Should the Bank wipe out £375 billion of government debt?

It had to happen sometime. Someone in the magic circle had to ask the obvious question. Why is the government solemnly paying the Bank of England interest on the government debt it has bought up? After all, the government on behalf of taxpayers, owns the Bank of England.

If I owned 100% of a private bank, and that bank bought up my mortgage from a commercial bank, I could ask my private bank to simply cancel the mortgage. I would, of course, have to tell the taxman about it! The government does not even have to do that, when it finds itself in an analogous position. The government also writes the tax law.

When asked to explain it on the BBC, Mr Peston told us that there could be a problem with the Bank’s balance sheet if the Treasury simply cancelled its debt. He said they would have to convert the outstanding gilts to irredeemables, loans with no repayment date, with zero interest. He clearly does not understand accounting or finance. Such loans would have zero value, so they would not solve the balance sheet problem Mr Peston imagines exists. Even if the zero interest bond theoretically would be repaid in many years time it would have a much reduced value from the bonds the Bank currently owns.
The government’s debts are an asset for the Bank, so anything which diminishes its value sounds like bad news.

Fortunately, Mr Peston, the Bank has bought the gilts on the back of a Treasury loan, with an idemnity from the Treasury. The Bank and the Treasury could agree to cancel the gilts (Bank assets) and cancel the Tresury loan (Bank liability), leaving the Bank’s balance sheet unscathed by the activity. The Bank would owe the Treasury the profits on the gilts it has bought, which indemnity could also be cancelled leaving the Bank all square.

And should they? That is altogether a more difficult question. It would be good, at a stroke, to cut the size of the official (gilt edged) debt by almost 40%, and cut the interest burden. It would be bad to let the markets think that the UK now just intended to print as much money as it felt like spending in the public sector over and above tax revenues. That way is the road to Weimar and Zimbabwe type inflation. If they do end up cancelling this debt, they will need to show greater resolve and success in cutting the deficit and controlling future spending, not less. It would have to be a one off, coupled with obvious commitment and achievement in returning to honest spending and honest money. Confidence is a precious flower, easily killed if the authorities look and act irresponsibly.

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  1. Matthew Haynes
    Posted October 13, 2012 at 6:00 am | Permalink

    Enjoyed reading your article… It’s good to know our politicians understand basic double entry bookkeeping, can you suggest to Preston a training course… My company will be happy to assist.

    I’m not a conservative voter but I must admit to enjoying your blog.


    Reply: Thanks for the kind words.

    • lifelogic
      Posted October 13, 2012 at 8:20 am | Permalink

      Only some of our politicians and not the BBC alas.

      • Bazman
        Posted October 13, 2012 at 5:34 pm | Permalink

        How about the rest of the channels like SKY and channel 4?

        • lifelogic
          Posted October 14, 2012 at 8:36 am | Permalink

          I do not have Sky but I agree that channel 4 seems only slightly less biased than the BBC. Particularly on the ever bigger state, higher taxes, quack greenery and pushing us further into the EU non democratic disaster area.

          They did at least transmit “The Great Global Warming Swindle”, nothing like that is ever on the BBC. Just endless arts graduates going on about the settled science, despite temperature measurements clearly showing nothing remotely worrying.

          Only the invented positive feedbacks on discredited computer simulations do that. These simulations do not even predict the past events properly nor the lack of warming since 1998.

          • Bob
            Posted October 14, 2012 at 11:26 am | Permalink


            Are you saying that not only is there no man made global warming, but there is no global warming whatsoever despite the consensus of all the world’s scientists, the BBC, the three old political parties, the Guardian, the Independent, the University of East Anglia’s Climate Research Unit and Al Gore?

            How could so many experts have got it so wrong?

          • lifelogic
            Posted October 14, 2012 at 8:19 pm | Permalink

            A doubling of C02 would give rise to about 1C were all other things to remain equal. The computer projections suggest far more, this because they assume positive feed back mechanisms will make this far larger. Clearly this has been done for political, taxation and funding reasons. All the evidence suggests we actually have negative feedbacks not positive. Countless other variables are also in the system anyway. There is no reason to predict a catastrophe whatsoever. It is, at best, a huge exaggeration, a religion or a fraud.

            Anyway looking at history a little warmer is probably better than cooler and anyway the solutions they propose, to reduce C02, do not in the main even work, nor are they remotely economic.

            I recommend you search Professor Richard Lindzen who has has risks and science spot on in my opinion.


            The temperature changes so far this century are not remotely abnormal relative to normal variations. For the last 14 years no real increase has occurred despite increasing c02.

            Remember everyone in government and at the BBC and the “experts” were all in favour of the EURO and the ERM. They have an agenda its not science or logic.

            Reply Indeed, the experts have gone very quiet over the lack of any warming since 1997, just as they do not recall too much the strong expert worries about a coming new ice age in the 1970s.

  2. lifelogic
    Posted October 13, 2012 at 6:39 am | Permalink

    Indeed Mr Preston only qualification for his current job seems to be his distinctive, irritating, cartoon like voice with its idiotic pregnant pauses. Whenever he “explains” anything I am left with the impression he has not got a clue. He even make Stephanie Flanders, with her Stephanomics waffle, another BBC, PPE dope, look good by comparison. Why do they not employ someone sensible and intelligent or just get Andrew Neil to do it in his spare time.

    I am glad to see that the car insurance market has finally been referred to the Competition Commission. This is hugely overdue, they often pay absurd referral fees and excessive repair&rental costs to artificially push up claims & premiums for all. The government should also address the pay day loans area, the no win no fee racket, the whole way the legal profession and courts work and the huge energy over charging that is happening.

    I see reported that 10% of US GDP in in compliance costs and legal requirement costs. What a waste of productivity this represents. I suspect the UK is not that far behind with its endless absurd laws and court system in so very many areas. We will not get wealthier, on average, just by all suing each other, it just makes lawyers wealthy and everyone else much poorer.

    • stred
      Posted October 13, 2012 at 8:26 am | Permalink

      The PRM chose the venture capital boss financing Wonga to advise him, so don’t be too hopeful.

      • lifelogic
        Posted October 13, 2012 at 11:25 am | Permalink

        Representative APR 4214% from their website. Who on earth benefits from a loans at these rates?

        The PM made much of his having kept interest rates low! These loans should not be allowed they are just a way of mugging the desperate and dim.

        • Bazman
          Posted October 13, 2012 at 5:42 pm | Permalink

          Like slum landlords they provide a service for desperate people who cannot get credit elsewhere and nothing they do is illegal. They should in fact be given charity status and tax breaks in my opinion.What are you proposing? More absurd and pointless regulation sending these borrowers into the hands of criminal loan sharks as this is exactly what will happen. If you borrow money for a few days the admin must be costly so your 4000% apr is meaningless. Rachman just got bad press from leftie film makers and music hall owners like the BBC and their fatwa against business called Watchdog today.

          • zorro
            Posted October 13, 2012 at 9:41 pm | Permalink

            Local credit unions are a better idea for the poor. As for your Rachmaninov comment, one can only assume that you were being ironic, but then who knows with you….?


    • zorro
      Posted October 13, 2012 at 8:35 am | Permalink

      I’m afraid that BBC economists always refer to money matters in terms of debt and interest as they assume that it is natural as everyone spends more than they have. They fail to see the big picture of why we have ‘debt’ and what ‘money’ really is.


      • Bazman
        Posted October 13, 2012 at 5:43 pm | Permalink

        How are going to buy your house without debt? Save up while you rent?

        • sm
          Posted October 14, 2012 at 10:14 am | Permalink

          I think Zorro was pointing out the fact that the money to purchase for example a house is created out of thin air by the bank when you sign on the dotted line. This newly created interest bearing debt allows the money to be spent and passed to the seller.

          This allows the credit bubble ponzi schemes to work for a while.

          If banks were only allowed to lend what they had received in deposits, the ratio of price to income would be closer to the long term mean.

          The problems faced by the private renter are caused by our rentier form of capitalism.
          (Absent proper competition, overgenerous tax subsidies on leverage to building which are already existing ).

          How many property millionaires donate to party political funds and gain undue influence?

          • zorro
            Posted October 14, 2012 at 4:49 pm | Permalink

            Thanks for that sm hopefully he’ll understand now.


    • Disaffected
      Posted October 13, 2012 at 9:43 am | Permalink

      I note that it is reported in the papers today that Clegg says he will flatly refuse any welfare cuts. Where does this leave Osborne and Cameron’s strivers?? Clegg got the welfare lifers a 5.2% pay rise this year the odds must be in Clegg’s favour- paid for by the poor old strivers like me and my family. He is winning to keep mass immigration and the numbers continue to soar, more EU and more EU contributions every day, the economic lunacy of the energy policy continues rumbling on towards disaster for the country and hitting every striver and pensioner in their pocket. I will watch with interest who wins.

