Can’t see the EU ever wanting to get into a bun fight over this with the UK ,they have had enough trouble to cope with within the EZ as it is. As I mentioned, the BoE is still paying interest on the reserves used to buy the APF gilts. They will report a loss upfront. Where does the £25m loss go? I gather to improve his chances Downing put considerable effort into trying to get a war going between England and the Low Countries, this against the specific written orders of his king. You would agree I hope that an entity with more liabilities than assets would be bankrupt. In not doing so, there are significant advantages but the bonds and their risk still exist. By suggesting prepayment (which is just hopelessly wrong, I’m afraid) you would also mean then that the opposite is true. But that was also applicable before 2008 and so the argument is hard to follow…. I have been asked to explain how quantitative easing works, given how important it is within our economy and managing the coronavirus crisis right now. Quantitative easing works through two channels. Quantitative easing is a monetary policy instituted by central banks in an effort to stimulate the local economy. You could do it all through repo, but ultimately the exact mechanism is not that important – as long as we know that it is, which we can see from the APF and WGA accounts. Even if you account for the APF and HMT in exactly the same manner, if you issue a bond at 100 and buy it back at 150 you will likely have lost money. But, economic growth was very slow. There is another advantage to the accounting method used, which is at arms length. QE expands the money supply and stimulates growth. If interbank markets are working normally, which they should be now after all the extra reserves pumped into the system this year, why do they still pay interest on reserves banks hold at the BoE? Any excess liquidity would then go seeking any place to be parked, even at negative yields. Information and translations of QUANTITATIVE EASING in the most comprehensive dictionary definitions resource on the web. Thank you Richard for going to the trouble of delving into these financial processes regarding QE. The mechanics of a QE transaction. If the gilts are never going to be sold, where is the Treasury liability? The difference will be the present value of 10 years worth of 5% coupons. Bonds are loans, or IOUs, but you serve as the bank. In that case the proceeds have been reinvested in the purchase of replacement gilts acquired in exactly the same way as other reacquired gilts, as already noted. Point 11 is just wrong. It is pretty easy to settle unrealized gains. However, without quantitative easing, the recession may have been even deeper. As I mention in my other post, another major reason for the WGA being prepared in the manner they are is to eliminate the fluctuation of Gilt prices on the value of government debt outstanding – effectively simplifying the situation. If we take your consolidation and cancel method, HMT suffers a loss of £25m. You really need to learn to read and understand accounts. OBR, government and BoE all acknowledge that QE has reduced debt servicing costs through lower rates and netting off with APF. In this short video, the BBC’s economics editor, explains the concept of quantitative easing from a British perspective and how it is supposed to work. I much refer the informed opinions who live and work in the real world. Where the Fed is not purchasing short-term debt, but is starting to buy longer term debt, things further down the yield curve. But I thought your point was that that government and the BoE aren’t acknowledging this reduction in debt service costs, when they vry clearly are doing so. The government stopped charging for creating coins at the Royal Mint. But established economists are taking me on on twitter this morning to say otherwise. This pamphlet explains the basic concept of quantitative easing and how low and stable inflation is crucial to a thriving and prosperous economy. It also clearly states that any profits are returned to HMT, and and losses are made whole by the HMT indemnity guarantee. This netting off is not, however, shown in the accounts of the Bank of England because although the APF is nominally owned by the Bank of England all its profits and losses are under written by the Treasury in an agreement dating back to 2009 when the QE programme began. I say in substance it is cancelled. “Quantitative Easing Explained: Putting More Money into Our Economy to Boost Spending,”by the Bank of England, 2010. My stamp collection is only worth something at the point that it is sold. The drive or desire to be rich helps remove uncertainty the degree of which is often the product of insecure parenting. ~And the APF can make neither profit nor loss: by definition. For security reasons, credit card donations require Javascript. Quantitative easing explained QE is a means of creating electronic money to buy in a government's own bonds from the market The Bank of England has spent billions on quantitative easing. This injects cash into the market and creates economic growth. Agreed, the BoE has only recently started paying interest on its reserves. a) If you sell something for a given price, and then buy it back for a higher price you have still lost the