How Brown plans to borrow more money than the market would ever let him

jim

It's not really a surprise though is it? QE us the hidden tax, that sneakily steals the value of your savings, all governments have used this. Getting the banks to buy gilts is new perhaps.
As the savings rate is crashing maybe people are smarter than you think. My mum and her friend have decided to spend all their cash before it becomes worthless, others might be too.
Given that Britain's main problem is the state, then it seems that what Brown is doing will ultimately be good. It will destroy all capital and profit, when the host is dead the parasite dies too.
We'll be back to Year Zero but the state will be powerless, as they'll be nothing to steal from the people.

George Laird

Dear Fraser

Well written piece of horror.

I think that Brown is priming up the economy for a massive crash.

He is like the employee who knows he is getting the sack and working his last week.

While everyone is getting on with their daily job; he is running round the office screaming, pouring petrol on the files, waving a pick axe.

It is only a matter of time before his "fellow" Labour cabal look up and attempt to wrestle the matches from him.

I can see it now, Brown on a desk, Labour punters with cold clammy boney hands reaching up from the bottom of the scrum to grasp their last chance to keep their seats.

The cry, "Get him", then Jack Straw in his Ninja suit stalking towards him resignation paper in one hand and knife used on Tony Blair's back in the other hand.

Stay tuned for Straw speaking disloyally soon.

Yours sincerely

George Laird
The Campaign for Human Rights at Glasgow University

TomTom

OK so Brown is monetizing Debt but Banks and Insurers were always net buyers of Gilts until PFI made government borrowing a private placement. These banks still need Depositors and may lose them if returns are not good. After all there are only 5 banks listed on the FTSE and the only two not listed as penny stocks are Hong Kong institutions.

Money can emigrate from depositors accounts to anywhere in the EU or globally. Brown will learn thast domestic money can be funk money too

teledu

Frightening.

kevin

brown has changed banking regulations to force banks to buy gilts and dropped the requirement to report printing balances to make up the difference.youmight as well counterfeit it no longer matters who wins the election we are toast.

Denis Cooper

Not all of the £150 billion is to be spent buying up UK government debt - that might be too obvious. So to thicken the smokescreen, £50 billion will be spent on buying up good quality, and therefore readily negotiable, "private sector assets", which aren't causing anybody any particular problem.

The problematic "toxic assets" we keep hearing about will not qualify for purchase by the Bank; instead they will be left to contaminate the financial system, with some, running into hundreds of billions, now guaranteed by Darling Insurance, in which the lucky taxpayer is unwittingly an investor with unlimited liability.

Jonathan explains it all

Television is the last refuge of the scoundrel.

Trevorsden

Perhaps then you can simplify the complexity for us.

'You' being the financial and political press generally.

Are you saying that nationalised banks are being forced to buy government debt. Buy it with money they have got from the govt for selling them 'assets' paid for by printed money?

If so then QE would fail would it not, since the idea was that this money by some mystical circuitous route would find its way into our pockets.

The question I have is - are we yet in 'deflation'? This is allegedly the great fear. But is it so close that we need QE? And if the Bank are acting early - being 'prudent' in printing money (!) - then will we not have to stop this exercise early as well.
What mechanism is there to force Brown to stop printing money?

Silent Hunter

We should really be out on the streets over this one.
But we are now so inured to Labours 'latest' stupid idea to 'help' the economy that we look on in disbelief, simply waiting to be allowed to vote these incompetent idiots out of power for good.

The General Election can't come soon enough.

http://politicalnewsblogs.com

hysteria

having a blond moment - I don't get it.............

donald fraser

British governments since Mrs Thatcher have avoided making unpopular decisions. Effectively it has been 20 years of living off that legacy. Privatisation and closing sunset industries (coal and shipbuilding) required a will of iron.

Neither Gordon Brown nor the current opposition were elected to make unpopular decisions. It has the comical makings of "Carry On Up the Khyber" as Sid James sips soup in his palace and masonry falls around him. Very British and some foreign leaders are equally bemused by the spending spree.

It's not really relevant how the current government shuffles around the few remaining hundreds of billions. The question is what will tip the boat? When America's economy stops its freefall, the "final cut" from President Obama must come. Obama is elected to tackle this crisis and stabilise his craft. The special relationship will be case aside just as the final bags of ballast are to give balloon lift-off.

So what type of sickness is Britain be diagnosed with? Mrs Thatcher ended our stigma as the "sick man of Europe". Hence a lot depends on the outcome of the European elections on June 4th. Britain's new diagnosis will be made with reference to our previous case notes. It will be how we are fairing against Europe (not the USA) that will count.

Obviously financial surgery (not three square meals day) is required on the British economy. The list of tough decisions to be made is long, gathering dust over 20 years. The most obvious is (given the French backing of it) does it take a British worker 3 years or 15 years to build a nuclear power station? Or in "city-speak" does it cost 30 billion or 150 billion? The difference may seem unimportant at the moment because the UK still has a blank cheque book. Not for long!

