The Bank of England ‘losses’ are meaningless and should never be used to justify fiscal austerity

We really get to see how absurd humanity can be when put in a neoliberal ideological straitjacket when we see serious discussion by serious and educated people about the government paying itself back for losses it makes by loaning itself currency that it issues as a monopolist. They conduct these conversations through the lens of complicated accounting structures that try to obscure what is actually going on and then invite political commentary from others that have no real idea of what is going on yet feel empowered or arrogant enough to offer all sorts of catastrophic scenarios about the consequences of what is essentially nothing at all. Once one sees through the nonsense it becomes clear that these ruses are just smokescreens for conservatives trying to cut fiscal spending and damage the prospects for those most in need of government support.

The financial media has been going agog about the reports of growing Bank of England ‘losses’ on its balance sheet as a result of the declining market value of the government bonds it is holding after its bond-buying program.

All sort of doomsayers are out in force predicting bad outcomes for ‘taxpayers’ in Britain.

It is in fact a monumental farce but one that is being weaponised by the mainstream economists and politicians to provide another ‘justification’ for unwarranted fiscal cutbacks.

On April 28, 2023, the Governor of the Bank of England exchanged letters with the Chancellor about the Asset Purchase Facility.

1. Letter from the Governor to the Chancellor.

2. Letter from the Chancellor to the Governor.

It is all cute right-pocket-government to left-pocket-government stuff in essence.

The Governor (left-pocket) told the Chancellor (right-pocket) that the Bank of England:

… holds a stock of high quality assets within the Asset Purchase Facility (APF), arising from activities in support of its statutory objectives.

Yes the Bank bought up lots of government bonds issued by the Chancellor to the value (at the time the letter was written) of £815.3 billion on top of £6 billion of corporate bonds.

The Governor said these purchases were “for monetary policy purposes” by which he means that the Bank used its infinite-minus-a-penny currency capacity to dominate the gilts market and suppress bond yields to near zero and maintain interest rates at near zero.

Of course, the bond purchases were only necessary to achieve this end because they had been issued in the first place.

The Chancellor did not need to issue the bonds as he can spend what he likes using the currency capacity it holds (through its left-pocket).

If the government had not issued the debt then the Bank could have achieved zero interest rates simply by leaving the excess reserves in the system and not paying any support rate on them.

By July 19, 2023, the holdings had fallen to £8.04 billion as a result of the so-called ‘unwinding’ operation – reselling bonds back to private market investors in addition to a proportion of the stock ‘maturing’ – that is, being repaid the face value of the gilt by the issuer (right-pocket).

The Governor then reminded the Chancellor that:

… the Bank and HMT agreed in 2012 to transfer coupon payments received by the APF, net of interest costs and other expenses, to the Exchequer

Which means the Bank (left-pocket) would get maturity payments from HMT (Treasury or right-pocket) and would then give them back.

So between 2013 and September 2022 “around £123bn of cash transfers were made from the APF to HMT”.

Left-pocket to right-pocket.

He then reminded the Chancellor that:

It was also recognised that it was likely that these cash flows would need to be reversed, with payments being made, on a timely basis, from the Government to the APF in order to meet the terms of the indemnity as Bank Rate rose …

Which means that because the Bank (left-pocket) was pushing up interest rates in a misguided attack on inflation that was being driven by factors not particularly sensitive to interest rate changes, the market value of the bond holdings fell

Why did the market value of the gilts fall?

There is an inverse relationship between the bond yield and its market value.

A bond is issued with a ‘coupon value’ – say at £1 million and a maturity date – say 10 years.

It also has a yield built into the coupon – say 10 per cent (to make arithmetic easy).

So for the 10 years that the bond is outstanding, the government pays the holder £100,000 per year (10 per cent of a million) and at the end of the 10 years whoever is holding the bond gets £1 million back.

However, the bond trades in the secondary bond market.

So investors consider the £100,000 per year return for 10 years in relation to alternative asset investments.

If interest rates in the open market rise to say 15 per cent, then that fixed £100,000 per year will not be competitive unless the price the bond trades at in the secondary market falls to £666,667 (100,000 on that would be a 15 per cent return).

In other words, the market value of the stock of gilts held by the Bank of England will decline as they hike interest rates.