difference. • Credit Easing Policy Tools Interactive chart of the assets on Federal Reserve's balance sheet. I also hope that we agree that a fixed coupon bond will always have the same coupons, and bullet maturity repayment. There is no prepaid interest, there is only present value, and what you are saying is simply totally wrong. but that is a full MMT story. There were also the Land Bank gang and the South Sea Bubble mob, and Philip Burmalachi, all of whom seem to have been inspired by the Dutch Finance model. So I did not read your example. c) I’m not sure what you mean by ” rates have reduced servicing cost”. It literally is that ridiculous. Over the years I have taken most financial services exams and this aspect has never been covered in this way. This also explains your confusion regarding the whole of government accounts. They explained this process in the Spring 2014 edition of their Quarterly Bulletin, The vast majority of the money created in this way was used by the APF to buy government gilts from the financial institutions that owned them. Lindsay Deen is a US Represented columnist who works to create activism and conversation in the Colorado Springs community. The GFC happens and markets price interest rate lower – to 2.5%. In points 4/5 you miss out the implication for buying Gilts in the open market. The pressure to fight wars and the consequent taxation and inflationary effects from this eventually resulted in a privately funded Bank of England to control in theory the government’s money creation being set up in 1694. If bond yields have gone down since the date of issue, then the price of the bond will have risen. Far better to have everyone see and that the BoE needs an actual asset (gilts)to justify all this money creation. Yes there is money(reserves) created here but what kind of liability is national currency? Which is a cost. In any understanding of the word “borrow”, what we have now is not borrowing. You still get your 5% coupons, but the increase in price is solely due to the current level of interest rates. ” the whole of the Govts.basis ” the gilts are indeed shown as cancelled. What baffles me more is why so few people question this basic premise. Large-scale purchases of government bonds lower the interest rates or ‘yields’ on those bonds (the investopedia website explains more about bond yields). Any surplus tax legitimately collected by them over and above this amount belonged to them. If you’re still unclear about the phenomenon I refer to as “Queasing,” this should clear up any questions. The APF accounts are done on an MtM basis for accuracy and efficiency, not least because bonds purchased at market prices would have to be written down immediately (for the reasons above) if moved to a different accounting basis comparable to WGA, even though their value would not have changed on an MtM basis. The only possible explanation for this misrepresentation has been that it has suited government purposes to make it. ..and buying gilts from banks and other financial institutions has the knock-on effect of generating handsome fees for intermediaries, which keeps everyone in the Square Mile happy. The BoE buys gilts from banks and other financial institutions who then take the cash and errr…… buy gilts from the government at auction. Silver was taken to the government mints to create coins. Tweets by @RichardJMurphy She knows no one is ever happy with their portion of the pie, but at least everyone gets something in a compromise. As Kimberly Amadeo explains in the balance: make money personal, during the Great Recession that began in around 2007, Quantitative Easing “removed toxic subprime mortgages from banks’ balance sheets, restoring trust and therefore banking operations. b) Why would it? : "http://www. We can tell from the accounts that the MtM gains ARE DEFINITELY passed back to HMT. Whichever way you look at it, QE allows the government to spend without taking money in from anyone. Of course it is not at arm’s length. Primarily for simplicity. Her philosophy: "Let's agree to disagree and find compromises." Quantitative easing (QE), a set of unconventional monetary policies that may be implemented by a central bank to increase the money supply in an economy. Thirdly, with the marketplace coming into existence the private sector needed a medium of exchange. The amounts involved are eye watering ( as they need to be). However, the UK government does prepare accounts on what is called a. When you mention QE into the economy, I take it to mean at the top end of the economy. Once an Inflationary Spiral Gets Going, It Is Really Hard to Stop. The more liquidity, the lower rates would go unless the BoE stepped in and put a floor in place. I am surprised you don’t know this. I have already explained why you are wrong on this, And the Treasury did not lose on repurchasing these gilts, It saved paying future interest to third parties – and that was what the premium represented, And now your posts will be deleted, because I bet bored after a while with people who can’t understand macro issues. Money is either physical, like banknotes, or digital, like the money in your bank account. You can acknowledge it upfront, as you see to want to do with consolidated accounts or you can amortize the cost as HMT has done, but you can’t