Thread by @Frank_vanlerven, The @bankofengland has today announced yet another measure

The @bankofengland has today announced yet another measure - the extension of the ways and means facility...

But WTF does this all mean?

Here are some thoughts and tools that might help on what the BoE is doing and the implications...
1/18

In our working paper, @jryancollins and I develop a typology of forms of fiscal-monetary coordination that includes both direct and less direct forms of monetary financing, illustrating this with case-study examples. https://www.ucl.ac.uk/bartlett/public-purpose/sites/public-purpose/files/iipp-wp-2018-08.pdf
2/18

(We also review holdings of gov debt by central banks+commercial banks as a proxy for fiscal-monetary coordination. We show it is often neglected that many central banks successfully supported industrial policy objectives, managed public debt w/out excessive inflation).
3/18

The extension of the ways and means by the BoE amounts to type 2b in our typology. Up until the year 2000, when EU law forced its cessation, the UK government financed a proportion of its spending through an overdraft facility at the BoE known as the Ways and Means account.
4/18

When used to cover the gov's new spending, the liabilities of the BoE (i.e. central bank reserves) increase, creating a form of new money in the process, just as the use of an overdraft at a commercial bank creates money by increasing deposit liabilities. BoE explains

5/18

When used to cover the gov's new spending, the liabilities of the BoE (i.e. central bank reserves) increase, creating a form of new money in the process, just as the use of an overdraft at a commercial bank creates money by increasing deposit liabilities. BoE explains 5/18

Using ways and means was relatively normal policy up until 2000. While, advances were only meant to be temporary, with repayments made as either tax receipts came in or bonds were issued, a significant sum remained outstanding at all times (more on why this matters below).
6/18

The provision of short-term liquidity – or ‘public overdraft’ facilities – to governments in terms of day to-day spending has long been an accepted role of central banks and is still widely practised today, with the exception of the EU member states.
https://www.imf.org/external/pubs/ft/wp/2012/wp1216.pdf
7/18

Indeed, the @bankofengland has traditionally been the fiscal agent of the government, this was the norm not the exception.

From 1100s to 1826 the crown was partly financed via creation of tally sticks (a form of currency) to make payments that were redeemed against taxes.
8/18

Sayers shows that from 1890 to 1914 - the @bankofengland lent directly to businesses but also helped support a nuber of government bodies throughout UK empire...
9/18

Cappie, Sayers, and Cerratano show that from 1914-1945 the Bank became heavily involved in the economy. Not just providing ailing liquidity to firms but also guaranteeing bond issues and loans.
10/18

The Bank from 1950s, started the Finance Corporation for Industry (lending big corporates), Industrial Commercial Financial Corporation, Equity Capital for Industry and Agricultural Mortgage Corporation - to help companies raise finance that couldn't via normal channels.
11/18

From helping bailout Rolls Royce and Burma oil in the 1970s, to Bradford and Bingley, to recent QE operations, there is a number of examples of different ways in which the @bankofengland and @hmtreasury cooperated.
12/18

But these operations have different implications for balance sheet position of different sectors (with consequences for debt servicing burden of the gov, and income + financial position of private sector). I tried to highlight in earlier paper.
13/18
http://positivemoney.org/wp-content/uploads/2016/04/Public-Money-Creation-2.pdf

The amount of gov debt held by the BoE, will not enter the government budget constraint and will not count towards the long-term net debt-servicing burden. The longer the BoE holds government debt, the closer to a fiscal operation it becomes (QE, monetary policy or not).
14/18

When the BoE holds gov debt “temporarily” on its balance sheet, it has financed government spending temporarily. Once the BoE stops holding the gov debt on its, i.e. stops rolling it over, gov's debt servicing burden to the private sector will have increased.
15/18

When BoE money is created to finance new government spending, private sector incomes will automatically increase
without increasing the private sector’s level of debt. It amount to a direct injection of new income into the private sector.
16/18

But if new money is created to finance private lending, the private sector’s assets (bank deposits) would increase but so would its liabilities (debt obligations). Throughout these transactions, the private sector’s balance of net financial assets has not increased.
17/18

It is therefore necessary to further deconstruct the private sector, to better understand; 1) what types of assets the private sector is holding, and 2) how assets and liabilities are distributed amongst households and businesses.
18/18

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