Who got the £375 billion?

JohnRo

Jegersmart wrote: »

so why does the Government need to pay interest to the BOE when they create money?

The Rothschilds and Rockerfellars have a few trillion reasons why bought and paid for governments need to make their nations pay interest to central banks.

grey_gym_sock

sabretoothtigger wrote: »

The assets are not increased, its more a case of the price has been inflated by QE. Remember when house owners 'earnt' more from their house price rising then in their jobs.
The company is correct to complain this is forcing them to rebalance funds towards something that may only be temporary and it is likely QE either reverses at best or at worst bond prices could collapse

The company would not be able to get back money put into the pension fund so this could be causing them problems hence QE is possibly destabilising business balance sheets.

of course the rise in a pension fund's assets isn't a magic gain, it's just temporary. but that doesn't change my point: they are gaining about as much from inflated asset values as they are losing from inflated liabilities. and both effects are likely to reverse at some point.

their liabilities are defined in terms of the available returns from gilts. some of their assets may also be in gilts, in which case the effects will exactly cancel out. probably more of their assets are in shares. shares have also done better than they would have done without QE, though it's difficult to say exactly how much better. so i can believe that their pension fund deficit has increased; but it might well have increased by just as much without QE. i.e. without QE, shares would likely have fallen. with QE, they've risen a bit, but not enough to cancel out the pension fund's higher liabilities.

some companies have a serious problem with pension fund liabilities. at its worst, they can end up being a bet on the pension fund with a small regular business tacked on. (i assume smiths group isn't that extreme, but i haven't looked at them in detail.) this is not the fault of QE.

So I dont dismiss the BOE QE effects as zero, some will profit and others will lose

absolutely.

If we say the 8% bond matches inflation as some point. All the premium is lost, lets assume this is a fair scenario but bad outcome to QE (as opposed to our current beautiful outcome )

that gilt will be redeemed in 5 years. you are effectively estimating an average of 8% inflation over the next 5 years. i think that's implausibly high, given the lastest RPI is 2.9%, and we are in a depression, with high unemployment and lots of unused capacity in the UK economy, so we are only likely to see much inflation from imports (which is likely for energy or anything including an indirect energy cost, but otherwise not very likely given much of the world is in a depression).

for longer-term gilts, losses in real terms could be higher, or in any case are a lot harder to estimate. however, 8% is a very high estimate for inflation on any timescale. though it's something we probably have no real ability to predict in the long term.

Our national debt is 1tn and QE costs us not in face value but in inflation a further 143bn until QE is zero.

as i said, i disagree with your assumptions. however, whatever we lose by buying gilts can be partly offset by the reduced cost of government borrowing as a result of QE. and then we have the (very hard to estimate) effects on the wider economy. so overall, i'd say it could be a big number, positive or negative, but who knows what? isn't that reassuring?

Glen_Clark wrote: »

The biggest losers from QE will be those who hold only fiat money - the poor.

well, the very poorest have no cash savings. the losers are people with only cash savings, or on a fixed income. which includes a lot of relatively poor pensioners - not the poorest, who only have state pension and other benefits.

Jegersmart

grey_gym_sock wrote: »

of course the rise in a pension fund's assets isn't a magic gain, it's just temporary. but that doesn't change my point: they are gaining about as much from inflated asset values as they are losing from inflated liabilities. and both effects are likely to reverse at some point.

their liabilities are defined in terms of the available returns from gilts. some of their assets may also be in gilts, in which case the effects will exactly cancel out. probably more of their assets are in shares. shares have also done better than they would have done without QE, though it's difficult to say exactly how much better. so i can believe that their pension fund deficit has increased; but it might well have increased by just as much without QE. i.e. without QE, shares would likely have fallen. with QE, they've risen a bit, but not enough to cancel out the pension fund's higher liabilities.

some companies have a serious problem with pension fund liabilities. at its worst, they can end up being a bet on the pension fund with a small regular business tacked on. (i assume smiths group isn't that extreme, but i haven't looked at them in detail.) this is not the fault of QE.

absolutely.

that gilt will be redeemed in 5 years. you are effectively estimating an average of 8% inflation over the next 5 years. i think that's implausibly high, given the lastest RPI is 2.9%, and we are in a depression, with high unemployment and lots of unused capacity in the UK economy, so we are only likely to see much inflation from imports (which is likely for energy or anything including an indirect energy cost, but otherwise not very likely given much of the world is in a depression).

for longer-term gilts, losses in real terms could be higher, or in any case are a lot harder to estimate. however, 8% is a very high estimate for inflation on any timescale. though it's something we probably have no real ability to predict in the long term.

as i said, i disagree with your assumptions. however, whatever we lose by buying gilts can be partly offset by the reduced cost of government borrowing as a result of QE. and then we have the (very hard to estimate) effects on the wider economy. so overall, i'd say it could be a big number, positive or negative, but who knows what? isn't that reassuring?



well, the very poorest have no cash savings. the losers are people with only cash savings, or on a fixed income. which includes a lot of relatively poor pensioners - not the poorest, who only have state pension and other benefits.

