Asset Purchase Facility

Discussion in 'Politics & The Economy' started by fluxo, Feb 25, 2014.

  1. fluxo

    fluxo
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    Firstly: I am by no means a specialist in financial matters. So this is my strictly amateur investigation into what is going on. There may be, therefore, errors in what I have posted below. I am also not sure about a few things, but for brevity I will not mention those few things for now.

    Let's start, then. When an organization acquires hundreds of billions of pounds of government debt, that is obviously something very important and may have implications for all of us. I had, therefore, been intending for a while to take a look into the Bank of England's (BoE's) Asset Purchase Facility (APF) through which quantitative easing (QE) is accomplished. This post contains some of the information I have discovered and perhaps you would find it interesting to discuss what it means.

    The BoE's introductory remarks on the APF:

    "In January 2009, the Chancellor of the Exchequer authorised the Bank to set up an Asset Purchase Facility (APF) to buy high-quality assets financed by the issue of Treasury bills and the DMO’s cash management operations. The aim of the Facility was to improve liquidity in credit markets."

    In simple language, the BoE's APF buys government debt (gilts) and now holds about £374 billion of that debt. The aggregate holdings are, apparently, listed in this Excel format document. From which:

    Code:
    GB00B29WRG55	UKT_4.5_070313	6110.7
    GB0008921883	UKT_8_270913	1556.9
    GB00B3KJDW09	UKT_2.25_070314	8232.
    GB0031829509	UKT_5_070914	12716.4
    GB00B4LFZR36	UKT_2.75_220115	4084.
    GB0033280339	UKT_4.75_070915	15092.5
    GB0008881541	UKT_8_071215	4715.9
    GB00B3QCG246	UKT_2_220116	7980.9
    GB00B0V3WX43	UKT_4_070916	11042.1
    GB00B3Z3K594	UKT_1.75_220117	11155.8
    GB0008931148	UKT_8.75_250817	4537.5
    GB00B7F9S958	UKT_1_070917	3306.1
    GB00B1VWPC84	UKT_5_070318	15516.
    GB00B8KP6M44	UKT_1.25_220718	416.2
    GB00B39R3F84	UKT_4.5_070319	16879.9
    GB00B4YRFP41	UKT_3.75_070919	11264.7
    GB00B058DQ55	UKT_4.75_070320	13139.
    GB00B582JV65	UKT_3.75_070920	3866.
    GB0009997999	UKT_8_070621	11284.8
    GB00B4RMG977	UKT_3.75_070921	6702.9
    GB00B3KJDQ49	UKT_4_070322	23080.8
    GB00B7L9SL19	UKT_1.75_070922	2172.1
    GB0030880693	UKT_5_070325	16300.7
    GB00B16NNR78	UKT_4.25_071227	16441.6
    GB0002404191	UKT_6_071228	7725.5
    GB00B24FF097	UKT_4.75_071230	11627.3
    GB0004893086	UKT_4.25_070632	14099.8
    GB00B52WS153	UKT_4.5_070934	7483.2
    GB0032452392	UKT_4.25_070336	5565.4
    GB00B00NY175	UKT_4.75_071238	7993.8
    GB00B3KJDS62	UKT_4.25_070939	6141.4
    GB00B6460505	UKT_4.25_071240	7280.7
    GB00B1VWPJ53	UKT_4.5_071242	7021.2
    GB00B84Z9V04	UKT_3.25_220144	628.
    GB00B128DP45	UKT_4.25_071246	4793.7
    GB00B39R3707	UKT_4.25_071249	4990.1
    GB00B6RNH572	UKT_3.75_220752	6031.2
    GB00B06YGN05	UKT_4.25_071255	8099.6
    GB00B54QLM75	UKT_4_220160	7099.6
    GB00BBJNQY21	UKT_3.5_220768	26.8
    
    In that table the first column contains the ISIN (International Securities Identification Number). The second column contains a string of the form "X_Y_Z". X is always "UKT" = UK Treasury? Y is the coupon rate of the gilt. Z is the maturity date. A time series of BoE gilt purchases can be found here. If those are the current holdings of the BoE, then the government would be expected to transfer coupon payments to the BoE (i.e., pay interest on their debt). But actually, the BoE is giving the money straight back to the government:

    "Since 2009 the Bank of England has operated QE by buying gilts and holding them in a dedicated facility called the Asset Purchase Facility (APF). These gilts attract regular coupon payments from the Exchequer. […]

    From now on this excess cash will be transferred to the Exchequer on a regular basis. […]

    These changes will end the current arrangement which requires the Government to borrow money to fund coupon payments to the Bank of England. Holding large amounts of cash in the APF is economically inefficient as it requires the Government to borrow money to fund these coupon payments."


