State debt and the Bank of England

 

Today I want to concentrate on the narrower definition of the nation’s debts – the £1300 billion of official borrowing in the name of the nation that gets measured in the international comparisons, some 80% of GDP. This excludes the  public sector pension deficits, the semi nationalised bank liabilities and the private finance guarantees.

80% of GDP is a comparable level of indebtedness to Germany, the USA and France, and well below Japan. Markets are getting used to highly leveraged states these days.

29% of this state debt is now owned by the state. We have bought it back from the people who originally lent it, using created electronic money from  the Bank of England. It means as of today we only owe 57% of our national income in this core borrowing.

I raise this because we have ahead of us a decision to make about what we do with this self owned debt. Currently we pay ourselves interest on it, and recoup much of that one way or another. The Bank tops up the amount of government debt it owes as repayments come due. There are three main options from here:

1. Sell the debt back to the private sector, destroying the created money as we do so. This would drive interest rates higher, improve the position of savers and worsen the position of borrowers, and would lead to a monetary tightening. This seems an unlikely course of action for the authorities to pursue any time soon.

2. Stop replacing the debt we owe as debt is repaid. Over a period the state holdings of debt would be run down, and the Bank of England balance sheet gradually deflated as this happens.

3. Cancel the debt as we owe it to ourselves, creating an accounting transaction to sort out the Bank of England balance sheet when this happens.

Which of these would you like to see happen?

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120 Comments

  1. Lifelogic
    Posted July 13, 2014 at 5:54 am | Permalink

    Clearly the main thing they should do is to stop the endless waste in the state sector over pay/pensions, the pointless activity and general incompetence in the state sector and stop borrowing yet more to waste. We can then use a combination of all three of the above.

    We actually need slightly higher interest base rates, but lower bank margins to compensate and a much smaller (far less parasitic) state sector. We also need lower taxes which will generate some real gdp growth.

    We can only have this when Cameron and Osborne stop the endless government waste, the dysfunctional NHS, the daft subsidies for green crap, the absurd over regulation, general anti-business policies and all the rest of their endless lunacy. They do not even seem to have really started this yet and only ten months left to go.

    The state sector pensions problem should be dealt with by a special state sector pensions tax to redress the balance between the private and state sector, This after Brown’s pension mugging tax, continued and augmented by IHT ratter Osborne with his further attacks of private pensions. What is the justification for private sector pension being about 6 times the size of private sector ones? They are paid more too on average anyway.

    • Bazman
      Posted July 13, 2014 at 7:29 am | Permalink

      About 19 pounds more in the real world and if you recall last week thre was a strike by a large number of state sector workers over ever falling wages and standards of living. Your endless repetition of the over paid state sector with msaaive pensions is deluded. Does this apply to dinner ladies, teachers, nurses, street sweepers all living on fine wines an steak? You never seem to mention the massive amounts of cas wasted on housing benifts to private landlords. No reply as you have no idea. Just more mindless ranting about state sector waste often in payments to landlords and other non productive individuals and companies employed for reasons of dogma.

      • yulwaymartyn
        Posted July 13, 2014 at 10:10 am | Permalink

        Bazman. Quite right. Thoughtful post by our host requires a thoughtful response. Manners. Anyone can rant.

      • Max Dunbar
        Posted July 13, 2014 at 10:30 am | Permalink

        Lifelogic is correct that the state sector is overpaid as a whole. There are far too many public sector workers who are employed not to provide a service but to service the Labour Party’s voter base.

        GPs are overpaid and underworked. Gordon Brown cut their hours and gave them a large pay rise shortly before he was kicked out by the electorate in 2010. We could manage on far fewer of the GPs currently employed at enormous expense and who dish out pills to patients who either don’t turn up or are health tourists or both. If a charge were introduced to arrange an appointment with a GP then the workload would plunge; massive saving.
        Teachers are, themselves, badly educated and have been for years. Why do we need these useless mouths? Approximately one in ten of them are any good anyway. If they strike then fire them and we will be rid of the worst troublemakers and those who bring their once respected ‘profession’ in to disrepute.
        Firemen need to wake up and smell the smoke. They have had a gilded existence for years. Take away their right to strike that allows buildings to burn down unattended while they do cash ‘homers’ for their private clients.
        You mention housing benefit and private landlords. Have you ever dealt with Housing Benefit as a landlord? Probably not, otherwise you would not write such rubbish. Who wastes the cash?

        The list is endless.

      • Richard Hobbs
        Posted July 13, 2014 at 1:20 pm | Permalink

        Thank you Bazman for articulating my own thoughts. The majority of public servants are in fairly low paying jobs and most pensions are very little. Someone I know, after many years a Civil Servant, is only receiving about 3000 pounds per year in pension. Not a lot! I have a lot of sympathy for them being a ‘frozen’ pensioner myself and knowing what a struggle it is to manage.

        • Lifelogic
          Posted July 15, 2014 at 3:00 am | Permalink

          On average state pensions are about 6 times those of the private sector and the state sector remuneration (with pensions included) is about 50% more than the private sector. Just look it up but make sure it includes the pensions.

          You may have a particular friend with low state sector pension, so what, averages are averages.

          • Bazman
            Posted July 18, 2014 at 5:37 pm | Permalink

            The complexity involved in estimating public sector pensions can be eye-watering. Even the Trades Union Congress (TUC), a stringent defender of public sector workers, has placed the average pension received by former public servants at £7,000.
            7k would be a mean average skewed by those on 40k+. The majority in the public sector receive pensions of less than £5,000. The data here is incomplete, but we’d certainly expect a median analysis of the average pension to be below £6,000.
            Now if you think that a 100-120 quid a week pension is generous and the public sector should be in line with this. Does this not tell how poor pensions are in general? Your ranting without facts to spread black propaganda of public sector workers living it up at the state expenses is sickening and deluded. The state is in effect subsidising both the private and state sector pensions to bring then up to liveable levels. The main point is though that you are continuously try to tell us that state pensions are worth a fortune. They are not. Like private there is a few who receive very large amounts the rest gt the crumbs. 5k a year. A hundred quid a week or 400 quid month is a fortune? How could you power a bike with this given the price of steak and salmon these days? No reply as you have no sense.

      • Lifelogic
        Posted July 13, 2014 at 1:54 pm | Permalink

        I refer to average remuneration of the state sector relative to the private sector with pensions included. State sector wages have risen more than private sector too recently. Nurses and Teacher are not that badly paid when pensions included and it is an enjoyable jobs with 12 weeks of holidays.

        Landlords are of course productive – they buy, rent out insure and maintain properties which are clearly much needed, just as vehicle rental companies rent out vehicles. These are just as needed as rentals of offices, shops, airplanes, JCBs, computers or countless other things. Nurses and Teacher are not that badly paid when pensions included.

        You make the usual lefty “BBC think” mistake of thinking rent benefits go to landlords – rental benefits clearly go to tenants and they use it to provided themselves with accommodation. It is like saying their other benefits, for food etc. all go to Tesco.

        • Anonymous
          Posted July 14, 2014 at 5:05 am | Permalink

          Lifelogic – The wage disparity has more to do with unionisation than whether these are private/public sector jobs.

          The private – non-unionised – sector have had their wages reduced by government subsidised immigration, the public sector have had some insulation from this.

          As others have said, not all public sector workers are living the high life.

          I have frequently received over-priced, substandard and indolent service from private sector builders but solicitors, vets, surveyors and bankers are among the most adept at self protectionism and paying themselves beyond the skill level I needed ( for delivering below the skill level I actually paid for !).

          • Anonymous
            Posted July 14, 2014 at 5:08 am | Permalink

            Germany’s World Cup win:

            High average IQ, honesty and discipline

            Three qualities which we have been busily working to reduce in Britain over the past 50 years.

          • Lifelogic
            Posted July 15, 2014 at 3:02 am | Permalink

            I agree certain professions get away with high fees and often lousy service too.

        • Bazman
          Posted July 14, 2014 at 6:56 am | Permalink

          Its called the middle class social security system that professionals enjoy, which of course does not exist. The idea that landlords are like car rental companies and supermarkets as they are a service to tenants is laughable maybe some small ones are many are large scale owners out to plunder the system that they game. As for teachers being well paid at about 26-30k a year. Coming from someone who believes 10 million is not much and there should be no minimum wage we will take that one with a bucket of salt.

          • Lifelogic
            Posted July 15, 2014 at 3:05 am | Permalink

            Why should someone be prevented from working for less than the minimum wage if they want too? They can work for nothing it seems as an intern or for a charity but not for anything else less than the minimum.

          • Bazman
            Posted July 15, 2014 at 4:08 pm | Permalink

            Exactly. So why are the British not competing with the EU citizens for jobs that pay minimum wage by lowering their living standards such as five to room in order to find work? Competition that you have said you are against. If there was no minimum wage we could see further competition and employment would we not? In particular in the EU citizens being able to find more work by further lowering their living standards and the British having to compete with this creating more wealth for all.

