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Mythbuster: What is quantitative easing and how does it work?

Published by Anonymous (not verified) on Mon, 26/10/2020 - 5:40pm in

I have been asked to explain how quantitative easing works, given how important it is within our economy and managing the coronavirus crisis right now. What follows is part of a larger piece of work that is in development, and is a bit technical in nature, but I hope it is of use to those who are looking for a bigger understanding of this issue. When I can find time I will do another Mythbuster to explain the economic consequences of this:

What is quantitative easing?  

The Bank of England says that quantitative easing (QE) is[1]:

Quantitative easing is a tool that central banks, like us, can use to inject money directly into the economy.

Money is either physical, like banknotes, or digital, like the money in your bank account. Quantitative easing involves us creating digital money. We then use it to buy things like government debt in the form of bonds. You may also hear it called ‘QE’ or ‘asset purchase’ – these are the same thing.

The aim of QE is simple: by creating this ‘new’ money, we aim to boost spending and investment in the economy.

There is nothing wrong with this simplistic explanation, but to make sure that it is properly understood, and that its consequences can be explained, it is important to break the QE process down into its relevant stages.

Accounting for quantitative easing

Quantitative easing is a process that involves the following operations:

  1. The Bank of England set up a new company, called Bank of England Asset Purchase Facility Fund Limited[2] (the ‘APF’) to manage this process. It had to do so because all money creation involves the making of loans, and the Bank of England cannot lend money to itself, and so had to lend it to this other company instead.


  1. The Bank of England lent money to the APF to provide it with the funds that it required to acquire government bonds, as well as a limited quantity of corporate bonds, under the QE programme. Those loans have now reached about £745 billion in total[3].


  1. As is normal with regard to bank loans of any sort, new money was created as a consequence of this loan. The Bank of England acknowledge this in the statement noted previously. They explained this process in the Spring 2014 edition of their Quarterly Bulletin[4].


  1. The vast majority of the money created in this way was used by the APF to buy government gilts from the financial institutions that owned them. These included banks, building societies, pension funds and life insurance companies as well as some overseas and private owners of these assets. The gilts in question were bought in an auction process. As a result, current market prices were paid at the time of the reacquisition of these gilts by the government. The price paid may not have been the price at which the gilts were originally issued by the government[5].


  1. Once bought by the APF the reacquired gilts have sat on its balance sheet as assets. To date none have ever been sold back to the financial markets although some have been redeemed by HM Treasury at the end of their lives. In that case the proceeds have been reinvested in the purchase of replacement gilts acquired in exactly the same way as other reacquired gilts, as already noted. The objective has always been to keep the same value of gilts in ownership.


  1. The loan from the Bank of England to fund the purchase of the reacquire gilts is a liability on the APF balance sheet.


  1. That same loan is, of course, an asset on the balance sheet of the Bank of England, and the two sums do balance each other out.


  1. This netting off is not, however, shown in the accounts of the Bank of England because although the APF is nominally owned by the Bank of England all its profits and losses are under written by the Treasury in an agreement dating back to 2009 when the QE programme began[6]. As such it is under the effective control of the Treasury. The consequence of this Treasury control is that although it would appear that the APF is owned by the Bank of England, the substance of the transactions undertaken is that the Treasury has reacquired debt that it has issued to the financial markets in the form of gilts, and has done so with a loan from the Bank of England.


  1. Although the nature of this transaction would imply that the reacquired gilts are cancelled, because it is immediately apparent that the Treasury cannot owe itself money, the legal form in which the gilts were created, and the nature of the loan structure used for their repurchase has meant that legally the gilts have not been cancelled as a consequence of their repurchase. Whilst the economic substance of what has happened is that the gilt is cancelled, the legal form of their continued existence has been maintained.


  1. As a consequence of this continued legal existence of the reacquired gilts, technically the Treasury has to still pay itself interest on these gilts as those interest payments fall due for payment, and as a matter of fact, these payments have been made.


  1. Politically it has suited the government’s narrative to maintain this pretence that interest is owing on these gilts. As a consequence of this pretence, successive governments have been able to claim that the cost of government debt servicing has been more onerous than has actually been the case, and have claimed that this has prevented it from undertaking other forms of spending. This claim has been disingenuous. In practice, the income received by the APF as a result of the payment of this interest belongs to the Treasury as a consequence of the management agreement reached between it and the Bank of England, previously noted. The result has been that the income in question has been returned to HM Treasury, as a matter of fact. The accounts of the APF make this clear. The refund has not, however, been used to cancel the interest charge recorded in the government’s own accounts: it does, instead, appear to be shown as part of the ‘other income’ of the government. In accounting terms this might be called a misrepresentation. The two sums should be offset to present a true and fair view of the interest cost that the government actually incurs. The only possible explanation for this misrepresentation has been that it has suited government purposes to make it.


  1. Because the accounts of the Bank of England do not include a consolidation of the APF the Bank of England’s accounts do not reflect the APF asset holding, and do instead show the loan account balance owing by the APF, which is actually effectively payable by HM Treasury as a consequence of the Treasury’s agreement to indemnify the Bank of England with regards to the Bank’s operation of the APF.


