City Am Calls Repayment Of Qe A Load Of ********

[bmf]

http://www.cityam.com/latest-news/allister-heath/we-need-open-contest-decide-who-will-run-the-bank

CANCEL THE BANK’S GILTS

Speaking of which, in theory the Bank of England will eventually sell back to the markets the £350bn or so in gilts it will own as a result of quantitative easing (QE). Yet I doubt this quantitative tightening (QT) will ever happen. The UK will still be borrowing too much for years to come.

A more honest and preferable option would be for the authorities to admit that the £350bn has been permanently monetised and for the Treasury to cancel all of the gilts owned by the Bank – in other words, admit that the Bank has permanently created more money, and used that to pay off government debt. Do taxpayers really need to be paying interest to the Bank on the gilts that it holds? A cancellation would cut the UK’s debt to GDP ratio from 63 per cent to 41 per cent, and slash the interest bill on gilts from £50bn to £32bn per year. The Bank holds these gilts on behalf of the Treasury, so the Treasury is paying interest to itself (and regardless of definitional niceties, the fact is that the state is borrowing from itself).

As M&G’s Jim Leaviss points out, the gilt cancellation could take place using the same process and precedent set with the cancellation of £9bn of UK of gilts acquired from the Post Office pension scheme in April 2012. No default would take place (so there would be no CDS trigger and no D from ratings agencies only interested in failures to pay private investors). Of course, the credibility of UK monetary and fiscal policy would be badly shaken – but that is at it should be. We have a major problem – pretending otherwise doesn’t help anybody.

ps the title is b0ll0cks - I restrained myself yet still it's starred out!

Edited April 12, 2012 by bmf

[okaycuckoo]

http://www.cityam.co...ll-run-the-bank

ps the title is b0ll0cks - I restrained myself yet still it's starred out!

Not a legal move. We're in the EU and can't pull a fast one like that. Sure, we can devalue the £, but that's a different story, already done.

[bmf]

Not a legal move. We're in the EU and can't pull a fast one like that. Sure, we can devalue the £, but that's a different story, already done.

And the EU can't have circular accounting to fund it's own deficit? How is the EU in control of our central bank's issuance and repayment of debt?

Rules are overrated when things get tight in any case. Retrospective laws were added to contracts when Greece went under.

[no accountant]

Not a legal move. We're in the EU and can't pull a fast one like that.

The EU will probably fall to pieces soon, so we won't be in it for long.

More importantly, it is really worth us slogging our guts out to pay tax to repay these bonds, when we could just cancel them like the article says? The existing bondholders are then even more likely to be repaid, hence yields might drop further. (Unless the market thinks will do it again and cause proper inflation...)

[bmf]

Not a legal move. We're in the EU and can't pull a fast one like that. Sure, we can devalue the £, but that's a different story, already done.

Hey good news - they just outlawed mortgage fraud, politicians lying to get votes and war!

This quote from Napoleon springs to mind:

A throne is only a bench covered with velvet.

[okaycuckoo]

And the EU can't have circular accounting to fund it's own deficit? How is the EU in control of our central bank's issuance and repayment of debt?

Rules are overrated when things get tight in any case. Retrospective laws were added to contracts when Greece went under.

That's what bankers want you to say - the law doesn't matter. So they can get away with breaking the law.

It's your own grave ...

[bmf]

That's what bankers want you to say - the law doesn't matter. So they can get away with breaking the law.

It's your own grave ...

It's not against the law for the BoE to never rescind QE so this point is pointless!

You think they are going to pay back QE then? Merv - is that you?

[57percent]

My feeling is that it'll never get reversed (maybe a small part)

Right now it's just 2 accounting entries. Wait for a quiet time and scrub them both out.

But do we know what'll happen to the interest?

[okaycuckoo]

It's not against the law for the BoE to never rescind QE so this point is pointless!

You think they are going to pay back QE then? Merv - is that you?

There you have it - that is the conundrum, and we'll be living with it for decades.

But it doesn't mean gilts can be cancelled.

[MongerOfDoom]

The EU will probably fall to pieces soon, so we won't be in it for long.

More importantly, it is really worth us slogging our guts out to pay tax to repay these bonds, when we could just cancel them like the article says? The existing bondholders are then even more likely to be repaid, hence yields might drop further. (Unless the market thinks will do it again and cause proper inflation...)

Why "slog our guts out" at all and pay any tax whatsoever? We just issue some bonds, buy them back, and cancel them. I really cannot see a flaw with that plan. And we could give everyone in the public sector a payrise too, and the rest of the country could be given huge tax-credits!

Edited April 12, 2012 by MongerOfDoom

[57percent]

Why "slog our guts out" at all and pay any tax whatsoever? We just issue some bonds, buy them back, and cancel them. I really cannot see a flaw with that plan. And we could give everyone in the public sector a payrise too, and the rest of the country could be given huge tax-credits!

Gordon?

[goldbug9999]

A more honest and preferable option would be for the authorities to admit that the £350bn has been permanently monetised

Forgiving the debt would would cause rampant inflation. As a big saver I would make a bigger real loss on my savings than I would save nominally in tax.

