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To Explain, Again, Why Richard Murphy Is Wrong About QE

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Richard Murphy tries to tell us, again, that we don’t really have a growing national debt. Because QE means that government owes money to itself and this nets out and so keep spending boys!

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.

Nope. As Murphy tells us:

To date none have ever been sold back to the financial markets

A certain amount of weight is being put on that “to date”. Too much in fact.

It is, of course, possible that those gilts will not be sold back into the market. It’s probable that not all of them will. But it’s also possible – I would say damn certain, but that’s an opinion, not a fact – that some of them will be.

This being the point of doing this this way. So that the new money creation can be reversed if reversing the new money creation seems like a good idea at some point in the future.

We also have an example of people having done this.

In a May 2018 Dialogue with the Fed presentation, Waller explained that the Fed is taking a capped, controlled approach to unwinding its balance sheet: letting Treasury securities “run off” at about $6 billion a month and letting mortgage-backed securities run off at about $4 billion a month. “And then it’s going to increase at every three months,” he said, “to where there’s a maximum of $30 billion a month in Treasuries running off, and $20 billion a month in mortgage-backed securities” running off.

“So, effectively we’re increasing the supply on the market of U.S. Treasuries,” Waller continued. “We’re letting the supply of U.S. Treasuries in the hands of the private sector grow.”

Or, in graphic form:

That decline in the balance sheet in 2018 and 2019. That’s bonds being sold back to the market. Or, more specifically, bonds that mature not being replaced with more bonds but the money being stuck back in the Fed’s basement and destroyed.

What Spud wants to tell us is that those bonds will never be sold back to the market. Therefore the total public debt is lower than the headline one. But the entire point of doing QE is to be able to reverse it if and when. Thus the bonds are still a liability. Further, the bonds haven’t been cancelled because the very point of the exercise is to be able to sell them back to the market if desired at some point.

Murphy then goes on to tell us that there’s a better way of determining the government’s debt position, the Whole of government accounts:

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.

OK, cool. So what is the state of liabilities in those entirely and wholly correct government accounts?

On the Statement of Financial Position, WGA shows total assets of £2,098.8 billion
(2017-18: £2,013.8 billion restated), and liabilities of £4,554.6 billion (2017-18:
£4,579.2 billion restated).

Call that £2.5 trillion of net debt among friends. That is, the Whole of Government basis for the accounts shows a higher national debt even if not a higher National Debt. This is not evidence in favour of Murphy’s insistence that we can just spend, spend, spend.

As Murphy concludes:

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.

Nope. Because we might sell them off in the future. Which is why we’ve done QE in this fashion in the first place, this is the whole point of doing QE rather than just printing and spending the money.

Murphy’s insistence that they’re cancelled ignores the reason why we’ve done it all in the first place – which ain’t a good start to an analysis when you come to think of it.

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  1. I recall Murphy telling us that if government runs a deficit for long enough, this will raise GDP because of the multiplier effect and eventually tax revenues will increase to the point that there won’t be a deficit. What would he do then?

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expunct (ɪkˈspʌŋkt)
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2. to wipe out or destroy

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