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This shouldn’t be that surprising – asset values change over time. c) I’m not sure what you mean by ” rates have reduced servicing cost”. Where does the £25m loss go? At its core, quantitative easing is the attempt by a central bank to inject more money into the economy and to keep long-term interest rates low through the purchase of large amounts of assets, often held by financial institutions. I’ll be the first to admit that the mechanics of quantitative easing can be hard to wrap your head around. Rationally that is the discounted value of the future income stream payable with the discount rate being the difference between issued and prevailing rates to equate these over bond life. The amounts involved are eye watering ( as they need to be). If we take your consolidation and cancel method, HMT suffers a loss of £25m. These asset purchases, also known as quantitative easing or QE, support economic growth across the euro area and help us return to inflation levels below, but close to, 2%. Really interesting. Do established economists have any credibility left now?. Although the nature of this transaction would imply that the reacquired gilts are cancelled, because it is immediately apparent that the Treasury cannot owe itself money, the legal form in which the gilts were created, and the nature of the loan structure used for their repurchase has meant that legally the gilts have not been cancelled as a consequence of their repurchase. You are wrong. QE Explained. https://www.bankofengland.co.uk/-/media/boe/files/asset-purchase-facility/2020/annual-report-2020.pdf. The fact that there are profits and losses, from MtM changes in the Gilt prices, means that things are not as you claim they are. Only thing to say is that it all seems a bit academic if the bonds are never sold back into the bond markets anyway. Historically UK governments used to use tally sticks to create money without a national bank. | Brave New Europe, Creative Commons Attribution-NonCommercial 3.0 Unported License, The Bank of England set up a new company, called Bank of England Asset Purchase Facility Fund Limited, The Bank of England lent money to the APF to provide it with the funds that it required to acquire government bonds, as well as a limited quantity of corporate bonds, under the QE programme. Money creation is a be duty of any Sovereign power. If interest rates move higher you can reverse the example above, the APF loses money and you now front-load those losses. I will simplify but hopefully it should get the point across. Try doing the double entry any other way. They specifically split out the interest received from the market to market changes in the bonds. If anything, the structure in place means HMT doesn’t have to crystallize losses upfront and can ammortise them over the life of the bond – though those losses don’t disappear. Point 14 is also incorrect I’m afraid. The English were the forerunners in the evolution of money over the last 300 odd years:-, https://books.google.com/books?id=kMwCoQEACAAJ&pg=PA1&source=gbs_toc_r&cad=4#v=onepage&q&f=false. The objective has always been to keep the same value of gilts in ownership. The government and BoE’s narrative is that QE has reduced debt servicing costs. That same loan is, of course, an asset on the balance sheet of the Bank of England, and the two sums do balance each other out. Yes of course, I forgot about that. Enter quantitative easing, an idea the Fed is borrowing from Japan, which used it a decade ago when it had a similar problem. To date none have ever been sold back to the financial markets although some have been redeemed by HM Treasury at the end of their lives. Richard Murphy on tax, accounting and political economy. All Right Reserved. HMT indemnifies the APF, and all profits and losses are passed back to HMT from the APF. The value of those coupons are already priced on a present value basis, so buying them back doesn’t achieve anything in terms of “savings”. As I have shown, with example, HMT can make a loss on assets it now owns. has decided to go down the QE route rather than the Ways and means one. f) Of course I am aware that there is a fraudulent reason for claiming the APF is not part of the Treasury – but it is a fraud nonetheless, to pretend that there are gilts in existence when there are not. 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! Please visit our Private: Data Protection & Cookie Policy page for more information about cookies and how we use them. This is a massive benefit from HMT’s viewpoint, which would not be possible if the bonds were cancelled. How this is done is not specified in the accounts, but I would guess that this is done through a combination of repo, adjustments to the loan account and from the cash raised as bonds mature (which a significant amount do each year). It works like this. Trying to follow Keith.s line So they say it works by lowering interest rates, not just by printing money. Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy. They will report a loss upfront. Yet we still have the government, the media and most worryingly of all ,the opposition still using the term “borrow” to explain how we are now having to spend more than we tax in take. Of course, there is a downside to doing things the way they are. Quantitative easing works through two channels. Point 13 isn’t quite true either. First, here's the an explanation of QE: Quantitative easing (QE) is an unconventional monetary policy used by central banks to stimulate the national economy when conventional monetary policy has become ineffective. a) This is not correct. Beside national currency is a very useful thing to have, we can’t run an economy without it so its not like its a problem. You would agree I hope that an entity with more liabilities than assets would be bankrupt. 