The Bank of England acknowledge this in the statement noted previously. Thirdly, with the marketplace coming into existence the private sector needed a medium of exchange. The coupons cancel each other out, as you suggest, but you have still lost money on the bond. 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. https://larspsyll.wordpress.com/2020/10/21/what-is-effective-demand-2/. If interest rates move higher you can reverse the example above, the APF loses money and you now front-load those losses. The accounts of the APF and WGA are not prepared on the same accounting basis, so you can’t just consolidate them in the manner you suggest. ( ignoring the interest element ) The EU fiscal pact rules have also been generally ignored/eased by the EU since their creation . 'http':'https';if(!d.getElementById(id)){js=d.createElement(s);js.id=id;js.src=p+"://platform.twitter.com/widgets.js";fjs.parentNode.insertBefore(js,fjs);}}(document,"script","twitter-wjs"); var sc_project=1690627; UK unemployment was lower than Eurozone where quantitative easing didn’t take place. The concept of equitability held by the less rich and particularly the poor, however, means pressure to place the larger burden of taxation on the rich. Argument over. ~And the APF can make neither profit nor loss: by definition. There is no court of arbitration to declare that given your changed circumstances forcing repayment of the debt would be morally wrong. But, economic growth was very slow. Perhaps such a diagram would be too complex to be useful? Quantitative easing (QE) policies include central-bank purchases of assets such as government bonds (see public debt) and other securities, direct lending programs, and programs designed to improve credit conditions. Far better to have everyone see and that the BoE needs an actual asset (gilts)to justify all this money creation. 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. 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. var sc_invisible=0; Businesses can borrow money more easily. This can turn around an economy in the throes of a recession. g) See above. So, in short, QE could cancel bonds, but there would be a cost associated with doing so – and quite a substantial one. You can see this on page 12 of the following APF accounts. As an artist, educator, and supporter of many causes, she wants to see her home town blossom and thrive economically and socially. This is corruption pure and simple! The APF gained £14.5bn from interest, £32.5bn from MtM changes on the Gilts they hold. My stamp collection is only worth something at the point that it is sold. Quantitative easing is when central banks, like the Federal Reserve, use newly printed money to purchase large numbers of securities from the private market. 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. The amounts involved are eye watering ( as they need to be). It literally is that ridiculous. Higher debt service costs for the 10y years. 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. If you enjoyed this blog, please subscribe free by email. Again, stop telling untruths. The UK entered a double-dip recession in 2012. They pay interest to the BoE of £3.5bn and the remaining £43.5bn is paid back to HMT. inject money into the economy at a potential huge loss to itself –our selves ? Why would the establishment, which is dominated by the rich and their gofers, want to set up a phoney debt obligation or obligations and the answer is they hate uncertainty. This is another reason you can’t simply cancel bonds in the manner which you suggest. The BoE buys gilts from banks and other financial institutions who then take the cash and errr…… buy gilts from the government at auction. Do you think that the owner of such a bond will accept less for a bond than it is actually worth which is what you are suggesting? f) The APF is at arm’s length for very specific reasons. It works like this. f) The claim the APF is at arm’s length is a sham – fraudulent even. The Treasury cannot lose on the assets it now owns: they are not longer traded and will be held to redemption. Of course it is not at arm’s length. Downing, our man at the Hague, came back from there with ideas for a CB but only managed to get what became the Treasury up and running. Quantitative easing is a sneaky way to make everyone dealing in U.S. dollars pay off the U.S. debt. So it is not a sham that the APF is at arms length. Until you get your head around that your comementary is worthless, b) Wrong: the short term rate would be zero. For example, the 5% bond with a yield of 0% and price of 150 does not mean any prepayment has occurred. This pamphlet explains the basic concept of quantitative easing and how low and stable inflation is crucial to a thriving and prosperous economy. The £25m profit can be passed back to HMT. Stop exonerating it. Our Website uses cookies to improve your experience. Who wins ? Before the great financial crisis, 10y bond yields are at 5% and HMT issues a £100m 10y bond with a 5% coupon. As I said, you can use repo, cash from redemption or adjust the loan account to manage it. We can tell from the accounts that the MtM gains ARE DEFINITELY passed back to HMT. The GFC happens and markets price interest rate lower – to 2.5%. As a consequence of this pretence, successive governments have been able to claim that the cost of government debt servicing has been more onerous than has actually been the case, and have claimed that this has prevented it from undertaking other forms of spending. And maybe things that aren't treasury securities to begin with. This is called quantitative easing. Yesterday’s post discussed central banks’ use of quantitative easing … The coupons cancel out, as you suggest, but they have still paid 150 for an asset which will redeem at 100. This is not so. those of the APF, still show transactions being undertaken with regard to these gilts, does not alter this economic substance that the transactions in question net out on consolidation for the government as a whole, and as such have no real economic substance to them, clearly indicating that the gilts in question are effectively cancelled. The premium is porep[aid interest not now due. When you attach “money” debt to the use of real resources then you’re obligated to others because all the might of laws neutrally and remorselessly reinforce that obligation. Any excess liquidity would then go seeking any place to be parked, even at negative yields. Quantitative easing definition. If they weren’t currently holding any cash, the tally holders had to wait until they were. This is basic financial mathematics. Quantitative easing refers to large-scale asset purchases conducted by a central bank in order to put downward pressure on market interest rates. The price paid may not have been the price at which the gilts were originally issued by the government. Their assets are the Gilts they purchased. See pages 1 and 2 of Chrisine Desan’s book on the evolution of money. 