      About time Cameron woke up to being a Conservative rather than him declaring to be a liberal conservative surrounded by Europhile Tory and Lib Dem ministers.

      I do not see the borrow, spend and waste of this government ending any time soon. Even if the debt is wiped off, it will only allow for more of the same. The government, like most people, need to learn to spend less than they earn. Basic really.

    • Bazman
      Posted October 13, 2012 at 12:40 pm | Permalink

      They could have an investigation into rip off landlords too.

      • lifelogic
        Posted October 13, 2012 at 5:40 pm | Permalink

        Most landlord’s do not even make a profit at the moment if they are using borrowed money. Bank margins are high, rental yields very low, property prices are falling and they have loads of government red tape and drivel to deal with too, and tenants who do not pay rent but take months to evict, leave a pig sty and then vanish.

        If you think they are a rip off try it yourself.

        • Bazman
          Posted October 13, 2012 at 11:17 pm | Permalink

          Rachman does not exist? I am reassured.

        • sm
          Posted October 14, 2012 at 10:22 am | Permalink

          A lot of landlords with property should have experienced a severe credit crunch and a resulting correction in property prices.

          They are on borrowed time , as once US bond yields turn the game is truly up. Hyper inflation or property deflation or both.

          Note ZIPR and continual QE for the banks will end, because the value of fiat will end.

  3. Andrew Campbell
    Posted October 13, 2012 at 6:47 am | Permalink

    What would be the benefit to the government in cancelling the debt? Yes it would get the official debt down but it would also highlight to everyone just what a scam the current scheme is. It’s far better for the government (though not the rest of us) to keep printing money on the sly and hoping not many people catch on.

  4. alan jutson
    Posted October 13, 2012 at 7:13 am | Permalink

    Thank you for highlighting this John.

    It had to happen sometime, that somone would recommend this solution.

    Why, because at first it seems the easy way out.

    We have had the dream of printing money to pay for spending we could not afford.

    We have had the dream of borrowing more and more at lower and lower interest rates, so we could keep on spending money we could not afford, by lending money to ourselves.

    Now we have a dream solution of cancelling the debt on the funny money printed, to reduce the interest on the low interest rate charges.

    To complete the “magic circle” (a good word/phrase by the way) we simply now want to write it all off as if it never hapened.

    But, and one big but, it did happen. they did print the money, they did waste it.

    If the above suggestion does happen, it will prove to everyone else in the world that we are now running a fake economy, with a fake value to our money, that we cannot pay our bills, that we will even CON OUR OWEN PEOPLE out of the value of their savings and pensions, and that we are really well and truely really busted.

    All because the idiots in charge of the asylum, could not live within their means.

    No it is not just this Government. It was left with a bankrupt policy of print. borrow, spend, and waste, by a man who was in charge of the system for 13 years and who used smoke and mirrors to try and cover his tracks, who brought a new dimension to so called off balance sheet borrowing, as if it did not really exist.

    But instead of really doing something about it, this government has pussyfooted about, instead of grabbing the problem by the throat and sorting it.

    The people of this Country are being/have been financially betrayed over many years, it now seems like the end game is getting closer, especially when solutions like the one proposed are being aired or even thought about.

    The whole system is now being proved by the politicians themselves, as being a giant ponzi scheme, like those thought up by a busted company, just to stay in business a little bit longer, with no thought given to the creditors, just themselves.

    Is it too late to rectify, I do not know, but I do know if THEY do not try to live well within OUR means, and soon, it will all end in tears for US.

    Yes the General Public will pick up the tab sooner or later, and that is the end game WE will be the creditors, and OUR pensions and savings will be worth diddly squat.

    Apologies for the tone of this posting, but I am angry, very angry, that someone else has got ME into DEBT.

    Reply: I share your anger about the way the state has wracked up debts in recent years – one of the main things I have been highlighting and trying to arrest.

    • Disaffected
      Posted October 13, 2012 at 9:48 am | Permalink

      You are not alone Alan. That is why our only recourse is to give the main parties the boot they deserve. Vote UKIP. It might make them wake up that WE are fed up with THEIR stupidity, you know US plebs.

      • zorro
        Posted October 13, 2012 at 11:19 am | Permalink

        Talking about plebs…..I see that what some people were calling a ‘storm in a teacup’ looks like it is rumbling on into a big vat of boiling coffee perilously perched above a certain somebody’s head who has difficulty in recalling what he says to people…..


        • Bazman
          Posted October 13, 2012 at 5:46 pm | Permalink

          Should say exactly what he said and then tell everyone to ram it as he stands by every word. The path to the top will then be clear.

        • lifelogic
          Posted October 13, 2012 at 5:47 pm | Permalink

          Interesting even if he did say, what he is reported to have said, legally a company would not be able to sack him for such a trivial matter. No doubt they would have to send him on an anger management course at their expense or something and monitor him for months or something.

          The real offence is surely that the police seem to have leaked confidential details to the press and their trade union is milking it.

          • zorro
            Posted October 13, 2012 at 9:45 pm | Permalink

            It’s called gross misconduct and I can assure you that people have been sacked from jobs for similar behaviour…..


          • Bazman
            Posted October 13, 2012 at 11:19 pm | Permalink

            Hmm? Would this logic apply to a labour whip?

          • Bazman
            Posted October 13, 2012 at 11:29 pm | Permalink

            Reply or shut up…

          • sm
            Posted October 14, 2012 at 10:31 am | Permalink

            Whats confidential about behavior in a public place directed at a police officer in the course of his duty.
            Why should disclosing facts be seen as confidential. Indeed i was wondering if a super-injunction had been taken out.
            Its hardly unusual for those with money and power to be granted them.

      • alan jutson
        Posted October 13, 2012 at 2:07 pm | Permalink


        Indeed if JR was not my MP, I would be doing exactly that.

        However I feel JR has more chance of being an influence (even if in opposition) than a UKIP candidate, if he remains an MP in parliament, so because of this, and only because of this, I will still vote for JR.

        The real problem I have with all of this is that Cameron will think because I am voting for JR , I support the present Conservative Party, its policies, his way of doing things, and his record, when that is very, very far from the truth.

        • David Price
          Posted October 14, 2012 at 5:31 am | Permalink

          Good comments ALan, I have the exact same problem.

        • Disaffected
          Posted October 14, 2012 at 11:08 am | Permalink

          Understandable in some ways as JR stretches his hand out to hear people. Unfortunately look at the cabinet and people who Cameron surrounds himself for advice, no one like JR in sight. JR is marginalised and treated with contempt like the rest of us. Sadly no matter how understandable your view is JR will not make a jot of difference. He is treated with equal contempt by Cameron and his likes. A wasted vote if you want to bring about change to this corrupt institution called parliament.

    • alan jutson
      Posted October 13, 2012 at 10:12 am | Permalink

      reply to reply


      Whilst I do not agree with all of your ideas, your site seems one of the few centres of financial and political sanity, and an oasis of financial commonsense on most matters.

      Thank you for allowing us to let give vent our own thoughts, ideas, and yes frustration from time-time on a whole range of topics.

      • outsider
        Posted October 13, 2012 at 11:57 am | Permalink

        Here, here.

        • outsider
          Posted October 13, 2012 at 12:27 pm | Permalink

          Oh dear, I meant hear,hear. Cannot even get two words right.

      • Dennis
        Posted October 13, 2012 at 9:11 pm | Permalink

        But remember that Mr Redwood also promotes/likes ponzi schemes. He wants economic growth which is borrowing from future non renewable resources to make us richer now.

        • Bob
          Posted October 14, 2012 at 11:47 am | Permalink

          What are “future non renewable resources”?

  5. Pete the Bike
    Posted October 13, 2012 at 7:14 am | Permalink

    What amazes me is that you, Mr Redwood, can discuss this like it is anything but financial fraud on a massive scale with the victims being savers and investors that are gullible enough to believe in the value of sterling. If a business conducted themselves like this, issuing loans then canceling them to manipulate cash flows and skim money off for themselves in the process the police would be making arrests. Central banks are a criminal enterprise enabled by Mafia style governments entirely devoted to theft from the unfortunate population. It is a tragedy that most voters are so brainwashed with statist propaganda from childhood that they cannot see how they are being conned.

    Reply: You may recall I have been a critic of the Bank’s approach to all this for many years. However, we are where we are, and the views of the establishment are clearly on the move, so I see the need to explain and to invite discussion. The main media are not engaging seriously with this proposal, because as Mr Peston has revealed they do not seem to understand it.

    • lifelogic
      Posted October 13, 2012 at 8:35 am | Permalink

      Central banks are indeed an enterprise devoted to theft from unfortunate savers. Furthermore most voters are brainwashed with statist, fake green & BBC think propaganda from childhood so that many cannot see how they are being conned. They are told to see the state as looking after them, when mainly it is robbing and indoctrinating them and using their own money to do it.

