The Bank of England has its Ways and Means

Today my home country the UK is back in the focus of economics and in several ways. The first returns me to my article of Monday when I pointed out this.

Let me finish off on the subject of monetary financing. The simple truth is that we have an implicit form of it right now. Why is the currency not collapsing? Because nearly everyone else is at it too!

This was on my mind this morning as I noted the announcement from the Bank of England although as I looked at the media I also noted that very few had bothered to read the headline and I have emphasised the relevant part.

HM Treasury and the Bank of England (the Bank) have agreed to extend temporarily the use of the government’s long-established Ways and Means (W&M) facility.

Here are a couple of responses who seem to have avoided reading the release.

‘Helicopter money” begins in the UK, the Bank of England will directly pay for government spending WITHOUT government having to issue debt. This will happen everywhere and should happen here in Ireland. Only way to avoid austerity stupidness later. ( David McWilliams)

 

Biggest experiment in monetary history: Bank of England to directly finance extra government spending ( @Schuldensuehner)

No-one seems to have told Holger about Zimbabwe or more curiously Weimar in his home country but he might have held his horses back if he had bothered to read the  actual release rather than the Financial Times click bait twitter headline.

Bank of England to directly finance extra government spending

Ways and Means

This is described below.

The W&M facility is the government’s pre-existing overdraft at the Bank.

This is a little awkward for the takes above and has another irony in that we see some claiming you cannot treat government borrowing like an overdraft when in fact this bit is one! In terms of amounts it existed yesterday.

Ordinarily a standing balance of around £0.4bn is maintained to support Exchequer cash
management…. As of 8 April 2020, drawings under the W&M facility remain at £0.4bn. The outstanding balance will, as normal, be published weekly on the Bank’s website.

Actually it is some £370 million but these days £30 million seems so small doesn’t it?

In terms of what will happen now well it will get larger.

As a temporary measure, this will provide a
short-term source of additional liquidity to the government if needed to smooth its cashflows and support the
orderly functioning of markets, through the period of disruption from Covid-19.

I have pointed out before that this orderly functioning of markets issue is something of a fantasy, after all the Bank of England is like a London Whale in the UK Gilt market. But as long as this is a short-term measure then it is sensible.

Let me explain with reference to the last time this facility was used in size.

The previous high for use of the W&M account was £19.9bn in 2008.

This was from Christmas Eve 2008 until the 25th of February 2009 when it fell to £4.14 billion and then to the overdraft level of £370 million on the 8th of April. As to the details well it was hard not to have a wry smile when I noted it was Robert Pearson who asked for them via a Freedom of Information request so let me show the relevant part of the reply.

The Government repaid £7.0 billion of the Ways and Means Advance on 17 April 2008. It subsequently decided to increase the balance of the Ways and Means Advance temporarily, by £3.8 billion, in order to smooth the impact of the refinancing of part of the Bank of England’s loan to the Financial Services Compensation
Scheme. The Government will repay the remaining £3.8 billion in 2009-10.

We are told that this will happen again this time around.

. Any drawings will be repaid as soon
as possible before the end of the year.

Quantitative Easing

Rather curiously the financial section of UK social media seem much less interested in the £200 billion of UK QE that has been announced. The UK issued  a  £3.25 billion of Gilt earlier this week and this led to more than a few reports that we were finding it easy to issue our debt. Whilst this is true it is surely relevant that the Bank of England bought some £4,5 billion of Gilts on the same day. That will happen again today meaning that a total of £13.5 billion will be bought this week.

If we stay with the QE purchases then we have bought out as far as 2071 ( QE for our grandchildren) and paid as much as £221.8 for something which will be redeemed at £100. That is a sign of how much Gilt yields have fallen because believe it or not the 2068 Gilt offers a coupon of 3.5% whereas we would now offer a coupon of 0.75%. Actually you might make a case for 0.5% but I think you get the idea.

UK Net Debt Issuance

In spite of a large amount of Gilt issuance this week by the UK government which is £12.21 billion by my maths if we allow for the Bank of England purchases we remain net buyers of the order of £1.3 billion. This seems likely to continue as this excerpt from a twitter conversation with the Gilt trade Moyeen Islam shows.

At 13.5bn a week, APF will outstrip supply and see 25bn returned in cash terms to the mkt over April.

Mortgages

There is a curious state of play right now. In the opinion of the Bank of England a major factor in its impact on the economy is via the housing market and house prices. These days that is more via QE and the Term Funding Scheme than official interest-rates because so many mortgages now have a fixed interest-rate.

