House of Lords: "BoE addicted to creating money"

[Zzzzzzzzzzzzzzzzzzzzzzzzzz]

Ouch, ouch, ouch - have never seen the Bank of England under so much pressure from such senior people, before... it's about time!

https://www.politico.eu/article/uk-inflation-jumps-by-2-5-percent-turning-heat-on-bank-of-england/

[Si1]

Notayesmaneconomist lays into QE with Lucille the baseball bat - devastating 

https://notayesmanseconomics.wordpress.com/2021/07/16/bank-of-england-qe-is-coming-under-increasing-fire-as-inflation-rises/

 

[A.steve]

2 hours ago, rantnrave said:

... and by the end of 2021, the Bank will own an eye-watering £875bn of government bonds and £20bn in corporate bonds.”

Hmmm...  Do you believe those figures?  (They surprised me...)

Sure, I expected that the BoE would have a lot of government debt on its balance sheet - but I had anticipated *much* more corporate debt.  The practise announced as being “QE” involved “doing the twist” as Bernanke put it… buying long-dated low-risk commercial debt in order to reduce the rate of curvature of the yield curve – i.e. reduce the rate of increase of the rate of return with respect to increasing maturity.  I had anticipated that a significant proportion of the QE instruments would need to be non-sovereign – in order to avoid a significant spread emerging between longer-term sovereign and longer-term commercial yields.

When the US started QE, they announced an initial scale of $675bn – if I remember correctly… and assume that figure had grown in subsequent rounds.  I can’t find a note of the scale of initial QE for Britain… but I’d have expected QE scale to be roughly proportional to GDP, or population, or something like that. My absolute minimum expectation was ~£100bn commercial debt – and I’d not have been surprised at a much larger figure.

Having £875bn sovereign debt on the BoE balance sheet is significant because it suppresses interest rates – but I feel that it is much less significant than private sector debt would be.  Given BIS rules, sovereign debt is the easiest to warehouse in the shadow banking system.  Consider Cuthbert-Worknottle – a well-connected ambitious aristocrat:  Cuthbert could launch a leveraged investment fund and use it to buy UK sovereign debt... which he could finance at face-value using short-term commercial bank loans to a single-purpose limited liability company.  It seems plausible that commercial banks would fund his venture (at very low rates of interest) and that Cuthbert might be motivated by potential recognition... in elite circles... making him prepared to run the operation without expecting big profits.  It wouldn’t need much capital... as sovereign debt is the soundest of collateral instruments… Cuthbert might even be granted a banking licence. If this were to happen… there might be no sovereign debt left on the Central Bank balance sheet… however, the real economy would, likely, remain unaffected.  Yields would only actually rise if yield expectations rise – and that’s only realistic if it also seems likely, to key-players, that the BoE would not intervene should yields rise in future.

There being ‘Only £20bn’ corporate debt on the BoE balance sheet suggests, to me, a much deeper question:  Which legal entities have this extraordinary support for their commercial debt?  Is it debt from commercial banks – like RBS?  Is it debt from some other close-to-government organizations?  What proportion of the outstanding debt, of any individual private-sector debtor, is on the BoE balance sheet?

A further question that this news made me consider concerns something I’m going to call “financial stability” – though I’m unclear if I mean the same by those words as central bankers.  [Insert-half-baked-disclaimer here…]   I always thought that there needed to be a range of financial assets in order meet the structure of investor demand… so, for example, a young investor might choose extremely risky speculative options for pension investments… because loosing a substantial proportion of 5 years’ pension savings (with 40 years returns and savings yet to happen) would be less of a catastrophe than losing a substantial proportion of 45 years of saving – just before retiring.  Given that senior generations are said to be more risk adverse, and also said to hold the vast majority of the capital… I would have expected plenty of demand for low-risk investments… including sovereign debt… but this doesn’t seem likely to be a good assessment... if so substantial a portion of the national debt sits on the BoE balance sheet.  I would like to find out:  Does this BoE balance sheet mean that senior generations’ pensions are not (to the same extent as one might have traditionally expected) invested in super-low-risk instruments?  If so, does this mean that this demographic might be on the hook to accept big losses if there were to be a substantial correction in equity prices (or the commercial bond market)?  If so, does this mean that a big asset-price correction (even if not in real-estate) should seem a real possibility?

