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Printed money can be an investment, as it creates demand, which produces more jobs, which means more taxes are collected, and then the govt gets its money back.
Win, win!
The British government has never paid off the £1,200,000 loan that created the Bank of England in 1694. In exchange it gave the merchants who provided the money the exclusive right to print banknotes against this debt, giving birth to the central bank and much of the architecture behind the world’s financial system. Today, as policymakers promise to do “whatever it takes” to prop up their economies in the face of coronavirus, central banks are facing calls to print money to finance government spending directly
Recent QE programmes, in fact, look increasingly likely to become permanent. Central bankers were unable to complete a much-discussed programme of “normalising” monetary policy between the financial crisis and today’s crash. They are not going to be able to do so any time soon. The scale of previous schemes means the Bank of Japan — which holds government bonds worth more than 100 per cent of Japanese national income — may never be able fully to unwind its purchases
FT
Well the wealthy merchants never gave £1,200,000 to the government simply printed off banknotes which actually exceeded that amount and gave them to the government in return the government collected up tax from others probably much less wealthy and paid this as interest to the wealthy merchants for their fictitious loan! Nice money if you can get it!
ReplyDeleteGood Heavens: the Financial Times has finally got to grips with MMT....:-)
ReplyDelete"The British government has never paid off the £1,200,000 loan that created the Bank of England in 1694."
ReplyDeleteOnce again, not true. The Bank stock was purchased by HM Treasury with the issue of 3% Treasury stock in 1946 when the Bank was nationalised, and that was paid off on 8 May 2015.
https://www.gov.uk/government/news/debt-issued-to-fund-the-1946-nationalisation-of-the-bank-of-england-to-be-repaid
Sort of interesting that the FT doesn't know what a swap is.
That sounds good! You know what the funny money people are like.
DeleteThese CBs at zero with extremely large liabilities can’t raise the rates because if they do then their short term variable rate liabilities (IOR, RRP, dividends, operating expenses, etc) soon exceed their long term fixed portfolio income and they would have to report zero/negative equity, while the law requires them to maintain a near constant 7B equity…
ReplyDeleteSo they are first going to have to reduce the system reserves by a very large % before they could ever try to slowly increase the policy rate…if they even ever could…
CBs can’t pay expenses by creating reserves they have to purchase assets… so there are 2 accounting entries.. RHS entry is the CB reserve liability and LHS entry is the USTs…
ReplyDeleteThen they can pay expenses out of the coupon income they receive from the purchased financial assets (USTs, etc)…
So they can never increase rates in a way that would have their expenses exceed their income in any period…
Not in the UK Matt. Here the Asset Purchase Facility provides whatever income is required to fund reserves since it has to pay the Bank of England the Bank Rate on the loan it has from the Bank of England.
ReplyDeleteAnd the APF is covered by an unlimited indemnity on its assets from HM Treasury.
"The Company is fully indemnified by HM Treasury: that is, any financial losses as a result of the asset purchases are borne by HM Treasury, and any gains are owed to HM Treasury."
Under the MoU with HM Treasury the Bank of England capital is always topped up automatically.
"To achieve this, the recapitalisation process will include, among others, notification by the Bank to the Treasury that the Bank’s capital is likely to breach the floor (or has breached it), evaluation by the Treasury’s Accounting Officer of the case for capital injection and how that should be undertaken, disclosure by the Treasury to Parliament, financing by the UK Debt Management Office, and payment by the Treasury to the Bank from the Consolidated Fund."
They can’t increase rates that would leave their equity non = to 7B which is what the law says..,
ReplyDeleteUS doesn’t have that and I’d assume ECB and BOJ don’t have that either…
ReplyDelete"To achieve this, the recapitalisation process will include, among others, notification by the Bank to the Treasury that the Bank’s capital is likely to breach the floor “
ReplyDeleteWe don’t have this if it ever happened it would create a BIG political problem… BIG…. Fed would have to go to Congress to get a special appropriation…
We can’t even get Congress to increase the debt ceiling…
Fed will do anything within their power to avoid this situation….
If they ever did that we’d probably be put back under gold by Congress…….
ReplyDeleteFull understand you don't have the legislation in the US.
ReplyDeleteThe UK has a few hundred years more experience at running central banks, and all those mistakes have already been made. Hence why the legislation is already in place that allows HM Government to recapitalise the Bank whenever required - and retrospectively get that approved by Parliament if necessary.
Similarly we don't have debt ceilings and our Finance Bills and Supply and Appropriation Bills are completely separate Parliamentary proceedings. Which means no chance of PAYGO either.
It's just years on the clock. The US is politically still a young nation.
But the only assets that Fed buys are govt bonds that are guaranteed by the govt which they put on their books at par… so there is no risk that they would ever experience a loss… they just hold them until redemption…
ReplyDeleteSo the Fed doesn’t have a guarantee by Congress against a general deficiency the Fed has all their assets guaranteed by federal govt …
Somewhat the same thing…
US law compels Fed to maintain a $7b residual… which they do….
ReplyDelete