Denis Cooper

Trevorsden, as I have read this is the plan:

Mondays and Wednesdays - Bank buys existing gilts, £2 billion each day

Tuesdays and Thursdays - Treasury sells new gilts, £3 billion each day.

Yesterday was a Wednesday, and the first buying day, and the Bank's offer to buy existing gilts with a (market) value of £2 billion was greeted with wild enthusiasm:

http://www.telegraph.co .uk/finance/economics/4974875/Bank-plan-to-print-money-begins.html

However:

"Market insiders said that most of the gilt selling had been done instead by investment banks and hedge funds, many of whom had been buying gilts from the Debt Management Office and merely selling them straight onto the Bank for an instant profit."

Today being a Thursday, it's a selling day, and the Debt Management Office will try to sell £3 billion of new gilts to help fund the government's budget deficit.

That should be significantly easier, as the Bank has just taken existing gilts to the value of £2 billion out of circulation, and will keep them locked away for the duration of the recession, at least.

The immediate net effect of this first buy-sell sequence will be the removal of £1 billion of pre-existing money from the private sector, but of course without the buy phase that would have been £3 billion. The £1 billion of pre-existing money will get back into the economy, but only when it has been spent by the government along with the £2 billion of new money.

And that insane cycle will be repeated, twice a week, until the government has supplemented its tax revenues by up to £100 billion of newly created money, in the hope that this will enable the Chancellor to spend his way out of recession.

You ask: "What mechanism is there to force Brown to stop printing money?"

I think the answer must be that at some point Parliament has granted the Treasury the power to do this, maybe without even realising it, and if Parliament decided that it should stop then that power could be rescinded.

TrevorsDen

Mr Cooper - then if what you are saying is true then QE will not enable banks to lend more money to industry or individuals and this 'new money' will not trickle down to the public and prevent deflation.
The new money will be used to fund govt debt.

I other words the recession will get worse unemployment increase and the labour govt go down to the biggest election defeat in the history of the planet.

Do you want to reconsider.

Why do I get the impression nobody on this thread knows what they are talking about?

Chuck Unsworth

@ Denis Cooper

Very elegant analysis.

But there's no political will or economic understanding within Parliament.

oldtimer

Among the categories of government debt we have long known - and some have even understood - are Consols.

Now, courtesy of the fertile mind of Mr Brown, we have an all new category. We should call them Cons.

The description Cons perfectly matches the smoke and mirrors characteristics of this innovative financial instrument. Brown can proudly announce to the G-20 that, once more, Britain "leads the world" and that the City of London has regained its rightful place as an innovator in financial instruments that no one understands and can be sure to deceive!

Philip Wright

As a non-economist the complexities of these issues makes my head swim at times, especially the harder I try to understand them. However, surely if QE is meant to increase the money supply by enabling the banks to use the money to lend, then having them buy gilts and thus taking money out of the money supply is self-defeating?

I wouldn't put this past Brown as another one of his slippery stunts, but it still raises the level of UK debt. This makes the promised reversal of QE much more difficult surely and still leaves us open to a down-grading of our precious AAA rating?

p.s. A technical point, slightly off-piste. Isn't it possible to make the graphs act as a link that when clicked on open then in a separate window, enlarged and therefore much easier to read the detail? This is what a number of other blogs/sites do and would add value to the always valid points Fraser is articulating.

Tim Carpenter LPUK

Well said Fraser, jim and Dennis.

It is a dangerous mix - Gordon Brown, Nationalised Banks and the keys to the printing presses.

Dracula and Blood Bank spring to mind.

And the Tory Party response? Very quiet. And now they want to throw more money away encouraging people to buy cars they have until now (sensibly) postponed in times of hardship.

The key is to ensure sound money and this government is doing quite the reverse.

Tim Carpenter
Head of Policy
Libertarian Party, UK

John Moss

BoE "buys" £2 bn of gilts from UK Bank by increasing UK Bank's "cash balance" in its account at the BoE. This is real money and increases UK Bank's balance sheet assets so lowering their debt / equity ratio, thus giving them "headroom" to lend £2bn to ordinary people and businesses.

Then ordinary people and businesses go bust and debt is written off. UK Bank makes huge loss but as UK Bank is owned by UK Govt, we pay for it all over again!

Brilliant, Gordon. Bloody brilliant. You are leading the world. Mr Mugabe is copying your actions as we speak.

Liz Brown

I am now truly terrified..............

Tom Pride

Would like to throw an observation by Edmund Conway (pro QE with caution) in his Telegraph blog “How printing money could make banks even less willing to lend”.

http://blogs.telegraph.co.uk/edmund_conway/blog/2009/03/07/how_printing_money_could_make_banks_even_less_willing_to_lend

Basically by forcing up Gilt prices and reducing interest rates the BoE / GB have shafted funded final salary pension schemes , again.

“All of which brings me to the worst unintended consequence of all: this may mean banks are not able to lend out as much as they would have done otherwise because they are having to put more of their capital into their [pension] schemes. I haven't yet had a chance to look into the figures, but someone from within the industry tells me the impact could easily end up being a £100bn reduction in their lending capacity. For £75bn of cash pumped in by the Bank of England. Whoops.”

