Current UK monetary policy

I can't see any mention on the BBS of the massive change to the monetary governance of the UK which has just been announced. Instead of issuing bonds to raise money, the government will be funded directly by the Bank of England on an unlimited basis.

Here is an article from an investment publication discussing this:

Quote:

Well that didn’t take long. With the prime minister incapacitated, the Bank of England governor has made its move. The governator, as he should be known henceforth, is now financing the government directly, without the government having to issue bonds. The wonderfully named “Ways and Means Facility” will be expanded to allow the government to spend money it hasn’t borrowed yet. It’s a bit like an overdraft facility for the Treasury at the Bank of England. The caveats make for a longer read than the policy itself. Politicians' favourite words are all over the new policy: “temporary”, “short term”, “temporary and short-term” together, “undisclosed amount”, “extraordinary” and claims they’d been doing it all along anyway, so nothing to see here. Just days earlier, with Boris Johnson still available on video conferencing, the BoE governator had a very different tone. He explained in a Financial Times opinion piece, perhaps exposing the nature of “opinions”, how “the UK’s institutional safeguards rule out” what he called “monetary financing”, which is an “expansion of the central bank balance sheet with the aim of funding the government”. Four days later, the FT’s top story reads “The Bank of England will directly finance the extra spending needs of the UK government”… The loophole is an old one. There are a few loopholes, actually. Because the BoE’s policy of financing the government directly is temporary, and because it’s always been around, it’s nothing to be worried about. But a lot of today’s government policies were once described as “temporary” when they were brought in. And the fact that the government has been doing something for a long time is no less of a problem if it is suddenly doing vastly more of it. How much more? (This is my favourite bit.) In a statement to financial markets, the government announced it would extend the size of the government’s bank account at the central bank, known historically as the “Ways and Means Facility,” which normally stands at just £400m. This will rise to an undisclosed amount, allowing ministers to spend more in the short term without having to tap the gilts market. In 2008, a similar move saw the Ways and Means Facility rise briefly to £20bn. Did you get that? The central bank is financing the government to an “undisclosed amount” which won’t show up in the bond markets. But don’t worry, the “undisclosed amount” will be temporary… How temporary is also undisclosed. Although the programme under which all this takes place – the Ways and Means Facility – isn’t temporary at all, so there’s nothing to worry about. A temporary increase of an undisclosed amount in a permanent policy? This is a contradictory combination of fudges. It undermines the basic accountability of government. The government is having its cake, eating it, not paying for it and not telling anyone how much cake. But we needn’t worry… Strangely enough, there are two versions of the FT article which I’m quoting from. The newer version has removed the reference to “undisclosed amount” and replaced it with “unlimited amount”. That’s reassuring too then… On to the second loophole. The governator also explained how doing exactly the same thing could have two different outcomes depending on how you justified it. This is the sort of argument I expect to pop up when my daughter turns 14. But let’s go with the BoE’s version. Because the BoE is governed by law that requires it to focus on financial stability and inflation of 2%, its own monetary financing won’t lead to runaway inflation. Despite it pursuing exactly the same policy as those who were explicitly trying to finance the government, which did lead to inflation. You see, it doesn’t matter what you do, it matters what you intend to do… This part of the governator’s opinion piece made me laugh out loud: “Our framework also recognises that the effects of monetary policy on the real economy are ultimately temporary.” Tell that to those who have experienced high inflation… But here’s the interesting bit. The part of the BoE’s policy that is getting all the attention today was carefully not mentioned by the governator in his opinion piece which explained why our central bank wouldn’t finance the government. On 5 April he listed the ways in which the BoE implements policy and how this wouldn’t lead to (deliberate) financing of the government. But he didn’t mention the Ways and Means Facility which was activated today. Why? Because it does finance the government – its primary purpose. It has nothing to do with managing inflation or bond markets. Four days later, now that it’s doing it, it’s been doing it all along... Four days ago, it wasn’t doing it, because it would be illegal and lead to inflation… Which brings us to my point today. The news from the BoE and the Treasury has kicked off a debate about Modern Monetary Theory. MMTers believe that the government need not borrow, repay debt or tax in order to spend money. Because the government can issue money itself, or get the central bank to do it for them, government finances are an abstraction. Just as you can keep a Monopoly game going by dishing out money, so too can the government keep the economy going. That’s the background to MMT. Today’s critics are in uproar about how the BoE has implemented MMT, without the prime minister being in place to know about it, let alone his approval. It’s just gone and done it. Critics argue that, because the Ways and Means Facility has always been around, it’s not MMT at all. It’s normal functioning of the BoE. The irony is, they’re both right. Or, to be strict about it, the MMT claim that we already live in a world of MMT is correct. We just didn’t realise it until now, when we needed to because of a crisis. In a world where the central bank can create money willy-nilly, because money isn’t backed by anything real like gold, money really is just a policy tool. It can be fiddled with however governments like. MMT, first and foremost, is a description of how the world already works, not how we should change it. This has been true since the Nixon shock, which closed the gold window. We’ve been living in the world MMT describes since then. It’s just that most of us never realised it. And didn’t realise what it means. The policies it makes possible. Now, with a crisis on our hands, governments are breaking sacrosanct rules of the past, only to discover that MMT did accurately describe how and why those rules could be broken all along. That those rules were from a different monetary era. When gold made breaking the rules impossible. The BoE and Treasury aren’t launching MMT. They’re discovering they can use their powers as MMTers have advocated for years, despite denying MMT is correct... This isn’t good news. It’s just true. It exposes why money needs to be backed by something and outside the government’s powers. But that probably sounds bonkers to you, despite the UK still having about ten different note-issuing banks – evidence that private banks used to control money, not the government, in much of the UK. The good news is, in his denial that he would ever do what he decided to do four days later, the BoE governator described what the consequences of his new policy would be: This type of reserve creation has been linked in other countries to runaway inflation. That is because it could undermine a central bank’s ability to control monetary conditions over the medium term. Using monetary financing would damage credibility on controlling inflation by eroding operational independence. It would also ultimately result in an unsustainable central bank balance sheet and is incompatible with the pursuit of an inflation target by an independent central bank. Now that we’re using monetary financing, to an undisclosed and/or unlimited extent, depending on when you opened the FT article, even if on a “temporary” basis, we’re on course for inflation. And then, the BoE will have to make a terrifying choice – does it finance the government or abide by inflation targeting? Because the two are “incompatible”, as the governator explained. What do you think he’ll choose?