The Treasury has published a letter sent today from George Osborne to Mervyn King. For those who want to read it, it's here.
Let's cut through the crap. As we all know the Bank of England has bought £375 billion of government gilts under the quantitative easing programme. That's more than a third of the UK government's debt.
Gilts pay interest. Billions a year (over £40 billion a year right now). The Bank of England has therefore been receiving billions in income from the QE programme. But because George Osborne wanted to scare the living daylights out of the country by saying we could not afford this interest he's not asked for that interest received by the Bank of England to be paid back to the Treasury, quite absurdly. He preferred to pretend that the deficit was bigger.
And now he can no longer afford to play that silly game and so he's asked for all the money the Bank of England is sitting on back. It is, I understand more than £30 billion. That's money we no longer need to cut.
And that's all this letter says.
And yet it also says much, much more. First it says, as I have long argued, that as these gilts are now owned by the Bank of England they might as well be canclled: they are never going to be sold again, the income on them is now being cancelled out and so might the debt be as well. This was in all but name a money printing exercise and it should be recognised as such.
But that then means our national debt is not over £1 trillion. It's under £700 billion. And our grandchildren can sleep easy as a result: that's £375 billion George says they were going to have to repay that they'll never have to worry about.
And third? This should stop all that nonsense Clegg and Danny Alexander love, in their small minded way, to spout about unaffordable interest.
Let's come down to the simple truth: we printed money; we needed to print money; it has had no impact on inflation and now we could do it again, but this time with direct inpact on the economy if only we used Green Quantitative Easing, as I've long recommended.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Just read the letter in full. This isn’t my field, as you know, but it seems to me that there are comments throughout that are designed to imply (at least) that the gilts will be re-sold (e.g in the last paragraph ‘avoid disruption to the gilt market)’. So while I think you’re right about it being a fiction that they will ever be resold I think Osborne and his Treasury servants are being careful to leave open that fiction for the purpose of being able to maintain the ‘dangerous level of debt’ argument.
That said, what I also find interesting is that Treasury officials (and BoE and MPC as well) will have known all along that this option was open to them. So why activate it now? Presumably for party political purposes – because it’ll look good for the Autumn statement, etc, and because to do otherwise before now would have undermined the argument for such savage public spending cuts.
Finally, why ever haven’t Ed Balls and the shadow Treasury team been banging on about this for months. They’d be in such a strong position now. But unless I’ve missed something they haven’t, so now they’re caught on the wrong foot (it’s not even worth mentioning how this leaves Clegg, Alexander and Cable looking. Amateurs).
The hints are just that – hints but rubbish actually.
There is no way the market will ever re-buy £375 billion of UK debt. Let’s get real! That’s a fantasy
Balls has always treated the electorate is if they were utterly ignorant about economics. One could argue that since he’s Shadow Chancellor this policy hasn’t done him any harm. In private, as I understand it, he suggests he’s limited in what he can discuss by what’s in the Overton Window, that small aperture into politics though which the public peer, anything beyond which they simply won’t be discussing. I don’t believe that though, I believe while he’s obviously smarter he’s as Neoliberal and destructive as Osborne.
Bill, I absolutely agree with you that Balls is as neoliberal and destructive as Osborne. Until another economic paradigm begins to take hold and that does not happen overnight we cannot expect any improvement in the country’s prospects. Labour is currently offering no real alternative with Balls at the helm of economic policy and Rachel Reeves is no better. Every day we are seeing examples of the dire consequences of light regulation – Will Hutton in yesterday’s Observer about the failure of water companies to provide for investment and our ‘official opposition’ party remains silent. Neoliberal policies from the Washington Consensus institutions failed in developing countries and now they have failed in the developed world. We can no longer just tinker at the edges and expect the future to be bright.
Yes, they could go it again – green QE, etc. My worry is they will do it again and give the proceeds to Merkel!!!!
I am not sure I am following this correctly, according to the BBC website:
“As of last March, the Bank held £24bn in cash received from government interest payments, a figure expected to rise to £35bn by next March.”
Was that £24bn that could have been accessed back then? Is it the Country’s money? If not who’s is it?
About £30 bn now then….
As I said
I was not questioning your £30 bn figure I was wondering was that £24bn that could have been accessed back then? Is it the Country’s money? If not who’s is it? or is it simply “magic money”?
