Who gets the interest on UK public sector debt? Answer : the Financial Sector

The nice man at the UK Debt management Office kindly pointed me to the historical data concerning the ownership of UK gilts. The dataset is really very interesting, and provides a breakdown of where ownership lies that goes back to 1987, and provides detailed numbers every quarter.

I've regrouped the more recent part of the dataset in the following table, which provides the detailed numbers for the period from the end of 2008 through to the end of 2014.  I chose that period because at the end of 2008,  the Bank of England had no Gilt holdings at all.

You can see that at the end of 2014, the UK government had emitted over £1617 billion in Gilts. £403.0 billion of this (24.9%) of this is held by the Bank of England and corresponds to Quantitative Easing.  In a sense, I think that this doesn't count, because the UK government effectively owes itself this money. The remaining £1214 billion can be split up as follows:

• Insurance Companies and Pension Funds : 38.6% (£468.4 billion)
• Other Foreign (not including Foreign Central Banks) : 27.5% (£333.4 billion)
• Other Financial Institutions : 13.2% ( £159.7 billion)
• Monetary Financial Institutions : 13.0% (£157.9 billion) 
• Foreign Central Banks : 5.5% (£66.2 billion)
• Households : 2.1% (£24.9 billion)
• Private Non-Financial Companies : 0.16%  (£1.9 billion)
• Local Government : 0.09%  £1.1 billion)
• Public Corporations : 0.04% (£0.5 billion) 

A first point is that the amount held by households, non-financial companies, local government and public corporations is trivial - around 2%. Gilts are clearly not being used significantly by anyone outside the financial sector - unless the "Other Foreign" label includes a substantial proportion of individuals, but I doubt it.

Clearly, the 18 Banks that have the status of GEMM (Gilt-edged Market Makers) sell the vast majority of the UK Debt that they buy every month towards other people in the financial sector - not to individuals.

I have also generated a graph showing how gilt ownership has changed over the entire 1987-2014 period covered by the dataset. Here's what it looks like.

This graph is particularly illuminating. You see that the massive purchasing of gilts on the secondary markets by the Bank of England that started at the beginning of 2009 has had almost no effect whatever on the overall structure. Every single actor has increased the amount of gilts held during this period. The worst case appears to be the Monetary Financial Institutions themselves (i.e. Banks). They actually increased the amount of gilts they were holding from £25.7 billion at the end of 2008, to £157.9 billion at the end of 2014. So much for the idea that Quantitative Easing was going to increase the amount of money in circulation in the economy. The Financial Sector has hung on to its pile of gilts, encouraged by a chancellor (George Osborne) who has turned the gilt printing process into overdrive, especially in the last couple of years.

It is difficult to make sense of this. But it looks like the UK government has been paying for its austerity program by running the printing presses. And, as I showed in yesterday's post that asked "Where did the UK government borrow £625 billion in just five years", ALL those gilts are initially purchased by a cartel of 18 banks - the so-called GEMMs - who are in a position to rig the market for their own benefit.

I also wonder to what extent this massive increase in the quantity of gilts that have been produced is not masking a massive increase in the money supply - directed clearly at the financial sector. I suspect that everyone can see that the Bank of England's decision to purchase over £400 billion in gilts can be seen as an attempt to pump newly created money into the financial system - although many people (including myself and 19 prominent economists) have argued that the same money would be far more useful if injected directly into peoples' pockets - QE for the people.

But, until I have been convinced that the 18 Banks that have the exclusive right to purchase gilts have not been buying those gilts with money that they create out of thin air, I will continue to believe that the whole system is very likely to be a big scam. A scam that allows Banks to create money buying bonds, and either sitting back and letting UK taxpayers pay them interest, or flogging those bonds on to other parasites in the financial sector. It's a scam that appears to be in operation since the creation of the Bank of England in 1694, and has cost UK taxpayers an average of 4.4% of GDP every year since then.

You might say that selling £468.3 billion in gilts to the Pension Funds and Insurance Companies, and allowing them to cash in on 36.8% of the roughly £49 billion that UK taxpayers pay in interest charges every year is a way to help out poor deserving pensioners in their twilight years. But if UK taxpayers wanted their money to go to pay pensions, they could simply increase the state pension - that way everyone would benefit.

Instead, the billions held by Pension funds are wasted. That money should be used for investment in business, energy, transport, housing - not as a risk free ticket for milking taxpayers.