LONDON (Reuters) – Britain’s housing market has been thrown into the deep freeze by measures to slow the spread of the coronavirus, and is unlikely to have recovered a year from now, according to the Royal Institution of Chartered Surveyors.

Actually when making the point I got this reply from Andy Barnes.

Indeed! If you’re after a 10 year fix as a FTB with less than 40% deposit (quite likely), then you have a grand total of just 2 mortgage products (HSBC) to choose from on the market. Min 20% deposit, relatively extortionate rates of 3.19% and 3.44%.

 

Comment

A calm analysis of the Bank of England action shows that today’s move is not as so many have broadcast. This does not mean that there are no challenges. For example we have seen the word “temporary” used and regularly abused in the credit crunch crisis. So much so that it is defined as “any time between now and the end of the universe” in my financial lexicon for these times. However the UK government is plainly spending at a very fast rate and it will take a while to issue the Gilts to pay for it. Otherwise the market may get indigestion in spite of all the Bank of England purchases. So for once there is some truth in this being to help create an orderly market.

The bigger danger to my mind is the amount of QE  that is being undertaken as we head for £645 billion. There are loads of takes that this is fine and for now it is. But should we ever recover we will have an expanded money supply with velocity picking up and there will be inflation dangers. Not now because even with money there is not a lot to spend it on! But it may happen sooner than we might think.

On the subject of inflation the UK has a new measure and I have formally replied to it.

Movements in the all-HDP items index show a stable increase over time, with an increase of 2.6% since week 1.

Anyway here are part of my thoughts and the full reply is on the Statsusernet website.

I can give an example of an issue here which is valid as this is essentially an anecdote index. In terms of Rice there was a sustained period when the shelves were empty of it and best of luck with getting an online shopping booking! Anyway when I could buy some I had to buy a different type which was some 73% more expensive. Also as I liked the Rice I previously bought I may have been substituting an inferior product making the change larger. So there was quite a shift which I am sure many experienced……….

Accordingly there is much to consider in terms of both the new measure and keeping the normal measures of inflation relevant. In that spirit may I suggest that the indicator saying Antibacterial Cleansing Wipes fell in price in the first week of the measure gets looked at again as the seems to quote the film Star Wars to be from a place “far,far,away…”

Let me finish with some good news which is that UK banks seem to have their US Dollar liabilities under at least some control, which is not true everywhere.

BoE: Allots GBP5 Mln At Contingent Term Repo Facility 3-Month Operation, Zero At 1-Month Operation

 

 

 

 

 

 

 

 

 

30 thoughts on “The Bank of England has its Ways and Means

  1. Great article as always Shaun. I saw this in the press this morning and I hoped you would comment on it.

    Finally the cat is out of the bag. The previous QE was money printing (despite us being told it wasn’t) and now they’ve dropped any charade and the printing presses are on max.

    I’m sure the inflation measures will be adjusted to hide any hyper inflation. I just hope that one day the central banks will be held to account. But I doubt they will.

    • Hi anteos and thank you

      I did a twitter thread on money printing earlier that you may enjoy.

      As to the Not QE era anyone who follows my work knows what to do with an official denial.

  2. Hello Shaun,

    and in other news my ISA has just dropped from 1.10% to 0.25%

    must ……save……harder…….

    Forbin

    • While asset prices go up and suck out the last drops of consumption demand. That will be followed by blaming the virus, even though restrictions are going to be lifted by the end of April. It is going to be a sunny Easter and if the Plod think they can keep people inside, they need to think again.

  3. Hello Shaun,

    re: ” But should we ever recover we will have an expanded money supply with velocity picking up and there will be inflation dangers”.

    Bob the Banker ;-

    It’s because it doesn’t matter whether the government supplies ether currency or bonds when it deficit spends. What matters is the availability of the real resources that the government is purchasing when it deficit spends.

    So its alright then ………apparently .

    Forbin

    • the time to fight inflation is when inflation is a risk.

      You don’t want to be fighting inflation when deflation is the risk. That would be absurd.

      • you statement is vague on which you believe it to be . So is a there real risk in today’s market of deflation or just dis-inflation ?

        I see several instances that point to inflation but I also see some for actual deflation and my crystal ball is still in the repair shop.

        • for the last 10 years or so deflation has been more of a risk. Despite headline low unemployment rates, there has been massive amounts of underemployment in the economy, with the private sector able and willing to produce far more than it has the demand for itself. The public sector could have run larger deficits, purchasing the output of that excess capacity and handing it back to the private sector, paying for it with bonds or money – it doesn’t matter which.