This was always the country’s money – it just took Osborne TJNs to agree with me
Agree. He’s steeped in it. It must be nigh on impossible to accept that all that you’ve become an expert in is a complete sham. Balls, and Brown and
really ‘clever’ people like that just can’t do it.
Why on earth has this move only just been taken? The Federal Reserve rebates these interest charges to the US Treasury (after deducting agreed expenses) and The Fed is supposed to be based upon the working principles of BoE.
Well done Richard for repeatedly hammering home this accounting anomaly.
In line with some of your other ideas I could ask you- where on Earth has Green QE actually worked? It’s good to have ideas and I like it myself , but like so many left wing ideas probably better in theory than in practice. But I would like to move on from that. Why not suggest a pilot project(s) to see if it worked? And propose some long term scientific research (with suficient resources) built into the process.
@ Stephen Griffiths – You say “where on Earth has Green QE actually worked? [ …] but like so many left wing ideas probably better in theory than in practice” – a truly extraordinary comment given the COMPLETE trashing of the whole intellectual and pracitcal case for neo-liberal economic theory and practice, with INNUMERABLE practical examples a) in every Global South country blighted by IMF and World Bank Structural Adjustment Programs, now b) being applied to Global North countries, such as 1) Greece, 2) Portugal, 3 ) Italy and, of course 4) the UK.
No one asked for Beta site tests for these SAP’s – oh no, the IMF theologians wanted immediate vindication – not to say stuff to trouser away in secret accounts, no doubt.
If Green QE is only half as bad as a Structural Adjustment Program, it will still be an improvement on what we have, and I suspect it would be a 180 degree turn-round of perforamce and effectiveness. But by all means lets try a Beta site test – I’m sure it would be convincing.
If this is correct, then why not do it twice more and eradicate the remaining £700 billion of government debt? I must be missing something obvious. If cancelling the gilts gets rid of government debt, then it must also get rid of the corresponding assets from the Bank of Englnd’s balance sheet? Does it not simply move the black hole?
That would cause inflation – this debt has only been been cancellable because of the recession during which it was created
Before QE, the govt owed the private sector £375bn. Now you believe after QE, that debt no longer exists. But unfortunately that would mean the private sector has somehow lost £375bn, which clearly they haven’t. what has happened is that they now have government debt in another form – central bank reserves that also pays them interest at base rate. So while the government saves a portion of the interest now, when the economy recovers and base rate goes up, that situation will probably reverse (the letter refers to this) and the government will sell those gilts back to retire the excess central bank reserves. Because without doing this, the BoE’s ability to control the monetary base, interest rates and inflation is lost.
See Paul Krugman’s explanation of why deficit funding with QE doesn’t work in the long term. http://krugman.blogs.nytimes.com/2011/03/25/deficits-and-the-printing-press-somewhat-wonkish/
Or what Mervyn King said (as reported by the FT)
Sir Mervyn also rounded on those calling for his institution to cancel the government debt it owns. Lord Turner, chairman of the Financial Services Authority and a leading candidate to replace Sir Mervyn as governor next year, mused about debt cancellation in a speech earlier this month. Calling such ideas “bad money creation” which would fudge monetary and fiscal policy, Sir Mervyn said “the BoE could not countenance any suggestion that we cancel our holdings of gilts”.
Sir Mervyn warned that the central bank would lose control over monetary conditions and inflation if the BoE took such a stance
The replacement debt is called cash.
Is it that hard to understand?
All money is debt. It’s created by banks. In this case the Bank of England. What is the difficulty in understanding that?
Phew, I was beginning to believe the conspiracy theories about the BOE before this announcement. Inflate our way out of debt without the inflation? Genius!
Excellent article by the way, and wouldn’t it be nice if the electorate were informed enough that this could be an open discussion.
We the electorate are deliberately uninformed on this and, I suspect, many other matters. We’re not so much educated at school as filled full of nonsense which we’re then encouraged to become conceited about. The reality is we’re just used by the banks as part of their money creation process; we apply to them for money so we can trade and they then create credit in our accounts which we duly return to them as real money. We aren’t in any society of our own, we’re in a farm for the banks.
A fuller explanation:
http://notayesmanseconomics.wordpress.com/2012/11/12/after-fridays-move-is-the-uk-now-monetising-its-government-debt-it-does-now-look-rather-permanent/