When I studied British politics (as one unit in a politics minor) at university, I was bemused by the role of the House of Lords. I know it is a curiously British institution that would be hardly tolerated anywhere else. But the fact that it serves as a part of the British democratic system continues to amaze me. Recently, the Economic Affairs Committee has been investigating (if that is what they get up to) Quantitative Easing because, apparently, some of the peers were worried about the “operational independence” of the Bank of England and the “economic effects” (read: inflation fears) among other concerns. They published their first report last week (July 16, 2021) – 1st Report – Quantitative easing: a dangerous addiction? – and it is littered with errors. The government has until September 16, 2021. The reply does not have to be long – they could just submit this blog post and get on doing things that matter, although the Tories are currently finding it hard to get their head around that essential task at the moment....Bill Mitchell – billy blog
British House of Lords having conniptions about QE – a sedative and a lie down is indicated
Bill Mitchell | Professor in Economics and Director of the Centre of Full Employment and Equity (CofFEE), at University of Newcastle, NSW, Australia
I actually made a submisstion to that enquiry, which anyone in the UK was entitled to do. I said that far from QE being some sort of problem, there was a good argument for taking it much further and "QEing" the entire national debt on the grounds that Milton Friedman advocated paying no interest on govt liabilities in normal circumstances and MMT advocates the same I think.
ReplyDeleteI haven't bothered looking to see if I get a mention in the report because to judge from the abstract and as Bill Mitchell rightly says, it's a load of nonsense.
“ When I studied British politics (as one unit in a politics I minor) at university, I was bemused …”
ReplyDeleteSpeaking of which, was anyone else here bemused by the launching of a giant mushroom dick into space this morning?
Sorry about that, Tom.
In US anyway the Fed has to transfer any Residual above about 7B back to the Treasury account in a timely fashion... so when they do that they may become 'out of money' until the next coupon payment is made on any bonds they own...
ReplyDeleteSo they might have some short term liabilities they have to meet before they receive the next coupon...
So they might have to buy more securities that will soon pay a coupon which they can then spend before their next excess Residual payment is due to the Treasury....
This process might become terminal at/near zero % so we see first Japan and now ECB seemingly in perpetual asset purchasing...
Fed might be next and maybe the others who have finally brought the policy rate to zero...
This perpetual asset purchases might be driven by this more or less "cash flow" problem they get themselves into down here at zero...
https://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm
ReplyDelete“ The Federal Reserve Act, as amended effective May 24, 2018, requires that aggregate Federal Reserve Bank surplus not exceed $6.825 billion. After providing for the costs of operations, payment of dividends, and the amount necessary to maintain a $6.825 billion surplus, any residual net earnings will be remitted to the U.S. Treasury. ”
So they can perhaps periodically run out of money and might have to buy additional bonds to get the coupon income before they have to make the statutory remittances…
“ Quantitative easing: a dangerous addiction?”
ReplyDeleteMore figurative language from Art degree unqualified morons…
Just because someone can be observed doing something repeatedly and consistently doesn’tliterally mean they are “addicted!” to it …. This is a figurative analogy to a human drug addict or something… it won’t help… you can’t correct someone who doesn’t understand the scientific abstractions via figurative language like this…
Japan went to zero and have been buying assets ever since.., then ECB went to zero and have been. buying ever since… us has now gone to nearest zero and has been buying ever since… etc…
There is a technical explanation for this but you are going to have to get SCIENTIFIC QUALIFIED forensic accountants to breakdown all the transactions into an abstract illustration of the CB cash flows and perhaps discover the TECHNICAL explanation for why they are doing this… when they hit the zero lower bound on their policy rate…
And Bill is not qualified… (and neither am I …I could perhaps point them in the right direction to start..)
It would take a lot of work… by…. THE… RIGHT…PEOPLE….
Here:
ReplyDelete“ One of the submissions – from the Director of the National Institute of Economic and Social Research – raised the alarm about the possible insolvency of the Bank of England, which might mean “the MPC may be reluctant to raise rates”.
The causality conjectured was that the Asset Purchase Facility – the bond buying program – “is funded by reserves that are renumerated at Bank Rate”.
He admits that the Bank of England has “passed some £110bn of profits to HMT so far” as part of the APF but if the Bank of England was to increase rates then it could start to make losses.”
