Wednesday, February 18, 2009

UK Government and Money Printing - More 'Funny Business'?

It looks like the government are up to no good, and I'm afraid it looks like they are trying to hide (or at least obscure) how much of the government is going to be funded by 'printing money'. As you will see, as I run through the situation, it all gets more than a little odd.

Since writing my last post on the bankruptcy of the UK government, I came across a different story in the Times:
The Bank of England will begin radical moves to “print money” in as little as two weeks as it embarks on an aggressive new phase of its efforts to stem the economic slump.

In a surprise acceleration of its fight against the recession, it emerged that the Bank has already written to Alistair Darling to seek his permission to begin so-called “quantitative easing”.
If you read the article, there is clearly a sense of urgency coming through. When Quantitative Easing (QE) was originally proposed, it was suggested that March would see a start. This is replicated in the current article, but there is a sudden sense of urgency. Why?

However, the reason for my returning to the subject is this, from the same Times article:
With the Chancellor expected to give a rapid green light to the scheme, the modern equivalent of printing money, the MPC will deploy the cash that it plans to create to buy up company IOUs and other assets held by Britain's banks, including gilts [Bonds] previously issued by the Treasury.
This was the original Telegraph article I used in my last post:
'Charlie Bean [the Bank of England Deputy Governor] put his weight behind the pound's 25pc fall over the past year in an unusual comment on the pound. Mr Bean also confirmed that the Bank is poised to start buying government bonds in a drastic attempt to resuscitate the stricken economy.'
As you will note, the Telegraph article implies that the bank will buy bonds (gilts) directly but the Times suggests that the BoE will buy gilts from banks, not in direct auctions by the UK Debt Management Office.

The interesting thing to consider is that the banks are now in the pocket of the state, so a deal where the banks sell the BoE gilts, then the banks replace these with newly auctioned gilts looks a realistic way of burying the BoE's buying of the gilts overall. The banks can just keep buying the gilts and selling them on to the BoE, whilst the bank holding of gilts remains relatively static.

If in doubt, however, the answer is to go to the original source, so I took at look the latest minutes from the the Bank of England MPC and this was how they stated their intentions:
But the MPC could also influence the economy by controlling the quantity of that central bank money directly. Increasing the supply of central bank money in the economy through additional purchases of government securities should raise private sector spending, both directly (through the increase in money holdings of private sector asset sellers) and indirectly (through an expansion by banks of the supply of credit).
You will notice that all of this is a bit vague and not too clear at all.....I conducted a search on the BoE website, to see if I could find any details under a search for 'quantitative easing' and found no results which offered any more detail on their policy, and how it will be conducted. My search is linked to here (the search was made 19th February, and may change if new material is added by the BoE).

This is rather curious, in light of the fact that the BoE is about to be creating £billions of money (printing money). I would have thought that, with the country in an economic crisis, the BoE might offer something about what it is planning? I mean, they are about to embark upon an action that, even amongst their own economists, is surely seen as drastic. And no details....??? Surely such a dramatic move would have a dedicated and detailed outline of the action and policy....

However I did find this document, which is Mervyn King talking to the press. A Financial Times reporter points out that the BoE February 2009 inflation report is a 'bit waffly' on the subject of quantitative easing, and refers to the BoEs discussion on pages 44-45. Inevitably, I took a look at this section. I found the following quote (the APF referred to is the Asset Purchase Facility which was granted to the BoE in January to buy up to £50 billion of financial assets):
In such circumstances, purchases by the APF would be financed by the creation of central bank reserves. This approach to monetary policy would continue to exploit the Bank’s position as monopoly supplier of reserves. But instead of focusing on reducing the price of those reserves — as now — the MPC would focus on expanding their quantity, using the proceeds to purchase a range of financial assets, for example government securities and the private sector assets targeted by the current APF
The FT reporter is quite correct, in saying that it is waffly. In response to the FT reporter's comment, Mervyn King points out that the BoE has always purchased gilts as part of open market operations. However, this is entirely a distraction and not of any relevance. He goes on to say the following:
What we now will be moving to is a world in which, again, we will be buying a range of assets, but certainly including gilts, in order to ensure that the supply of money, initially base money, but the impact is on the broader supply of money - that's what matters - in order to ensure that the supply of money will grow at an adequate rate to keep inflation at the target, and that normal rates of economic growth can resume.
Are we any the wiser as a result of this response? I would say not. He later adds even more confusion by mixing together the APF with buying gilts in normal open market operations, and the general purchasing of gilts, and QE measures.
And that I think is the essence of the operations. Now we've already announced a variant of that, which I think is a more unconventional approach. I mean, what I've just described, which is central banks buying government assets in order to ensure that either the overnight rate or the monetary base are consistent with their target for inflation, those are very conventional activities and they've been going on for decades. And that's why I called these - in my speech recently - I called these activities conventional unconventional measures.
Here he is suggesting that QE is comparable with normal central bank operation, whilst at the same time saying it is not! Followed later by:
As a result I think we think these operations, which I call unconventional conventional measures, and the more conventional ones - buying gilts - are a natural partnership; they go together. And I would see us operating on both of them.
You may notice that there is no mention of how the gilts will be purchased here. We are still none the wiser as to how the operation will be conducted.