[Game_Over]

http://www.cityam.com/latest-news/allister-heath/we-need-open-contest-decide-who-will-run-the-bank

ps the title is b0ll0cks - I restrained myself yet still it's starred out!

Well this is exactly what I keep saying has happened when people claim that the Government has printed money and given it to the evil banksters

The government has printed money and given it to itself via the banks who have taken a cut

the problem is government deficit spending NOT insolvent banks

the sooner people realise that this is a political problem the sooner something 'might' get done about it

[benzlife]

This chap's response is quite tame compared to how most of the country feel about banking and government....................

[quick Prime minister, the serfs are getting uppity, give the police more powers so they can protect blatant government theft]

Can you post a link to that video please. Want to share it!

[Bland Unsight]

Surely QE was always a wheeze

At the time they could pretend that they weren't monetising the debt. If by some miracle things weren't as bad as they looked in 2008, they could then have sold the gilts back to the market. If things were much, much worse then the thought was presumably that whatever stunts the EU was going to have to pull to get out if its mess would be as nothing compared to a little harmless QE.

As to how or who it helps to monetize the debt or why they think it helps, that's all up for discussion.

QE was the Bank saying, "We are pretty sure that the world financial system is broken so it's every man for himself. Good luck!" We are in a new world and will write new rules, and just like normal in all human endeavour, we will be making it up as we go along.

I pointed out in another thread that the boys at M&G Fixed Interest do like a bit of special pleading. I bet that if you see their financial statements for the last quarter you'll see millions of pounds being pulled out of bonds, driving down their fees because 1.5% of less is less than 1.5% of more.

IMO this is another clue that investors are dividing into two camps, those who think that the UK is going to deal with this debt by paying it off or forgiving it whilst maintaining low inflation and those who think that they are going to inflate it away.

Paying it back is impossible; we've got mortgage lenders capitalising arrears, probably 60% of all CML lenders are already zombified and pretending they aren't. There's every reason to think that 10% of the £1.2 trillion CML loan books is just fiction.

Forgiving it is a political nightmare.

[MongerOfDoom]

Gordon?

No, no, it's not me at all. To prove it, my other ideas are i) a few more aircraft carriers, ii) another Olympics, iii) using the free money to pay the interest on new borrowing to be spent on overseas aid, iv) buying up all the available copies of the Big Red Book of New Labour Sleaze, v) introducing a 10 bedroom LHA rate set at 3% of GDP, and vi) making sure the golden rule is never broken again.

[long time lurking]

. Do taxpayers really need to be paying interest to the Bank on the gilts that it holds? A cancellation would cut the UK’s debt to GDP ratio from 63 per cent to 41 per cent, and slash the interest bill on gilts from £50bn to £32bn per year. The Bank holds these gilts on behalf of the Treasury, so the Treasury is paying interest to itself (and regardless of definitional niceties, the fact is that the state is borrowing from itself).

Will never happen the BOE is privately owned doing the above would seriously affect the living standards of the owner`s of the BOE

The treasury borrows from the BOE and pays interest to them just like we would do if we borrowed from HSBC

[DungBeetle]

Not a legal move. We're in the EU and can't pull a fast one like that. Sure, we can devalue the £, but that's a different story, already done.

We never signed that agreement, there are no rules stopping us doing this.

[DungBeetle]

Will never happen the BOE is privately owned doing the above would seriously affect the living standards of the owner`s of the BOE

The treasury borrows from the BOE and pays interest to them just like we would do if we borrowed from HSBC

What a load of conspiratorial nonsense.

[zugzwang]

Here's my 2p.

(Caution advised, I am NOT a banker.)

The only reason we haven't seen Weimar-type inflation thus far is because the QE cash has been largely confined to the banking system. The commercial banks have returned much of it to the BoE whence it originated, where it earns a notional 0.5% on deposit.

The commercial banks are profit-seeking enterprises. Since the original QE cash showed up as a liability on their balance sheets (transaction deposit?) they were obliged to generate assets on the other side of the ledger, or risk failure. They also expect QE to be reversed.

As the BoE reverses QE, so the commercial banks will draw down their deposits with the Bank and exchange them for the superior yield of 'risk-less' gilts. ~3.0% on the 20 yr ain't much but it's way better than 0.5%.

If the BoE doesn't reverse QE then the banks will go in search of yield elsewhere, releasing up to £325bn of new money into the economy proper. This has the potential to be wildly inflationary, to say the least.

[easy2012]

Naive article - v. similar to one by the Bond Vigilantes the other day.

Illegal under EU rules.

Any profits/losses are the Treasury's anyway.

Might as well just wait until maturity to avoid any accusations of debt monetisation and just spin it out.

(don't forget £300bn of printing buys a hell of a lot more bonds than £300bn if the money keeps being recycled to buy more and more bonds - but no more than £300bn at a time)

Can't BoE setup a SPV to hold all the UK Gov debt and then the Treasury acquire the SPV at half price or whatever and then cancel the debt so that the BoE can continue to pretend that it is independent from the Treasury (and does that get round EU law ? )

Actually, Ben was asked this question in the past, and he said then "the currency will not be backed by the bonds".....

