So, the cure for QE is a permanent gilt. A Consol in other words, a couple of years after they were paid off.
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.
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.
It would help if Spud actually understood the reason that the QE bonds do have to go back into said market at some point.
MV = PQ
Money times velocity of circulation is equal to prices and quantities. PQ is also roughly equivalent to GDP. Money here is base money (it is V which multiplies it up to broad money, so, not quite but about, P is M0 and MV is M4). Please note these descriptions are wrong, inaccurate, but useful to explain what is going on.
The essential QE point is that V sank like a stone in the crisis. To avoid P doing so (deflation) or Q, or even PQ, a Depression, we needed to do something. So, increase the amount of M in order to keep PQ up and thus not see horrible fall in PQ. Again, not accurate, but useful enough.
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 around £500 billion at present (or will be by the time the latest extension ends).
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. Inflation that is.
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, those terribly successful economies, the monetisation of government spending.
Which is why Ritchie’s magic money tree doesn’t exist. It can exist for a time, that time being when V is depressed. But we need to reverse it when V recovers.
We also know how it will be done when the time comes. As bonds mature currently the Bank buys more. At some point it will stop doing that and the Treasury will have to issue more bonds to the market to cover the repayments to the Bank. Yes, we do know this because the Fed has stated very clearly that that is the way they will do it.
Spud’s just getting this wrong.