    According to the BBC:

    "This is likely to reduce the government's budget deficit by about £11bn a year"

    But it's not necessarily "free money":

    "At some point in the future, as monetary conditions normalise, it is likely that the cash flows will need to be reversed. Return payments from the Government to the APF may be necessary to meet shortfalls in the APF’s net income as the Bank Rate rises, or capital losses on its gilt holdings as the Monetary Policy Committee unwinds QE. The previous Government agreed that any future losses incurred by the APF will be met in full by the Government. For this reason, any net coupon income transferred from the APF to the Exchequer should be used solely to pay down government debt."

    Again, quoted from here.

    Summary: The government borrows money by issuing gilts. The gilts attract coupon payments. The goverment makes those payments to the Bank of England. The Bank of England then gives the money back to the government. The government then uses the money to pay off some of the debt it took on in the first place (intake of breath!). And then, at some future point in time, the government may have to borrow more money to hand back the coupon money to the Bank of England so that the BoE does not make a loss when it asks the government to pay the BoE the gilt redemption value (assuming the gilts have not been sold to a third party). Does that need a diagram? :)

    There's some discussion of the difficulties involved in the Financial Times.

    Finally, it is interesting to note that the APF holdings in the table above include gilts that have already reached their maturity date (last year). What is going to happen to those now?

    Cheers.
     
  2. karkus30

    karkus30
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    They roll over the debt by issuing new bonds to replace the previous ones as they mature.
     
  3. Stuey1

    Stuey1
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    Which if I understand correctly is similar in principle to a GIANT Ponzi scheme :)

    They have to issue bigger and bigger bonds to pay off the old ones.

    If there was only £1 in existence and the government borrowed it and promised to pay back with interest they would have to borrow the extra £s to cover the interest?

    and those extra £s are created by the bank of england and loaned to the treasury and sold as bonds?

    It's all way over my head to be honest - but I watched a documentary on netflix called:
    End of the Road
    (End of the Road: How Money Became Worthless)
    I'm not sure how factual it is, but if it is correct then what is going on is pretty scary to say the least. So if anyone with a netflix account and some understanding of this is willing to watch it and explain if there are any flaws in the thinking/explanations?
     
    Last edited: Feb 25, 2014
  4. karkus30

    karkus30
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    I couldn't possibly comment. :) how can it possibly be a Ponzi scheme when it has Government backing and lawful assent ?
     
  5. fluxo

    fluxo
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    Kafka's "indefinite postponement"? ;)

    Richard Murphy (who I don't necessarily agree with) suggested the government debt held by the BoE could and should be written off (debt amnesty solution). If they did that in a very complicated way, perhaps no one would notice - the APF hardly attracts much attention in the mainstream media as it is. And looking at the table above, some of the maturity dates are a long way off (last listed date is in 2068).
     
    Last edited: Feb 25, 2014
  6. Stuey1

    Stuey1
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    I suppose by definition it can still be classed as a ponzi scheme:

    "A Ponzi scheme is a fraudulent investment operation that pays returns to its investors from existing capital or new capital paid by new investors"

    In which the new investors are the BoE (every time with increasingly bigger bonds), all with the promise of repayment by the taxpayer?
     
  7. karkus30

    karkus30
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    It really is just fluff. RM assumes the role of a facilitator of indefinite postponement. It shows a lack of understanding of what money actually is and what it represents. Unless we develop a respect for money it will eat us, but fools have deluded themselves that it doesn't matter if we debase it to cover our debts.

