Quantitative Easing – The Myths

WHERE DID THE BENEFIT OF THE QE MONEY GO?   NOBODY KNOWS!

Contents:

1     Executive Summary

This paper sets out the evidence that Parliament, the Bank of England, its Monetary Policy Committee and the Treasury have no idea where the benefit of the Quantitative Easing money actually went.  This is because they have no record of the identity or nationality of the actual owners.  The Bank bought through agents.

Even worse, it appears that Parliament, the Treasury Committee, the MPC, the media and even the Treasury appear never to have been told that the Bank has no means of knowing where the QE money actually went.  It seems that the Bank thought that this was  so obvious that nothing needed to be said!   Indeed, because Gilt-edged-Market Makers (GEMMs) operate on a wholesale basis, it is they and not the Debt Management Office of the Treasury which maintain their own private registers of client gilt owners. 

Despite being responsible for the management of the QE programme, the Monetary Policy Committee appears from its minutes neither to have been advised nor ever to have asked where the benefit of the QE money was actually going.  It seems they were ignorant as to the fact that it could go anywhere in the world.  Could it be possible that the Governor was also totally in the dark?

Because both the Treasury and the Bank either did not know or were concealing an uncomfortable truth, it would appear that Parliament and the public have been misled as to the true facts.

Furthermore, Bank officials appear to have misleadingly asserted to the Treasury Committee that the Bank "injected a vast amount of liquidity into the economy" when they had no idea where the benefit of the liquidity went.

Despite this lack of knowledge as to who owned the gilts and where the money went, a further £175 billion of QE was allocated by the Coalition for gilt purchases between October 2011 and July 2012.  This also happened despite clear evidence from a detailed study of the MPC minutes that its members had no clear idea either!  Indeed, the Treasury, the Bank and the MPC seem never to have asked! Why not?

The problem – The QE money has been largely wasted.  The UK economy is in desperate need of investment finance.  

The solution – (a) Cease the QE gilt purchase programme;  (b) commence the phased sale of the Bank's purchased gilts with proceeds being redeployed through a Bank of England new SPV to fund verifiable investment aimed at directly inducing growth in the UK economy.

2    The Facts behind the QE myth

The term “Asset Purchase Facility” equals Quantitative Easing (QE).

Between March and November 2009, the MPC authorised the purchase of £200 billion worth of assets, mostly UK Government debt or gilts.  The MPC voted to begin further purchases of £75 billion in October 2011 and, subsequently, at its meeting in February 2012, the Committee decided to buy an additional £50 billion.  In July the MPC announced the purchase of a further £50 billion to bring total assets purchases to £375 billion.

The purpose of the purchases was and is [October2012] to inject money directly into the economy in order to boost nominal demand. The objective has remained unchanged – to meet the inflation target of 2 per cent on the CPI measure of consumer prices. Without that extra spending in the economy, the MPC thought that inflation would be more likely in the medium term to undershoot the target.

The Monetary Policy Committee (MPC) members throughout were:

  • Sir Mervyn King
  • Charles Bean
  • Paul Tucker
  • Various representatives of HM Treasury

3    What are the official declared objectives for committing £375 billion on QE?

The ‘objectives’ evolved over time.

Objectives stated in the MPC minutes include:

  • Increase the supply of money in the economy as well as lending and nominal spending
  • Encourage the flow of credit to companies
  • Provide a material stimulus to nominal spending
  • Improve the supply of funds to the corporate sector
  • Use the instrument of asset purchases to stimulate demand
  • Encourage greater bank lending
  • Stimulate nominal spending through boosting the money holdings of the non-financial private sector.
  • Support household and business spending, attenuating downside risks, including from the ongoing weakness in the banking system and the anticipation of further fiscal consolidation
  • Prevent inflation undershooting [???] the 2% target in the medium term.
  • Loosen monetary conditions
  • Stimulate expenditure by lowering borrowing costs and raising wealth
  • Lower a range of market interest rates, supporting asset prices and so nominal demand

Objectives stated in response to Freedom of Information requests in July 2012:

HM Treasury: HM Treasury FoI response July 2012

  • "Raise the level of spending in the economy by increasing the amount of money in circulation."

Bank of England:  Source Bank’s FoI response July 2012

  •  "Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been." [The Bank cannot possibly know this since where the money went is unknown].  
  • "The aim [is also] to lower the yields on government and corporate bonds and boost other asset prices, therefore lowering borrowing costs for a range of businesses and households throughout the economy".

4    How does QE work?

The Debt Management Office (DMO) is an Executive Agency of HM Treasury.  Its responsibilities include debt and cash management for the UK Government, lending to local authorities and managing certain public sector funds.  Gilts are marketable sterling government bonds issued by the DMO on behalf of the UK Government as part of its debt management responsibilities.