escape this very basic fact. The Federal Reserve is playing a … Before the great financial crisis, 10y bond yields are at 5% and HMT issues a £100m 10y bond with a 5% coupon. It’s not a liability in any real sense of the word. The first thing you would see if all excess reserves being placed into other return seeking assets – which would promote instability in markets as asset prices would be linked closely to the availability of money market liquidity. It could buy gilts direct from the government (with money it has created) but, for various reasons chooses to buy gilts in the open market. Like lowering interest rates, … What better way to make sure the people don’t get what they want from their government than making sure the government has to have its own bank. So I’d like to turn my attention now to the questions I raised earlier—what the public and some officials have asked us to explain about QE. You start to go wrong at point 9. What I find strange is that people are able to simultaneously believe in an expanding supply of money, but also hold the belief that the government needs to borrow the money it itself has created. has decided to go down the QE route rather than the Ways and means one. HMT itself now shows assets of £125m (£100 from sale of bond, £25m from APF) and liabilities marked to book of £100m, but the ammortised cost of repurchasing the bond is still £25 over the life (because they have locked in a sale at 5% and repurchase at 2.5%). HMT has made it’s money back – as well as front-loading the £25m to today and spreading it’s cost over 10 years. The tallies issued by government departments in payment for goods and services were, in effect, cheques drawn on the farmers of those taxes which had been hypothecated for the supply of those goods and services, which the farmers of those taxes were obliged to honour from the cash they were holding in revenues from those taxes. The accounts of the APF make this clear. As I said, this is part of a much bigger piece and did not cover all issues, The bigger piece covers much of what you say, but is not finished. If interest rates move lower to 0%, that bond will trade at 150. Who wins ? If you those bonds were cancelled when bought at £125m, that £25m loss is locked in. By flooding the economy with a greater money supply, governments hope to maintain artificially low interest rates while providing consumers with extra money to spend more freely, which can sometimes lead to inflation. Only thing to say is that it all seems a bit academic if the bonds are never sold back into the bond markets anyway. First, here's the an explanation of QE: Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. Quantitative easing is a process that involves the following operations: [1] https://www.bankofengland.co.uk/monetary-policy/quantitative-easing, [2] https://beta.companieshouse.gov.uk/company/06806063, [3] https://www.bankofengland.co.uk/monetary-policy/quantitative-easing, [4] https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/quarterly-bulletin-2014-q1.pdf. If you do it the way things are currently done, you get a distinct advantage. There is also the suspicion that this will also allow the BoE to keep pretending that it cannot on its own resources sustain gov spending by the Treasury(via Ways and Means) as this risks awkward questions about where the BoE is getting its reserves from we can’t have people seeing that money can be created out of thin air! Richard Murphy on tax, accounting and political economy. The interest payments from bond coupons net out, but the mark to market gains and losses don’t. Copyright © 2018 US Represented. So HMT repurchasing the bond will not save them anything. The value of those coupons are already priced on a present value basis, so buying them back doesn’t achieve anything in terms of “savings”. Because the accounts of the Bank of England do not include a consolidation of the APF the Bank of England’s accounts do not reflect the APF asset holding, and do instead show the loan account balance owing by the APF, which is actually effectively payable by HM Treasury as a consequence of the Treasury’s agreement to indemnify the Bank of England with regards to the Bank’s operation of the APF. It is interesting the govt. That same loan is, of course, an asset on the balance sheet of the Bank of England, and the two sums do balance each other out. So if, as in my example, HMT issues a bond with a 5% coupon when rates are at 5% that bond will trade at 100. The fact some separate accounts e.g. The Bank of England acknowledge this in the statement noted previously. var sc_invisible=0; So this is a kind of a fig leaf to cover the BoE’s /Treasury’s modesty. After that there is no risk because the Treasury owns both sides of the arrangement. These included banks, building societies, pension funds and life insurance companies as well as some overseas and private owners of these assets. You claim the treasury makes a loss on purchase, which rather bizarrely means you think the bond is legally cancelled; it could not do so otherwise. I believe it was after the 2008 crash as a way of giving the banks yet another subsidy in hard times…poor souls. A city may sell bonds to raise money to build a bridge, while the federal government issues bonds to finance its spiraling debts.”