A Bloomberg reporter also later presses Mervyn King on the issue, and on transparency, and independence of the BoE. Again, the answer is waffling. Mervyn King goes on to say:
If we were to get to a point and we may well when the Monetary Policy Committee feels that it would like to create Central Bank money to finance purchases of assets, whether it's gilts or whether it's further credit easing operations then a resolution will
be put to the Monetary Policy Committee after a discussion and the Monetary Policy Committee would vote on the operations it wanted to carry out. And it would then delegate to the Executive as now the actual authority to carry out the operations itself to deliver that impact. And the minutes would come out at the normal time and would reveal what the Monetary Policy Committee had decided to do. [my italics]
If you look at the minutes, and the form of the minutes, there is no obligation to provide any detail on what will be done. The minutes are meaningless as a reporting instrument - and they are not designed as such. They are there to show the overall policy decision, not implementation and detail. As such, there is no mechanism for reporting what will actually be done, or how.

Just to add to the worries, Mevyn King later admits that the the BoE will be coordinating with the government's Debt Management Office:
But it's clear the Central Bank has to work in a way that the Debt Management Office, or the funding operations of government are not working at cross purposes, they have to work together. That is the only difference I can think of. But there is certainly no compromise at all of the operations of the independent Central Bank. And we will be just as independent as the Federal Reserve.
In other words, the government and the BoE are going to be working together. I am genuinely puzzled as to what these 'cross purposes' might be, in light of the explanations of why QE is being undertaken. It seems simple - the BoE buys assets to inject more money into the money supply....what coordination does that require? They later give a very vague answer to this, that never deals with the specifics.

In a later reply to a BBC question we get a little closer to an explanation (of which I am very dubious) of why gilts are being purchased, which hints at direct purchase, but is still unclear:
Well I think what we're doing in terms of our buying government gilt is to reduce the net purchases which the private sector have to make of those instruments. And that is the essence of under funding. So provided the Debt Management Office keeps its
sales of gilt the same, if we then buy them and create Central Bank money that will reduce the size of purchases that will have to be made by the non-bank private sector.
In a reply to the Economist, Mervyn King later gives a hint of the potential scale of Gilt purchases:
[...] order to increase the supply of money overall by an appropriate amount to top that up by actually making potentially significant purchases of gilts. [my italics]
Interestingly, the Economist journalist was having difficulty in untangling the APF from ordinary operations from forthcoming QE measures. I find it a little worrying that none of the journalists even asked how much money might be printed, how it might specifically be used, and what the operation of purchase of assets will be. This perhaps explains the difference between the reports in the Times and Telegraph.

The problem is that, throughout the whole press conference, there is absolutely no detail on how much money will be created, what assets will be purchased and how they will be purchased. I did find one other document, but it offered even less clarity.

What we therefore have is a situation in which the BoE is going to print unspecified amounts of money with no clear policy statement, no detail on either how or what they will buy, and with no formal system for reporting on this.

Does this not seem odd to you?

Meanwhile, in the comments section of my last post I added my own comment and linked to this news:

The U.K. government-bond market is set for its biggest overhaul in more than a decade amid concern that buyers could be swamped by a huge increase in issuance.

The expected changes would overhaul the 300-year-old system of auctioning the bonds, known as gilts, to specialist market makers employed by banks. They could instead open up the gilt market directly to investors such as pension funds.

I like the words 'such as' which I have highlighted here, which are suitably unclear. By strange coincidence, this change will allow the BoE to make direct purchases......A funny coincidence perhaps?

