Expanding the ways and means account. Have we become Zimbabwe? Are we going to get Zimbabwe like outcomes? No.
This is the move by HMT to instruct the BoE to loan it electronic reserves, which it can use to fund its programs, rather than having to wait for the Debt Management Office to sell gilts at its auctions.
This surprised me, as the coverage at recent auctions was good. Much more demand than supply, in other words. No doubt bouyed by knowing that the BoE would be there buying at pace in the secondary markets, so investors could carry them for a bit and sell them on.
In a literal sense it is 'monetary financing'... it's the creation of money to meet government financing needs. But it is intended, and may well prove to be temporary.
The temporariness of 'monetary financing' is sometimes moot: the BoE insisted QE would be temporary in 2009. But here we are with none of it reversed before the new tranche prompted by covid19 began.
Of course there were reasons: regulatory changes, the risk environment.. increased the demand for liquidity. Some of the asset purchases [flip side of money supply increases] could not be reversed as they were simply accommodating increases in money demand.
And the trajectory of the recovery was too weak to allow the BoE's MPC to embark on [much] monetary tightening. So the balance sheet expansion persisted.
The issue of substance at the root of this is not the temporariness of the operation, but whether it represents a subordination of monetary policy objectives in favour of fiscal objectives; or even if not whether it portends one in the future.
This of course is hard to tell. We cannot peer into anyone's souls. The government is unlikely to say 'we have subordinated monetary policy for now' even if it has. My assessment would be that what they are doing is perfectly consistent with monetary policy at the moment.
A delay in getting money to people through the covid19 support programs, or a default, could trigger a full on financial crisis, with risks of substantial deflation or inflation, and a protracted recession, neither of which would be consistent with monetary policy mandate.
So, is this the sound of helicopters whirring? No one can really say. The temporariness of the balances in the Ways and Means account will be an indicator. What the MPC choose to say about it will be another.
Of course, the reason why dipping your hungry fingers into the Ways and Means account is frowned on is partly because it is hard to to tell why you are doing it, and it is good to avoid generating the impression you are permanently monetary financing when you don't intend to.
And it's an indication therefore of the extraordinary pressures on government that niceties like 'it would be good to virtue signal to the markets that we are not monetary financing by not doing this' have to be set aside.
So back to the original question. Are we on the way to Zimbabwe. Not yet. There are perfectly good reasons to expand the overdraft on the Ways and Means account.
[Just putting it like that reminds you of one of the bad ones, which is that some benefit is derived from most people not knowing what on earth this means. It is not named 'The Helicopter Account' for a reason].
But state capacity is healthy! There is broad consent for taxes and the spending measures. The public health strategy has worked in China, is working in Italy and Spain, and it will probably work here. This has a clear consequence for good forecasts of the deficit beyond 2021:
The interegnum in tax revenues will be temporary; the surge in spending likewise. Both returned to normal levels as the lockdown is unwound.
Zimbabwe and Venezuela did not kill their tax revenues deliberately. It was an unintended consequence of incompetence, expropriation and extreme corruption, one that was very hard to reverse as it engulfed their own capacity to decide to do and to actually do things.
We are killing them deliberately. And at the same time engaging in unprecedentedly generous support schemes designed to tackle the regressive nature of the crisis and the public health strategy. That command support.
So, we are nohwere near the situation in Venezuela or Zimbabwe. Relax. Buy government bonds.
As a PS... even if what we were seeing was the first sign of the subversion of our existing monetary policy objective for fiscal priorities, would this be the end of the world as we knew it?
We have to remember that price stability is *not* an end in itself; it is a *means* to the end of our joint prosperity. Not an end in itself. And one that circumstances could well dictate has to be set aside or at least moderated to achieve the ultimate aim of govt policy.
Addendum - if the Bank and the MPC had decided to accede to a request to set aside the monetary policy mandate [the inflation target] - which I don't think it has - it should say so.
And the government should explain that it sees it like this too. The fact that neither has happened indicates that it is at least true that neither side wants to admit to this and thinks a convincing case can be made. [And they are right].
I gather from @ChrisGiles_ that Raab has just said that the BoE decided to do this 'autonomously'. This is almost certainly not true. The untruth is that they will have been instructed to do it. And will have had the option of objecting in public, but chose not to.
If the overdraft increase was thought to constitute a setting aside of the MPC's objectives, the proper way to do this would be to invoke the escape clause in the inflation target itself.
If the BoE executive or MPC thought this, the proper thing for them to do would be to insist that this clause is used.
There will be some concern that monetary policy objectives ARE being set aside, but neither the govt nor the BoE want to say that this is happening, because that might inject panic, and if it goes well no-one would be able to tell anyway. [They might be right!]
But, as I've already said, I doubt that this is what is going on.
