Modern Monetary Theory

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Reblog – No, MMT Didn’t Wreck Sri Lanka

Published by Anonymous (not verified) on Sun, 15/05/2022 - 8:37pm in

Debunking Bloomberg with Fadhel Kaboub

Written by Stephanie Kelton

Originally published on Stephanie Kelton’s “The Lens” on 29th April 2022.

Two poor men sitting on a trolley on a street of closed shops. Petta, Colombo, Sri LankaImage by Harshabad on Pixabay

Last week, Bloomberg touted an opinion piece (written by one of its regular columnists) claiming that “Sri Lanka was the first country in the world to try MMT” and that “the experiment has brought the country to ruin.” A few days later, The Washington Post republished the article. So it garnered a fair bit of attention. Unfortunately, the essay offers little insight into what’s really gone wrong in Sri Lanka. But, hey, editors and writers have discovered that MMT drives clicks, so there’s no dearth of efforts to shoehorn MMT into almost anything.

A number of people sent me the link and asked me to respond. I sat down to do just that, but then I remembered that MMT economist Fadhel Kaboub talks about Sri Lanka in some of his presentations and that he’s been studying the country for years.

Fadhel is an Associate Professor of Economics at Denison University and President of the Global Institute for Sustainable Prosperity. He brings deeper knowledge of the Sri Lankan economy and the policy decisions that have paved the way for their current predicament. So I reached out to invite him to respond to Mihir Sharma’s main claims about the so-called MMT experiment in Sri Lanka.

Sharma’s big claim is that “two cherished heterodox theories…became official policy in Sri Lanka and, within two years, they brought the country to the brink of default and ruin.” The government has halted payments of its foreign debt and warned that it may default. Import prices are surging. It’s hard for people to buy food and fuel. There are periodic blackouts and rationing. Inflation is close to 19 per cent and the central bank has recently doubled interest rates. Sharma acknowledges that there are ’structural factors’ at play, and he concedes that the pandemic hammered the nation’s tourism sector while the Russian invasion of Ukraine made everything worse. But he argues that “the deeper problem” is that the ruling elite “turned Sri Lanka’s policymaking over to cranks.” One of the heterodox theories that is supposedly responsible for the crisis is MMT.[1] What follows is a lightly-edited transcript of my Q&A with Professor Kaboub.

KELTON: Sharma claims that “Sri Lanka is the first country in the world to reference MMT officially as a justification for money printing.” He blames former central bank governor, Weligamage Don Lakshman, for listening to monetary cranks who convinced him that “nobody needs to worry about debt sustainability” as long as you “increase the proportion of domestic debt [relative to debt denominated in foreign currency].” Is there anything in MMT that says that as long as you “increase the proportion of domestic debt” you can “print money” without worrying about debt sustainability or inflation?

KABOUB: When I first read the statement of Sri Lanka’s Central Bank governor, Mr Weligamage Don Lakshman, back in 2020, it was very clear to me that he does not understand the basic MMT insights. He was under the impression that what matters in terms of monetary sovereignty is the proportion of foreign currency debt relative to domestic currency debt and that there was no need to rethink the foundation of the economic development model that his country has used since the late 1970s. Governor Lakshman focused on the proportion of debt but never questioned what the external debt was fueling, and never articulated how a higher proportion of domestic debt was going to build economic resilience in Sri Lanka.

MMT economists have been very clear all along that a country’s fiscal spending capacity is constrained by the risk of inflation, which is determined by the level of productive capacity (availability of real resources, productivity, skills, logistics, supply chains, etc.) and the level of abusive market power enjoyed by key players in the economy (cartels, exclusive import license holders, shell companies, cross-border traffickers, speculators, corrupt government procurement systems, etc.). Therefore, increasing a country’s fiscal policy space must be done via strategic investments to boost productive capacity and regulation of abusive market power. Sri Lanka’s economic policy choices (pre-pandemic and Russia-Ukraine war) do not even come close to what MMT economists would have suggested.

As I will explain below, Sri Lanka has three structural economic weaknesses that were systematically reinforced via mainstream economic policies: 1.) lack of food sovereignty, 2.) lack of energy sovereignty, and 3.) low value-added exports. These deficiencies imply that accelerating the country’s economic engines leads to more pressure on its external balance, a weaker exchange rate, higher inflationary pressures (especially food/fuel/medicine and basic necessities), and, as a result, it leads to the classic trap of external debt.

Here is how it all started. Sri Lanka, like many countries in the Global South, began the liberalization of its economy in 1977, and adopted a classic IMF-style economic development model based on exports, foreign direct investment (FDI), tourism, and remittances. This development model remained tamed during the civil war (1983-2009), but it was fully unleashed in 2009, and that is when external debt began to skyrocket, going from $16 billion in 2008 to nearly $56 billion in 2019. The value of the Sri Lankan rupee dropped from 114 to 178 LCU/USD. Thanks to a massive increase in government subsidies and transfers reaching more than 30 per cent of government spending in recent years, Sri Lanka struggled to keep inflation below 5 per cent. Yet, economists celebrated Sri Lanka’s great achievements with an average growth rate exceeding 5 per cent in the decade after the civil war, and a real per capita GDP growth putting the country officially in the upper-middle-income economy category. Sri Lanka was following the mainstream economic development model like a good student. In the decade starting in 2009, exports grew from $9.3 to $19.1 billion, tourism quintupled from 0.5 to 2.5 million visitors annually, FDI inflows quadrupled by 2018 to a record $1.6 billion, and remittances doubled to nearly $7 billion annually. These are the four engines of Sri Lanka’s economic growth, but they are also the engines driving the country deeper into the structural traps of food and energy dependency, and specialization in low value-added exports.

Here is how these engines constitute a trap. An increase in tourism induces more food and energy imports. An increase in remittances means more brain drain. An increase in low value-added exports induces more imports of capital, intermediate goods, fuel etc.; and an increase in low value-added FDI does the same plus the repatriation of profits out of Sri Lanka. On a global scale, these neocolonial economic traps have suctioned $152 trillion from the Global South since 1960.

KELTON: Sharma argues that it was the “printing of money” that caused inflation to hit record highs. He cites the rate of growth of the Sri Lankan money supply and concludes that inflation hit record highs because the central bank expanded the money supply by 42 per cent from December 2019 to August 2021. Why isn’t this a critique of MMT, and how do you think about the current inflationary pressures?

KABOUB: Sharma is wrong on two fronts here. First, he is assuming that the central bank actually controls the money supply, when in fact the money supply is an endogenous variable determined by the private sector (consumers, business, and banks). The central bank simply accommodates the needs of the market in order to keep short-term interest rates at a stable target, otherwise it will cause all kinds of instability across financial markets. Second, Sharma is assuming that inflation is caused by an increase in the money supply, when in reality, Sri Lanka’s inflation, like many developing countries, imports its inflation via food and energy imports. The higher the pressure on the external balance, the weaker the exchange rate, the higher the inflation pressure from imported goods. Sri Lanka struggled with these pressures for a decade, and managed to muddle through by accumulating more external debt, which quickly became unbearable after the pandemic (loss of tourism, remittances, FDI, and export revenues) and the massive increase in global food and energy prices after the Russian invasion of Ukraine.

