QE “Cash Management” Operation Really is Benign
The cash management ministers have in mind is to reduce the government deficit now by raiding the surplus accumulating at the Bank of England under its quantitative easing programme. Lower borrowing now comes with the sure knowledge that a future chancellor will have to borrow more to cover the losses that will build up as QE is unwound and bonds bought above their par value lose money on redemption. This is no contingent liability. It is also large, with an initial cash grab of £37bn, more than 2 per cent of national income.
If future borrowing was likely to be cheaper than current borrowing, this would be sensible, but the likelihood is that QE will be unwound when economic prospects are better and government bond yields higher than their current historic lows. If we assume that QE breaks even in a profit and loss sense – an optimistic assumption – the Treasury is proposing expensive borrowing in the future instead of cheap borrowing now. It is bad cash management and will harm Britain.
I still think this argument is wrong-headed.
Chris makes the assumption that it is is desirable for HM Treasury to attempt to hedge against a future capital loss on the QE portfolio. In fact, he goes further, arguing that is desirable that HM Treasury borrows money and hoards it, so as to hedge against future losses on the QE portfolio.
If the government borrows money and hoards it, that is the exact reverse of QE; it reduces the private sector’s holding of central bank money and increases the private sector’s holding of gilts.
The reductio ad absurdum is that it is undesirable per se to conduct monetary policy at the ZLB by printing money and buying gilts, because it risks a loss of capital. But if the Bank is going to conduct monetary policy by varying the size of the base it has to buy something, and gilts are least risky option.
The assumption that it is desirable to hedge against losses from QE by hoarding cash must be false. Then we are back to the macro argument: what matters above all to the public sector finances is the level of nominal GDP, because that determines tax revenues. If the government was really concerned about reducing the public debt burden they could simply raise the inflation target or set a (higher) target for nominal GDP. Everything else is noise.
Chris is also concerned about economic credibility:
So far, the reaction to Mr Osborne’s ruse has been indulgent eyebrow-raising. People appear to feel that ripping off future taxpayers, polluting statistics and undermining independent monetary policy is benign. Unless the policy is reversed or some independent authorities put a spanner in the works, Britain’s economic credibility has died. Financial markets and credit rating agencies have not noticed yet. They should and I fear they will.
Though I have no love for the fudging of national statistics (I’m also surprised the ONS will allow any impact on the main fiscal deficit measure), Chris’ attachment to the “independence” of UK monetary policy seems misplaced. The highly discretionary operation of UK monetary policy since 2008 is the reason we are in this mess, and absent a monetary superhero to replace Mervyn King, government interference in monetary policy is long overdue.