I still cling to the M0,M1,M2,M3,[M4] model of ‘types of money’… with M0 being base-money… and M3/M4 being broad-money.  Broad money expands (and perhaps contracts) most readily. Broad money requires active management of the risks associated with debts - while narrow money requires far less.  While M0 – as a statistic - was broken by BoE policy changes in 2006… it has a the closest relationship with sovereign debt – while M3/M4 are least closely related.  Does holding sovereign debt on the BoE balance sheet actually starve the financial system of something analogous to M0?  Could this, by itself, be enough to trigger another crisis?

 

[zugzwang]

54 minutes ago, A.steve said:

Does holding sovereign debt on the BoE balance sheet actually starve the financial system of something analogous to M0?  Could this, by itself, be enough to trigger another crisis?

 

 

The Bank of England owns only 20-25% of UK gilts. Starving the market? Hardly.

Plus, the world is drowning in sovereign debt. A superabundance of 'risk free' alternatives.

Currently ~40% of the Bank's gilts have a duration of 15+ years, legacy debt from the aftermath of the GFC. On that basis a sovereign debt crisis would appear to be highly unlikely. Obviously, if the UK continues to borrow at anything like the present clip the composition of that debt will change significantly.

[spyguy]

10 hours ago, gruffydd said:

Ouch, ouch, ouch - have never seen the Bank of England under so much pressure from such senior people, before... it's about time!

https://www.politico.eu/article/uk-inflation-jumps-by-2-5-percent-turning-heat-on-bank-of-england/

 

9 hours ago, Si1 said:

Notayesmaneconomist lays into QE with Lucille the baseball bat - devastating 

https://notayesmanseconomics.wordpress.com/2021/07/16/bank-of-england-qe-is-coming-under-increasing-fire-as-inflation-rises/

 

Economics is not s science. Its barely even an arguable opinion.

Banking isnt economics.

The whole independence central bank thing is a load wnk.

CB create money (credit) which is very much a political thing.

The pitch that CB would be more prepared to 'take away the punch ball from the party' turned out to be a load of Greenspanish BS.

Take the UK.

BoE  independence in 2000.

90% of UK banks by lending capacity blow up under a decade later as theyve gone on insane expansion of their balance sheets to lend to real estate.

They cant argue that is was a totally novel thing - this is the exact same thing Japan did mid 80s early 90s.

Sweden did similar in the 90s too.

https://en.wikipedia.org/wiki/Sweden_financial_crisis_1990-1994

The BoE cannot argue that this was a problem with 'foreigners'

Abbey National blew up, in the what turned out to be a smaller but still bank destroying way

https://www.theguardian.com/business/2002/jul/20/uknews2

2002. A full 5 years before it was obvious to even the most stupidest person that it was going to end badly.

Few people seem to know that the Abbey National blew up. Swept over in a massive Brownian, under the carpet, nothing to see here, where all geniuses here ....

This is why Steven Hester cropped up at RBS - he was Luqman Arnolds side kick as they tried to work their way thru all the insane illiquid + risky commercial aircraft leases and whatnot that the idiots at AN, a medium sized building society FFS,  had put on their balance sheets.

More than 15 million people still have the Abbey habit, saving, borrowing or investing through the bank itself, through insurance subsidiaries like Scottish Provident and Scottish Mutual, or financing their cars through Abbey's consumer financial house, First National.

But Mr Harley has lost his job because of a financial adventure which took the bank far away from the brightly coloured high street branches, with their mortgage deals and savings offers.

If the adventure had worked, it might have propelled Abbey into the premier league of modern international banking, alongside names like Citigroup and JP Morgan. Sadly, it has not, and instead of transforming itself into one of the world's most innovative financial institutions, the bank has found itself a potential takeover target or even, if the business environment continues to deteriorate at its current rate, a candidate for a Bank of England rescue package.

Back to CB.

CB may nto be Pols. But they need political oversight.

They need to have presented to HoP what they were truing to achieve with QE, what the pros are, what the cons are, what they expect to happen.

You can make a case QE when there was chaos. But onyl for a couple of ~24 months.

IN terms of 'taking the punch ball away' What we are seeing with CB is even more butt headed - failing to acknowledge that there theory is totally wrong, doesnt  and causing more damage than good, and that damage and good is falling on very different groups.