  1. However, the UK government does prepare accounts on what is called a Whole of Government basis. In these accounts the gilts owned by the APF are shown as cancelling the liability owing by the Treasury with regard to those same gilts Because, as a matter of fact, no one outside the government is owed any money with regards to these gilts once they have been re-acquired this presentation does show an overall true and fair view of the position of the government with regard to the gilts in question. Because of the accounting requirement that the economic substance of a transaction must take precedence over the legal form in which it is undertaken the correct presentation of the liabilities of the government with regard to these debts is shown in the Whole of Government accounts as a consequence, with the gilts in question being shown to be cancelled. The political preference of the government to show that the debt still exists is overruled by the accounting requirements that a true and fair view be presented by its accounts.


  1. The fact some separate accounts e.g. those of the APF, still show transactions being undertaken with regard to these gilts, does not alter this economic substance that the transactions in question net out on consolidation for the government as a whole, and as such have no real economic substance to them, clearly indicating that the gilts in question are effectively cancelled.






[5] There is nothing surprising about this change in the price of gilts after their issue. As official interest rates have been reduced to almost nothing[5] over the period during which the quantitative easing programme has been in operation, and whilst the amount of interest actually paid on government bonds in issue remains a constant (which on all but index linked bonds it does, over the lifetime of a gilt, which can be for a period of up to fifty years), the price of bonds increases in the open market to equate the price of a bond already in issue with the current equivalent interest rate return expected upon it as if it had been issued now, taking into account the time expected to pass until redemption of the bond takes place. There is nothing untoward about this: this is how fixed interest bond markets work.


Goldman Sachs: suppliers of corruption services

Published by Anonymous (not verified) on Fri, 23/10/2020 - 6:20pm in

Need I say more than this?

I defined the suppliers of corruption services way back in 2007 as:

1. Those governments who supply the secrecy spaces in which corruption can take place, which include (but by no means exclusively) the recognised tax havens;
2. Those who supply the services that allows such corruption to happen including the bankers, lawyers, accountants and trust companies who set up and operate such arrangements;
3. Those who undertake illicit transactions related to capital flight and tax abuse;
4. Those who ignore such transactions in the course of their duties.

Goldman Sachs has pleaded guilty to facilitating massive corruption. They fit fair and square into my category 2. Of course, they may also fit into 3 and 4 as well, but let's leave it at 2, because that is enough.

Now to ask the obvious question, which is why has to still got a licence to operate? The usual punishment for a crime of this scale is the denial of freedom. Why has it kept it?

Financial shocks, reopening the case

Published by Anonymous (not verified) on Thu, 22/10/2020 - 7:00pm in

David Gauthier Since the tumultuous events of 2007, much work has suggested that financial shocks are the main driver of economic fluctuations. In a recent paper, I propose a novel strategy to identify financial disturbances. I use the evolution of loan finance relative to bond finance to proxy for firms’ credit conditions and single out the … Continue reading Financial shocks, reopening the case →

The case for MMT: or why the FT is wrong to publish ill-informed arguments against it

Published by Anonymous (not verified) on Thu, 22/10/2020 - 6:53pm in

Stephen King, who is HSBC’s Senior Economic Adviser and author of ‘Grave New World’ has an article in the FT today under the title 'The case against Modern Monetary Theory'. It makes false claims about MMT, as usual. 

King starts by suggesting that:

In a world in which government debt is rapidly rising, it’s hardly surprising that there’s growing interest among investors in Modern Monetary Theory. After all, one of its central claims is that budget deficits are, from a financing perspective, an irrelevance. So long as increased government borrowing doesn’t lead to inflation — and, at the moment, there really isn’t much of it around — we can all afford to relax.

That’s not what MMT says, of course. What MMT says is not that we can be relaxed about financing, because financing is not its focus. What it actually says is that if there is unemployment that a government wishes to address, then assuming that government spending is appropriately directed to achieve that goal then financing is not a constraint until full employment is achieved. Then it says three further things.

The first is that if spending is continued without any further action when full employment has been achieved then inflation will result.

Alternatively, and somewhat overlooked, more tax at that moment can limit that inflation risk.

But, third and more important still, if the government still thinks its programmes more important than additional private sector growth at that point then a bit more tax reduces private sector demand for labour, so releasing it for publish sector use without inflation arising.

That’s what MMT really says. But King is having none of it. He says:

As Stephanie Kelton notes in her book The Deficit Myth, governments with access to a printing press are “currency issuers” (exceptions include, most obviously, members of the eurozone). As such, all their spending could, in principle, be financed via the creation of cash. Taxes may serve other purposes — the redistribution of income and wealth, the discouragement of “sinful” behaviour — but, in the world of MMT, they serve no useful macroeconomic role.

I have to say that there are some in MMT who do take this view. That’s deeply regrettable, naive and just wrong. I have already demonstrated why, but I have been deeply frustrated by such people in my time, so I can’t deny King’s claim. But that’s not what is said by what I might call the exponents of what I might call 'pragmatic MMT'. This is the MMT promoted by those at the interface between it and the real world. I would call myself an exponent of pragmatic MMT. I would describe Stephanie Kelton as another. She and I first discussed this tax issue quite some time ago, and found common ground, I think.

We would actually agree, quite strongly, with King when he says:

In the real world, however, taxes are crucial.

We would also agree with some of his reasoning, when he says:

The fundamental difference between government finances and those of companies and households is not access to a printing press but, instead, the coercive power to raise taxes. A company making a severe loss cannot reduce that loss by imposing taxes on everyone else. A government can. A worker receiving a pay cut cannot force others to make up the difference. A government can.

Precisely. This is why tax gives money its value. It is why MMT says tax is so important. It’s why MMT says a government realising this can be monetarily sovereign. It’s why tax can be used as a macro instrument in MMT.