      • libertarian
        Posted July 13, 2014 at 6:16 pm | Permalink

        Was there a strike then Bazman? Never noticed, if all these people are so important how come them not doing any work didn’t have any effect at all? the state sector is paid more in salary and benefits than the private sector. Private landlords are paid money to house people who can’t afford rents themselves. Are you suggesting that they shouldn’t be helped to rent?

        • Anonymous
          Posted July 14, 2014 at 5:19 am | Permalink

          Libertarian – It follows that the rush to build property portfolios has helped drive the prices of houses beyond the reach of ordinary workers. So landlords themselves have contributed to the problem and helped to drive up rents as well.

          They also contributed to the housing booms – this caused the creation of the debt crisis as the commercial banks created money with credit.

          Working people have been forced to compete for housing with non-working people through the welfare-to-landlord system. This has contributed greatly to the national debt.

          UK housing is what is ‘saving’ us now with foreign investment. How long before foreign speculators take flight ? We have gone beyond selling the family silver and are now hocking the family home.

          Yes. I blame landlords for a lot of our problems though I don’t blame them for playing a deeply flawed system.

        • Bazman
          Posted July 14, 2014 at 6:58 am | Permalink

          Much of the lower jobs in the private sector at the lower end pay poverty wages and are subsidised by benefits. You are suggesting the public sector pay less too?

      • APL
        Posted July 15, 2014 at 2:43 pm | Permalink

        Bazman: “Does this apply to dinner ladies, teachers, nurses, street sweepers all living on fine wines an steak?”

        Perhaps not.

        But it does apply to;

        Sue Bryce ‘Chief executive’ Edinburgh City council. £160,140.
        Lesley Seary ‘Chief executive’ Islington borough council £160,000.

        or these guys;

        http://www.theguardian.com/society/2013/sep/19/nhs-england-executives-earn

        So no, not your cleaners, nor the nurses.

        • Bazman
          Posted July 15, 2014 at 6:02 pm | Permalink

          Surely nurses and cleaners must be in some way being protected from cheaper EU labour at the taxpayers expense?

          • Edward2
            Posted July 16, 2014 at 4:10 pm | Permalink

            You are not allowed to discriminate on the grounds of a person’s nationality when employing someone, so there is no chance of anyone keeping jobs for the British only as you seem to be calling for.
            And wage rates have to be equal for all applicants, you cannot have different rates for different nationalities.
            And quite right too.

          • APL
            Posted July 18, 2014 at 7:20 am | Permalink

            Bazman: “protected from cheaper EU labour at the taxpayers expense?”

            Why? The left leaning intelligentsia are too busy protecting themselves at the tax payers expense.

            Why bother about silly nurses and cleaners, they are ten a penny in Eastern Europe.

          • Posted July 21, 2014 at 9:08 pm | Permalink

            One is not allowed legally to keep jobs for immigrants either.

    • Posted July 13, 2014 at 5:54 pm | Permalink

      Your claim that the state sector is “incompetent and wasteful” is purely political point which nothing to do with the technical point addressed by John Redwood.

      The political left thinks that on balance the state sector, despite some waste, is good value for money. The political right tends to claim otherwise. That’s justpart of the bog standard left versus right argument

      • Mark B
        Posted July 14, 2014 at 9:39 am | Permalink

        Ralph,

        To me it is not so much about savings, it is more to do with choice.

        I have only one council to make sure that my bins are emptied, and even though the company that does it is private, I have to pay what is negotiated.

        If I could negotiate my own contract, either collectively or individually, then I could choose which service provider and the amount I wish to pay. Further, I could cut out the middle-man of the council, thereby saving on additional overheads.

  2. Mike Stallard
    Posted July 13, 2014 at 6:02 am | Permalink

    “29% of this state debt is now owned by the state. ” Bought with electronic money?
    Why not go the whole hog and cancel all the £1,300 billion pounds with much more electronic money?
    Whenever I cannot understand stuff, there is something fishy. I cannot understand this at all. I couldn’t understand all the stuff about subPrime either…
    Luckily we had the Scottish Genius to save the world then. Who will save it now?

    PS Our defence bill costs about the same as repaying the debt. We are pretty well defenceless now aren’t we? – Oh no I forgot the aircraft carrier (planes due in 2020).

    Reply The annual defence bill is a tiny fraction of our debt

    • Bazman
      Posted July 13, 2014 at 7:33 am | Permalink

      How much of it is housing benifit? Build some homes rent them to get an income and reduce landlord bills aswell as providing stability and savings for the average person unable to live on cham pag nee and cod roe.

      • bigneil
        Posted July 14, 2014 at 9:47 am | Permalink

        What happens if the houses built are purely for thousands of people coming here to claim benefits etc? – no job – no financial input into the country at all. We have thousands already – -and still they can come. Until we control who comes here – and also repatriate the freeloaders already here – we are throwing money away – -but the govt doesn’t seem to care.

    • Gary
      Posted July 13, 2014 at 8:32 am | Permalink

      Mike, you are so right. Trust your instincts, this is voodoo economics. The right hand is buying from the left hand with chits conjured out of thin air. It’s a farce, and you can bet you and I are getting shafted.They are doing repos, swapping debt for equity, our equity, the savers and pensions etc. We are not intended to understand this. It is not formally taught anywhere.

      The sooner honest crypto currency bypasses these charletans, the better. And it certainly will happen.

      • M Davis
        Posted July 13, 2014 at 2:07 pm | Permalink

        …’cham pag nee and cod roe’…??

        You’re obviously a Socialist!

        How’s about Chateau Lafite-Rothschild and Almas Caviar? ;-}

        • M Davis
          Posted July 13, 2014 at 2:14 pm | Permalink

          A bit of frippery, on my part!

          In answer to JR:

          A bit of all three, as some others have said. If only there was a rule that all potential Politicians should have at least 10 years in business, maybe we wouldn’t be in the mess we’re in.

    • Leslie Singleton
      Posted July 13, 2014 at 2:01 pm | Permalink

      Mike–I suspect that it is not that you do not understand, but rather that, like me, you have trouble believing what is going on. They need money, so they just “create” it–what’s to understand?

      • Anonymous
        Posted July 14, 2014 at 5:28 am | Permalink

        The point I find most difficult to grasp is why the rest of the World trusts us and takes us so seriously.

        • Denis Cooper
          Posted July 14, 2014 at 9:24 am | Permalink

          Because weighted for their contributions to global GDP most of the rest of the world has been doing much the same thing.

    • Stephen Berry
      Posted July 13, 2014 at 2:59 pm | Permalink

      Mike Stallard asks a very pertinent question. If we can create money to cover 29 per cent of the debt, why can’t we create some more money to cover the remaining 71 per cent? In fact, I am surprised no politician has suggested this. Getting something for nothing is the life’s ambition of any number of people, so it must be worth a few votes.

      We could go further here and raise the minimum wage substantially. It’s a mere £6.50 or so at the moment. Why don’t the politicians raise it to £106.50 eliminating poverty at the same time? What a masterstroke that would be and it’s amazing that no party has put it in their manifesto.

      So, I would choose option 3 of cancelling the debt. But I would then go on to abolish the Bank of England so that we wouldn’t have to worry about what was or was not on its balance sheet.

      This would also ensure that if future British governments borrowed immense sums of money, they couldn’t get the central bank to bail them out. More important, the honest savers and consumers of this country would not then have to pay indirectly for the cost of their government’s extravagance.

    • Posted July 13, 2014 at 5:56 pm | Permalink

      Several leading economists, including Milton Friedman, argued that government debt is pointless and that we might just as well print money and buy back the whole lot.

      • Denis Cooper
        Posted July 14, 2014 at 9:27 am | Permalink

        Ah, but who is that “we”?

        If “we” means the government, what is that but a group of politicians?

      • waramess
        Posted July 14, 2014 at 11:43 am | Permalink

        Thank the lord it is only several monetary statists then.

        Government debt is a discipline which whilst not ensuring financial discipline does, to some extent prevent abject financial hooliganism.

      • Sebastian Weetabix
        Posted July 14, 2014 at 2:26 pm | Permalink

        And Milton Friedman was right.

    • Posted July 15, 2014 at 10:06 am | Permalink

      29% of this state debt [80% GDP] is now owned by the state. We have bought it back from the people who originally lent it, using created electronic money from the Bank of England. It means as of today we only owe 57% of our national income in this core borrowing.

      I would imagine that the average voter wouldn’t have a clue about the meaning of this! And with good reason! How is it that the State can own its own debt? It really doesn’t make any more sense for the State to do that than it would you or I.

      The technical reason for this is that money created, from nothing at all, by the BoE, isn’t counted as debt. Issued cash isn’t counted. Issued bonds are counted as debt even though the interest rate may be close to zero and, could in theory, be negative. So Mike Stallard is quite right to be suspicious. It makes no sense at all to think that the National debt can be paid off simply by issuing money from the BoE.