The DMO’s cash management objective is to ensure that sufficient funds are always available to meet any net daily central government cash shortfall and, on any day there is a net cash surplus to ensure that this is used to best advantage.

The DMO undertakes, amongst other roles, the management of the UK gilt programme on behalf of HM Treasury.  In consultation with HMT, it manages the Government's auction of new gilts which are open to all Gilt-Edged-Market Makers (GEMMs) who alone are allowed to make competitive bids. Successful competitive bidders in conventional gilt auctions are allotted gilts on a bid-price basis, paying the price they bid. There is also a limited facility for non-competitive bids from members of a pre-approved group of individuals.

When gilts are purchased in the market place by the Bank of England subsidiary Bank of England Asset Purchase Facility Fund Limited (APFF), it buys the gilts as a block from GEMMs.  APFF does not seek and does not know the identity of any of the actual owners whose transaction is managed and recorded by the GEMM.  In consequence, APFF, the Bank of England, the DMO and HM Treasury have no idea as to the identity of the beneficial owners of the gilts purchased which could be located anywhere in the world.

In the initial QE phase, the DMO issued Treasury Bills and lent the proceeds to APFF to enable it to purchase a small amount of corporate securities. 

The gilt purchases in the main and ongoing QE programme have been financed in the following way which does not involve any lending by the DMO.  The Bank has explained that:

          "The money created for QE is central bank money.  It has to be repaid one way or the other to the Bank of England.  If there is a shortfall that would have to be made up by the Treasury.  It is one of the reasons why APFF could not cancel the gilts because the Government would have to pay the Bank anyway. All QE has been funded by the Bank of England by just creating money electronically – it is called central bank money."

  1. As an example the Bank creates £50bn of central bank money.
  2. The Bank then makes a loan to its wholly owned subsidiary APFF of £50bn.
  3. APFF then enters the market, purchasing gilts on a tender basis from GEMMs which either own the gilts in their own name or more normally are acting on behalf of their unidentified clients.
  4. DMO records on the gilt register the sale of the gilts by the GEMM to APFF – the identities of the actual owners (clients of the GEMM) are not made known either to APFF or the DMO.  This is because their holdings and identities are recorded in the books of the GEMM and are not accessible by the DMO.

The DMO does not own any gilts on its own account and thus cannot sell gilts to APFF.  All gilts purchased by APFF are existing gilts owned by GEMMs on their own account or as agent for third party investors located anywhere globally.  Neither the Bank of England nor APFF are permitted to purchase newly issued gilts from the DMO.  This is prohibited by Article 123 of the Lisbon Treaty

The following three diagrams set out the public sector cash flows:

  1. Basic DMO cash flows
  2. Expand QE using central bank electronic money
  3. Redeploy QE money solely to support growth in the UK economy

1.     Basic DMO Cash Flows

This diagram sets out the basic UK Government cash flows:

  • Receipts from taxes,  sale of Treasury Bills and Gilts
  • Central Government, executive agency and local government expenditure.

CLICK ON IMAGE TO ENLARGE

 

2.     Expand QE using central bank electronic money

This diagram sets out the UK Government cash flows when the QE programme is expanded:

  • Financing route for funding QE gilt purchases
  • Distribution route for QE funds including where benefit winds up

CLICK ON IMAGE TO ENLARGE

 

3.     Reduce QE by selling APFF gilts and redeploying the cash directinto the UK economy through a new bank subsidiary

If the Bank merely sells the gilts owned by its subsidiary ABFF back to the market, the sales proceeds are paid back to the Bank to reduce its loan to ABFF.  Unless the Bank can find a further use for the money, the cash received is set off by the Bank against the total amount of the Bank’s reserves.  This reduces the balance sheet totals on both sides of the Bank’s balance sheet.  None of the money is due to be paid to the DMO which never funded the gilt purchases in the first place.  Thus selling the gilts has no impact on the total funds available to the DMO.  Indeed, if the Bank were to lend the money to the DMO, it would be in breach of Article 123 of the Lisbon Treaty.

The Bank needs to find and urgently implement alternative methods of directly injecting much needed financial support into the SME sector which bypasses the retail banks.

This diagram sets out the Bank of England / APFF cash flows when the QE programme is reduced by selling gilts back into the market and reinvesting the proceeds in a new Bank SPV subsidiary with the target of directly supporting UK economic growth. The envisaged solution does not reduce the M4 (broad money).

  • Resell QE gilts owned by APFF to the market.
  • Apply the proceeds of sale for the benefit of the UK economy.

