So Ritchie insisted that QE would never be reversed

Insisted recall. The government would just cancel it, the Gilts would never go back out into the market. The money never be cancelled and we don’t therefore have a large national debt.

My enquiries of the Bank of England suggest that this year £20.1 billion of the quantitative easing funding owned by the Bank of England will be redeemed and require reinvestment. This is in two broadly equal tranches, one this month and another in September.

Now just suppose that instead of this sum being used to buy gilts already in issue in the market place it was instead used to buy the loans issued by a new National Investment Bank tasked with creating national infrastructure. Under Maastricht rules we know these would need in the first instance to be offered to the markets, but just suppose that £20.1 billion was at the very least made available to underwrite these issues in case the market did not have the appetite for them. What would happen then?

Now he’s actually insisting that as the QE gilts mature they must indeed be repaid and the cash spent on his pet project.

There’s nothing like consistency is there, and this is nothing like consistency.

Tree stump….

10 thoughts on “So Ritchie insisted that QE would never be reversed”

  1. erm not sure this is inconsistent, I mean he has always
    1. predicted assets bought under QE would just be rolled over
    2. advocated BoE financing an NIB, PQE etc. instead of conventional QE

    here he’s just saying, instead of doing 1. why not do 2.?

  2. “Now he’s actually insisting that as the QE gilts mature they must indeed be repaid”

    QE Gilts are rolled over like any other Gilts. So what happens is that the government sells Gilts into the market to soak up reserves generated by prior government spending and returned to the banks via the initial QE process.

    The proceeds from that are then given to the Bank of England to ‘redeem’ the Gilts. The Bank of England then goes into the markets and purchases the Gilts the Treasury has just sold.

    The result is the same as the Treasury giving the BoE new Gilts to replace the maturing Gilts, except a few market makers make a few quid on the side and some reserves go on a needless roller coaster ride back to where they started.

    Richard’s proposal is that the roller coaster ride gets a new extension. This time via a national investment bank – which issues bonds to the Bank of England, then spends the proceeds back into the economy.

    The result is infrastructure is built, more tax is paid, more Gilts are issued and the reserves end up back in the bank where they started.

    aka more government spending.

    We don’t need to bother doing all this. If we need infrastructure, and there is physical capacity in the economy to do it, then the government should just buy it. No ‘investment bank’ required.

    That then generates about 90% taxation and 10% additional private financial savings in the usual multiplier fashion (depending upon what the gross savings rate is at the moment).

    If people upgrade their understanding of how money works, then we don’t need all these silly side diversions designed to fool people. And in particular we don’t need to clobber people with tax rises.

  3. Spending on infrastructure? Great idea.
    Helping the economy this year? Not so much.
    Can help the economy years down the line, particularly with new build.

    When was HS2 announced? When will it be finished – London to Brum?

  4. Maybe it’s just me, but I can’t see why substituting a bond issued by a State Investment Bank for a bond issued directly by the Government makes any difference at all. If the government wants to spend money on infrastructure, it can – whether directly by issuing gilts, or via a State Investment Bank in order to preserve the fiction that it isn’t increasing the public debt. And the Bank of England can buy whatever public sector bonds it chooses. If it buys a SIB bond instead of a gilt, the gilt will remain in the private sector. If it buys a gilt instead of a SIB bond, the SIB bond remains in the private sector. It’s a wash.

    Unless of course we are back to SIB issuing bonds specifically for the Bank to buy them.

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