The solutions to Sri Lanka’s inflation problems are not in the hands of its central bank. Raising interest rates in Sri Lanka will not end the war in Ukraine, or end the pandemic-induced global supply chain disruptions. The most effective anti-inflation tools fall under fiscal policy. It is the parliament, and the various ministries and commissions that can design strategic investments to boost productive capacity, and have the legal authority to update and enforce antitrust laws. In fact, raising interest rates can often fuel inflation (and inequality) because it is the equivalent of an income subsidy to bond holders, and a tax on actual investors who might be discouraged from increasing productive capacity

KELTON: Sharma appears to know that he has offered a faulty representation of MMT. He anticipates some of the counterpoints that I suspect you and I would both raise. He writes, “proponents of MMT will likely say that this was not real MMT, or that Sri Lanka is not a sovereign country as long as it has any foreign debt.” You have been studying Sri Lanka for a few years now. What, if anything, have policymakers done that suggest that they have been running any kind of “MMT experiment” over the last two years?

KABOUB: Well, this is where Sharma nails it! As I explained above, Sri Lanka’s economic policies don’t even come close to anything informed by MMT insights. Sri Lanka’s government ignored its structural weaknesses, didn’t invest in food/energy and strategic domestic productive capacity, didn’t tax/regulate abusive market power, has a corrupt political system dominated by a single family, and when it was backed into a corner after the pandemic, it doubled down on bad economic decision by claiming that agricultural fertilizers are unhealthy (when they really didn’t have the foreign exchange reserves to pay for the imports), so they destroyed agricultural output, especially rice, in the middle of global food crisis. If the Sri Lankan government was serious about investing in healthy food or a healthy economy, it would have put forward an actual food sovereignty strategy centred on native seeds, it would have discouraged intensive monoculture farming, it would have invested in regenerative farming to undo decades of damage to the soil, and it would have supported farmers to increase yields with well-defined medium and long term strategies. Clearly, this “organic farming” experiment was sloppy at best, but it should not overshadow the fact that the roots of the agricultural vulnerability have been decades in the making.

KELTON: Sharma chides the government for shunning the advice of “mainstream economists” and for “refusing to even consult the IMF.” Let’s assume he’s right about the central bank and other policymakers turning away from mainstream economists and institutions like the IMF. What kind of advice has the IMF given to Sri Lanka in the past, and what kind of economic development strategies would you recommend if officials called on you to advise them?

KABOUB: Sri Lanka has been following the IMF instruction manual for decades. It has received 16 loans from the IMF since the 1960s, and it is currently negotiating another one. Since 1996, Sri Lanka has never been away from the IMF’s negotiating table for more than 3 or 4 years at a time. Despite the political rhetoric of the Sri Lankan government over the last couple of years, the current Sri Lankan administration has abided by the IMF’s terms and conditions of the $1.5 billion Extended Fund Facility (that’s the 16th loan disbursed between 2016-2020). So maybe the Sri Lankan government has come to realize that the IMF instruction manual is actually harmful. The problem is that they don’t fully understand why, and they certainly haven’t identified an alternative strategy to escape from this trap.

In terms of policy advice, Sri Lanka needs emergency assistance with immediate shipments of food, fuel, medicine, and basic necessities. Sri Lanka needs debt relief rather than debt restructuring. For example, UNDP has recently recommended negotiating debt-for-nature swaps. There are other debt swap mechanisms such as debt-for-development, debt-for-equity, and debt-buy backs. The Sri Lankan central bank should be negotiating FX swap line agreements with the central banks of its major trading partners in order to stabilize the value of its currency.

Sri Lanka should also access the IMF’s newly created $45 billion Resilience and Sustainability Trust (RTS), which, unlike other IMF facilities, is actually a program that funds strategic investments to build resilience and promote sustainability. Sri Lanka would qualify for up to $1.4 billion of concessional loans with substantial grace periods. However, to qualify for RTS funds, Sri Lanka must first have an existing agreement with the IMF. It needs to enter these negotiations with its own strategic vision in order to escape the IMF’s austerity and external debt trap.

The IMF wants countries to establish an economic policy framework that leads to external debt sustainability, but its track record has been a miserable failure. Sri Lanka needs to convince the IMF and other lenders and strategic partners, that it can only escape this external debt trap if it tackles the problem at its source — e.g. by investing strategically in food sovereignty (with an actual long-term strategy rather than half-baked organic farming wishful thinking), investing in renewable energy capacity (energy efficiency, public transportation, etc.), investing in education and vocational training in order to climb up the value chain in the manufacturing sector, and becoming more selective in its support for export industries and FDI projects. In other words, ending the race to the bottom policies, and building resilience to external shocks.

These strategic investments must be coupled with an actual democratization of the political as well as the economic system. The government needs to crack down on corruption, cartels, abusive price setters, and entities that enjoy exclusive economic power and have every incentive to object to the strategic investments listed above.

The sad part of this story is that Sri Lanka is only one of many countries in the Global South facing the same structural traps, struggling with unbearable external debt, soaring food and energy prices, shortages, and rising social and political tensions.


[1] The other has to do with a shift toward organic farming that has apparently fueled a precipitous drop in crop yields, farming incomes, and export revenues.











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The post Reblog – No, MMT Didn’t Wreck Sri Lanka appeared first on The Gower Initiative for Modern Money Studies.

MMT and tax: the reality is that there is much more to be done on this issue

Published by Anonymous (not verified) on Tue, 10/05/2022 - 4:41pm in

I was trolled from the left and right on modern monetary theory and tax yesterday. The right wing turned up here. The left used Twitter. All claimed I did not understand the literature on this issue.

So, for the record, first of all would they please read these two papers on tax and tell me what I got wrong? One is in the Real World Economic Review and the other in Social Policy and Society Constructive criticism I am happy with.

Second, note that there is very little literature on this. MMT has not developed a coherent theory of how tax fulfils the withdrawal function to control inflation it has prescribed to it, hence the papers by me and me and Andrew Baker. Hence too why we are also planning to develop this, considerably. We are seeking to develop theory on how tax does simultaneously have this withdrawal function, which does not fund spending but is an explicit part of the overall funding cycle, whilst simultaneously having a strong function in delivering social, economic and fiscal policy.

Two points though (and quick ones as I have presentations to make to PWC on tax justice and the EU parliament on the abuse of secrecy jurisdictions today, and some preparation to do). The first is that tax as a withdrawal function only controls inflation if it is demand pull inflation. We do not have that right now, excepting amongst the products the wealthy buy, and so it cannot be used to control most inflation at present, excepting for the impact that those with high incomes and wealth have. Tailoring theory to policy in the situations we actually have is intelligent political economy. Sticking to dogma whether useful or not is the exact opposite of that.