CLICK ON IMAGE TO ENLARGE

 

 

5       What has happened to the benefit of the QE money?

As previously explained, the identity and location of the actual owners of the purchased gilts are unknown.  This was confirmed under FoI disclosure by the Bank of England in 2009 and 2012 and by HM Treasury also in 2009 and 2012.

No restriction is placed by the Bank or APFF on either the selling agents or the actual owners of the purchased gilts as to what they can do with the money. Whilst the sterling paid for the gilts remains, of course, in existence, the owner can exchange the sterling it receives into any foreign currency.  The funds can be invested, lent or spent for any purpose anywhere in the world. 

In the Bank’s FoI correspondence with the Editor, the Bank has repeatedly claimed that the benefit of the QE money is solely to the UK economy.  Similar misleading statements appear to have been made by the Governor and other officials of the Bank of England to Parliament’s Treasury Committee on 25/10/11 (Q53) and 29/02/12 (Qs 14 & 26).

The Bank’s above assertion under FoI disclosures is contradicted by the Bank’s own published Working Paper 442 (WP 442) dated January 2012 which exposes deeply buried secrets when it states:

"There may also be potential leakages, to the extent that gilts were purchased from the banking system or from the overseas sector.”

"The exchange rate could form part of this adjustment mechanism. To the extent that financial institutions want to diversify into foreign currency assets, they may wish to exchange sterling deposits for foreign currency deposits as an intermediate step to purchasing foreign currency assets. That could bear down on the exchange rate.”

"First, some gilt sales to the asset purchase facility may have come from outside of the UK non-bank private sector which may have reduced the initial effect on broad money.”

"It cannot be certain that the ultimate sellers of all the gilts purchased during QE were members of the UK non-bank private sector. The intention of QE was to purchase assets largely from UK non-bank financial companies, such as insurance companies, pension funds and other asset managers. But the banking sector or non-resident sector may have sold some of their gilt holdings to the Bank of England. In this case, the money balances of the non-bank private sector would not have risen, so the initial increase in M4 money holdings may have been less than the programme of asset purchases.”

WP 442 makes no mention of the discovered fact that the Bank has no idea as to the identity of the real owners of the purchased gilts.  However the authors of WP 442 clearly recognised that the benefit of QE money could flow overseas.

It is reasonable to ask whether the Governor and the other members of the Bank's Court of Directors and the MPC were indeed ignorant about this shameful waste of UK resources.  Or were they all too complacent to recognise the disastrous impact on the UK economy of the precious QE money leaking overseas.  Either way, it is a disaster!

As a consequence, the Bank of England is funding the world economy with only an unknowable proportion of the scarce funds finding its way into the UK economy.  It is hard to believe that such a unwanted result was not obvious to successive Governments, the Bank of England and their multiple advisers.  The Editor acknowledges that this QE nonsense was revealed by the economist Dr Ros Altmann at the outset in March 2009.  This grotesque mistake is a primary cause of the collapse of UK growth.

Dr Altmann spotted the flaw in this logic some seven months before Charlie Bean made  the speech when she wrote in Thisismoney on 11 March 2009 (Day #1 of the QE programme):

"The Bank of England is today implementing its first major 'quantitative easing'.  It will create about £2bn and use this money to buy gilts from institutions in the market.  This is supposed to stimulate the economy as the institutions selling gilts are expected to invest in UK company debt instead. This is not going to happen!
          For the policy to work, investors must use the money they receive from selling their gilt holdings to buy smaller or medium sized corporate bonds.  This is then supposed to help UK companies who need to borrow to survive.  But institutions can invest in non-UK companies and there is nothing that will force them to focus only on sterling debt.
          Institutions who sell gilts have a wide opportunity to invest [elsewhere], so there will be substantial leakage to other assets. Many will switch to overseas Government bonds, some will buy index-linked gilts, some will buy top quality corporate bonds of overseas companies, not UK companies, but very few will want to switch to smaller UK company credit – where the need for new investment is most urgent.
          So QE will help overseas government and corporate borrowers more than domestic companies who so urgently need the money…”

Charles Bean (Deputy Governor) attempted to explain the workings of QE in a speech on 13 October 2009

Despite not knowing the identity of the owner of the gilts purchased by the Bank, he drew comfort from a statement of the obvious.  Sterling cannot be transmuted into USD, Yen etc.  Agreed.  Whoever receives the QE sterling holds a claim against the Bank.  Ergo, no QE money is lost to the UK economy.

It is misleading because it ignored how the benefit of the QE money could migrate overseas by conversion through FX as recognised in WP 442.