      • Bazman
        Posted October 13, 2012 at 5:50 pm | Permalink

        What propaganda does the BBC promote that channel 4, 5 SKY and the rest do not. Give a specific example of a reliable news source TV or web based or stop ranting.

        • Bazman
          Posted October 13, 2012 at 11:32 pm | Permalink

          Shut up.

        • Single Acts
          Posted October 14, 2012 at 5:33 pm | Permalink

          Er, the licence fee?

      • StevenL
        Posted October 14, 2012 at 2:18 am | Permalink

        Most voters are long land with planning permissi0n and short sterling / sterling interest rates. Many swing voters have such a large position on this trade that a relatively small move against them will wipe them out.

    • stred
      Posted October 13, 2012 at 8:48 am | Permalink

      It is amazing that the the £ has stayed as high and appreciated against the Euro when this fiddle has been reported and analysed in your blog and other media since it was invented. When Robert Peston was interviewed by John Humphries it seemed that they did not understand the ‘funny money’ as it was called.

      Why can’t the highly paid financiers in the currency markets understand that the government is as credit worthy as a Fanny/Freddy customer. The debt will have to be cancelled because they have no money and have taxed and charged to the point of negative returns.

      How the UK taxpayer will be able to afford the cost of living when the £ falls and still pay high taxes is another question. At least exporters will be happy.

      • zorro
        Posted October 13, 2012 at 11:23 am | Permalink

        The reason why the pound is staying so high is because of the instability in the Euro and because the markets are already discounting based on the inevitability of some more mega QE in the Euro area. That allied with endless QE in USA has given the UK some considerable wriggle room in deploying strategies to try and mitigate economic collapse. They could have played their hand a lot better though……


        • stred
          Posted October 14, 2012 at 9:38 pm | Permalink

          The £ has risen over the E for 2 years, although the UK has been doing more QE than the US and the Germans have stopped the ECB from printing so fa. This may be about to change. (as far as I understand)

          You seem to be saying that the markets have been discounting the E based on the expectation of inevitable future printing. Are you certain this is so?

          • zorro
            Posted October 15, 2012 at 6:00 pm | Permalink

            The pound has indeed appreciated against the Euro over the last two years despite the QE experiment. The markets are, of course, wise to what QE is really for, but know at this stage that inflation is being relatively contained by the banks’ inability to grant credit because of the requirement to make sure that they bolster their balances…….

            What it shows is that QE is a factor in determining relative strengths of currency but not the dominant one in this crisis.

            The weakness of the Euro is because the outlook for the Euro economy is not good. Several countries are suffering badly and are in danger of spiralling into decline. The only way they have left is to QE/print quite radically. Depending on what decision is taken regarding the Euro, there will be complications for the major players. In that sense, although I cannot be sure, I suspect that the markets are already factoring in a major printing exercise in the short term.


      • Dagney Taggart
        Posted October 13, 2012 at 3:48 pm | Permalink

        At least exporters will be happy.

        Very few of those left!

  6. Justin Walker
    Posted October 13, 2012 at 7:23 am | Permalink

    Wouldn’t it just be easier for the government to do the lawful thing and divorce itself from private banking altogether – to outlaw the whole debt-creating complex scam system that creates money out of thin air and then charges interest on that nothingness thus creating spiralling debt that can’t be paid back without losing your sovereignty to the bankers? A sovereign government has the perfect right to issue its own debt-free and interest-free money based quite simply on the wealth and integrity of the nation it governs. So simple and with historical precedent – Abraham Lincoln’s Greenback Dollar. So why not a Greenback Pound issued by our Treasury? The status of the Bank of England is not as simple as you make out – I suggest people research thoroughly the Bank for International Settlements and the Bank of England Nominees Ltd and then come to their own conclusions – I think you will find that the House of Rothschild and other debt-creating banking dynasties are having a lot of influence from behind the scenes!

    Reply: I see no Rothschild influence. The Bank is wholy owned by the UK state. The Uk state has been issuing “greenbacks” all my lifetime – the issue before us is should the state now convert its QE/loan method of injecting new cash into a simple note/bank balance creation system? The two are related.

    • zorro
      Posted October 13, 2012 at 8:31 am | Permalink

      John, it’s not quite the same thing though is it? I seem to recall that we are paying billions in interest each year on loans which we wouldn’t be doing if we were issuing ‘greenbacks’……

      Hallelujah though that we are looking at a practical way in the ‘we are where we are’ world in which we find ourselves at trying to get out of this situation and allow us to rebuild our economy. I would not have wanted this, but endless QE is not the solution. Such a measure as this would need to be coupled with fiscal legislation regulating government expenditure. Any infrastructure spending would have to be financed by subscription with no more PFI schemes. I think that we could get by with that and still retain international confidence. In any case, the only way that will be retained is by having a successful productive economy which is not a debt magnet.


    • Denis Cooper
      Posted October 13, 2012 at 9:02 am | Permalink

      Oh, for God’s sake, not this tripe about Bank of England Nominees Ltd again.

      Can people never understand that if a parent company has a wholly owned subsidiary then the parent owns the subsidiary, not the other way round?

      And does anyone really believe that the supposedly ultra-secretive Rothschilds would publicly announce their intention to destroy the greenback system in a leading article in the Times, another load of anti-Semitic tripe which is now going the rounds?

      Whatever may be the case with Fed, the Bank of England was nationalised by Act of Parliament in 1946, and it has never been denationalised – although there have been occasional suggestions that it should be – and it remains in public ownership and under public control; if the Bank is not doing what we want, that is simply because the MPs we elect are not insisting that it must do what is in our interests, and nothing to do with the claimed evil machinations of (a private bank-ed).

      • Denis Cooper
        Posted October 13, 2012 at 11:49 am | Permalink

        JR, I didn’t refer to “a private bank”, I referred to the real target of these false claims about the ownership of the Bank of England, ie people of a certain religious group which previously suffered not just persecution but mass extermination driven by similar false claims about their international financial and other activities.

      • Gary
        Posted October 13, 2012 at 11:55 am | Permalink

        “Can people never understand that if a parent company has a wholly owned subsidiary then the parent owns the subsidiary, not the other way round?”

        You said it , Denis. Which makes it even more strange why we have the circuitous money lending transactions between the Bank and its owner, the govt. Why would that be ? And it goes far beyond the MPs not doing their job monitoring the transactions, the question is why even have these transactions in the first place ?

        I suggest it may be that The Bank’s ownership is not what we are led to understand, or there is some other complicated arrangement for the benefit of parties that remain to be identified. There may be a wholly innocent explanation, but this is not being communicated very well. Even experienced financial journalists appear to be confused.

        You see, when things get very convoluted in the matters of money, the first reaction it naturally evokes is suspicion.

        • Denis Cooper
          Posted October 13, 2012 at 5:19 pm | Permalink

          As I’ve tried to explain before and try to explain again in comments further down this thread, it boils down to the Treasury needing to pay the government’s bills in money, and if necessary being able to borrow existing money for that purpose if it can find willing lenders, but not being able to create new money because that is the preserve of the Bank of England.

          Money and gilts are both forms of IOUs issued by the UK state, but money is issued by the Bank while gilts are issued by the Treasury.

          As people can only use the Bank’s IOUs, money, for everyday purposes such as paying their rent or buying their groceries, they naturally expect that when the government makes a payment to them, eg paying their wages as public employees or paying their state pensions, they will be paid in the Bank’s IOUs, money, not in the Treasury’s IOUs, gilts.

          Therefore the trick has been to arrange for a swap of IOUs between the Bank and the Treasury, which has now reached the point where the Bank owns Treasury IOUs, gilts, valued at £366 billion while in exchange the Treasury has had (almost all of) the £366 billion of the Bank’s newly created IOUs, money, and has used it to help pay the government’s bills.

          The additional complexity has come in because to obey EU law, and also to better disguise what is going on, the swap of IOUs has not been a direct swap but has been indirect, with the Bank using new money to buy gilts while the Treasury has been selling gilts.

      • outsider
        Posted October 13, 2012 at 11:59 am | Permalink


        • outsider
          Posted October 13, 2012 at 12:27 pm | Permalink

          Sorry, meant hear,hear.

      • Justin Walker
        Posted October 13, 2012 at 1:33 pm | Permalink

        Please Mr Cooper, answer me this – what is the role of the Bank for International Settlements when it comes to the supposedly nationalised Bank of England?

        And please don’t play the anti-semitic ticket, it really is overplayed and thoroughly discredited. For the record, I’m anti-Zionist (etc)

        • Denis Cooper
          Posted October 13, 2012 at 5:27 pm | Permalink

          I’ll leave you to waste your own time answering your question and explaining how it negates the Bank of England Act 1946.

