23 Oct 2016

BIS Transaction data : $9.765 quadrillion in 2015, over $100 quadrillion over 10 years

Isn't the BIS great? Not only is the Bank for International Settlements the place to go for the Triennial report on the levels of transactions in the Foreign Exchange and Interest Rate Derivatives markets (see my latest posts), it's also a place where I have been going for hard numbers on levels of transactions in 23 major countries. Their preliminary data for 2015 came out in September and, as usual, I downloaded the whole dataset so that I could get an idea of how transaction volumes have faired over the past year.

You can check out their webpage on "Statistics on payment, clearing and settlement systems in the CPMI countries" which has the preliminary data for 2015.

The full report (597 pages) can be found here but I find the Country Tables and Comparative tables  particularly informative, because they can be downloaded as Excel files - Country tables or Comparative tables.

I've been scrutinizing the BIS figures for several years now, and so I can see how total levels have changed over the years. Here's a table with the total value of Financial Transactions according to BIS since 2006.

As you can see, the total value appears to have dropped back somewhat in 2015, down to about $9.8 quadrillion form $10.9 quadrillion in 2014. But it's still a very large numbers.

But I find it remarkable just how stable the numbers have been. Over the last 10 years, the value has fluctuated between a minimum of $9.5 quadrillion in 2006 to a maximum of $11.5 quadrillion the following year. The really impressive figure comes from the total over ten years - the number exceeds  $100 quadrillion. That's a 1 with 17 zeros after it.

For me, what is truly impressive is that all that frenetic financial activity is totally untaxed. When I spend money, I generally pay VAT at around 20%. And that is after I have already paid Income Tax. But the $100,000,000,000,000,000,000 that has churned through the financial markets has done so without anyone taking an interest at all.

I will also note that while the BIS's figures look impressive, they are notoriously underestimated. In many cases, their tables report that figures for particular players are "nav" (not available).  For example, the figures for a certain LCH Clearnet Ltd, which processed $1.58 quadrillion in transactions in 2007 have been "nav" since 2010.

BIS apparently doesn't know about the Options Clearing Corporation in the USA with handles more than 4 billion transactions a year (4,210,542,258 contracts in 2015 to be precise). It is quite possible that OCC alone could add a further $10 quadrillion to the figures provided by BIS.

But the bottom line is that, if ever any Central Bank decided to impose a Financial Transaction Tax on this activity, the revenue stream could be very impressive. And that revenue stream could be used to directly finance direct injections of money into the real economy - for example, by paying all citizens an Unconditioanal Basic Income. Remove money from the financial markets, and put it into peoples' pockets. Makes good sense to me. 

BIS Triennial Report on Interest Rate Derivatives Turnover in 2016

The other part of the Bank for International Settlement's Triennial report on activity in the financial markets concerns turnover in Interest Rate Derivattives. You can download the main report yourself here, and the numbers are all provided in an Excel file that you can download here.

This table provides the key figures

As you can see, daily turnover was $2.7 trillion, up from $2.3 trillion a day in 2013. If we assume roughly 250 trading days per year, this means that the total for 2016 will be around €667 trillion - about 2/3 of a quadrillion dollars worth.

Of course, I would never wish to suggest that all this frenetic activity is not incredibly important for the functioning of the world economy. I will note, however, that none of this is taxed at all. When I buy things, I nearly always have to pay Value Added Tax. And yet when the traders do all their interest rate swaps, they pay nothing. I suppose that makes sense in that even the traders will presumably accept that their activity adds no Value at all, and so the absence of VAT is natural.

But, as you may be aware, I have been arguing for about 6 years that we could have a much simpler system if we replaced the vast majority of taxes by a flat rate financial transaction tax on all electronic trading - including everything that you and I do to, of course.

The trick is that the tax should not just benefit the government in the place where the trading is supposed to occur. As you can see from this table, if you did that, the US would get 41% of the revenue, and the UK 39%. Since US dollars are the base for 50.9% of the trading, 41% is not so far off being proportional. But the fact that 39% of the trading takes place in the UK, despite the fact that Sterling only accounts for 8.9% of the total, means that it would be quite ridiculous to allow the UK government to reap the benefits of such a flat rate FTT. And, as the lobbyists would point out, any attempt by the UK government to impose such as tax would immediately be followed by vast majority of the trading moving somewhere else. And as long as there was a rock somewhere where no FTT applied, the traders would find some way to do their $2.7 trillion of trading somewhere else. In the end, we might find that all the trades were being done on some satellite, or on the moon!

