Speaking of which, in theory the Bank of England will eventually sell back to the markets the £350bn or so in gilts it will own as a result of quantitative easing (QE). Yet I doubt this quantitative tightening (QT) will ever happen. The UK will still be borrowing too much for years to come.
A more honest and preferable option would be for the authorities to admit that the £350bn has been permanently monetised and for the Treasury to cancel all of the gilts owned by the Bank – in other words, admit that the Bank has permanently created more money, and used that to pay off government debt. Do taxpayers really need to be paying interest to the Bank on the gilts that it holds? A cancellation would cut the UK’s debt to GDP ratio from 63 per cent to 41 per cent, and slash the interest bill on gilts from £50bn to £32bn per year. The Bank holds these gilts on behalf of the Treasury, so the Treasury is paying interest to itself (and regardless of definitional niceties, the fact is that the state is borrowing from itself).
As M&G’s Jim Leaviss points out, the gilt cancellation could take place using the same process and precedent set with the cancellation of £9bn of UK of gilts acquired from the Post Office pension scheme in April 2012. No default would take place (so there would be no CDS trigger and no D from ratings agencies only interested in failures to pay private investors). Of course, the credibility of UK monetary and fiscal policy would be badly shaken – but that is at it should be. We have a major problem – pretending otherwise doesn’t help anybody.
ps the title is b0ll0cks - I restrained myself yet still it's starred out!
This post has been edited by bmf: 12 April 2012 - 07:04 PM