          It was you, not me, who mentioned the House of Rothschild, and it was you, not me, who wrote a rubbish article suggesting that they’d arranged the assassination of Abraham Lincoln.

      • sm
        Posted October 14, 2012 at 10:51 am | Permalink

        Indeed why pay interest on your own debt? The answer someone is getting a cut? and for the purchases of GILTS in the 2ndary market is resulting in subsidized capital gains for the sellers? Why and for what social purpose?

        What is the purpose of a nominee account? The purpose is to to ensure secrecy? Sorry, i dont buy it even if it wholly owned, that says nothing about effective control. Why not dissolve the subsidiary.

        Full reserve banking with full transparency is way to proceed.

        • Denis Cooper
          Posted October 14, 2012 at 5:31 pm | Permalink

          sm, we’ve been over this repeatedly, and you can read my detailed reply to you back in March here:

          If there’s a lack of effective control of the Bank in the public interest, despite it being publicly owned, that’s simply because MPs fail to exercise their rights on our behalf.

          Most of this nonsense comes from the US, especially with videos in which US commentators assume or imply that whatever is true for the Federal Reserve must be true for the central banks of all other countries in the world.

          I had one such video circulated to me recently, with the note:

          “Applies to the USA but the same in Britain”

          to which I replied:

          “Why is it the same in Britain?

          We don’t have the Federal Reserve Act, we have the Bank of England Act 1946 which nationalised the UK central bank, and as it has never been denationalised it remains in public ownership and under public control.”

          However I realise that people will believe what they want to believe, even if it is tripe.

    • Justin Walker
      Posted October 13, 2012 at 1:25 pm | Permalink

      Sorry, Mr Redwood, but we have not been issuing Greenbacks – Greenbacks are debt-free, interest-free paper money issued by the Treasury, they are treasury notes that people and commerce have confidence in. As soon as a central bank is involved, then debt and usery raise their ugly heads. And the Bank of England issues bank notes not treasury notes if I’m not mistaken.

  7. Acorn
    Posted October 13, 2012 at 8:13 am | Permalink

    Remember we are dealing with a fiat money system not commodity money. the two systems are as different as MS Windows and Googles Android; but they are both operating systems that do the same job. At the macro level, the Treasury and the Central Bank are one and the same. The government freely chooses to act like a currency user while letting the BoE act as the currency issuer with no theoretical limit to how much it issues. Later on you can start thinking in MMT mode, and say what is the point of paying interest to yourself.

    “Today the Treasury announces the cancellation of £350 billion of gilt-edged stock held by the authorities. These gilts were bought as part of the Quantitative Easing programme started in the aftermath of the financial crisis. The purpose of Quantitative Easing was to boost nominal growth after what we thought was a temporary fall in UK output. Several years later it appears that this fall in output was permanent – the fall in UK GDP remains more severe than that experienced during the Great Depression. We will therefore make this liquidity injection permanent in order to boost UK growth and reduce unemployment. The Bank of England of course remains fully committed to its inflation target of 2% – a cornerstone of UK economic policy. Should inflation rise, or be forecast to rise above the target range, the Bank may raise interest rates, or sell Treasury Bills to the market in order to drain excess liquidity from the system and return inflation to its target. Today’s action also reduces the UK’s debt to GDP ratio from 63% to 41%, and slashes our interest bill from £50 billion £32 billion per year. This prudent action safeguards the UK’s AAA credit ratings and leaves holders of gilt-edged securities in a stronger position than before.

    Note from the Debt Management Office: the gilt cancellation will take place using the same process and precedent set with the cancellation of £9 billion of UK gilt-edged securities acquired from the Post Office pension scheme in April 2012.”

    [HT Bond Vigilantes]

    • Acorn
      Posted October 13, 2012 at 10:43 am | Permalink

      If Labour pick up this theme JR, and it will fill out its left of centre economic position; you had better start circling the Tory economic waggons. It will be hard to defend austerity against it.

      Start with Stephanie Kelton slide show then try the others

    • Denis Cooper
      Posted October 13, 2012 at 12:13 pm | Permalink

      “The government freely chooses to act like a currency user while letting the BoE act as the currency issuer with no theoretical limit to how much it issues.”

      This is the crucial point which is often misunderstood: although the Treasury owns the Bank of England, the role of issuing money has been assigned to the Bank alone and while the Treasury can issue gilts, bonds, to borrow existing money it cannot itself issue new money.

      Hence one way of looking at QE as so far practised in the UK is to say that the Bank and the Treasury have arranged to swap their respective IOUs: the Bank has got IOUs issued by the Treasury, gilts, now to the value of £366 billion, while in return the Treasury has got the Bank’s IOUs, money, to the value of £366 billion minus some small transmission losses.

      Because it is rarely the case that those who are due to be paid some sum of money by the government will instead accept payment in gilts, or anything else other than money; for example it’s no good a state pensioner turning up at the supermarket checkout and offering to pay for his groceries in gilts or Treasury bills or National Savings certificates or any other IOU issued by the Treasury, as they will want to be paid in the IOUs issued by the Bank of England, money.

      On the Post Office pension fund, as I understand from this:

      the gilts owned by Royal Mail Pension Fund were to be transferred to the Treasury as part of a larger scheme, presumably with future pensions being paid directly out of government funds rather than through payments on the gilts, and as the Treasury became the owner of those gilts they could be cancelled.

      The position is rather different with the gilts held in the APF because in his first letter of authorisation, dated January 29th 2009, Darling indemnified the Bank against any losses.

      • acorn
        Posted October 13, 2012 at 5:56 pm | Permalink

        Denis, you will see in your link that the DMO says cancelling the RM pension fund guilts, will not affect the government’s cash, borrowing or fiscal aggregates. Does that sound like a government that has to borrow to spend?

        • Denis Cooper
          Posted October 14, 2012 at 11:20 am | Permalink

          As I understand this part of the overall scheme:

          Retired postal workers receive pensions.

          Until now part of the money they’ve been paid has been money that the Treasury has paid to the pension fund on its holdings of gilts.

          In the future, that part of the money they receive will come more directly from the Treasury, the gilts being among the pension fund assets that will be transferred into public ownership.

          So it’s understandable that the cost to the Treasury would not be affected by just paying the same amount of money more directly to retired postal workers, rather than paying the pension fund on its holdings of gilts so the pension fund can then pay that money on to the pensioners.

          “Does that sound like a government that has to borrow to spend?”

          The whole document is about how the government plans to borrow to spend, its acquisition and proposed cancellation of the ca £11 billion of gilts held by the Royal Mail Pension Fund being just one item in those overall plans which involve borrowing £168 billion by sales of gilts.

  8. Denis Cooper
    Posted October 13, 2012 at 8:28 am | Permalink

    JR, the Bank hasn’t bought the gilts using a Treasury loan, it has created new money to fund those purchases.

    Originally when the Bank’s Asset Purchase Facility was set up the stated intention was that its purchases would be funded by the Treasury, but that was quickly changed to the Bank creating new money for that purpose.

    That’s why in the summary of the current position, here:

    there are two columns, the first for purchases financed by:

    “Issue of Treasury bills and the DMO’s cash management operations”

    and the second for purchases financed by:

    “Creation of central bank reserves”.

    There has never been very much in the first column because the switch to using newly created money was made within a few weeks, and there have never been any gilts in that column, and now there’s only £22 million of corporate bonds; the £366 billion of gilts is in the second column, along with just £65 million of corporate bonds.

    Reply: Yes , new money was created, but the Bank insisted on the risks residing with the Treasury, not the Bank, so in effect it is the Treasury that created the money and the Bank has a matched balance sheet which could easily be written off on both sides.

    • Denis Cooper
      Posted October 13, 2012 at 8:29 am | Permalink

      Forgot to put in the link to the APF results summary:

      • outsider
        Posted October 13, 2012 at 12:23 pm | Permalink

        You are quite right Mr Cooper. Furthermore, as the Bank’s accounts explain clearly, the gilt-edged holdings are NOT on the Bank’s balance sheet. They are held in an “off-balance-sheet” company precisely because all profits and losses accrue to the Treasury. As I interpret it, they even accrue to the Treasury either in real time or annually.

        I do not know why Robert Peston, who is usually well-briefed, suggested that the QE gilts were on the Bank’s balance sheet. In accounting terms, there are two fairly simple accounting methods to achieve cancellation.
        It might, however, suit the MPC, the Treasury and those who still believe in the Bernanke theory to imply that there were difficulties because cancellation would only be beneficial if QE was stopped and abjured for the future.

        If the existing gilts were cancelled and QE via money creation was started up again, all credibility would be lost with the public and the markets.

