What is George Osborne playing at?

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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:

August 15 2012 at 10:57 am

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:

August 15 2012 at 11:46 am

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

15 August 2012 10:25PM

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:

https://think-left.org/2012/08/04/neil-barofsky-how-washington-saved-wall-street-and-abandoned-main-street/

 

(1) http://www.telegraph.co.uk/news/politics/georgeosborne/9477918/George-Osborne-no-longer-enjoys-faith-of-former-prominent-economist-backers-over-deficit.html

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

(3) http://www.taxresearch.org.uk/Blog/2012/07/13/the-untold-truth-about-quantitative-easing-is-it-simply-cancels-debt-and-that-means-national-debt-is-now-just-45-1-of-gdp/

(4)   Financial crisis, five years on: Q&A

9 August 2012 9:33AM

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

(10)  http://goo.gl/G0lk3

(11)  http://www.golemxiv.co.uk/2012/08/a-waiting-game/#comments

Simon says: QE is the biggest confidence trick of all time.

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Simon (Jenkins) says ‘QE is the biggest confidence trick of all time’:

‘It is a cheat, a scam, a fiddle, a bankers’ ramp, a revenge of big money against an ungrateful world. It is called quantitative easing, and nobody has a clue what it means. According to the Bank of England, the past four years have seen £325bn pumped into the British economy to kickstart growth, with another £50bn now on the way. This enormous sum does not exist and never has. It is not “printed” money or funny money. It is no money. The one silver bullet on which the coalition relies to pull Britain out of recession is a fiction.’ (1)

Has Simon got the wrong end of the stick?

Frankly, it depends … listening to politicians in the media, it is clear that (shamefully) most of them understand very little about economics.  They regular confuse government debt and the structural deficit. (2)  For the most part, they and our journalists are steeped in the strait-jacket of monetarism and the mythologies of neoclassical economics.  TINA still prevails in mainstream thinking….  But in 2008, there was a horrified realisation that the economy was not working as predicted and that the financial system was bringing about its own Armageddon. Since that point, the public have only been offered the impenetrability of economist-speak to explain QE, which may be spoken in good faith or to deliberately obfuscate the listener.

However, MMT-er Professor Bill Mitchell explains:

‘Does quantitative easing work? The mainstream belief is that quantitative easing will stimulate the economy sufficiently to put a brake on the downward spiral of lost production and the increasing unemployment.

It is based on the erroneous belief that the banks need reserves before they can lend and that quantitative easing provides those reserves. That is a major misrepresentation of the way the banking system actually operates. But the mainstream position asserts (wrongly) that banks only lend if they have prior reserves. The illusion is that a bank is an institution that accepts deposits to build up reserves and then on-lends them at a margin to make money. The conceptualisation suggests that if it doesn’t have adequate reserves then it cannot lend. So the presupposition is that by adding to bank reserves, quantitative easing will help lending.’ (3)

In other words, the mainstream assumption is that the bank is simply a ‘middle-man’ between those who put money in, and those who want to borrow… but that is neither what is happening, nor actually resembles the way in which banks work.


http://www.youtube.com/watch?v=l7L3ZtCSKKs&feature=related
New Economics Foundation – ‘Where does money come from?’

Simon (Jenkins) says:

‘Osborne and Cable still utter strangled cries for banks to do “more lending to small and medium-sized businesses”. They formulate endless schemes to “kickstart the economy”. They know that none of these works, but we still have such flops as Project Merlin, the regional growth fund and the business growth fund. The British economy is in a classic Keynesian liquidity trap. It is starved of demand, but nothing is done to boost it.’ (1)

Simon Jenkins is absolutely correct to identify the lack of demand… and that is why big business is not investing (4), and they are not going to start investing unless they see the return of demand.

‘… the weirdest assumption of all is that business will invest massively more? Why will they do that? Their customers – whether here, or the government, or abroad – are all going to be consuming less but it’s assumed business will invest substantially more. That is utterly implausible. They just aren’t that irrational. They want a return before they invest – and since this forecast clearly says none will be forthcoming then that isn’t going to happen.’ (5)

The Bears also agree with Simon (Jenkins) that Quantitative Easing does not do what the Federal Reserve and the Bank of England say it will do! …  But is it possible that there is another intention?  Could thecheat, scam, and fiddle’ be a completely different ‘cheat, scam, and fiddle’ from that identified by Simon Jenkins?

Could QE be removing government debt with just a magic click on the mouse? 

Payguy2 says:

‘… QE obviously isn’t working in the way it is intended.  The credits given to banks are not finding their way into the real economy.  QE is simply not stimulating growth in the money supply in the way it is intended to….. 

Is there a silver lining though? (6)

The Bank of England can obviously create money from thin air without creating a parallel debt anywhere else and this money could be used to clear Government debt. 


QE works thus – the Bank of England creates £75 billion electronically as it is a central bank and can credit its reserves with as much money as it likes. The Bank lends this £75 billion to a Special Purpose Vehicle – a wholly Government owned PLC called the Asset Purchase Facility.  The APF then buys £75 billion of outstanding Government gilts from banks, pension funds and other institutional investors. The banks all make huge profits from the sales and get cash credited on their central bank reserves. The APF takes on the government gilts. So far so good as no money created or destroyed.

What is intriguing is that this offers a chance to destroy government debt with no inflationary risk or build up of debts anywhere.

How? The AFP is sitting on £75 billion of government debt.  It is wholly owned by the government.  If it just retires the debts by communicating that they no longer exists. Job done. There is no further inflation or loss of investor confidence.

Already 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. It would be more honest to monetize this debt and just retire it.

