How the Bank of England and the government can cut UK debt

I agree with the government that UK gross state debt is on the high side. It makes a significant contribution to total UK debt.

There is a simple way to bring it down. The Bank of England should announce that from next month it is going to reduce the stock of government debt it owns by £7bn a month. Over a five year period this would eliminate the £435 bn of government debt the Bank of England owns on our behalf. It would reduce state debt by around one quarter and would reduce our total indebtedness as a nation by a little over one fifth of National Income.

There is a precedent for this. The USA has announced its plan to start to cut the US state debt the Fed owns.

How can this be done? At the moment every time a government bond owned by the Bank is repaid they go out and buy another bond to replace it. Basically they can stop doing this and accept the repayment, which cancels the debt. They would need to switch bonds of varying maturities from time to time to ensure a smooth pattern of debt reduction.

What is the downside? The danger is such action tightens money too much. As an offset the Bank should relax its some of its strictures against new mortgage and car loan borrowing, whilst still policing proper evaluation of individual credit worthiness. It should keep interest rates low whilst reducing the stock of debt in this way. It should be ready to abort the programme of debt reduction if money tightens too much.

If instead money grows too quickly for other reasons then of course it can take other action to avoid any inflationary threat.

What’s stopping them getting on with this? We should be taking strides towards a more normal monetary policy now.

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74 Comments

  1. Mark B
    Posted August 7, 2017 at 5:19 am | Permalink

    Good morning.

    As I read it, essentially what our kind host is saying is, we will load the State debt onto the individual and get them to repay it.

    Could be wrong, but . . . . !

    Debt is not a bad thing but it can be if allowed to get out of control. Never borrow more than you can pay back, and only borrow for things that you need and not necessarily want. We need homes but we do not necessarily need cars.

    • Lifelogic
      Posted August 7, 2017 at 6:37 am | Permalink

      We need homes and often cars too. But cheap second hand cars internal combustion cars are fine indeed better in general to new electic ones.

      We do not need lunacies like all the subsidied green crap, subsidised electric cars, HS2, Hinkey C, the largely unproductive & hugely bloated state, about 50% of the university degrees (that are clearly largely worthless), we do not need more employment laws we need far less, nor gender pay reporting or enforced pensions.

      Borrow to make sensible investments yes but not as governments do borrow to piss down the drain, buy votes or produce propaganda or childish gimicks.

      We do not need the BBC. A long and absurd interview with someone from “Energy UK” this morning on radio 4. Not a single sensible question to the man from the BBC.

      I got the impression Energy UK was mainly a green crap, subsidy demanding, pressure group. What is needed is cheap on demand energy and the scapping of all the anti CO2 legislation now that it is very clear that the climate alarmism is at best a huge exaggeration and con.

    • David Murfin
      Posted August 7, 2017 at 6:47 am | Permalink

      A high proportion of people’s current expenditure is on things they don’t need, or goes on replacing things which are perfectly serviceable.

      • Narrow Shoulders
        Posted August 8, 2017 at 7:06 am | Permalink

        Make do and mend does seem to be passé these days.

    • sm
      Posted August 7, 2017 at 7:24 am | Permalink

      A significant proportion of the population do need cars, however.

      If you are a parent trying to get 3 children to 2 different schools in areas where there is little or no public transport; if you have to regularly take your partner to hospital for cancer treatments or emergency consultations, and s/he is too weak to cope with the vagaries of public transport; if you are the prime carer for an elderly relative or friend who lives miles away, and who for reasons of mental or physical infirmity requires door-to-door transport; if your business is in rural areas.

      Modern life is predicated on the use of the privately-owned combustion engine, in one form or another, and sentimental twaddle about kids walking to school or adults biking merrily to and from work doesn’t help in any practical fashion.

      • Mark B
        Posted August 9, 2017 at 4:15 am | Permalink

        Yes. But do you need a new one every 3 or 4 years and top of the range?

    • NickC
      Posted August 7, 2017 at 10:49 am | Permalink

      Mark, No, I don’t believe JR is saying that state debt be loaded onto the individual, as though he could choose otherwise. There is no choice in the matter. All state debt (bar BoE money printing) has to be repaid by taxpayers. That’s the unfairness of state debt – we borrow, but our children must pay it back.

      The £435B of QE is money invented out of thin air by the BoE. It was used (mainly) to buy gilts, thereby gifting the government (Labour, Coalition, Conservative) roughly £435B of “free” money. Probably most of that QE was essential to stave off a depression that stemmed from the 2008 crash.

      At some point QE must taper off and stop. When it does, the initial subsequent policy should be no further QE. Not, as JR states above, the consuming (cancelling) of QE as the gilts mature. To bang the lever over directly from QE to reversing QE is too abrupt in my opinion.

      To some extent JR recognises the danger by suggesting that personal debt strictures should be relaxed to prevent the supply of money tightening too much. In contrast I think that the historically low interest rates are signal enough for individuals to borrow more. And if they don’t – good for them.

