Thanks for sharing this and a must read. Its important to have an understanding of what QE is and how in reality it has done very little to grow the economy and instead has caused wealth inequality.
He explains that it was largely a subterfuge to obscure the reality that the government was simply running a large overdraft at the BoE. In 2008 we were in the EU, and EU rules forbid govts borrowing from their CBs, so it was a piece of smoke & mirrors. That link offers text or a YouTube talk.
Some say the same smoke and mirrors approach was used to 'hide' 'unfunded spending' during Covid. Roughly £450bn spent, gilts to a similar amount issued by government and repurchased from secondary market by the Bank of England - they claim this was not coordinated. There are various *interesting* comments on the topic here - https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4206.htm
Thanks George. That letter's a great find - as is the parliament note. I wasn't aware of these. I notice though that in that Parliament document there still persists the idea that that QE will actually stimulate the economy: when of course - as I argue in my article - that's highly unlikely - and it's the wrong tool anyway. The mention of inflation is also nonsense - as I show in my article. The bottom line is: there is no spending going into the private sector with QE: it's an asset swap. They are trying to reach an inflation target: that's one major aim of QE: but again - unlikely to be success - other than by accident.
One of the channels for QE stimulating the economy that's sometimes claimed is through bank lending. Here the BoE debunks that idea -
"The Monetary Policy Committee (MPC) didn’t expect there to be strong transmission of the APP’s impact through the bank lending channel. In line with that, we find no evidence that suggests that QE directly boosted bank lending to the real economy, even when controlling fully for demand-side effects."
For what it's worth, here's a BoE employee confirming that QE is an asset swap, but arguing that the QE for the GFC and Covid were unrelated to the government spending -
"The notion of QE as government financing may stem from the fact that asset purchases have typically taken place when the government deficit was expanding. However, the reason for that correlation is that both fiscal policy and monetary policy acted counter-cyclically, responding to a common shock; in particular, they were both loosened in response to the Global Financial Crisis and the Covid-19 pandemic. Monetary policymakers undertook QE in order to achieve their inflation targets, not to support fiscal expansions.
Of course, countercyclical monetary policy (whether through Bank Rate or
other tools) can push down on borrowing costs in times of crisis for both the public and the private sector. But as long as independent central banks are implementing QE based on their inflation-targeting remits, then this is not a form of government financing."
Jim, an interesting post but it doesn't address the fact that the Bank of England buying performing assets or non-performing assets does not add money into the economy. Only the Bank of England buying performing assets from the private sector creates money for the economy. And whether that's inflationary depends on the private sector's use of the additional funds.
Thanks for you comment Donald. I have covered the purchase of government bonds in the secondary market in this article: that essentiall is what QE is - and I explicitely say that it does not add any new assets to the non-government sector.
Interest on government bonds - which have been purchased by banks or other institutions earn interest: that is indeed income that flows into the private sector.
Beyond that, only authoriseds spending by the government itself creates new money spent into the non-government sector. The central bank cannot make spending decisions. The central bank is owned by the government.
Isn't that backwards? When the CB "buys" an asset, the BOE gets the interest. Left pocket of government pays the right pocket. Silly pointless stuff.
When the BOE "buys" a liability, say some poor sod's mortgage agreement, then it will pay the bank and add to the private sector. (However, also silly, since why not let the poor sod have the mortgage and give the poor sod a decent job so the mortgage payments can be made.)
When the BOE issues a liability - no "buying" involved, they are "selling" - (a BoE bond) then the private sector gets the interest and that adds to the non-government sector currency supply.
"When the CB "buys" an asset, the BOE gets the interest." Yes that's correct. If you are replying to me, that's not what I say in my comment. I said, when commercial banks buy bonds. When the BoE purchases government bonds in the secondary market the interest from those bonds goes to the government.
Thanks for sharing this and a must read. Its important to have an understanding of what QE is and how in reality it has done very little to grow the economy and instead has caused wealth inequality.
Thanks Michael. :-)
Richard Murphy has a slightly different take: Understanding QE https://share.google/SsnZw7HGEEuYwak6u.
He explains that it was largely a subterfuge to obscure the reality that the government was simply running a large overdraft at the BoE. In 2008 we were in the EU, and EU rules forbid govts borrowing from their CBs, so it was a piece of smoke & mirrors. That link offers text or a YouTube talk.
