I had one of the boring 'but QE will have to be repaid one day' conversations that have been a part of my life for some time now towards the end of last week. The argument of those putting forward this idea is that it's all well and good the Bank of England buying up government debt and holding it under the QE programme but one day (they say) the Bank will either have to sell it back into the market (the reason why they 'have to' is never specified, largely because it does not exist) or it will become impossible to roll the debt over one day at the same interest rate. This is another non-argument: if the Bank of England replaces one government bond with another for the sake of QE the rate does not matter: interest is not paid on QE debt. Let me however suggest a way in which this argument could be put to bed for good.
Let's suppose the government decided (or more accurately, recognised) that it was never going to re-issue the debt acquired under the QE programme back into the market, not least because it can create new debt to meet market needs for debt with much better social consequences (new investment, etc.). In that case all the government has to do is create a new perpetual gilt carrying a very low rate of interest (less than 1.8% which happens to be the current incredibly low 30 year yield on government debt). By perpetual I mean a gilt that is never repaid: this is an irredeemable gilt: the government would never have to repay it. It would never require rolling over.
The government would then offer to buy all the gilts in issue of any type where the Bank of England has a current holding under he QE programme and replace them with this new perpetual irredeemable gilt. The offer would be to all who held that debt: a level playing field is appropriate. Most would not want this new gilt: it would be (deliberately) low yielding which would make it relatively unattractive to most compared to the assets they hold. To the Bank of England this is, however, a matter of indifference: they earn nothing on the gilts they hold as the government does not pay interest on QE gilts because there is no point in them doing so: it's equivalent to them paying themselves. The Bank are also granted an indemnity on gains or losses on the gilts they hold. An irredeemable gilt would avoid the need for this: there could never be a gain or loss requiring indemnity because there would never be a redemption where that gain or loss could be crystalised.
At a stroke a number of problems are solved. QE would never roll over again.
Gains and losses on QE investments would end: they could not happen.
And a new class of low cost gilt would have been created. At some point this could be issued to fund the investment this country really needs if only a government were prepared to undertake that beneficial activity on behalf of the country.
And those pointless arguments about QE having to be repaid would end: the QE debt could be held in perpetuity, neither redeemed or cancelled, but just sitting there like the double entry book-keeping which is all that it now really represents.
What's the objection? The only one I can see is that people want debt to be repayable. Why? So they can try to make governments beholden to markets. It's time to shatter that myth for good. This would help do that.
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Simple.
What needs to stop is further QE programs pumping new money into financial assets. Has the latest £70bn program finished now? We should make sure that we never see it’s like again.
If state money creation is necessary again, and it is likely to be, it should be spent into the productive economy or real capital investment.
Agreed
Absolutely correct.
I’m struggling a bit to get my head around this. Perhaps some time you could try to put it in Janet and John terms – that might also help sell it to MP’s :0
It was thinking out loud to be honest
I will revisit it
Sometimes my blogs are just place markers that others happen to read
‘Most would not want this new gilt: it would be (deliberately) low yielding which would make it relatively unattractive to most compared to the assets they hold’
The bonds acquired by the BofE under QE are purchased in the open market. If the new gilt is made ‘deliberately’ unattractive because of an artificially low yield, what sort of take-up do you imagine there would be in the market ?
There may well be attractions to the Government’s own internal books, but if the new issue is less attractive than the gilts they already hold, people will continue to hold their existing bonds.
The new gilt is unattractive so that it only ends up in the hands of the BoE
That’s exactly what I intend
But you seem not to have noticed it has £435 billion of gilts right now
That had not escaped my attention. And where do you suppose that £ 435 Billion of gilts came from ?
If you’re suggesting that the BofE would be the only buyer of the gilts from the DMO, why go through the pretence of issuing debt at all ? Why not just print money to achieve your stated objectives ?
EU law has not permitted it to date as I pointed out in a recent blog about useful things we could do post Brexit
Clearly, you don’t understand the reason that the QE bonds do have to go back into the market — at some point.