    • John
      Posted August 7, 2017 at 9:19 pm | Permalink

      You are not wrong in that the State has de risked investment Banking debt by loading it on to the taxpayer. If I may sir, you might be a little late in realising that.

      I think what our kind host is saying is that, it’s time to stop taking billions every year from the gilt market by devaluating the pound as the BoE is doing, devaluing the annuity market, the savings market to gear a low favourable interest rate in favour of borrowers. To return to market forces which better addresses the balances.

      But I don’t profess to be a know-all so stand to be corrected.

    • Lifelogic
      Posted August 8, 2017 at 4:03 am | Permalink

      Well no one else will repay the state debt but individuals, the state can only repay it by taxing individuals.

  2. Sakara Gold
    Posted August 7, 2017 at 6:02 am | Permalink

    Coupled with a serious attempt to reduce the twin deficits by increasing exports of manufactured goods and/or services so reducing imports and making government live within its means, this would work.

    When interest rates rise, as inevitably they will, the amount of the national debt and the interest payments will enforce austerity, the like of which make Osbourne’s austerity look like profligacy.

    • David Murfin
      Posted August 7, 2017 at 6:49 am | Permalink

      “the like of which make Osbourne’s austerity look like profligacy.”
      Which is what it was. Any ‘austerity’ programme with HS2 in it is woefully misnamed and misguided.

    • Fed Up
      Posted August 7, 2017 at 11:45 am | Permalink

      “When interest rates rise, as inevitably they will, the amount of the national debt and the interest payments will enforce austerity, the like of which make Osbourne’s austerity look like profligacy.”

      IMHO, if interest rates ever rise, the government will either default on some of the debt, or use inflation to reduce its impact. Either way, Joe Public will be on the hook.

      I agree with Mr Redwood though that the BOE should look to normalise monetary policy, but my suspicion is that they are now trapped; look at Japan who went down this road long before us.

    • ChrisShalford
      Posted August 7, 2017 at 4:39 pm | Permalink

      Agreed and a small increase in Base Rate now will help to reduce later increases which are too large and too sudden.

  3. Alan Jutson
    Posted August 7, 2017 at 6:16 am | Permalink

    Following on from your post yesterday, individuals are getting drunk on borrowed money, many see it as a solution to not just short term problems, but all problems, and they do not seem bothered about the consequences.
    I am afraid many politicians and voters seem to think the same way.

    Supporters and believers of the magic money tree seem to be growing, and if they get their way we will end up in a huge forest of debt that will really affect us all.

    So far Government attempts at financial management have been both confused and inept.

  4. Richard1
    Posted August 7, 2017 at 6:19 am | Permalink

    Sounds sensible, we certainly do need a more normal monetary policy, what’s happening now has become a disincentive to investment. The BoE should be concerned with leverage in the banking system (still too high) and making sure there is in place a mechanism for insolvent banks to be restructured at the expense of their shareholders and creditors. These two things on their own would have avoided the financial crisis, instead of which we had the great leveraging under Labour and the disasterous Brown bailout. So long as the market is operating properly I don’t see why we need the BoE to lecture subjectively about different forms of credit. That should be up to borrowers and lenders, acting freely, so long as they are responsible for the consequences of their actions.

    • Richard1
      Posted August 7, 2017 at 6:22 am | Permalink

      Meanwhile the government should most certainly be continuing to strive to bring the budget back into balance. How can we be thinking of projects like HS2, and of imposing what amounts to another £50bn of taxes on the public and industry with Hinkley Point, whilst we have the debt levels we do and a deficit of £50bn or so?!

  5. Duncan
    Posted August 7, 2017 at 6:24 am | Permalink

    Keynes and his legacy will, I have no doubt, end with the bankruptcy of the western world and the surrender of all our liberties, freedoms and wealth.

  6. formula57
    Posted August 7, 2017 at 6:26 am | Permalink

    Surely that is no more than an accounting trick that would serve to give legitimacy to the debasement of the coinage that arises from the QE programme?

    Better to punish the young people perhaps, especially those who voted Remain and for Corbyn?

  7. Posted August 7, 2017 at 6:30 am | Permalink

    If only…

    The government – whether Labour or Conservative – seems frightened of the electorate. There are so many ways that government expenditure could be (and actually is being) cut back too. That seems to be a lot of the problem. Buying votes with taxpayers’ money is never honest.
    There just doesn’t seem to be any idea of the urgency of living within our means.

  8. Tabulazero
    Posted August 7, 2017 at 6:40 am | Permalink

    Well. Wouldn’t what you propose go against the independance of the BoE and wouldn’t that be a grave precedent ?

    In short, do you see no value in the BoE being isolated from political interference ?

    Also, what would the bank do with the cash it receives when bond mature.

    • Bob
      Posted August 8, 2017 at 8:41 am | Permalink

      @Tabulazero
      To the best of my knowledge, the BoE doesn’t have autonomy over such decisions.
      It was setting of interest rates, where they were given independence, and you would need to be pretty naïve not to suspect influence from No.11 in that respect.