        • Denis Cooper
          Posted October 13, 2012 at 5:35 pm | Permalink

          But the net assets or liabilities of the APF must appear on the Bank’s balance sheet.

    • Denis Cooper
      Posted October 13, 2012 at 12:24 pm | Permalink

      But by undertaking to indemnify the Bank against any losses incurred as a result of its asset purchases the Treasury has only accepted a contingent liability; it hasn’t actually lent the Bank any money to make those purchases apart from those few tens of millions right at the start before Darling authorised the use of “Central Bank Money” for that purpose.

    • Mark
      Posted October 13, 2012 at 8:07 pm | Permalink

      Here’s the BoE’s explanation:

      Asset Purchase Facility transactions are undertaken by a subsidiary company of the Bank of England, the Bank of England Asset Purchase Facility Fund Limited (BEAPFF). The BEAPFF borrows from the Bank to pay for the purchases it makes. It is this lending to the BEAPFF that appears on the Bank’s balance sheet as an asset.

      On the Bank’s balance sheet the liability corresponding to this asset depends upon how it has been funded.

      Where purchases by BEAPFF have been made as part of the Bank’s quantitative easing programme, the Bank finances its lending to BEAPFF by the creation of central bank reserves. On the Bank Return this is reflected in an increase in the level of Reserves Balances.

      Whilst quantitative easing is paused, the Bank’s lending to BEAPFF is financed via a deposit from the government’s Debt Management Office. This deposit appear s under ‘Other liabilities’ on the Bank Return.

      • Mark
        Posted October 13, 2012 at 8:20 pm | Permalink
        • Denis Cooper
          Posted October 14, 2012 at 12:20 pm | Permalink


          So on the first chart the “reserve balances” are a liability, presently about £330 billion which is up by about £250 billion since early 2009; while on the second chart there are “other assets” which have grown from about £20 billion in early 2009 to about £390 billion now; and those “other assets” must include its loans to the APF as stated in the passage you quoted above; and if the £366 billion of gilts held by the APF were simply cancelled tomorrow then the APF would only be able to repay a small part of those loans from the Bank; and so the Bank would then still have total liabilities of about £400 billion but total assets of only about £20 billion plus whatever the APF could cough up.

          Is that correct?

        • Mark
          Posted October 14, 2012 at 1:46 pm | Permalink

          Of course, under the 2009 Banking Act, the BoE is at liberty not to disclose its entire balance sheet.

      • Denis Cooper
        Posted October 14, 2012 at 11:49 am | Permalink

        I don’t know how you interpret “whilst quantitative easing is paused”, but I note here:

        “The APF continues to operate its corporate facilities, with purchases financed by the issue of Treasury bills and the DMO’s cash management operations.”

        That’s despite King’s statement in his letter of February 17th 2009:

        “If and when the MPC decides that private sector purchases should be financed by the creation of central bank money … I would expect that the need to finance purchases using Treasury bills would cease, at least initially.”

        But the fact remains that whenever I’ve checked that summary of the APF results as it has been updated since early 2009 the scale of purchases funded that way has always been low, I don’t recall it ever being used to fund the purchases of gilts, and in fact the entry for that cell in the table is simply “n/a” which I take to mean “not applicable”.

        So if the term “quantitative easing” is restricted to the purchase of assets using newly created money, “Central Bank Money”, “the creation of central bank reserves”, then the Bank’s explanation makes sense – even while there is a pause in the Bank doing that, the other much smaller scale transactions may continue using money supplied by the Treasury.

  9. oldtimer
    Posted October 13, 2012 at 8:38 am | Permalink

    The temptation to do this must be very great. And it sounds so simple. All our problems solved at the stroke of a pen. But it would be the thick end of a very much thicker wedge. And it would be open to endless abuse by future governments; cf how Labour abused the PFI system invented by an earlier Conservative government.

    The consequence of further manipulation like this would be the continued diversion of natioanl resources into unproductive activities that politicians thought up to buy votes. It would chart the road to hell.

    It was only a few days ago that the PM was telling us we must sink or swim. He should live up to his words, not contemplate scams like this. The only concession I would make to your line of thinking is to classify the accumulating deficit and National Debt into two elements – the debt government owes to third parties and the debt it owes to itself. Thus we can, or rather would, [all] see by just how much the government is failing to finance itself in open markets and just how far it still has to go to operate honrestly and above board without screwing savers and pensioners.

    Sorry about the typos – I am unable to correct them on my android tablet.

    • BigJohn
      Posted October 13, 2012 at 1:50 pm | Permalink

      > Sorry about the typos – I am unable to correct them on my android tablet.

      If you install the free Hackers Keyboard application from the google play store, there is a free English completion dictionary application that can be added to it.

  10. Andrew Moore
    Posted October 13, 2012 at 8:54 am | Permalink

    Is the freshly created money just offsetting the shrinking money supply caused by deleveraging consumers? With the boomers running down their credit – surely a credit based expansion doesn’t work therefore the balloon needs to be pumped up by money printing. Is this the only way a government can raise enough funds to substitute the drop in spending? Just curious really whether QE is a necessity or a crutch to help us cope with the demographic realities.

    Reply: QE is meant to be temporary boost by buying bonds from the private sector, so the private sector has mroe cash to spend or to buy riskier assets. The idea was to sell those bonds back to the private sector when things were better. the issue raised by Lord Turner, is will things be sufficiently better to do that, or shoulod the cash be a one off injection to try to create more activity?

    • Richard1
      Posted October 13, 2012 at 10:55 am | Permalink

      I would have thought the key issue is the impact on inflation. If QE is temporary and the bonds are at some point sold back, then there is no reason for QE to be inflationary so lng as the timing is right. If this permanent cancalletion is effected as Lord Turner has suggested (and others have) is it not bound to be inflationary, with the only question being when?

      It is extraordinary that the BBC’s leading business commentator should have broadcast the nonsense he has on this – it shows how divorced from & inexperienced in the world of business & finance are the BBC’s panjandra.

      • zorro
        Posted October 13, 2012 at 11:36 am | Permalink

        The issue is whether they have the bottle/ability to end the QE tactics they currently employ, and unwind as required. I would suggest not for the foreseeable future particularly with open ended QE in USA. I wonder whether the current crop of politicians have the nerve to stop what they have started. They worry about elections, and might struggle with enforcing balanced budgets.


        • zorro
          Posted October 13, 2012 at 11:40 am | Permalink

          It won’t of necessity cause more inflation but that will depend on the political consensus around balanced budgets (not much at the moment). QE will though eventually if there is no end in sight and they feel that they have to inject it directly to the banks (as opposed to how the tactic is currently used) whilst still not controlling public spending….


          • sm
            Posted October 14, 2012 at 1:45 pm | Permalink

            QE and ZIRP is about protecting the current banking system and its incumbents.

            If the banks start to lend more as the government intends then the inflation will ignite, the government will then slowly raise interest rates. Guess who will win and who will lose.

            If the banks dont lend, we continue with QE/ZIRP until we get price increases, whereby the banks laibilities melt away.

            This is the system and it is rigged. Where was the public referendum to decide if we should save the banks?

            Representative democracy -well maybe if your Icelandic or Swiss.

  11. Leslie Singleton
    Posted October 13, 2012 at 9:32 am | Permalink

    The analogy is not that good but somehow I am reminded of the pub or hotel owner who chooses to drink or stay free–thus kidding himself about his own expenses (not that that is too serious) but also ruining the meaningfulness of the accounts of his business not to mention give the signal to his employees, as some will see it, that they can steal from the business themselves.

  12. Matthew
    Posted October 13, 2012 at 9:48 am | Permalink

    Yes, Mr Peston may be an accomplished financial journalist, but he clearly doesn’t understand double entry bookkeeping. For every debit there’s a credit.
    (took me long enough to master it!)

    • lifelogic
      Posted October 13, 2012 at 11:29 am | Permalink

      An accomplished financial journalist! I thought he was just someone with a silly voice who suffered from BBC think.

  13. merlin
    Posted October 13, 2012 at 10:05 am | Permalink

    My first reaction to “should the BOE wipe out 375 billion of government debt” is that it is complex, and when something becomes complex then it is very important and therefore deliberately difficult to understand. My life’s philosophy is keep it simple so that everyone can understand it.
    The essence of it though is that the Government can print money to pay off debt, so the issue is whether the government should get the printing presses going again as they have and are doing in the United States.
    If the government starts to print money what will be the future consequenes?

    1) negative effect on savings and pensions

    2) Inflation

    My own hunch is that economists and governments actually do not know what the future effects of QE will be and that it is a shot in the dark, an experiment in other words. One of the countries that has tried it in the past is Japan and the Nikkei has not moved for about 20 years.
    My own opinion is that at some point in the future, I don’t know when, it will cause hyper-inflation and that paper money, fiat currency, will loose value and that the only assets with any value at all will be commodities.
    I was against bank nationalisation and QE and still am, banks should have been allowed to go bankrupt.
    When Governments interfere in the market they only make things worse.