      The Bank of England openly acknowledges that the £ is an IOU of government. Cash is an IOU without any interest component , whereas bonds/gilts do have an an interest component. All government IOUs should be counted as part of the National Debt. That would put it back as 80% of GDP I’m afraid!

      Having said that it should be recognised that the National Debt isn’t quite such the bad thing it is popularly supposed. Its not like a normal debt which has to be repaid. As an issuer of currency, the government has to be in debt to enable us users of currency to hold financial assets.

      • Denis Cooper
        Posted July 16, 2014 at 8:58 am | Permalink

        As I understand the National Debt is the total debt that the UK state owes to entities which are not part of the UK state, so it is not increased if one arm of the UK state owes money to another arm of the UK state. In this case one arm of the UK state, the government and in particular its Treasury department, owes money to another arm of the UK state, the Bank of England, albeit through a subsidiary of the Bank. Every gilt owned by the Bank’s subsidiary says that the Treasury owes it money, firstly in the form of interest payments and finally in the form of the capital repayments if it still holds the gilts when they mature. While those gilts are in the possession of the Bank’s subsidiary they do not say that the Treasury owes money to an entity outside the UK state apparatus; on the other hand on the Bank’s balance sheet the reserves created to fund the purchase of those gilts do appear as liabilities to entities outside the UK state apparatus, while the loan that it extended to its subsidiary to buy the gilts appears as a corresponding asset. It seems to me that either the gilts should be added to the National Debt or alternatively the Bank’s liabilities arising from the purchase of the gilts by its subsidiary should be added to the National Debt, but not both.

        • Posted July 16, 2014 at 3:36 pm | Permalink

          Denis,

          Yes, on second thoughts I think you are right. Certainly if one branch of the State owes money to another branch it shouldn’t be counted. I’m not sure if it is in the UK though. The USA’s ND includes some $4 trillion or so which is owed to other branches of government. They have other inconsistencies in their accounting too. Apparently they don’t count their coinage which means it’s technically possible for the President to get around any debt limit simply by striking $trillion dollar coins.
          The whole thing needs tidying up so that every liability of government , except to itself, right down to issued 1p coins is counted as debt. That way when the accountants get to work the balance sheet balances , to the penny, exactly as it does in a well run business.

  3. zorro
    Posted July 13, 2014 at 6:18 am | Permalink

    My opinion counts for little, and the government machine will do what it intended to do all along. That is to erode the debt through inflation and cancel it wherever possible. Hence the reason why QE was used as a mechanism to pay for government spending in lieu of a lack of tax receipts…. Expanding the monetary base and printing money has had littleffect on inflation, but has boosted asset values for the rich and powerful. They like it and are getting used to it. So clearly option 3 will be chosen…..

    zorro

    • Denis Cooper
      Posted July 13, 2014 at 8:30 am | Permalink

      Well, taking the Bank of England study published in April:

      http://www.telegraph.co.uk/finance/bank-of-england/10773681/QE-has-boosted-UK-growth-by-3pc-says-Martin-Weale.html

      and extrapolating to the full £375 billion, QE seems to added nearly 8% to CPI.

      So an unconventional monetary policy originally advertised as being necessary to ward off impending deflation has actually caused excess inflation, which we saw in practice each month when the MPC repeatedly overshot the 2% target set by the Chancellor; that has devalued earnings and been a main cause of the “cost of living crisis” for which Labour blames the coalition government.

      Those with money on deposit have also suffered that erosion in the value of their savings, while some wealthier people with investments as well as cash savings have had the compensation of rising asset prices through low interest rates.

      It hasn’t been the Weimar or Zimbabwe hyperinflation catastrophe that some feared, and nor did it trash the external value of sterling as some expected, but the inflationary effect has still been significant.

      • margaret
        Posted July 13, 2014 at 9:11 pm | Permalink

        I struggle to understand , but refuse to stop trying. Tell me Denis what assets did the UK purchase which has helped a 3% growth.

        • Denis Cooper
          Posted July 14, 2014 at 9:45 am | Permalink

          It was the £375 billion of new money that had that effect, when it was created by the Bank and indirectly lent to the government to be spent into the economy. In principle the Bank could have used the new money to buy any assets that the government had available for sale and that would have had the same end result of helping to fund the government’s budget deficit; but the government did not have corporate bonds for sale, and selling government owned real estate or Royal Mail to the Bank would have been more complicated and restricted and slower than just creating more new Treasury IOUs to be put into the secondary market while the Bank was syphoning off the excess of previously issued Treasury IOUs.

          • Posted July 15, 2014 at 3:14 pm | Permalink

            Denis,

            If £375 billion of new money, under the QE program, had been spent into the economy, as you suggest, then inflation would have indeed taken off. As it was, the new money was no more likely to be spent than the bonds the money was replacing were likely to be sold and the proceeds of those bonds spent. The latter transaction only takes milliseconds.
            Perhaps you can explain why these milliseconds make all the difference?
            Why do they make any difference to the bank’s spending intentions?

          • Denis Cooper
            Posted July 16, 2014 at 10:16 am | Permalink

            The secondary market in gilts is huge and very liquid and at no time did it seize up; the fact that Darling had authorised the Bank to buy assets to inject liquidity into seized financial markets, and it then proceeded to buy gilts, was a first sign that all was not as it was being represented. A second sign was that while the Bank was buying up previously issued gilts from investors the Treasury was continuing to sell new gilts at much the same rate, and to much the same set of investors who were selling previously issued gilts to the Bank. In fact during 2009 the government borrowed about a quarter of all the money that it spent without any significant increase in its total indebtness to those normal investors; that was because the Bank came in as a new, and abnormal, gilts investor and used £198 billion of newly created money to buy up previously issued gilts roughly equivalent to all the new gilts that the Treasury had sold. So there is no question that in that year £198 billion was passed from the Bank to the Treasury via the gilts market, minus minor transmission losses, and that the Treasury then spent that money to help pay the governments bills, which means that it was almost all of it was spent into the UK economy.

            And there is also no question that this did increase inflation; going by the last study by the Bank of England the full £375 billion of QE would have added nearly 8% to CPI over and above the 2% pa target, and something like that was seen in practice with the inflation figures significantly exceeding the 2% pa target month after month.

    • StevenL
      Posted July 13, 2014 at 8:59 pm | Permalink

      They like it and are getting used to it. So clearly option 3 will be chosen…..

      How times have changed. Could you imagine John Redwood seriously floating the idea of printing £375bn, buying government debt and then cancelling it at the start of the ‘crisis’?

      Western governments are all backed in a corner now, all they can do is more of the same and hope for the best.

  4. JoeSoap
    Posted July 13, 2014 at 7:29 am | Permalink

    The answer surely depends on what you’re trying to achieve.
    If you want sky high house prices, low interest rates, savers punished, public sector supported, go for continuing high spending and carry on doing option 3.
    If you want a return to common sense, realistic house prices, the need to take a scythe to public sector waste, real returns for savers, hope for private sector workers as deflation kicks in go for option 1.

  5. Denis Cooper
    Posted July 13, 2014 at 7:46 am | Permalink

    Five years ago I briefly thought that the Labour government might have 3. in mind, but then it became clearer to me that simple cancellation of the gilts owned by the Bank of England would leave it with a massive hole in its balance sheet, in fact it would be bust in the sense that it would have negative net assets.

    It is hard to imagine that the Bank would calmly and voluntarily agree to forgive the Treasury its debt, so wiping out £375 billion of the Treasury’s liabilities but also wiping out £375 billion of the Bank’s assets. It seems to me that it would need Parliament to pass primary legislation to force that on the Bank against its will, and almost certainly against the current law.

    Would Parliament be prepared to pass an expropriation Act to cancel gilts legally owned by the Bank, albeit through a subsidiary, and so bankrupt it? It has to remembered that the £375 billion of new money created by the Bank to purchase those gilts could not be cancelled in the same way; minus transmission losses that money was indirectly passed to the Treasury and spent by the government when it paid its bills, and so is now out of its hands.

    It has to be 1. or 2. or some combination as circumstances permit, so the extra money is drawn back out of circulation and returned to where it was created and can be cancelled, namely the Bank. In the old days, that would have literally meant putting banknotes into the furnace, but now its destruction would be virtual and achieved with keystrokes.

  6. Mark B
    Posted July 13, 2014 at 7:46 am | Permalink

    I am no financial expert but, can’t you do a little bit of everything, including reducing the amount we spend ? Reduce the size of the state and, reduce the size of our overseas commitments, such as aid ?

    If you can look after the pennies, the pounds will take care of themselves.

    • Anonymous
      Posted July 14, 2014 at 5:37 am | Permalink

      “If you can look after the pennies, the pounds will take care of themselves.”

