From November 2022 until January 2024 the United Kingdom borrowed £118 billion, not to invest it in any way, but simply to “remove it from circulation” or, in simpler words, destroy it, cancel it out of existence.
£118 billion is a huge sum of money. Just think what else we could have done with that vast amount if we hadn’t just cancelled it out. £118 billion is Labour’s £28 billion green spending pledge restored. You can add in the whole of the government’s now scrapped Health and Social Care levy, which was meant to fix the NHS and social care by investing £36 billion from 2021 to 2024. It’s the extra £7 billion that Tom Tugendhat wants us to spend each year on defence, now that we are in an active confrontation with Putin’s Russia. That still leaves tens of billions for building new council houses. Possibly we could even fill in some pot-holes….
Moreover, the £118 billion is just the start. The Bank of England plans on borrowing a further £737 billion over roughly the next seven or eight years, just to cancel it out of existence.
Those sums are so large that those amounts don’t even seem real. Unfortunately those hundreds of billions are very real indeed. Why, at a time of multiple, interlocking crises, is the UK doing such an apparently crazy thing?
This is all about destroying the money created by Quantitative Easing (QE) to deal with first the 2008 Financial Crash, and then the pandemic (plus a bit more for Brexit). That further begs the question of why the UK feels the need to cancel out that QE created money in the first place. The justifications for all this have varied over time, but the latest, as at February 2024, are given in this report by the Treasure Select Committee: https://publications.parliament.uk/pa/cm5804/cmselect/cmtreasy/219/report.html.
Unfortunately, given the extreme importance of this issue, that report is full of holes, copiously uses technical jargon and euphemisms in a way that looks as if it is at least unconsciously intended to deceive, and has been produced essentially by two institutions, the Conservative dominated Treasure Select Committee, and financial industry influenced Bank of England, whose motivations have to be called into serious question.
Firstly, we may think that the main rationale for borrowing money, for cancelling hundreds of billion of pounds out of existence, is to fight inflation. That is not, however, the case: the Bank of England regards its setting of interest rates as its main weapon against inflation, and sees the likely affects of Quantitative Tightening (QT) on inflation as being both difficult to quantify and most likely not significant. In August 2023, reviewing QT to date, the Bank of England said this: “the impact on activity and inflation is also likely to have been small” .
Instead, the primary justification for QT, as stated in the Treasury Select Committee’s report, now seems to be “in order to create space for future interventions,” in other words for a future resumption of QE.
This claim is so disingenuous it would best be described as preposterous. Now money is just a claim on resources, not actual resources, so governments (at least those with what are called “fiat” currencies) can genuinely conjure it into being at will, and then force people to accept it as payment by mandating that money as “legal tender”. However, there is one obvious constraint on a government’s ability to create money: inflation. Adding to a money supply, without increasing the resources that money, can be used to buy, reduces the purchasing power of each unit of money.
The reason why the UK was able to create £875 billion of additional money, and then use that money primarily to address the effects of the Financial Crisis, including saving our banking industry, and then dealing with COVID, was because those periods were deflationary. The potentially inflationary effects of Quantitative Easing were largely offset by prices that would otherwise have been falling. That indeed was one of the main points of QE in the first place, as, however, unpleasant inflation feels, economists are actually more scared of deflation. In a situation where prices are generally falling, people will tend not to buy today what they anticipate being able to buy more cheaply tomorrow, and the whole economy can stall and spin downwards into a “deflationary spiral”.
Our reality now, and for the foreseeable future, is, however, obviously inflationary, due to a sequence of supply shocks, most lately the disruption to shipping, arising from the Gaza crisis, affecting the route through the Red Sea and Suez Canal, and climate change induced droughts reducing the water available to operate the locks in the Panama Canal. With the ongoing and intensifying climate emergency those supply side pressures are, of course, likely to continue.
There will be no prospect of sustained “future interventions”, in other words more QE to reverse the public funds destroyed by QT, unless inflation is likely to fall significantly below the Bank of England’s inflation target of 2%. To pretend otherwise is absurd and very deceiving. Moreover, if we were to actually find ourselves in another deflationary situation, no one would care how much QE you had done in the past: all they would want is for the Bank of England to quickly create new money to stop the deflation. The implied assumption that there is a finite limit on QE, that applies across all time, is nonsensical. The whole argument that we are doing QT to allow more QE to be done in future is insultingly absurd.
