The company issuing the bond then deposits that money in their own bank. So now it is the corporate’s bank that holds the claim on us. A similar sort of circle occurs if the corporate then uses its deposit to buy a new piece of machinery, because the seller of that machinery will end up putting the proceeds into her bank, so that the claim on the Bank of England is now held by the capital goods producer’s bank. Whatever the type of purchase, it will always end up with someone’s commercial bank having a claim on us. That is even the case if the money is used to buy foreign goods, as the foreign commercial bank will need to exchange the sterling claim with a commercial bank that holds an account with us, if it does not do so itself. The only way that the claim can be eliminated from the system is if a bank chooses to exchange it for cash, which would make little sense since cash pays no interest at all. The reason for going through this in such mind-numbing detail is to make the point that the level of commercial banks’ reserves in aggregate is determined by the way we have funded the asset purchases, not by the commercial banks’ own decisions. The size of banks’ reserves cannot, as is frequently claimed, be a sign that they are “sitting on them”.
The moral from all this is one that will be all too familiar to you as accountants, though perhaps one that sometimes gets forgotten by consumers of accounting statements, namely that the appropriate way to frame accounts depends on how they will be used and what questions are being asked. The Asset Purchase Facility accounts may tell us the scale of gains or losses on the Asset Purchase Facility portfolio narrowly considered, but will miss the impact on the public finances from higher activity and lower financing costs and fail to tell us anything about it macroeconomic effectiveness. The rise in asset prices and the recovery in confidence since the start of the Quantitative Easing program have been significant. We cannot identify precisely how much of this is a direct result of Quantitative Easing, and hence the scale of the boost to tax revenues. I have no doubt that this issue will continue to be debated for years to come, and that some sceptics may remain unconvinced. But even a sceptic should acknowledge that the net accounting gain or loss on the Asset Purchase  3  4  Of course that is not true of holdings of corporate assets. BIS Review 126/2009  Facility provides an incomplete measure of the impact of Quantitative Easing on the economy and on the public finances. Thank you.