It is very, very  likely that the debts will have to be monetised anyway.  With the Bank sitting on £325 billion (and some estimating this will rise to half government total debt or £500 billion) it just simply will not be possible to sell this at any time before the gilts mature and expire naturally. How on earth could the government fund its normal gilt issues when the Bank was dumping out £200 or potentially £500 billion worth of gilts from the APF.

This certainly won’t happen whilst the government still runs a deficit and needs to borrow and it certainly can’t happen when and if we have recovered. At this point, the banks will be creating enough lending to allow the money supply to widen at its normal rate. Dumping an additional £200 -500 billion of liquidity out on the market at this point will cause rampant inflation.

Until then we are left with a ridiculous situation where the Tories are moaning about huge and “unaffordable” government credit card bills. At the same time over a third of the debt they are moaning about is stuck in the government owned Bank of England with no hope of it ever being anything other than cancelled and retired.  (7)

Richard Murphy of Tax Research blog puts the case even more simply:

‘.. the Bank of England, which is owned by the government, has paid HM Treasury, which is part of the machinery of government, £325 billion to buy debt issued by the government …. as I have explained before, this means that in any proper accounting system that produced a single set of accounts for the government .. debt that was repurchased would have been considered to be cancelled. That’s because you can’t meaningfully owe yourself money, and yet that is precisely what is happening here. The Treasury owes the Bank of England money but as it, in effect, owns the Bank of England, it therefore owes itself the money and as such the debt has simply been cancelled….

I am saying that the arrangements used in QE hide this economic reality and that [when] all the mumbo jumbo is cleared away what is happening in QE is that money is being printed to clear the government’s deficit and that debt is not really being issued at all …

But that also means that … 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. (8)

Jim Leavis argues much the same point and poses the following question in an article intended for Investment professionals:

‘If the government simply cancelled the £300 billion of QE gilts held by the Bank of England, who would be unhappy?

No default [would have] taken place (no CDS trigger, no D from the ratings agencies who are only interested in failure to pay private investors), the UK’s public finances become sustainable, the economy gets a boost from the knowledge that the QE cash injected will stay there for the foreseeable future, and a mechanism exists to remove cash from the economy should inflation return.’ (9)

So why would the government want to hide such positive news?  What would be the consequences of the Treasury and the Bank of England acknowledging that QE is a means to eliminate the huge hike in government debt which resulted from the socialization of banking losses? (10) 

Clearly, there would be political consequences:

‘…. If the population broadly understands that a sovereign government can never run out of money and can always make these electronic transactions then the questions they might ask their politicians will change and force the latter to be more accountable for their political choices….’  *UE is needed rather than QE  (11) 

… it means the whole debt paranoia is wrong. Debt is not rising at the level claimed by the government. Secondly, the focus can then move onto paying for services. That kicks in the tax gap debate. Third, it means Labour can honestly say it is not constrained by having to repay debt to future generations – because well over half of all debt issued since 2008 has already been repaid. (8)

 

In other words, this would be of enormous political significance, because such knowledge would undermine the ‘Austerity’ argument of George Osborne, the EU troika and the IMF .. and would demonstrate that the dismantling of the NHS, and public services, was an entirely ideological decision.. namely the ideology of the Washington Consensus. 

The misnamed ‘deficit-deniers’ would be thoroughly vindicated! 

Simon Jenkins was right to say QE isa cheat, a scam, a fiddle, a bankers’ ramp, a revenge of big money against an ungrateful world’….. but for the wrong reason.  The QE ‘confidence trick’ is that it hides the ‘inconvenient’ truth that sovereign governments can never run out of money.  The cuts are not, and were not, ever necessary.

Post-script:  In the light of the above, George Osborne’s speech is misleading to say the least.  

George Osborne: no U-turn on deficit reduction plan

Speaking at an investment conference in London, the chancellor admitted that the 0.7% plunge in growth in the three months to June was “disappointing” but insisted that the Treasury would stick to the course set two years ago.

“You will hear those arguing that we should abandon our plan and spend and borrow our way out of debt,” Osborne said in response to widespread calls for the coalition to do more to lift Britain out of double-dip recession.

“You hear that argument again today. These are the siren voices luring Britain onto the rock. We won’t go there.”

http://www.guardian.co.uk/business/2012/jul/26/george-osborne-no-u-turn-deficit-reduction?CMP=twt_gu

(1) http://www.guardian.co.uk/commentisfree/2012/jul/12/qe-bankers-swindle-liquidity-crisis?INTCMP=SRCH

(2) http://www.guardian.co.uk/politics/reality-check-with-polly-curtis/2012/may/09/nickclegg-davidcameron 

(3) http://bilbo.economicoutlook.net/blog/?p=661

(4) http://stumblingandmumbling.typepad.com/stumbling_and_mumbling/2012/03/capitalists-on-strike.html 

(5) http://www.taxresearch.org.uk/Blog/2012/03/21/the-key-economic-assumptions-osborne-is-making-are-wrong-which-means-he-cant-balance-his-books/

(6) Mervyn King has turned our leaders into zombie puppets 12 july 2012

(7) http://www.guardian.co.uk/business/2012/may/17/barack-obama-eu-growth-crisis

(8) http://www.taxresearch.org.uk/Blog/2012/07/13/the-untold-truth-about-quantitative-easing-is-it-simply-cancels-debt-and-that-means-national-debt-is-now-just-45-1-of-gdp/

(9) http://www.bondvigilantes.com/2012/04/11/if-the-government-simply-cancelled-the-300-bn-of-qe-gilts-held-by-the-boe-who-would-be-unhappy/

(10) https://think-left.org/2011/12/21/gordon-brown-did-not-spend-all-the-money-the-banks-did/

(11)  http://bilbo.economicoutlook.net/blog/?p=19828

*UE = Unemployment Easing