. Yet we still have the government, the media and most worryingly of all ,the opposition still using the term “borrow” to explain how we are now having to spend more than we tax in take. Doing it the way they have is the most efficient way to manage the situation – even if it doesn’t meet your standards. Should interest rates rise, the APF and therefore HMT would suffer losses on the bonds it holds. So, in short, QE could cancel bonds, but there would be a cost associated with doing so – and quite a substantial one. So still a net loss of £25m. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence "quantitative" easing. So they say it works by lowering interest rates, not just by printing money. Of course, there is a downside to doing things the way they are. c) For example: https://obr.uk/forecasts-in-depth/tax-by-tax-spend-by-spend/debt-interest-central-government-net/. Money creation is a be duty of any Sovereign power. Banks are all about creating debt. The loss is still very real though – HMT has simply repurchased the bond it issued at a higher price. If they decrease in value the APF would be bankrupt, and would need money from elsewhere to remain a going concern. Which is why bond prices change. Of course, one then has to explain the limits of this ability (inflation etc.) Secondly, governments like the UK would issue credit money in the form of tally sticks without a central bank. Quantitative easing can take several forms, depending on the assets the central bank buys, from whom it is purchased, and in what amounts. The premium is prepaid interest to be unwound over the remaining life of the gilt previously contractually arranged, and still paid but with this cancelling the income on return to the treasury, so stating interest cost at originally contracted price. In a nutshell politically motivated “smoke and mirrors” is being used to deny all the citizens of the UK an equitable Integrated Supply and Demand Policy. [6] https://webarchive.nationalarchives.gov.uk/20091204191052/http:/www.hm-treasury.gov.uk/d/chxletter_boe050309.pdf. You have to look at all of this from a psychological viewpoint. The Houblons, one of whom had been out there at the same time as Downing, actually managed to get the CB going, probably because unlike Downing they applied to do so at a time of war when monarchs were traditionally scratching for readies. The U.S. central bank engages in quantitative easing to influence the economic activity and increase cash in order to stimulate the economy as a whole. As a result, current market prices were paid at the time of the reacquisition of these gilts by the government. That’s it. I hope that much at least is not controversial. We then use it to buy things like government debt in the form of bonds. Maybe they're starting to buy mortgage-backed securities. Now, with quantitative easing, the Federal Reserve buys bonds at a slightly higher price than anyone else in the market is willing to pay. The premium is porep[aid interest not now due. Re point 11 in your summary, am I right in thinking that the smoke and mirrors effect of interest paid on such gilts also works it way into the GERS figures as part of mysterious “accounting adjustments” charge? Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing is a sneaky way to make everyone dealing in U.S. dollars pay off the U.S. debt. Please visit our Private: Data Protection & Cookie Policy page for more information about cookies and how we use them. The WGA would show a liability of £125m (repurchased bond) vs an asset of £100m (cash from original sale of bond). The £25m profit can be passed back to HMT. The government and BoE’s narrative is that QE has reduced debt servicing costs. The coronavirus pandemic has been a … Take a £5 note to the BoE for redemption and they will give you another £5 (or maybe 5 x £1 coins). It might be an accounting technicality, but doesn’t mean those bonds are cancelled. A very clear explanation of a very complicated process. Jonathan Portes says I am wrong because there is a new liability – the new money, Along with his claim that they are equal and opposites. The BTL arguments as usual also very helpful. As it turns out, there have been profits to date on QE operations, but accounting for it in this manner means that losses are also possible, should interest rates rise. That will be true irrespective if the bond is never re-sold to the market – the loss will be locked in. document.write(""); Tax Research UK Blog is written by Richard Murphy unless otherwise stated and published by ​Tax Research LLP under a Creative Commons Attribution-NonCommercial 3.0 Unported License. What does QUANTITATIVE EASING mean? Been even deeper also not true fixed amount with a yield of 0 % question has been that BoE! Fed is not a sham that the MtM gain is the second post in three-part! And the government is fixed EU since their creation earlier where the Fed is not.! Of money governments used to buy things like government debt in the which... Cash in settlement of their obligations to the Exchequer given your changed circumstances forcing repayment of the assets it owns. Them over and above this amount belonged to them but some of that value is.! Been that the gilts they hold fig leaf to cover the BoE about... 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