Dear Bank manager can you please give me £35 Billion?

It appears that George Osborne and Mervyn King have made a very nice agreement whereby the Bank of England (BoE) gives the Treasury £35 Billion of interest back or a 35 Billion gift? This money being the interest earned on State debt that was purchased by the B of E under Quantitative Easing (QE).

There are a number of different versions of this story doing the rounds and I admit that I am not sure which is the most accurate? This one by Unison Active sees this as evidence that the whole austerity programme is a deceit by the Government and George Osborne. However it also  indicates that both the Federal reserve in the US and the Bank of Japan pass on any interest earned on Government debt back to the Government anyway.

If that is the case then surely we should do the same rather than borrow more money to pay the interest owed to the Bank of England. Seen this way the BoE are simply giving the Government back the interest it has paid on its QE debts – making it an interest free loan.

This article in the Business Recorder states that it is interest in one paragraph and then describes it as excess cash held by the bank in its Quantitative Easing facility? The article also states that this procedure is in line with arrangements in other countries.

Bloomberg Newsweek also carries this story and comments on the fact that it is a timely decision as it saves George Osborne from a rather difficult position whereby he was going to have to admit that he had missed a target he set to have Government debt  falling in the fiscal year of 2015 – 2016.

What is interesting in this article is that this transfer of money to the Treasury is predicted to have the same effect as if it had been used to buy Government debt under quantitative easing!

“The Monetary Policy Committee views the transfer as “having an effect similar” to the central bank buying gilts through quantitative easing.”

So the Bank of England is just giving this money to the Treasury rather than using it to buy Government debt?

If that is the case then the argument in the Unison article that the “The austerity programme is a political tool to justify the decimation of the public sector and the benefits system and should be so exposed.” does seem to have some merit. I say this because it appears that the Bank can just give the Government money or it can give it an interest free loan.

In either case this begs the question as to why we need an austerity programme at this point in time when the country is struggling so much to drag itself out of recession.

My understand is that the 35 billion was there in case we needed further QE. As it’s possible that we may well be in for a triple dip recession I am left to ponder why this money is not being held to help with that possible scenario?

Instead it will be transferred to the Treasury and if this is the case what will happen if we do triple dip and the B of E has to find more money to enable more QE and if it can conjure up more money in that way then surely could just give that money to the Treasury rather than causing more Government debt and if that is the case why as the unison article asks did it not do so in the first place?

If the Bank of England is supplying an interest free loan to the Government then the debt repayments can wait until tax receipts recover. Therefore the government does not need to slash and burn everything at this point in time instead it could have kept people in  employment which would have improved tax receipts until growth returned.

At that point an ideological move from public to private sector would have been much less painful as people could have naturally moved from public to private sector jobs rather than being forced into them or into unemployment through the austerity measures imposed by the Government.

That’s my understanding of this particular issue. I admit that I have always seen the austerity programme as a rather blunt and unnecessary government tool to massively reduce the public sector rather than the best way to deal with our current financial difficulties.

To me this transfer of funds does suggest that there may be some mileage in this point of view.

What do you think?

Update 12/11/2012 last night I found another post on this topic on Think Left indicating that there is nothing underhand to this except the timing perhaps in relation to Osbornes debt targets. The article also makes a similar point to that stated above about Government debt. “This latest announcement is just another reminder that much of ‘the debt’ is not really debt at all and certainly isn’t a burden on future generations.”

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3 thoughts on “Dear Bank manager can you please give me £35 Billion?

  1. syzygysue

    Good post. I like the quiet and rational way in which you have put together the various arguments together. However, I wanted to correct your impression of Think Left’s position in:

    http://think-left.org/2012/11/11/what-are-the-treasury-and-the-bank-of-england-up-to/

    IMO George Osborne putting 35bn into a special holding in the Asset Purchasing Facility was two-fold in purpose. Firstly to make the deficit look worse, so that he could justify a further 10bn cut to benefits; and secondly, so that he could bring it out in 2014 as a pre-election sweetener. However, it seems that the shortfall in the predicted targets is now so great that he wants to use it to shore up his ‘argument’ that his austerity measures are working! The reasons for this are given in:

    http://think-left.org/2012/08/18/what-is-george-osborne-playing-at/

    Furthermore, Think Left (along with many others) has argued that QE has effectively reduced the debt by 375bn; and that the basis on which the structural deficit is calculated is erroneous and misleading. For me, this is clear evidence of manipulation of the economic data to create the appearance of a disaster, which justifies dismantling the welfare state or post-war consensus.

    http://think-left.org/2012/07/27/simon-says-qe-is-the-biggest-confidence-trick-of-all-time/

    http://think-left.org/2012/08/25/why-does-the-structural-deficit-remind-me-of-libor/

    Reply
    1. steveb1960 Post author

      syzygysue Thanks for your comments and the links you have supplied – I must admit that as a a lay person with regard to economics I find it difficult to really make sense of the various messages we all receive.

      The one message which I think many of us are agreed on even if we don’t quite understand the reasons why is the fact that this government is determined to reduce the public sector way beyond what is required including the complete sale of the NHS to the private sector.

      They are very efficient and completely ruthless in the way they are going about this and I fear that we will not have any recognisable public services left by the time the next election comes round.

      If the current governments strategy is ideological and deliberately designed to fool the majority of us into believing that austerity, cuts and privatisation are really necessary to reduce our debt then they are in effect committing a crime against the public.

      If, as suggested the Central banks can just produce money and write off debt why haven’t countries with excessive debt just written them off & why doesn’t the European central bank just write off the debts of Greece et al?

      Reply
  2. syzygysue

    Spot on! Why doesn’t the EU Central bank write off Greece’s debts? The reasons are somewhat similar. Merkel et al want a federal Europe and, as good disaster capitalists, they are hoping that perpetuating the crisis will induce the populations of the different members to give up their individual democracies. They are neoliberal ideologues, and want to impose the German model of ordoliberalism. Wall Street and the City are putting on the pressure too, because they need the Bond holders to be repaid .. a default would trigger the insurance for the loans which would cause another credit crunch. Obama was particularly determined that nothing should happen before the election. Merkel is also rather hide-bound because she faces elections next year. Essentially, all of them are determined that the populations of the EZ will pay the debts.

    On another level, this is an old story. Financial markets create a crisis by raising interest rates. Politicians respond by cutting and privatising public services, and then fire-sale assets. Transnational corporations and the 0.14% move in, and benefit from a captive market, with payment assured by government who collect our taxes on their behalf! Profits get moved offshore, untaxed. This is redistribution upward and offshore!

    http://think-left.org/2012/06/15/brinkmanship-and-the-euro-crisis/

    Reply

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