As one comment says:

"...the worst unintended consequence of all…"

No, Edmund, you mean "the worst unintended consequence so far“

We are only two days into the implementation of this hare-brained scheme. You can rest assured there will be far, far worse 'unintended consequences' to come.

Fraser has spotted the next one- or maybe that is not so unintended.

Which leads me on to wonder if Short / Long the UK has taken these pension deficits into account. The top UK companies could be “pensionised”, taken over, by their final salary schemes which will get first go at the dividends for the next few years.

What a mess.

Denis Cooper

John Moss

"BoE "buys" £2 bn of gilts from UK Bank by increasing UK Bank's "cash balance" in its account at the BoE. This is real money and increases UK Bank's balance sheet assets so lowering their debt/equity ratio, thus giving them "headroom" to lend £2bn to ordinary people and businesses."

Well, we don't actually know who was holding the gilts that the Bank bought yesterday, because the Bank is refusing to say.

But supposing they all came from UK banks, then they will indeed have "headroom" to increase their lending, unless they use the money they received yesterday to buy some of the new gilts that the Treasury is selling today.

Or, alternatively, replenish their stock of gilts by buying some in the market. Equally, if they had previously wanted to dispose of the gilts they sold to the Bank yesterday, they could have sold them in the market at any time.

Of course the gilts being issued today by the Treasury will not be identical to those bought by the Bank yesterday, and the sellers and the buyers will not be identical, and in both cases some may well be foreign banks and companies.

But the fact remains that the Bank is now using newly created money to prop up the gilts market, making it easier for the Treasury to sell its new issues.

"Brilliant, Gordon .. Mr Mugabe is copying your actions as we speak."

Rather worryingly, the Times reports:

http://business.timesonline.co.uk/tol/business/economics/article5891365.ece

"In another sign of success, the US Federal Reserve is thought to have been so impressed by the early results for QE that is considering similar moves."

TrevorsDen

"... if what you are saying is true then QE will not enable banks to lend more money to industry or individuals"

It could do, if UK banks were more sellers than buyers, and foreign banks and companies were more buyers than sellers.

But then, as I say, if UK banks had wanted to sell some of their gilts, there is a liquid market and they could have sold them at any time; there was no need to wait for the Bank to offer to buy them. Similarly foreign banks and companies could have bought them at any time, if they wanted.

These are top quality assets, not "toxic assets" that nobody wants to buy. If the Bank was creating money to buy up "toxic assets", and get them out the system, then that might have made more sense.

"... and this 'new money' will not trickle down to the public and prevent deflation."

Yes, it will "trickle down", because the government will spend it.

That's why it wants to borrow, so it can spend; and it's the fear that some day it may no longer be able to borrow enough that lies behind this scheme:

http://www.telegraph.co.uk/finance/financetopics/recession/4967505/Inflation-will-kill-the-gilt-rally-in-the-end.html

"But before everyone gets carried away it is important to understand that while the Bank of England may be a net buyer of gilts, the Government is still a net seller. At the start of the year gilts were heavily sold as the full implications of the Government's truly dreadful fiscal position dawned on the investing public.

Indeed numbers were being bandied around suggesting gilt issuance in the region of £120bn or more and even the head of the Government's own Debt Management Office (DMO) warned of the possibility of failed gilt auctions in 2009 as the sums required seemed to be unmanageable.

So instead the Government is in effect deliberately under funding its fiscal deficit by printing a significant proportion of the money required. It is having to do this in a convoluted route as the Treasury cannot sell gilts directly to the Bank of England as this is not allowed (for very good reason) under the Maastricht treaty."

NofriendofGordon

Moron. You have no idea what you are talking about.

I especially like the paragraph: "Now he has his new toys, he can tweak banking regulations to have the nationalised British banks buy his crappy debt instead, and thereby divert the nation’s savings into the Treasury’s coffers. And let’s not forget what the £150 billion “quantitative easing” package does – provides money that is to be spent on, well, government debt."

So, that Nefarious Mr Brown and his lacky's at the so-called independent (Ha!) Bank of England are forcing the banks to buy gilts so that they can... buy them back! Horror of horrors - what insane ways to destroy the our dear England will they think of next?!

You are an idiot, who clearly has not grasped any part of the financial crisis nor the government's response.

Herbert Thornton

Brown's smoke-and-mirrors sleights of hand are meant to hide what is really happening. It's a more sophisticated version of a Robert Mugabe style operation on the currency.

If you have cash, best spend it now - on whatever durables you will need over the next few years. Gold is the old stand-by but beware of that - as the pound falls, the government will treat the increased worth of your gold as a capital "gain" and tax it at a confiscatory rate.

Tiberius

No Friend of Gordon: I too am a moron.

So please explain to me the part of the financial crisis and the government's response that I have not grasped.

Also, if you are able, please explain the financial plusses of the Lloyds/HBOS deal (that begat the arm-twisting that Brown indulged in), in contrast to the negative politicking that the Great Leader is accused of.