It’s also why King is right when he says, as MMT does that:

Armed with this knowledge, creditors are understandably willing to accept mostly lower returns on government bonds than on other investments. Put simply, the risk of government default in the face of an adverse economic shock is lower than for other would-be borrowers.

Of course that’s true. Actually, the risk is non-existent. It’s why this monetary sovereignty - the power to control the economy delivered by the power to tax - is so core to MMT.

But then, as always happens, King goes off-piste and begins to make things up, saying:

[I]magine for a moment that governments embrace MMT. Imagine too, as MMT proponents suggest, that control of the printing press is taken away from unelected central bankers and given to “accountable” elected fiscal representatives. Would we be any better off?

How many errors can a person make in a paragraph? First, governments don’t embrace MMT. It describes what actually happens now in places like the UK and USA.

Second, money is not printed. It is created.

Third, central bankers do not have the power of printing presses now. Every penny of QE is, for example, created with explicit HM Treasury consent. That is hardly surprising. The Bank of England QE operation is controlled and indemnified by the Treasury. See the letters at the bottom of this link as the evidence of that.

Fourth, elected representatives are accountable: there is a ballot box. HSBC have shown themselves far too comfortable with China’s suppression of democracy in Hong Kong. They should not make their contempt for it here quite so apparent.

And would we be better off? That is not a question that flows from these claims. That would depend on entirely what policy this action was used for, and not to the mechanics itself.

King thinks otherwise. He says:

Far from it. Giving elected representatives the keys to the printing press is the equivalent of giving a gambling addict the keys to the casino.

In other words, democracy cannot be trusted and politicians, without the wise paternalist constraint if the banking community  exercised through their club in Threadneedle Street, would run amok. The little faith he has in democracy is all too apparent.

That he then makes some rather strange claims about tax is inconsequential. Instead I turn to his conclusion. He says:

Thanks to Covid-19, government debt is rising rapidly and, for that matter, appropriately. In the face of recurring lockdowns, we are better off allowing companies and workers to enter a period of economic “hibernation” in the hope that, once the virus is under control, they can thaw out. The alternative of multiple business failures and mass unemployment is of no use to anyone.

Of course, I agree with that. But this is profoundly wrong:

In the process, however, we are in effect borrowing from our collective economic futures. At some point, some of us will be presented with a bill which, if hibernation policies succeed, we will be in a reasonable position to pay. The political process will decide whether that bill comes in the form of higher taxes, more austerity, rising inflation or eventual default. That, I’m afraid, is the deficit reality.

It is quite staggering that a supposed economist working for a major bank does apparently know so little about what is happening in our economy at present.

First of all, we are not borrowing right now. Quantitative easing ss covering the entire cost of the coronavirus crisis, and will very obviously continue to do so, as I have already noted this morning.

Second, quantitative easing is not going to be unwound: it is new credit money creation (as the Bank of England confirms) that is essential to fill the gap created by private sector banks not lending at present.

Third, this means that quantitative easing reversal is not debt repayment: it is removal of money from the economy, and that would crash it as surely as not keeping businesses going now, as King says he wants.

As such King shows he is unaware of what is happening in the real world.

Worse, he shows that he does not appreciate that it is something akin to MMT (akin because MMT would not use QE by choice) that is keeping our economy going right now.

We should be thankful that people like Stephen King are not in charge and that we have means to make sure that they are not.

We should worry that the FT gave him space.

We should just hope that one day he realises how wrong he is.

Our future depends on people doing so.


The right wing of economics really do need to learn some very basic things about money

Published by Anonymous (not verified) on Fri, 16/10/2020 - 5:39pm in

My attention has been drawn to the Zero Hedge website where this has been posted:

The conclusion of the piece was:

I was asked to comment on this. I have three comments to make.

First, there is no such thing as fractional reserve banking anymore. Even the Bank of England says that is history. So, the whole basis for this post is wrong.

Second, Zero Hedge appear to be unaware that the quantitative easing process has the effect of creating new bank deposits which are then held with a central bank. This is not by accident. This is by design. And those deposits are not made within the commercial banking system by way of commercial banking loan, because this is central-bank money, and not commercial bank money, and the two are not the same.

Third, that central-bank money is created by loan, just like all of the money is created in that way, but the loan arrangement is entirely within government-controlled functions. This is what differentiates it from commercial bank-created money. Commercial banks can only create money by lending to third parties. Government can do it by lending to itself. In the UK that is done by government / Bank of England interaction. In the US, substitute the Fed, but the outcome is the same.

Given these three facts, what Zero Hedge reveals is that it has no comprehension of the way in which the banking sector, or quantitative easing processes, work. It's quite scary that such ignorance still exists.

Perhaps more importantly, it also reveals that it is entirely unaware of the difference between commercial bank-created money and government-created money.

Less surprising is the fact that it has not thought about whether, given that such a difference exists, it is appropriate for deposits held by commercial banks with their central bank should be shown as deposits on their balance sheets, or as something quite different.

I do not wish to be presumptuous here since this is an issue that I am currently working on. However, it seems to me that some fundamental accounting errors are now being made with regard to such issues. That error is partly in government accounting. There central reserve accounts maintained by the commercial banking sector with the central bank are shown as liabilities. However, in practice those commercial banks have no control over the redemption of these deposits, which can only be moved between those banks, but not ever, in effect, be reclaimed by them at their option, meaning that they do not behave like any normal bank liability. In that case, as they are effectively not repayable, are they liabilities at all?  And in that case do these accounts need to be differentiated in the accounts of those commercial entities as being something fundamentally different from bank deposits?