But there's a simple solution. The tax should be applied by the Central Banks. Any trading in a given currency that did not pay the tax to the relevant bank would be illegal, and anyone found attempting to do it would be immediately arrested and locked up. After all, it would be no different to someone doing blackmarket dealing in an attempt to avoid paying VAT or other sales taxes.

Each Central Bank would be free to set whatever tax rate they want. Indeed, if a particular Central Bank wanted to set the tax at 0.0000001% that would be their right.  And I suppose that there may be some obscure advantage of having a rate that was a fraction of the tax levels imposed for other currencies. But the sorts of rates that I am talking about are so low that I really don't think that it would be a big deal.

Imagine what could be done if the European Central Bank was to impose a 0.3% tax on all Euro-denominated Interest Rate Swaps. With $159.4 trillion of trades in a single year, that would genrate a very handy €500 billion in income. Add that to the €1 trillion a year that would be generated by the Foreign Exchange Markets (see yesterday's post), and you can see that this would enormously increase the ECB's power to regulate the amount of money in circulation.

Effectively, Central Banks could have two levers - one to pump money directly into the economy using one of a range of methods that include providing a direct Unconditional Basic Income, and one to remove money from the system via a simple, painless and scrupulously fair Financial Transaction Tax that would be paid by everyone - including you and me. The critical point is that while everyone would be paying the tax, the ridiculous levels of trading in the Foreign Exchange and Interest Rate Swap markets would mean that the bulk of the tax would be paid by the financial markets themselves.

Seems perfectly fair to me.

If you are interested in this idea, you might like to watch the talk that I gave at the Toulouse School of Economics in February 2015, and which includes a discussion of the two levers that Central Banks could use to regulate the amount of money in circulation.

22 Oct 2016

BIS Triennial Report on Foreign Exchange Trading in 2016

My apologies to the large number of people who have been following my Economics Blog and who have had nothing new to read since the Brexit vote in June. Apparently, the fact that I haven't said anything has stopped people (or robots?) checking out my blog. Last month, there were 10,618 visits, bringing the total to a impressive 336,352 pageviews since I started the blog in October 2010 - six years ago.

But when I saw that the Bank for International Settlements (BIS) has published their Triennial surveys of activity in the foreign exchange and OTC (over the counter) interest rate derivatives markets for the month of April 2016, I thought it was time I broke my silence. After all, they only do this once every 3 years, the last one being in April 2013.

So, first lets look at the report on Foreign Exchange, which you download yourself here. You can also get an Excel file with all the numbers here. The bottom line is that there was an average of $5.1 trillion of foreign exchange per day. If you suppose that this level is typical, then we can estimate that in a year with 250 trading days, the total will be $1.275 quadrillion in a year. Here is a summary of the key numbers
 A staggering 37.1% of this foreign activity goes through the UK's financial markets, nearly twice that in the next largest player, namely the US (19.4%).  Next come Singapore (7.9%), Hong Kong (6.7% ) and Japan (6.1%). Counties like  France (2.8%) and Germany (1.8%) are almost insignificant.

Those who know my blog will know that I have been arguing that it would be very sensible if governments and central banks  imposed a flat rate financial transaction tax on this sort of activity. Even a tax of only 0.3% on this would generate over $3.8 trillion in tax revenue - enough to scrap many of the taxes that the average citizen has to pay, including VAT and Income tax.

Obviously, no country is going to impose a tax locally, because the traders would simply move somewhere else. And that's why there is little chance of the UK imposing such a tax, despite the fact that with 37.1% of the $1.275 quadrillion occuring in the City - namely $473 trillion, it could be enough to avoid UK citizens paying tax at all.

No, the solution is not to impose taxes locally. Instead, each Central Bank should impose a tax on all transactions involving their currency. The Federal Reserve could tax the $1.1 quadrillion in foreign exchange involving dollars. The European Central Bank could impose a tax on the roughly $400 trillion that involve Euros, and the Bank of England could impose a tax on the $162.4 trillion in exchanges involving sterling.

It doesn't have to be a large tax. Obviously, it might be thought fair if the Central Banks charged the same "International Fees" imposed by the vast majority of Credit Card companies we people like you and I need to change from one currency to another. This figure, which is charged for multiplying the number in one currency by the current exchange rate  is typically between 2.5% and 2.75%. So if I pay a $100 restaurant bill in the USA with my French Euro Credit card, I get charged a 2.5% fee. That's very expensive for just doing a multiplication. A typical PC or Mac will do billions of such multiplications for second, with no labour costs whatsoever. And don't forget that this is in addition to the merchant fees of roughly 3% that you the shop or restaurant owner has to pay.