Charles Bean said:

"Now I can add detours for the money at any point in this cycle.  For example, the pension fund that sold the gilt [through its agent] to the Assets Purchase Facility might now withdraw its deposit and use it to purchase a newly issued corporate bond.  The company issuing the bond then deposits that money in its own bank.   So now it is the corporates bank that holds a claim on us.  A similar sort of cycle occurs if the corporate then uses its deposit to buy a new piece of machinery, because the seller of that machinery will end up putting the proceeds into its bank, so that the claim on the Bank of England is now held by the capital goods producer's bank.  Whatever the type of purchase, it will always end up with someone's commercial bank having a claim on us.  This is even the case if the money is used to buy foreign goods, as the foreign commercial bank will need to exchange the sterling claim with a commercial bank that holds an account with us, if it does not do so itself.  The only way that the claim can be eliminated from the system is if the bank chooses to exchange it for cash, which would make little sense since cash pays no interest at all."

6        Action to redeploy the ill-managed £375 billion

The remedies include:

  • Commence an urgent, phased sale back into the market of the existing gilts owned by APFF.  The UK cannot afford to wait until the gilts mature.
  • Ensure that the recovered funds are deployed as set out in Section 4 above supporting essential action to generate growth solely for the benefit of the UK economy.
  • Cease further QE gilt purchases under the Asset Purchase Facility.
  • Treasury Committee to investigate as a matter of urgency how it came about that:
  1.  The Bank, the MPC and the Treasury all failed to recognize the negative economic significance and danger of not knowing the identity of the actual owners of the purchased gilts.
  2. Despite the FoI disclosures by both the Bank and the Treasury in 2009 confirming that the actual owners of the purchased gilts were unknown, both Parliament and the Committee were not so informed.
  3. Despite the FoI disclosures by both the Bank and the Treasury in July 2012 confirming that the actual owners of the purchased gilts were unknown, the MPC was not so informed when it met on 1 and 2 August 2012.
  4. The Governor and other Bank officials and certain MPC members asserted without any factual basis that the QE programme had “injected vast amounts of liquidity” into the UK economy when the beneficiaries of the QE money were unknown and unknowable.

7    What has the Bank told Parliament about the QE objectives?

October 2011:  The Governor appeared before the Parliamentary Treasury Select Committee on 25 October 2011 when he stated in response to a question (Q57):

“I think the fall in bank lending would have been worse had we not conducted our asset purchases because what we were doing was injecting money into the economy…”

February 2012:  The Governor together with Charles Bean, Paul Tucker and Adam Posen appeared before the Treasury Committee on 29 February 2012 (uncorrected transcript of oral evidence).  The Governor repeated his earlier assertion about the purpose of QE:

"(Q14) Sir Mervyn King: Can I just go back to what I thought was the simplest way in which at least I could understand asset purchases? We conducted asset purchases to inject more money into the economy. We did so because, very unusually, the amount of money in the economy was hardly growing at all. Why was that? Because the banks were deleveraging, but to ensure that we could get the growth rates of broad money back up to normal levels."

"(Q26) Sir Mervyn King:  … We did not have that problem, but we have injected a vast amount of liquidity, so the one thing that the British banking system is not short of is liquidity."

These statements are severely economical with the truth.  The Committee was not told that the Bank and the Treasury had no means of knowing where the QE money had actually gone.  The MPs never asked presumably because no one in their right mind would expect that precious UK resources would be applied to finance a global recovery. 

It also appears that the MPC was likewise kept in the dark because, in July 2012, both the Bank and the Treasury admitted in their FoI responses that, as they bought gilts through agents, they have no idea as to the identity of the owners and thus have no idea what the owners did with the Bank’s money.  Both made similar FoI disclosures in December 2009! (see Bank FoI / Treasury FoI)

8    What did the Monetary Policy Committee consider about the fate of the QE money?

The MPC never discussed where the QE money had actually gone.  They only considered the supposed economic impact without regard to the hidden fact that the benefit could enure anywhere in the world.  In essence this occurs when QE sterling currency is exchanged to a foreign currency and deployed as say USD for any business purpose – including the funding of a foreign company competing with a struggling UK company!  By the FX route, the Bank's QE money merely winds-up in the accounts of the FX Dealer as currency stock .  The Dealer is most unlikely to be a meaningful investor in the UK economy other than making short-term sterling deposits!

Extracts from MPC minutes: (see also full text MPC minutes from April 2008 to August 2012)

MPC – Mar 2009  (36) “[There] was the high degree of uncertainty over the precise impacts on nominal spending and inflation of these operations. …the Committee would be able to gather some information on how the sellers of the assets were responding to the subsequent increase in liquidity of their portfolios …”.

MPC – Apr 2009 (32)  “It was too early for data to reflect how the purchases of assets were being transmitted into broad money and credit and into nominal spending, and thus to enable the Committee to judge its overall efficacy.”

