Quantitative easing is a party with a nasty hangover. After the binge of creating money and buying debt, the received wisdom is that the Bank of England will sell the debt it has purchased back into the market. But this will be deflationary and raise interest rates. It is an unnecessary hangover.
Instead of selling the debt back into the market, the BoE can retire the debt. At a stroke, £325bn of UK government debt disappears. If the US follows suit, about $1.5tn of US government debt will be retired.
To understand why this is possible, you have to simplify QE. After buying £325bn of debt from the market, the public sector (the Treasury) is paying interest to itself (the BoE) on debt that it owes to itself. It makes no sense for the public sector to owe itself money. Retiring the QE debt puts an end to this accounting nonsense.
Read it at The Financial Times
Bank of England should retire QE debtBy Jo Owen
(h/t Scott Fullwiler via Twitter)
Scott adds: "stf18: Or at least gets it mostly right."
Scott adds: "stf18: Or at least gets it mostly right."
Scott also cites his previous post:
Read it at New Economic Perspectives
By Scott Fullwiler
4 comments:
I surely hope the BoE and then the Fed do something like this, because it will speed of the process of spreading public understanding of the so-called "debt" governments owe to their own central banks. People will begin to compare processes like the following and decide the second is definitely preferable from the public point of view:
Process One:
Treasury sells $1000 bond to dealer for $900
Fed buys bond from dealer for $950
Government cancels $1000 intra-governmental debt represented by bond.
Net result: Treasury account +$900; dealer's account +$50. Fed books a so-called "liability" of -$950.
_________
Alternative process:
Fed credits Treasury account +$950, and books a "liability" of -$950 on its own balance sheet. Dealer gets nothing.
____________
Maybe we should cut out these middle-men?
I actually think this plan it not MMT-friendly *at all*. In the MMT analysis, wasn't the original QE operation just a swap of NFAs with NFAs? If you believe that the debt asset on the BOE balance sheet is balanced by BOE equity, then it seems that ripping up the debt will be more *deflationary* than inflationary (NFAs are being removed)... or you think that the debt has *already* disappeared, in which case this ripping up will be a no-effect operation.
It seems that you'd need them to buy and rip up other financial obligations (MBS, munis, common stock, etc) to get excited about this.
The securities have been bought already, there is no net NFA being withdraw from the system, neither being injected.
It's just destroying liabilities (debt securities) from the government to itself (central bank books). It's deflationary because it removes the necessity to pay interest rates to bond holders in the future issuing more NFA.
If needed a bigger deficit WITHOUT issuing more debt securities will help (if you issue debt securities you are acting on inflationary policies). How these deficits are distributed is important to the inflationary or deflationary effect: more income for rentiers which already have too much money probably does not do anything, more income for financially stressed households helps.
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