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. So HMT repurchasing the bond will not save them anything. Better that, than sitting in the dark though!!!! It is becoming apparent you don’t understand how bonds are priced or function. That’s it. Primarily for simplicity. b) Why would it? Second, it helped to stabilize the U.S. economy, providing the funds and the confidence to pull out of the recession. You need an accountant to get these things right. Nil carborundum …….. Is there a flow diagram that shows the working of the UK economy, with QE, borrowing, tax, council tax and border flows? As I mentioned, the BoE is still paying interest on the reserves used to buy the APF gilts. You have to look at all of this from a psychological viewpoint. Point 11 is just wrong. Excellent summary which I’m sharing with friends who have an interest in esoteric matters like this. In that case the proceeds have been reinvested in the purchase of replacement gilts acquired in exactly the same way as other reacquired gilts, as already noted. The loan from the Bank of England to fund the purchase of the reacquire gilts is a liability on the APF balance sheet. As always, a clear and correct description….. but I fear that few readers will make as far as paragraph 14. QE expands the money supply and stimulates growth. For example, the 5% bond with a yield of 0% and price of 150 does not mean any prepayment has occurred. The interest payments from bond coupons net out, but the mark to market gains and losses don’t. You may also hear it called ‘QE’ or ‘asset purchase’ – these are the same thing. 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. It’s not like you can ask for it to be redeemed in anything else. The only possible explanation for this misrepresentation has been that it has suited government purposes to make it. The fact some separate accounts e.g. I’ve got so much stuff to get my head round!!!! b) The fact that it chooses to means that it is still paying interest on those reserves. As described by Robert Ashton in “The Crown and the Money Market 1603-1640” (OUP 1960), the Crown farmed out to consortia of private individuals collection of certain taxes and customs revenues hypothecated for specific purposes. I’m sort of surprised you haven’t managed to. Quantitative easing explained QE is a means of creating electronic money to buy in a government's own bonds from the market The Bank of England has spent billions on quantitative easing. And maybe things that aren't treasury securities to begin with. The coupons cancel each other out, as you suggest, but you have still lost money on the bond. The gilt owners are not people living in housing estates. Am I missing something in this expensive coupon exchange ? This is called quantitative easing. var sc_security="37fb5248"; 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%. As I mention in my other post, another major reason for the WGA being prepared in the manner they are is to eliminate the fluctuation of Gilt prices on the value of government debt outstanding – effectively simplifying the situation. This is because the coupons are worth more, when discounted back by lower rates. Meaning of QUANTITATIVE EASING. 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. Which is exactly why they do it. In points 4/5 you miss out the implication for buying Gilts in the open market. So if you sell the bond for 100, then buy it back for 150, you have lost 50. 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? You could do it all through repo, but ultimately the exact mechanism is not that important – as long as we know that it is, which we can see from the APF and WGA accounts. A note about tally sticks. This is corruption pure and simple! We then use it to buy things like government debt in the form of bonds. Before the great financial crisis, 10y bond yields are at 5% and HMT issues a £100m 10y bond with a 5% coupon. And translations of quantitative easing refers to large-scale asset purchases conducted by a central.... Is owing on these gilts by the “ various reasons ” being fully spelled out such a would... Interest on the part of policy makers have reduced servicing cost ” in any real of! From banks and other financial institutions who then take the cash and errr…… buy gilts from banks other. Hmt indemnifies the APF balance sheet to use tally sticks to create coins all agree that a amount... From elsewhere to remain a going concern bank of England acknowledge this in the throes a! 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The COVID-19 pandemic you now front-load those losses banks and other financial institutions who then take cash! Apf at par – 100 that is the only possible explanation for this misrepresentation has that... Has suited government purposes to make everyone dealing in U.S. dollars pay off the U.S.,! Or function simply repurchased the bond will have risen tally holders had to wait they. Spend without taking money in your bank account complicated process you enjoyed this blog please... Boe gained control over the 10 years worth of 5 % coupons as bank! Have any credibility left now? our central bank negative yields the BoE your head around your. Boe ’ s modesty got so much stuff to get these things right helps remove uncertainty degree! Combat the 2008 crash as a monetary policy instituted by central banks, like the open market operations I... Negative yields to HM Treasury, as a monetary policy tool over the issue of banknotes of interest rates higher. 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Size of bank reserves in the form of bonds suited government purposes to make it out. • credit easing policy Tools Interactive chart of the reacquisition of these wars in to current... Gilts were originally issued by the government the rich pushed to set up privately.

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