As it stands, BoE is funding a grossly bloated UK state, as great cost to the young, wholl have to pay for the ffing mess, and at great benefit to the old, who are double bubbling, dumping on he young.

BoE has been funding UKGOV to keep ~20m UKers and EUer in stupid low paid paid, made up jobs, which require vast tax payer transfer.

 

 

 

[A.steve]

7 hours ago, zugzwang said:

 

The Bank of England owns only 20-25% of UK gilts. Starving the market? Hardly.

Plus, the world is drowning in sovereign debt. A superabundance of 'risk free' alternatives.

Currently ~40% of the Bank's gilts have a duration of 15+ years, legacy debt from the aftermath of the GFC. On that basis a sovereign debt crisis would appear to be highly unlikely. Obviously, if the UK continues to borrow at anything like the present clip the composition of that debt will change significantly.

If £875bn is 20-25% of UK gilts, this would imply a total of between £3.5tn and £4.375tn.  This is larger is larger than the figure I had previously understood for the UK national debt (£2.2tn).

The hypothetical crisis about which I pontificated was not a traditional "sovereign debt crisis" (where there is inadequate demand for fresh government debt).  The sort of crisis I had in mind was sort-of the opposite... where, investors find that they have taken more risk than they would have otherwise done... because the supply-side of investment opportunity is skewed towards higher risk.  Obviously, I don't have any clear description of how any such scenario might play out.)

 

[Si1]

17 minutes ago, A.steve said:

If £875bn is 20-25% of UK gilts, this would imply a total of between £3.5tn and £4.375tn.  This is larger is larger than the figure I had previously understood for the UK national debt (£2.2tn).

The hypothetical crisis about which I pontificated was not a traditional "sovereign debt crisis" (where there is inadequate demand for fresh government debt).  The sort of crisis I had in mind was sort-of the opposite... where, investors find that they have taken more risk than they would have otherwise done... because the supply-side of investment opportunity is skewed towards higher risk.  Obviously, I don't have any clear description of how any such scenario might play out.)

 

To my amateur mind that sounds like a common or garden recession and banking crisis, like 1989 and 2007?

[Warlord]

There is going to mass hyper inflation .

There is no way they can unwind this.

The path to destruction is set and was a long time ago. We warned them about this.

The banksters will bring everything crashing down (again).

This is entirely predictable for followers of Mises or Hayek ( @zugzwang)

 

[spyguy]

2 hours ago, Warlord said:

There is going to mass hyper inflation .

There is no way they can unwind this.

The path to destruction is set and was a long time ago. We warned them about this.

The banksters will bring everything crashing down (again).

This is entirely predictable for followers of Mises or Hayek ( @zugzwang)

 

I dont know.

Youd need the money to escape.

What I thinks happening is the start of the of the post Bretton Woods system.

There, the US struggled with the gold standard due to Vietnam.

Freely trading, fiat/credit currencies have only been a thing since 1980.

Then, the claim was central banks would manage the money, avoid mass outflows, inflation, etc etc ensuring stability

The run up to 08 and what's followed have shown central banks are just not up to that.

BoE had had indolence for 20 years, 13 of which have been crisis management, caused by the banks that the BoE are meant to oversee.

The ******wittery of high house prices mean the economy is grinding to a halt as it's been impossible to recruit people for high skilled, high margin work.

 

 

[zugzwang]

2 hours ago, A.steve said:

If £875bn is 20-25% of UK gilts, this would imply a total of between £3.5tn and £4.375tn.  This is larger is larger than the figure I had previously understood for the UK national debt (£2.2tn).

 

 

The current quantity of gilts owned by the Bank is £814bn as of 14/07/21.

https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/results-and-usage-data

The national debt has gone up a bit too.

£2.2tn at the end of last year to which Sunak is adding an additional £30bn/month, so ~£2.4tn.

So, the actual measure is more like 34%. My bad.

 

[zugzwang]

11 minutes ago, spyguy said:

Youd need the money to escape.

Highly unlikely.

Capital reserves can be retained indefinitely by the Bank at zero cost. In practice, modest inflation over 30-50 years will render the sums insignificant.

[spyguy]

11 minutes ago, zugzwang said:

Highly unlikely.

Capital reserves can be retained indefinitely by the Bank at zero cost. In practice, modest inflation over 30-50 years will render the sums insignificant.