No, I don't insist on applying the number used by the commercial banks and credit card companies - that would be greedy! No, just a tenth of that would be fine, thanks. In the case of the European Central Bank, a 0.3% tax would generate over $1.4 trillion a year - roughly the amount of money that Mario Draghi pumps into the financial markets in the form of "Quantitative Easing". He could just give that money to Eurozone citizens in the form of an unconditional basic income, for example. That would get the economy going.

24 Jun 2016

The end of the UK in Europe and the end of the UK

I've just been trying to digest the decision of voters in the UK to leave the European Union. The first point is that while England and Wales voted to leave, Scotland and Northern Ireland voted to stay. A breakup of the United Kingdom seems almost inevitable. Well done David Cameron - the UK prime minister who led to the end of the UK.

The Guardian has posted a fascinating set of graphs that show the demographic factors that are linked to the choice of voting leave or remain in different local authority areas. Here they are:

The relation between the proportion of people with higher education and voting choice is stunning. Rarely do you find such strong negative correlations.  The relation with the percentage of residents with no formal qualifications is also clear, as in the link with median income. Yes, there is a link with age - young people were more likely to vote remain. But the really strong links are with education and skills.

The message seems clear. This is the mass of the people telling the elites that they won't take anymore. They no longer believe the story that the politicians and the business lobbies are working for them. They don't believe that the European Commission, led by Jean-Claude Juncker, the guy involving in setting up tax systesm in Luxembourg that allowed multinationals to avoid paying their fair share. It's exaactly the same phenomenon that has led Donald Trump to become the Republican candidate in the States.

What will happen now? Well, if nothing changes, the example set by UK voters will propagate across Europe. France could end up with Marine LePen as president next year and could end up leaving too. And of course, voters in countires like Greece, Spain and Portugal could easily also decide that they want out too.

But things could easily change. Suppose that Mario Draghi and the European Central Bank decided that rather than pumping €80 billion a month into the financial markets, they should simply put €240 euros into the pockets of every man, woman and child in the Eurozone. Would that change things? You bet. People would say that, yes, the European Union does care about the people. They don't only care about making the system work for big business, the multinationals. So, if the Brussels Technocrats want to stop the rot, there are ways they could change the course of events.

In the end, while I am incredibly worried about the implications of the UK's decision for both the UK and Europe, I see a  possible positive effect. It could be the start of the revolution that will change the entire economic system so that it works for the people - not just for the elites.

22 May 2016

All the increase in Eurozone Public Sector Debt since 1995 is due to Interest Payments!

This is a real bomb-shell.

We are continuously being told that Public Sector Debt is the result of governments spending too much on health, education, social services etc. Austerity is essential to balance the books.

Here is the proof that this is a total myth. The real culprit is the insane system, built into the Maastrict and Lisbon treaties that forces our governments to borrow money from Commercial Banks, who can create the money they lend out of thin air, and then charge taxpayers interest.

I took the latest data from Eurostat, which provides information about the level of Public Sector debt for nearly all European countries since 1995. It also provides details of the amount of interest paid on Public Sector debt every year for the same period. I've already had a series of posts on the data since they came out on the 21st April. The first post listed the levels of Public Sector debt for Eurozone Countries which had increased to nearly €12.5 trillion at the end of 2015. A second post looked at the interest payments which totalled over €335 billion in 2015, and brought the total since 1995 (when Eurostats figures start) to nearly €7.2 trillion. A third post looked at the effective interest rates we have all been paying since 1995, and noted that taxpayers have been paying way above market rates for years.

But the current post really puts a finger on where it hurts most. Specifically, the following table provides what I consider to be the ultimate demonstration of the stupidity of the system.

The first line shows that total public sector debt across the 28 countries of the European Union stood at nearly €12.5 trillion at the end of 2015. If we compare this number with the total debt at the end of 1995 (it was over €4.75 trillion), we can calculate the increase in debt over that 21 year period - namely €7.73 trillion.  The next column gives the total cost of interest periods for the same period - €7.18 trillion. And that means that 93% of the increased public sector debt was used to pay the banks.

The second line shows that the situtaiton for the Eurozone is even worse. Since 1995, public sector debt in the 19 Eurozone countries has increased by over €5.37 trillion. But the interest payments for the same period now total over €5.7 trillion, meaning that 106.3% of the increase in public sector debt was used to pay the banks.

