Monday, September 19, 2011

Merv has marked his own homework and he got A++

Chart of the Day: how the Bank of England saved us

"The Bank of England has graded itself on its efforts to pull the economy out of recession and it comes up trumps." We need to stop being so tough on the BoE - they are obviously doing a great job (or is that a sterling job?)!

Posted by timmy t @ 02:37 PM (1831 views)
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27 thoughts on “Merv has marked his own homework and he got A++

  • Merv has marked his own homework and he got A++

    I think you will find that Merv actually gave himself AAA+++

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  • peed myself laughing at pretty chart with 2% inflation

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  • Great. Everything is fine then. Why do we need more QE?

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  • Merv trying to justify his knighthood? I would much rather he fell on his sword.

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  • If you know what UK-style QE actually is in real life, then the BoE may have a point.

    What QE boils down to is the government replacing long term fixed rate debt with average interest rate (say) 4% with very, very short term debt (overnight) with interest rates 0.5%. There’s no more or less to it than that, with lots of smoke and mirrors.

    As a ‘saver’ I hate it. As a taxpayer I’m all in favour. As a nervous person, I do wonder what happens when interest rates go up (they might end up paying far more than 4% again). And to be fair, low interest rates tend to be good for the economy (albeit terrible for inflation and terrible for house prices, i.e push them up).

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  • So the BoE spent 14% of GDP to boost GDP by 2%? Brilliant!

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  • I also note that in chart 1 of the actual BoE report, there seems to be no phase of QE which involves reducing the broad money created again…

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  • I wonder how many times they can use QE before it becomes a zimmer frame for the UK

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  • Mark, they can keep going until all gilts have been bought back and the government is paying 0.5% on all its borrowings, they can drop that to 0.25% if they want (as long as enough people are prepared to accept 0.25% interest, which they probably aren’t) and that is then the end of the matter.

    Then we’re into a Japanese situation, only without the domestic savers, the R&D, the export surplus, the relatively low taxes on incomes and low share of govt spending to GDP etc. About the only thing we’ve got going for us which the Japanese haven’t is a tolerance for alcohol.

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  • so we are screwed after the run out of purchases

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  • @Mark Wadsworth, i am interested in your perception of QE; you seem to think it is “NOT” printing money, whereas ia m of the understanding that it is printing money, so we differ not in agreement, but my understanding, if you are correct, all the better, but can you convince me about QE UK STYLEEEEEE……

    The way i understand it is, the BoE magic some money out of thin air, create some digital numbers on a screen, digitally print some money. They go to the market and buy up some GILTS. These GILTS were originally sold to the market to raise funds for the goverment to spend, this money has been spent. In the original form, when these GILTS mature, the DMO would redeem the origanal purchase price with funds raised from taxes. So the government borrowed money to spend, then paid back the money through income. But with QE they buy the GILTS with new money, non debt backed money, created out of nothing. So digitally pinted money. When the BoE buy these GILTS though QE, they hold them until maturity, so they do nott have to redeem the origianl purchase coupon price, so they do not have to pay for the redeemed GILT through raised tax revenue. So they have created money out of thin air as they do not have to redeem the GILT coupon price at maturity etc etc…….

    Thoughts

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  • @Mark Wadsworth, i am interested in your perception of QE; you seem to think it is “NOT” printing money, whereas ia m of the understanding that it is printing money, so we differ not in agreement, but my understanding, if you are correct, all the better, but can you convince me about QE UK STYLEEEEEE……

    The way i understand it is, the BoE magic some money out of thin air, create some digital numbers on a screen, digitally print some money. They go to the market and buy up some GILTS. These GILTS were originally sold to the market to raise funds for the goverment to spend, this money has been spent. In the original form, when these GILTS mature, the DMO would redeem the origanal purchase price with funds raised from taxes. So the government borrowed money to spend, then paid back the money through income. But with QE they buy the GILTS with new money, non debt backed money, created out of nothing. So digitally pinted money. When the BoE buy these GILTS though QE, they hold them until maturity, so they do nott have to redeem the origianl purchase coupon price, so they do not have to pay for the redeemed GILT through raised tax revenue. So they have created money out of thin air as they do not have to redeem the GILT coupon price at maturity etc etc…….

    Thoughts

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  • Panda, the books always have to balance. This is not my perception this is cold hard fact which you can trace for yourself by looking at accounts of BoE and commercial banks.

    1. Remember: the UK government, the BoE, the Debt Management Office, HM treasury are all part of the same thing. If you own a gilt, it does not really matter whether it says BoE or HM Treasury as issuer – they are all back by the UK govt.

    2. Day One – DMO has borrowed £x billion and has issued bits of paper saying “IOU £x billion”.

    3. Day Two – the BoE “buys back” £y billion’s worth of bits of paper and credits the sellers (mainly commercial banks) with £y billion to their current accounts with BoE.

    4. The BoE can now chuck the bits of paper in the skip, they are merely a record that one dept of HMT owes another department of the treasury £y billion, so they net off to nothing.

    5. If you are a bank, on Day One, you had bits of paper confirming that the UK government (via DMO) owes you £y billion.

    6. On Day Two, you have a bit of paper (or its electronic equivalent) confirming that the UK government (via BoE) owes you £y billion.

    7. All that has changed is that the original £y billion gilts weren’t due to be redeemed for five or ten years, so they paid 3% or 4% interest and the electronic balances pay 0.5% interest but you could in theory withdraw the money overnight with no risk of gilt prices falling.

    8. The whole thing is about as exciting as you taking a £10 note to the bank and paying it into your account. You give up one bit of paper worth £10 which you can spend or save with an extra £10 in your bank accounts which you can spend or save of indeed withdraw and convert back into a good old £10 note.

