The seed had nevertheless been sown for the later magic money tree, which duly blossomed in the madness of the pandemic; the always thin line that separates the legitimate pursuit of the inflation target from overt monetary financing of government deficits was deftly and massively breached.
There’s that element of the MMT argument which is true. Govt can print money to spend it. And as I’ve been saying for 15 years now, when it is printed to be spent then that’s when the problems start. MMT being one of those things that can be done but shouldn’t be.
In essence, QE is the financing of government bond purchases through the creation of short term central bank reserves. Investors swap their bonds for reserves. This works fine, and to the advantage of governments, as long as interest rates are falling, for what is basically happening is that expensive long term debt is being replaced with less costly short term debt. The resulting profit from the interest rate differential would then be transferred from the central bank to the sponsoring government. A recent Bank of England paper estimated these transfers at £123bn since the start of QE in 2009.
Unfortunately, the tables are now reversed. With the return of inflation, the interest rate on reserves has risen above that of the average in the Bank’s £847bn holding of government bonds. Having banked and spent the previous profits, governments are now being forced to finance the consequent losses.
This is also true and nicely put. And it does lead to an observation. Spud³ insists that the Bank should stop paying interest on reserves. Which seems to be a socialisation of the profits and a privatisation of the losses. For govt has collected and merrily spent that £123 billion already, hasn’t it?