Simon Jenkins says in the Guardian this morning:
It must be the biggest confidence trick of all time. It is a cheat, a scam, a fiddle, a bankers' ramp, a revenge of big money against an ungrateful world. It is called quantitative easing, and nobody has a clue what it means. According to the Bank of England, the past four years have seen £325bn pumped into the British economy to kickstart growth, with another £50bn now on the way. This enormous sum does not exist and never has. It is not "printed" money or funny money. It is no money. The one silver bullet on which the coalition relies to pull Britain out of recession is a fiction.
His argument is that no one knows what the £375 billion in question has done, so let me tell you. My data sources for what follows are the Bank of England and HM Treasury. I've prepared the following table from their data:
The first line is new debt issued in the year. For this purpose I exclude debt in privatised banks.
The second line shows quantitative easing issued. Remember what QE is: the Bank of England says:
Between March and November 2009, the MPC authorised the purchase of £200 billion worth of assets, mostly UK Government debt or “gilts”.
"Mostly" is a loose term hee: more than £199 billion was gilts. It has been in the subsequent purchases.
Now what that means is that the Bank of England, which is owned by the government, has paid HM Treasury, which is part of the machinery of government, £325 billion to buy debt issued by the government. I agree that it is true that the nominal value of the debt purchased may not have been the same as sum paid for it: I have not got a statistic on that. But although that point is important it does not change the substance of the matter. The reality is, as I have explained before, this means that in any proper accounting system that produced a single set of accounts for the government that debt that was repurchased would have been considered to be cancelled. That's because you can't meaningfully owe yourself money, and yet that is precisely what is happening here. The Treasury owes the Bank of England money but as it in effect owns the Bank of England it therefore owes itself the money and as such the debt has simply been cancelled.
Now there are some who might say that this is the language of the Mad Hatter's Tea Party - that I am talking in riddles to go round in circles. But that's not what I am doing. I am saying that the arrangements used in QE hide this economic reality and that is all the mumbo jumbo is cleared away what is happening in QE is that money is being printed to clear the government's deficit and that debt is not really being issued at all. Precisely because we are in a slump - not just a recession - that money can be printed without major fear of inflation, and indeed without inflation risk at all if the banks could be kept out of the loop.
But that also means that, as a I show in the table above, we haven't giot national debt of just over a trillion now, it's just under £700 billion. Now that's a lot, but it's only 45% of GDP and that was so commonplace during, for example, the Thatcher years that no one noticed it.
That though has ramifications. First, it means the whole debt paranoia is wrong. Debt is not rising at the level claimed by the government. Secondly, the focus can then move onto paying for services. That kicks in the tax gap debate. Third, it means Labour can honestly say it is not constrained by having to repay debt to future generations - because well over half of all debt issued since 2008 has already been repaid.
That doesn't mean we're not still in crisis. All this can happen simply because we're in a slump. But what it does mean is that the slump and not the debt should be the focus for debate precisely because it is the real issue.
So can we do that now, please?
[…] Someone just asked on Twitter if they could do the debt cancellation trick that QE represents. […]
Long, long, long ago a Coalition government came together and said that Canada’s debt reduction in the 1990s was its model.
This model of debt reduction undertaken by Canada 1994-98 has as its political genealogy: Jean Chritein, his finance minister Paul Martin and Crow at the central bank undertook reduction of the public sector while the anti-waste ex-broadcaster Ralph Klein looked to be making political progress with his anti-debt populism: this led to the Canada’s little slump with unemployment at over 11% . Klein cited as his model Roger Douglas of New Zealand, who came to power there in 1984. Douglas and his followers from the University of Canterbury were influenced in a roundabout way by reading Milton Friedman’s Free to Choose: 1984-99 New Zealand GDP grew at the slowest rate of any western world country. See Brad DeLong’s Project Syndicate article from a couple of months ago ‘Re-Capturing the Friedmans’ to cap off the journey which takes us back to the wrong turn in understanding the 1970’s stagflation.
When the BoE purchases gilts it will not be doing it directly from the government – there is still a market in government bonds. So do you have any figures of how much brokers are paid to perform this sleight of hand? It seems to me that one effect of QE is to provide a subsidy to the City through these QE transactions.
The other question is: has anyone got any plan for reversing QE? The MPC is irresponsible from a board governance point of view when they make the decision of more QE if they do not suggest how the QE will be reverse. Osborne also must have some policy on the reversal of QE: why isn’t this well-known? It is impossible for QE to be reversed short term (ie before the end of this Parliament) so if Osborne does have a policy of reversal then it can only occur at some point in the future, in which case he is just as guilty as any Labour politician of piling debt on future generations. If he has no policy of reversing QE (which I suspect is the case) then he should be honest and say so.
The reality is QE will never be reversed – precisely because there is no demand in the market for that much UK government debt
To try to sell it back would demand a level of saving that would kill the economy
The government seem to be doing their best to kill the economy (along with increasing numbers of the population) as it is – so I wouldn’t put it past them!
QE does not cancel government debt, it merely transforms the nature of it. Instead of the government owing £325bn to bondholders, it now owes £325bn to the UK banking system in the form of central banks reserves that are now on the banks balance sheets (http://www.bankofengland.co.uk/markets/Pages/apf/results.aspx#). Cancel this debt and the UK banking system goes bankrupt. The benefit of QE has been to create demand for the significant new issues of gilts (and avoid our rates heading to Spanish levels) and to cut the effective cost of borrowing on the £325bn from 4% odd to the 0.5% it pays the banks to fund QE.