          Now I’m not so sure. Of course demand has fallen from already depressed levels, but supply has also taken a massive hit – quite deliberately, with whole industries accounting for maybe 30% of consumption being effectively shuttered,

          The question is (and I don’t have the answer to it), when we hopefully emerge on the other side of this horrible situation, will demand increase faster than supply can come back on line? I have a suspicion that it may, in which case the government is going to have the tricky act of draining purchasing power from the private sector very rapidly in order to prevent inflationary pressures developing.

          But, as I say, the time for fighting those inflationary pressures is when they appear. That time is not now.

          • the FOi answer was a complete non-answer. Turns out though, the UK has a derogation from the terms of Article 123, which explicitly allows it to used the W&M. That’s how it got used in 2008 and how it can be used now. It could be used all the time. No obvious reason why it isn’t

          • You guys got me intriigued….Article 123 freedom of information “robert pearson” cant find it.

          • I agree, shocking realisation of reduced output, and supressed demand… then followed by patchy return of supply only satiating demand in some goods and services but creating inflation in others… think hand sanitiser.

  4. They can get away with it at the moment with interest rates on the floor, but in a few years when interest rates have spiked thanks to inflation from printing, they’ll no longer be able to print.

    But one good thing to come out of this is, the BoE will have solved our toilet paper shortage. Well they would have if it was still made of paper!!

    • the only notes worth anything will be £50 – you’ll be able to buy a packet of Rolos with it ……. 8 Rolos pack , not 12 of course….

      Forbin

  5. Great blog as usual, Shaun.
    You left out the funniest part of your posting on the RPI CPI User Group site: “Accordingly there is much to consider in terms of both the new measure and keeping the normal measures of inflation relevant. In that spirit may I suggest that the indicator saying Antibacterial Cleansing Wipes fell in price in the first week of the measure [by 0.3%] gets looked at again as the seems to quote the film Star Wars to be from a place ‘far,far,away.’”
    There was an even larger decrease (0.6%) for flour in the index. I find this hard to believe too. My wife Sonja bakes a lot, and was upset when she couldn’t find any flour in the large Metro store where she works at the end of her shift. We were able to find it at a small independent grocery in our neighborhood that specializes in Italian products, and they were running low on it. Isn’t baking one of the things you would expect a lot of suddenly idle people to be doing in their spare time? Was there a surge in prices from week 1 to week 2, and now from week 2 to week 3, we are seeing them normalize slightly?
    Anyway, to switch from Star Wars to Star Trek, the ONS has boldly gone where no NSI has gone before with these measures of price changes for high demand products, even if there may be caveats about some of the numbers. It shows the potential for web-scraped data to fill many of the gaps in official data.
    Listening to the intro of the song in the link below, the great John Prine jokes he was told not to donate his organs to anyone because they wouldn’t be of use to anyone. Of course, he didn’t know then that he would die of COVID-19 and his organs could not be donated.

    • Hi Andrew and thank you

      I had a wry smile at this week’s HDP report saying that the main faller was the price of Rice at ~12%. If that was a reply to me there is still 60% or so to go. As to the concept there is a danger at a time like this from online prices as there may be a price but no supply. I do not know what the state of play in Canada was but in the UK the supply of personal cleaning stuff went to zero for a bit so for the wipes mentioned as well as soap and so on there wasn’t any. The idea that when there was it was cheaper well……

      Bread supplies held up here but sometimes you had to go to several shops and if the pictures on Twitter etc are any guide baking has become a past time for more than a few. So yes the flour numbers are dubious.

      I hope you wife has now found a more normal supply and will listen to the song.

  6. I was reading the Sky report on this and thought Shaun would be blogging on this. Call me Mystic Dave – and people do, he did! I love the “temporary” measure as it will be in a Milton Friedman way and once addicted, the govt will be on it like a heroin addict. It is of course a sign of the real trouble we are in, whatever spin Jeff Taylor and “thick as mince” Davies might try to put on it. If as Shaun points out, the BoE is buying more debt than the UK govt is issuing, nobody wants UK debt, any more than they will be wanting Italian debt soon. If you have a choice of German bunds at minus 0.75% and U.K. sterling bonds at plus 0.5%, You would only buy the latter if you think sterling is not going to tank. The chickens are coming home as jobs disappear permanently and reality sets in.

    I doubt there will be house price inflation as people are going to self-reduce the availability of credit by only taking 3x income loans and nearly all owners will sit tight, making price information volatile through scarcity. That will further reduce the willingness to buy. The clear sign is from the banks ramping up the deposits as that merely reinforces the ideas of falling prices as deposits are ultimately the bank’s insurance policy against bad debt. So, where will this money go? My bet is public sector pay as a “reward” to the emergency services, but the rest of us will be paying higher taxes, so that is just more damage to the consumption demand. An extra one million unemployed will further damage the UK economy. I don’t see retail price inflation, despite the printing as consumption is so badly damaged and the worried people will be saving even more just as traders buy negative yield bunds. I am not sure if it is a valid barometer, but the value of English Premier League football squads has apparently fallen by £1.3bn, which may show where assets are headed.