So why do Governments have to pay interest to another entity when printing money?

J

grey_gym_sock

Jegersmart wrote: »

So why do Governments have to pay interest to another entity when printing money?

how many times are you going to ask this question?

QE isn't attempting to change the current system for creating money, in which money is created when banks make loans (this is fractional reserve banking).

perhaps it should be changed. some interesting ideas for that here - http://www.positivemoney.org.uk/

Masomnia

Jegersmart wrote: »

So why do Governments have to pay interest to another entity when printing money?

J

They don't.

sabretoothtigger

Governments dont have to do anything do they. In theory they can force through just about anything, the problem then is does it serve society.

Mervyn doesnt like the term printing money, I dont blame him. How uncivilised these people are in their labels

The problem for me is the economy is plain people not the all powerful bank like him. He doesnt mean diddly outside politics because he is not a producer of anything real.
He is the wizard of Oz alas the man behind the curtain is not that impressive beyond rhetoric

well, the very poorest have no cash savings. the losers are people with only cash savings,

Ive heard it said a few times that great upsets wipe out the middle classes.
The very rich have their assets abroad if needed and can join them for holidays years at a time if need be.
The very poor like you say may favour revolution even if destructive so its the suckers who actually invested in a singular countries system who lose most from its downfall

I think sub prime debt works fine for a comparison.
The ninja homes or non deposit no payment debt holders, lost nothing by this stupid mortgage fuss. They got some free housing then moved on after the good times ended, with many places that debt is not accountable to them anyway.
However some people paid in for years a big part of their wages and they are still just as badly off, they are the worst off as these normal houses sold too high

The very rich in very big houses got some cheap finance, after a few years they'll sell off another asset like gold or oil shares, whatever and easily cover it
Many senators got 1% loans as return for their good judgement on housing debt, our own MP have their housing costs met, etc

It'll be the same with QE I guess - Mervyn King for example has his pension in inflation indexed bonds I believe, he aint no sucker buying low fixed yields.

Jegersmart

Masomnia wrote: »

They don't.

Well thats that then!:)

Why do you say that?

J

JohnRo

sabretoothtigger wrote: »

It'll be the same with QE I guess - Mervyn King for example has his pension in inflation indexed bonds I believe, he aint no sucker buying low fixed yields.

What's a little insider trading between friends.

To be fair though those poor pensioners at the BoE did have a close shave, moving most of the BoE pension pot to index linked bonds just in time, before billions were wiped off equity values in the 2008 financial crash, then bolstering their index linked holdings year on year as their printing press began to crank out wealth transfer tokens to the retail banks.

Most of the pension pots of the BoE crooks have more than doubled since 2007 but that's clearly just down to a bit of luck.

Glen_Clark

grey_gym_sock wrote: »

well, the very poorest have no cash savings. the losers are people with only cash savings, or on a fixed income. which includes a lot of relatively poor pensioners - not the poorest, who only have state pension and other benefits.

I should not have used the word 'hold'
I meant the poor only have fiat money.
They don't have assets like agricultural land that has more than doubled in price since QE started - and benefits those holding the most - the extremely rich.
The poor will be at the sharp end of the increase in food prices that tenant farmers are campaigning for to offset the increase in rents they have to pay as a result of the increase in agricultural land prices.
The poor have suffered most from the inflation caused by QE because they have nothing to counteract it. Except possibly the increase in benefits which Gideon is now trying to decouple from the rate of inflation.

chewmylegoff

grey_gym_sock wrote: »

there's nothing to prevent BOE extracting the £375bn gilts from BOEN and canceling them, so that neither interest nor principal has to be repaid, and public debt is that much reduced. it's just that the consequences might be unpleasant. the theory is that it was only OK to buy the gilts with printed money because they will later sell the gilts again and then burn/cancel the printed money, so no net money has been created. putting this operation inside BOEN is presumably a way to keep the printed money separate so that it's clear they're sticking to this theory.

whether the theory makes any sense, i don't know. it seems unlikely to me that you can print so much money, even temporarily, without there being unfortunate side-effects.

There is one small problem with this. When the BOE started to engage in quantitative easing, HMT indemnified the BOE against any losses that it might incur. QE is conducted through a subsidiary of the BOE called the asset purchase facility or something like that - that subsidiary's accounts are not consolidated into the BOE's results, because the BOE has no economic interest in its subsidiary.

So, if the government cancelled the £375 bn of gilts held by the BOE, the accounting entry would be - DR: Impairment charge £375 billion; CR: Gilts £375 billion. This would create a loss of £375 billion in the BOE's subsidiary.

The government would then owe the BOE £375 billion. If HMT refused to come good with its promise to indemnify the BOE against losses from QE, the BOE's balance sheet would look like this:

Current Net Assets: £3 billion (approx, according to BOE accounts)

New Liabilities: (£375 billion)

Net Liabilities after impairment of gilts: (£372 billion)


So the central bank would be hopelessly insolvent...