The rest of the table shows how the figures breakdown country by country. Things are complicated by the fact that there are some holes in the Eurostat data. Specifically, figures for debt in Denmark are only provided since 2000. During that period, Denmark's public sector debt only increased by €13.8 billion, and yet during the same period Denmark's taxpayers handed over 5.5 times more money in the form of interest payments.  Very generous of them.

Norway's figures only start in 2011. Since then, public sector debt only increase by €4.3 billion. But Norway's taxpayers nevertheless handed over 3 times as much money in interest payments.

Neverthless, for most countries, the Eurostat data provides both Public Sector Debt and Interest Payments since 1995. And the results are a real surprise.

In the Eurozone, Belgian public sector increased by 50%, but if they had not been paying the interest charges, public sector debt would be just €117 billion, 27% of what it is today.

In Italy, if taxpayers had not had to pay over €1.65 trillion in interest, their public sector would  be a mere €517 billion, instead of getting on for €2.2 trillion.

Without interest payments, Germany's mountainous €2.15 trillion of public sector debt would have dropped to €820 billion.

And so it goes on.

Isn't it time that we changed the system?

How could we change it? Just put an end to a system where commercial banks lend our goverenments money and charge interest. Central banks like the ECB and the Bank of England should lend to goverenments at the same rates they charge the financial markets.

5 May 2016

Effective Interest Rates on European Public Sector Debt 1995-2015

Here's something I wanted to do when Eurostat released the figures for European Public Sector Debt and Interest charges on the 21st April. Unfortunately, I was very busy putting together a €11.4 million project to create the Toulouse Mind & Brain Institute (TMBI). I finally got the thing submitted yesterday, having managed to round up well over 300 members from 25 different labs in Toulouse, of whom 240 have permanent positions. If you are interested, feel free to download my handiwork here.

But now have a bit of time for some more fun things ;-)

I did something pretty simple, given that the Eurostat gives an almost complete set of data for Public Sector Debt and Interest payments for every EU country since 1995.

So, if you know how much the government owed at the end of a particular year, and how much tax payers money was handed out during the year, you can easily calculate the effective interest rate that was being paid. Just divide one by the other. Here's the result.

The good news is that the average rate has been dropping. In 1995, we were paying nearly 8% interest on public sector debt, with some countries (Greece, Hungary, Romania, Slovakia and Slovenia all paying over 10%. The Romanians win the prize for the highest rates, because they were paying interest at nearly 24%. Were they using a credit card maybe?

But, rates over 10% have been a thing of the past since 2003, and in 2015, the average rate was a bargain 2.7%. Only Croatia, Hungary and Romania were paying over 4%. Wondeful, right? We should all be celebrating.

But then there is the bad news. Haven't we all been told that Central Banks have been offering money at knock down prices to anyone in the Financial Sector who can be bothered to ask. The list of current rates for European countires can be found  here
  • Eurozone : 0.0% 
  • Czech Republic : 0.05%
  • Denmark : 0.05%
  • Hungary : 1.05%
  • Norway : 0.5%
  • Poland : 1.5%
  • Sweden : -0.5%
  • Switzerland : -1.25% 
  • UK : 0.5%
You can find the historical information here where you can see the historical evolution of rates for 1 year, 2 year, 5 year and Maximum duration loans from the Fed, ECB, Bank of England and so on.

Here's the ECB 5 year loan rates since 2000 - well under 1% since 2011.
And here are the 5 year rate at the Bank of England since around 1990 - 0.5% since 2009 or so.

In both cases, it is clear that taxpayers in the Eurozone and the UK have been paying way over the market rates on Public Sector Debts. Why?

If you've got a mortgage, and they are charging you 10%, but you can get loans at 2%, you renegotiate, and pay off the 10% loan with the 2% right?

So, why don't our governments do the same thing? Why don't they just say to the Primary Markets or the GEMMS (the banks that have a monopoly on lending our governments money), that they will not pay more that 1% above the market rate. When the market rate is 0%, that's 1%.

Are we being ripped off? You bet we are.

But this racket has been going on since 1694 when the Bank of England (a private bank) discovered that the King was too stupid to realize that when they lent him money to fight wars, they just invented the money out of thin air. UK taxpayers have been paying an average of 4.4% in GDP every year since 1694 with peaks of 10% of GDP following the Napoleonic wars, and around 9% for an entire decade after World War 1. The roaring twenties really were roaring if you were anywhere near the bankers who had lent the warring nations non existent money for fighting the war. Of course, as we know, they couldn't keep it going, and things went belly up in 1929.