      I did exactly this and I am far worse off than people who maxed out their mortgages and bought expensive houses. It didn’t harm them to inflate their own egos with flash cars on credit either – these are the people being looked after by the government now.

      Dare I say it – being prudent and modest is at the source of my biggest regrets.

      • Mark B
        Posted July 14, 2014 at 9:46 am | Permalink

        Sadly, you are not alone.

  7. Gina Dean
    Posted July 13, 2014 at 7:49 am | Permalink

    They should not be allowed to write off debt which was due to miss management and white elephant spending.

  8. formula57
    Posted July 13, 2014 at 7:59 am | Permalink

    Option 1. please – which would also cause the downfall of the zombie banks, thereby removing a major obstacle to recovery.

    Debasement of the coinage is of course the route of least resistance and the ruinous effect can be disguised as to cause from the public so I should not be surprised if that is adopted, at least in part.

  9. Andyvan
    Posted July 13, 2014 at 7:59 am | Permalink

    I’d like to see people stop “focusing on the narrower definition of the nation’s debts” and start focusing on the actual amount of debt our government and banks have lumbered us with. All the dodgy off the books state financing, the extremely dubious accounting procedures at government and banks, the pensions time bomb, the fact that should interest rise to anything close to historic averages state spending would suffer massive real cuts instead of the pseudo austerity we’ve seen recently.
    How about having a look at where we really are in the world bankruptcy standing? Many commentators put us at number 2 after Japan. Let’s have a discussion about what would happen if the Treasury- Bank of England-Too Big to Fail Banks money printing merry go round stopped?
    To focus on the narrow definition of debt is like ignoring an alcoholics side interest in crack cocaine. The UK is addicted to funny money, excessive debt and accounting procedures that would put a small business man in jail. We are in a pre election bubble that stands a very good chance of bursting very suddenly and very badly if enough people realise the Emperors clothes are, in fact, just a birthday suit.

    • APL
      Posted July 14, 2014 at 8:23 am | Permalink

      Andyvan: “I’d like to see people stop “focusing on the narrower definition of the nation’s debts” and start focusing on the actual amount of debt our government and banks have lumbered us with.”

      Recommended:

      Social security related unfunded liabilities are estimated at £3,843 trillion or 263% of GDP.

      Unfunded public sector employee pension liabilities are estimated at £853 billion or 58% of GDP.

      The total cost of the public sector employee pension liabilities are projected to double over the next six years to £1,500 per household.
      The total cost of the public sector pensions will be closer to £39,billion.

      In the last 44 years, the United Kingdom government has only had annual budget surplus’s for six years, a total of £46billion.

      The other 36 years the UK government has run up a budget deficit of over a trillion pounds £1,038,266,000,000

  10. alan jutson
    Posted July 13, 2014 at 8:02 am | Permalink

    John many thanks for highlighting the situation the country now finds itself in, and some of the options you suggest will need to be taken.

    At last we have a politician who is not afraid to speak the truth about creating manufactured money (QE) to cover up ever greater borrowing, and then fixing the accounts as if it did not matter.
    This is or course is all an illusion, it did matter, because it devalued our currency and trashed the value of those who held savings.

    Given the above I can only suggest the government be honest with itself and the people, and take up a combination of option 1 and 2 which we were led to believe was the original policy for this Parliament, and was the promise made to the electorate at the time.

    The longer you leave it, the worse it will get, as many of us have been saying for years on this site, the fact that the Chancellor decided to go on manufacturing further sums of money, has simply made matters worse for the future.

    If ever there was an example of why Governments should not be allowed to borrow money in the taxpayers name, then your post today highlights the situation.

    • A different Simon
      Posted July 13, 2014 at 10:13 am | Permalink

      Alan Jutson ,

      Fiat money is manufactured . What is special about the state money created to buy or extinguish our own debt ?

      • alan jutson
        Posted July 14, 2014 at 7:49 am | Permalink

        A D S

        Often wondered why they call it Fiat money.

        Would perhaps make more sense if:
        £5 was Fiat
        £10 was Ford
        £20 was BMW
        £50 was Bentley.

        Only difference being the size of the notes , after all just like their namesakes, they can all still move around to any destination the driver wants to take them.

        The above is just about as sensible as creating fake money with fake value, but believing it helps matters.

  11. Andrew S
    Posted July 13, 2014 at 8:09 am | Permalink

    The new money was presumably created by this government to help to cover the profligacy of the Blair/Brown years. Removing that from the money supply would be best of all as it wasn’t earned in the first place. However, you have indicated that is not likely.
    Cancelling £377 billion debt and interest that was due, seems bad practice and seems not to rein in public spending choices.
    Gradual removal of the debt over time seems more palatable and good practice. Presumably this leaves the new money still in supply? But keeps a pressure on reducing public spending.
    The fourth option of doing nothing about it is also not good as it doesn’t put pressure on public spending and yet leaves the balance sheet permanently flabby to the tune of the £377 billion.

    • Denis Cooper
      Posted July 13, 2014 at 10:22 am | Permalink

      “Gradual removal of the debt over time seems more palatable and good practice. Presumably this leaves the new money still in supply?”

      No, because the Treasury would take money out of the economy through taxes to pay off its debt to the Bank – just as with other, normal, creditors – and then the Bank would cancel the money it had received in respect of its holdings of gilts, so reversing what it did initially when it created the new money to buy up the gilts from private investors.

      It all becomes much easier to visualise if you think of the Bank literally printing £375 billion in crisp new banknotes – if they were £50 notes they would almost fill four Olympic swimming pools – and sending couriers with suitcases of notes to buy previously issued gilts from investors, the couriers coming back with the paper gilts certificates to be stored away in the vault at Threadneedle Street, and the investors then taking suitcases of that money round to the Treasury’s Debt Management Office in Philpot Lane to buy new gilts, and the Treasury then sending those crisp new banknotes out across the country and the world to help pay the government’s bills; to reverse that process, banknotes to the value of £375 billion would have to be collected back in to the Bank, either through taxes or through the Bank selling its gilts, so the Bank could put them in its furnace.

  12. margaret brandreth-j
    Posted July 13, 2014 at 8:23 am | Permalink

    To me option 3 seems like bankruptcy.Option 2 seems to be the hard long way , but something I have done in my personal life, option 1; debts could be partially sold back.
    The answer may be to include all 3 options in various amounts and at different time intervals.

    • A different Simon
      Posted July 13, 2014 at 2:03 pm | Permalink

      Household finances and government finances are completely different .

      The Govt in a sovereign nation has the prerogative of issuing it’s own money – debt free so can always service or extinguish debt denominated in it’s own currency .

      In our households we may consider sacrifices virtuous but look at the effect on the economy when people pull their horns in and money stops circulating .

      My work counterparts over in Israel and the Far East would not believe that I eat out less than 6 times a year . I feel guilty for not spending enough locally and am conscious of it being a case of use it or lose it .

      All the private banks have done in their capacity to create money is puff asset prices and increase private debt – and private debt is the real problem , not public .

      As a result of their actions almost everyone is bringing forward what would be their consumption in old age to today just to pay for their puffed accommodation prices .

      It’s all a confidence trick . The infrastructure and accommodation in the UK was built by people who died a long time ago and all the I.O.U.’s in creating most of what we have today have been extinguished .

      We should ALL be benefiting from the accumulated the wealth of the generations who have gone before us but it’s been confiscated from us – and our children – largely by the antics of the financial sector and complicit politicians .

      • margaret brandreth-j
        Posted July 14, 2014 at 7:54 am | Permalink

        But you don’t seem to have proved your own hypothesis. By your argument personal finances are or should be very similar to government finances.

      • Denis Cooper
        Posted July 14, 2014 at 10:12 am | Permalink

        Household finances and government finances are only different to the extent that the law allows them to be different, and personally I do not take kindly to the idea that a bunch of politicians who have got control of the country should then be able to order the creation of as much money as they wanted to spend for whatever purposes they may have in mind, any more than in a previous era I would have taken kindly to the idea that the king should be able to order the debasement of the coinage to provide himself with as much money as he wanted to spend for whatever purposes he had in mind. Whatever the form of government the power that the state has as the issuer of the currency necessarily comes at the expense of those compelled to use that currency, which we have seen in practice in terms of the excess CPI inflation caused by QE. Taken to the extreme, it could end up with politicians in the government always having as much new money as they wanted to spend, and waste, while the rest of us found that the value of the money in our possession was being reduced towards zero. I note again that there has never been a single vote in the Commons to explicitly authorise the creation of £375 billion of new money for the use of the government, so the power has not even been distributed as far as our 650 elected representatives in Parliament.

  13. oldtimer
    Posted July 13, 2014 at 8:36 am | Permalink

    The temptation for the political class is option 3. Its adoption, as a free standing step, would be a disaster as it would only encourage continued profligacy in public spending, embed inflation over time and create the impression that a endlessly fruiting money tree does in fact exist.