MPC May 2009 (36) “There was uncertainty about the impact of asset purchases on this scale to stimulate nominal spending. The Committee would learn a considerable amount about the transmission mechanism of asset purchases in the coming months. … With the benefit of more information on the impact of its existing asset purchase programme, the Committee would be in a better position to judge these issues at future policy meetings.”

MPC Jul 2009 (16) “The monetary data did not provide a precise guide to the success of the Bank’s asset purchases. It was possible that the impact of the asset purchases this month on the money numbers had been offset by insurance companies and pension funds running down their deposits to buy UK banks’ new long-term debt or equity. More generally, companies might use the proceeds from the increased issuance of corporate securities to reduce bank debt rather than increase deposits. If the asset purchases helped banks and businesses to repair their balance sheets, that should support bank lending and money spending in the future.”

MPC Aug 2009 (25) “Although it remained too early to assess the full effect of the asset purchase programme, there were some promising signs that it was having a positive impact.”

MPC Dec 2009 (30) “Money growth had been disappointing. ….The reasons for that were unclear, however, and it remained likely that the full impact of the asset purchase programme on the economy would be felt only with a lag. The Committee would continue to monitor closely the evidence on the impact of its asset purchase programme.”

MPC Feb 2010 (35) “It would also enable the Committee to assess the strength of the emerging economic recovery as more reliable data became available.”

MPC Aug 2011 (29) “There was inevitable uncertainty about the precise impact of asset purchases on demand and inflation”

MPC Oct 2011 (33) “Evidence on the impact and transmission channels of the first round of asset purchases, reviewed in the Bank’s 2011 Q3 Quarterly Bulletin, indicated that, while there was considerable uncertainty about the magnitudes, the earlier asset purchases had had economically significant effects. There appeared to be no strong reason to expect the economic effect of further asset purchases to be materially different, but their impact would need to be kept under review. The size of the asset purchase programme could be adjusted if there were evidence that its marginal effects were different than past experience suggested.”

MPC Nov 2011 (27) “Domestically, there were also uncertainties around the impact of the Committee’s asset purchases on nominal demand, and over how much domestic headwinds, including the fiscal consolidation, tight credit conditions and the continuing desire by households and businesses to repair their balance sheets, would restrain spending."

(36) "The Committee noted that the existing programme of asset purchases would take a further three months to complete and market capacity made it difficult to increase the monthly rate of purchases substantially above what was already under way. During that time the Committee could gather evidence as to the impact of the purchases on asset prices and the real economy. … . Given the imprecision with which the appropriate stance of policy could be calibrated at this juncture, there was little merit in fine tuning.”

MPC Dec 2011 (27) “The Committee had initiated a programme of asset purchases in October, which would take a further two months to complete. Assessing the effects of the current programme was complicated by the volatility in financial markets, and the Committee was still gathering evidence on the impact of its purchases on asset prices and on the economy.”

MPC Jan 2012 (28) “Although the Committee was monitoring the impact of the continuing purchases on financial markets and the wider economy, there was no compelling reason to think that the impact on nominal demand would be materially different from the first round of asset purchases.”

MPC Feb 2012 (37) “While the Committee continued to monitor the impact of its asset purchases, it saw no compelling reason to think that their impact on nominal demand would be materially different than had been anticipated in October [2011].”

MPC Mar 2012 (32) “Although the Committee was monitoring the impact of the continuing purchases on financial markets and the wider economy, there was no compelling evidence that the impact on nominal demand would be materially different from the first round of asset purchases”.

9    What do either the Bank or the Treasury know about the true fate of the QE money?

Both organisations have a fundamental problem.  Almost all gilts are purchased through agents.  Whilst the agents know the identity of their principal (the owner) at the time of sale, the Bank neither asks for nor holds any record as to the identity of the owners.  This makes it impossible to know what really happened to the money.

This lack of knowledge was confirmed in July 2012 in response to Freedom of Information requests served on both the Bank and the Treasury.

Extracts from HM Treasury’s FoI response in July 2012

"Thank you for your Freedom of Information enquiry dated 27 June 2012."

"HM Treasury does not hold any report setting out the total amount of funds paid out under APF by the name or type of UK financial institution. … Also, as it is not possible to know where and how these funds work their way through the economy, HM Treasury does not hold any information on where funds have been onward lent."

"It may help if I further clarify the purpose of QE … It is a macroeconomic policy tool, which is designed to raise the level of spending in the economy by increasing the amount of money in circulation."

"The Bank of England's asset purchases during QE have largely been from non-bank financial institutions, including insurance companies and pension funds, which use the money received to purchase other assets such as corporate bonds and equities. It is important to note that those from whom the Bank purchases the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners."