And second, to address the MMT zealots, it is undoubtedly true that tax does not fund spending. So there is no tax and spend. But to opened there isn’t spend and tax if inflation is to overall be controlled is absurd, but that seems to be what some are suggesting. Learning a tiny little bit of MMT and then shouting that it must be obeyed as a mantra for all time just discredits the MMT cause. I am bored by those who want to do that.

MMT is not a fully developed theory when it comes to tax. And in current circumstances blind adherence to its usual presentations would be as crass as Bank of England policy is right now. Exceptional times require exceptional thinking. Sticking to rules written for other occasions is not exceptional thinking. It is instead crass stupidity. I don’t endorse that.

The government would rather people starve or be homeless than create new money

Published by Anonymous (not verified) on Tue, 26/04/2022 - 8:04pm in

I posted this Twitter thread this morning as a reaction to the government's desire to take 'non-fiscal steps' to tackle the recession that is now very rapidly developing:

The problem for the government in the developing economic crisis is it doesn't want to take on more debt. But no recession can be solved without the government doing just that. So what is the trade-off? Should it balance its books or ensure people are fed and warm? A thread...

The problem is that due to external pressures the government can't stop the prices of oil and gas and so road fuel and domestic energy and almost all food from rising. Wages are not rising though, and the government does not want them to. So, 5 million or more people face poverty.

These people have no financial margin for error left. They have no savings. Their incomes from wages or benefits are not rising to cover costs. They have too little discretionary spending to cut to cover the cost increase of necessities. Most have rent or mortgages to pay.

These households have only a few bad choices available in that case. They could borrow, but have very limited access to sufficient or affordable credit and limited capacity to repay. Alternatively they could go into mortgage or rent arrears, and so risk losing their homes.

Or they can choose between heating their homes and cooking food, and food itself. As the recession deepens and more and more lose their jobs as discretionary spending falls the number facing these stark choices about poverty will only grow, and maybe by millions.

In a country where there is enough food for all and every house could be kept warm with sufficient fuel for everyone to cook that this situation even exists is an indication of policy failure. We should not be in this position now. But we are.

In the face of this crisis the government is now saying that it will not take on any more debt. The consequence is that it is not planning to spend any more to help those in need. One thing follows from the other. It is disguising that by saying it is looking for 'non-fiscal solutions'.

There are no 'non-fiscal solutions' for a debt crisis that will drive millions of households into poverty, unless starvation is described as such. Presuming that the government is not seeking that outcome (and that is a big assumption) it has no choice as to what to do.

When money is the answer to this problem and households have none, and the private sector will not provide the affected with more or affordable loans, then only the government can solve this problem by making the necessary cash available.

It's not rocket science to say this. Money is either generated by creating new economic surpluses. Or it is reallocated to those who need it through new taxes. Or it is created by private sector lending. Or the government has to create it. Those are the only options available.

In a recession there are no new surpluses to be made. The government is refusing windfall taxes, and they are in any case too small in size and too slow in impact to solve any problem now. The private sector is not going to lend to impoverished people. So the government must act.

The reality is that, as this analysis shows, the choice is simply between people going hungry, or cold, or losing their homes, or the government creating the money required to ensure people are not forced into poverty on a scale we have not witnessed for nearly a century.

And the government can create this money. More than £400 billion was created to tackle Covid, which meant not a penny of the cost of that crisis was paid for by borrowing or taxpayers. It was all paid for with newly created money.

Where is that money now? In the government's accounts it's represented by new deposits held by the commercial banks with the Bank of England. That's it. It is just new money. And why is it with the Bank of England? This needs explanation.

Remember that the Bank of England paid this new money to the commercial banks on behalf of the government in exchange for the promise the commercial banks made to pay it on to those it was due to. That's how payment from the government to people works.

Tax and government borrowing, incidentally, works the other way round. In that case people ask the commercial banks to pay the government, and it flows from those banks to the Bank of England. This is how money moves in and out of the government.

But why does the money end up still being deposited with the Bank of England by the commercial banks in that case? That's because most new money does not leave the commercial banking system. After all, when we're paid it's only if we take out cash that the money leaves a bank.

Most of us are not paid in cash. And even if we are and we then spend cash whoever gets it pays it back into a bank. Just as if we pay someone by bank or card payment all we actually do is move money between bank accounts.

That’s how banking works: it’s just an accounting system in which money is just a record of debt owing to and from people recorded on bank statements.  Money is no more complicated than that.

So, when the government creates new money what it actually does is pay money into the banking system as a whole. Which bank has it may change. And who they use it to pay money too can change. But the new money simply puts more money into banks, which they then hold with the Bank.

Why would a bank hold the money with the Bank of England? Because a) it's the safest place to hold it and b) the accounts on which they hold it are also the accounts that banks also use to pay each other: the Bank of England is the bankers’ bank. That's why it's a central bank.

And how much do these extra deposits that the Bank of England created for the government cost a year? At present the total for the £400 billion or so that Covid cost is about £3 billion a year paid in interest on these deposit accounts, from which our commercial banks benefit.

£3 billion a year might seem a lot, but in government terms it's less than one two hundredth of total tax receipts, which makes it small change.

I think that for maybe £50 billion or so a year - and maybe less - would keep British households out of debt now. The borrowing cost on that will be less than £0.5 billion right now. That would be the cost of injecting the money needed to keep the country out of poverty right now.

The government won't do this because it says it will not take on debt. But all the new debt it would take on is actually just new money that never need be repaid because right now our economy will need that money to function.

There’s good reason for saying that. Usually our money is created by both the government and commercial banks. But in recessions banks lend less, meaning they create less new money. So the government has to create more money if there’s to be enough money to keep the economy going.

In that case this debt does not need to be repaid. Nor is there a burden on future generations, unless you happen to think that the money we use is a burden that future generations will not want (about which I think you will find they disagree: they'll be happy to take it).

So what the government is saying when it says it will not help people with the debt crisis they’re facing is that although it could create all the money required to solve this problem it just does not want to do so, although it could by creating all the money required to do so.

To put that another way, instead of creating the new money that people need to stay warm, fed and in their homes the government would prefer people starve, go cold, and be evicted from their homes.

And making this new money is really easy. It just requires a few keystrokes on a Bank of England keyboard and the job would be done. That's how all the money to pay for QE was created. That's how the poverty that this recession could create could be addressed as well.

So, when this morning the government says that it is looking for every solution to this crisis except for anything that involves them spending more money they're lying, because they know the only solution is for them to create that new money or for people to be ruined.

And the Opposition has to note this too. There is no windfall tax solution to this crisis, although such a tax would help. And more taxes on wealth would definitely help tackle the inflation we've got.

But it is more money that the government needs to spend. And only the government can create it. If they’re to really provide an alternative solution to this problem Labour and the SNP have to say that. If they do it would help. If they don’t, we really are in very deep trouble.

