“This means that there is just a single account held by the government at the BoE which has a non-zero balance at the end of the day, which makes clear the position of the government with respect to the BoE”
Are you stating It’s the National Loans Fund (NLF), my understanding is the NLF also ends each day with a nil balance at BoE, any cash surpluses or deficits are offset by transfers to or from the DMA.
Thanks for the incisive comment. Yes, that's my understanding too.
I hope it didn't come across as misleading. My aim is to follow the structure of the BTW paper, which doesn't deal with the DMA until chapter 6, where it shows the final stage of the sweep from the NLF to the DMA. I've been trying to avoid saying anything incorrect, without suggesting at this point that there's an extra step. I thought this approach worked well when I originally read the paper a couple of years ago.
It seems to me the argument the authors are making is the ‘intra-day’ crediting of reserve accounts is an expansion of BoE liabilities and an expansion of the money supply, rather than the first step in a two step process of value transfer, which the BoE achieves via a Liability Swap between any two accounts in the BoE ledger. The authors are only giving us half the sandwich!
Forensically, I’ll concede every credit and every debit is a change in total outstanding BoE Liabilities, but if the end of day BoE balances with the Gov/Treasury show the same total outstanding BoE Liabilities, then there is no expansion of total Liabilities or reserve account credits to cover Treasury spending, and there is no net increase in reserves. The BoE is not creating money for the Treasury to spend.
If the BoE crediting the reserve accounts of banks of Gov payees is directly offset by Gov/Treasury reserves already on deposit in the NLA or simply any Treasury account on the BoE Ledger, then the payment is a BoE liability swap, and not a loan where the BoE ‘lends’ to Treasury, and not new net reserve creation. If there is no loan from the BoE to the Treasury, which we can determine by finding the correlated new BoE asset to the new BoE liability, if there is no increase in the BoE balance sheet or BS expansion, then there is no lending, and no new net reserves and no expansion of the money supply, the BoE is not creating new reserves ‘for’ the Treasury to spend, or lending new reserves to Treasury to spend, the BoE is transferring existing reserves from one Treasury account to the reserve account of the bank of the Gov payees.
Their argument is akin to saying when the coach sends in a substitute player on the pitch, and he taps and pulls off a player already on the field, was the team playing with twelve men?
Forensically, we can observe there were twelve men on the field, but this was a temporary state that resets back to 11 men.
In banking, we use the updated end of day state, where the BoE first debits for payments the appropriate Gov accounts where reserves are already on deposit, and only if the Treasury is short does the BoE lend those balances to Treasury on the Ways and Means facility, the Treasury Credit Line. If the definition of the BoE printing money is inter-day new Net Reserves, then the BoE has not created new reserves for the Treasury to borrow or spend in 17 years.
“This means that there is just a single account held by the government at the BoE which has a non-zero balance at the end of the day, which makes clear the position of the government with respect to the BoE”
Are you stating It’s the National Loans Fund (NLF), my understanding is the NLF also ends each day with a nil balance at BoE, any cash surpluses or deficits are offset by transfers to or from the DMA.
Thanks for the incisive comment. Yes, that's my understanding too.
I hope it didn't come across as misleading. My aim is to follow the structure of the BTW paper, which doesn't deal with the DMA until chapter 6, where it shows the final stage of the sweep from the NLF to the DMA. I've been trying to avoid saying anything incorrect, without suggesting at this point that there's an extra step. I thought this approach worked well when I originally read the paper a couple of years ago.
Awesome job Chris!
It seems to me the argument the authors are making is the ‘intra-day’ crediting of reserve accounts is an expansion of BoE liabilities and an expansion of the money supply, rather than the first step in a two step process of value transfer, which the BoE achieves via a Liability Swap between any two accounts in the BoE ledger. The authors are only giving us half the sandwich!
Forensically, I’ll concede every credit and every debit is a change in total outstanding BoE Liabilities, but if the end of day BoE balances with the Gov/Treasury show the same total outstanding BoE Liabilities, then there is no expansion of total Liabilities or reserve account credits to cover Treasury spending, and there is no net increase in reserves. The BoE is not creating money for the Treasury to spend.
If the BoE crediting the reserve accounts of banks of Gov payees is directly offset by Gov/Treasury reserves already on deposit in the NLA or simply any Treasury account on the BoE Ledger, then the payment is a BoE liability swap, and not a loan where the BoE ‘lends’ to Treasury, and not new net reserve creation. If there is no loan from the BoE to the Treasury, which we can determine by finding the correlated new BoE asset to the new BoE liability, if there is no increase in the BoE balance sheet or BS expansion, then there is no lending, and no new net reserves and no expansion of the money supply, the BoE is not creating new reserves ‘for’ the Treasury to spend, or lending new reserves to Treasury to spend, the BoE is transferring existing reserves from one Treasury account to the reserve account of the bank of the Gov payees.
Their argument is akin to saying when the coach sends in a substitute player on the pitch, and he taps and pulls off a player already on the field, was the team playing with twelve men?
Forensically, we can observe there were twelve men on the field, but this was a temporary state that resets back to 11 men.
In banking, we use the updated end of day state, where the BoE first debits for payments the appropriate Gov accounts where reserves are already on deposit, and only if the Treasury is short does the BoE lend those balances to Treasury on the Ways and Means facility, the Treasury Credit Line. If the definition of the BoE printing money is inter-day new Net Reserves, then the BoE has not created new reserves for the Treasury to borrow or spend in 17 years.