    The BoE should be reduced to a pile of smoking rubble. At the very least the banks should be prevented from undertaking fractional reserve banking and the link to gold re-established. Governments can't be trusted because they won't stay within a narrow remit or be held to account for borrowing. This is what happened when the UK and Germany fell off the Gold standard to prosecute a war. If they had stayed on the standard they would have run out of money, but you know, war is big business with opportunities for vested interests. If it isn't war, its welfare. Always borrowing more and more like a drug addict has to snort more drugs. If some rules or laws should intervene then they write new laws so they can keep on borrowing.
     
  8. karkus30

    karkus30
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    Well who is the borrower. Don't blame the dealer for the junkies addiction. Just like any addict will beg, borrow, steal and even kill to continue getting the supply. The dealer will seek to expand his market. All the better if the junky controls all the laws controlling the supply.
     
  9. fluxo

    fluxo
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    More information on the APF here:

    http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/apfquarterlyreport1310.pdf

    From which:

    "In line with the MPC's decision on 5 July 2012 in relation to the asset purchase programme, the APF was authorised to purchase £375 billion of high-quality assets financed by the creation of central bank reserves."

    (Note: I wrote £374 bn in post one, but that should have been £375 bn.)

    The quoted sentence confirms that money creation has funded the purchase of government debt. Interestingly, as can be seen in the above-linked document, the BoE used to hold corporate bonds but those holdings have now been run down. Consequently, UK government gilts are the only securities the APF now holds.

    Finally, if you sum the nominal amounts listed in the table in my first post, you will not end up with a figure of £375 bn. Two possibilities:

    1) The table is missing some holdings.

    2) £375 bn is not the total nominal (redemption value) amount, but some other amount (purchase price?).

    And I'm open to other possibilities.
     
  10. fluxo

    fluxo
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    Thank you, sidicks.

    Often the amount is said to be £375 billion of government debt, which might be taken to suggest that the government owes that amount (in relation to these gilts). But that appears not to be the case. I don't know whether that way of speaking about it is technically incorrect or not, but clearly care has to be taken in the interpretation.

    Examples:

    Should the Bank wipe out £375 billion of government debt?

    Tax Research UK » How did Danny Alexander end up in government?

    Interestingly, John Redwood doesn't dismiss entirely the possibility of cancelling the debt (but does not strongly advocate it). I would think that, if he has written about this, then there's a very good chance that discussions about it are taking place within the government.

    Random link of the day:

    http://www.threadneedle.co.uk/media/2521325/en_viewpoint_uk_national_debt_october2012.pdf
     
  11. fluxo

    fluxo
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    Well, that's odd, sidicks. Your post was here and has now vanished. Like the government's debt :)

    Forum malfunction?
     
    Last edited: Feb 26, 2014
  12. fluxo

    fluxo
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    More on the ramifications of debt cancellation:

    http://blogs.ft.com/gavyndavies/2012/10/14/will-central-banks-cancel-government-debt/

    Given the vagueness of the BoE's pronouncements, it's impossible to know with any certainty what they will do. Carney has said, however, that any unwinding there is would take place after an interest rate rise. In the meantime, the APF will keep topping up their holdings as and when (in their view) necessary.
     
  13. karkus30

    karkus30
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    It could be repudiated. There is no debt obligation as such. The money is coercively appropriated by the state by the tax payer and the lender knows that this is how they will paid and profit from what is basically theft.

    The government could could auction off its assets in order to pay the debt back. Treated like any bankrupt. Buckingham Palace, Houses of Parliament, GCHQ etc could all be sold.

    My issue isn't so much the repudiation but that the robbers stay in place and begin their theft all over again. The public debt is a reminder, a festering sore which imposes a destruction of capital/production/living standards. It should inform the population like a lighthouse warns of rocks that we should never steer our precious cargo in its direction.

    In other words fix the leak in the roof before buying new furniture.
     
  14. IronGiant

    IronGiant
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    Nothing to do with me or the forum software :)
     
  15. fluxo

    fluxo
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    From earlier today:

    [​IMG]
     
  16. Squiffy

    Squiffy
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    I saw it, so it isn't just you.
     
  17. IronGiant

    IronGiant
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    I wasn't denying it's existence :) Just saying it wasn't a glitch in the system or a moderator's action. Occam's razor then leaves you with one remaining logical solution to the question...
     
  18. Squiffy

    Squiffy
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    Aliens!
     
  19. fluxo

    fluxo
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    Can posts be self-deleted now?
     