The £118 billion destroyed so far is gone. Once the whole £875 billion is wiped out it will also be gone. There will be no reversing those losses to the public balance sheet any time soon. Also, as we saw in October 2022, it isn’t easy for governments to borrow another odd hundred billion, to say address the multiple crises we now face, to compensate for the hundred odd billion borrowed so far just to cancel it out, without causing other financial instabilities, such as driving up interest rates or trashing the value of government debts already held by institutions, such as pension funds, potentially making them bankrupt. Just as government money creation is constrained by inflation, government borrowing is constrained by the risk of destroying the value of government debt already held by institutions that have, for example, invested workers’ life savings into purchasing that debt, and making government’s future borrowing, and indeed everyone’s borrowings, much more expensive.
That in itself is another of the huge issues with the Treasury Committee’s report. Though it talks at some length about the losses to the public purse being caused by QT (mainly down to the fact that QE bought UK government debts, i.e. “gilts” in the jargon, at prices above that at which those gilts are now being sold back to markets, under QT) it never even mentions how borrowing money, just to cancel it out, will make it much more difficult for governments to borrow money to invest our way out of all our current difficulties.
QT is essentially the cause of our new rounds of austerity, and that fact needs to be stared fully in the face. Also, if we accept that public investment will be needed to facilitate sustainable economic growth, it condemns us to continuing stagnation, so any talk about growing our way out of our problems is, again, total nonsense.
It is also important to understand how the UK did QE, as otherwise we can’t grasp that, at a time we are repeatedly being told that there is no money for public spending, we really are borrowing hundreds of billions just to cancel that money out. Even though governments create money, “direct financing”, meaning just creating that new money and spending it, is seriously frowned upon among central bankers: indeed it is actually illegal for members of the EU. The new QE created money was therefore used to buy back government debts (gilts), but those debts were not cancelled out: instead they were held at the Bank of England. The plan was to eventually reverse the QE either when the debts matured, or by later selling the debts back to the markets: those methods of reversing QE are called “passive” and “active” QT receptively. Now passive QT involves having to pay off the capital of a government debt, now effectively held by government itself though the Bank of England, which is done by reborrowing the money and then cancelling the money so received out of existence. Active QT is similar: it involves “selling” the debts back to the “secondary markets”, in other words reborrowing the money again, and then again cancelling the money received out of existence.
This is yet another failing in the report. Nowhere does it state that QT involves borrowing money just to cancel it out: instead we get all those euphemisms. Reborrowing the £875 billion becomes “selling the Bank’s stock of QE gilts in the secondary market”. Cancelling money out of existence, becomes the much “softer” “removes from circulation”. This is very dangerous, as even the report itself says this: “Given the uncertainty over its effects, the Bank should also update Parliament and the public on QT”. How engaged, so you feel, dear reader, by the Report’s jargon? Were you even aware of this issue and it’s implications? Of the real reason for our never-ending austerity? When did you last hear this discussed on the news? Alternatively, does the way this topic is being covered when it is even discussed, and how it is so little discussed at all, make you feel as if you may be being “gas-lit”?
Also, when QE was started, there was no anticipation of the huge sums that would eventually be involved. It was intended just as another intervention to keep money flowing once there was no capacity to reduce interest rates below zero. Instead it evolved into almost a trillion being created, with, at times, government debts being bought back as soon as they were issued. Rather, this was direct financing in all but name, and it worked: it allowed us to survive a decade of crises. Now, however, the plan is to turn all that created money into real public debt. That will cripple us for generations: remember that, infamously, it wasn’t until 2015 that we finally paid off the debt incurred through the compensation we paid to slave owners for emancipating their slaves.