This wonderful system, invented by my compatriots I'm ashamed to say, got foisted on the rest of the world from the 1970s onwards. And now, with the Lisbon treaty, no government is allowed to borrow directly from the central banks at the market rate of 0% (or whatever). Instead, they have to go via our friends in the Banking system who impose a slight markup. Currenly, in the Eurozone, that slight markup is 2.66%. That racket cost Eurozone taxpayers €250 billion last year - equivalent to 2.4% of GDP.

Does anyone else think that this is insane? Does anyone else think that this racket should be stopped immediately? No government should ever pay interest at a rate above the one provided by Central Banks to commercial profit making banks. Full stop.

21 Apr 2016

European Public Sector Interest Payments in 2015 - over €335 billion. €7.18 trillion since 1995.

The other fascinating data set released by Eurostat this morning concerns the amounts of money paid by European Governments in Interest payments on Public Sector debt.

I've compiled the numbers in the following table.

Together, the goverments of the European Union handed over €335 billion of taxpayers money in interest payments in 2015. For the Eurozone countries, the total was well over €250 billion.

The Eurostat data set provides information for interest payments since 1995, so that I have been able to calculte the total amount of interest paid by most countries in that 21 year period. By comparing that total with the level of Debt, you can work out what percentage of the debt is simply due to payments of interest charges. For three countries, shown in red, the  figures don't go all the way back to 1995.

Overall, for the Eurozone, 60.5% of all Public sector debt has been used to pay interest charges. The percentage varies quite a bit between countries, from a minimum of 21.9% for Luxembourg to 76.7% for Italy. In France, where I live, 46.5% of the total debt of nearly €2.1 trillion is simply the result of interest payments. And over €44 billion of French taxpayers money went to pay the interest in 2015.

Outside the Eurozone, one country can proudly say that it has paid out 106.5% of its national debt in interest charges - well done Denmark.

And the big number is the amount that collectively, European Governments have paid in interest since 1995. The total has now reached €7.185 trillion - and this amounts to 57.6% of all government debt.

Now, readers of my blog will hopefully be aware of the fact that all these interest payments are stupid. The banks that lend our governments money don't even have the money they lend. As admitted by the Bank of England commercial banks can just invent money to lend out of thin air. That system is absurd. But when the money creation system is used to rip off  trillions of taxpayers money, I think that it cannot be thought of as anything other than a criminal racket that has allowed the richest people on the planet to exploit every one of us.

Does anyone reading this blog not believe that our governments could do something more intelligent with €335 billion?

European Public Sector Debt in 2015 : €12.48 trillion - up 3%

Eurostat has just released the figures for European Public Sector Debt and Interest payments for 2015. You can find the details here. If you want to do the analysis yourself you need to go to the tables of Government Finance Statistics, and then Government Deficit and Debt (t_gov_dd).

But I've extracted the key numbers here.

Overall, EU public sector debt has gone up by over €360 billion (3%) to €12.48 trillion. For the Eurozone, debt went up by €133 billion (1.4%) to reach €9.44 trillion.

But there are large variations between countries. For example, within the Eurozone, seven countries actually got their debt levels down a bit - Greece was down by 2.6%, and Latvia even managed to lower debt by 7.7%.  But some other counties went up a lot - Finland by 7.4%.

Outside the Eurozone, and measuring debt in the National Currency Units, only one country - Denmark - actually reduced debt (8.3%). Other countries like the UK were up 3.8% to £1.66 trillion - well done George Osborne. And Norway increased its debt levels by 15.2%.

Overall, I think it is fair to say that there is no evidence that governments are really making appreciable progress on Debt levels.

27 Feb 2016

More detail about Draghi's €60 billion a month of money creation - and why he needs to change his methods

Following my other recent posts I'm getting increasingly interested in understanding the details of how Mario Draghi and the European Central Bank have decided to use their ability to create €60 billion a month until at least March 2017. A first point is that there are currently three different programs parts to its Expanded Asset Purchase Programmes (APP) :
  • the third covered bond purchase programme (CBPP3) which started in October 2014
  • the asset-backed securities purchase programme (ABSPP) which started in November 2014
  • the public sector purchase programme (PSPP) starting in March 2015
I've extracted the monthly status of all three programs from files that can be downloaded from the ECB's website and the results are shown in the following table.

As you can see, the ECB had already generated over €712 billion by the end of January 2016, with over three quarters of the money creation (over €544 billion) used for buying up public sector assets - essentially government bonds.  You can see that indeed, since March 2015, the ECB really has been buying up around €60 billion a month.