    • zorro
      Posted October 13, 2012 at 11:44 am | Permalink

      Pretty much so I agree, but as you know over the last century purchasing power has diminished massively compared to a similar period from 1800s to 1914. So it’s all relative.


    • Denis Cooper
      Posted October 13, 2012 at 12:39 pm | Permalink

      Once again, “the government”, ie the Treasury, cannot print money; that is the preserve of the Bank of England, and the two are not the same even though they are both arms of the UK state and the Treasury owns the Bank.

      As the government was spending £4 for every £3 of revenue, and is still spending something like £5 for every £4 of revenue, if the Treasury itself was empowered to print money then it would a simple matter for it to print the missing £1.

      Instead the Treasury has to get the Bank to create the new money and then borrow it; moreover under Article 123 TFEU in the EU treaties there are legal constraints on the Bank extending an overdraft to the Treasury or buying gilts direct from the Treasury, so the two have to go through the rigmarole of doing it indirectly, with the Bank buying up existing gilts from investors while in parallel the Treasury sells them new gilts.

      • sm
        Posted October 14, 2012 at 1:58 pm | Permalink

        Nice work if you can get it for the middle men or ‘investors’?

        • Denis Cooper
          Posted October 14, 2012 at 5:46 pm | Permalink

          No doubt the gilts investors who take part in the “money-go-round” are suitably rewarded for their co-operation in making sure that the UK government doesn’t run out of money.

          If we were living in pre-electronic times and the Bank was actually printing banknotes, and if a Bank messenger then took an attache case full of new banknotes to an investor and came back with paper gilts certificates in exchange, then I suppose the investor might skim some bundles of notes off the top before taking the money along to the DMO to buy new gilts …

  14. Denis Cooper
    Posted October 13, 2012 at 10:06 am | Permalink

    That rapid transition from the original position of the Treasury using existing money to fund the Bank’s asset purchases, to the position of the Bank creating new money to fund the purchases, can be tracked by looking up the earliest letters that Alistair Darling sent to Mervyn King.

    APF letters exchanged between the two successive Chancellors and the Governor are available through the Bank’s website here:

    In his letter of January 29th 2009:

    Darling authorised the Bank to purchase up to £50 billion of “high quality private sector assets”, and the government would indemnify the Bank against any losses, and the purchases would be financed by the issue of Treasury bills and the DMO’s cash management operations.

    But in his letter of March 3rd 2009:

    Darling changed that to using “Central Bank Money” to buy an expanded range of assets including gilts, up to £150 billion in total of which up to £50 billion could be for private sector assets.

    In the event, the Bank has bought hardly any private sector assets, and now owns gilts valued at £366 billion, all purchased with “Central Bank Money”.

    In his letter of March 3rd 2009 Darling also made it clear that the Treasury would continue to SELL new gilts as planned – “the Government will not alter its issuance strategy” – while in parallel the Bank would be using new money to BUY previously issued gilts from investors.

    Three and half years on, and hasn’t that yet struck anybody else as being a bit fishy, am I still alone in thinking that the Bank has been induced to rig the gilts market in favour of the supplier of new gilts, the Treasury?

    It’s all getting very tiresome.

  15. Lindsay McDougall
    Posted October 13, 2012 at 10:07 am | Permalink

    You haven’t asked the obvious question: Why is the Bank of England allowed, nay forced, to buy government debt at all?

    The gilts market should be a proper market, with sales to members of the public and to companies on merit. Nor should there be an obligation on the big insurance companies to place x% of their funds in gilts. This happens, and it is reinforced by the practice of so called independent financial advisors recommending that people about to retire buy annuities rather than invest their pension pots in SIPPs. These financial advisors have to be approved by the FSA, and we all know the implications of that.

    Will the Bank of England be encouraged to sell on the government debt that it holds to individuals and companies?

  16. Denis Cooper
    Posted October 13, 2012 at 10:19 am | Permalink

    JR, because the gilts have been bought using new money, which has been put into circulation and cannot be cancelled, and which surely must figure as a liability on the Bank’s balance sheet, the Bank would not be left all square if the counterbalancing assets, the gilts, were cancelled and the Treasury did not compensate the Bank for that massive loss – which of course the Treasury could not do, as it doesn’t have a spare £375 billion lying around.

    On the contrary, the Bank would be left with a massive hole in its balance sheet, and I suppose it could end up with negative net assets.

    Would that be legally permissible, and if so would it matter if the Bank was continuing to operate even though on paper it had negative net assets?

    Reply: The Bank bought the gilts using a Treasury loan, so the Bank could cancel both asset and liability.

    • Denis Cooper
      Posted October 13, 2012 at 4:40 pm | Permalink

      JR, do you have any documentary evidence that the Treasury has lent money to the Bank so that it could buy gilts?

      In the opposite direction there is the evidence of the two letters from Darling to King, links given above, in the first of which he authorised the Bank to purchase private sector assets using money supplied by the Treasury, but in the second of which he switched to authorising the Bank to use “Central Bank Money” to buy a wider range of assets including gilts.

      In between those two letters there is also this letter from King to Darling, dated February 17th 2009:

      in which King writes:

      “To the extent that the facility could be used to buy gilts on the secondary market financed by central bank money, this would be similar to the current implementation of monetary policy, except that the instrument of policy would shift towards the quantity of money provided rather than its price.”

      With several other references to the use of “central bank money” including:

      “If the Committee were to use the facility for monetary policy purposes, purchases of assets would be financed through central bank money, rather than by the issuance of Treasury bills.”


      “If and when the MPC decides that private sector purchases should be financed by the creation of central bank money, the Bank executive will apply the same criteria in selecting those assets as if the purchases were financed by the issuance of Treasury bills. And in that case, I would expect that the need to finance purchases using Treasury bills would cease, at least initially.”

      Then there is the current summary of the APF results, link also given above, which shows the purchase of all the gilts as having been financed by “Creation of central bank reserves” and none having been financed by “Issue of Treasury bills and the DMO’s cash management operations”.

      It would have made no sense at all for the Treasury to lend money to the Bank so that it could buy up previously issued gilts, when the Treasury was already having to sell large volumes of new gilts to investors to borrow about a quarter of all the money the government was spending, and on top of that it would then have been faced with borrowing the additional large sums it would be lending to the Bank to buy up gilts; what made a warped kind of sense was for the Bank to create large sums of new money and use it to buy up previously issued gilts from investors, thus making it very much easier for the Treasury to sell new gilts.

      Reply: Yes, I read the Bank’s balance sheet!

      • Denis Cooper
        Posted October 14, 2012 at 12:34 pm | Permalink

        But the charts of the Bank’s liabilities and assets provided by Mark above say that if the gilts held by the APF were simply cancelled then the Bank would be bust.

        Where exactly in the Bank’s balance sheet is there an entry corresponding to loans from the Treasury so the Bank’s APF could buy gilts?

        Reply: It’s there as a liability to match the assets of the gilts.

        • Denis Cooper
          Posted October 14, 2012 at 4:58 pm | Permalink

          According to the Bank’s explanation quoted by Mark above:

          “On the Bank’s balance sheet the liability corresponding to this asset depends upon how it has been funded.

          Where purchases by BEAPFF have been made as part of the Bank’s quantitative easing programme, the Bank finances its lending to BEAPFF by the creation of central bank reserves. On the Bank Return this is reflected in an increase in the level of Reserves Balances.”

          So the liability is not any loan from the Treasury, but the reserves created by the Bank itself to fund the APF, which as I understand will correspond to the money the APF spent buying the gilts.

          Apart from the details of the accounting, surely there is the basic reality that Treasury is already having to borrow large sums of money and doesn’t have similar sums of spare cash available to lend to the Bank for the purpose?

          • stred
            Posted October 14, 2012 at 10:39 pm | Permalink

            The missing 20-25%, borrowed at cheap rates compared to the high rates paid in Europe- evidence that you are right? How else?

  17. Electro-Kevin
    Posted October 13, 2012 at 10:23 am | Permalink

    The left always plump for the ‘easy’ way.


    Debt cannot be reconciled with greenism.

    Debt is consumption with deferred payment. Unearned consumption in other words.

    Now they want never-to-be-earned consumption

    How does Labour/ the BBC square that with their ‘save the planet’ tosh ?

    • Electro-Kevin
      Posted October 13, 2012 at 2:59 pm | Permalink

      My point is that the natural limit for consumption (unaffordability) is bypassed by means of private credit facilities, govt borrowing and welfarism.

      Debt has become more environmentally destructive than any other activity. It enables consumption where it ought not to be happening.

      Perhaps Mr Balls might care to counter that one.