  9. Nig l
    Posted August 7, 2017 at 6:47 am | Permalink

    As a lay person I would have thought they gusted need rather than just roll the debt over. Interesting the Bank has just announced that the TFS scheme allowing Banks access to cheap money for mortgage lending, is to end. Why chose this route to tighten money supply. It could make mortgages more expensive and because the Challenger banks have taken full advantage, mean that they cannot compete with the established lenders, in truth HSBC has such a massive deposit base that only its risk appetite is stopping it wiping the floor with the rest if the mortgage providers.

    So the Bank by this action will make mortgages potentially scarcer and more expensive hardly helping HMGs policy of a greater home owning society and restrict the Challenger’s ability to compete with the mainstream, again contrary to the policy of the Government.

    Whose side is the Bank on and is this a covert way of punishing it for Brexit?

  10. Turboterrier.
    Posted August 7, 2017 at 6:50 am | Permalink

    Whats stopping them?

    Experienced gained from the school of hard knocks and the university of life that over the last thirty years governments have borrowed and borrowed. Over the last 7 years the national debt has almost doubled. This has created a situation that nobody in the political parties is going to want to call a halt to and start reeling in all the handouts, funding of vanity projects and the waste that has reached epidemic proportions across government spending. Action of this nature is going to condemn any party that endeavours to address this fixation with easy money, to the political wilderness for years if not decades.

    The country is living beyond its means and the fact that interest rates are so low only compounds the problem as it is easier to borrow more. Borrowing is the easy bit the problem is paying it back. Will the situation arise of a world High Court issuing warrants with the warning “can’t pay we take it away”? The only consolation is there is any is that nearly every other country in the world is in the same boat regarding debt.

    The country has reached that moment of truth and until all leaders sit there and say I/we are spendaholics and talk openly about the national debt and how it impacts on everybody and admit their failings, the country is heading for the cliff edge if and when world interest rates rise.

    Every time a pet project is considered the first question has to be “how much in interest is this going to cost” Nearly week on week its billions here, billions there on something or other but its time to wake up and smell the coffee simply because we don’t have the money. The magic money tree has died, but still we have politicians promising utopia as long as they are allowed to invest in projects with more borrowed money. Economics of the madhouse.

  11. Nig l
    Posted August 7, 2017 at 6:56 am | Permalink

    Sorry ‘gauged’ need

  12. Prigger
    Posted August 7, 2017 at 7:09 am | Permalink

    “How the Bank of England and the government can cut UK debt”
    JR Your suggestions in toto are beyond my competency to answer. I would not wish, however, that new mortgages and car loans NOT be facilitated.
    Few people know their short term economic future. How can they? Are the men going to follow their dads and grandads and work down the coalmine as before? Are the women, changing jobs from ammunition production and going back to their endless lines of factory sewing machines? No.
    There is not enough road space for more cars. Not enough housebuilding space as in my town and other Commenters’ towns without knocking existing viable public properties down. England is full.

    • Prigger
      Posted August 7, 2017 at 7:11 am | Permalink

      Apologies. One too many “nots” in my sentence: ” I would not wish etc……

  13. Anonymous
    Posted August 7, 2017 at 7:11 am | Permalink

    Thought we’d be discussing £36bn today.

    Gina Miller and Lord Sugar want Leave politicians prosecuted for the Battle Bus.

    If we’re going to start prosecuting politicians who lie then why does it only apply to Leave politicians ? Why not the people who caused Brexit by creating a refugee crisis with their lies ?

    • Anonymous
      Posted August 7, 2017 at 7:58 am | Permalink

      The EU would do well to revisit history, in particular the Treaty of Versailles and its long term effect on Germany.

      North Europeans do not take poverty lying down.

      If there is anything to be paid then we must be left in a fit state to pay it.

  14. Harry Gordon johnson
    Posted August 7, 2017 at 7:28 am | Permalink

    ” The Bank of England should announce that from next month it is going to reduce the stock of government debt it owns by £7bn a month.”
    The next time Jacob Rees-Mogg attends a Parliamentary Committee meeting with Mr Carney of the BoE he can ask why he has not persued such a course of action.He will probably reply he is “tranquil” about how things are.There are more tranquil people in Canada now than ever before naturally occurred.

  15. agricola
    Posted August 7, 2017 at 7:41 am | Permalink

    With my very limited knowledge it sounds like a good idea. Call it pruning the money tree. Whether government listens is debatable , I think they like it as it is. Add to it a major halt in spending and you might have a basis for recovery. It will be a difficult one to sell because all the ministries , their host of civil servants plus quangos are not in the business of not spending. Perhaps a speech on how to financially run the UK at party conference would be in order or do the organisers not encourage such.

  16. E.S Tablishment
    Posted August 7, 2017 at 8:05 am | Permalink

    Exteremely strange people object to the nation north of South Korea testing its missiles and nuclear weapons? Does this mean ours are untested? Very worring. Mr Fallon should ensure ours are tested as soon as is humanly possible. Cancel his holiday in a Blackpool B&B, yes it’s as important as that!

