Will the Bank of England be able to sell gilts from Q.E?

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Readers Question: In  Risks and benefits of Quantitative easing  one point the programme mentioned was:
The scale of quantitative easing could make it impossible to sell bonds back to market and this will damage the UK’s ability to borrow in the future. If the UK’s ability to borrow is constrained, this will lead to higher interest rates and reduce economic growth.
Readers Question: Why won’t we be able to sell bonds because of the size of QE? it surely is not that big as % of total?
Firstly, Bank of England gilt holdings are getting close to 30% of the total public sector debt, £375bn so it is a significant total.
Bank of England gilt holdings as % of total

percent-gilt-holdings

Gilt holdings by Sector £m

This data is from 2012, but it gives an indication of the scale of bond buying by the Bank of England. Since then the gilt holdings have risen. – In October 2013, the quantity of gilt holdings have risen to £374,991 mn or £374 billion. (HM Treasury)

Will the Bank of England be able to sell these gilts on the open market when the economy recovers and the Bank of England wants to reverse quantitative easing?

Firstly, I’m not entirely sure how it will go. There is no precedent for a Central Bank in the UK adopting such a policy of quantitative easing. I can only suggest there will be a few factors at play

  • The Bank of England can take its time, and decide when it wants to sell. It won’t have to sell £374 billion in a short time frame. I suppose it is possible the Bank of England will never fully sell off its gilt holdings or it will allow inflation to slowly reduce the real value of the gilt holdings.

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The irritating monopoly power of Apple

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I’m a good Apple consumer. Over the past few years, I’ve bought three Apple mac laptops and two iPhones. I appreciate the quality of the product and have been willing to pay more than the average price for a laptop and mobile phone. Yet, although their products are generally very good, they do irritate me for the way they exploit their monopoly power.

apple-iphone-cable

A while back I lost my original 9pin cable used to charge my iPhone. I bought a replacement from a local shop in Oxford. I think it cost about £10, but it worked and I was happy.

Yesterday, I updated my iphone to IOS7 (new software for Apple). It was all looking very nice, but when I tried to charge the phone it didn’t work! A quick look on the internet and many people are in the same situation. (My iPhone 5 won’t change)

Basically, Apple have deliberately blocked third party chargers. The logic behind this is that, by blocking third party chargers, Apple can make more money selling their own chargers and licensing other firms to produce them. They don’t want third party companies offering cheaper chargers which Apple don’t get commission from. These cables are very expensive if you buy from an Apple store – £25. This price sounds to be suspiciously like monopoly pricing.

To me this is a clear exploitation of Monopoly power. Apple are using their market power to introduce vertical restraints and prevent a competitive market in the area of charging cables.

It reminds me of printers who prevent other firms selling compatible ink cartridges. This enables firms making printers to sell printers cheaply and then make high profits selling ink to a captive market.

From an economic perspective this decision by Apple, is highly inefficient.

  • Allocative inefficiency. At £25 for an official Apple cable, the price is much higher than the marginal cost of producing it.
  • Wasted resources. The cable I bought is now useless, I’ll probably have to throw it away.. There is no good reason for Apple to prevent this cable being used. It is just ensuring that there is a wastage of resources. It is also bad news for the firms who have been producing these cables without an Apple chip.

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Questions on the nature of economics and the importance of money

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Several readers questions on the economy, such as different types of economic systems and the role of money and the economy.
jarrow-crusade
Jarrow crusade in the 1930s – resulting from a failure of the economic system and mass unemployment.

 

1. What is an economic system?
An economic system is the general way that an economy is set up. For example, it could be free market (no government intervention) or at the other extreme a Command economy (Communist). In a communist economy the government decides what to produce, how to produce and for whom. In a free market, the economic system leaves it up to individuals and firms to decide what to produce.
2. What are the different types of economic systems?

Free market, | Mixed economies | Command economies

 

3. What is the largest importing country?

US, China (Largest importers)

 

4. What is the largest exporting country?

China $ 2,057bn, then US, Germany and Japan. See CIA databook

 

5. Why is money important for the world?

Money has many functions. See Functions of money Essentially money enables firms and consumers to make transactions. For example, firms pay workers wages. Workers can then use their money to buy goods and services. Using money which is universally accepted is more practical than a barter economy (e.g. swapping a potato for a chicken) Money also enables us to put a value on goods and services and borrow money.