      • M.A.N
        Posted October 13, 2012 at 5:34 pm | Permalink

        @ Electro Kevin. Agreed, this moves beyond normal economics and into the realms of alchemy. I also suspect this a one trick pony, the bond/ gilt markets will not tolerate this say every five years. QE causes distortions in the gilt market does it not? Why we have not been penalised for engaging in qe is beyond me, some very clever people suggested we would pay higher interest because of qe. Blimey we are lucky, or I suspect we are VERY well connected in terms of international hierarchy. This proposed scheme is only mooted because the ‘money’ is electronically created, as is I suspect are the corresponding gilts which were purchased with said £. Surely a country cannot buy near enough ALL its own debt? And then keep cancelling it? The times it bloats the BOE balance sheet it surely stokes inflation and hurts growth? Or does it if its off balance? It does not of course stop the government overspending, nay it encourages it more!. My head hurts I’m opening a bottle of wine …….

        • Electro-Kevin
          Posted October 14, 2012 at 4:28 pm | Permalink

          It’s made us soft too.

          The North Wind made the Vikings.

  18. Gary
    Posted October 13, 2012 at 10:35 am | Permalink

    You have asked such a pertinent question that this one could get you into even more trouble than the last most pertinent question you asked, that one on Afghanistan.

    You are asking the question that perhaps the Financial Emperor has no clothes ?

    The question goes to the heart of our financial system, and I believe to the heart of the financial mess that we see not just here , but in the world.

    At least someone in parliament is awake and has a spine.

    However, moving from one form of printing money via third parties who are taking commission and goodness alone knows what else, to a system of direct govt issued credits does not address the Austrian view of inflation and the impossibility of centralized Economic Calculation. The real solution lies in letting the market both determine the amount and type of money and credit. But getting from here to there, if we are ever allowed, is going to be somewhat of a nightmare.

    Now you need to wake the rest of the house up , explain to them what the problem is and have a debate. The latter two points may be a mountain too high.

    Reply: I am trying to wake people up to the debt mountain, and to the consequences of QE. I will resume in Parliament next week when at last it is back in action.

    • stred
      Posted October 14, 2012 at 10:56 pm | Permalink

      I am moderately thick- not as thick as Cameron, Milli, Balls and Brown, but thicker than Robert Peston and Evan Davies. So why can I understand the obvious above, but not the latter?

      • lifelogic
        Posted October 15, 2012 at 7:34 pm | Permalink

        The BBC has some sinister, selective, lobotomy machine – perhaps in the basement?

  19. davidb
    Posted October 13, 2012 at 1:00 pm | Permalink

    I am horrified at this proposal. Truely horrified.

    So what we have is artificially created numbers transferred to the gamblers who bought the chips of gilts – not many ordinary folks there. They get to cash in their chips, move the money into some asset – land maybe, gold bars, anything with intrinsic value really. And now that they have the value of their “savings” protected the state proposes to tear up the pretend money which will devalue all the money us suckers who saved up all their lives have deposited in our bankrupt banks.

    Tell me why I shouldn’t just vote for someone who will guillotine the whole bloo*y lot of them?

    We really have a crisis here. Maybe the best thing isn’t that we pussyfoot about with housing benefit caps and whatever Nick Clegg’s third placed party will permit, and just call the election now.

    I do not want the money I have saved to be flushed down the pan because some bigtime gamblers got caught out.

    And while we are at it. In the current hysteria viz Mr Savile the magic word compensation is being banded about. Who will be getting to pay that since it is our public owned NHS and BBC that are in the frame? Just like the public owned banks are paying out for the misselling scandals. When will we reach a situation where the people who actually do the stupid thing, get stripped of their assets, incomes, pensions etc before the stupid ordinary taxpaying sheeple get hit with the tab?

    And they wonder why people dont vote…..

    • stred
      Posted October 14, 2012 at 11:04 pm | Permalink

      Anyone old enough to remember the 60s ‘sexual revolution’, though not necessarily to have partaken in it, will realise that the compensation bill for old ‘groupies’ will be enormous.

      • lifelogic
        Posted October 15, 2012 at 7:36 pm | Permalink

        Indeed will these ageing pop stars be able to afford it?

  20. Bernard Juby
    Posted October 13, 2012 at 1:03 pm | Permalink

    If they did such a simple thing then they would just Quantitively ease themselves out of it by printing the money! If you watered the milk or beer it’s a punishable offence – so why isn’t the BoE prosecuted for watering down the money?

    By the way, why does the BoE pay such a miserable rate of interest and yet charge small businesses an arm and a leg to borrow other people’s money? No wonder the economy is stagnant – businesses can’t expand and savers have no money (from interest) to buy their goods and services anyway!

  21. David Langley
    Posted October 13, 2012 at 1:16 pm | Permalink

    I am virtually ignorant of financial matters regarding government debt manipulation forgive me. Is it true that if a government buys another countries debts, it buys that debt from the government of that country, not from a commercial entity that can easily renege on the debt/interest payments. eg bonds when issued by that government. That purchase adds to our assets but is risky if a PIIGS country so attracting higher interest. Why do we not use that money used to purchase bonds to pay off our own debts where we borrowed ourselves from other countries? Repay those borrowings and therefore owe less. This would appear to me to indicate to other countries that we are extremely solvent and a good bet and our credit rating would improve. In the fullness of time we would be free of debt and then able to invest more in our own country than be concerned in making a bit of interest by buying other countries debt and encouraging them to live beyond their means using our money .
    Unlike it seems to me the EU which is encouraging this through the EU banking system and the IMF.
    Do we attach strings to this lending to extract other favourable terms or special deals for the banking people concerned???

    • Denis Cooper
      Posted October 13, 2012 at 6:18 pm | Permalink

      “Is it true that if a government buys another countries debts, it buys that debt from the government of that country, not from a commercial entity … ”

      If for some reason a government wished to buy bonds issued by the government of another country then in principle it could either buy newly issued bonds direct from whatever agency of the foreign government was responsible for selling new government bonds, the so-called “primary market”, or it could buy previously issued bonds from an investor who has at some point acquired them and is now prepared to sell them on, the so-called “secondary market”.

      There is a high turnover in the secondary market for gilts, the bonds issued by the UK government, as different investors seek to adjust their portfolios of various classes of gilts and increase or decrease their overall exposure to match their investment requirements, but for the bonds issued by some other governments the secondary market may not be so liquid.

  22. peter davies
    Posted October 13, 2012 at 2:26 pm | Permalink

    On the face of it having not heard Robert Peston and not really understanding how this big balance sheet works this may well work as a ‘one off’ solution but I fear future governments particularly left leaning ones if we get saddled with the Union Placemen again could use this type of mechanism many times over as an easy fix to hide the debt they keep racking up each time the government balance sheet begins to look bad – they might well get away with it now because the EZ is in such a mess.

    There’s one thing worse about not learning from past lessons because there’s now an easy way to dig oneself out – next time the consequences of being reckless could be even more serious – and even now I don’t think those at the top of the Labour party really get it, I doubt they ever will.

    Can you imagine our great former Prime Minister using this mechanism to get out of the mess he created then doing it time and time again thus bringing back the good old days of mass inflation etc?

  23. waramess
    Posted October 13, 2012 at 2:27 pm | Permalink

    What happened to the original idea that when the economic recovery happened the Bank of England would sell the purchased assets back to the market in order to slow down economic activity?

    Have they all now conceded there will be no economic recovery? If not it would be entirely inappropriate to cancel the debt

  24. Jon
    Posted October 13, 2012 at 3:14 pm | Permalink

    Doing so would not solve the problem of rising public spending and set to rise more as we get older.

    If public spending were under control, no deficit and room to cover the costs of an ageing population then perhaps it could be looked at. As that is no where near the case we will still need to look to the markets to hold us up.

  25. Sebastian Weetabix
    Posted October 13, 2012 at 3:21 pm | Permalink

    Mr Redwood, what do you make of the “positive money” campaign? (ie the government should create debt-free money and take the power of fiat money creation away from private banks)

  26. Antisthenes
    Posted October 13, 2012 at 3:27 pm | Permalink

    Even if you leave all that printed money gilt debt on the balance sheets the inflation catalyst is still there. This will in time have the eventual effect of reducing that debt considerably maybe not to zero but close to it. To avoid the inflation then the gilts at some point have to be sold to the market but that is never going to be practicable unless of course the UK economy suddenly has record periods of growth. No doubt that has been the strategy all along to inflate our debts away. Very risky in an environment that is not geared up to being able to produce enough wealth to maintain our current economic and social models. So the medium term would be to greatly impoverish the nation and it’s people. On the bright side in the long term those models would be rebuilt out of necessity to encourage wealth creation relegating social democracy into second place. Then maybe not as we do appear to be hell bent come what may to continue the tried and failed socialist policies and practices unto death.