  17. Up Periscope!
    Posted August 7, 2017 at 8:26 am | Permalink

    USA is starting selling coal to Ukaine. Trump announcement. I bet Germany is pretty upset. She had set her heart on selling coal to Ukraine, selling too, mining technologies and equipment to them, oh!!!! and supporting Ukraine in its struggle with Russia of course. Also selling to other markets which the UK DID. Germany’s coal industry and production of electricity has never been cut back and is/was expanding. Trump also says China is now buying Amercan coal and presumably follow-up technology and safety equipment as we DID.What will Germany and the EU do now? What does Germany normally do when its export markets are drastically cut and its main manufacturing industries this time around including cars which are failing big style…and its banks are in a mess and its airline is being knocked into pulp by competition even from Ryanair?
    Should the BoE encourage loans to our people? Not yet. Stuff is happening. Without headlines.

  18. Bert Young
    Posted August 7, 2017 at 8:53 am | Permalink

    All forms of debt are bad and should not be encouraged . Government spending is far too high and stringent controls should be introduced to cut back . We are in no position to give away via Foreign Aid and it should be stopped forthwith .

    Our dire financial position has to be reflected into any position we strike with the Brexit /Eu negotiation . We kid ourselves too often about our strength in the world when underlying this is our mountain of debt .

  19. ChrisS
    Posted August 7, 2017 at 8:58 am | Permalink

    An excellent contribution from our host on the Brexit bill yesterday.

    The very idea that £36bn would be an acceptable figure is nonsense, of course.

    We need to watch the issue of the transition period. Of course, the 27 will want us to maintian full £10bn pa contribution to their budget for that whole period.

    If a three year period is agreed, I would suggest that a more appropriate figure would be 75%/50%/25% and, based on a current net contribution of £10bn pa, this would amount to a total of £15bn would be the sum total of the Brexit bill.

    We should certainly not be paying for their decision to move EU institutions out of the UK.
    The very suggestion is outrageous. After all, there is no reason for them to move and we would be perfectly happy for them to remain here and if newspaper reports are to be believed, the staff overwhelmingly want to stay.

  20. Dinero
    Posted August 7, 2017 at 9:19 am | Permalink

    The process in the post , reducing BoE holdings of Treasury bonds, without a reduction in State borrowing, would not reduce state debt , it would increase the amount of bonds held by persons/institutions other than the Bank of England.

  21. ChasE
    Posted August 7, 2017 at 10:05 am | Permalink

    Yes agreed all we need to do is print more money to the tune of 7 billion a month and buy back the debt but don’t think it is going to happen until Mr Carney is safely back in Canada and following another career.

    Even if it was a sensible idea I couldn’t see government ever doing it because they would never take the sensible option that would put the country first- politicians only put themselves first and that is what has us in this terrible mess that we are presently in. Makes you wonder why JR would fly this particular kite on a Monday morning?

  22. bigneil
    Posted August 7, 2017 at 10:13 am | Permalink

    As far as my little working class brain goes – -it seems like the govt is wanting to cut the debt, while at the same time throwing billions away in “Foreign Aid” and also importing hundreds of thousands ( every year ) of non=contributing non-working people who will be nothing but a financial burden on the taxpayer and the system/services they pay for.

    Even Paul Daniels couldn’t pull that trick off.

  23. AdamG
    Posted August 7, 2017 at 10:14 am | Permalink

    I don’t like the idea that we follow precedent set in America for this or for anything.

    We should wait to see how much money we can afford after paying the EU 60bn probably before embarking on mad schemes that we could not posdibly keep up with unless ee were to borrow more to pay off debt..crazy economics

  24. Epikouros
    Posted August 7, 2017 at 10:51 am | Permalink

    Government should not have been so imprudent as to turn to the levels of borrowing it did to keep the financial taps flowing to maintain and expand the money available to accede to the ever growing demands of the welfare state and the public sector. Only then having to turn to the BoE to rescue it when a crisis came along that the bare cupboards of the Treasury could not cope with. The consequence a mountain of debt, a potential hyper inflation in the offering and the means to combat any further crises even less assured.

    Some attempt to address this state of affairs has been made by reducing the the level of borrowing but not by nearly enough. Understandably so because to make the necessary cuts to government spending really needed would have produced unacceptable levels of social unrest. Successive governments especially those controlled by Labour have been liberally showering the populace with their own and borrowed money for decades in the dubious belief it is for social justice and for a rather less charitable reason political gain.

    All these actions by government and from popular demand have created deep systemic problems. How to achieve that the nation is able to live within it’s means and address it’s debts and deficits and continue to pay for a welfare state and a public sector that has an insatiable appetite for taxpayers money and debt to fund them. At the same time to satisfy the demands of all the other organs of state that demand ever increasing funding.

    Unravelling QE the mechanism the BoE used to patch up the last crises is another necessary step that must be taken to restore economic stability. When and how is down to those who are purported to understand these thing to decide. Whether they do correctly or not is in the lap of the gods and history informs us the gods are rarely helpful. It would be as well to also look at changing our economic and social cultures so we do not repeat our sins of the past. To do that we need to change those policies, institutions, organisation we currently have that only satisfy greed, envy, fantastical ideologies and emotional thinking. Instead to ones that reflect economic and social realities and contain are created from logical, rational and objective analysis.