    9. PS, the US style QE was different in that they are so corrupt they overpaid wildly for mortgage backed cr4p, that was outright fraud on a grand scale, UK QE was very modest fraud on an acceptable level.

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  • I think you’re missing a distinction. The BoE is supposed to be the only entity with the authority to create sterling. The DMO and the HM treasury do not have that authority. If we look it at it from your point of view then it just means that the money printing or inflation happened when the DMO borrowed the money rather than when the BoE bought the gilts. And the same thing doesn’t have to stop at the government. Anyone can promise to pay anyone else any amount they want (and this is exactly what happens when someone agrees to pay interest on a loan to a commercial bank). The point is that two things can then happen (a) the BoE can create enough money to make sure that everyone gets what has been promised to them or (b) the BoE can refuse to create the money in which case someone has to accept that they aren’t going to get what was promised to them (i.e. some loans get defaulted on). What happened was people promised to pay money which hadn’t yet been created in interest to the commerical banks. The treasury borrowed money to buy the debts from the banks and then the BoE created money to buy the debts from the treasury. What should have happened is that the debtors should have been allowed to default and the commercial banks should have lost that which was never theirs in the first place.

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  • Shawkie, if you want to go with the official version of events, feel free to do so, it is simply not true. I am second best accountant in world and I have delved into this applying logic to facts and cross referencing everything.

    “the commercial banks should have lost that which was never theirs in the first place”

    Hang about here, the government borrowed money from people and gave them IOUs called ‘gilts’. Whoever owns them is owed money by the government. The government may have wasted most of it, but that is not the lenders’ problem. Using your logic, the NS&I could just cancel all its accounts and tell people to s0d off. The fact that the banks and bankers deserve a good kicking is an entirely separate topic.

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  • NS&I can’t cancel its accounts but if they’re broke then they can declare themselves bankrupt. When you lend someone money and charge interest the interest is only there to cover your risk. If there’s no risk then there’s no interest and by the if there is interest then there is also risk. You are simply gambling that the particular party you have chosen to lend to is going to be able to pay you back and that it is someone else that is going to lose out. As it happens I would probably argue that the NS&I probably pays more interest than the level of risk warrants (and is therefore subsided by the taxpayer) but then they bailout the commercial banks which kind of levels out the risk factor so…

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  • MW @9, point 7 is crucial. QE just exchanges long-term bonds (government and corporate) for reserve balances. The net financial assets of the non-government sector are unchanged but yields and returns are changed – IRs are reduced at the long end of the yield curve. This keeps up asset prices and is one of the strategies used to recapitalise banks (especially in the US as MW points out). The idea that it stimulates the economy increases lending to businesses and consumers is a joke. QE and other bank recapitalisation strategies, along with deficit reduction, is killing economies and transferring wealth from the many to the few.

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  • “The idea that it stimulates the economy BY INCREASING lending…..

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  • This is that chart again …

    Erm …

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  • Icarus, 13, agreed.

    By the way, all this nonsense about banks lending to small businesses is nonsense, they never have done and never will, certainly not on any big scale, and if you strip out lending secured on the owner’s house, it’s virtually non-existent.

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  • I think I’m more confused now than I was before…

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  • [email protected]
    I think you have not addressed couple of points
    1) Where did the BOE get the funds from to buy the gilts?
    It created them on a computer ie digital money printing.
    2) At the the end of the process The government debt (effectively) does not exist anymore, the banks have the same amount of cash they started with, yet the government has the cash from the original debt auction which it will spend.

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  • MW and panda I am trying to follow this. I must say it does seem like new money has been created.

    “3. Day Two – the BoE “buys back” £y billion’s worth of bits of paper and credits the sellers (mainly commercial banks) with £y billion to their current accounts with BoE.”

    OK so the commercial banks had a bit of paper, a bond, that gave them a right to be paid cash in the future, a call on our future money. Now they have cash immediately.

    “4. The BoE can now chuck the bits of paper in the skip, they are merely a record that one dept of HMT owes another department of the treasury £y billion, so they net off to nothing.”

    Hmmm. No I don’t think so. The goverment was going to have to pay back the principal on the bond in the future out of future taxes, and instead it has paid it back today with newly created cash, stuff that didn’t come from taxes or from anywhere else in the economy. Solve the puzzle of understanding this by reducing it to the absurd. Imagine the government did QE for the entire existing national debt out there. They would buy it all back instantly with new cash they create. They would therefore have no future pending obligations to pay anything out of future taxes. We would have zero debt without having produced anything new. Where did that reduction in our liabilities come from?

    Why don’t we just privatise this ability? The government would send me a tax demand for money I owe them by December, and instead of waiting until then and paying them out of income, I create some zeros on a computer and send them new cash instantly. Great.

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  • @Mark Wadsworth………….Thanks, but i am not convinced, QE is inflationary, your perception is not inflationary, just an accounting trick to lower the rate of interest payable on UK goverment debt? So reducing the deficit in reality? So it could be less money out, less money needed, less money deflationary, so does not seem right to me?

    @ontheotherhand said…I tend to agree, it is creating new money out of nothing, Convince me otherwise Mark?

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  • general congreve says:

    Aha, a back door of sorts. A big hello to all my old friends from room 101! 🙂

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  • Panda, QE in the UK sense (known as “The Twist” in the USA) has the effect of shortening average time to maturity of UK government debt (i.e. from several years to overnight) so the average interest rate paid drops accordingly, this tends to push (or pull?) down interest rates generally which is in itself inflationary, absolutely no dispute there.

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