The problem here is that the government has got form on this kind of odd behaviour, but were 'found out' last time. This is the matter of the BoE not having to publish the amount of money that it creates. I will quote my post on the subject.
It is for this reason, I suspect, that the Bank of England is planning to print money, and the same reason why they changed the law in the banking in an Act of this year as follows:
235 Weekly return
Section 6 of the Bank Charter Act 1844 (Bank to produce weekly account) shall
cease to have effect.
The act can be found here, and the relevant section is on page 115. Here are the words from the original act of 1844 that has been repealed (to be found on the first page of the pdf copy on the BoE website):
6 Weekly account in form in schedule (A.) to be rendered by the Bank of England
… An account of the amount of Bank of England notes issued by the Issue Department of the Bank of England, and of gold coin and of gold and silver bullion respectively, and of securities in the said issue department, and also an account of the capital stock, and the deposits, and of the money and securities belonging to the said governor and company in the banking department of the Bank of England, on some day in every week to be fixed by the [Commissioners for Her Majesty’s Revenue and Customs], shall be transmitted by the said governor and company weekly to the said commissioners, in the form prescribed in the schedule hereto annexed marked (A.), and shall be published by the said commissioners, in the next succeeding London Gazette in which the same may be conveniently inserted.
Essentially, it now possible for the Bank of England to print money and not tell anyone about it. I was originally made aware of this on the Guido Fawkes blog here. I have previously quoted several reports that there have been problems for the government in raising finance.
It all looks painfully familiar. In one case, a little clause in an act so that they do not have to tell people how much their printing in a change to a very old act, and now changing a 300 year old system. It seems that, as if by magic, modernity is finding its way into the system.....

As regular readers will know, I am not very positively inclined to conspiracy theory. However, what we have is two significant changes in the financial system which also happen to be very useful for the hiding of mass direct purchase of government debt. These changes happen to be happening at a time of financial crisis, at a time when the government is running up a debt mountain, and when the £GB is falling like a stone and likely to scare off overseas investors....

...and quantitative easing will be taking place with no publicly available formal policy document, with the sole reporting being the MPC minutes.

You may note that I am, to say the least, rather suspicious.......

One other thought keeps nagging me.

Why the urgency? If this policy is not an act of desperation, why must it be done right now....?? I mean, what difference would a few weeks make? An economynormally takes about a year to respond to interest rates= changes, for example??

I will leave you with that thought.


  1. Hi Cynicus,

    The most interesting point I picked up from a currency dealer yesterday was that a ratings agency could put the UK on watch for a downgrade from AAA to say AA. This would terrify the markets as some holders of Gilts would have to sell, being only mandated to hold AAA. Sterling would fall probably 10%. The currency dealer said that for the future health of the UK it was needed quickly.


  2. Excellent work Cynicus. You seem to have assumed the mantle of investigative reporter relinquished by the press.

    Here's the BBC's Economics Editor on QE:

    "...there are big practical differences between this policy and Zimbabwe-style money financing. The most important is that the Bank is choosing to buy gilts as a means to an end. It is not being forced to buy them because the government has nowhere else to go."

    The other places it could go are, of course, unspecified...

  3. It's all very worrying indeed. It's obvious the government has run out of money and this is a huge panik move to try and save them and the country. So my savings are going to be eroded by these government measures.

    People give a counterargument which is that we are trying to avoid deflation and that we don't want end up like Japan in the 90s... although I know nothing about Japan and what happened there. Do you know what has been the cause of the recent deflation and what the economic impacts would be if it continued?

    I am actually now contemplating moving everything (what little is now left after the bank crash) either to gold or chinese stocks to avoid this potential inflation (perhaps the iShares ftse xinhua china 25 index)... I know you don't give investment advice cynicus but what do you reckon?!!

  4. Your good detective work points to a further question.

    Personally, I don't understand gilt or bonds. I know what they are but not much else. I work in a very technical field, and as a general rule, in hiring decisions or when evaluating a solution, if the answer to a problem can't be explained in terms that a fool can understand, it usually means that the communicator either doesn't want you to understand, or they don't really understand it themselves.

    Much as we would like to think otherwise, central bankers are not fools.

    So the question you're really asking Mark, is: What is the money printing transmission mechanism central bankers and the government would prefer people not to understand, and why?

    Well, I reckon using freshly printed money to buy any asset class will likely have a significant effect on that asset classes market. In fact, it would likely crowd out other private investors in those assets initially, much to the anger of those investors losing out on (naturally) not having a money printing press handy. So there we see a motivation for the government to conceal the transmission mechanism. We know why.

    Next issue is the "what?". Moving to the uncomfortable collaboration between the Debt Management Office and Bank of England on this. Whatever asset the government is buying from the government (did I just say that out loud?), the nature of how the money is allocated between various government liabilities also needs to be concealed. Why?

    I think the answer lies in the root of the problem and the means of transmission available to government. All roads lead to the housing market, and the government vehicle Northern Rock being used to offer cheap, market-busting mortgages to new market entrants (probably first time buyers) at significantly discounted mortgage rates to re-kickstart the mortgage market, allowing banks to remark their assets to new market conditions, all funded by freshly printed money.

    The snag is that if it is recognised that this transmission mechanism is being used, other banks will be up in arms and on the long-distance lines to Brussels crying foul. But the government has headed that one off already, or is in the process. The second reason for concealment is that if consumers got wind of the fact that the government is printing money to intervene to support house prices, they'd likely be angered at the social inequality of the scheme, and might even be skeptical of being entrapped if the scheme fails into a market-resetting SVR mortgage in the current climate!