"May's [2012] MPC minutes continue to note that, "as yet, there is no compelling evidence that the impact on nominal demand of the additional round of asset purchases completed in May, to be materially different from previous asset purchases [Despite the ultimate destiny for the QE cash being unknown]. Recent market intelligence, low gilt yields and a pickup in sterling deposits by both residents and non-residents were consistent with asset purchases working as expected through the portfolio rebalancing channel with a lag."

Bank of England’s co-ordinated FoI response dated 23 July 2012

"You may find it helpful if we provide some further explanation. When the Bank of England buys gilts under the reverse auctions associated with its Asset Purchase Facility (APF) it does so from its direct counterparties"

"May I point out however, that those from whom we purchase the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners."

"The aim … was to lower the  yields on government and corporate bonds and boost other asset prices, therefore lowering borrowing costs for a range of businesses and households throughout the economy.  There is a good deal of encouraging evidence that QE had the effects we intended. Government and corporate bond yields fell considerably as the separate trenches of asset purchases were announced, and the period of the Bank's initial QE asset purchases saw an increase in the issuance by businesses of the bonds and equities by which their activity is financed."

"Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been [Bank cannot know this since it is unknown where the money went].  Ultimately, that money needs to be placed on deposit somewhere within the banking system at a commercial bank. It is possible that these additional deposits might encourage greater lending by the commercial banking system, although this was not the primary objective of the Bank's QE policy."

"A further important aspect of QE asset purchases is that they are reversible, and indeed all of the assets can be sold back to the market sometime in the future when a tightening of monetary policy is required in order to meet the 2% inflation target."

FoI requests in 2009 produced similar responses

HM Treasury’s FoI response letter dated 22 December 2009 states:

“Also, as it is not possible to know with any certainty where and how these funds work their way through the economy, HM Treasury does not hold any information on where funds have been onward lent.”

Bank of England’s email of 23 November 2009 in response to an FoI request stated:

“In respect of the Asset Purchase Facility (APF) I am afraid that it is impossible to provide this information because a seller can use an agent (e.g. a bank) to conduct the transaction.  We only observe the transaction, not who benefits from the transaction.

10    Highlights of correspondence between Bank of England and the Editor – 2012

The Editor's email to Bank dated 6 August 2012

Certain statements required clarification and confirmation as they appear to be in conflict:
1    Unknown vendor:

"May I point out however, that those from whom we purchase the gilts directly are, to a very large part, acting as intermediaries for the ultimate sellers of the gilts and so the Bank does not know the identities of the 'original' owners."

Please confirm my understanding of this statement that the Bank, not knowing the identity of the 'original owners' has no possible way of knowing where the funds are ultimately banked.

2    Increase in UK money in circulation:
"Another consequence of the Bank's QE asset purchases is that the amount of money circulating throughout the economy is greater than it otherwise would have been."

Having just confirmed that the Bank does not know who were the ultimate beneficiaries of the QE funds, please explain how the Bank has any evidence supporting the above assertion on the amount of QE money in circulation in the UK.
3    Identity / location of bank receiving the QE funds:
"Ultimately, that money needs to be placed on deposit somewhere within the banking system at a commercial bank."

This is an unhelpful statement of the obvious.  The QE cash would have been credited presumably to the account of the agent representing the original owner.  That agent, as trustee, will apply those funds in accordance with the owner's directions.  On this basis, the funds will either wind up in the owner's bank or be invested as directed by the owner.  The owner's commercial bank is totally unknown to the Bank and could be located anywhere in the world.

Please confirm whether my understanding is correct.

4    Encourage greater lending:
"It is possible that these additional deposits might encourage greater lending by the commercial banking system …"

The Bank has previously admitted that it does not know the identity or banking / investment arrangements of the original owner.  The QE funds might have encouraged greater commercial bank lending.  However, as the Bank does not know where the funds actually went, this lending could have taken place anywhere in the world.  Worse, the funds could have supported the growth and success of the UK's overseas competitors.

Please confirm whether my understanding is correct.

Bank of England's email to the Editor dated 21 August 2012

Highlights from the Bank's email:

“"I believe your main concern is that the Bank of England should be able to trace where the money from QE has gone. in particular, you are concerned that some of the money may have left the UK and is being used to fund business activities in other countries. Let me reassure you that while we cannot identify the ultimate sellers of gilts, we can trace the newly created money, and it cannot leave the UK banking system.

"In a speech given by the Bank's Deputy Governor Mr Charles Bean on 13 October 2009 at the London Society of Chartered Accountants Annual Lunch, he covered this point in his detailed description of how money from QE enters the economy. He said:

Whatever the type of purchase, it will always end up with someone's commercial bank having a claim on us. That is even the case if the money is used to buy foreign goods, as the foreign commercial bank will need to exchange the sterling claim with a commercial bank that holds an account with us, if it does not do so itself."