    I think it is the WTO saying that exports from Asia and North America will be hardest hit, which is no surprise, but probably bad news for The Donald and Brexiteers. Apparently, world debt stands at 323% of annual output. This will be a long haul out and let us hope that the CBS are not stupid enough to think house price inflation will save us.

    So, pardon the language, but this song seems to sum up where we are

    • “let us hope that the CBS are not stupid enough to think house price inflation will save us.”

      I ‘ll not be holding my breath on that one ……

      Forbin

  7. Hi Shaun
    In USA monthly unemployment number expected 5m
    actual 6.5m. So Fed to add another $2T to support
    businesses resulting in big gains in share prices.
    Did I really read that?

    • The Dow has certainly jumped since opening and well done to someone, who called Barclays as they are now 98p. My risky tip PDL did jump on Monday, although the spread was quite broad, and it is now falling back.

  8. Inflation is on the way?
    “Special e-mail from Professor Tim Congdon – 6th April, 2020

    Prospects for US money growth in spring 2020
    The main point of this e-mail is to bring attention to another remarkable week in the US monetary scene, following up the special e-mail of 30th March. Deposits at the US commercial banking system increased in the week to 25th March by 2.6%, from $13,797.5b. to $14,150.3b., according to a Federal Reserve press release. In the fortnight to 25th March they climbed by 4.8%, or at annualised rate of almost 240%. As these deposits are the principal element in the quantity of money, broadly-defined, it is clear that March and April will see extraordinarily high growth rates of money. If deposits are on average in April $200b. higher than at the end of March (which seems cautious, in view of current policy-making), the growth of deposits between March and April will be 4.5%, and the growth of M3 broad money will be similar. The annual growth rate of deposits/broad money in the year to April will then reach 13% – 14%, already ahead of the 10% – 12½% range suggested in the Institute’s original March 2020 note. The annual rate of broad money growth could continue to accelerate in summer and autumn 2020, to move into the 15% – 20% band. US money growth in 2020 may be the highest ever in peacetime.

    Variations in the ratio of money to nominal GDP (or “velocity”) do occur, but large variations are unusual. In the medium term they are ironed out as the underlying stability of agents’ money holding behaviour takes over. It follows that – at some point in the next two/three years – the growth rate of US nominal GDP will accelerate towards a figure in the teens per cent. Given that the trend growth rate of real output is not much more than 3% a year, a big resurgence in inflation is implied by our analysis. The only way to prevent this is for the Fed not just to end its current stance as ready financier of the government deficit, but to withdraw the money stimulus (i.e., to cause the quantity of money to fall by the “excess over normal growth” now being recorded.). In a Presidential election year, that seems very unlikely.”

    Click to access iimr.special_e_mail_2004_US_money_growth.pdf

  9. Hi Shaun
    Thankyou for your thoughts.
    Just heard that around next Tuesday
    the next bailout wil be the car finance
    companies who will be helped to protect
    PCP shortfalls and that CAP have
    allegedly been asked not to reduce
    car values.
    What comes next, probably more
    manufacturer and retailers support!
    When will they ever learn?

    JRH

    • Hi JRH

      I was contacted by a friend who had been looking at the offers from Ford. Basically you get 6 months with no payments if you buy now. Ford pays for 3 months of them and the other 3 months get deferred. So they are trying hard already.

  10. Cannot see the problem with some deflation – imagine what flights, computers and cars would cost without it. Some economists would say it dampens demand, because people put purchases off hoping for a lower price and cite this happening in Japan.

    In fact, we have had deflation of consumer demand. Oh, hang on, you mean asset price deflation, aka falls, so who benefits from stopping that?

    • Hi dave

      I prefer to call it disinflation and it is one of the ways the word progresses. After all what was the industrial revolution without it? But of course we are supposed to idolise inflation at 2% per annum as a type of nirvana.

      • I might be way off on this, but my understanding was two-fold: first, under monetarist theory, it meant demand was expanding and with supply lag, you get a bit of inflation; secondly, productivity growth of 1.5 – 2% meant that production was rising from the same resources at about trend rate.
        Given that demand has tanked and productivity is unchanged, maybe that simply means that inflation and growth are roughly reflecting what is actually happening.

        Oh, I forgot, they would be exceeding a 0.5% target and so rates would have to rise, which would damage asset prices. Silly me.

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