Summary
Quantitative easing (QE) was introduced to obscure the fact that central banks were lending money to their own governments. It was launched after the 2008 financial crisis and involved the Bank of England buying government and corporate bonds to stimulate investment. However, this was a concealment of the financing of government spending with newly created money. Since quantitative easing began, the government has incurred significant costs in issuing and repurchasing bonds. The entire approach was complicated and unnecessary and highlighted inefficiencies in macroeconomic practice.
Quantitative easing, or QE, as it is commonly called, was and remains a deception to disguise the fact that a central bank is lending money to the government that owns it. In this video I explain the details and costs of this ridiculous denial of the truth.
The audio version is available here:
This is the transcript:
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To understand modern macroeconomics, one must understand quantitative easing.
After the 2008 financial crisis, quantitative easing began in the UK and other countries. The aim pursued by Alistair Darling as the last Labor Chancellor of the Exchequer in government from 1997 to 2010 was to require the Bank of England to buy both government bonds and corporate bonds in the financial markets in order to reduce the interest rate and achieve a return , which can be achieved by increasing their price (which is the case when the government creates demand for them), and as a result forcing people to instead, as he saw it, invest in stocks and other risky assets, which in which leads to an increase. He thought that the overall rate of investment in the real economy would, in his opinion, reduce the risk of a recession at this point.
You will notice that I have very clearly rejected many of the statements I just made. I did this for good reason.
The truth was that in 2009 Alistair Darling and the Bank of England actually wanted to increase the amount of money that the Bank of England made available to British commercial banks to ensure that they had sufficient ability to pay the debts that arose between them could pay on a daily basis without having to resort too much to the bank for credit facilities. This required an increase in their central bank reserve accounts – the accounts that commercial banks hold with the Bank of England.
And the way to achieve this was to effectively allow the Bank of England to create money that would be used to finance government spending, which in turn would drive up central bank reserves because that money would not come from the economy would be reclaimed. through taxation or bond sales.
The problem was that the European Union, which of course we were a part of at the time, did not approve of central banks providing this kind of financing to their governments through an increase in government spending, without the need for bond sales or taxes. And so they had to devise a ruse to cover up the fact that they were doing just that.
Quantitative easing is the trick that obscures the fact that the British government was largely funded by the Bank of England from 2009 to 2021 and has the ability to create new money to finance government spending. During this period the Bank of England created a total of £895 billion of new money for this purpose, but this was disguised by quantitative easing.
Let me explain what quantitative easing really did. What happened was that the government had to spend money. This was necessary because the economy was in crisis. In 2009, tax revenue collapsed. In 2020, tax revenues also plummeted due to massive drops in economic activity. Therefore, although the company had a loss of income, it still had to spend the entire amount. The consequence was that it had to get money from somewhere.
There were three options. It could have increased tax rates, but that would have been of no use because tax revenue was already declining.
It could have tried to borrow on financial markets, but that would have caused a financial crisis.
Or it could have asked its central bank to create the money in question, which it did.
But to disguise the fact that she was asking her central bank to raise the money, she appeared to sell a bond equal to the amount of missing tax revenue. So if the government was £10 billion short of tax revenue in a month because the economy was in crisis, it also seemed to sell a bond for £10 billion. But within a week of issuing this bond, the government went into financial markets and bought back £10 billion worth of government bonds through the Bank of England. They were not necessarily those that the Treasury had issued the week before. That could have been them.
What happened, however, was that the value issued was, by and large, almost immediately bought back by the Bank of England.
Why did they bother to include this step in the process? The expenses were easy to understand.
The Bank of England gave the government an overdraft and the government issued money.
The state then issued a bond, demanding back from the financial markets the amount it had just spent.
But almost immediately the Bank of England returned this money to the financial markets by buying back bonds equivalent to the value of the bonds it had just issued.
If you’re confused, I think that’s intentional. The government did this to create confusion. By issuing these bonds they acted as if they were not funded by the Bank of England, even though this was indirectly the case, because the consequence was that if the bonds were issued and then bought back they would clearly not be available to the financial markets would stand.
In my opinion they weren’t a problem at all. Instead, the Bank of England disguised the granting of a loan to the government behind the fact that the government had issued bonds that had been purchased by the Bank of England.
This is exactly what quantitative easing has done. It was a ploy to cover up the fact that the government had actually taken out an overdraft with the Bank of England.
But it was a ruse with enormous costs. First, these costs were due to the financial transaction costs of issuing and then repurchasing bonds, which caused an immediate loss of profits to the banks that conducted these trades, even though they knew full well that they would get the return because they knew it all Bonds that the government had issued up to a certain value from 2009 and up to a certain value through 2021 were supposed to be bought back because it was announced in advance how much was to be bought at a certain time.
Secondly, there was a cost because if the Bank of England owned bonds issued by the government, the government had to pay interest to the Bank of England. Now in 2013 this became ridiculous. It turned out that the Treasury was paying a huge sum of money to the Bank of England, which apparently benefited the bank, while the bank was obviously owned by the Treasury and therefore there is no real profit at all in this system. And that money was then returned to the Treasury on George Osborne’s instructions. This negated the net effect of the Bank of England owning these bonds.
But this problem still existed, and it remained so present that people could argue that it was necessary for the government to get rid of this burden and send it back to the financial markets by eventually selling the bonds back, and that has always been established be the plan.
It was this part of the ruse that proved so costly. There are two costs. On the one hand, the government is now selling back some of the bonds it allegedly bought. And I know the Bank of England says it makes its own independent decision, but if you believe that, you also believe there are fairies at the end of your garden.
So the bonds bought by the Bank of England are resold in the financial markets and this increases the government’s real financial cost as it is now paying interest to the financial markets whereas previously it was paying the interest to the Bank of England.
Additionally, these bonds are being sold at a loss because they were purchased at a time when the government was trying to drive up the price by increasing demand for government bonds, and now it is trying to sell too many bonds on the market, and if you try to sell too many bonds, you drive down the price, and the result so far is a cost of well over a hundred billion pounds to the government in the form of supposed financial losses from alleged new bond issues which, frankly, frankly, were canceled at the time of repurchase.
This ploy to pretend that the government has not taken out overdrafts from the Bank of England has cost a significant amount of money, with the intention of pretending that the macroeconomics do not allow the government to borrow from its central bank when in reality this is the case.
Does that sound totally confusing? I’m really sorry if that’s the case. I tried to make it as simple as possible. But the fact is that this should sound confusing. It should sound very clever. It was meant to sound very complicated, and it needn’t have been any of that. There could have been a simple, direct statement from the government that it would borrow from the Central Bank and that was it, the circumstances required it, and there were no complications, no involvement in the financial markets, no burden on the banks and no losses as Consequence.
All of this could have happened.
QE was completely unnecessary.
We could have simply given the government an overdraft.
The cost of pretending the economy is anything other than what it is has been enormous, and we should never allow that to happen again.