    When the financial crisis broke and these emergency measures were introduced, we were told “we were all in it together”. If the political class sees option 3 as a kind of get out of jail free card, then a similar card must be offered to the long suffering taxpayers and savers who have been hammered by the many measures justified by the mantra “we all are all in it together”. But to do that we need to be clear that the crisis is indeed over, that the state finances are indeed back in order and that special measures, including QE and the extra taxes, are no longer required. I have yet to be convinced that we have reached that stage.

  14. Anonymous
    Posted July 13, 2014 at 8:39 am | Permalink

    Option 2

    Sad to say we are no longer a nation of belt-tighteners, so this option is going to be impossible.

    • Bazman
      Posted July 13, 2014 at 2:34 pm | Permalink

      The belt tightening is being done by the working and working poor not by the wealthy who are getting tax cuts.

      • Edward2
        Posted July 14, 2014 at 6:36 am | Permalink

        The headline percentage rate may have fallen but the amount the rich are paying has gone up.
        The current top rate is still 5% higher than 12.5 of the 13 years of Labour’s time in office.

        • Bazman
          Posted July 14, 2014 at 5:41 pm | Permalink

          Didn’t mention the hit took by the disabled and working poor edward did you and have still not told us why the British worker should be in some way protected from cheaper EU labour happy to reduce costs and pass on these savings to employers? If they can live five to room why should the British workers not reduce costs and compete too?

          • Edward2
            Posted July 15, 2014 at 6:00 pm | Permalink

            First of all Baz, you spoke originally of “the working and the working poor” and compared them with the rich and their tax cuts. I replied about that as the facts prove you wrong. They are paying more.
            Now you come back on a different argument about disabled people and then complain that I didn’t say anything about them!

            I’m puzzled why I need to tell you “why the British worker should in some way be protected from cheaper EU labour…why should the British worker not reduce costs and compete too”
            This is happening after your beloved socialists in their 13 years of total misrule allowed over 5 million new arrivals into the UK to compete for jobs, housing and health care.
            So I suggest you write to the Labour party and ask them.

          • Bazman
            Posted July 16, 2014 at 5:18 pm | Permalink

            The wealthiest 10 percent in the UK pay a smaller proportion of their income tax than the poorest 10 percent, meaning that in general, the UK such as yourself vastly overestimates the tax burden on the rich. You think households with the highest incomes pay more than those with the lowest, whereas the opposite is the case the higher percentage paid by the poor is comprised of indirect taxes on consumption and more than four times as much of their income in council tax as the top 10 percent. Any increase they have had in tax have been massively compensated by pay rises that the rest of us have not got. You seem to think they are doing us some sort of favour when the reverse is true.

          • Edward2
            Posted July 17, 2014 at 3:41 pm | Permalink

            Your statistics are well argued Baz and I would agree that the less well off pay far too much tax and NI from their average or below average earnings.
            This is partly why I have always felt a minimum wage is a good thing as is the drive by this Government to increase the starting point for paying tax.
            Up again to £10,000 this year I believe.
            It seems odd to me that you can be paying tax and NI to the State whilst on the minimum wage as set by the State.

            But it is a fact that the richest 1% percent are paying over 10% of all income tax.
            And in a mobile world it is easy for them to move away to are more tax friendly country which could be costly for the rest of us stuck here.
            I think we should have a drive to get more millionaires and billionaires to come here and pay tax.
            It might help reduce the burden on the rest of us.

            VAT at 20% is too high and impacts the less well off disproportionately.
            But all this money plus over £100 billion borrowed each year is need to pay for State which you keep telling us needs to do more and inevitably spend many billions more.

  15. Uri
    Posted July 13, 2014 at 9:05 am | Permalink

    Options 1 and 2 sound responsible so I would imagine the government will be going for 3.

  16. Antisthenes
    Posted July 13, 2014 at 9:11 am | Permalink

    Against all expectations QE and borrowing has not lead to the doomsday scenario that me and others were predicting when it was brought in or continued at high levels. Perhaps we got it wrong and others have called it correctly. However I do not believe that high leveraged states can continue to be so indefinitely and one day there will be a high price to pay. Debt and deficits must now be tackled and reduced over a reasonable period of time and growth and wealth creation must be stimulated. The coalition has made some efforts in that direction despite the il-Lib-Dims and the next government if it is staffed by Conservatives will no doubt continue the good work. Unfortunately that is not likely to be the case as Labour looks set to form the next government and if another Democrat enters the white house and the EU continues with their anticompetitive and protectionist policies then the West’s decline now well advanced will only get worse and quickly and that day of reckoning will arrive quite soon.

  17. Lindsay McDougall
    Posted July 13, 2014 at 9:28 am | Permalink

    I favour zero inflation and low state debt so it is option 2 for me. However, with an annual fiscal deficit currently running at £100 billion, we have not yet reached the starting line.

    Let me lay it on the line. There are worse courses of action than raising the standard rate of income tax. However, the state is still spending far too much of GDP. In 2001, public expenditure was 36% of GDP. The electorate thought that health spending was too low but there were few other serious complaints. Public expenditure is now about 44% of GDP . Why?

  18. Brian Tomkinson
    Posted July 13, 2014 at 9:29 am | Permalink

    Option 1 was what we were told would eventually happen when this money printing first started – therefore I see no likelihood of that ever taking place. What we would like to see happen, or you for that matter, is of no interest to those who will decide. We are regarded by them as mere chattels. As the state debt is still increasing by £2bn per week I don’t expect any of this is going to be dealt with any time soon.

  19. Hefner
    Posted July 13, 2014 at 9:43 am | Permalink

    A large part of the debt was created by private institutions (banks at the forefront), which when in needs were only too happy to see “warm-hearted” neo-liberal inclined politicians to socialise their losses. So only solution 1 is, to me, the only justifiable one.

  20. John Fisher
    Posted July 13, 2014 at 10:15 am | Permalink

    Isn’t money is a commodity like any other commodity? It should be produced and managed under competitive market conditions, the same as clothes, bread or mobile phones. Politicians should have left money and banking to the private sector.Banking should be managed by the free market, with absolutely no government involvement at all. Anything else is socialism.

    • Posted July 15, 2014 at 3:21 pm | Permalink

      No. Money is not a commodity. You can sell commodities for money. You can buy commodities with money. But you can’t buy or sell commodities for or with other commodities.
      That is known as barter.

  21. A different Simon
    Posted July 13, 2014 at 10:30 am | Permalink

    You mention public sector pensions but the elephant in the room is that private sector workers don’t have any pension and will be retiring broke/with debts .

    Private sector banks haven’t been serving society , they have been shafting it . Nowhere is this more true than in their money creation and credit creation capacity .

    Why not kill two birds with the same stone by relieving private banks of their privilege to create money and helicopter the money into existence through a livable (but still unfunded) state pension ?

    I didn’t used to like pay-as-you-go pensions but they are not subject to fund management charges and the above scenario would seem to be preferable to the situation we currently have .

  22. John E
    Posted July 13, 2014 at 10:38 am | Permalink

    I can’t get my head round why option 1. increases interest rates? Reducing the money supply is deflationary, allowing interest rates to stay low longer than otherwise for a given inflation target. QE was intended to have the same effect as a reduction in interest rates below zero. Therefore unwinding QE is the equivalent of raising rates – but while QE is being unwound rates don’t need to rise as much as they otherwise would. What am I missing? I am assuming this is all happening in an economy where real growth has returned and the Bank is no longer pushing on a piece of string when setting rates. When the Bank introduced QE they said they would raise rates first and unwind QE second. Is that order being changed due to the electoral cycle?

    Option 3. is obviously attractive in a “Could we really get away with it?” way. Option 2. is the same thing in slow motion.

    Given all this is happening in uncharted waters, option 2. seems wisest as it allows for adjustment if things don’t go as we expect. It also helps retain confidence in the system which is vital to our interests.

    The Chinese are wondering if all the promises we give them in return for their goods as worth anything. They seem to have sucked in most of the gold in the world, with rumours abounding that they intend to use it to back the remnimbi as a hard currency alternative to the dollar. There are questions about whether the US has the gold it claims to have – the Germans don’t seem to be able to get theirs back from the New York Fed. And foreign companies have lost faith in the US justice system. All threats to the current financial order, and reasons to avoid things that could be seen as trickery that further erode confidence.

    • Posted July 15, 2014 at 3:42 pm | Permalink

      You are right to question why government swapping bonds in exchange for cash would necessarily increase interest rates. It would depend on the interest rates that the market attaches to the bonds. The opposite process is known as QE was designed to lower interest rates so there is some justification in this belief.

      Interest rates are set by government’s actions in setting the overnight rate. They issue gilts/bonds to drain excess reserves (cash) from the market but could just as well put that cash into the equivalent of a savings account and pay interest on that.

