Weekend Reading: Nightmare on Threadneedle Street
The £895 billion which the Bank of England used for QE wasn't expended. It was created.
The BoE fabricates all the money the government spends. Taxation then cancels the spending, helping control inflation. There are no economic losses from OT now, as there was no net cost to QE to begin with. Nor could there be a cost when the money used for QE was simply willed into existence digitally by the BoE.
Money is just a consensual shared hallucination. A means of account. The losses aren't real. However, the damage to human and social capital had the economy entered a deflationary depression in 2009 and 2020 would have been very real.
@Delta Hedge is correct. Money is just magically created, in the UK either by BoE or generally by private banks. The BoE even have a white paper about it: https://www.bankofengland.co.uk/-/media/boe/files/quarterly-bulletin/2014/money-creation-in-the-modern-economy.pdf It still escapes most people, including most MPs how money is created.
A Situation Many of Us Can Relate To
I enjoyed the link to the article on “Job Hugging”, this is a situation I find myself in, firstly because I’ve got too comfortable in my job after 10+ years at the same company and secondly I’m about 5 years away from FIRE (Financial Independence, Retire Early) and it seems easier to grind those out doing something with little risk and also the job market seems stale in tech.
I tend toward the view that QT should have been suspended prior to the start of the BoE’s recent cutting cycle. On one hand they are cutting policy rates, loosening financial conditions. On the other hand, they are selling Gilts, withdrawing liquidity and tightening financial conditions.
Understanding QT
Active QT is where the B of E accelerates the process by actively selling bonds it bought through QE, rather than waiting for the bonds to reach maturity. Active and passive QT combined have been taking place at about 100 billion pa.
Estimates are that QT is increasing gilt yields at the longer terms by about 0.2% pa (the B of E figure) to about 0.7% pa, but nobody really knows.
The Implications of QT
Active QT also affects the government headroom under its fiscal rules as this brings forward losses from QE/QT into the headroom calculation. So the chancellor might hope for a pause to active QT (?)
While the government can create money, it is also the case, that banks have made gains from QE and QT. Might that be used as an excuse to tax banks at the budget (?)
A Concern About Yields
The Long Gilt Sell Off
A +2.4% index-linked gilt looks very tempting to me as someone who is FIRE’d and wants to diversify away from cash/gold (and not feeling too thirsty for more equities at the moment).
I enjoyed the link to the article on “Job Hugging”, this is a situation I find myself in, firstly because I’ve got too comfortable in my job after 10+ years at the same company and secondly I’m about 5 years away from FIRE and it seems easier to grind those out doing something with little risk and also the job market seems stale in tech.
Understanding QT
I tend toward the view that QT should have been suspended prior to the start of the BoE’s recent cutting cycle. On one hand they are cutting policy rates, loosening financial conditions. On the other hand, they are selling Gilts, withdrawing liquidity and tightening financial conditions.
The Implications of QT
Active QT is where the B of E accelerates the process by actively selling bonds it bought through QE, rather than waiting for the bonds to reach maturity. Active and passive QT combined have been taking place at about 100 billion pa.
The Implications of QT
Estimates are that QT is increasing gilt yields at the longer terms by about 0.2% pa (the B of E figure) to about 0.7% pa, but nobody really knows.
The Implications of QT
Active QT also affects the government headroom under its fiscal rules as this brings forward losses from QE/QT into the headroom calculation. So the chancellor might hope for a pause to active QT (?)
The Implications of QT
While the government can create money, it is also the case, that banks have made gains from QE and QT. Might that be used as an excuse to tax banks at the budget (?)
A Concern About Yields
-index linked gilts are similarly affected. I’ve bought some more index linked gilts at the beginning of the week when yields went up to their highest point but if combined QT is announced to continue at 100 billion pa that will probably work against me.
The Long Gilt Sell Off
A +2.4% index-linked gilt looks very tempting to me as someone who is FIRE’d and wants to diversify away from cash/gold (and not feeling too thirsty for more equities at the moment).