  25. James Doran
    Posted August 7, 2017 at 10:58 am | Permalink

    Am I missing something here? Isn’t the simplest way to reduce debt to stop spending what you don’t have?

    • Turboterrier.
      Posted August 8, 2017 at 6:19 am | Permalink

      @ James Doran

      Steady on there James, you should hold back on applying common sense to this problem that the country faces. You are out of step with two left feet when it comes trying to understand politicians and their thought and actions. They are right and we are wrong. But then when did they ever really listen to the electorate?

  26. Mark
    Posted August 7, 2017 at 11:01 am | Permalink

    If the BoE starts to wind down its portfolio of QE gilts then other purchasers must be found to take them – either domestically, reducing money available for investment and consumption, or internationally, increasing our overseas borrowing. On redemption, the government pays out the face value of the redeemed gilt – but it funds this by the proceeds of sale of a new gilt. Over the course of a year, the total new issuance must finance the gilts being retired, plus the government borrowing requirement – the DMO’s remit. There is no reduction in overall debt, unless the government manages to run a budget surplus. The extra supply of gilts into the market caused by the BoE reducing its portfolio holdings would be expected to lower the price of gilts, and therefore raise gilt yields and interest rates. If the price of gilts falls too far, the BEAPFF would incur losses on its portfolio of holdings which the Treasury has underwritten – these would fall to taxpayers to fund presumably via further gilts issue.

    There was a very useful technical discussion of the various effects of QE unwinding in the BEQB 2013 Q1, and a number of spreadsheets (updated for changes in gilts held and the Treasury appropriation of gilt coupon income) illustrating alternative scenarios are also available here:

    http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2013/f13.aspx

    The problem with QE is that the bigger the BEAPFF portfolio, the more disruptive and/or lengthy will be the process of unwinding it. It was originally designed as a sticking plaster until the economy could be reformed – letting it become a permanent crutch while failing to enact necessary reform risks the whole edifice collapsing.

  27. ian
    Posted August 7, 2017 at 11:07 am | Permalink

    Micky mouse economic again,

  28. Peter Martin
    Posted August 7, 2017 at 11:25 am | Permalink

    Before we start to come to any conclusions we need to understand what money, or cash, is. Essentially it’s an IOU of BoE/the State that doesn’t pay any interest. Purists might argue that the Bank of England, though owned by Government, is independent of Government. Others who have observed the way the BoE actually operates dismiss this argument as a fiction. Issued money doesn’t count as debt.

    A bond or gilt is an IOU that does pay some interest. It does count as debt -even if the interest is ultra low. Gilts are issued by the Treasury which is certainly a part of Govt.

    Governments are free to swap cash for bonds or bonds for cash. These swaps are nothing more nor less than exchanging one form of IOU for another. We might appear to be reducing our debt if we do it one way and increasing it if we do it another. We aren’t really if we consider that cash is a liability too.

  29. Denis Cooper
    Posted August 7, 2017 at 11:46 am | Permalink

    Back in 2009 when the Labour government feared that it would shortly run out of private gilts investors willing to lend it the huge sums it needed to borrow, about one pound in every four that it was spending. and so dreamed up the cunning dodge of getting the Bank of England to start up the Quantitative Easing “money-go-round”, with the Bank (or more accurately its wholly owned subsidiary) acting as a kind of captive gilts investor for the benefit of the Treasury, it was quite widely assumed that in due course the Bank would allow its gilts portfolio to shrink as the gilts matured.

    However with an average maturity of something like 18 years for a portfolio of £435 billion that would only be in the region of £24 billion a year, much less than the £84 billion a year suggested here.

    Personally I would hold back from this until we have left the EU – that is if we actually do leave the EU, despite the anti-democratic machinations of many government ministers and most civil servants and almost all parliamentarians across both chambers – just in case we need to create more money to ride out any economic problems.

    For a start, it seems that the government is now content to pay the EU huge sums just to try to persuade them to negotiate more sensibly, even though strictly speaking we will have no legal liability to pay anything when we leave and anything we do agree to pay should be no more than a token of our goodwill towards the peoples – the peoples, not the governments – of the other EU countries, who would otherwise have to make up any shortfall in the funding of the EU.

    • Denis Cooper
      Posted August 7, 2017 at 11:48 am | Permalink

      Incidentally, JR, I had to click on Captcha squares more than twenty times to get that comment submitted, it really is ridiculous.

  30. Peter Wood
    Posted August 7, 2017 at 11:49 am | Permalink

    Dr. Redwood,

    You didn’t finish the equation; when the B of E receives repayment from the government, what does it do with the cash? Since it “created” it in the first place to lend to the treasury does it now destroy it, use it elsewhere, what?
    The problem with your idea is that the government is running, for want of a better analogy, a Ponzi scheme. It doesn’t have enough income to repay its debt so it has to keep borrowing more. If it only receives money from the free market it is most likely that interest rates will rise rapidly; it is after all only the B of E creating money to buy the gilts that funds government profligacy that has kept interest rates low. As soon as the real world returns from its slumber there will be an uncomfortable reckoning.
    A gradual increase in interest rates up to say 5% over 12 months, in 0.5% increments, is the way to go. It will return real value to money, ie deflate current mad asset prices, and give the necessary discipline to both government and private sector borrowing.

