RichardJMurphy “@AnnPettifor: Extraordinary how a private banking crisis became a welfare state crisis – with just the swish of an ideological wand…
On a day when previously supporting economists urged George Osborne to change tack (1) we learnt that many billions are being put aside, doing nothing in an economy with 0.7% negative GDP growth!
As explained in ‘Simon says: QE is the biggest confidence trick of all time.’ (2) Quantitative Easing has the unspoken-about capacity to eliminate government debt. So far, it has in effect reduced the debt burden down to about 45% of GDP (3). Alternatively, those gilts could be monetised (turned into money) and spent on stimulating the economy. In spite of being asked, by Paul Mason of the BBC and others about this possibility, Mervyn King did not acknowledged that this is a reality (4). But then he did not deny it either!
Richard Murphy of Tax research writes:
… we haven’t got national debt of just over a trillion now, it’s just under £700 billion. Now that’s a lot, but it’s only 45% of GDP and that was so commonplace during, for example the Thatcher years, that no one noticed it. (3)
Not only are we not being told this but it gets worse!
Payguy2 writes (2)
… we have a situation where over a third of the outstanding National debt is sitting in the Government owned Bank and another section of the Government, the Debt Management Office – an arm of HMT – is paying interest to the Bank which is again just sitting there unused.
This is corroborated by Neil Wilson who has unearthed a piece of astounding news when investigating that the Asset Purchase mechanism was slowly unwinding’:
”That is when I discovered that the UK’s version of Quantitative Easing, unlike any other QE system in the world, doesn’t automatically sweep the interest paid on the government bonds back to the Treasury.” (5)
As you teach any child it is good to save for a rainy day. The UK Chancellor of the Exchequer appears to have taken that advice to heart and has a nice fat piggy bank set aside.
The question is: how much more rainy does it have to get before he spends it?
£31bn sat there doing nothing in an economy with negative GDP growth. (5)
That is right! £31 billion that Government has spent on interest for Government gilts which the Government has bought back from banks, pension funds and other institutional investors.
Now, in the ‘real world’, if you buy back or pay off an IOU, you assume that you have cancelled that debt. You don’t put the IOU into a special drawer marked ‘money that I owe myself’ and pay interest, on that ‘money that I owe myself’, into an account that you have opened for yourself to hold that interest. It is nonsensical!
So what does this ‘nonsense’ suggest?
Richard Murphy says:
What it shows is that despite the Treasury taking all the risk on quantitative easing it is refusing to take the income back into the Treasury coffers even though it could at any time. The result is that the government is artificially inflating the apparent cost of borrowing in its accounts as an excuse for imposing cuts on the UK economy. That’s something called fraud, I think. And it’s one that has to stop. (6)
The comments thread following Richard Murphy’s blog further concluded:
JohnM says:
The scandal is that the free (tory) press also know this. While it is possible that it may generate a lot of vote-buying for the election, it may also be used to enrich the rich further.
Ivan Horrocks says:
My thoughts entirely: all there to try to buy the next election. Its been a successful strategy in the past.
At the next PMQ (which is some way, away, I know) Miliband needs to make this the first subject that he questions Cameron about.
As to the health of the UK economy, the latest set of statistics speak for themselves:
http://bilbo.economicoutlook.net/blog/?p=20369
There is no way to put a sugar coating on the data. All sectors (industries) contracted. The ONS said that:
1. Real GDP “decreased by 0.7 per cent in Q2 2012 compared with Q1 2012″.
2. “Output of the production industries decreased by 1.3 per cent in Q2 2012 compared with Q1 2012, following a decrease of 0.5 per cent between Q4 2011 and Q1 2012″.
3. “Construction sector output decreased by 5.2 per cent in Q2 2012 compared with Q1 2012, following a decrease of 4.9 per cent between Q4 2011 and Q1 2012″.