I will return to this theme, but suffice to say for now that I think that significant new thinking on this issue was required.

The IFS Green Budget is a manifesto for a bank that wants to see increased interest rates rather than a report that approximates to objective comment

Published by Anonymous (not verified) on Tue, 13/10/2020 - 4:26pm in

The Institute for Fiscal Studies has issued its Green Budget (i.e. its forecasts for what it sees the budget scenarios to be) for autumn 2020 even though no budget is now expected. I think it fair to say that some of what they say is unsurprising, most especially as the work is being done with Citi, the US bank that has extensive operations in London.

They forecast growth as follows:

They make clear that this is impacted by Brexit:

And then they show the impact on the government's balance sheet:

It is annoying that this last is stated in percentage terms, as is this chart:

The implication of both is, however, that the government will have to undertake what the IFS thinks to be borrowing over the next five years, and at rates much higher than those forecast in March 2020.

As the report says:

The UK has traditionally shown itself to be a relatively flexible economy. This reputation is likely to be tested to the extreme over the coming years. We expect substantial restructuring of the UK economy in the years ahead as it responds to the new shape of demand from UK consumers in the wake of COVID-19 and the new shape of trading relationships in the wake of Brexit. Such restructuring implies a more protracted economic recovery and a substantial loss of economic capacity as some of the expertise and capital specific to now shrinking sectors becomes surplus to requirements.

In other words, expect turmoil, massive rates of corporate insolvency, major economic restructuring (the basis of which they do not seem to predict) and the need for significant state support.

And as they add:

In addition, we think COVID is likely to have hampered public and private preparations for the end of the Brexit transition period, compounding the near-term economic cost. We expect GDP growth in 2021 to be 2.1% lower than in the event the UK were to remain in the EU Single Market and Customs Union. In a normal year, this would be enough to push the economy into recession. Some of this growth is likely to be made up in 2022.

A third of the deficit will, in that case, be Brexit related, in their opinion. And it is their opinion that this must be compounded by moves towards austerity. As they say in their summary briefing:

Persistent policy support will be needed to help the economy through this transition. However, fiscal policy will also have to tread a fine line between supporting growth in the near term and charting a path to fiscal sustainability in the medium term. This is a significant challenge.

It is an obsession that permeates the report, that is paranoid about 'sound government finances', without appreciating that this is precisely what we now have. For example, they say:

This year’s deficit will reach a level never before seen in the UK, outside of the two world wars of the 20th century. But what matters much more for the long-run health of the public finances is how complete the economic recovery will be. With the cost of borrowing at a record low, additional spending now that helps to deliver a more complete recovery would almost certainly be worth doing. For now, the government should focus on designing and delivering such support. But, in the medium term, getting the public finances back on track will require decisive action from policymakers. The Chancellor should champion a general recognition that, once the economy has been restored to health, a fiscal tightening will follow.

I highlighted the last point, but it is repetitive, with foreign-owned debt being their excuse for this:

The economic response to COVID-19 has seen monetary and fiscal policy complement each other, as the Bank of England and the government both seek to support the economy. However, this complementarity is less assured in the medium term: upward pressure on inflation (and particularly inflation expectations) could lead to the Bank tightening monetary policy even if fiscal policy still needs to remain loose. The UK’s dependence on foreign credit remains a notable additional vulnerability. More fiscal support will likely be needed in the near term. But getting the public finances on a sustainable trajectory in the medium term is also now a key challenge.

And as if to make clear that obsession they focus heavily on the foreign ownership of UK government gilts, before noting what they claim is the resulting cost of this dependence:

The COVID-19 crisis has pushed up government borrowing substantially, meaning that the Debt Management Office (DMO) will need to sell a much larger value of gilts than normal. Our central scenario is for over £1.5 trillion to be raised through gilt issuance over the next five years, double the £760 billion forecast in the March 2020 Budget. There is considerable uncertainty around this amount.

This sum is not all new debt, of course: much is rolled over debt. And they add:

The expansion of the Bank of England’s programme of quantitative easing means it bought £236 billion of gilts between March and September 2020, almost exactly the same as the £227 billion of gilts issued by the DMO over the same period. As a result, private borrowing has not been crowded out by government borrowing. The financing cost of quantitative easing is Bank Rate, which is at record low levels, and has therefore further depressed government debt interest spending from already record lows as a share of receipts. However, the tilt towards Bank of England held debt means that the government’s debt interest bill will rise sharply if Bank Rate rises.

To this they add:

The expansion of the Bank of England programme of quantitative easing means that virtually all of this new debt has been bought by the Bank. The cost of financing this debt is the Bank Rate. While this remains historically low, it helps to hold down the government’s debt interest bill; however, debt interest spending will rise suddenly and sharply when the Bank Rate increases. Since government spending is now more closely tied to the Bank Rate, it will be even more important to ensure that the Bank of England continues to be – and be perceived as – independent and focused on its monetary policy mandate.

But they cannot, or do not, explain why this is the case. They say:

Quantitative easing reduces the effective maturity of government borrowing. This – combined with elevated issuance over the next five years – means that a 1 percentage point increase in all yields would now add £19 billion to debt interest spending in 2024–25, some 76% higher than the £11 billion forecast in March 2020.

So, for the sake of £8 billion, which is utterly immaterial in the context of this analysis, they want the whole of the economy to be run on the basis of the fact that there is austerity to come. The reasoning is not explained.