LOL.

[Sour Mash]

Well this is exactly what I keep saying has happened when people claim that the Government has printed money and given it to the evil banksters

The government has printed money and given it to itself via the banks who have taken a cut

the problem is government deficit spending NOT insolvent banks

the sooner people realise that this is a political problem the sooner something 'might' get done about it

You seem to forget that the BoE swapped huge amounts of treasury Gilts for toxic bank crud, much of which no doubt ended up being purchased under QE and giving the banks large amounts of cash to play with.

EDIT: I do agree that the government used the opportunity to monetise it's own debt too, of course, but the banks benefited by more than just the risk-free cuts they made on fencing bonds from the treasury to the BoE.

Edited April 12, 2012 by Sour Mash

[rit]

Not a legal move. We're in the EU and can't pull a fast one like that. Sure, we can devalue the £, but that's a different story, already done.

Sorry but it's all very legal, and very likely once the UK government get to the point of issuing fewer new bonds due to lower borrowing. Its has a number of advantages beyond the ones already listed.

1) The BOE has been purchasing bonds of 10 years or less, so removing them means that the UK government will not have to issue bonds to cover the near term repayments.

2) Any increase in the interest that the UK Government has to pay on new bonds after pulling this stunt will be less that the likely increase seen if the £350B of bonds were placed back in the market.

3) It will stop all the reports about how much money the bankers will make if the BOE trys to resell these bonds.

If Lab wins the next election this is a 100% cert as the market will raise the cost of borrowing just because it's Lab. If the Lib/Con win I would say 75% chance.

[Bland Unsight]

Here's my 2p.

(Caution advised, I am NOT a banker.)

The only reason we haven't seen Weimar-type inflation thus far is because the QE cash has been largely confined to the banking system. The commercial banks have returned much of it to the BoE whence it originated, where it earns a notional 0.5% on deposit.

The commercial banks are profit-seeking enterprises. Since the original QE cash showed up as a liability on their balance sheets (transaction deposit?) they were obliged to generate assets on the other side of the ledger, or risk failure. They also expect QE to be reversed.

As the BoE reverses QE, so the commercial banks will draw down their deposits with the Bank and exchange them for the superior yield of 'risk-less' gilts. ~3.0% on the 20 yr ain't much but it's way better than 0.5%.

If the BoE doesn't reverse QE then the banks will go in search of yield elsewhere, releasing up to £325bn of new money into the economy proper. This has the potential to be wildly inflationary, to say the least.

I don't know squat about central banks but I can read a balance sheet, and if there are £325,000 million deposits from other banks on the Bank of England's balance sheet, they they are hiding them very, very well - this is the balance sheet from the Bank's 28 February 2011 financial statements the column heading I've trimmed off is £m. You can find the financial statements here

One assumes that the zombies have all got this stuff on deposit with each other. It was a solvency crisis - no one would lend to UK banks apart from the UK government. I would assume that they can't get their hands on any cheap funding apart from by lending to each other in a kind of suicide pact. That's why ISA rates are climbing. I read somewhere, I forget where, that LIBOR is so fictitious now that trading desks just go onto MoneySavingExpert and compare ISA rates to see the real cost of funding for their competitors.

IMO the zombies yield chasing days are over, these days the yield chasers come to them. And, to bore people again with my pet theory, when the yield chasers do come Merv chases them off by firing up his money printing machine

[rit]

Here's my 2p.

(Caution advised, I am NOT a banker.)

The only reason we haven't seen Weimar-type inflation thus far is because the QE cash has been largely confined to the banking system. The commercial banks have returned much of it to the BoE whence it originated, where it earns a notional 0.5% on deposit.

The commercial banks are profit-seeking enterprises. Since the original QE cash showed up as a liability on their balance sheets (transaction deposit?) they were obliged to generate assets on the other side of the ledger, or risk failure. They also expect QE to be reversed.

As the BoE reverses QE, so the commercial banks will draw down their deposits with the Bank and exchange them for the superior yield of 'risk-less' gilts. ~3.0% on the 20 yr ain't much but it's way better than 0.5%.

If the BoE doesn't reverse QE then the banks will go in search of yield elsewhere, releasing up to £325bn of new money into the economy proper. This has the potential to be wildly inflationary, to say the least.

Sorry but thats complete and utter twaddle. The whole point of QE is to purchase bonds from bond holders who then mainly just purchase more bonds and so allow the government to continue the process of issuing more of them. If this has not happened the current yield on UK bonds would not have dropped in the way it has. The main players in this game are the bond market makers who have made rather a lot of money from the additional volume of business created. They have been purchasing bonds from the market and as the BOE issues new ones, held on to them and then sold them when the BOE has gone to the market to purchase bonds.

Banks do hold UK bonds, but that is more because they have to hold a percentage of high grade assets and UK bonds are still AAA, they also do not suffer from currency risk unlike say german bonds. Banks are also able to get away with holding short dated bonds without reporting profit and losses from price movements so they can hold the bonds and just book the interest payments as a profit.

What Banks do is place their short term deposits with the BOE overnight - so earning the 0.5% this is not £350bn created from QE.