In summary: for the sake of debt paranoia millions of people might suffer, wholly unnecessarily.

Out this morning – the paperback edition of Money for nothing and my Tweets for free

Published by Anonymous (not verified) on Thu, 21/04/2022 - 5:03pm in

This is out this morning:

My thanks to Jim Stone and David Mullins who helped in the production process.

I hope that this might help a few politicians understand just what it is that money is really all about.

The PDF version is still available free of charge. The book has simply been priced as an alternative, without the aim of making a profit.

The government is claiming that all the money it issues is asset backed, and that is complete nonsense

Published by Anonymous (not verified) on Mon, 04/04/2022 - 6:42pm in

Peter May, who pretty much runs the Progressive Pulse website these days, even though I am its director, wrote a really important blog on Friday. As he noted he'd had another letter from the Treasury to an MP on the subject of whether or not it creates money using quantitative easing. This was as follows:

Another interesting letter from HM Treasury:

As Peter noted:

They say:

….the Treasury does not require the Bank to create money, neither does money created by the Bank of England need to be paid back via taxation. Rather, the Bank creates money to supply notes to the economy as well as creating money under its monetary and financial stability objectives. In all cases, the creation of money is backed by assets.

So we have some money created by the Bank of England which does not need to be paid back via taxation. Just simply for monetary and financial stability…

Presumably we could increase the ‘national debt’ purely on the basis of “money created by the Bank of England [which does not] need to be paid back via taxation.”

That is surely progress.

So that indicates, I suggest, that at least some money is not part of the supposed ‘national debt’.

That again is progress (if philosophically dubious!)

But backed by which assets?

What are these?

Unsurprisingly, I have asked for further clarification.

All in all this rather looks like an eighth reason why we never tax and spend...

I wanted, in particular, to consider the claim that all the money that the government creates is asset-backed, as that is a very strange claim to make, especially as the Bank of England’s own webpage on money creation, linked in the letter, makes it clear that commercial bank money is not asset-backed. It is instead an arrangement backed by mutual promises to pay, which it explains. Why then is government money so different, as John Glen MP claims?

Some evidence helps. First, the Bank of England’s balance sheet in 2008 and 2009:

Now contrast those 2008, pre QE and financial crisis, figures with 2021, which is the latest data available:

To add important colour, I also add these notes:

So, let's be clear about the differences between 2008 and 2021.

Net assets have grown from £2.3 billion to £940 billion.

Repo funding has stayed almost exactly the same (£136 billion in 2009, £63 billion in 2008 and £126 billion now).

But other loans and advances have grown from £4 million (yes, million) to £785 billion and sums on deposit (the central bank reserve accounts of the UK's clearing banks and related financial institutions) have grown from £25 billion to £804 billion.

Money is a liability on the Bank of England balance sheet. It is not an asset. In other words, the new money supply since 2008 was £779 billion (£804bn less £25 billion). So what is the asset that backs this? It is the loans and advances of £785 billion, which note 11 shows was almost entirely lent to the Bank of England subsidiary company, Bank of England Asset Purchase Finance Facility, whose accounts are illegally (in my opinion) not consolidated in the Bank of England accounts, an action that can only be justified if it is not really a subsidiary company of the Bank of England but is instead under the control of the Treasury (which it is easy to argue that it is).

What do the accounts of this company show that it did with the money? Like the accounts of the Bank of England, these are available here, the most recent being for February 2021 at present:

Again, some notes help:

So, the APF (as it is called) used the sums lent to it to buy government gilts. These are its assets.

In that case if the company's accounts had been consolidated with those of the Bank of England what we would see is that new money created by government spending (the sums on deposit from the commercial banks held with the central bank, and effectively representing quantitative easing balances) were backed by government bonds. In other words, the only backing for government-created money was a government promise to pay, in the form of bonds. There was no other asset involved at all; there was just a promise to pay, which is what all money is.

How then can John Glen claim that the money in question is asset backed? The simple fact is he cannot. The money is just backed by a government promise, and that is all. In other words, the money is made out of thin air.

I hope Ben Bradshaw MP might go back and say:

Dear Mr Glen

Thank you for your letter of 29 March 2022.

I have noted your claim that all government created money is asset-backed. I have also noted the analysis of this claim on the Tax Research UK blog, which shows that the only asset that has backed the issue of new money by the Bank of England since 2008 has been the acquisition by that Bank of government bonds through its subsidiary, the Bank of England Asset Purchase Finance Facility Limited using the quantitative easing process. There is no evidence of any other asset backing on the Bank of England balance sheet.

Might you, in that case, explain what you meant by asset backing for this government created money?

Might you at the same time explain why the Bank of England does not consolidate the results of its subsidiary company into its own accounts? Is that because it is agreed that this subsidiary company is actually under the practice control of the Treasury, which guarantees all of its liabilities and has an absolute claim to its income?

In that case would you also agree that the only asset backing this newly created money is, in fact, a government guarantee?

I look forward to hearing from you,


I leave it to Peter May to decide what to do.

Out-of-touch Chancellor’s Spring Statement fails to help those most in need

“Once we allow ourselves to be disobedient to the test of an accountant’s profit, we have begun to change our civilisation.”
John Maynard Keynes  

This week, amidst continuing global economic uncertainty caused by the ongoing pandemic and the outbreak of war in Ukraine, the Chancellor, Rishi Sunak, delivered his Spring Budget. Unsurprisingly, it did little to help the very poorest of households, as the Resolution Foundation reported in its analysis that followed:

“Taking into account the measures announced by the Chancellor, the typical working-age household faces an income fall of 4 per cent, or £1,100, in 2022-23. But the greatest falls will be felt by the poorest quarter of households who are set to see their incomes fall by 6 per cent. This will see a further 1.3 million people fall into absolute poverty next year, including 500,000 children – the first time Britain has seen such a rise in poverty outside of recessions.


Incomes are on course to be lower at the next election (2024-25) than they were at the last (2019-20), with typical non-pensioner income projected to be 2 per cent lower. Such an outcome would make this the worst parliament on record for living standards growth.


The Chancellor pre-announced a 1p cut in the basic rate of Income Tax for April 2024, saving an average earner £243 a year. But the gains of this and the lasting impact of a higher National Insurance threshold are wiped out by previously announced tax rises.  In 2024-25, when the income tax cut comes into effect, 27 million out of the 31 million people in work will pay more Income Tax and NI as a result of personal tax changes announced by Rishi Sunak.”

Chancellor Rishi Sunak filling a red car with petrol at a petrol stationImage by HM Treasury on Flickr. Creative Commons 2.0 license.

While the Chancellor continues to count the tax beans and make his calculations, those who have already suffered the consequences of the last 12 years of Conservative policies will now be expected to take further pain in the form of a resurrection of harmful austerity dressed up in the concept of possible ‘jam tomorrow’. Cynically speaking, just before the next election.