  20. IronGiant

    IronGiant
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    Of course :)
     
  21. fluxo

    fluxo
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    Well, I've just tried it and it does work immediately. Wasn't it a case of asking someone else to delete it in the past or am I thinking of another forum? And when it asks you for a reason, where does that reason go?

    Anyway, the difficulty in this case is that I have seen the deleted post and the memory of that is undeletable. It might be a self-erasing memory, but we'll have to wait a few months to find out. And, of course, by going on about it the self-erase date has been pushed forward into the future, death and dementia not occurring (to any greater degree than at present).

    Well, now I'm wondering why he deleted the message and if the message contents were correct.
     
  22. IronGiant

    IronGiant
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    IIRC members have always been able to delete their posts, but on the old forum the "deletion" still showed as having occured to everyone. As a mod I can see deleted posts and see "This message by fluxo has been removed from public view. Deleted by fluxo, 19 minutes ago." Did you leave a reason? Because, had you done so I "think" I should be able to see that too... I can also see the contents of deleted posts.
     
  23. sidicks

    sidicks
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    It's like the x-files or some other unexplained phenomena.

    Where's Mulder & Scully when you need them...?
     
  24. karkus30

    karkus30
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    Getting ahem, back on topic and away from the disappearing value/cost vanishing post.

    I forgot to add the upshot of repudiating the debt-which is a very libertarian thing to do-is that the banks will be less willing to lend to the state if they know they aren't going to get their money back.

    This would be great, except this isn't a system in isolation. The state needs access to finance to keep going because this is how it works. The state and its cronies don't want to disturb the big money machine that keeps them all in power/wealthy. It would require an entirely different way of thinking and would include small government and a very radical real austerity programme which I cannot see people accepting.

    It would be an admission of the failure of the state and its Keynesian/democratic/socialist model.

    So, we should do it :)
     
  25. fluxo

    fluxo
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    In respect of these gilts, I thought the banks (plural & =/= BoE) had already got their money back. Or is that wrong?
     
  26. sidicks

    sidicks
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    Yep, Karkus is getting confused.

    The discussion is about whether the money created in the system as part of the QE process will be unwound (I.e. Repaid) or just left in place. Ordinarily you'd have expected money creation to lead to inflation, hence the intention / expectation that this would, be unwound at some point in the future.

    Of course there is no suggestion that any existing UK government bonds will not pay their interest and principal as promised, and the banks and other institutions (people seem to think that it was only the banks involved in the QE process when in fact the banks were net buyers of government bonds over the period, and it was pension funds, insurance companies and other investors that were heavily involved in the Qe process) that sold gilts to the BOE have already been paid for those gilts.
     
  27. karkus30

    karkus30
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    I'm not getting confused at all. I know that well enough. I'm talking about repudiating the entire debt including all bond holder payments-pension or otherwise. It is wrong to say we aren't seeing inflation, it just hasn't occurred in the amount and place that is normal when money is helicopter dropped on the public. Inflation is most certainly still happening and continued through the down turn in growth which should have created deflation. QE is not neutral by any means. We can see this in the US when they have attempted a minor taper.

    This is a good account by Murray Rothbard on public debt repudiation. Its an audio file. It doesn't delve into the mechanics of gilts, but explains the reason why there should be a serious consideration to embark on it.

    Repudiating the National Debt - Mises Media


    Sent from my iPad
     
  28. sidicks

    sidicks
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    So to be clear, you were making a generic 'libertarian' point but nothing directly related to QE (and the unwind thereof) which was the subject under discussion...?
    :confused:
     
  29. karkus30

    karkus30
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    We were discussing reputation of the entire debt as far as I know even though the subject is asset purchase. We could roll up QE anytime we want. A keystroke on a computer would do that. Surely that would be just back to square one in which the banks fall over as credit dries up ? Except I suppose most of us would all just be a lot poorer for the experience.

    Oh yeah, my bad. It was the 375 bn and not the entire public debt that was been discussed. Blame fluxo as he was getting me excited :)
     
  30. sidicks

    sidicks
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    We haven't done any new QE for months. Why would cancelling the debt on a computer a) cause credit to dry up and b) adversely impact banks' balance sheet...?
    :confused:
     

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