Nor is there a hint that there may be further quantitative easing to cover debt issues in the years to come, even though the chance that this will happen is extraordinarily high.

And there is no hint of the fact that since these issues are effectively made at base rate, and that the reserve balances in question are now likely to be in excess of £600 billion, and maybe more, the Bank of England has almost total control of short term rates as a result of this structure, as well as long term rates via QE. In other words, it is a strength and not a weakness.  a

They also give no hint as to why rates will be rising in the next few years, when there seems little chance of that around the world with Fed, ECB and Bank of Japan policy as it is, so why they think the UK will be so out of line is hard to imagine. Unless, that is, because an independent Bank of England might decide to increase them for the reason that the IFS suggests, which is that, as they put it, without explanation:

Rising yields accompanied by stronger growth would be welcome.

So why do they say this, and what's the reason for the obsession? I can only offer one explanation, and come back to the fact that this report was written with Citi, which is a City-based bank as far as the UK is concerned. And, of course, it wishes for an increase in yield: that's a way for it to make money.

This report from the IFS is not objective in that case. Nor is it fair comment: it is simply a reflection of the obsession fo a bank with increasing interest rates, for which there is no justification, or need. And it is a reflection of the desire of that bank to suggest that bond markets are still in charge of those rates, when they are not. And it is a reflection of the desire of that bank to suggest that what we need is independent control of monetary policy, irrespective of fiscal policy, so that bankers have the best chance of delivering those increases in rates in the interests of bankers but not the economy as a whole.

This report has, then, to be read not as any form of objective review, bit simply as a manifesto for neoliberal policies that maintain the status quo in the interests of the banking community of the UK. The fall of the Institute for Fiscal Studies from any sort of credibility is just about complete. They are instead simply a cover for the wealthy to demand the policies that they desire. It would only take a 55 Tufton Street address for that to now be completely apparent.

The leverage ratio: a balance between risk and safety

Published by Anonymous (not verified) on Tue, 06/10/2020 - 7:00pm in



Jonathan Smith What was the root cause of the financial crisis? Ask any economist or banker and undoubtedly they will at some point mention leverage (see e.g. here, here and here). Yet when a capital requirement based on leverage — the leverage ratio requirement — was introduced, fierce criticism followed (see e.g. here and here). … Continue reading The leverage ratio: a balance between risk and safety →

How A New Supreme Court Could Forever Change America

Published by Anonymous (not verified) on Thu, 24/09/2020 - 4:32am in

David Sirota speaks with UCLA law professor Adam Winkler, the author of the book We the Corporations: How American Businesses Won Their Civil Rights. He has also written a series of articles for The Atlantic about corporations’ winning streak at the high court. Continue reading

The post How A New Supreme Court Could Forever Change America appeared first on

London and Jersey: still planning to fleece developing countries for money they should not be paying

Published by Anonymous (not verified) on Mon, 07/09/2020 - 7:22pm in

Time was when I spent much of my time looking at shady finance in developing countries. Now I do so closer to home. But that does not mean that the issues in developing countries have gone away: far from it, in fact. As the Tax Justice Network has reported they are alive and well, aided and abetted by London, of course, plus its friends in Jersey. As the Tax Justice Network reported last week (and which I think worth sharing in full to show just how pernicious finance can plan to be at cost to people in developing countries):

From Ghana Business News:

On the last days before Ghana’s Parliament went on recess the government laid before it for approval some agreements
. . .
Parliament hastily went through those bills, ‘debated’ and approved them on Friday August 14, 2020.

The bill, which is not law yet, is a strange, murky, and exceptionally unpopular arrangement. Ghana’s Attorney-General described the deal as “unconscionable.” A group of civil society organisations has said it “lacks the basic minimum of transparency.” A think tank calls it “broad daylight robbery.”

Essentially, a mysterious company based in the UK tax haven of Jersey, Agyapa Royalties, has inserted itself into the middle of what looks like a highly unwise financing arrangement. In exchange for an up-front payment from ‘investors’, variously forecast between $500 million and $1 billion, Ghana will be signing away over three-quarters of its future gold royalties to Agyapa — forever.

We have obtained a little information about Agyapa from Jersey, which, combined with some leaked documents from Ghana outlined below, paint a pretty shocking picture.

Mortgaging the future

This is far from the first time an African country has exchanged future mineral revenues for an up-front cash injection. Angola has since the 1980s set up a series of oil “prefinancing” arrangements where it has taken often large loans from consortia of western banks in exchange for future oil cargoes secured by its state oil company Sonangol. During the war, these loans were used to secure urgent weapons deliveries – with plenty of money going missing along the way. However, while those Angolan loans have for years rightly been criticised for their opacity, this Ghana deal seems to have added a further element: the insertion of this mysterious private party into the middle of the financing streams, under opaque terms. Even Angola rarely went that far (with one spectacularly murky exception involving Russian debts, for true connoisseurs of shady dealing.)

Shadow Banking and the Wall Street Consensus

The Ghanaian financing arrangements are consistent with, and are a twisted version of, what the shadow banking expert Daniela Gabor calls the “Wall Street Development Consensus” (a close relative of the Wall Street Climate Consensus that we’ve written about recently.) Under the overarching Wall Street Consensus (which is supported by the World Bank, development banks and others,) the solution to “development” issues in Africa and elsewhere (and the solution to funding the climate transition) is to maximise the amount of finance flowing in to countries and projects by tapping into the vast pools of liquidity in the hardly-regulated shadow banking sector. Getting “investment” money into poor countries may sound like a great idea: but what matters is the terms and conditions under which money will subsequently flow out via repayments, interest and other channels.