What possible benefits could these massive purchases have?

According to Mario Draghi, one beneficial effect of buying up bonds could be to reduce the cost of interest payments for governments. We have not yet access to the Eurostat figures on the cost of interest payments in the Eurozone for 2015 - these generally appear in mid April of the following year - see my analysis in 2012, 2013 and 2014.  But we can look at the how long term interest rates on public sector debts have evolved over the past year by looking at the ECB's own figures. The following table compares the rates for all Eurozone Countries in January 2015 and January 2016.

There are variations - but there are as many countries where the rate actually increased as there were where the interest rate dropped. There is thus no evidence that Mario Draghi's €544 billion in bond purchases has done anything to help governments.

I also got an email two days ago from the Banque de France in response to a mail in which I asked whether its bond purchases has had any effect on French Public Sector debt. The reply was clear - the Banque de France is completely independent of the Government, and so buying up bonds has no effect on Public Sector Debt.

Mario Draghi has also argued that buying up bonds and other assets can increase lending in the economy. But Frank van Lerven, who gave an introductory presentation on QE at the QE4People conference in Brussels last week (you can see his presentation here and he starts after about 5m:20), nailed that one on the head. He showed the results of the ECB's own Bank Lending Survey into whether or not the assets purchasing programme had been effective. Here's the slide.

I rest my case.

If governments get no direct benefit from all that freshly minted ECB money, and there is no improvement in lending into the economy by banks, who is benefitting?

To me, the answer seems clear. Since commercial banks have an effective monopoly on buying government bonds on the primary markets, and it is typically the same banks that sell to the National Central Banks via the secondary markets, it seems highly likely the the direct beneficiaries of the whole system are those commercial banks.

I would even go as far as to suggest that since commercial banks can create the money they use to purchase government bonds out of thin air, with no need for capital to back up those purchases (since government bonds are typically considered to have zero or very low risk), it is quite possible that the ECB's massive €60 billion a month program is going directly into the pockets of the commercial bankers.

I may be wrong. Maybe the National Central Banks are going through the Commercial Banks that are the secondary dealers to buy up bonds belonging to third parties - such as pension funds. But since the majority of those bond holders non-resident (62.8% of Negotiable French Debt for example, at the end of Q3 2015), it means that the ECBs cash injections could be ending up in the hands of US and Canadian Pension Funds. Again, it seems almost stupid to do things this way.

Many reputable economists are saying more and more loudly that Mario Draghi's methods for trying to get the economy moving are doomed to failure, and that he should start putting his €60 billion a month directly into the economy. Lord Adair Turner made a very strong case for such a change in his book "Between Debt and the Devil : Money, credit and fixing global finance". And just a couple of days ago, Martin Wolf, the chief economics correspondant of the Financial Times argued that "Helicopter drops might not be far away".

24 Feb 2016

More on the ECB's €60 billion a month - and the possibility of an even more lucrative racket for the bankers

Following up from my post yesterday about the way the ECB's €60 billion a month of quantitative easing has been used, I discovered some more details by exploring the ECB's webpages on the subject, and in particular the details of the monthly statements. For example, you can download a file with the History of Cumulative Purchase Breakdowns under the PSPP (Public Sector Purchasing Program). Using such information, I have been able to generate the following table showing assets purchased by each Central Bank in the Eurozone since the start of the PSPP program in March 2015.

As you can see, from the word go, Germany has been taking full advantage of the new ECB program, with an average of well over €11 billion of purchases a month. And, between them, the central banks of the various Eurozone countries have managed to buy up over €545 billion in assets - essentially government bonds - since the start of the program.

Given that this table shows  essentially the purchases of government bonds by central banks of the Eurozone countries, you might be tempted to think that the result of this could be a reduction in the level of public sector debt in those countries. After all, isn't it almost as if the ECB had authorised the National Central Banks to buy up the debt of those countries?

To check on this possibility, I looked at the latest figures from the Eurostat website on the level of public sector debt in the Eurozone countries. Eurostat provides the numbers every quarter, and the latest figures are those for the third quarter 2015. Here are the official figures for the last 8 quarters.

As you can see, total Eurozone debt at the end of the third quarter 2014 did drop a bit- by about €700 million, but this was absolutely trivial relative to the total level of debt - namley €9.68 trillion - a value that has stayed almost exactly the same for the past three quarters. In other words, is doesn't appear to be the case that Mario Draghi's €60 billion a month is being used to reduce the levels of public sector debt in the Eurozone countries. So what is it doing?