That assumes the economy grows and theres no other crisis.

 

[Will!]

44 minutes ago, spyguy said:

BoE had had indolence for 20 years, 13 of which have been crisis management, caused by the banks that the BoE are meant to oversee.

Is that a Freudian slip?

[zugzwang]

1 minute ago, spyguy said:

That assumes the economy grows and theres no other crisis.

 

Yuss.

 

[A.steve]

 

1 hour ago, zugzwang said:

The current quantity of gilts owned by the Bank is £814bn as of 14/07/21.

https://www.bankofengland.co.uk/markets/bank-of-england-market-operations-guide/results-and-usage-data

The national debt has gone up a bit too.

£2.2tn at the end of last year to which Sunak is adding an additional £30bn/month, so ~£2.4tn.

So, the actual measure is more like 34%. My bad.

I'm pleased to find interest in discussing such topics... where even vague measurements often remain elusive.  I wonder where the journalist (quoted at the head of this thread) obtained the £875bn figure?

While 34% is a smaller proportion of the available pool of 'completely safe' gilts... I have assumed that this means that there's £800+bn that would otherwise have been invested in gilts - that now funds riskier investments.  Perhaps this isn't necessarily the case (perhaps there's been a ~£800bn contraction in non-central-bank balance sheets)?  I still think the effects of having such a large proportion of gilts out-of-circulation could cause serious consequences.  I'm less clear exactly what those consequences might be - or what objective measurements might help gain a better understanding.

[spyguy]

1 hour ago, Will! said:

Is that a Freudian slip?

Lucky one, too.

Independence.

The idea that BoE getting control of IR policy n 'fixing' the UK economy/business cycle etc didn't work out in practise.

Again, 2002 and Abbey National had blown up its balance sheet and, to all intents n purpose, was insolvent.

 

Edited July 17, 2021 by spyguy

[spyguy]

1 hour ago, zugzwang said:

Yuss.

 

You cant fix stuff by assuming everything is going to be perfect n not go wrong in the future.

In the main, hits have to be took when n where they occur.

But like this social care taxes.

Oaps whove provisioned for old age are being bailed out by you for tax payers who also have to fund their own care n pension, pay for education, then buy the oaps house off them.

Nuts.

Fix for social care us simple. Go thru all the regulation around care homes and, unless it offers some use, RIP it up.

 

[A.steve]

6 hours ago, Si1 said:

To my amateur mind that sounds like a common or garden recession and banking crisis, like 1989 and 2007?

I associate recessions - e.g. early 90s, or following the 'global financial crash' of ~2008 - with reduced risk appetite among investors... causing capital to flow into safer alternatives - for example... into government bonds.

The Idea I'm suggesting is the exact opposite.  Rather than there being reduction in risk-taking, causing a slowing of economic activity - resulting in all the things we associate with a recession... Perhaps... by taking the safe investments off the table, the BoE has had a systematic influence - that has driven investment into riskier instruments than would otherwise have been bought... and, perhaps, that that indicates a particular type of failure will emerge as a consequence.

[Si1]

2 hours ago, spyguy said:

Lucky one, too.

Independence.

The idea that BoE getting control of IR policy n 'fixing' the UK economy/business cycle etc didn't work out in practise.

Again, 2002 and Abbey National had blown up its balance sheet and, to all intents n purpose, was insolvent.

 

Yeah, don't forget the BoE backed Help to Buy. That's about as politically independent as Boris Johnson's career in journalism.

[spyguy]

46 minutes ago, A.steve said:

I associate recessions - e.g. early 90s, or following the 'global financial crash' of ~2008 - with reduced risk appetite among investors... causing capital to flow into safer alternatives - for example... into government bonds.

The Idea I'm suggesting is the exact opposite.  Rather than there being reduction in risk-taking, causing a slowing of economic activity - resulting in all the things we associate with a recession... Perhaps... by taking the safe investments off the table, the BoE has had a systematic influence - that has driven investment into riskier instruments than would otherwise have been bought... and, perhaps, that that indicates a particular type of failure will emerge as a consequence.

Daft assumption by idiots in central banks- more Risk= more reward.

Theres no such relationship.

You've got idiot council buying shopping centres with cheap-at-the-moment debt.