Agyapa would seem to be an example of this: an apparently large injection of up-front money to Ghana’s budget, in exchange for likely vastly larger sums flowing out at a later date.

Unfortunately, this broad consensus has a growing chorus of allies and cheerleaders: even in supposedly pro-African bodies such as the African Union and the UN Economic Commission for Africa (UNECA.) The latter has lobbied hard for African countries to create an “enabling environment” for private equity, public-private partnerships, and other ‘innovative’ shadow-banking practices which have appallingly predatory records in countries at all income levels. This is all the more strange, given that the same document strenuously highlights the risks of illicit financial flows.

This Wall Street Consensus involves pushing domestic financial market reforms to make countries more hospitable to securitisation and other shadow-banking practices; and for states and taxpayers to underwrite risks and costs, while maximising rewards for investors. As one analysis puts it:

such reforms would involve a wholesale reorganization of the financial sectors and the creation of new financial markets in developing countries in order to accommodate the investment practices of global institutional investors.

In other words, making “development” serve the interests of financial players, rather than the other way around.

Put crudely, a large part of shadow banking essentially involves creating ever cleverer tools for providers of capital to maximise rewards for themselves, while shifting risks, costs and losses onto the shoulders of others. This kind of financial ‘inward investment’ can be likened to a crowbar: a tool for providers of capital to jimmy open the national safe and make off with the proceeds. African countries are generally recipients of capital, not providers of capital: there is no discernible net ‘development’ benefit to this formula — while there are a large number of risks.

An Agyapa-related “Indemnity Letter” that has come to our attention contains pages and pages of such risk-shifting language — and its header contains this:

What fees would such players earn? At this stage, we cannot know.

More and more questions

The Agyapa deal raises clouds of more specific questions, of which this article can only cover a few.

Question 1: Is this good value for money? An internal Ghana government document from last month outlining the details of what it calls “Project Kingdom” justifies it like this:

There is no way for us to know if it is will be good value for money, or what the future royalty payment projections are, which would be needed as an initial basis for calculating appropriate financing costs, and we don’t know what the actual financing costs will be either. We have no idea. An opposition statement describes this as an agreement in perpetuity: an unverified but credible document we have seen essentially supports this: the agreement ends when the gold runs out.

Even that crazy Angola-Russia deal never went quite that far. What is more, the document says that under the agreement,

“Royalty rates in Ghana are 5% for some mines and 3 to 5% for others depending on the gold price.”

Ghana is a stable, long-term, low-risk gold producer: why are these rates so low?

What about tax? Well, look at this astonishing set of carve-outs, as outlined in an August 2020 Finance Committee report (to aid understanding, ARG Royalties Ghana is a wholly owned local subsidiary of Agyapa):

The sheer brazenness of all this is breathtaking.

In addition, it is worth noting that

London’s courts and tribunals, in the discreet pursuit of what some call “competitiveness,” have since the age of imperialism proved highly favourable to the interests of mobile global capital, especially when it is pitted against sovereign governments like Ghana’s. And one of London’s several advantages is, as a law firm put it:

arbitration in London is chosen by many parties because of the confidentiality advantages that are provided.

What is more, Agyapa’s location in Jersey could place important parts of Ghana’s future before the courts of Jersey, which has just as much, if not more, of a pro-capital, anti-sovereign bias than London’s, and on past records may be prone to “unusual rulings” in this respect – as we have noted before (see e.g. p5 here, under “Jeffrey Verdon”).

There are many other reasons why Agyapa appears likely to be an exceptionally bad deal for Ghana.

  • The stunning absence of transparency, over project terms, and project ownership: the information we have is based on leaks, not on official publication. Indeed, an opposition statement said that the government’s decision to withhold documents is “in clear violation of Article 181(5) of the Constitution.”
  • It is election year in Ghana — so incumbents are likely keen to maximise personal rewards up front before they may perhaps lose power.
  • A statement by Ghanaian Civil Society Organisations estimates that these future royalties are being sold off at 30% of their true value. This is admittedly speculative, in the absence of transparency, but still.
  • An opposition party statement slammed “the indecent haste with which these high-stakes agreements were being rushed through the parliamentary approval process” — they had four hours to scrutinise a deal which was two years in the making.
  • more generally, the astonishing potential for mischief in international financial arrangements, especially those run through tax havens, with lenders typically holding large information advantages over borrowers, and the ease with which conflicts of interest can be hidden.
  • A range of other criticisms is available here.

And all that is even before we get into the next question.

Question 2: What is Agyapa and who owns it?

Good Question. The above document calls it a “Gold Royalty Company.” The Jersey Financial Services Commission provides this data:

We note, in passing, the role of Ogier, an “offshore magic circle” law firm, in the transaction. (We sent them a detailed list of questions with follow-up: nothing has come back so far.)

The underlying Annual Return (under a previous name, Asaase Royalties Limited) registered on February 28th 2020 provides helpful information on who the directors are:

It does, however, provide details of an “authorised signatory” as company secretary:

And this, apparently, is he . . .

The annual return says, slightly more helpfully, that it is a company made up of 5,000,000 shares of which just one share has been issued, worth £0.01, under this ownership structure:

The Minerals Income Investment Fund (MIIF,) according to the Project Kingdom document, was

“established from the passing of the MIIF Act December 2018 to hold and manage the equity interests of the Government of Ghana (“GoG”) in mining companies, to receive mineral royalties due to the GoG from mining operations, provide for the management and investment of the assets of the Fund, finance further developments in the mining sector and monitor and improve flows into the mining sector.”