"I would also point you to a Quarterly Bulletin article on the subject, which reinforces the point that the newly created reserves cannot, in aggregate, leave the reserves accounts of our counterparties (through whom the gilts have been purchased):

"Before asset purchases began, the main holders of gilts were UK non-bank financial institutions and overseas.investors. Gilts only represented a modest part [Over £250bn is not "modest"] of UK non-bank financial institutions' overall portfolios in 2009, suggesting they might be prepared to reinvest some of the money from gilt safes in other assets. Overseas investors might be more inclined to choose to invest in foreign assets. However, to do so they would need to change their sterling for foreign currency, putting downward pressure on the exchange rate. And, since all central bank money has to be held by someone, those who received the sterling might then choose to invest in other sterling assets. [As argued elsewhere, not if they are an FX Dealer]"

Response by the Editor to the Bank dated 6 August 2012

Thank you for your letter dated 6 August 2012.

I regret having to trouble you again but your reply does not make entire sense to me as an FCA.  I am not an economist.

You state in your letter:

"I believe your main concern is that the Bank of England should be able to trace where the money from QE has gone. In particular, you are concerned that some of the money may have left the UK and is being used to fund business activities in other countries. Let me reassure you that while we cannot identify the ultimate sellers of gilts, we can trace the newly created money, and it cannot leave the UK banking system"

You are quite right is describing my main concern is that the benefit of the QE money should only have benefited  the UK economy.  I am wholly unconvinced by your assertion that there is no serious 'hole in the bucket' enabling the benefit of QE to flow through to the rest of the world.  The following nightmare scenario appears to me to be one such 'hole':

  • Owner sells £100m of sterling Gilts through its Agent to the Bank.
  • Agent receives £100m from the Bank which is paid into the Agent's sterling account.
  • Owner receives £100m from its Agent's sterling bank account and pays £100m into its sterling account
  • Owner decides to invest in or make a loan to a US corporate
  • Owner requires $150m to effect the transaction
  • Owner purchases requisite amount of USD from an FX dealer to whom the Owner pays £100m
  • FX dealer remits $150m to the Owner's USD bank account in New York
  • FX dealer holds the £100m in its general stock of currencies to be employed in future FX trading.

The FX dealer is the ultimate holder of the Bank's QE money.  FX dealers are not in the business of making investments into the UK economy.  To my accountant's mind, the £100m made available by the Bank in purchasing the gilts has ultimately benefited the financial state of the US corporate. Furthermore, the $150m comprises a much needed inward investment from the US economic view point, helping the US balance of payments.  Incidentally, the above scenario is applicable to any similar transaction in any currency or country.

As a UK citizen, I find the idea of the UK [unknowingly] using its precious resources to support the world's economies wholly repugnant.  I am awaiting your reply hoping that I am wrong but your present explanation makes no sense to me.

Reply by Bank  dated 21 August 2012

"Thank you for your further email of 6 August concerning 'Quantitative Easing' (QE) and whether money from QE can find its way abroad.

Using your very helpful example, let me start from the point where:

  • Owner receives £100m in its sterling account

The important point to note is that no matter what the owner does with the sterling which he has received, unless he exchanges it for cash which he takes out of circulation, the additional £100m sterling is circulating and cannot leave the UK banking system.

If the owner buys dollars with it and invests those dollars abroad that does not mean that any sterling has left the UK the sterling has just moved from one commercial bank to another. Let us, for example, say that the FX trader has a sterling bank account at a commercial bank that is not the same as that of the original gilt owner. In this case the claim on the Bank of England — the reserves — moves between the two commercial banks when the currency exchange is effected. The sterling moves from one commercial bank to the other.

Meanwhile the movement in the dollars from a dollar account of the FX trader ultimately to a dollar account of the company. This does not in any way reduce the extra sterling which has entered the UK economy as a result of QE.

Thank you once again for writing to the Bank. I hope that this additional clarification has been of assistance to you."

Response by the Editor on 21 August 2012

Thank you for your letter dated 21 August 2012.

Your reply has ignored or failed to understand my point. Obviously the additional QE sterling has added to the total liabilities of the Bank, offset by the loan to your subsidiary which in turn owns the purchased gilts.  Your above letter and earlier correspondence has sought to give assurance that sterling has not somehow disappeared.  This is not what I allege.  It is the potential for the benefit of the QE funds to have drained away into the overseas economies that is the issue.

Following your last letter, I undertook further research and was very surprised to discover the Bank's own Working Paper 442 dated January 2012.  I attach a paper setting out relevant extracts.  WP 442 includes statements such as:

First, some gilt sales to the asset purchase facility may have come from outside of the UK non-bank private sector which may have reduced the initial effect on broad money.”

