The Saturday Economist

Transcription

1 Special Feature - Who bought all the gits? According to the latest figures from the Debt Management Office (Q2 2011), the total market value of central government liabilities was 1.1 trillion of which approximately 200 billion is index linked and the balance conventional gilts. At the end of 2008, the level of gilts outstanding was just over 600 billion, in three years the total level of liabilities has almost doubled. So who has bought all of the gilts? The Bank of England has purchased the equivalent of over 50% of the new debt issued by the debt management office in the three year period. According to the QE theory, the Bank purchases assets predominantly from non-banks but in fact all stakeholders in the gilt market have increased their holdings over the same period. The Bank of England has completed the large scale asset purchases not from banks and non banks but from the Debt Management Office in a process of monetizing the central government debt burden. John Ashcroft is Chief Executive of pro.manchester, a director of Marketing Manchester, a member of the Greater Manchester Chamber of Commerce, the AGMA Business Leadership Council and a visiting professor at MMU Business School specialising in Macro Economics and Corporate Strategy. London School of Economics London Business School with a PhD in macro economics from MMU.

2 The Bank of England holding is recorded (Q2) at 199 billion, that is 19% of total gilts in issue and almost 25% of the conventional gilt stock. The decision to increase the programme of quantitative easing by a further 75 billion is likely to increase the share of conventional gilts in issue to 30%. The Bank of England has certainly performed a great service to the debt management office buying up over half of the gilts issued in the three year period. The Bank of England asset purchase programme has resulted in higher gilt prices and lower yields with the yield on ten year gilts just 2%. The bank claims the asset purchase programme stimulates growth by purchasing gilts from third part holders of government debt, generating liquidity in the economy, pushing up asset prices, increasing the wealth effect and stimulating demand in the economy. According to the Bank of England Red Book, the objective of Quantitative Easing is to boost the money supply through large-scale asset purchases and, in doing so, to bring about a level of nominal demand consistent with meeting the inflation target in the medium term. Government Liabilities have increased from 500 billion in 2008 to 1.1 trillion by the end of Data from the Debt Management Office The Bank of England holding (Q2) is 199 billion, that is 19% of total gilts in issue and almost 25% of the conventional gilt stock. Page 2

3 According to the Red Book : The Bank purchases these assets predominantly from non-banks - but banks act as intermediaries in the process. The Bank pays for the assets purchased by creating central bank reserves and crediting the accounts of the banks that act as intermediaries. Those banks will in turn credit the accounts of the non-banks from whom they obtained the assets. They will either spend the money on goods and services, which directly adds to overall spending, or purchase other assets, which will tend to boost the prices, and hence lower the yields, of those assets more broadly. But is this really the case? In the UK, all holders of government debt have increased their holdings in the period from Q to Q The largest domestic holders of gilts are monetary financial institutions, insurance companies and pension funds. Holdings of MFIs have increased from 56 billion to 322 billion. An increase from 4% of total stock to 30% of total stock. The Red Book Holdings of insurance companies and pension funds have increased from 228 billion to 302 billion, an increase of over 30%. Page 3

4 Other financial institutions (OFIs) have seen a fall in gilt holdings from 126 billion to 104 billion but there is some evidence of gilt loading in the sector before QE began. In the four quarters prior to the formal launch of QE but including speculation about the process, the average holding was 90 billion. In the run up to QE, OFIs bought almost 50 billion of gilts peaking at 137 billion by the end of 2008 presumably to sell on to the Bank of England at a quick profit. Even domestic households accounting for just 1% of total holdings have maintained the level of gilt stocks at 13 billion in Q and 13 billion in Q Internationally total holdings of UK gilts have increased from 215 billion to 323 billion around 30% of total stock. From a portfolio perspective foreign central banks held 6% of stock in 2009 and the same ratio in Other overseas holdings averaged 25% of gilts in issue down from 27% in 2009 to 24% in Holdings of other financial institutions evidence of loading up before QE begins Page 4

5 So from whom has the Bank of England been acquiring the stock? Well from the Debt Management Office, HMT and the Government, of course. That is why at a recent Treasury Select Committee meeting, the Governor was pretty relaxed about the potential loss on gilts trade once the QE process was reversed. The loss could be as high as 100 billion but would be offset by the notional gain on gilts (to Treasury) at the time of purchase. It would be a public sector book adjustment, the gist of the response. QE is not acquiring debt from the private sector to ease liquidity and stimulate growth. It is an asset purchase programme of government debt from the DMO. It is simply monetizing the debt, transferring government debt as interest-bearing securities onto the Bank of England balance sheet. An easy way to finance the deficit with a willing buyer in the form of the Bank of England to absorb the enormous demands of the government borrowing programme. The total stock of debt is likely to increase by over 10% this year alone and the costs of servicing the debt will increase by almost 20% compared to last year. Shopping trip from the Bank of England to the Debt Management Office... Page 5

6 Traditionally, monetizing the debt is considered to be an inflationary process. Although it may temporarily depress interest rates by pushing gilt prices up, it is likely to result in higher interest rates and lower bond prices in the long run as a result of higher inflation. For the Bank of England, an unwind of QE and an asset sale programme will result in lower gilt prices and much higher yields. The market will be cruel in marking the gilts as the forced sale results. As the Hunt brothers discovered in the early 1980s in their adventure with silver, it is easier to corner a market, than it is to market a corner. This is one area of rebalancing the Government is not promoting. Quantitative Easing pushes up gilt prices and lowers long term yields. Of itself it does little or nothing to stimulate demand in the economy. The asset purchase programme is not an interaction with banks, non banks and the private sector increasing wealth and nominal demand in the economy. Quantitative Easing or financing the deficit? There were some much need liquidity effects in the first round but in reality QE and the asset purchase programme is more about assisting the enormous gilt issue programme from the Debt Management Office than it is about stimulating demand. JKA Page 6