Unwinding QE is relatively easy. Using QE the Bank buys gilts issued by the Treasury. All gilts are issued for fixed periods varying from only a couple of years to up to 50 years. Because technically the gilts the Bank buys aren’t cancelled – because the Treasury and Bank like to play a game of make believe that suggests that the Bank of a England is independent of the government – the gilts it owns eventuality come to the end of their lives. When that happens the Treasury repays the sum borrowed, including to the Bank of England.
The reality is that the Treasury pays for the redemption of the old gilt by issuing new gilts. In effect, they ask the markets for the money they have redeemed back. And to date the Bank of England had gone along with this. It has always reinvested the proceeds of any redemption in alternative gilts that it has repurchased from the money markets. The QE process has been pretty much uninterrupted by redemptions in that case.
However, hints are being given that this is to change. Andrew Bailey, the Governor of the Bank, wants to reduce the size of its QE debt holding, and next March it so happens that £28 billion of the debt it owns will come up for redemption.
It wasn’t that long ago that His Sagacity was insisting that QE would never be unwound as no one would ever do such a thing. Therefore that £800 billion of gilts at the Bank of England didn’t really exist and therefore the national debt was very much lower than the official figures.
Whether QE should be reversed is another matter. But now we find out that it is easy and that the BoE is going to do it. So, all that £800 billion of gilts is in fact – at least in a conditional, possible, maybe contingent, sense – part of the national debt, isn’t it?
Wonder if that’ll be admitted anytime soon?