    • Peter Martin
      Posted August 11, 2017 at 6:30 am | Permalink

      “You didn’t finish the equation; when the B of E receives repayment from the government, what does it do with the cash?”

      Cash is an IOU of the BoE. What do you do with your own IOUs when you get them back?

      “The problem with your idea is that the government is running, for want of a better analogy, a Ponzi scheme. It doesn’t have enough income to repay its debt so it has to keep borrowing more. ”

      Not really. The BoE is owned by the Govt. Most governments issue their own currency. The USA has the US$. The Canadians have the C$ etc etc.

      The issuers of currency always have to assume a liability so the users can hold assets.

  31. Denis Cooper
    Posted August 7, 2017 at 12:18 pm | Permalink

    My God, look, it seems that one of the many hundreds of civil servants in David Davis’s department has actually bothered to make a comment on some Remoaner rubbish:

    http://www.bbc.co.uk/news/uk-politics-40846830

    “The UK’s Brexit negotiations have not begun well amid “differences” inside the cabinet, a former head of the diplomatic service has said.

    Sir Simon Fraser, chief mandarin at the Foreign Office until 2015, said the UK side had been “a bit absent” from formal negotiations in Brussels … ”

    Of course he himself has been completely absent from those negotiations, having retired in 2015, so how does he know so much about them and why is he repeating to the media whatever he may have been told; but why should the BBC bother about that little detail when he is prepared to join them in the daily chorus of opposition to Brexit?

    But then, amazingly:

    “A spokesman for the Department for Exiting the EU last month said negotiators had already made “good progress on a number of issues”.”

    Oh, no, sorry; I didn’t notice that this was not a current riposte, it was from “last month”. So perhaps David Davis has ordered that official rebuttals of criticisms should be limited to one a month, and we can hope for one during August but then no more?

    It may be that David Davis is actually doing an excellent job on the international plane, dealing with the EU, but does he not realise that another, albeit smaller, part of his task is to defend government policy and maintain domestic support for Brexit rather than watch in silence while it is eroded day by day through Remoaner attacks?

    I’m getting tired of this, JR, I’m getting very tired of it.

    • Turboterrier.
      Posted August 8, 2017 at 6:24 am | Permalink

      @ Denis Cooper

      We all are. It is getting way past a joke.

    • Nig l
      Posted August 8, 2017 at 8:19 am | Permalink

      Sir Simon Fraser is a bit more than a chief mandarin. He worked for Mandelson, as seconded to the EU and headed up the FCO European unit and wrote a full on piece about why we should remain before the referendum, so a full on one yed Remainer. Funny enough the BBC did not say this when introducing him. I am with you I want David Davis yo beef up hits comms team.

  32. Frank Salmon
    Posted August 7, 2017 at 12:19 pm | Permalink

    I don’t understand this? John, are you saying that the government will borrow £7 billion less each month? Surely the £7 billion re-purchased by the BoE helps government to finance the deficit?

    Reply They buy the bobds in the secondary market so it does not add to the stock of debt outstanding

    • Denis Cooper
      Posted August 8, 2017 at 7:31 am | Permalink

      The answer to your second question is “Yes”, because by buying up existing gilts, that is gilts which have previously been issued and are being traded on the secondary market, the Bank makes it easier for the Treasury to sell new gilts. The answer to your first question is strictly “No”, because if there were enough willing lenders then the Treasury could carry on borrowing at the same rate. However realistically that might become difficult without the help of the BoE rigging the market in its favour.

  33. Mike Wilson
    Posted August 7, 2017 at 12:22 pm | Permalink

    As an offset the Bank should relax its some of its strictures against new mortgage and car loan borrowing, whilst still policing proper evaluation of individual credit worthiness.

    Well, that made me smile. Our economy floats on debt. The provision of finance for people to run BMWs for £300 a month is now a massive industry. Mortgages are as cheap as chips. My sons have bought a house together and have a £380k mortgage – with help from ‘the government’ lending them 20% of the price of a very over-priced new house. The mortgage payment is a minor thing to them – they pay for a gardener, cleaner and window cleaner too!

    And the answer, apparently, is to hunt down those credit worthy, selfish so and sos who are not borrowed up to the hilt – and get them to do the decent thing and borrow a load of money and spend it.

    The mind boggles. Can’t we have some actual investment in new technologies? In industry? In education? Something that will make our future brighter – not just replace government debt with consumer debt.

  34. Terry
    Posted August 7, 2017 at 12:26 pm | Permalink

    John you say, “What’s stopping them getting on with this? We should be taking strides towards a more normal monetary policy now”

    I suggest YOU ask that question at the next PMQs and maybe we all shall get an answer. I doubt one will be forthcoming from the BoE, though.