In the light of a sustained round of higher government spending and the myth that we have borrowed heavily to sustain an economy hit by a global pandemic (even if much of that went into corporate pockets), some economically uneducated politicians are now appealing to the nation yet again to sacrifice their well-being on the altar of balanced budgets. We should be willing victims, according to this false logic. Despite the huge spending over the past two years, the household budget myths were never far away from the public gaze as the media pounded their messages about how there would be a price to pay, eventually.

At the same time as the Resolution Foundation lays it on the line as to the significance of the Chancellor’s budget, which yet again divides rich and poor, it then goes on to reinforce the myths about how the UK government spends. Tax receipts, it said, had come in much stronger in 2021/22 than expected, which would give the Chancellor ‘headroom against his fiscal rules’. The Independent claimed however that Sunak was keeping some of that tax bonanza back for a rainy day or to cover his planned tax cut in 2024. Whilst the Foundation’s analysis is stark on the consequences of this week’s budget, it is clearly still in the dark ages when it comes to describing how currency-issuing governments spend, as are so many think tanks and organisations on both the left and the right, not to mention a myopic media.

Charles Dicken’s character Micawber has been resurrected (if he ever went away) by a Chancellor who, after an astonishing fiscal response to the pandemic, is now re-donning Thatcher’s mantle, reinforcing the lie that taxes fund spending, or that government needs to borrow to fund itself over and above its revenue.

The suggestion by Torsten Bell at the Resolution Foundation, that these unexpected tax receipts would allow the Chancellor to consolidate the Treasury’s fiscal position and deliver his promises is just more shoring up of a myth that governments spend like our own households. And a bit of a joke because by any standards what the Chancellor, with his great wealth and extensive property portfolio, has done, is punish those who can least afford it and who do have to live within their financial means or face the prospect of debt because they are currency users, not currency issuers. The rising use of food banks and increasing homelessness can only get worse as his budget decisions begin to bite in April and our public services will continue to deteriorate without adequate funding.

Holding forth from his ivory tower, Sunak has not an ounce of understanding about the impact of government spending policies on the lives of working people, not to mention the economy. His decisions are directed by a desire to show himself fiscally prudent, not by public health and economic security.

When Rishi Sunak says, as he did earlier this week, that ‘we can’t help everyone because it’s too expensive’ or proposes an efficiency drive to cut £5.5bn of claimed government waste with a view to those savings being used to fund vital public services, it is quite simply a distortion of the facts to serve a political agenda.

Whether it is the Chancellor reciting the usual mantra about it being ‘vital that every single penny of taxpayers’ hard-earned cash is […] spent well,’ or the Shadow Chancellor and other uninformed left-wing politicians suggesting that they would fund public services via a windfall tax on energy companies, the public is being led by the nose in its ignorance of how government spends. An ignorance perpetuated by the daily narratives in both left- and right-wing quarters and by a compliant media singing from the same hymnbook. The economic orthodoxy rules the roost. And yet increasingly we are seeing the true cost of such narratives. They are not financial, they are the threats to human life, biodiversity, and a functioning planet.

Given the challenges we face from an increasingly forgotten climate crisis (and incidentally scarcely mentioned in the Spring budget), the ongoing exploitation of the global south, which has bled countries dry to sustain the lifestyle of the west and which is coupled with rising poverty and inequality affecting citizens across the world, it is time to challenge these myths which have served a political agenda and a toxic ideology. Keeping the myths alive for the purposes of social control and the profits rolling into private pockets with government serving its corporate masters.

Nothing is too expensive in monetary terms; government doesn’t have a finite pot of money with which to provide public and social infrastructure and neither does it have to doff its cap to the wealthy or large corporations to provide it. Contrary to the usual household budget narrative, when the government spends, it does so based on a political agenda, not the state of the public coffers. It just doesn’t want the public to know that, because it is a lie that can be used to justify its spending policies and who gets the money, or indeed yet another round of austerity when it suits. A harmful ideology that feeds government policies and spending decisions.

The proof of the pudding lies in the fact that when it serves that agenda there is always money to fund a government’s own political priorities such as war or defence spending, or public contracts divvied out to its mates with no accountability. Only this week, Sunak revealed that the UK had given Ukraine £100 million worth of weaponry. And yet at the same time, he tells us that savings in government departments must be found by rooting out waste which can in turn, according to the household budget narrative, be used to fund public services, as if a government that issues its own currency has no money of its own and has to tax or borrow or make ‘savings’ by robbing Peter to pay Paul to fund its agenda.

While the Telegraph talks this week about the parlous state of the public finances and running out of road, suggesting that excessive government spending was crowding out investment in the private sector by discouraging ‘innovation and competition in crucial sectors such as health and education’ (which tells us a lot about the priorities of those on the conservative right), it claimed also that government spending levels were ‘indefensible.’  These statements are predicated on the lie that money is a finite and scarce resource and that the State and its public infrastructure is wasteful of hard-earned taxpayers’ money!

While the Telegraph talks tough by suggesting that spending needs to be cut even further, the Spring Budget is already a kick in the teeth for those who are currently struggling to make ends meet and will mean even more hardship and poverty as energy, food and other costs continue to rise. The Chancellor has made a political choice to create further difficulties for already beleaguered citizens on the promise of ‘jam tomorrow.’ Fiscal discipline over national economic well-being. What a cruel way to view the lives of millions of people, who it seems have become expendable in some people’s eyes where government finances are concerned. Better a balanced budget than a happier, healthier more productive nation.

Let us ask what is the role of government? To balance the budget, keep the wealthy happy and the profits rolling? Or something else? What we should be discussing is not the state of the government finances, whether it has balanced its budget or gilded its reputation as being fiscally prudent, but how it has managed the real but finite resources it can, if it chooses, access through its tax and other policies to create a sustainable and functioning economy which benefits everyone, not just a small section of it.

Thus, a healthy economy depends primarily, not on a private sector paying its taxes to provide vital public infrastructure, for too long the public has been misled on this issue. It depends instead on the spending and legislative decisions taken by a currency-issuing government to create the publicly paid for and preferably managed national and local infrastructure upon which we all depend as individuals and businesses, from health to education, welfare, public transport networks, and employment. Government in service to its electorate, not the corporate body. That should be the starting point for a discussion about where we go from here and involves creating a better public understanding of how government really spends.

In short, the current economic problems and inflationary pressures are not caused by too much government spending as some would have it, but by supply chain disruptions resulting from the pandemic, the war in Ukraine and the growing effects of climate change on the world economy including food production. This is a moment not for fiscal retrenchment but thinking best how to support working people in these difficult days and planning for a sustainable and fairer future for all.




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Let us never forget this fundamental truth: there is no source of money other than the State.

Published by Anonymous (not verified) on Fri, 11/03/2022 - 6:51pm in

On Wednesday I noted the speech that Sajid Javid had made on the future of the NHS in England.

In that speech he said:

As someone once said: ‘There is no such thing as public money, there is only taxpayers’ money.'