And oaps putting nest eggs in scam mini bonds.

Clusterfuk.

Edited July 17, 2021 by spyguy

[zugzwang]

3 hours ago, A.steve said:

 

I'm pleased to find interest in discussing such topics... where even vague measurements often remain elusive.  I wonder where the journalist (quoted at the head of this thread) obtained the £875bn figure?

While 34% is a smaller proportion of the available pool of 'completely safe' gilts... I have assumed that this means that there's £800+bn that would otherwise have been invested in gilts - that now funds riskier investments.  Perhaps this isn't necessarily the case (perhaps there's been a ~£800bn contraction in non-central-bank balance sheets)?  I still think the effects of having such a large proportion of gilts out-of-circulation could cause serious consequences.  I'm less clear exactly what those consequences might be - or what objective measurements might help gain a better understanding.

£875bn is the correct figure in toto but since the gilts were bought at different times and have different maturities unless there are fresh QE purchases the pool gradually shrinks. It's £814bn now, next month it might be less than £800bn.

34% is a lot more than I was expecting. That's not a trivial rise. At the end of 2019 the comparable figure was lower than 25%.

In addition, the Bank has £20bn of commercial bonds and £5bn in commercial paper on its books plus £24bn of loans still outstanding from the TFS (which closed in 2018), and £90bn of loans made through the TFSME which opened last year.

Staggering sums. An entire virtual economy.

[Warlord]

6 hours ago, spyguy said:

Daft assumption by idiots in central banks- more Risk= more reward.

Theres no such relationship.

You've got idiot council buying shopping centres with cheap-at-the-moment debt.

And oaps putting nest eggs in scam mini bonds.

Clusterfuk.

This is classic example of "malinvestment" identified by Mises in a Central bank induced bubble. 

We need to get rid of the Central Bank! 

We need sound money! Backed by something hard like Gold or Silver.

It's the only way.

Fractional reserve banking, central banks and fiat money have always ended in failure and always will,

The seeds are sown. It's baked in.

@zugzwang

[spyguy]

7 hours ago, Warlord said:

This is classic example of "malinvestment" identified by Mises in a Central bank induced bubble. 

We need to get rid of the Central Bank! 

We need sound money! Backed by something hard like Gold or Silver.

It's the only way.

Fractional reserve banking, central banks and fiat money have always ended in failure and always will,

The seeds are sown. It's baked in.

@zugzwang

I dont think we are ging back to metal based currencies.

However I dont think we (UK, ECB) can continue as they are - just expanding credit to bail everything out.

The basis of post Bretton has gone - CB have failed.

Everyone bar the US dont really have a say - US drives short term IR; Boe Has not real independence, just a length of rope to hang itself.

 

 

[Warlord]

5 hours ago, spyguy said:

I dont think we are ging back to metal based currencies.

However I dont think we (UK, ECB) can continue as they are - just expanding credit to bail everything out.

The basis of post Bretton has gone - CB have failed.

Everyone bar the US dont really have a say - US drives short term IR; Boe Has not real independence, just a length of rope to hang itself.

 

 

The gold standard served us well for hundreds of years before central banks came along, especially in the US post-1776 revolution where they got rid their central bank. 

It was a big issue at the time and a popular move.

Imagine that today ! 

Getting rid of the central bank and reverting to a gold standard is just not sexy but it is the only form of a monetary system that works and restrains government i.e they cannot print or create credit out of thin air thus politicians cannot trash the currency as they always and inevitably do.

Mises predicted the demise of fiat and he is right ... 

 

 

Edited July 18, 2021 by Warlord

[A.steve]

On 17/07/2021 at 18:10, zugzwang said:

In addition, the Bank has £20bn of commercial bonds and £5bn in commercial paper on its books plus £24bn of loans still outstanding from the TFS (which closed in 2018), and £90bn of loans made through the TFSME which opened last year.

While, I agree, the numbers are all huge... £20bn would seem to be a tiny drop in the ocean of commercial bonds.  I wasn't aware that the BoE accepted "commercial paper" - I hadn't expected them to accept anything except the best collateral... and, it seems to me, commercial paper should be considered less robust than a bond.  It also suggests that the BoE may be picking and choosing which issuers of debt need their debt service costs reduced by market intervention.  If that is happening, it would definitely be politically significant.