 

6. Why is the economy important for the world?

The economy determines living standards; it determines how much a country can spend on health and education. Countries which experience economic crisis tend to experience political crisis too. e.g mass unemployment can lead to the rise of political extremism. Economic stability can enable a more peaceful world.

 

7. Does money make people greedy?

Money can make people greedy. But, it really depends on the person. If you look at the behaviour of certain monopolists (e.g. capitalist class who paid very low wages to workers and made their workers do long hours in dangerous conditions) it seems some people can become greedy for more money, even if it means reducing the quality of life for the people working for them) But, other business owners, like Robert Owen, put the welfare of his workers above making profits. Even the great US monopolists, like Rockefeller, Carnegie J.P.Morgan and Bill Gates became philanthropists later in life – giving away large parts of their monopoly profit.

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Tax on sugary soft drinks

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A few years ago, I looked at the arguments for and against a tax on ‘fatty foods‘. Generally, I supported the idea of a tax on unhealthy foods because it is a way to price the full social cost of the good. It is an example of a Pigovian tax. A tax which internalises the external cost of the good.  Recently, the Academy of Medical Royal Colleges has produced a report stating 10 factors that could help reduce the UK’s obesity epidemic. One of these is an experimental 20% tax on sugary soft drinks.

A new study claims a 20 per cent tax on sugary drinks would reduce the number of obese adults in the UK by 180,000, bring in £276m to the Treasury and save the NHS millions.

The logic behind the new tax.

  • Higher price will reduce demand and make ‘healthier alternatives’ more attractive.
  • Over time, the higher price may change peoples spending and eating habits.
  • The sugary soft drinks create an external cost – of contributing towards obesity. Since obesity has external costs, the tax is making people pay the full social cost. It is the same principle as taxing petrol so people pay the social cost of congestion and pollution.
  • You could also argue sugary soft drinks and other unhealthy foods are a demerit good. People don’t know (or ignore) the damage to health. Making them more expensive discourages the consumption of these demerit goods.
  • If the tax is on volume, it may encourage people to enjoy smaller sizes.  Then people can enjoy without drinking to excess. e.g. the free refill is a popular marketing tool, but encourages consumption to excess. But, could a tax stop free refills?
  • It could raise up to £0.3 billion. This £0.3 billion could be used to lower other taxes, such as VAT or it could be used to increase spending on the NHS or specific obesity units.

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US debt and deficit stats

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A selection of graphs and statistics about US Federal debt and the US Federal budget deficit / surplus.

US Federal Deficit since 1946

The federal deficit is the annual difference between federal spending and federal tax revenues. For example, in 2012,

  • Federal receipts (tax e.t.c) were $2,450.2 billion ($2.4 trillion) (15.8% of GDP)
  • Federal spending was $3,537.1 billion (22.8% of GDP),
  • leaving a federal deficit of  $1,087.0 billion ($1.1 trillion) (7.0% of GDP)

budget-deficit-46-13

Source: Whitehouse.gov

 US borrowing during World War Two

Budget deficit % of GDP
1942-14.2
1943-30.3
1944-22.7
1945-21.5
1946-7.2
19471.7

During the Second World War, the deficit reached over 30% of GDP in 1943!

US Federal deficit since 1995

budget-deficit-95-13

The US budget deficit has fallen in 2013 more than initial forecasts. The government says the deficit for the 2013 budget year totaled $680.3 billion, down from $1.09 trillion in 2012. (a fall of 37%. see: Washington Post) The fall in the deficit is due to spending cuts (-2.4%) which took place in March and due to rising tax revenues (+ 13%) from higher economic growth.

The Whitehouse estimate for 2013 was originally 6% of GDP, but the CBO have updated that to a deficit of just 4% of GDP.

 Commentary

The US faced a political battle about raising the debt ceiling. But, recent budget data offers encouraging signs of a reduction in government borrowing. Importantly, the biggest reduction in the federal deficit came from a surge in tax revenues due to economic growth. The biggest challenge facing the US economy is to maintain a strong economic recovery. This will be the best way to continue improve short-term and long-term debt projections.

Given the rate of deficit reduction, there was no economic logic to raise the threat of massive spending cuts, which would only have risked plunging the economy back into recession.

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US economy stats

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A short summary of main US economy stats and where to find more detailed stats. Other data GDP: $16.66 trillion (Q-2 2013) GDP per capita $49,601 (2012) 10th, nominal; 6th, PPP Gini coefficient 0.48 (2011) Labor force 155.6 million (11.26 mil. unemployed) Related pages at economicshelp.org History of US national debt Other helpful external links …

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