Does this answer Ritchie then?

Credit Suisse’s answer last week to the (rather odd) idea of the British government “cancelling” (restructuring) the gilts held by its central bank under quantitative easing…

From the bank’s credit analyst William Porter, it’s worth a read:

Any financial problem can be solved at a stroke if double-entry book-keeping can be ignored as a constraint. The problem is, it cannot.

So, err, no, they can\’t just cancel the gilts the Bank has from QE.

18 thoughts on “Does this answer Ritchie then?”

  1. All these moves are justs shifts in creditors and debtors, and the idea is that if we make the right shift we somehow produce economic growth. Alas, no free lunches. Who needs a central bank anyways? Just let the banks operate their cartel and be done with it.

  2. I am not sure that I understand it. The Bank has bought gilts and is expecting repayment at maturity from the Treasury. Both are arms of one entity. Consolidated Government accounts would cancel out the asset and liability. So why does double-entry book-keeping prevent this from happening?

  3. @ diogenes
    The bank also prepares its own accounts to show it has net assets to cover its liabilities. If it cancelled the gilts it would be very insolvent – make Lehman and MF Global look like a storm in a teacup.

  4. Surely there are three possible scenarios for what happens with QE money.

    1) When the gilts bought with the QE money are redeemed, the Bank ‘destroys’ the money it gets, returning the total money supply to pre QE levels. No, I don’t see that being likely, somehow.

    2) The bank simply cancels the gilts – ergo they have effectively just printed money and given it to the government to fritter away, but they have done it in a way that has temporarily kept the yields down on all gilts, rather than pushing them through the roof as simply writing HM government a cheque would have done.

    3) The bank just keeps rolling the gilts over in perpetuity – this has the same theoretical effect as 2), but probably keeps gilt yields low for a bit longer…

  5. BoE has the monopoly on printing paper – physical – money. Nothing to stop them printing a load and making a gift of it to Westminster with which to repay its debt.

    That physical printing doesn’t have to turn up in any ledger. I’m sure it does at the moment, but no good reason why it always has to.

    Or doing the electronic equivalent thereof.

  6. Sorry, Tim, but you don’t understand.

    Ritchie and his ilk NEED the money, so they can “help” the poor, the vulnerable, the old, those in receipt of child benefit, housing benefit, JSA, the old.

    You can’t sacrifice hungry children for an abstract concept like “double-entry book-keeping”!


  7. Goethe was of the opinion that double-entry bookkeeping was among the “finest inventions of the human mind.”

  8. They can do this – in fact Adair turner floated the suggestion to Peston a few weeks back. The question is how inflationary this will be when the cash sitting unused in the economy starts to be deployed. Also once you do this, you create a precedent which would be so tempting to politicians that it would become a periodic event.

  9. john77 (#6), BoE notes are not a liability of the Bank in the same way that Lehmans had liabilities; all the BoE has to do on presentation of one of their notes is to give you another one of their notes.

    The problem, if I’ve understood it, is inflation (your #11).

  10. The idea that if the gilts are cancelled it will be inflationary is misguided. It’s already inflationary! The government is already printing and spending!

    Before the BoE can buy government bonds, it must create some money. It does so by increasing its balance on the ledger. This is the exact moment that the new money is created.

    It then gives the money to the government in exchange for the gilts. The government then spends the money, bidding up prices.

    The idea that these gilts will be paid back in the future, reversing the inflation, is silly. They will not: the government will roll over its debt when the bonds mature: total govt debt will increase. Or the gilts will be cancelled.

    “The bank also prepares its own accounts to show it has net assets to cover its liabilities.” No. It increases its balance: that is the point when the money is created. Then it swaps the money for an asset (gilts). But at no point is the money a liability, unlike a normal bank (which would owe it to its depositors).

  11. obviously I agree with James James and Richard, who have explained my viewpoint probably more cogently than I did.

  12. @ James James
    QE is not the BoE buying gilts from the government. It is the BoE buying gilts on the open market from those (usually banks and insurance companies) holding gilts already issued.
    The Bank of England is technically still a company and its directors are subject to those laws appertaining to company directors: it is illegal for it to continue to trade if it is insolvent and has no reasonable expectation of returning to a solvent position. The notes in issue are made up of two parts – that covered by the gold bullion stored in the bank’s vaults and the “fiduciary issue” which is, from time to time, sanctioned by Parliament. While the UK was on the gold standard a foreign national could walk into the BoE and ask for the bullion equivalent of the notes he/she tendered (and during the more-than-five years that the USA was “neutral” during the two world wars it did just that, transferring most of the BoE’s gold holdings to Fort Knox.
    @ Mario
    a la George Soros in 1992, but worse. Holders of BoE notes or assets denominated therein would try to exchange them for more secure assets: gold, dollars, renminbi, even euros (probably not cigarettes but I cannot promise that).

  13. john77 the extra liquidity isalready out there in the real economy…fiddling around with gilts between the Treasury and BoE does nothing to alter that fact. As a counter-experiment, if the BoE held those gilts to redemption, what would happen?

    Do you really expect any government to call in the value of those gilts from the economy in the form of extra taxes?

Leave a Reply

Your email address will not be published. Required fields are marked *