There is an alternative to QT. As Ford Prefect famously challenged the Vogon guard in “The Hitchhiker’s Guide to the Galaxy”, just before said guard threw him out of an airlock, we could just “stop doing it, of course”. The immediate way to do that is to simply “roll-over” government debts owned by the Bank of England when they mature: in other words, when a Bank of England owned government debt matures, and more money must be borrowed to repay the capital of the debt, immediately buy back the new debt with more QE: this leaves the accounting position exactly as it was before the debt matured and therefore means no net additional QE or QT. Active QT can be stopped simply by ceasing sales of the debts back to the markets. A more permanent plan is one outlined by Thomas Piketty, and more than a hundred economists, politicians and campaigners from across Europe, as part of a similar conversation they had with the European Central Bank (https://www.euractiv.com/section/economy-jobs/opinion/cancel-the-public-debt-held-by-the-ecb-and-take-back-control-of-our-destiny): that is to convert the government debts still owned by the Bank of England into a zero interest never-maturing debt, which avoids destroying money while leaving the Bank’s balance sheet still perfectly healthy, according to current international central banking accounting conventions. Whichever of those approaches we take would still leave us with the issue of the “reserves” the commercial banks hold at the Bank of England. Basically all the QE created money ended up in those reserve accounts, and, from 2006 on, the Bank of England has been paying interest on all that money to the commercial banks, who have therefore repaid being saved by QE in the first place by being allowed to make hearty excess profits. The way to solve that one is to reduce those payments by tiering the interest rates paid on those accounts, as is already done by European Central Bank and the Bank of Japan (and the way the Treasury Committee Report discusses such a possible tiering of interest rates is so outrageous it implies influence from the banking industry so intensive that it amounts to a conflict of interest serious enough to be considered misconduct in public office).
Why, then, are the Bank of England and the Treasury Committee doing QT at all? Part of it is group-think, this is just the “done thing”, even though, as the report itself acknowledges QT, and especially active QT, is “ innovative for all central banks”. To an extent, they are trapped by their own jargon (and here it should be noted that even the current Labour Shadow Chancellor worked at the Bank of England and HBOS). Nevertheless, it is also wise to take account of the individuals involved here, their associations and the interests they really represent. There is something of a revolving door between the Bank of England and the UK and US banking industry, and the Treasury Select Committee is dominated by Tories, who hold the chair and six out of the eleven committee posts. If you want a “smaller state” so that you can cut the “needy” adrift, and there is more role for your businesses to make profits, then QT is one way to bake in eternally brutal cuts to public spending. Perhaps we are back to Vogons (“not actually evil, but bad-tempered, bureaucratic, officious and callous” ). Then again, given the hundreds of thousands of British citizens now estimated to have died prematurely due to austerity (see:
“www.dannydorling.org/Austerity led to twice as many excess UK deaths as previously thought – here’s what that means for future cuts”) perhaps we should mix our metaphors and say “Daleks” instead.
Reading between the lines of the Report, even the current Chancellor, Jeremy Hunt, seems to be attempting to distance himself from QT: “QT is a tool that is exercised independently as part of its array of tools on monetary policy. It is therefore not appropriate for me to comment on that, just as I would not comment on whether it is right or wrong to raise or lower interest rates.” In other words Mr Hunt is hiding behind Bank of England independence to side-step the whole issue of Quantitative Tightening, as if a government controlling our sovereign Parliament could not redefine the rules for the Bank of England at will. Given the significance of QT, this position is the mother of all cop-outs.
In summary, and with apologies for bluntness, let’s just accept the fact that, through QE, we created some money. So what: live with it. Unless, in fact, we do live with it then, in a state when we are facing multiple crises, such as the climate emergency, collapsing public services, the threat from Russia and the prospects of a Trump presidency, there is a real risk we won’t be able to live at all. We want our futures back. We need to stop QT now, or we are doomed. With £100 billion now being actively destroyed each year, the clock is ticking.
Notes:
1) For further blogs on this topic see:
which discusses the international context and:
which explores the UK situation in more detail.
2) The £118 billion of borrowing so far, which was then just cancelled out of existence, was derived as follows.
The source data is in this paragraph in the Report:
”The Bank is still in the relatively early stages of QT. As of 31 January 2024, the Bank’s stock of gilt purchases, as measured by the price at which they were bought, stood at £738 billion, down from £875 billion at the onset of QT (of the £20 billion in corporate bonds purchased at the onset, less than £1 billion remained). In September 2023, the MPC decided to undertake an additional £100 billion of QT over October 2023 to September 2024 (with passive and active QT accounting for around £50 billion each), which will bring the purchases of gilts down to around £650 billion.”
3) Here again is the “House of Commons Treasury Committee Quantitative Tightening Fifth Report of Session 2023–24” : https://publications.parliament.uk/pa/cm5804/cmselect/cmtreasy/219/report.html
Enjoy.
gezwinstanley 