My, this is interesting.
Essentially, we don\’t have a girt big national debt because we can just ignore 20-30% of it.
However, it should be noted that the government has done something else at least as significant. Through the quantitative easing programme the Bank of England has repurchased or will be soon repurchasing near enough £275 billion of that debt (I’ve shown the last £75 billion as happening in Q3 of 2011 as that’s near enough when it was authorised).
Now the Bank of England is owned by the UK government so if, in accounting terms, a consolidated set of accounts were to be prepared the £275bn owed by the Treasury to the Bank of England would simply be crossed out, or ignored. The actual debt would only be £725 billion.
In static terms we could look at it this way, yes. BoE has printed money to buy gilts, that is what QE is. However, static ain\’t quite the way to look at it, dynamic is.
It’s all a matter of getting the story right and on this occasion it takes an accountant to do that.
That\’s where the problem is, yes. The national debt isn\’t quite as amenable to an accountant\’s take on it as the accountant thinks.
Nor is there any hint now of this QE causing inflation, all of which can safely be said to have had other causes, not least because as Government accounts also show, the M3 measure of money supply has fallen steadily since 2009, meaning there is no prospect of inflation in the future either as a consequence of this process.
It\’s here that we start to get into those problems. QE doesn\’t impact directly upon M3. Only indirectly. Now I get as lost as everyone else in these Ms, M0, M3 etc.
But roughly speaking the relationship is that M0 is what the BoE has been creating to buy the gilts. This is money if you like, printing the stuff (or calling it into existence on a computer). M3 is what the money supply is after we\’ve gone through the mulitplying effect of fractional reserve banking. You know, all that \”banks create credit for nothing\” stuff.
Which gives us something of a problem. Imagine, if you will, that the banking system starts to lend again. You know, like all of those plans that Ritchie has to make them lend again? So, that multiplier between M0 and M3 goes back to something like historic levels. At which time we do get inflation, because we\’ve got a lot more M0 to be multiplied into M3.
Which means, of course, that the BoE now needs to sell those gilts and cancel the money creation so as to reduce M0 and thus not have inflation.
Just to reiterate, it\’s true that M3 ain\’t surging: but as soon as the banking system is sorted out it will which is why we need to reverse QE when the banking system is sorted out.
So, we can indeed look at it in the static terms that Ritchie uses but we shouldn\’t. For the whole thing must be looked at in dynamic terms, not static.
This is the mistake he makes about Green QE as well: he misses that the whole point of QE is monetary and also needs to be reversible. Getting the BoE to print up £200 billion to go spend on real things doesn\’t have the same effect at all: we end up increasing M3 by whatever is the, currently low agreed, multiplier to M3.
As I said above, I can, like most, get lost in those M0 and M3 things. But even if I\’ve got the precise definitions of the monetary aggregates wrong the basic argument is still true. QE creates base money, base money is multiplied by the banking system. That mulitplier is currently low as a result of the credit crunch (low multiplier equals credit crunch in fact) and when the multiplier returns to normal we have to reverse the base money creation thing.
So while the BoE does currently own said debt it won\’t forever.
And then this, which is simply quite lovely:
And in this case that would be absolutely the right point of view. There is no hope at all that this debt will ever be sold back into the markets: there’s enough new debt to sell to meet all market demand for UK debt without ever re-selling this stuff.
Do you see what he\’s said there? We\’re already going to be issuing all the debt the market wants. On current plans. Which means that the borrow to do stimulus to get out of recession plan won\’t work, will it? Because that would mean issuing more debt: more debt which, as Ritchie says, would be more debt than the market wants. Which would mean that if that more debt (to do the stimulus which Ritchie says we should do) were issued then the price of the debt would fall, yields rise and we\’d find any nascent recovery being chocked off by higher interest rates.
Isn\’t that lovely? Part of Ritchie\’s proof that we\’re not in as much debt as we thought is the proof that we cannot issue any more debt than we already are?
Might be why we have bankers not accountants running Central Banks really.