If I have understood correctly, our governments are still borrowing like crazy by selling bonds to the commercial banking system. The only difference is that now, those banks can sell those bonds to National Central Banks who have been authorized by the European Central Bank to create around €60 billion a month. In effect, rather that using that money to finance governments, the current mechanism means that the new ECB money appears to be going directly into the pockets of the bankers.

I've not yet got a full understanding of the underlying mechanism, but in the case of France, I have seen that the French government has been emitting new long term bonds as frenetically as ever. You can see this by checking out the activities of the Agence France Tresor, the official organisation that is charged with handling French Government Debt. On their website, you can find details of all the operations that they were involved in during 2015. I've downloaded all the monthly files and found no evidence whatsover for a slow-down in the rate at which they have been emitting new government bonds (or OATs, to use the term used by the French Authorities) during 2015.  It's not possible to know exactly who has been buying French bonds, but we know that only authorized primary dealers can buy up such bonds. There are 18 of them - and they are all commercial banks - and the list of those primary dealers can be found here. 

However, while we don't know exactly what each of those banks has been doing, we do know the list of the most active primary dealers, because this information is provided on the AFT site.  Here is the list of the most active primary dealers in 2015:
  • 1 BNP Paribas
  • 2 Morgan Stanley
  • 3 Crédit Agricole
  • 4 Société Générale
  • 5 HSBC
  • 6 Barclays
  • 7 Natixis
  • 8 JP Morgan
  • 9 Royal Bank of Scotland
  • 10 Citigroup 
The AFT site also gives a ranking for the 10 most active secondary dealers:
  • 1 BNP Paribas
  • 2 Société Générale
  • 3 JP Morgan
  • 4 Crédit Agricole
  • 5 Barclays
  • 6 Nomura
  • 7 HSBC
  • 8 Morgan Stanley
  • 9 Citigroup
  • 10 Royal Bank of Scotland
As you can see, the group of banks doing the primary bond dealing is effectively the same group doing the secondary dealing too (only Nataxis and Nomura differ). So, it would appear that a bank like BNP Paribas has not only been very active buying up French Government bonds as a primary dealer, but it has also been very active on the secondary markets,  presumably selling those bonds  to the Banque de France which has been authorized to create money to make those purchases. As we can see from the ECB data, the Banque de France has apparently bought back around €102 billion in bonds since the start of the ECB Public Sector Purchase Programme in March 2015. That's one hell of a lot of money.

You might wonder why the Banque de France doesn't simply buy those bonds directly from the French government. I suppose that the reason is that article 123 paragraph 1 of the Lisbon Treaty forbids such purchases.

But here's the really intriguing question. When banks like BNP Paribas buy French government bonds, do they make those purchases with pre-existing money - i.e. money that has been deposited with them by savers? Or could it be that, since commercial banks like BNP Paribas can create money out of thin air (as revealed by the Bank of England), that they actually buy up those French government bonds with newly created money?

If that is true, it seems to me that this wonderful new system invented by Mario Draghi and his collaborators at the ECB may potentially be the most incredible racket yet devised. Commerical Banks like BNP Parisbas, Morgan Stanley and Crédit Agricole, may be in the process of  buying billions of euros worth of government bonds using non existent money, which they can then sell to Central Banks in exchange for real money - freshly minted with the authorisation of the ECB.  If this is true, it is a truly amazing way to transfer Central Bank money directly into the pockets of some of the richest bankers on the planet.

Methinks that it is time to put an end to this. We need QE for the People - now!

23 Feb 2016

What has the ECB been spending €60 billion a month on?

One of the questions that emerged during the four day IMMR training program concerned the use that the European Central Bank has been making of its ability to create €60 billion every month of new money.

With a bit of investigation, I think I have found out.

If you look at the ECB's website, you will find numbers for the total amount of newly created money that it has been injecting into the economy since they started the so-called Expanded Asset Purchase Program in January 2015. There are three components:
  1. The third covered bond purchase programme (CBPP3) amounted to €17,586 million at the end of January 2016
  2. The asset-backed securities purchase programme (ABSPP) stood at €150,337 million
  3. The public sector purchase programme (PSPP) amounted to €544,171 million. 
Together, the three components make up a total of €712,294 million - a number that effectively means that in 12 months the ECB has indeed been injecting around €60 billion a month - as promised.

The overwhelming majority of that money (over 76%) results from the PSPP program, so let's have a look at that in more detail. The ECB website provides figures for the amount of asset purchases that have been made by each country in the Eurozone. Here they are, ranked according to the value of those purchases.