    The urgency is clear too. Mortgage lenders, construction companies and residential developers and estate agents (all sources of income for the government) are going out of business quickly.

    Like Jack Nicklaus used to say a few years ago from the Polaris World Spanish residential property development golf course, "You can call us tomorrow, but better today".

    P.S. Someone tell me I'm wrong, please.

  5. I've been following your posts since Dec last year. You have excellent investigative writing skills.

    I have two thoughts about the apparent aloofness:

    1) He who gets first use of new Pounds gets biggest bang for their Pound

    When anyone wants/needs to unload a large volume of anything onto the market they do so as secretly as possible so as to minimise the downward pressure on the value of what they are unloading. If you leak what's going on, the effectiveness of the operation is diminished.

    2) National security is playing a part in this.

    Making public the exact sums and methods involved would completely expose what remains of the economy to the free market (and hostiles, if you want to get tin-foil).

    Furthermore, what would happen if the general populace knew exactly what the BoE and Treasury plans are?
    It would be most destructive if citizens decide that they really are waving increasingly worthless stacks of coins and paper at each other. If the UK citizens lose confidence in their own currency its absolutely game-over for the government.

    Can you be sure that this event isn't actually historical? I suspect that we'll find out that the operation went into effect starting Feb 2nd (at the latest) and there has been a news black out in effect since. - Or, to muddy the waters, editors have been told what they can print. After all, why would they go as far as repealing Section 6, and on then decide that being open and frank about what is going on is in the national interest?

  6. Its so suspicious that you almost have to wonder if there's a bald man on a tropical island somewhere, stroking a cat in his lap and chuckling evilly.

    But frivolity aside, this is getting more worrying by the day. Each day I'm sure it can't get worse, then it gets worse.

    I'm not a conspiracy theorist either, but with Gordon Brown talking about a "new global deal" I literally have shivers running down my spine.

    Without wanting to be too dramatic, if the money is really being printed at full tilt, how long will it be before the effect makes its way obviously into the markets?

    Think about it... the Prime Minister has to call the election, at the latest in mid 2010, right? There's no way he can avoid doing so, and its pretty clear he and his party are going to be utterly crushed.

    If Hyper-Inflation has taken hold and the country is in desperate crisis about that time, might this be a reason to postpone the elections due to a 'national emergency', while using the usual sleight-of-hand to blame everyone and everything else for the situation?

    I just wanted to put that out there. I'm aware its fanciful and probably unlikely. But would anybody guarantee its definitely wrong?

  7. Well thanks, this looks very plausible.

    Do we think that they are being deliberately vague to hide their cunning plans, or do they not really know what they are doing? I suspect the latter.

    Do they panic, is that why they do such stupid things? Why can't the people at the BoE sit down sensibly and work out what is going on and why?

    I realise these are not your area of focus but I am just wondering

  8. Hello CE,

    Maybe this explains the rush?

  9. Moving on from the risk of a failed bond auction.

    I too fear some sort of inflation is the likely outcome.

    But the best arguement against QE automatically leading to inflation (sorry i didn't keep link) centred on this premise:-
    The banks have multiplied up money by a factor of 50 odd or whatever, and lent it out - thus for QE to be inflationary, the amount of new money 'printed' would have to be huge.

    The theory was convincing enough while I read it, but...
    1) Maybe the Central bank is going to print a huge quantity
    2) When the banks get hold of the new money, it will effectively be multiplied up again ?...unless they (the banks) are ordered to increase their capital ratios at the same time.
    ( Not sure 'capital ratio' is the correct term )

    Farmer John

  10. John Redwood has blogged on the subject.

    "I asked the Treasury to tell me if they were going to start underfundign the deficit, to aid a policy of printing more money. Yvette Cooper assures me not. She says:

    “The Government intends to continue to finance the Central Government net cash requirement using the framework that was established in the 1995 debt Management Review. The Government aims to finance its net cash requirement plus maturing debt and any financing required for additional net foreign currency reserves through the issuance of debt.” Elsewhere she says they are not planning more use of short term debt.



You are more than welcome to comment on the posts, but please try to stay on topic....I will publish all comments, excepting spam and bad language, and my moderation of the comments is just to exclude these.

Please allow up to two days for the comment to appear.

I have had a request for an email address for the site and have created the following:


I have ommitted the @ symbol to avoid spam....

For general purposes I would suggest using the comment form, but will occasionally look at this email account. Please be clear what is for publication and what is not, though I will also not guarantee publishing of email comments, unlike the comments through the form! Thanks.