So that is alright then. Or is it? Well, the same document says:

“Government of Ghana through MIIF will be the majority shareholder with at least 51% of the shareholding.”

(Other documents and media reports say “49 percent” instead of “at least 49 percent.”) So somebody else will retain the remaining 49 percent. But who?

There is plenty of speculation in the Ghanaian media about who will benefit from this, which we won’t indulge. But we will note that the annual return above states that under Jersey law any members who hold one percent or more of the vehicle should be disclosed. However, the documents also state that the 49 percent of shares not held by the Ghana government will ultimately be listed on the London and Ghana Stock Exchanges.

That way, it would be easy for shareholders of Agyapa to hide their identities. For example, imagine that one powerful Ghanaian somehow obtains all that 49 percent equity. He or she sets up 50 companies, each in an opaque tax haven, all of which she owns, and each shell company then owns a slightly less than one percent share of Agyapa – and therefore squeezes under that Jersey threshhold of one percent.

There are several other features of Jersey law that enable secrecy to be assured for Agyapa. We won’t get into details here, but this document provides an overview of some loopholes that Agyapa may be taking advantage of. Jersey certainly isn’t unique in this respect: this is how offshore business so often works.

We will also note, in passing, the presence of a couple of Ghanaian names in the documents registered at the Jersey FSC. For example, in the incorporation documents, we find this:

These people are unlikely to be the real players: a source familiar with Ghanaian politics, shown these names, told TJN:

These are fairly prominent party hacks, but it’s the people behind the people that is probably more interesting.

Illicit Financial Flows: the Jersey Connection

Jersey ranks 16th out of 133 jurisdictions on the 2020 Financial Secrecy Index (for comparison, Ghana ranks 117th). Jersey also ranks 7th on the most recent Corporate Tax Haven Index (Ghana is 60th). Between them, the two indexes capture the global risk of illicit financial flows posed by each place.

Think of a list of the risks that are posed by financial secrecy, for a country with major natural resource wealth. Now imagine that the government of that country, working with a major international law firm in a leading secrecy jurisdiction, has come up with a scheme that appears to tick every item on the list.

That’s where Ghana now finds itself – facing the threat of a deal that could strip the country of revenue and, through powerful contractual terms enforceable in London and Jersey, taking away from future governments the possibility to democratically reverse the decision.

The law firm Ogier advertises itself as ‘the only firm’ to advise on the law of five particular jurisdictions: BVI, Cayman Islands, Guernsey, Jersey and Luxembourg. Aside from Jersey, the jurisdictions rank 9th, 1st, 11th and 6th respectively on the Financial Secrecy Index; and 1st, 3rd, 6th and 15th respectively on the Corporate Tax Haven Index.

A country like Ghana with natural resource wealth faces a range of risks of illicit financial flows (IFF). Together, these can result in major losses of tax revenue, and also do significant damage to the standards of governance and effective political representation. Financial secrecy is at the heart of each IFF risk.

A lack of transparency about the value of a country’s natural resources, or of the resulting profits, creates the risk that fair values are not achieved; that fair revenues are not received; and that private interests may gain unfairly.

A lack of transparency about the ownership of assets and income streams related to a country’s natural resources create the additional risks that contracts may be entered into opaquely, in which public resources are transferred to private hands without appropriate scrutiny; and that political decisions over resources may be taken with parliamentary oversight.

In Ghana’s case, the existing sovereign wealth fund provides the mechanism, and the necessary transparency and parliamentary scrutiny, to minimise all such risks. This makes it especially strange to see the government invest so much time, effort and political capital in creating a new structure that appears to raise the risks of illicit flows in each dimension.

We have seen a number of other documents surfacing, related to this deal, but this is enough to highlight the problems. Nothing about this deal makes any sense to us, except under certain logics which we shall not allude to here.


First, the Government of Ghana should urgently cancel and repudiate this entire deal — and investigate all the parties involved for possible corruption and self-dealing. Given the Attorney-General’s silence on this affair, after having initially raised serious concerns, we won’t hold our breath, until at least after the election. However, there is positive news here.

We hear that this deal is politically wobbly, and vulnerable. As a sign of that, yesterday, a senior Ghanaian official announced that the deal had been suspended pending further consultation – but within hours the Finance Minister overruled him, saying it had not been suspended.   It is therefore essential that maximum domestic and international pressure is now exerted, to ensure the deal is cancelled and repudiated.

Second, there is good evidence that one should treat the “transnational network of plunder” as a unit of analysis, including from a legal and criminal perspective. Is Agyapa such a unit? We don’t know, because we don’t have all the details. International legal bodies where Agyapa touches down — and this includes London and Jersey – should open investigations into Agyapa, and if wrongdoing is found, prosecute accordingly.

Third, Jersey should open up further to scrutiny. It should:

  • urgently publish its beneficial ownership registry, and not just in 2023;
  • demand beneficial ownership definitions should include any individual who directly or indirectly owns or controls at least one share, regardless if listed or unlisted;
  • publish all legal owners online even if they own less than 1% of shares immediately, and not only once a year;
  • publish annual financial statements of all companies incorporated in Jersey.
  • Publish details of the directors of all companies

Primer: Understanding The Money Multiplier Model

Published by Anonymous (not verified) on Tue, 18/08/2020 - 11:00pm in


Banking, money

I ran into a question about the Money Multiplier Model, and I realised that explaining it is a lot more complicated than I expected.  The story of the model is how an initial cash deposit at one bank creates a chain of smaller and smaller loans, until the aggregate loan book has grown by a multiple of the initial deposit. The key to understanding the model is that it is based on a defective behavioural assumption. That is, it would apply -- if bankers operated in a way that they do not do in the real world.