Thanks Rick. I'll check that out. I haven't heard about that. Thanks for the heads-up. :-)
The Asset Purchase Facility was first set up in Jan 2009, authorised by Alistair Darling in this letter - https://www.bankofengland.co.uk/-/media/boe/files/letter/2009/chancellor-letter-290109
Without an APF, there's no QE.
Some say the same smoke and mirrors approach was used to 'hide' 'unfunded spending' during Covid. Roughly £450bn spent, gilts to a similar amount issued by government and repurchased from secondary market by the Bank of England - they claim this was not coordinated. There are various *interesting* comments on the topic here - https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4206.htm
Thanks George. That letter's a great find - as is the parliament note. I wasn't aware of these. I notice though that in that Parliament document there still persists the idea that that QE will actually stimulate the economy: when of course - as I argue in my article - that's highly unlikely - and it's the wrong tool anyway. The mention of inflation is also nonsense - as I show in my article. The bottom line is: there is no spending going into the private sector with QE: it's an asset swap. They are trying to reach an inflation target: that's one major aim of QE: but again - unlikely to be success - other than by accident.
One of the channels for QE stimulating the economy that's sometimes claimed is through bank lending. Here the BoE debunks that idea -
"The Monetary Policy Committee (MPC) didn’t expect there to be strong transmission of the APP’s impact through the bank lending channel. In line with that, we find no evidence that suggests that QE directly boosted bank lending to the real economy, even when controlling fully for demand-side effects."
https://www.bankofengland.co.uk/-/media/boe/files/working-paper/2020/does-quantitative-easing-boost-bank-lending.pdf
Interesting they know that themselves - but orthodox economists still continue with the myth.
For what it's worth, here's a BoE employee confirming that QE is an asset swap, but arguing that the QE for the GFC and Covid were unrelated to the government spending -
"The notion of QE as government financing may stem from the fact that asset purchases have typically taken place when the government deficit was expanding. However, the reason for that correlation is that both fiscal policy and monetary policy acted counter-cyclically, responding to a common shock; in particular, they were both loosened in response to the Global Financial Crisis and the Covid-19 pandemic. Monetary policymakers undertook QE in order to achieve their inflation targets, not to support fiscal expansions.
Of course, countercyclical monetary policy (whether through Bank Rate or
other tools) can push down on borrowing costs in times of crisis for both the public and the private sector. But as long as independent central banks are implementing QE based on their inflation-targeting remits, then this is not a form of government financing."
https://www.bankofengland.co.uk/-/media/boe/files/speech/2023/april/quantitative-easing-quantitative-tightening-speech-silvana-tenreyro.pdf
As in the parliament note, he's saying you might think it's a trick, but we need to explain it better to stop you having that thought. 😎
Thanks again George. There's nothing in your comment I don't agree with.
In the US, spend and tax fails because the fed doesn’t have control over tax policy and implementation.
Jim, an interesting post but it doesn't address the fact that the Bank of England buying performing assets or non-performing assets does not add money into the economy. Only the Bank of England buying performing assets from the private sector creates money for the economy. And whether that's inflationary depends on the private sector's use of the additional funds.
Thanks for you comment Donald. I have covered the purchase of government bonds in the secondary market in this article: that essentiall is what QE is - and I explicitely say that it does not add any new assets to the non-government sector.
Interest on government bonds - which have been purchased by banks or other institutions earn interest: that is indeed income that flows into the private sector.
Beyond that, only authoriseds spending by the government itself creates new money spent into the non-government sector. The central bank cannot make spending decisions. The central bank is owned by the government.
Isn't that backwards? When the CB "buys" an asset, the BOE gets the interest. Left pocket of government pays the right pocket. Silly pointless stuff.
When the BOE "buys" a liability, say some poor sod's mortgage agreement, then it will pay the bank and add to the private sector. (However, also silly, since why not let the poor sod have the mortgage and give the poor sod a decent job so the mortgage payments can be made.)
When the BOE issues a liability - no "buying" involved, they are "selling" - (a BoE bond) then the private sector gets the interest and that adds to the non-government sector currency supply.
"When the CB "buys" an asset, the BOE gets the interest." Yes that's correct. If you are replying to me, that's not what I say in my comment. I said, when commercial banks buy bonds. When the BoE purchases government bonds in the secondary market the interest from those bonds goes to the government.
👍🏽 It was replying to the other guy.