This is grossly economical with the truth.  By the Bank's own admission, it has no idea as to the identity of the actual owners of the gilts.  In consequence, the Bank has no data to support any assertion as to the amount or proportion of gilts purchased "from outside the UK corporate sector".  Your are reminded of the Bank's letter dated 23 July 2012 which unequivocally states:

"May I point out however, that those from whom we purchase the gilts directly are, to very large part, acting as intermediaries for the ultimate sellers of the gilts and so the bank does not know the identities of the 'original' owners."

WP 442 goes on to state:

It cannot be certain that the ultimate sellers of all the gilts purchased during QE were members of the UK non-bank private sector. The intention of QE was to purchase assets largely from UK non-bank financial companies, such as insurance companies, pension funds and other asset managers. But the banking sector or non-resident sector may have sold some of their gilt holdings to the Bank of England. In this case, the money balances of the non-bank private sector would not have risen, so the initial increase in M4 money holdings may have been less than the programme of asset purchases.”

I am totally unable to reconcile your last two letters with the prior admissions by the Bank and the known facts. Please supply a much more realistic reply which takes proper account of the fact that the Bank has no data on the actual owner of the gilts.  WP 442 clearly recognises that the benefit of QE funds could move overseas to the detriment of the UK economy.  Please either confirm that the authors of WP 442 were right (thus confirming my contention) or provide a much better reasoned, fact based explanation as to why your authors and I are wrong.

I am now also very concerned whether there has been proper the public disclosure by the Bank that it has no knowledge of the actual identities and thus nationalities of the 'original' owners. An internet search has located no public disclosure of this fact.

Accordingly, as part of the fragmented response to my current FoI request, please provide the following information:

In relation to the agreed fact that the actual owners who sold gilts to the Bank are unknown, please identify all public documents and other references by way of Bank and MPC publications, reports and speeches (including by members for the time being of the MPC and the Court of Directors) including statements by Treasury and other ministers to Parliament (including replies to PQs) and Parliamentary Committees amounting to full or even partial disclosure of the fact that the Bank has no record or idea as to the identity of the actual owners of the gilts it has acquired under the Asset Purchase (QE) scheme.

In case you find yourself unable or unwilling to provide this information in response to this FoI request, I will shortly be serving a further request both on yourselves and HM Treasury.

Reply from Bank awaited

 

4 Responses to Quantitative Easing – The Myths

  • The main problem here is that it completely misses the point. The Bank of England was just a buyer in the Gilt market – one of many. Therefore the sellers of the Gilts would have sold anyway to the other people in the Gilt market. Not one Gilt was sold to the BoE that wouldn’t have been sold anyway eventually So the behaviour of sellers is almost completely unchanged.

    You are looking in the wrong area. The effect of QE is on the buyers that were *outbid* by the BoE – those who were unable to buy Gilts at the price they wanted because the BoE was in the market. The economic effect is based upon what those buyers did instead of buying Gilts.

    Asset purchase has nothing at all to do with the quantity of money and everything to do with price. It raises the price of Gilts and lowers their yield *which is supposed to puts off other buyers forcing them into other assets*. That generates a cascade effect and a portfolio reconfiguration as the lower level of income from the available assets is redistributed across the market. The lower level of income is then supposed to spur on people to search out and generate new forms of income via primary investment.

    Of course it doesn’t and all the buyers do, since they were in saving mood anyway and full of fear, is purchase deposit accounts or bonds at the bank.

    • Editor says:

      You need to ask what was the declared purpose of QE.  It was not to set the Bank up as yet another gilt investor – there were enough already!  A primary declared objective of the QE programme was restated by the Governor to the Treasury Committee on 25 Ocober 2011 (re Q53) when he said “what we were doing was injecting money into the economy…”  This has been repeatedly stated thoughout the QE programme.  The MPC, at its meeting in March 2009 (when QE began), took the view “By increasing the supply of money in the economy, these [QE] operations should, over time, cause nominal spending to rise.”

      As set out in my bloq, the Bank and the Treasury overlooked the fact that the benefit of the QE money could and has leaked via FX to competitive economies throughout the world.

  • This looks like a very well researched article. Congratulations. You deserve a Knighthood. But of course in making trouble for the establishment, that’s the last thing you’ll get. In contrast, had you done a Fred the Shred and totally bug*ered up the UK economy, then you’d have been showered with gongs.

    • Editor says:

      Hi Ralph.  Thanks for your kind comments. It is amazing how many supposed economists, ministers and politicians (with one known exception) do not understand how QE actually works. I am now finalising my submission to the Treasury Committe on QE realities including where the QE money came from and went.  In addition to the pension victims, the other great unloved are the SMEs who were out of Bank’s focus – unless a corporatate employee average of 10,000 counts as an SME .  Regards Alan Kay