  35. miami.mode
    Posted August 7, 2017 at 1:17 pm | Permalink

    This sounds like a socialist’s dream. Run up government debts – pay them off with a dose of QE and then simply cancel the QE bit by bit.

    This will not be a Bank of England decision. QE needs the approval of the Chancellor and no doubt this will as well. At least it will distance the Chancellor from the EU as the ECB i.e. Germany would probably not allow it.

    If this idea emanates from the USA, then we can well imagine who is behind it and their previous machinations have not generally turned out well. They’ll probably conjure up some derivatives via CDOs, CDSs, MBSs, MOPs, BROOMs, ad infinitum.

    • Denis Cooper
      Posted August 8, 2017 at 7:47 am | Permalink

      Simple cancellation of the gilts held by the Bank would indeed be a socialist’s dream. But that is not what JR is suggesting, his proposal is that the Bank should simply stop re-investing the proceeds from maturing gilts that it holds. So then the Treasury would use taxpayers’ money to repay the Bank, or more accurately its wholly owned subsidiary, on the gilts it owned, as now, but the Bank would not then use that money to replenish its stock of gilts. In fact the subsidiary operates on loans from the Bank and it would start to repay those loans, and the Bank could then delete those sums from both sides of its own balance sheet. Thus the new money which had previously been created and indirectly pushed out into the economy as part of government spending would then be gradually withdrawn as part of the Treasury’s revenues, mainly taxes.

  36. PaulW
    Posted August 7, 2017 at 3:27 pm | Permalink

    Don’t like to be in debt myself, lucky for me i never was..the only loan i ever had was a 25 year mortgage for my home which i paid off fully after 12 years.. to do that i had to make many sarcrifices but now that i’m retired, i own my own home and have plenty of lolly for enjoying life.. getting into debt is not the answer.. not for the individual..and not for the country.. but who is listening? Not the government and certainly not politicians

    • Turboterrier.
      Posted August 8, 2017 at 6:34 am | Permalink

      @ PaulW

      but who is listening? Not the government and certainly not politicians

      Spot on Paul. They do not want to hear about the electorates perception on the looming debt crisis because they do not understand that in the real world perception is all there is. Maybe just maybe if the true figures were out in the public domain then the country would motivate itself to actually do something about it.

      Sacrifices, you are right do and will have to be made.

  37. Dennis
    Posted August 7, 2017 at 3:33 pm | Permalink

    I’m no economist but if reducing imports is a good thing then it can be achieved by reducing the population – how? 200,000 leave (seems usual these days) and let 100,000 (that magic figure) in, if needed so population goes down 1 million each 10 years. The numbers can be juggled to suit. Solves many problems.

  38. Denis Cooper
    Posted August 7, 2017 at 4:31 pm | Permalink

    Off-topic but topical, just out of interest, in April 2016 JR posted an article entitled:

    “What does Remain look like?”

    in which he said:

    “So here are some questions interviewers ought to put to the Remain people.

    1. How big will the EU budget become in future years? …”

    Of course there is no way to predict that with any reliability, but I offered a guess:

    http://johnredwoodsdiary.com/2016/04/19/what-does-remain-look-like/#comment-810752

    “However taking the whole period from 1973 to 2014 our net contribution has increased roughly tenfold, from about £1 billion to about £10 billion, that is an average compound rate of increase of 6% a year, over and above inflation.

    And projecting forwards at that average historical rate of increase it would increase from £10 billion in 2014 to about £26 billion by the end of Osborne’s forecasting period, 2030, and would be up to about £112 billion by 2057, when I suppose we might be graciously allowed another referendum on the matter.”

    I mention this because those who are now gloating over the prospect of our government caving in and paying the EU an extortionate bribe just to agree to start negotiating more sensibly than they have been so far, those people who constantly betray their country by siding with the EU, never stop to ask how much it would cost us in the alternative case that we did what they want and ignored the referendum and stayed in the EU.

    Well, if the bribe we paid them now was £38 billion then that would be less than our net contributions for just the following four years, taking inflation at 2% a year:

    £10.0 billion +
    £10.8 billion +
    £11.7 billion +
    £12.6 billion = £45.1 billion

    And then the Remoaners would have us pay more and more each year forever.

    I don’t believe we should pay anything like £38 billion even for the sake of goodwill – if placidly allowing them to run an annual trade surplus roughly twice that doesn’t get us any goodwill, then nor will a one-off £38 billion to grease their palms – but whatever we paid would not be the cost of leaving the EU, it would just be part of the continuing price of having made the mistake of joining it in the first place.

  39. RDM
    Posted August 7, 2017 at 4:32 pm | Permalink

    That would harden the currency, OK, do you really think Asset holders are going to invest, and really generate wealth for all!

    Rubbish!

    And, there is no need to rebalance the Economy?

    Rubbish!

    And, it has nothing to do with Brexit, it has be soft since 2008.

    The best best way to repay this country’s debt, is to grow, and invest the income generating assets, within, and throughout the UK. So, everyone has a chance, not just London based Asset traders.