He was, of course referring to Thatcher.

In response, Andrew, who is a regular commentator on this blog, said this:

Here is the whole quote, from Margaret Thatcher’s speech to Conservative Party Conference in 1983:

“Let us never forget this fundamental truth: the State has no source of money other than money which people earn themselves. If the State wishes to spend more it can do so only by borrowing your savings or by taxing you more. It is no good thinking that someone else will pay—that “someone else” is you. There is no such thing as public money; there is only taxpayers’ money.”

But that paragraph above gets the economics entirely back to front. Perhaps we can try something better:

“Let us never forget this fundamental truth: there is no source of money other than the State. If our State with its own currency wishes to spend more, it can do so simply by creating the money. There may be good reason to tax some of that new money back, but the State’s resources are not limited to taking money from its citizens: it literally prints the money. There is no such thing taxpayers’ money: it is all public money.”

Ultimately, it is all about priorities and distribution. The rest is bunk.

That is something I wish I had written. It is correct. It is a perfect retort. It is the essence of the thinking on which our economics should be based.

How do we fix the economy?

Published by Anonymous (not verified) on Sat, 26/02/2022 - 7:57pm in

This is worth sharing:

Thanks to commentator Charles for the recommendation.

The orientation is to the US of course, but it’s still of value.

Why progressives have to understand money

Published by Anonymous (not verified) on Mon, 14/02/2022 - 6:30pm in

Peter May, who is largely responsible for the Progressive Pulse  blog (which I direct) posted this comment on this blog yesterday, and I thought it worth escalating to post status:

If you understand where money comes from, and that its issuance is a government function in a modern democracy, then you can call out fairness and justice.

Because it is much more difficult to argue against fairness and justice, than the ideology of socialism.

Conservatism is also an ideology.

Yet modern Conservatism has no place for fairness.

It justifies its stance by the language of ‘difficult choices’ and by suggesting that there is no money, that we tax and spend, there isn’t a Magic Money Tree and that the government is a household.

Once all this is shown to be a misunderstanding or even a deception, then Conservatism has to declare simply that ideologically, it is not in favour of fairness or justice.

Conservatives have to stop using economic arguments about money as a means of keeping the rest of us in check.

They are exposed as the naked and corrupt self-servers that they now are.

They are shown up as simply an elite wanting to keep resources for themselves with no concept of fairness.

That is why progressives have to understand money.

Even better is that all the – frankly outdated – baggage about Labour being too middle class and not supporting the workers can be avoided. And of course there would be no need either to have prolonged debates on what socialism is – or isn’t…

The requirement would simply to be in favour – or not – of fairness and justice.

Hard to disagree with that.

Reversing QE could be a recipe for economic disaster

Published by Anonymous (not verified) on Sun, 06/02/2022 - 10:30pm in

I have just posted this rather long thread on Twitter. If you think it too long to read the summary is that reversing QE could be the recipe for an absolute economic disaster:

All the debt issues by the government to pay for Covid - about £450 billion of it - was in effect bought by the Bank of England. The government owns the Bank of England. So Covid debt is owed by the government to itself. Why do we have to repay it then? A longish thread…..

Covid cost the UK around £450 billion. It so happens that since March 2020 the Bank of England has bought that same value of government bonds. All were issued to pay for Covid. In other words, neither taxpayers or financial markets have paid for Covid. The Bank of England did.

The Bank did that by creating new money. There is nothing magic about this. Every time a bank lends money, even when you use your credit card, new money is created. You promise to pay the bank and they promise to pay whoever you want. And those two promises create new money.

Money is just debt. It is a promise to pay. That is all. When Covid began promises to pay were in short supply. People stopped spending. Banks stopped lending. Work closed down for many. The government knew money might stop being made. So they stepped in and started making it.

Under international regulation a government is not meant to borrow from its central bank - in the UK case the Bank of England. So, instead they have to do this in a roundabout way. The government issues bonds to fund its debt and the Bank of England buys them.

To make this purchase possible the Bank of England has to create the money. It can’t lend it direct to the government. It can’t lend it to itself. There is no promise to pay in that case. So it created a new company owned by the Bank to lend the money to.

This company was and is called the Bank of England Asset Purchase Facility Fund Limited. Call it the APF, for short. The APF borrowed money from the Bank of England to buy the bonds the Treasury was issuing. It promised to repay the Bank.

There was, however, a twist to the tale. In case the APF could not for any reason repay the Bank of England the Treasury - which is the finance division of the government - guaranteed to pay the debt on its behalf. So, in effect, the government did borrow from the Bank.

How can I be so sure that the government borrowed from the Bank of England? Simply because if all money is debt created by promises to pay then it was the promise of the Treasury to repay the money borrowed by the APF that made this process possible.

This process was and is called quantitative easing. It looks and is technical. The essence is, however, incredibly simple. The bonds issued by the Treasury are bought by a company technically owned by the Bank of England using a loan guaranteed by the Treasury. That’s it.

The consequence of quantitative easing, or QE for short, is in that case that the Treasury owes the Bank of England for the money that the Bank creates that the government can spend.

And the government did, of course, spend. It spent around £450 billion of Bank of England created money on furlough, supporting business and the self-employed, and PPE. In other words, the money the government created using QE was spent into the real economy.

It’s important to understand how this money got into the real economy. The process is, as usual, simple, but little understood. The money goes from the Bank of England to the person due it - such as a person receiving support as a self-employed person - via a commercial bank.

The Bank of England did not pay the self-employed person directly. The Bank paid HM Revenue & Customs’ commercial bank account. That commercial bank account then paid the self-employed person. The QE created money, made by a Treasury guaranteed loan, was now in the real economy.

There is an important element in this most people don’t get. The commercial bank paid the self-employed person because HMRC asked it to. And it did so because the Bank of England credited it with the money to do so.

But remember, money is not real, or physical. It is just a promise to pay. What the numbers that represent the balances on your bank account mean are that you have either promised to pay the bank if you are overdrawn, or they have promised to repay you if you are in credit.

That’s all those numbers in your statement mean. There is nothing you can see, touch or feel that looks like money that those numbers represent. They are just numbers. They are simply the amount of debt owing between you that one has promised to pay the other.

I sort of hate to break this to you if you have never appreciated it before, but there is no ‘money in the bank’. There is just a computer that records debts owing to and from people. That’s it. That’s all a bank is. It’s an accounting system to record debts owing.

That’s important. It explains why when the Bank of England credits commercial banks with money to pay for government spending the debt that the Bank of England owes to the commercial bank - like HSBC - does not disappear when the self-employed person is paid.

The commercial bank pays the self-employed person as instructed, by increasing their bank account and reducing the account of the government department that made the payment. But, the government department got its funds from the Bank of England in the first place.

That sum owing from the Bank of England to the commercial bank is not then cancelled by the payment made to the person eventually owed money. The government still owes the commercial bank.

