The cat’s out of the bag – Rachel Reeves hasn’t broken the bank but you can guess who did (again).

If you said, “bankers,” take a gold star (if you can find any gold that hasn’t been sold off at an extremely high price).

Here’s Richard Murphy:

So it turns out that the Bank of England has been doing “quantitative tightening” – selling back to the financial markets bonds that it supposedly acquired from them during the financial crises of 2008 and 2020 (but actually didn’t – the government told the Bank to whip up money quick and this was done using the fiction of buying bonds that had been issued by the government).

There is no reason for these bonds to be sold to the markets – except in order to keep interest rates above the rate of inflation, which is a priority for the Bank of England and nobody else. They’re reinforcing the rate of interest by selling the bonds – £100 billion worth of them this year.

The money won’t fund government spending but will be removed from the private sector economy. The private sector doesn’t want to buy this many bonds, so it needs an incentive – and the incentive is a high interest rate.

Worse still, because bond prices and interest rates work as an inverse of each other, the cost of the bonds themselves will be low. So it will be making large losses for the government on the sale.

The sale will stop the private sector from investing the money elsewhere – harming growth (although Gary Stevenson might welcome the removal of private money from asset accumulation?).

It artificially raises interest rates, which means the cost of government borrowing has risen – it is the Bank of England that is responsible for this trap into which Rachel Reeves and her Treasury have fallen.

So now Reeves will find it much more difficult to balance her books – even though we all know that she doesn’t really need to do that in any case.

The upshot is that Reeves is now under pressure to impose austerity – spending cuts, meaning less growth, less tax revenue and less chance of the government balancing its books.

All Reeves has to do is tell the Bank of England to stop selling the bonds – and then the whole problem will go away.

Under the Bank of England Act 1998, she can overrule the Bank’s policy if she feels it is in the national interest to do so.

But she won’t because she’s afraid of the Bank of England.

She needs to grow a backbone.

And one more thing:

Isn’t it funny how this vital information is not made available to us when these stories break?

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