4. “Output of the service industries decreased by 0.1 per cent in Q2 2012 compared with Q1 2012, following an increase of 0.2 per cent between Q4 2011 and Q1 2012″.
So production and construction have now contracted for two consecutive quarters and are thus unambiguously in recession. And now the service sector, which had resisted the broadening gloom until now, is also in decline.
What an appalling indictment of government policy.
Larry Elliott observes in If the economy was a sick patient, George Osborne would be struck off :
‘Britain’s economic performance has been similar to that of the eurozone crisis countries Spain and Portugal, even though the Bank of England has the luxury of being able to set bank rates and the pound has the freedom to fall.’
I take this to mean that George Osborne is deliberately holding back economic recovery. Michael Burke (7) has shown that the UK’s budget deficit is rising not falling, and Professor John Ross has calculated (8) that:
‘Gauged by decline in GDP, using a common international purchasing measure, dollars, no other economy in the world has shrunk even remotely as much as the UK.’
As usual, Payguy2 pulls the evidence together in a coherent whole (9):
Monetization of government debts is perfectly safe in a liquidity trap. It would solve the need for austerity and allow governments to repair their economies. Unfortunately the global elite want depressions as unemployment lowers wage demands, increases the time debtors owe money to creditors and increases interest rates and their yields. …
The second part of QE is the insane bit. Sitting in the wholly publicly owned Asset Purchase Facility is £325 billion of outstanding government debt. The same debt Cameron says it is critical we eradicate. His plan for it is that in a few years time, the Asset Purchase Facility should sell it back out to the banks we bought it off and then rip up the money the banks give us for it.
Given the original reserve crediting didn’t cause the money supply to widen this is just treasonous and insane. The resale obviously can’t be inflationary – the money creation bit from part one happens over 5 years before the reissue of gilts. Re-issue will obviously be deflationary as banks will allocate liquidity to buy the gilts instead of using the money for something else. But it cannot be inflationary as there is no money creation at that point.
The second part of QE should be abandoned. A sensible government would announce that the money supply is shrinking, that the £325 billion in the Asset Purchase Facility can be safely monetized and that public sector cuts are cancelled and a £175 billion stimulus package can safely be afforded.
How likely is this? Given how corrupt, incompetent and misleading [it] is [of] the current government to mis-explain how the economy works in order to justify selling off the public sector to their friends and funders.
The Tories and their backers want high unemployment and household debts to rise as this lowers wage demands and increases corporate profits. They are deliberately engineering a slump in order that the banks who provide 50% of their funding and the donors who can afford the £250,000 dinners with Cameron can slightly increase their profits.
Business is sitting on £700 billion of retained profits, banks are rich enough to pay an average of £350,000 to their staff. So what does Cameron do? He abolishes the bankers’ bonus tax, drops the 50p highest tax rate, lowers corporation tax and exempt overseas subsidiaries of multinationals from paying tax.
The rest of us get a 5% hike in VAT, trebling of university tuition fees, youth unemployment raised …
Banking reform debate hots up as party conference season approaches
It seems that the only conclusion that can be drawn, is that George Osborne et al are deliberately misleading the electorate and deliberately wrecking the economy in order to justify lowering wages, lowering benefits, increasing unemployment, increasing household debt, running-down the NHS/state education and dismantling public services. Furthermore, there is a little nest-egg of £31 billion ready to be pulled out as a sweetener for the 2015 General Election.
But this behaviour of a government raises deeper questions. Professor Michael Hudson offers this global overview (10):
In these respects neoliberalism is a doctrine of power and autocracy, a weaponization of economic theory in today’s financial war against the economy at large. Its fiscal program is to un-tax banks and insurance companies, real estate and monopolies. The result is a financial war not only against labor but also – indeed, most of all – against industry and government, because that is where the money is. Gaining the power to indebt economies at increasing velocity, the banking and financial sector is siphoning resources away from the real economy. Its business plan is not to employ labor and expand output, but to transfer as much of the existing flow of revenue as possible into its own hands, by capitalizing it into interest payments.”