      From the POV of a bank it wouldn’t make any difference. Holding bonds is the equivalent of us keeping money in a savings account. Holding reserves is the equivalent of us holding money in a current account. It may make some difference when interest rates are high but as the BoE is paying just about the same interest on cash reserves as the Treasury pay on their gilts, its hard to see what difference switching accounts is going to make to the workings of the economy.

  23. Nick
    Posted July 13, 2014 at 10:39 am | Permalink

    Today I want to concentrate on the narrower definition of the nation’s debts – the £1300 billion of official borrowing in the name of the nation that gets measured

    What’s a 100 bn error when you’ve missed off 7,200 bn of pensions debts.

    http://www.dmo.gov.uk/reportView.aspx?rptCode=D1A&rptName=22793228&reportpage=D1A

    Total Amount Outstanding (including inflation uplift for index-linked gilts) = £1,405.02 billion nominal


    80% of GDP is a comparable level of indebtedness to Germany, the USA and France, and well below Japan. Markets are getting used to highly leveraged states these days.

    Ho hum. It’s just the borrowing and the markets only care about the borrowing. They don’t care about the pensions debts. The public however does.

    That’s another 7,200 bn pounds, rising at over 600 bn a year.

    Not surprising you won’t discuss the pension debts.

    I raise this because we have ahead of us a decision to make about what we do with this self owned debt. Currently we pay ourselves interest on it, and recoup much of that one way or another. The Bank tops up the amount of government debt it owes as repayments come due.

    So if we believe you there is nothing stopping you cancelling all tax. None. Zero. You fund the entire state from QE.

    Which of these would you like to see happen?

    Ah the give people an option and leave out choices.

    How about sending people a bill each year for their pro rata share of the debts?

    Of course you would have to stand in front of them and tell them you’ve found a bill for 7,200 bn stuffed down the back of the sofa. You’ve fiddled the accounts contrary to section 2 of the 2006 fraud act.

    http://www.legislation.gov.uk/ukpga/2006/35/section/2

    Fraud by false representation

    (1)A person is in breach of this section if he—

    (a)dishonestly makes a false representation, and

    (b)intends, by making the representation—

    (i)to make a gain for himself or another, or

    (ii)to cause loss to another or to expose another to a risk of loss.

    (2)A representation is false if—

    (a)it is untrue or misleading, and

    (b)the person making it knows that it is, or might be, untrue or misleading.

    (3)“Representation” means any representation as to fact or law, including a representation as to the state of mind of—

    (a)the person making the representation, or

    (b)any other person.

    (4)A representation may be express or implied.

    (5)For the purposes of this section a representation may be regarded as made if it (or anything implying it) is submitted in any form to any system or device designed to receive, convey or respond to communications (with or without human intervention).

    =================

    Now politicians know they owe people pensions.

    Politicians know they aren’t reporting the pension debts.

    They know they are more debts than borrowing.

    So that leaves one thing are people exposed to, or have experienced, a loss on their pensions?

    Yep, raising the state retirement age by 1 year is a 10K loss for average person.

    • margaret
      Posted July 13, 2014 at 9:15 pm | Permalink

      Thanks Nick ,perhaps you can send this to the police so they do actually know what fraud is.

    • Denis Cooper
      Posted July 14, 2014 at 9:17 am | Permalink

      Sounds like those writing election manifestos could be guilty of fraud!

    • Posted July 15, 2014 at 4:09 pm | Permalink

      You can’t count future expenditure as a debt. If so, a child would be hugely in debt as he/she would have to total up all future expenditure they’d need, education, health housing , transport etc they would need to live to a ripe old age!

      That said, there is a problem with an aging demographic. But it is a mistake to think government can put money aside to deal with it in future. Money is an IOU of government and its just not possible to save up one’s IOUs.

      Consider the possibility that someone in Mrs Thatcher’s government had squirreled away some money in a secret account and which has just been discovered. Is that money any more usable than if government just simply prints some more? No it isn’t. Both would be equally inflationary /reflationary when spent.

      What governments can do is build up their resources now to cope with the anticipated problem. That means increasing the skills of the present younger generation so that they can create wealth in the future when it is needed. But, keeping them unemployed or having them work in crappy jobs on minimum wages isn’t exactly the best way to achieve that.

  24. The PrangWizard
    Posted July 13, 2014 at 10:46 am | Permalink

    I do not understand, but it seems like fraud and trickery to me, set up by State and City fraudsters and tricksters. How is it that after all we hear about how we must all sacrifice to pay off the debt, somehow all of a sudden it can just be wiped? Is it within the letter of the law but not the spirit? The State decides it can raid my bank account, even if I act lawfully but outside the spirit, so may I have a reciprocal right? The State has wasted thousands of my tax money over the years, so I want some of it back. Maybe there needs to be some kind of revolt to make this happen. After all when there was a riot in Trafalgar square over the poll tax, the State backed down and pretty damned quick too.

  25. acorn
    Posted July 13, 2014 at 10:49 am | Permalink

    There is no operational requirement to unwind QE. Buying securities by the BoE are identical to the Debt Management Office (DMO) not issuing them and instead letting government deficit spending remain as “reserve” balances at the BoE. Government spending always results in increased balances in reserve accounts at the BoE not increased balances in “securities” accounts at the BoE for any particular account holder.

    Securities (Treasury Gilts) are paid for by the BoE debiting “reserve” accounts and crediting “securities” accounts at the BoE. All QE does is reverse that; debits the securities accounts and ‘recredits’ the reserve accounts. This removes interest income from the economy and the government pays the interest on those Gilts, to itself via the BoE. Hence, QE is a tax on the economy.

    QE was supposed to “encourage” Banks and Pension funds etc, to go out and get a better return on their new cash money, rather than sitting on a “risk free” government bonds paying a few percent interest. The fact that those Gilts were savings of the pension funds and not investment funds raring to go find an entrepreneur, would give you a clue that those funds didn’t want to play that game and they haven’t.

    Monetary policy is ineffective in a Household sector balance-sheet recession. Banks will not extend loans to poor credit risks, no matter how much “liquidity” is injected into bank reserve accounts. The bottom line is that the private sector cannot sustainably lead the economy out of a balance-sheet recession, only government deficit spending can do that.

    • Denis Cooper
      Posted July 14, 2014 at 9:14 am | Permalink

      It would certainly have been much simpler if the Bank had extended a £375 billion overdraft to the Treasury, but it was prohibited from doing that by the EU treaties, articles which apply to the UK even though we are not in the euro; it would even have been simpler if it had bought gilts direct from the Treasury rather than buying previously issued gilts from investors while in parallel the Treasury was selling new gilts to much the same set of investors at much the same rate, but it was also prohibited from doing that by the EU treaties. For the same reason the ECB purchases of bonds issued by the governments of distressed eurozone states were also done indirectly, through the secondary market.

    • acorn
      Posted July 14, 2014 at 3:35 pm | Permalink

      Apparently, I am told moments ago, that I could have explained the above better.

      The only place you can get Pounds Sterling is from the UK government.
      The government issues its own money by spending a fiat token into existence. This token is not convertible to anything, but you need to get some because it is the only token the government will accept to clear your taxes (tax driven money).

      For purely political reasons, the government issues debt instruments (Gilts) pound for pound to cover its spending. There is no operational requirement to do this in a sovereign floating fiat currency economy. Politicians like to pretend they are just like a household and with the same financial constraints. Wrong.

      Households are currency USERS not currency ISSUERS like what the government is. The government will never run out of these tokens, nor will its Central Bank. These tokens are just scores on a scoreboard. No matter how many runs England may score in a Test Match the scoreboard will never run out of numbers to display that score. Likewise, we may run out of land; but, we will never run out of “acres” to measure it with.

      Inorder to buy the governments Gilts, it has to have spent enough of its tokens into the private sector beforehand, to buy them. Hence Gilts serve the function of paying welfare benefits (interest payments) to rich people, just like the DWP pays welfare payments and pensions to poor people.

      QE. You have got your Gilts paying a risk free interest; you know you will (most likely) get your money back when the Gilt matures and you redeem your cash. Now remember how you got that cash in the first place; from the government.

      Now, the government is reluctant to spend money to boost the economy; fiscal stimulus. It has a massive deficit and national debt inherited from the previous government and our children and their children will be paying it off till kingdom come and all that rollicks; which is a total myth, it doesn’t work like that and never has for a sovereign floating fiat currency economy. All politicians still think we are on the Gold Standard.

      So the BoE has to use monetary policy,which in the UK case will be nowhere near as effective as fiscal stimulus, to try and make a fist of it. It will SWAP your Gilts for Cash (in the form of a keyboard boost to your BoE “reserve” account. Then it will insist you go out and find another Richard Branson to invest in and boost employment and wages and GDP etc. How was it for you?

      PS. A “reserve” account is a “current account” for Commercial Banks at the BoE. There is a savings (securities) account that goes with it. It has an unlimited overdraft facility during the daytime; but, you have to settle all your debts from your “reserve” account at the end of the day. If you have to borrow to do that you are into LIBOR rates. Banks don’t lend their “reserves”, except to other Banks as part of the settlement procedure.