Only, we don’t actually describe it like that, because what’s actually recorded is that the commercial bank has money on deposit with the Bank of England as a result of this transaction.

Bank deposit accounts are, of course, just money owed by a bank (in this case, the Bank of England) to whomsoever has deposited money with them. But in this case there is something special about the deposit. The Bank of England deliberately made that money.

All banks can create money. I have already noted how. They just record promises to pay. But the government and Bank of England create a special form of money. It’s called base money.

Some of this base money is the only type of money you can see, touch and feel. That’s because it is the notes and coins that we use. There are around £80 billion worth of these in circulation right now. But don’t get confused. They too record a promise to pay. They aren’t money as such.

If you are in doubt about the fact that notes and coin just record promises to pay think what happens when it is said that a note or coin is being taken out of use. Suddenly we want to be rid of them. That’s because they are no longer of use in recording or cancelling debts.

So, notes and coins only differ from the rest of money by recording debts owing and settled in a physical format rather than through a computer screen. Think of them as being like an abacus in that case, instead of being electronic.

Now let’s get to the more important form of base money. This is the electronic money that that Bank of England has been injecting into the economy in large amounts since 2009.

When the Bank injects new money into the banking system it does so via what are called the central bank reserve accounts that the commercial banks maintain with it. I stress, you can only have such an account if you are a commercial bank or financial institution.

These central bank reserve accounts are the way money flows from commercial banks to the Bank of England. They are, for example, the accounts used by the commercial bank you pay tax to if you are a company, self-employed or an employer for them to then pass it to the government.

These central bank reserve accounts are also the way in which the commercial bank accounts of government departments are topped up when required to ensure they can make payments to whomsoever is due money. The Bank of England then makes payment to those commercial bank accounts.

Vitally, they are also the way in which the proceeds and sales of government bond (or gilt) issues flow to and from government. So, if the government sells bonds money flows from the commercial banks to the Bank of England to reflect what people pay for those bonds.

Similarly, when the government repays a bond at the end of its life (and all gilts have a fixed life now) then these accounts are used to repay the funds owing. The government pays the commercial bank via its central bank reserve account and they then pay the bond holder.

I know this is getting a bit technical but stick with me, because the next bit is important. A vital thing to understand is that we have had two quite distinctly different eras of quantitative easing since 2009.

The first QE era was from 2009 to 2016. The aim at this time was firstly to inject new money, or liquidity, into the banks so that they could not fail again. The second aim was to keep interest rates as low as possible. The third aim was to encourage riskier lending by banks.

These need brief explanation. The injection of new money into the banks was necessary because from 2008 onwards the commercial banks stopped trusting each other. They realised that they had all been reckless and had piled their balance sheets high with useless loans.

What they also realised was that which bank might fail next was unknown. Remember that many did fail and were bailed out by the government. What the remaining banks realised was that they could not trust each other. Any of them might go bust at any time.

What this meant was that they would not accept each other’s promise to pay. But, banks paying each other is vital. It’s how a payment from an account held at Lloyd’s gets into another account paid at Barclays, for example. Unless banks pay each other the system fails.

So, an alternative to the banks simply trusting exchange other to pay - which was the arrangement used before 2008 - had to be found. That alternative was to use the central bank reserve accounts for this purpose – because money held with the government was always reliable.

All the commercial banks knew that the money that they held on deposit with the Bank of England was guaranteed because the Bank of England can never go bust. After all, the government can always create new money to make any payment, if it wants.

So, the central bank reserve accounts are the sole source of cast iron, guaranteed to pay, money that there is. And for that reason the accounts that record the commercial banks’ stores of this money have also been used post 2008 to make payment between commercial banks.

It’s a weird arrangement. The overall balances on these accounts are decided by government. It decides how much it wants to pay into and withdraw from the economy, and that determines the account balances. So the banks get this money whether they like it or not.

If ever there was a magic money tree this is it. Hundreds of billions of pounds is now held in these accounts, essentially gifted to the commercial banks by the government but which the banks can’t withdraw without government permission or use for anything but paying each other.

The trouble was that in 2008 there was only £42 billion held in these accounts. If they were to be used for more than payment to and from government then bigger balances were needed to make sure no commercial bank went overdrawn.

QE created those bigger balances. The government bought its own debt. The commercial banks’ central bank reserve accounts were credited for those payments. The amount available for the commercial banks to pay each other increased. This is how those commercial banks were bailed out.

The process had two other consequences. First, buying £450 billion of government bonds in this way kept the price of those bonds high. And since bonds carry a fixed interest rate for their whole life a bond with a higher price has a lower implied effective interest rate.

This is how the low interest rates since 2009 were forced upon the financial markets. It wasn’t just because the Bank of England paid low rates. It reinforced its policy with about £450 billion of bond purchases.

The Bank hoped that because it only paid minimal interest on this sum the commercial banks would be encouraged to increase their lending to high-risk businesses. That did not happen. They increased mortgage lending and financial speculation instead.

The result of the Bank of England failing to understand what would happen with QE was that we have had a house price boom and massive increases in share and other asset prices. The rich just got richer. This was how the finance sector and landlords were bailed out by QE.

Excepting the fact that our remaining banks survived and another crash was avoided the version of QE used from 2009 to 2016 was a disaster for the UK economy. It created asset price inflation, kept wages low and increased inequality.

In that case let’s be clear that the type of QE used since March 2020 has not been the same as that used from 2009 to 2016. I stress that the Bank of England would like you to think that it is, but it is not. Their clams about this are not true.

What we known is that in the spring of 2020 the Bank of England agreed that in the face of a looming crisis that they would fund the UK government to keep it going. We know that is true. The FT reported it:

And this is what they did throughout 2020 and 2021. This chart from the @NEF shows what happened:

Every time the government spent money the Bank of England undertook QE to match, with very small lags between the two. The process used to undertake this QE looked similar to that used from 2009 to 2016. Government bonds in issue were repurchased.

However, this time, in effect, happened was that every time new bonds were issued as a result of government spending taking place without tax revenues to match the Bank of England stepped in and effectively bought bonds of a similar value to those just issued.

Although the bonds issued and reacquired may not have been the same - and they were not, always - the process was one that guaranteed that no real funding from the bond market was asked for. Instead the Bank of England provided all the funding the Treasury needed.

The impact of QE on the central bank reserve accounts was quite different as a result. From 2009 to 2016 when QE took place there was no immediate match with government spending and the bonds purchased had usually been in issue for some time.

The result was that from 2009 to 2016 QE lifted the value of the central bank reserve accounts by an amount that over time broadly equalled the amount of QE. I stress that the relationship was not precise, but this was very clearly what happened.

From 2020 onwards that was not what happened. Every time the government was at risk of spending more than it was raising in tax revenues it issued bonds. Issuing bonds reduces the balances on the central bank reserve accounts.

But then, usually at around the same time and often within days of it, the Bank of England bought bonds back from the financial markets. What this meant was that the central bank reserve accounts were restored to their original balances.