MV = PQ
Money times velocity of circulation is equal to prices and quantities.
Now, crudely in order to keep it simple…
PQ is also roughly equivalent to GDP. Money here is base money (it is V which multiplies it up to broad money, so, again roughly, P is M0 and MV is M4).
V sank like a stone in the crisis. To avoid P doing so (deflation) or Q, or even PQ, a depression, something had to be done. So the BoE increased the amount of M in order to keep PQ up and thus avoid a disastrous fall in PQ.
M0 is notes and coins in circulation which is about £70 billion these days. QE money isn’t M0 but we can usefully, if inaccurately, think of it as being an addition to it. QE money is c.£500 billion at present.
Some day, who knows when, V will return to something like normal. We’ll then have £570 billion of M0 as the M in our MV. That will lead to a considerable — to be mild about it — increase in P. Or mega-inflation.
Which is why QE has to be reversed. Because we must take that created base money out of the economy and destroy it. At some point. The alternative is a massive jolt of inflation. Not to reverse QE would be what Zimbabwe and Venezuela have both done.
I imagine you’ll delete this, because you don’t like being corrected.
You really do not understand money do you?
The only effective tool against inflation is tax, which destroys money
What you’re suggesting is crashing GDP to beat inflation when taxing more could do the job, permit growth still and clear deficits
What a sad prescription yours is
Even if you really think V will return to ‘normal’ by which you mean ‘good old neoliberal times’ which have gone forever, if you have no noticed
“The only effective tool against inflation is tax, which destroys money”
Debt repayment also destroys money which is essentially the problem of a debt overhang (or Richard Koo’s balance sheet recession).
I think I agree with you though that the right way to inject money in these circumstances is via fiscal stimulus.
QE did not increase the net assets of financial entities, it simply replaced a gilt with cash. Since gilts are near cash investments they should be included already in current or near cash balances. Therefore the BoE did not increase the near liquid assets of banks, banks have been free to convert gilts to cash at any time.
What the banks then did with the cash, who knows; the theory is they sought out riskier investments. But RBS is carrying a cumulative loss of £58 billion yet is somehow able to continue to pay its creditors.
I think that you are arguing that QE cash is somehow pumped into the economy to increase velocity but I would repeat that asset base upon which increased lending could be based was not increased.
Paul, You should read Between Debt and the Devil by Adair Turner, or the work of Richard Koo on the balance sheet recession. This video is long but very good.
https://www.youtube.com/watch?v=8YTyJzmiHGk
If inflation is low – as it is – and P is not rising, why do you think there is too much M? When might we expect to see your massive jolt of inflation?
Thanks
May suit being in a Ladybird Book expert format as per climate change publication. Would love to see another on where does money come from.
I think it was Abba Lerner who put forward the idea that modern societies would be better off if they regarded their central governments as “Institutional Entrepreneurs” tasked with ensuring a country’s economy in aggregate was as optimised as it possibly could be. Since at root money is “communication” enabling us to contract with each other for both private and public goods and services it makes sense the amount of this “communication medium” (money) is optimised in regard to its active circulation on an equitably distributed basis. Since the creation of money is simply based on maintaining a continuous flow of refluxed credit in non-hyper inflationary times deficits are the norm for both privately and publicly created money. The Institutional Entrepreneur is tasked like Goldilocks with ensuring the deficits (both private and public) are just right neither too hot or cold.
You must be heartily fed up with just about every economic and political commentator saying you are talking nonsense. When are they all going to realise that they are all wrong?
You clearly have very selective reading because I am frequently reassured that I surprisingly widely listened to
After all, why would you be here if I was not?
I should blow the dust off those textbooks and look up what happened to all those ‘Perpetuals’ the Bank of England issued centuries ago.
Here we are: Consols!
https://en.m.wikipedia.org/wiki/Consols
Bank of England Consolidated Loan Stock, paying interest until redeemed at the Government’s pleasure.
Remember I do not think these will actually be in common use
They are a ruse to cancel QE