      • Denis Cooper
        Posted July 14, 2014 at 5:53 pm | Permalink

        Under current legal arrangements you cannot get any pounds sterling from the government, other than those which have previously been issued by the Bank of England – every banknote has the Bank’s name on it – and which have come into the Treasury by one route or another.

        Once again we come back to the fact that while the Bank is owned by the government it is not part of the government, instead is a separate arm of the UK state whose responsibilities include issuing the UK currency, IOU’s issued by the Bank which are known as money, pounds sterling; and the government cannot issue new money, it can only issue its own IOUs, one form of which is bonds known as gilts, to borrow money from those who have it and are willing to lend it to the government.

        So in QE as practised in the UK we have had one arm of the UK state, the central bank, and another arm of the UK state, the government, indirectly swapping their respective IOUs, the Bank getting gilts issued by the Treasury and the Treasury getting money issued by the Bank, minus the small transmission losses as the two sorts of IOUs passed through the gilts market in opposite directions.

        • acorn
          Posted July 16, 2014 at 4:05 pm | Permalink

          This, the last time Denis because I am flogging a dead one here.

          “… the government cannot issue new money …”

          The government is the only entity that can issue new “money”. To be precise, the government is the only entity that can increase the “net financial assets” in the economy. That is, in a fiat currency economy like what we have.

          The government does this by spending NEW tokens into the economy every day. It does this by keyboarding numbers into commercial banks “reserve” (current) accounts at the BoE. So when it pays your pension, the DWP dials the money into your high street bank account. At the same time, it dials an equivalent amount into your banks “reserve” account at the BoE. Your banks balance sheet remains balanced. That is called vertical money.

          Everything in the commercial banks sums to zero, there is an asset for every liability. For every loan (asset for the bank), the bank makes, there is a deposit created (a liability for the bank). The exact opposite for the person taking out the loan. This is called horizontal money (credit). This activity does not create any new “financial assets” in the economy, but it can (and does) create REAL assets like houses cars and stuff.

          To control the aggregate demand for houses cars and stuff, the government uses taxation to put the brakes on the private sector and leave some real stuff for the government to buy for the poor people; and, to a certain extent, inflation in sectors of the economy that are short of supply.

          Taxation is part of government vertical money. Tax money is shredded back into thin air. It doesn’t physically pay for anything. Vertical money is created out of thin air and taxes send it back to thin air eventually. The so-called national debt is just the amount of its money it hasn’t got back yet because the little people keep saving the stuff instead of spending it and paying more VAT etc.

          Ask yourself why a government that creates its own money would want to borrow any of it back; give you a bit of paper to say they will pay interest on it. They could just create some new “money” for free. I am very pleased they do that cos I have got loads of those bits of paper that pay the interest that is paying my pensions.

          Sorry JR, I will stop there, thanks.

        • Posted July 17, 2014 at 12:13 am | Permalink

          Denis,

          We’ve had this conversation before about the status of the BoE. Your comment that “the Bank is owned by the government it is not part of the government” sounds pretty lame, if you don’t mind me saying so.

          And you yourself have criticised the BoE for technically violating what is, in your opinion, their legal obligation to act independently.

          It must be obvious to everyone that the so-called independence of the BoE is, to say the least, severely exaggerated. When the economy is ticking along reasonably well the government may be happy to allow the bank to set interest rates ‘independently’. But, that’s as far as it goes. Generally the BoE is required to act as instructed. When it is told to buy back £370 billion of government securities, it does just that. Totally independently? Come on!

          Every central bank operates that way. Even the Federal Reserve in America is effectively part of the US Treasury even though it is supposedly privately owned.

  26. Bert Young
    Posted July 13, 2014 at 10:51 am | Permalink

    Options one and three would be irresponsible ; the public cannot escape the realism of debt – there are too many temptations of debt around them in the day to day running of their lives ; eg, I am shocked at the behaviour of one young married woman I know who changes her car for the latest model every 2 years , shops for her new clothes whenever she fancies , stops paying rent to her mother when she says ” I’m a bit short ” , goes on fairly expensive holidays and , meanwhile , has managed to fleece the savings of her partner ( he admitted that to me !) , by the way , her credit card borrowing has gone through the roof . While the economy is expanding and salaries are almost caught up with inflation , it is only reasonable and sensible to repay debt ; of course it cannot be done overnight , so , a system of gradual replacement should be put in place much as we did to pay off ” Lend Lease “. Maintaining our integrity in the international borrowing world is essential ; without this standing it would be difficult to remain a financial centre of some consequence .

  27. Max Dunbar
    Posted July 13, 2014 at 11:06 am | Permalink

    No accountancy skills but options 1 and 2 look vaguely reasonable whilst option 3 looks distinctly dodgy and the product of a convoluted accountancy mind so is probably the one that the government will favour.

  28. Terry
    Posted July 13, 2014 at 11:41 am | Permalink

    A very emotive subject.
    I want my private pension back. My SIPP and my savings have been decimated by QE which created both ultra low Gilt Yields and negative returns on savings interest rates. I am struggling to pay my way now. But are those bankers?

    I, amongst millions of other careful savers, have been sacrificed to save those grotesquely irresponsible, feckless UK Banks, lenders and borrowers.
    If Capitalism was allowed to work properly, those over their heads in debt would have gone to the wall (Banks too) but the astute and the strong would have survived and we would have turned the corner long ago.
    Government interference in true Capitalism is giving it a very bad name and if they really knew what they were doing they would have stopped it in 2010.
    Alas like most modern politicians they were too inexperienced and too naive to challenge the BoE and change the course of our history for the better.
    The legacy of Labour and now the Coalition, is a future Britain faced with crushing debts that will cripple future generations. It will never be repaid so the borrowing will continue ad infinitum until the markets pull out our plug. Just as happened to Argentina, where they too decided to pay themselves with money nobody had actually earned.
    Printing money without collateral support is counterfeiting by any other name (QE) and there is only one result. Take your pick – Deflation or Depression or hyperinflation. Or possibly all three, in succession. By that time, the perpetrators will have long gone and swear it was not their fault.
    I look forward to the forthcoming collapse of assets which only the undeserving wealthy can currently afford.

    • Denis Cooper
      Posted July 14, 2014 at 9:04 am | Permalink

      “… they were too inexperienced and too naive to challenge the BoE … ”

      The Bank agreed to do what the Chancellors, Darling and Osborne, wanted it to do, which was indirectly lend the Treasury first £198 billion under Darling and then another £175 billion under Osborne to help pay the government’s bills, while maintaining the pretence that the creation of these vast sums of new money was necessary to ward off deflation and stimulate the economy.

      Because at the start the Treasury had given the Bank an indemnity against any losses incurred through its asset purchases either could have refused to authorise any further purchases of gilts at any time, but they chose not to do so because it served their purposes.

    • Iain Gill
      Posted July 14, 2014 at 10:54 am | Permalink

      I hope something along the lines you describe happens.

      Sadly it looks likely the political class will continue to kick the can along the street and delay some home truths.

      I am coming to the conclusion we need something radical, maybe a currency union with the USA, or just adopt the US dollar are our currency, pass a law to prevent any more government debt, and start on a proper repayment of current debts.

  29. Richard1
    Posted July 13, 2014 at 12:00 pm | Permalink

    Option 1 is the only one which will avoid a resurgence on inflation due to money printing at some point. So long as spending is kept under control and growth is promoted byneg low tax policies, it should be possible to carry out option 1 over a period without too much adverse effect.

  30. ian
    Posted July 13, 2014 at 12:28 pm | Permalink

    You have only just got started on this crisis, so if i was you i would put on your tin hat and get under your desk and stop asking silly question.

  31. Big John
    Posted July 13, 2014 at 12:32 pm | Permalink

    Option 1 is the correct option.
    Anything else is just stealing.

  32. Paul
    Posted July 13, 2014 at 2:43 pm | Permalink

    Option 3 has, by definition, to have consequences, otherwise countries could simply borrow money off themselves ad infinitum.

    Devaluation of the currency springs to mind.

    Hefner, the money was spent, well wasted, on the public sector, on which spending went up an insane amount in real terms during Brown’s era.

    • StevenL
      Posted July 14, 2014 at 4:29 pm | Permalink

      Sure it has consequences, remember how big the numbers were on Italian, Spanish and Greek banknotes before they joined the Euro?

  33. Tom William
    Posted July 13, 2014 at 5:12 pm | Permalink

    Edward Heath introduced index linked public sector pensions. Whether or not they are justified, they are certainly valuable. But there was no public pressure for them at the time.

    Since then they have been recognised as fundamental to recruitment and retention and the 2010 Hutton report into public pensions stated that none of the three main parties had any intention to alter the terms of recipients. Whether a change might be made for new entrants is a different matter.