  27. Richard
    Posted October 13, 2012 at 3:43 pm | Permalink

    Is it just a coincidence that the £375 billion we are considering wiping out as a bad debt is roughly equal to the amount of QE the Bank of England has created in the system?

    Reply: No, it’s meant to be equal

  28. Barbara Stevens
    Posted October 13, 2012 at 4:39 pm | Permalink

    Well Mr R, it seems we are in a quandry with this debt problem, and understanding its full problems is very difficult the the lay person, and if Mr Preston is mistaken then we’ve no chance.
    However, I have a question which is dear to my heart which I hope you will find time to answer to. The NHS, and the GPs who are being forced to allow foreigners to use it, as it’s been deemed against their human rights. We already have hospital waiting lists, GP’s surgeries where appointments take, sometimes days to fix; and now we will have the added people on them. Why is Cameron allowing this to happen, it stated in the Daily Mail Saturday 13th October 2012, this as been distributed to all GPs with instructions for them to allow these people on their lists. We have been told time and time again, people cannot have hospital treatment if they are not resident here, but this system will allow them to access treatment for free. Its a mockery for all the ‘strivers’ your party has talked about during it’s conference a short while back. I hope you will use your influence within the Conservative party to stop this madness which is an affront to all those of us who have paid NI for years and paid taxes. If this goes ahead then your party will find it’s self doomed, and I sincerely hope it will stop this in its tracks. We are not allowed to use other countries health systems for free so why should they when they come here. To say I’m angry is an understatement.

    Reply: A good quesiton which others of us have asked. We are told the new Minister is “reviewing it”

    • zorro
      Posted October 13, 2012 at 10:01 pm | Permalink

      It’s interesting that the Minister is reviewing a decision which only seems to have been taken recently. Not even Labour would have let this happen, and it flies in the face of recent Immigration policy to create a ‘hostile’ environment, and the employment of NHS Trust overseas visitor officers who are tasked with chasing non payment of treatment by foreign nationals. Treasure Island has nothing on this country!


  29. David B
    Posted October 13, 2012 at 5:34 pm | Permalink

    This represents a default under insolvency law.

  30. uanime5
    Posted October 13, 2012 at 8:51 pm | Permalink

    Perhaps the Government should cancel the debt in stages so the markets are less affected.

  31. Edward
    Posted October 14, 2012 at 7:32 am | Permalink

    All this QE, ‘funny money’, debt, PFI,/PPP is theft from current savers and future generations. Debt that is never paid back is theft.

    It either reduces interest rates to penal levels (yes low interest rates can be penal just as much as high interest rates can) or it will lead to inflation which simply wipes out lenders. Either way society becomes feckless and irresponsible as it never has a proper incentive to curb its borrowing. Borrowing can never be a substitute for real sustainable long term economic growth based on productivity and hard work.

    Borrowing only has a place where there is a defined real need and when there is a clear path for its repayment on a reasonable timescale.

    Individual borrowing, such as for a house purchase, is absolutely fine so long as the debt is paid back before the borrower’s future anticipated income declines (such as upon retirement).

    Similarly government borrowing (in all its forms, Direct, PFI/PPP, QE etc) is right and proper so long as it is done for essential timing differences. Examples may include temporary recessionary impacts, dislocation of industry due to technological change (etc) but it is essential that such borrowing is paid back (for example in periods of growth).

    The last government essentially turned this all on its head and, seemingly, this government does not understand.

  32. David Langley
    Posted October 14, 2012 at 9:44 am | Permalink

    Have we ever had a surplus and not a deficit?

  33. David Langley
    Posted October 14, 2012 at 9:51 am | Permalink

    I probably mean have we ever had a surplus and not a debt. I know we have had trading surpluses, well I seem to remember we did.

  34. Jon
    Posted October 14, 2012 at 5:17 pm | Permalink

    Imagine as an example an international bond buyer say acting for a pension fund.

    You bought UK bonds in say 2011, they gave a very low return but the overall fund risk augmented from having AAA safe status bonds in it. Lets say they were 10 year bonds. Should the UK government make headway on securing its finances then those bonds are worth more should they wish to rebalance their portfolio.

    On the other hand if they write it off internally without having addressed the deficit etc then they are holding on to bonds that represent a much higher risk. They also carry a very low return. The resale vale of then is low because having made that move new bond sales will offer a higher return.

    The fund manager sees the risk of his fund just up plus there is no corresponding rise in return. They need to sell these at a bit loss to bring the fund within their governance ranges. Are they going to be as good a customer for the UK as the past having just been stung with the UK still with big financial problems? No bond buyers, no borrowing. The UK will need to raise its interest it offers even higher. A sort of debt spiral.

  35. toby hayes
    Posted November 28, 2012 at 6:51 pm | Permalink

    It desparately pains me to say, but this is our best (least worst) course of action.

    Horrific demographics, lunatic off balance sheet pension deficits, negative fiscal feedback loops and low growth will conspire to ensure that our debt will continue to rise. We are past the point of no return in bringing this problem to heel through sensible fiscal policy (as Osbourne is slowly discovering). We are bust and therefore need to think of the best way to default.

    We have three options to default.

    Outright Default, Inflate or Cancel.

    Our current path of endless austerity, chasing our debt tail, with ever rising fiscal commitments means we can expect default within 20 years. This is drawn out torture ending in a bloodbath.

    Inflating is the most likely route as it is politically more palitable. The UK has longterm debt so inflating does not cause costly refinancing issues every year. However, inflation can savage the real economy as much as default and once the genie is out the bottle…..

    Cancelling debt is at worst, the same as inflation but at best ‘could’ (fingers crossed) be a free lunch.

    Cancelling debt is seen as inflationary as it ensures that QE is a permanent monetary base increase rather than currently reversible. However, this extra cash may not feed through to broad money supply growth and cause inflation. Afterall, QE has not currently lead to inflation and it is not a certainty that cancelation will cause inflation as there are other (conventional) mechanisms to mop it up excess cash or more likely, banks may just continue not to lend.

    Similarly,I don’t think there will be a bond market rout if you can keep inflation contained. If you still own a gilt, your UK government credit risk is down by 40% overnight. I’ll take that.

    The problem will be in keeping inflation expectations contained. The bank will need to be chrystal clear on this one.

    The bank must convince the world that
    1) debt cancelation is a one off,
    2) inflation targets will still be maintained via conventional policy AT ALL COSTS
    3) No more QE. Period (perhaps put this in statute)

    If the bank can keep its credibility after this rabbit out of the hat, then Game on. I think debt cancellation has a 50:50 chance of working. As we are bust, I would take these odds any day.

  36. Conrad Jones (Cheam)
    Posted November 29, 2012 at 11:22 pm | Permalink

    “…the Bank has bought the gilts on the back of a Treasury loan, with an idemnity from the Treasury”

    Apologies Mr Redwood, please could you clarify something for me?

    From Treasury Accounts March 2012:
    Page 66: Figure 12 shows a simple diagram of the mechnaics of QE

    The Bank of England created a Subsidiary Company “Bank of England Asset Purchase Facility Fund Ltd” (BEAPFF).

    BoE lends (creates £375 billion) to BEAPFF.

    BEAPFF then uses this money to buy Government Debt (in form of Gilts) from struggling Private Banks to create more liquid Reserves in their Central Bank Accounts.

    The Treasury pays the Interest on the loan from the Bank of England that the BEAPFF borrowed. The Interest Payments that the Treasury pay are paid back to the treasury at the end of the year by the Bank of England (because – like the Treasury, it is also in the Public Domain).

    Are you saying that the Treasury Loan is actually a BEAPFF Loan made by the Bank of England and indemnified by the Treasury ?

    The BoE Balance sheet shows £286.582 Billion (as of 29 february 2012), as an Asset under “Other loans and advances”.

    National Loans Fund:

    Effectively – the Consolidated Balance sheets of BoE, BEAPFF, Treasury and National Loans Fund show that this debt is parked for future sale to the Private Sector, with us paying ourselves for money we’ve lent ourselves. It’s basically a Parked Car with the engine running waiting for future passengers.

    A way of preventing runaway inflation would be to increase restrictions on Bank Lending, Cancel the debt in the Consolidated Balance Sheet – as the QE Asset Purchase now contains both the Liability and the Asset, create another £375 billion to balance the Liabilities side of the Central Bank Balance sheet. This will keep the necessary Liquidity, balance assets against Liabilities and help enable Banks to make loans without excessive Credit Expansion.

    Housing Loans would have to be based on the Rentable Value of the Property. It serves no ones interests to have House Price Inflation, it just diverts money away from Job Creation. More Jobs equals more spending which provides more taxable revenue.

    The Trick will be to get the Economy going again before Interest Rates rise.

  • About John Redwood

    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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