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 only the entire populace could be educated on this (and the EU). That’s it. Maybe they're starting to buy corporate debt. For it to be any other way, there would have to be a finite supply of money. This influx of cash is supposed to stimulate the economy. I’m sort of surprised you haven’t managed to. Agreed, the BoE has only recently started paying interest on its reserves. Meaning of QUANTITATIVE EASING. Just because it is a paper entry doesn’t men it isn’t real and cash doesn’t change hands – it’s called a margin account. Questions about quantitative easing. You still get your 5% coupons, but the increase in price is solely due to the current level of interest rates. This is actually roughly where he current 4.75% coupon 10y bond is trading in price terms currently. And there is not a penny of risk – because whatever risk the APF has is equal and opposite gain to the Treasury – so you are wrong. Nonetheless, citing necessity during a past implementation of quantitative easing, the Financial Times stated,  “The Federal Reserve, the Bank of England and the European Central Bank each had to intervene in order to prevent a deeper economic depression.” Because the market already had such low interest rates, the only way they could intervene was by quantitative easing. Quantitative easing involves us creating digital money. Second, it helped to stabilize the U.S. economy, providing the funds and the confidence to pull out of the recession. When you say HMT can’t lose on these bonds you are also unfortunately also wrong. Whilst the economic substance of what has happened is that the gilt is cancelled, the legal form of their continued existence has been maintained. Is it ever likely that they will be? The more liquidity, the lower rates would go unless the BoE stepped in and put a floor in place. Ultimately you have to wonder why mankind developed an economic system that enforces repayment of money spent defending against a natural disaster. Thank you Richard for going to the trouble of delving into these financial processes regarding QE. There is another advantage to the accounting method used, which is at arms length. 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. Enter quantitative easing, an idea the Fed is borrowing from Japan, which used it a decade ago when it had a similar problem. As I note – the premium is an asset representing interest prepaid. The Fed used it to combat the 2008 financial crisis. They specifically split out the interest received from the market to market changes in the bonds. Quantitative easing, as used by the US and Europe during the global financial crisis, is another tactic where a central bank effectively prints money that it uses to buy government bonds. Tallies were thus acceptable in payment not because they served to redeem recipients from their personal liabilities to taxation (as MMT accounts imply) but because they served as negotiable claims on tax revenues intended for the Exchequer. As I mentioned, the BoE is still paying interest on the reserves used to buy the APF gilts. HMT has made it’s money back – as well as front-loading the £25m to today and spreading it’s cost over 10 years. Information and translations of QUANTITATIVE EASING in the most comprehensive dictionary definitions resource on the web. You start to go wrong at point 9. So if you sell the bond for 100, then buy it back for 150, you have lost 50. Please do consolidated accounting/ The Treasury cannot lose on these bonds: it is impossible unless they chose to sell them – and they have no need to do so. Excellent summary which I’m sharing with friends who have an interest in esoteric matters like this. Quantitative easing works through two channels. a) If you sell something for a given price, and then buy it back for a higher price you have still lost the difference. So to clear my head The coronavirus pandemic has been a … People afraid of debt! I think understanding is best served by the “various reasons” being fully spelled out. Point 10 is essentially correct – the interest payments (coupons ) on the Gilts are effectively cancelled, but you fail to mention that instead of coupon payments the BoE now has to pay interest on the reserves it has created. ..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 APF now has an asset of £150m and liabilities of only £125m. Banks are all about creating debt. Point 11 is just wrong. If they decrease in value the APF would be bankrupt, and would need money from elsewhere to remain a going concern. 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? As I have shown, with example, HMT can make a loss on assets it now owns. c) I’m not sure what you mean by ” rates have reduced servicing cost”. You really need to learn to read and understand accounts. This means those bonds are still in existence and still carry risk. Great article Richard, really interesting. Once bought by the APF the reacquired gilts have sat on its balance sheet as assets. The UK Govt. our bond now has a value of 125, the extra 25 coming from the present value of 5% coupons and bullet repayment at a lower discount rate of 2.5%. The objective has always been to keep the same value of gilts in ownership. Point 12 is true, but you miss a major issue here. Mythbuster: What is quantitative easing and how does it work? This is a liquidity measure that they use to fight economic downturns. The interest payments from bond coupons net out, but the mark to market gains and losses don’t. For security reasons, credit card donations require Javascript. It’s not a liability in any real sense of the word. Secondly, governments like the UK would issue credit money in the form of tally sticks without a central bank. "https://secure." d) MtM is not a red herring, and the APF accounts show that net MtM changes are paid to treasury, or any losses covered by treasury. var scJsHost = (("https:" == document.location.protocol) ? These values have been generated by the mark to market value of the Gilts held changing with interest rates (bond yields, specifically) and not the coupon payments from the bonds. 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. Her philosophy: "Let's agree to disagree and find compromises." 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! In practice, the income received by the APF as a result of the payment of this interest belongs to the Treasury as a consequence of the management agreement reached between it and the Bank of England, previously noted. They make specific mention in the whole of government accounts that the APF gilts are represented by the reserves used to buy them, because the APF is at arms length, and there is a risk on the APF balance sheet because of those bonds. 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. 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