Two questions are being asked. Is more QE on the way and did the Bank of England really make Â£20.7 billion profit from QE operations, which could be used for a nice little tax giveaway?
The minutes from the latest meeting of the Bank of England’s Monetary Policy Committee suggests that the door to more QE is wide open.
Whilst agreeing to hold interest rates at 0.5% all nine members voted to keep the asset purchase programmes at its current value of Â£375 billion but the minutes showed that some thought there was a good case for increasing itand that the decision not to vote to raise it was ‘finely balanced’.
For an explanation of QE and how it works please do watch the BoE’s own short Youtube video (below) which, despite having been available since 1st Feb 2010 and the subject attracting so many million column inches, has actually been watched by very few people it seems (less than 22,000). Obviously not as important to watch as fluffy kittens etc scampering about.
It looks then like we are going to gradually ramp up the amount of QE to keep the system as it is afloat in the hope that something will come to our rescue. You know, keep doing the same old thing time and time again hoping for a different outcome next time and being surprised when nothing changes. Just how high will this QE mountain will grow is anyone’s guess.
The Telegraph reports on another interesting aspect of QE here. UK economist at Citi, Michael Saunders, has put forward the idea that the ‘profit’ that the Bank of England has made from QE should be given to the government in order to fund a nice little reduction in income tax.
Mr Saunders thoughts go something like this. The BoE buys Gilts. The Gilts pay a coupon (interest) from the government to the holder every six months. The BoE therefore receives these interest payments as a ‘profit’. The BoE should therefore pay this Â£20.7 billion in cash (annual report page 2) back to the government so it can use it instead of it sitting in the Bank of England vaults (which is itself part of government of course).
This though for me seems to miss a few vital points. For QE to work there must be an accounting firewall of sorts between the BoE balance sheet (actually the balance sheet of the Bank of England Asset Purchase Facility Fund-BEAPFF) and the ‘real’ economy. Without it all that is happening is that the amount of money in the general economy would be getting larger. The mechanics of QE is to swap electronically created liquid money for the more illiquid Gilts, which maintains the ‘real’ economy at the same size.
Then with Gilt yields and inflation where they are as well as associated fees you have to wonder if any ‘profit’ has really been made. At the moment after all is said and done you might break even as Gilts are trading at a premium.
When the BEAPFF buys Gilts it uses money that is loaned to it by the BoE after being electronically created and it takes the Gilts onto its balance sheet. When the coupon is paid by the government the money goes into the BEAPFF and is taken out of the ‘real economy’, which tightens back some of the easing – except note the indemnity/profit agreement below. It could then conceivably be destroyed in the same way it was created. Then when the Gilts are either sold or mature the remaining money will be taken out of the ‘real’ economy put into the BEAPFF and again could be destroyed.
But while QE is in operation the money generated from the interest payments sits on the BEAPFF’s balance sheet for accounting to ensure QE works as it was planned to.
The important point to note though is that the BEAPFF is indemnified against loss by the Treasury and in return on making gains passes those back to the Treasury. In that way the BEAPFF is designed not make a profit or a loss. This is also explained on page 2 of the annual report linked to above.
And where Gilt market prices change it has no overall effect. The logic is explained here – “The simple economic logic is that the gilts held in the Asset Purchase Facility (APF) are both an asset and a liability of the public sector. So, taking the public sector as a whole, fluctuations in the market price of the gilts held in the APF have no net impact on the public finances.”
The Â£20.7 billion in cash is then primarily just coupons received.
If the government now decided to put its hand through the accounting firewall and take the coupon payments back it would be forgiving itself some of its own debt (one wonders whether this would constitute a technical default or not) as well as imposing a loss on the BEAPFF. In fact without a rule change then the indemnity for loss would kick in and the Treasury would then have to pay it back to the BEAPFF anyway.