If only our rulers understood QE

Sadly, that headline could also be “If only our rulers understood (insert issue of your choice)”.

Here it’s about losses on quantitative easing:

In 2012 Osborne transferred profits from the scheme to the Treasury, lowering the Exchequer’s borrowing requirements – but agreeing, as part of this deal, to also bear the weight of any losses in future.

However, higher interest rates and lower bond values mean the Bank is now losing money on the scheme.

As a result, in the past year the Treasury has transferred £44bn to the Bank to cover the losses. The Office for Budget Responsibility (OBR) expects an overall net cost to the public purse of more than £100bn.

Of course, £100 billion here, £100 billion there, pretty soon you’re talking real money. It is also possible to think that £100 billion as a once off cost for avoiding another Great Depression is a bit of a bargain.

But the specific that is being whined about here. The difference between holding a bond to maturity and selling it off so as to crystallise the loss.

Conservative MPs are demanding that the current chancellor, Jeremy Hunt, reassesses the system and pushes the Bank of England to stop selling bonds at a loss.

Greg Smith, chairman of Conservative Way Forward, said: “It’s not at all clear why the Bank is choosing to sell billions of pounds worth of bonds a year into the market, taking larger losses than would be incurred if they simply held them to maturity.

Selling the bonds doesn’t - barring a slight margin because of uncertainty about the future - change the loss. The loss exists, it is there. For currently the Bank is paying 5.25% on those central bank reserves the banks hold. And is receiving perhaps 0.5% or whatever in interest on the gilts it holds as part of that QE. The difference, that 4.75% a year, is the loss.

It’s possible to take that loss as a cashflow between now and the maturity of the bonds. It’s possible to take that loss as a capital sum right now - and the loss is, by and large, the difference between 0.5 and 5.25% over the remaining years of the life of the bond.

That is, the loss has happened because interest rates have changed. How it’s recognised makes no difference to the fact that it has happened.

We tend to think it would be helpful if those who ruled us grasped this. Money printer go brrr has its costs.

Of course, it is possible to reduce the amount of those central bank reserves held by the banks and thus the amount that the Bank is paying 5.25% upon. Something which is achieved by selling the QE bonds back to the banks…….which crystallises the loss. For the loss exists, it’s real, it has already happened.