is indeed extremely dangerous – especially when ‘mainstream’ media sources take his pronouncements seriously.
In effect all MMT/QE schemes suggest that one can have something now and someone else will have to pay for it later, maybe much later. MMT says ‘tax away the inflation’ so the people paying the taxes may not be the same ones as benefited from the printed money (though at least inflation arises reasonably quickly once you start printing money so there shouldn’t be too much a of gap between the printing and the taxing). QE on the other hand can seemingly have a very long gap between the QEing and the QTing and an agreement made 15 years ago by one set of politicians and civil servants may very well not be upheld by todays ones. After all why should they? The politicians of the GFC got the benefit from QE back then, Boris got the benefit from the QE during covid (fat lot of good it did him in the end), why on earth should a Starmer government (or any subsequent ones) agree to keep paying billions for QE losses they never agreed to?
The problem with pushing people out on the risk curve is that they will end up falling off.
Jim has a point, it’s turning out no different to Keynesians loving the bit about spending but conveniently forgetting the bit about fixing the roof when the sun shines.
I hate that ‘fixing the roof’ analogy, because fixing the roof involves spending a lot of money. Which is what Keynesians duly do when the good times arrive. “We’re borrowing to invest,” they cry. “We’re fixing the roof.”
in response to Stuart’s dialogue with murphy, i have just sent this.,. it ties the idiot up in knots but i imagine he won’t publish
Richard believes QT is inflationary because rising interest rates increases the cost of money (though the BofE and most economists argue this reduces the demand for money, aggregate demand and therefore is disinflationary).
Question for you Richard if QT is inflationary then is QE deflationary???
I hate that ‘fixing the roof’ analogy, because fixing the roof involves spending a lot of money. Which is what Keynesians duly do when the good times arrive. “We’re borrowing to invest,” they cry. “We’re fixing the roof.”
Fair point.
Fixing the roof is maintaining capital not increasing the value of it. So its not really new investment.
You shouldn’t be creating new borrowing for that, it should be from savings – provisions for maintenance. At best you could argue is that the roof repair savings were used to pay off the mortgage in the expectation that you’d bump it back up by up to the same amount when the roof needed fixing.
But even that’s not the actual argument from Keynes. Instead, in hte good times government should be running a *surplus* to pay down the debt incurred in hte bad times.
Don’t forget, he was writing before the 2 to 4% inflation rate was brought into being in order to pay down the debt to GDP ratio without government having to stop pissing it up against the wall.
The problem with the “fixing the roof” analogy is, from my experience, that in the good times when you can afford to fix the roof, there’s no bloody tradesmen prepared to do such a menial job because there’s loads of more fun things to do instead, such as the government paying you to sit on the sofa watching Vanessa.
I’ve actually got a GOVERNMENT GRANT – FREE MONEY! – to refurbish my shop frontage, and trying to find a tradesman to do the actual work is like prospecting for unicorn shit.