Quantitative Easing. Who pays?

[Roland]

Here is the reply from my MP.Attachment 5255

Poor reply. If some one knows what they are talking about they should be able to come up with a clear statement, with at least an attempt to put things in laymen's term and offer places to go for further information as obviously a complicated issue takes more than a letter to explain. The BoE reply at least did that, the MP's reply was just palming you off with a load of nonsensical gibberish.

[Cactus Jack]

The MP who wrote you that reply doesn't understand what QE is

[longjohn]

Here is the official reply from the Bank of England. I am still analyzing it.

-----------------------------------------------------------
Thank you for your e-mail dated 15 June 2012 regarding quantitative easing (QE).
Before turning to your questions I thought that it was worth explaining the mechanics of QE.
The money used for QE is created electronically as a positive balance on the accounts of the Bank of England, known as central bank money. This money is then lent, with interest charged, to the Bank of England Asset Purchase Facility Fund (BEAPFF) in order that the BEAPFF can then buy assets from the private sector. So far the BEAPFF has principally bought British Government Stocks. This part of the national debt still exists, it is just held temporarily by the BEAPFF. When the Bank decides that QE has done its job and we need to unwind the BEAPFF’s holdings in order to meet the inflation target, these can be sold back to the market and the electronically created money will disappear as the BEAPFF pays back the loan to the Bank of England.
If the gilts mature before the Bank decides to sell them back to the market, the government will pay the redemption value to the BEAPFF. Given the shortest residual maturity of gilts purchased was three years, the earliest redemption is not until 2013. Meanwhile coupon payments (interest) from the gilts purchased accumulate in the APF, and so will repayments of principal when they fall due. They are not automatically reinvested unless the Monetary Policy Committee decides to do so.
For further information on coupons and the QE programme in general, please see a recent article in the Bank’s Quarterly Bulletin, at:
http://www.bankofengland.co.uk/publi...n/qb110301.pdf
I also recommend a speech by our Deputy Governor, Mr Bean, on 13 October 2009, on how the BEAPFF operates:
http://www.bankofengland.co.uk/publi.../speech405.pdf
For further information on the QE programme please see:
http://www.bankofengland.co.uk/marke...f/default.aspx
Finally, I thought that it was worth noting that central banks routinely buy and sell Government debt in the secondary market as part of their normal operations in the money markets. The only thing that distinguishes the purchases of assets under QE from normal operations is the scale and the length of time for which the assets are likely to be held.

Thank you for your enquiry, I hope the information provided will be of assistance to you.

Regards
Maxine Self
Public Information and Enquiries Group
Bank of England
0207 601 4878

I am still not happy with the reply I received from the BoE so I have wrtten to them again as I still feel we pick up the bill at the end of the day.

Dear Maxine Self,

Thank you for taking the time to respond to my question about quantitative easing. I would like you to clarify one point. Your statement: - When the Bank decides that QE has done its job and we need to unwind the BEAPFF’s holdings in order to meet the inflation target, these can be sold back to the market and the electronically created money will disappear as the BEAPFF pays back the loan to the Bank of England.

The BoE is holding 350 billions worth of Government bonds and the bonds are going to be sold in the “after market” after you feel the need to “unwind”. When they mature, isn’t the Government the one who has to pay back the face valve of the bonds and any interest accruing regardless who is holding them at the point of the bonds maturing? As the Government has no money of its own won’t it be the tax payer who will pick up the cost of these maturing bonds?

I look forward to hearing from you on the above.

[longjohn]

I am not sure if anyone is still following this thread but it appears that the letter from my MP is correct as this is the reply I have had from Maxine Self from the BoE. WE DO PAY THE 350 BILLION later from our taxes!

Thank you for your e-mail of 27 June concerning ‘Quantitative Easing’ (QE). Your e-mail has been passed to me to reply.

At present the British Government Stocks (BGS) we have bought are being held by the BEAPFF and when we sell them back to the market the ownership of the BGS will of course change. However, the BGS remain payable on maturity by the British Government as is the case with all BGS. The Government indeed has to fund the cost of redeeming these BGS along with the dividend payments throughout the life of the BGS. This money can either come from Government revenue or by the issue of further BGS. But this situation has not been altered because of the banks’ QE program; this was always going to be the case.

Thank you once again for writing to the Bank. I hope that I have been able to clarify these matters for you.

[CB100]

I think you misunderstand. The BGS were stocks already issued by the government years ago in return for cash which was used to fund whatever spending programmes had been required at the time.