  34. Posted July 13, 2014 at 5:58 pm | Permalink

    I suggested Option 3 in the FT a year ago. Government debt in the hands of the central bank is an essentially meaningless concept: that so called debt might as well be torn up.

    • Denis Cooper
      Posted July 14, 2014 at 8:30 am | Permalink

      Government debt in the hands of the central bank is not a meaningless concept if the law requires the latter to keep separate accounts and does not permit it to operate with net negative assets, which is what would happen if all the gilts were simply torn up.

      Technically those £375 billion of gilts are held by a wholly owned subsidiary of the Bank, the Bank of England Asset Purchase Facility Fund Limited, and they are the assets which approximately match that subsidiary’s principle liability, the loans that it has received from the Bank itself.

      On page 6 here, as of 28 February 2018:

      http://www.bankofengland.co.uk/publications/Documents/other/markets/apf/boeapfannualreport1307.pdf

      that subsidiary had assets of £417 billion, of which £393 billion were the gilts held; while its liabilities were also £417 billion, of which £375 billion was the new money borrowed from the Bank to buy the gilts and £41 billion was due to the Treasury under the indemnity.

      If the Bank of England Asset Purchase Facility Fund Limited agreed to the gilts being simply torn up then its total assets would be cut to the £24 billion cash and so without the activation of the Treasury indemnity it could not repay the £375 billion it owes to the Bank and so both would be bust, while the activation of the Treasury indemnity would require the Treasury to immediately stump up about £351 billion which of course it does not have readily available.

      Reply It is a subsidiary owing to the holding company! It’s not bust.

      • Denis Cooper
        Posted July 14, 2014 at 5:22 pm | Permalink

        The subsidiary would be bust if all the gilts that it holds as assets were rendered worthless without a corresponding elimination of its liability to repay the holding company the money it borrowed to buy the gilts.

        Then as the subsidiary could not repay that massive loan the holding company would also be bust.

        That is how it would work if the holding company and the subsidiary company were private companies, and the former lent the latter a vast sum to buy something which then proved worthless.

        The qualification in this case is that the Treasury has indemnified both the holding company and the subsidiary against any losses, as Darling stated in his first letter to King dated January 29th 2009:

        http://webarchive.nationalarchives.gov.uk/+/http://www.hm-treasury.gov.uk/d/ck_letter_boe290109.pdf

        It follows that cancellation of the gilts would either trigger that indemnity and so require the Treasury to immediately stump up something like £351 billion cash, which of course it does not have to hand, or if the Treasury reneged on its promise the Bank of England Asset Purchase Facility Fund Limited would immediately go bust and consequently the Bank of England would also immediately go bust.

        Reply This is nonsense. They can control both sides of their balance sheet and can create as much as they need.

        • Denis Cooper
          Posted July 16, 2014 at 5:50 pm | Permalink

          I don’t see how that could possibly work. As can be seen on its balance sheet, linked above, the Bank of England Asset Purchase Facility Fund Limited owes the Bank of England £375 billion. It could repay that loan from the Bank if the Treasury paid out as normal on the gilts that it holds, but if those gilts were cancelled and rendered worthless then it could only repay the Bank if the Treasury made up the consequent losses under the indemnity. Either way the Treasury would have to pay to make sure that the Bank was repaid on its loan to the fund, because it is by far the largest asset on the Bank’s own balance sheet and without it the Bank itself would be bust.

    • waramess
      Posted July 14, 2014 at 11:35 am | Permalink

      Sensible solutions often stem from unwinding stupid decisions of the past.

      The most stupid act ever seen was the roundabout way of the government printing money to buy its own debt in order that it could then sell some more. We were given an old cock and bull story about keeping long gilt yields under control but we all know now what the reason was.

      So, now we seek the most sensible way that the past folly might be unwound.

      Certainly it will not be to cancel the purchased debt. For the same reason we do not allow government the convenience of printing money instead of incurring debt or raising it through taxation whenever it needs some more, i.e. fiscal discipline. To cancel the gilts would certainly give overseas investors in gilts quite the wrong (right) idea about our government’s fiscal probity.

      Bear in mind this links to yet another of mainstream economists maddest views; that the UK B of P can be financed forever with inward investment.

      Of course part of that inward investment is the purchase of gilts by overseas buyers who represent the second largest buyers after insurance companies and pension funds, and many of these are Central Banks.

      Risk losing a reputation for fiscal prudence with the Central Banks and bang goes any argument about financing the B of P deficit as overseas investors take flight.

  35. stred
    Posted July 13, 2014 at 7:18 pm | Permalink

    Pre crisis, the banks had simply financed debt by creating ‘You owe Me s’ through over leverage. Gordon Brown said during the crisis that the banks needed to get back to these levels of leverage. (A.Marr show) However, financial regulators thought differently and levels of created money has had to be reduced. Perhaps governments have got away with money printing in order to finance continued levels of public spending, because they have replaced the withdawn private debt financed through the banks. Banks have been allowed to raise their charges and savings to debt differentials in order to write off their bad debts. Governments have been able to squeeze business and savers in order to avoid any real spending cuts.

    Any truth in this?

    Also, what is the value of total PFI borrowing to date? This should be added to the total, as it is having to be repaid at very high interest levels.

  36. Kenneth R Moore
    Posted July 13, 2014 at 10:00 pm | Permalink

    “So though this government has had to make some difficult decisions, we are making progress. We’re paying down Britain’s debts.”

    David Cameron, Jan 2013.

    Either Mr Cameron is a liar or incompetent. In either case he is unfit for office.

    Despite Mr Redwood’s protests, David Cameron’s policy is to increase Britain’s debt by 60 per cent. Or to put it another more to increase it more over five years than Labour did over 13 years.

  37. Kenneth R Moore
    Posted July 13, 2014 at 11:03 pm | Permalink

    That Question posed in the article is a bit like asking whether the reader would prefer their arm or leg cut off. The debt will be paid of by government sponsored theft. ie rigging interest rates and pushing up inflation.

    Professor Redwood doesn’t mention the fact that government borrrowing costs are at historically low levels. His article doesn’t consider the consequences if these were to rise to more ‘normal’ levels.

    The true scale of the national debt is beyond belief when taking iunto account banking liabilities. It’s closer to 800% and then some more when the level of personal debt is added on.

    In short we are flat broke, the economy has become a giant ponzi scheme powered by phoney borrowed money and IOU’s.

  38. Kenneth R Moore
    Posted July 14, 2014 at 9:57 pm | Permalink

    http://blogs.spectator.co.uk/coffeehouse/2013/05/dominic-raab-reveals-britains-true-debt-burden/

    I think our host should paint a fuller picture of our debts. Germany is in a very much stronger position and is in no way comparable. This is whatI find most infuriating about politicians in general – their ability to cherry pick.

  39. ian
    Posted July 15, 2014 at 2:10 am | Permalink

    Traders looking for jobs as central banks and back room machines take over.

  40. Reaguns
    Posted July 15, 2014 at 9:15 am | Permalink

    I wish I knew enough to comment but, despite a long study of economics, I do not.

  41. Robert Taggart
    Posted July 15, 2014 at 9:48 am | Permalink

    Personally Johnny option number one would suit Moi just fine.
    From the perspective of Blighty methinks option number two would be the best course of action.
    Either way, Blighty needs to live more, much more, within its means – while still ‘shelling out’ for the benefit of us scroungers !

  42. Rob
    Posted July 16, 2014 at 9:23 am | Permalink

    Option (1) should be persued. A gradual tightening, but very slowly, starting with a rate rise.

    Reasons?
    - The employment rate hit 73.1% in the first three months to May, equalling the highest level on record (back in 1971)

    - We no longer require an emergency base rate of 0.5% as we’re not in an emergency. Quite the opposite actually.

    - House price inflation is out of control, it’s not just London based. It needs nipping in the bud now. A small rate rise should cool things down.

    - The currency is still weak (ignore misguided media reports of a strong pound, it’s still 17% below the pre-crisis average against the euro for example). A weak currency for a net importer like the UK just increases import costs. UK exports are not afftected by currency strength and a weaker currency is just shooting ourselves in the foot.

    - CPI has been consistently above target over the last 5 years. The “real” figure (not the fudged one) even more so. It has just way overshot (1.9%) the predicted value (1.6%) again – the “real” figure even more so.

    - Borrowers have now had more than 5 years to sort themselves out.

    In short, a series of small rises should start right now.

  43. Kenneth R Moore
    Posted July 16, 2014 at 11:32 pm | Permalink

    Well we are in a very deep hole and the Conservatives aren’t going to save us.
    Remember in 2005 they sacked Howard Flight for daring to suggest that more spending cuts could be made. Sometimes being right isn’t enough especially within the useless past it’s sell by date new Conservative party.

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  • About John Redwood

    John Redwood has been the Member of Parliament for Wokingham since 1987. First attending Kent College, Canterbury, he graduated from Magdalen College, and has a DPhil from All Souls, Oxford. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.
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