That doesn’t mean the value they will receive on maturity declines (the coupon). That is fixed in the terms of the bond issue.

But what the Governor was noting was that under these elaborate right-pocket/left-pocket arrangements, as a result of the interest rate hikes:

… quarterly transfers from HMT to the APF have taken place: the first occurred in October 2022, and the second in January 2023.

Right-pocket to left-pocket rather than left-pocket to right-pocket.

It reads like a Monty Python script.

Most recently, after the Bank decided to start selling its bond holdings into the secondary market, it has estimated that the loss it will make on the book value of those bonds will be around £150 billion onver the next 10 years, a 50 per cent increase on its earlier (April 2023) guess.

The losses will probably increase given the Bank governor’s obsessive:

We are not desiring a recession but we will do what is necessary to bring inflation down.

In other words, in his own logic and economic framework, he is intent of causing a recession.

The upshot of these new estimates though is that the Treasury is required to transfer cash to the Bank as part of the indemnity against losses.

So you get the picture:

1. The Bank goes feral pushing up rates until it melts the economy down.

2. That obsession reduces book values of government bonds it has on its balance sheets.

3. The Bank insists on selling those assets at a ‘book’ loss even though it could just flick a computer key and write them off completely with no further consequence.

4. As a result of those losses, and ‘agreements’ with itself (Bank as part of government with Treasury as part of government), the Treasury has to pay the Bank cash to cover the losses, even though the Bank can flick a key and come up with infinity-minus-a-penny in cash.

5. Then the Treasury informs the British people that it is broke and has to cut welfare spending which damages real people who are already fragile.

That is what is happening.

The so-called progressive National Institute of Economic and Social Research bought into the farce claiming (Source):

… it was “increasingly clear” that losses on the BoE QE scheme would act as a constraint on fiscal policy

The asinine Daily Telegraph claimed in its article (February 25, 2023) – Taxpayers on the hook for up to £200bn over Bank of England money-printing losses – that:

The Treasury began bailing out the Bank for losses suffered from QE …

And more.

Government bailing itself out.

The currency-issuer bailing out the currency-issuer.

Right-pocket getting help from left-pocket.

The fact is that the Bank of England is not a private corporation that must operate under strict solvency rules.

The Bank of England could operate into perpetuity with negative capital if it chose.

The losses are meaningless from the perspective of the government being able to meet spending aspirations.

There are no spending cutbacks that necessarily follow from these ‘book’ losses.


All the posturing is politics and ideology.

The problem, though, is that the application of the politics will end up damaging those most in need of government support, which is the usual outcome that follows these nonsensical procedures.

That is enough for today!

(c) Copyright 2023 William Mitchell. All Rights Reserved.

This Post Has 4 Comments

  1. “Bank as part of government with Treasury as part of government”

    The relationship is even closer than that. As the Bank says:

    The capital of the Bank is held by the Treasury Solicitor on behalf of HM Treasury.

    Although we are owned by HM Treasury, we carry out our responsibilities independently. We’re free from day-to-day political influence.

    So the Bank of England is a subsidiary of HM Treasury which means all this back and forth wouldn’t even show up on the consolidated financial statements of HM Treasury prepared under IFRS 10. We don’t even need to consider the wider government sector.

    Clueless commentators are getting excited about inter-departmental accounting entries that would disappear on consolidation.

    You couldn’t make it up.

  2. Thank you, Bill.
    Provides very helpful ammunition for any debate resulting from this debacle.
    Best, MrS

  3. You are absolutely right that the question with the BoE is not about losses.
    If the BoE keeps “printing” pounds, for the sole purpose of keeping the elites happy (so they can hold enough assets to stay rich), they will keep INFLATING bubbles.
    The only private business guaranteed safe now is real estate, and so we have this bubble that inflates and bursts every ten years or so.
    When it bursts, you have losses in assets value and inflation fallout to offset the losses of the rich.
    But then, we have a problem.
    Inflation affects everybody, rich and poor, unless…
    Unless the government interferes and transfers the brunt of the cost of inflation to the middle and lower classes.
    That’s exactly what the elites are saying to the British government: make them pay!

  4. “Printing” and selling bonds is a relic of gold as de facto money. Under a fiat currency regime bond sales have no practical effect beyond giving households and firms the option of holding a mix of cash and bonds in their financial asset portfolio.

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