The BOE then bought these stocks from the banks using QE. So QE makes no difference whatsoever to the government's obligation to repay the amounts due on the stocks at their normal maturity date.

As your extract states: "But this situation has not been altered because of the banks’ QE program; this was always going to be the case."

I am not sure if anyone is still following this thread but it appears that the letter from my MP is correct as this is the reply I have had from Maxine Self from the BoE. WE DO PAY THE 350 BILLION later from our taxes!

Thank you for your e-mail of 27 June concerning ‘Quantitative Easing’ (QE). Your e-mail has been passed to me to reply.

At present the British Government Stocks (BGS) we have bought are being held by the BEAPFF and when we sell them back to the market the ownership of the BGS will of course change. However, the BGS remain payable on maturity by the British Government as is the case with all BGS. The Government indeed has to fund the cost of redeeming these BGS along with the dividend payments throughout the life of the BGS. This money can either come from Government revenue or by the issue of further BGS. But this situation has not been altered because of the banks’ QE program; this was always going to be the case.

Thank you once again for writing to the Bank. I hope that I have been able to clarify these matters for you.

[Roland]

I am not sure if anyone is still following this thread but it appears that the letter from my MP is correct as this is the reply I have had from Maxine Self from the BoE. WE DO PAY THE 350 BILLION later from our taxes!

Thank you for your e-mail of 27 June concerning ‘Quantitative Easing’ (QE). Your e-mail has been passed to me to reply.

At present the British Government Stocks (BGS) we have bought are being held by the BEAPFF and when we sell them back to the market the ownership of the BGS will of course change. However, the BGS remain payable on maturity by the British Government as is the case with all BGS. The Government indeed has to fund the cost of redeeming these BGS along with the dividend payments throughout the life of the BGS. This money can either come from Government revenue or by the issue of further BGS. But this situation has not been altered because of the banks’ QE program; this was always going to be the case.

Thank you once again for writing to the Bank. I hope that I have been able to clarify these matters for you.

Still following been working some hours and not really getting time to make sense of it all.


The last reply is a bit more clear cut it would seem assuming I'm following it right.

So is a BGS a government bail out?

[CB100]

No. They are in effect "loan notes" issued by the government in exchange for cash and this forms part of the overall national debt. The loan notes will have been bought by the banks in exchange for cash provided to the government years ago.

So QE has no impact on the obligation of the government to repay those loan notes. All that happens is that the BOE now owns some of the loans notes rather than the banks.

So is a BGS a government bail out?

[Roland]

No. They are in effect "loan notes" issued by the government in exchange for cash and this forms part of the overall national debt. The loan notes will have been bought by the banks in exchange for cash provided to the government years ago.

So QE has no impact on the obligation of the government to repay those loan notes. All that happens is that the BOE now owns some of the loans notes rather than the banks.

Your a corporate financial adviser, I am a carpenter. Is there any chance you can explain that in a way that I might clearly understand. I'm dead interested in the subject but what you have written above means nothing to me.

[CB100]

Your a corporate financial adviser, I am a carpenter. Is there any chance you can explain that in a way that I might clearly understand. I'm dead interested in the subject but what you have written above means nothing to me.

Ok here's an example:

Let's say years ago the government wants to spend a load of money on hospitals, let's say £100 billion. It doesn't have enough money from tax receipts so it decides to borrow the money from the markets.

It offers government stocks to the investment market yielding whatever interest rate is required to attract investors. Investors (in this case banks) buy the stocks and give the government £100 billion in cash which it goes out and spends. The government starts paying the banks interest on the money they have borrowed.

THEN, years later. The BOE uses QE to create some money. It uses the money to buy the stocks off the banks and gives the banks £100 billion in cash. The government now pays the interest on the stocks to the BOE intead of to the banks.

So in summary. All that has happened with QE is that an investment (government stocks) originally acquired by the banks has changed hands and is now held by the BOE. QE does not affect the government's obligation to repay the amounts borrowed at normal maturity date but instead of owing the banks the £100 billion, they now owe the BOE.

Does that explain it for you?

[Geoffrey Collier]

I see that an additional £50bn of QE is to be made available by the Bank of England. They are, however, being chided for
unjustified caution by Citibank. Celebrating two hundred years of business, and operating in 160 countries around the world, they say this is a time for bold actions. Citibank say that a further minimum of £100bn is what is required. While QE is the economic orthodoxy of our time, calculating the exact amount can only be guesswork. Judging on their record to date; I am sure that Mystic Meg would be as reliable a source as any institutional banker when it comes to matters like QE.