This guy is probably correct… they probably can’t raise rates because it will put them in negative equity position… and maybe even before that would happen they don’t have the balances available to meet other short term liabilities without buying additional interest bearing securities…
So they may effectively be stuck at zero and having to continuously buy additional interest bearing securities …
And yo here from the law:
ReplyDeletehttps://www.federalreserve.gov/monetarypolicy/bst_fedsbalancesheet.htm
“ The Federal Reserve Act, as amended effective May 24, 2018, requires that aggregate Federal Reserve Bank surplus not exceed $6.825 billion. After providing for the costs of operations, payment of dividends, and the amount necessary to maintain a $6.825 billion surplus“
Here the law says: “MAINTAIN A $6.825b surplus”
So you morons who say “hey! The Fed can just run negative equity!”
Wake the fuck up you leftist commie dummies the law says they HAVE TO maintain 6.825b residual… so that’s what they are doing…
https://idioms.thefreedictionary.com/if+the+shoe+fits%2C+wear+it
ReplyDeleteAnd this from Bill here:
ReplyDelete“ 1. If they believe that inflation is about to accelerate because all those bank reserves will be spent or loaned out, which is the sort of causality they beleive in, then they should be relaxed that QE hasn’t impacted much at all.”
Is false from the US system regulatory context…
That reification error Bill refers to , where these morons think the Accounting abstractions are real, has been the source of many problems here in the US including the GFC, last years crash in March and the present deposit strike US depositories are on…
I don’t think it’s fair to say “not impacted much at all” for presently here in the US, these people have the thing so screwed up that our depositories can’t accept any more deposits…
Matt,
ReplyDeleteBill's post is about the UK QE system based upon a House of Lords report by a bunch of 1990s rejects who are still pushing the Third Way. And Mervyn King who failed to spot the Financial Crisis as governor of the Bank of England.
Here QE has no effect at all. But then we have the DMO whose job it is to neutralise daily reserve movements, and we don't include 'near cash items' in bank capital ratios.
One of the advantages in having a century or two more experience in banking.
Neil yes the UK regulations are a bit different from the US…
ReplyDeleteBut does UK require maintenance of a minimum equity/residual? Does UK pay some sort of IOR?
Is BOE operating under an appropriation? Or is UK like US where the CB has to make a positive return on its assets in order to pay its expenses?
I think all these CBs have some basic common characteristics…
I’ll tell you one good thing you guys have is that the banks don’t have to consider Reserve assets in their total leverage ratio… this has continued to be a big source of regulatory conflict here…
ReplyDeleteNeil here:
ReplyDelete“ the Bank of England has “passed some £110bn of profits to HMT so far” as part of the APF but if the Bank of England was to increase rates then it could start to make losses.”
Does UK have a law that acts to prevent or forbid these losses at the BOE? If they do then probably BOE can’t raise rates… or maybe they could but would have go very slowly like maybe +0.25% per year or so…
"Does UK have a law that acts to prevent or forbid these losses at the BOE?"
ReplyDeleteNo, there is no law against it. There is an MoU between the BoE and its owner HM Treasury to maintain the capital buffer of the BoE between £0.5bn and £5.5bn. BoE also holds HM Treasury indemnities for any losses within APF.
In 2018 assets from the APF we lifted to the main BoE balance sheet, the indemnity removed, and capital injected into the BoE by HM Treasury.
BoE cannot make a loss, because HM Treasury just tops up the pot as required with a parliamentary nod.
Interest on Reserves is paid by paying the interest on Gilts into the APF, which then pays interest to the BoE on a loan from the BoE, who then shares it out between the banks.
If the BoE put interest rates up to 5%, capital would be injected into the BoE which would give it an asset with the National Loans Fund paying at least 5%, and you would get a run down and top up process until you got to a steady state.
The interest on Gilts is appropriated as a standing charge by virtue of 12(4) of the National Loans Act 1968.
“ BoE cannot make a loss, because HM Treasury just tops up the pot as required with a parliamentary nod. ”
ReplyDeleteThat would NEVER….EVER…NEVER… NO WAY IN HELL… NEVERRRRRRRR happen in the US…
Pocahontas would go on the warpath…