As you can see, Germany has bought up the most - with nearly €128 billion of purchases authorized by the ECB, followed by France with nearly €102 billion.  It is almost certain that these purchases consist of government bonds, which indirectly means that the ECB has been financing those governments. Despite Germany's tendency to disapprove of ECB money creation, it looks like they don't turn their noses up when they are given the option to do some money creation themselves. And it looks like all the Eurozone countries have been having a go, with the notable exception of Greece, which apparently has not been allowed to buy any assets at all.

In principle, I suppose that I would be in favour of having the ECB financing governments in the Eurozone, even if the mechanism is rather convoluted. However, I must say that I would have thought that the obvious way to do that would be simply to provide each nation with an amount of funding that depended on the population size in each country.

That's why I thought it would be interesting to compare the way the ECB has divided up the €60 billion with the split that would be expected with if each eurozone citizen was treated equally. In the next table, I have removed the €66.1 billion that was used for purchasing "Supranational" assets so that we can see how the ECB's money was split between countries.  I also included the split that would be expected based on population size in each country. That way, I was able to determine what I call an "ECB bias" that reflects the degree to which each country is favoured (or discriminated against) by the ECB.  Here are the results.

As you can see, the country that got the best deal was Luxembourg which was allowed to purchase 58% more assets than it should expect on the basis of its population. Ireland, the Netherlands, Finland and Austria all get a particular good deal. In contrast, countries like Greece (of course) but also Estonia, Cyprus, Latvia and Lithuania all got a bad deal - with far less asset purchasing than would be expected on the basis of population size.

I have written to the ECB to ask them to justify their choices, and to ask them what would be so terrible if each Eurozone country was simply allowed to buy its own bonds to a degree that depended on population size. I'll will let you all know what the ECB has to say.

It's interesting to note what this level of money creation corresponds to at the level of individual citizens. For example, in the case of France, the Banque de France has purchased €102 billion worth of bonds from the secondary markets in 9 months. That’s the equivalent 170.2 € per month for every man, woman and child in France.

In the case of the Netherlands €28.5 billion in 9 months for a population of 16.9 million works out at €186.7 person person per month.

The obvious question for the ECB is this - why not simply put that much money into peoples' pockets, rather than throwing the money at the financial markets? Can anyone seriously claim that it is more "efficient" to inject all this newly created money into the financial markets, than giving the money to the Eurozone's citizens?  The case for QE4People seems overwhelming.

Note added on March 7th 2016:
The figures for the PSPP program at the end of Feburary show that the total has now reached €601.2  billion.  Germany now has a total of €140.4 billion in cumulative monthly net purchases.


I've been a bit quiet recently, but things have nevertheless been moving. I have just returned from a four day training program of the IMMR (International Movement for Monetary Reform). The event took place in Brussels and was organised by Stan Jourdan and other members of Positive Money. It was very well organised, good fun, and was an opportunity to meet other reformers from a wide range of countries - UK, Belgium, Bulgaria, Denmark, France, Germany, Greece, Iceland, Italy, Netherlands, Portugal, Spain, Sweden, Switzerland and well as South Africa and the USA.

We kicked off with a special conference on QEforPeople that was held in the European Parliament on Wednesday the 17th of Febraury. It was introduced by Molly Scott Cato (MEP for the UK Green Party) and featured talks by Richard Werner (Director of the Centre for Banking, Finance and Sustainable Development at the University of Southampton), Eric Lonergan (a macro hedgefund manager, economist and writer), Frédéric Boccara (a member of Les Economistes Atterés), Frances Coppola (who has worked in banking for many years) and  Frank Van Verven and Fran Boait who are both from Positive Money. You can see interviews with a journalist during the meeting for several people at the meeting : Molly Scott Cato, Eric Lonergan, Frances Coppola and Fabrio De Masi (MEP) in which they talk about the basic ideas.

The arguments presented in the debate were pretty convincing. We know that since march 2015, the European Central Bank has been trying to get the Eurozone economy kickstarted by injecting €60 billion a month into the financial system by using a range of measures known collectively as Quantitative Easing. However, as argued by Frank Van Verven, these measures have been remarkably ineffective, and in general have mainly led to increase in asset prices - thus increasing inequality by putting money in the pockets of people who are already wealthy.

People at the meeting were arguing, quite rightly, that it would make far more sense to simply put those €60 billion directly into peoples' pockets - for example with a citizen's dividend.

Note added on 25th February: There's a short description of the meeting that you find here. A full two hour video of the entire conference has now been uploaded to Youtube.