And David Malone concludes (11):
I don’t think the banks will lend in to the real economy because they calculate that such a socially useful strategy gives low returns to them. Should they ‘defect’ from this generous strategy and chose instead the selfish strategy of ‘hoard and wait’ then they could make not just a large return but an epic one. They could emerge as owners of everything people will need in order to rebuild their lives. Water, power, rail, hospitals, you name it.
This is what the banks are waiting for. And our politicians are giving them our money so they can.
It is probably a great mistake to think that George Osborne, or at least those advising him, do not know what they are doing. What George Osborne might gain as a result of taking the flak for being the ‘worst Chancellor’ of all times is a matter for speculation.
Related post:
(2) https://think-left.org/2012/07/27/simon-says-qe-is-the-biggest-confidence-trick-of-all-time/
(4) Financial crisis, five years on: Q&A
Paul Mason and Jeremy Werner asking Mervyn King yesterday about monetizing the debts in the Asset Purchase Facility. King does not deny the monetization.
It is time somebody FOI-ed the Bank to ask for full break down of the maturity dates of all the gilts in the APF. The shortest we know is 3 years and this was bought 2009 so some of the gilts will start to monetize … about now.
There is no prospect of selling the gilts back put into the private sector until 2017 at the earliest (OBR projection is … the government to have large deficit spending requirements until at least then).
Come on guardian- read some MMT and then ask the right questions. Do not let the establishment get away with an utterly fraudulent description of the economy.
(5) http://www.3spoken.co.uk/2012/08/the-uk-governments-rainy-day-fund.html
(6) http://www.taxresearch.org.uk/Blog/2012/08/15/16938/
(7) https://think-left.org/2012/08/04/the-uks-budget-deficit-is-rising-not-falling/
(8) https://think-left.org/2012/08/10/the-incredible-shrinking-uk-economy/
(9) http://www.guardian.co.uk/business/blog/2012/aug/15/banking-reform-vickers-report
(11) http://www.golemxiv.co.uk/2012/08/a-waiting-game/#comments
Think Left 
What if Milliband does nothing? What will that tell us about those who rule or might rule? How many times do we hear Balls, for example, say he’d have followed the same principles, made the same cuts, but slower, more cautiously? Doesn’t that make him just as much a Neoliberal as Osborne albeit one not so overt? I don’t think we should make the mistake of thinking that just because many Tories are overtly Neoliberal that Labour automatically won’t be. It’s Neoliberalism itself that’s the enemy here not particular political parties.
I read the Golem’s recent piece too, changing the subject a little. I’m not sure I agree with his reasoning. It may be the real reason banks aren’t lending any more is perhaps because, with the advent of the digital era, one of infinite hypothecation and leverage, they just don’t need a wet signature any more to create money. So, why bother with all the aggravation, now unnecessary, of lending to the peasants eh? Just rehypothecate existing non-‘marked to market’ assets into infinity and, hypothetically, you’ve got all you need.
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I am confused by Balls’ statements. Reading his Bloomberg speech and other statements, it is clear that the ‘too far, too fast’ line is the political line forced on Brown and adopted by shadow cabinet, rather than reflecting Balls’ understanding of economic policy. However, he was also the one who went for matching Tory policy for two years from ’97.
Re: Golem’s piece – I agree with him that the aim of the global elite is to own the assets, and therefore to control… just like the East India Co.. However, as you suggest, there are many layers within what we call the banks. In theory, the banks just manage the global elite’s wealth by infinite hypothecation, repo, etc.. but looking at the top echelons and their wealth (and the ‘web’ revealed in New Scientist) there are a lot of top bankers amongst the global elite.
The really significant point is the financial-corporate-political nexus which has stitched up the 99%. As Buffet says “Its class war.. and my class has won”.
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I just passed this page along to Mike ‘Mish’ Sherlock so you may have a few more visitors tomorrow 🙂
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