BoE loan to Northern Rock

Martin writes

I gather that each of us is lending N.R. about £750.

But I can assure you that we won't each get our portion of the interest made on the loan

Tiddy Ogg.

Doesn't the BoE just "create" the money out of thin air as and when required? I don't think there is any question of it being called in from anyone else.

No, the money was printed by the Bank of England and lent out to Northern Rock. When/if they repay it, it will be destroyed again.

If they stopped printing money would it make the notes under my mattress more valuable?

In the case of NRK provided the liquidity is "mopped up" sufficiently afterwards i.e. the loan is repaid then it should not cause inflation and therefore lead to a loss of purchasing power.

Generally though, you are right. However the BoE printing money is only a small part of the problem. Commercial banks creating money to lend out accounts for 98% of the money currently in circulation.

Northern Rock borrow money from other banks They lend it to mortgage customers, who buy houses, and so the money enters the general economy The other banks ask for their money back They borrow printed money from the Bank of England, and pay off the other banks with it. The other banks then use the money to lend to other people, pay back other loans, pay for directors' bonuses etc, and it enters the general economy

Until such time as Northern Rock repay the loan, this extra money is in general circulation.

So are we saying that the pound has been effectively devalued, until such a time as NR repay the loan? Can this effect be quantified, perhaps in terms of increased inflation?

The monetary base has increased by about £188bn in the last year, so the NRK loan represents about 12% of that. So at a guess it would be adding 12% to general inflation (making CPI 2.2% instead of 2.0%) although it is more complex than that.

Who gets it then? I'd assumed it would go straight to the Exchequer.

Tim.

In message , Martin writes

In message , Jonathan Bryce writes

Except no printing is involved of course as no physical money is used.

In message , Gordon H writes

Wow. I thought the BoE was a Limited Company.

In message , Jonathan Bryce writes

Nope. No printed 'money' is involved.

No.no extra money is in circulation at all. The BoE merely stands in the same place as the lenders who have withdrawn thereby maintaining the status quo.

The 'Issue Department' section of the weekly Bank Return shows no significant increase in notes in circulation.

The 'Banking Department' section does show an increase in 'other assets', but this is secured by those assets which NR had previously used to secure their borrowing from the lenders who have now withdrawn.

In message , news outlook writes

No. Its rubbish.

No.

The status quo has been maintained.

Good. So we're all better off, cos BoE is now getting c.7% interest on $22bn - which previously was earning nowt.

Do you agree?

It is a company incorporated by Royal Charter.

I realise they haven't printed 460m £50 notes, but they have increased M4 money.

The money that Northern Rock borrowed was used to repay the loans from other banks. What did the other banks do with the money they were repaid? That money won't have disappeared. They will be able to do something with it.

In message , Martin writes

yes!