As the New Economics Foundation chart shows, these transactions almost exactly matched each other. The result is that this QE could not have increased the balances on the central bank reserve accounts held by the commercial banks.

What we do know, however, is that those balances rose. In February 2020 they stood at £479 billion on the Bank of England balance sheet. A year later they stood at £803 billion. The increase might have looked like the increase in QE in this period, but it can’t be.

For the reasons already noted, QE could not have increased the central bank reserve account balances during this period. There was no new debt issued to or withdrawn from financial markets to make this happen during that period. So, we must be seeing something else.

We are. As the Bank of England said it would in April 2020, it was directly funding the Treasury. That is what was happening. QE operations over the last two years were little more than an a set of sham transactions intended, as ever with QE, to disguise what was really happening.

In this case the reality is that nothing has really happened in the bond market over the last two years. In March 2020 according to the Debt Management Office of HM Treasury the market value of government debt in issue was £2,219bn and 23.4% was owned by the government.

In September 2021 (the most recent data available) the market value of all gilts was £2,589bn and 33% was owned by the Treasury. Ignoring Treasury ownership debt was, then largely unchanged from £1,699bn net of government holdings in March 2020 to £1,734bn in September 2021.

So, given that QE operations take place at market rates QE is not changing the central bank reserve accounts. In that case the something that is changing them is the Bank of England simply injecting the money it creates into the economy. That is what has happened since March 2020.

To date more than £400 billion has been spent in this way. This has enormous implications. First, it says that they whole game of QE has been a charade, knowingly played by the Bank of England.

Second, it says, more importantly, that the supposed debt owing has nothing to do with the bonds supposedly issues during the course of the Covid crisis. Although by September 2021 there were supposedly £2,023 of these in issue, precisely one third were owned by the government.

As the analysis noted above implies, this means that in real terms there was no new actual debt owing by the government during this period, at all.

So, that’s where we are. Although the government claims it has issued a pile of debt that it says we cannot afford now to pay for Covid that is not true. One third of that debt is already owned by the government and so is already cancelled, in effect. And real debt has not risen.

On the remaining net debt interest rates to be paid are at record low levels, and that will remain true even if the Bank of England increases rates (as the government, bizarrely, wants it to do) over coming months.

But, publicly unacknowledged by the government and the Office for National Statistics, is the reality that the amount of money held by commercial banks on deposit with the Bank of England has increased to around £900bn, up from £42bn in 2009.

Now the government is ending QE. But is is going to run a deficit of almost £100bn next year. So it intends to issue bond of that amount. And it is stopping reinvesting the value of QE bonds when they are repaid at the end of their lives. That sum may be £25bn next year.

In other words in the next year the government will ask for around £120bn from the financial markets when it has been asking for nothing of late. Let’s put this in context. It’s almost the amount paid in VAT each year. It’s £20bn more than we spend on education.

If income tax was to be adjusted to take this sum out of the economy the basic rate of income tax would have to double from 20p in the pound to 40p in the pound. That’s how big this change is. That is what the government is planning to take out of the economy in the coming year.

The central bank reserve accounts which guarantee the safety of our banks will fall in value. Pension funds, banks, life assurance funds and others will have to find the money to buy these government bonds.

And the government is planning to increase interest rates to make the bonds, which they do not need to sell as they could do more QE instead, attractive to purchasers. So, selling these bonds has a massive real cost impact for UK households.

Let’s be clear that some households will go bankrupt or lose their homes as a result of these bond sales and the resulting interest rate rises, which will push interest rates on mortgages up.

But that is not the end of the chaos that I fear. I think the Bank of England has got this policy horribly wrong. They think that there will be no disruption in financial markets as a result of this change of plan from the Bank. I think they are wrong.

We know that share prices are historically very high. Right now the UK stock market is valued at more than thirty times the annual earnings of the companies quoted on it. Historically a rate of around fifteen times was considered fair.

In the US we have seen the threat of interest rates causing stock market mayhem before it has really happened. The value of Facebook fell $200bn in a day recently. January saw a big stock market fall in the US.

I think that as UK banks, pension funds and others begin to sell shares to buy government bonds we might see the same thing happening here. And net selling stock markets in shares can be chaotic, and even panicky.

Stock markets are good at putting prices up. They are really bad at the downside. Stock markets don’t usually descend gently, which is what the Bank of England policy demands. They tend to crash.

If at the same time banks are pushed for money as the Bank of England takes £120 billion out of the economy and the banks react by reducing mortgage lending we could see a reverse in house prices as mortgages get more difficult to get.

Perversely, this might have another consequence. To get higher interest rates on bonds the Bank of England hopes bond prices will fall, which is logical as they will be making more of them available to financial markets. But that may not happen.

When financial markets become chaotic savers tend to flock to safety. Government bonds are the safest savings account anyone can get as the UK government cannot go bust. What that means is that demand for bonds might increase by more than the amount the government wants to sell.

Perversely, what the government is planning may backfire then. So big is the demand for money it plans to make in the next year the likelihood exists that it could create market chaos and crash share prices, and increase the price of bonds so for that interest rates go down.

If this happens not only does government policy fail, but we get a crash and massive household stress all because the Bank of England wants to reverse QE, much of which was never real in the first place as it simply provided cover for direct government borrowing from the Bank.

And, remember, that even if none of this happens a sum equivalent to education spending is being taken out of the economy. That is going to have a big knock on effect, equivalent to a big tax increase. That’s enough to create a recession in itself.

So why is the Bank so desperate to reverse QE then? First, that may be because it believes its own claims that it did not fund the government, but just kept interest rates low by doing QE and now wants those rates increased to help tackle inflation.

That is perverse of course. Thinking that increasing or inflating the price of money is going to control inflation was always perverse.

Second, it may believe the figures for government debt that ignore the fact that it owns one third of that debt. Perversely, it seems to think reversing QE will reduce debt. But to achieve that they are actually increasing the debt. You could not make this up….

Third, they want to do this just because they can. They don’t like it being said that they funded the government for the last two years and so they are trying to prove they did not by being macho now. They are playing games.

But, the price of those games could be catastrophic. We already have a cost of living crisis that the government is making worse by perversely increasing taxes. Now we have the Bank wanting to destabilise the financial markets as well. They may also trigger a recession.

If the Bank is wrong and I am right (and we don’t know, but they are gambling more than I am) we get a crash at enormous cost to us all and all because of the Bank’s perverse logic that QE is ideologically wrong and must be reversed.

We cannot afford their ideological crisis right now. We need real world policy to deliver real world change. That would mean we would have to acknowledge how QE really works, and tackle the inequality side effects of it using tax.

We’d also need carefully planned policy, delivered through regulation and tax, to slowly deflate financial markets.

But what we do not need is a Bank of England and government created crash that might result in mass hardship. There is, however, real risk that this is where we might be heading unless plans are changed. We have to hope that they are.