Graph showing increase in reserves: http://www.bankofengland.co.uk/markets/PublishingImages/images/liabilities_assets.jpg
QE will not be reversed in the foreseeable future, but it will eventually be reversed because otherwise it will mean that our economy is permanently stuffed!
I have to say you really don’t get it
The cash in the form of central bank reserves could have been created without the debt – and what you don’t get is that money is literally created out of thin air to do that
I suggest you go and learn about the nature of money
As an accountant I suggest you look at the Bank of England accounts and how they reflect a mirror image of the banking sector accounts. Only the Bank of England can create reserve and they are a debt to the bank system and hence an asset of the banks.
I have a bond worth 100
I sell it under QE, I get a 100 transfer to my current account, which the BOE affects by creating 100 of central bank reserves for the bank. My 100 in a current account (a liability to my bank) is now backed by the 100 in central reserves (an asset to the bank on which the BOE pays it interest). Simple double entry accounting.
In the BOE’s books, it now has a 100 central bank reserves (a liability) backed by 100 of gilts that it owns. Again basic double entry accounting.
There is plenty of information on BOE website you can read so you can learn how it works
You are ignoring the fact that the BoE is a subsidiary
I am referring to the gov’t group accounts
And there the accounting works as I suggest and not as you do
You are caught in the minutiae
Once upon a time, a fortunate young man who had attended the right schools and university was given the tough job of handling the finances of a large operation. Let us call him Gideon. Gideon’s business account fluctuated heavily but fortunately his rich uncle Jacob transferred large sums to Gideon’s deposit account from time to time so the bank was not too concerned.
Gideon loved the high life and he decided to take a holiday in Montenegro where there were large yachts, luxury bars and restaurants – also many attractive, friendly and expensive young East European girls. Many people here he thought he had also seen in Corfu and Klosters. Then he spotted nasty Mandy sitting in the shadows sipping European champagne from a silver tankard with two young pretty boys.
All good things must come to an end and when Gideon returned home he found a letter from the bank. He had exceeded the limits on his platinum card and his business was well overdrawn. In panic he drew up a new business plan and made numerous of his staff redundant.
Meanwhile the bank had discreetly contacted uncle Jacob, knowing that he was also a major shareholder of the bank, and another large quantity of funds was eased into Gideon’s deposit account. The bank liked this business because they could charge Gideon various fees and interest for exceeding his limits and they also made an administrative charge of 3% to transfer sufficient new funds from his deposit account to clear the overspending. Uncle Jacob was also happy because his bank shares were gaining value and Gideon’s business was also paying him handsomely.
All fiction, of course, Richard!
I’ve been saying this for ages.
The analysis leads to one of two conclusions:
1) The Government is totally incompetant and does not understand basic accounting.
2) The Government is lying to the public about the scale of the debt to push through it’s neoliberal agenda.
It’s probably a mixture of both.
Dave
never under estimate the power of old ideas which one has been brought up with.
Thomas Kuhn 50 years ago wrote a book, the Structure of Scientific Revolutions. he popularised the term ‘paradigm shift. When scientific paradigms change, they rarely do so because of emotionless calculation by intelligent people. new ideas are often resisted with personal attacks, ignoring or easy dismissal of evidence, emphasizing the old and so on. The new was often only accepted when the old guard retired or died.
Economics often has more characteristics of religious belief than of a science.
Forgive me Richard, if i have said this before-but it probably bares repeating.
You’ll be welcome to say it again
Timely now to remind any possible new readers here of my associate Chris Wallers popular (and LONG!) article based around that very subject, Time for a New Reformation.
Too bad QE does not ease the debts problems behind the repossessions of the homes whose values were bid up to socially unhelpful heights by the banks.
It could…
[…] listen. Because they don’t I have to come to the conclusion they want a deficit and to pretend we are in debt than is actually the case instead of wanting to tackle the tax gap to pay for the public services […]
How long will it take for the gilts to mature and what do you think will happen then?
When the gilts mature we have a relationship from the gov’ts left pocket to its right pocket – a none event
Or they’re just replaced – indefinitely
Next problem?
Please can I ask, is anybody else out there (economists, mainstream media) picking this idea up?
Because it really does appear to answer the $64 billion (or indeed trillion) dollar question.
As this is almost an aside from your main work, it is as if you have discovered a second Higgs particle in your garden shed over the weekend, and CERN didn’t know about it. Is anyone in the MSM on this, or not?
Those who think about these things a) seem unable to think big macro systems b) don’t understand accountancy c) can’t link economics and accountancy together
The result is as far as I know I’m pretty much alone in this argument
That doesn’t mean it’s wrong
If it was wrong they’d have to be saying the BofE isn’t actually ours after all. I look forward to that! Anyway, the Tories themselves did something similar back in Thatcher’s day, they had one part of government obligingly write off a debt owed it by another part of government and then held the resulting drop in the National Debt up as example of their fiscal prudence. This was uncovered after FOI requests by one James Gibb Stuart and you can read about it in his book The Money Bomb. So the idea’s not actually new, just kept secret.