It is entirely possible that the reader is taking a course that teaches the model. This can be viewed as the "Devil's Guide" to it.
Questionable (If Not Wrong) AssumptionsMy assumption is that the reader has a grasp on how banks work. For such readers, the Money Multiplier Model is an enigma.

In order for it to apply, the following assumptions are made. They are all obviously questionable, but one could imagine work-arounds (as described below).

  • The first issue is that reserve requirements have to exist, which is largely no longer the case in the developed world. (The United States finally abandoned them in 2020, and American textbook authors might finally be forced to catch up to reality.) However, since this is model of reserve requirements, technically not wrong.
  • We assume that a non-bank financial sector ("shadow banking") does not exist. We could try to pretend that shadow banking does not matter, but it raises a lot of questions.
  • We ignore the existence of bank capital and liquidity regulations. This is defensible on the basis that we want to model the effect of reserve requirements; those regulations just impose added constraints.
  • All deposits are subject to reserve requirements. Once again, we can argue this is an approximation.
  • Reserve requirements are applied in real time, not with a lag. (We can pretend that bankers are forward-looking, or that real-time regulations were imposed.)
  • The explanations I have seen have skated over the difference between dollar bills and Fed settlement balances. We will assume that these are immediately fungible as a simplification.
  • Cash withdrawals do not happen. (This could be worked into the story, so not a big deal.)
  • Customers cannot force a loan to be made (loan pre-approvals, lines of credit). This is obviously not descriptive of the real world.

Behavioural AssumptionsThe killer assumptions are behavioural assumptions.

  • It is assumed that deposits are sticky - people leave all deposits untouched. However, loan proceeds are spent immediately, with the proceeds transferred to somebody else. (This assumption is defensible as an approximation.)
  • It is assumed that banks process loan applications one at a time, with the loan officer consulting with the bank Treasury with regards to the bank's real time liquidity position. (This is a defective description of bank operations.)
  • It is assumed that banks limit their loan sizes to the amount of excess reserves that they hold. (This assumption is drop-dead wrong.)

The "Model"We assume that reserve requirements are 10%, and that all banks start the day with no excess reserves. Then, a depositor at Bank A gets a $1000 transfer from the Federal Government. We assume that this initial deposit sticks at Bank A.

  1. Bank A gains a $1000 settlement balance asset, along with a new $1000 deposit liability. The $1000 deposit implies $100 increase in required reserves. The result is that required reserves rise by $100, and excess reserves by $900.
  2. This then allows the loan officer at Bank A to make a $900 loan to somebody, who then spends it. This increases both assets (the loan) and liabilities (deposits) by $900. (Jump to point 3 or 4.) 
  3. If the recipient of the spending is also at Bank A, then Bank A has no external transfers. Since deposits rise by $900, that means that $90 of excess reserves turn into required reserves. This leaves Bank A with $810 of excess reserves. (Go to 5.)
  4. If the recipient of the spending is at Bank B, then Bank A has to make a $900 transfer to Bank B. Bank A loses its $900 in excess reserves, but its deposit liabilities shrink by $900. Meanwhile. Bank B has a settlement balance increase of $900 (an asset), but deposits go up by $900 (liability). The $900 deposit implies $90 in reserve requirements, so Bank B has $810 in excess reserves. (Go to 5.)
  5. Whichever bank was the recipient has $810 in excess reserves, allowing it to make a $810 loan. It then does so, starting the process again, with a smaller loan. This repeats until the loan size goes to zero. Total deposits = $1000 + $900 + $810 + ... = $10,000. ($1000 /(1 - 10%)).
  6. The final deposit size ($10,000) is divided by the initial reserves injection ($1000) is the multiplier (10).

Why This Does not Describe The Real WorldThe multiplier chain story does not happen because bank loan officers do not limit themselves to loan amounts that are less than the bank's excess reserve position. There are two obvious reasons.

  1. Bank loan officers and Treasury departments are not in constant communications during the day, unless this is a hokey small American community bank. Bank treasurers are not going to have frank discussions of the bank liquidity position with hundreds (thousands) of loan officers, as this would pose severe run risk in any sort of crisis.
  2. A well-run bank starts the day with zero excess reserves. They are not going to have their loan officers sitting on their rear ends drinking coffee until some excess reserves make their way through the front door. 

The way banks actually work is that they make loans within guidelines (which have the bank's capital/liquidity position behind them), and then the Treasury trades reserves or money market instruments to hit the regulatory target for end-of-day balances. That is, they make the loan, then seek out reserves. If there are no excess reserves in the system (not an issue for a long time...), then the central bank has to do open market operations to supply them.

One final point is that this model explains the story that there is a belief that banks lend out reserves, which is obviously crazy. To the extent that this is believed, it is a result of looking at the assumed bank behaviour, and then converting this arbitrary constraint that there is a 1:1 relationship between excess reserves and lending.Concluding RemarksThe reader should now know enough to be able to pass a mainstream course that teaches the money multiplier, as well as enough to explain why the teacher should not be teaching it.

(c) Brian Romanchuk 2020