    No one is advocating lossing any value off the Financial center, but grow parts of the Economy that suits people with little, or no, qualification’s, out in the regions ( not based on Labours devolution, individual’s investing).

    Do you realise I have not had a reply for a contract for four, or note, mouths! Things are that bad!!! Not see this in 20 years of contracting, and it had very soft since 2008!

    All the buffet jobs are gone, what does one do???

    Regards,

    Roger Moore.

  40. ChrisShalford
    Posted August 7, 2017 at 4:34 pm | Permalink

    I do agree that QE should not become a permanent feature of our economy.

  41. RDM
    Posted August 7, 2017 at 5:25 pm | Permalink

    John,
    Strange, I seem to be getting calls (off agency’s) checking my availability, but, for four or more months now, I have not had one call with feedback or taking it forward?

    Can I ask; would you put this down to company’s, living in an uncertain world, or there something more deliberate going on. I.e the EIB Bank cutting loans to the company’s I would normally be contracting to?

    I”m not saying you know, just if you have heard anything from your Investor or Party friends, or just your opinion?

    I’m only asking because I have never see it like this, before.

    I have no idea what I should be doing.

    Besides, if I don’ t get a contract soon, or something to do, soon, You will have my comments coming at you, every day! 😱

    Sorry, I mean well!

    Regards,

    Roger Moore.

  42. Narrow Shoulders
    Posted August 7, 2017 at 6:15 pm | Permalink

    How can this be done? At the moment every time a government bond owned by the Bank is repaid they go out and buy another bond to replace it. Basically they can stop doing this and accept the repayment, which cancels the debt. They would need to switch bonds of varying maturities from time to time to ensure a smooth pattern of debt reduction.

    I happily concede your greater knowledge in this area but do we not need the new bonds in order to pay the original debt. We are spending more than we earn. Where is the £84 billion cash a year coming from?

    or are you suggesting we write off the BOE’s stock of government debt at £7 billion a month. If this is what you are suggesting then banks will have lower recognised capital against which to lend. This will constrict the money supply.

  43. Trumpeteer
    Posted August 7, 2017 at 8:36 pm | Permalink

    The BBC , a few days ago , said that it was “unprecedented” that a US President ( that is BBC Public Enemy Number One, Trump ) “should have such a long holiday” and made references to him “not working very hard”…silly childish sarcastic grin from broadcaster..earning more than Trump, hundreds of thousands of dollars more. Trump works for an obligatory token salary $1 per annum.
    “Donald J. Trump‏Verified account @realDonaldTrump 9h hours ago
    More
    Working hard from New Jersey while White House goes through long planned renovation. Going to New York next week for more meetings.”

    The BBC should be privatised. The TV license fee abolished.

    • Bob
      Posted August 8, 2017 at 9:20 am | Permalink

      “The BBC should be privatised. The TV license fee abolished.”

      there was a No.10 petition on that very subject which was due to be debated on May 8th, but it was cancelled due to Mrs May’s disastrous “snap election”.

      I dare say that this debate will never see the light of day based on the reluctance of most of our MPs to challenge the justification for the TV Licence Fee.

  44. Nerwmania
    Posted August 8, 2017 at 5:19 am | Permalink

    So we borrow money and then we do not pay it back . Why not just print it … hey lets print lots more and buy ourselves sugar coated ponies .

    Genius

    • Narrow Shoulders
      Posted August 8, 2017 at 7:03 am | Permalink

      There is actually no reason why we can’t just print the debt and then adjust the amount of reserves institutions receiving this payment must hold to restrict broad money.

      To maintain credibility going forward having done this we would need to run a balanced budget so we are not in a position to do so at present.

    • Denis Cooper
      Posted August 8, 2017 at 7:53 am | Permalink

      2009 – 2010 was the time for George Osborne to hammer home to the voters what Labour was doing, in the run up to the 2010 election, but after one outburst about “money printing” early in 2009 he chose to keep quiet about it.

      • acorn
        Posted August 11, 2017 at 5:52 pm | Permalink

        Denis, I hope you live long enough to find out just how totally wrong you have got it. 😉

  45. ian
    Posted August 8, 2017 at 9:15 am | Permalink

    Forgot to put in the prostitution and drug dealing, i like the 10 years reviews of no growth, then they add a few more things in.

  46. ian
    Posted August 8, 2017 at 9:47 am | Permalink

    and change the way growth is calculated to beef it up.

  47. Caterpillar
    Posted August 9, 2017 at 9:40 am | Permalink

    QE first needs to stop and the BoE restricted from using again. It is a long time since the risks of 2007/8, and the cranking up of purchases after the Brexit vote was stupid (/conspiratorial). So (1) BoE to stop new purchases and be prevented from repurchasing.

    Rather than paying BoE on maturity, for BoE to then delete from balance sheet, BoE to just cancel debt on maturity. Govt’s borrowing requirements may initially go down but as bond rates then increase may return without discipline. Companies struggling to pay pension scheme holes will benefit and will hopefully close salary gap to other companies. There may be some loss of confidence if housing and share markets are not as robust, but these are distorted markets.

  • About John Redwood


    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. 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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