When the Bank Of England uses newly made electronic money to buy government debt to the tune of £375 billion, the practical effect of the move is that the debt is paid off. If you buy your own mortgage for its face value, the money you owe on your house is due to you, so that is that.
There has, hitherto, been a peculiar reluctance to accept that because the State owns the Bank of England, this tranche of about one third of the government’s total debt, is effectively written off. Indeed, the Treasury has doggedly continued to pay the interest to the Bank of England, just as it would to any outside holder of these bonds. It has now been agreed that this accounting process is pointless, no matter what obscure objections are raised by this forecaster, that think tank or the other economist.
The impact on the government’s finances should be considerable and may even forestall the ferocity of the next round of cuts, since interest on debt is a major item in the government’s list of bills, more or less equalling the entire defence budget. Because of the Byzantine complexity of the mechanisms and accounting processes which are used to organise quantitative easing, even now the benefit of this new arrangement is both obscure and open to variable interpretation as to its effect. Indeed it has already slipped from prominence on the newswires because nobody wants to get their knickers in a twist talking about it.
This blog will be bolder. If you own your own mortgage a) you do not need to pay yourself the interest due and b) you do not have to pay the money back to yourself when repayment falls due. As a private citizen, you would have needed to raise the money to buy the mortgage from the original lender, unless you had it saved up already or had a lucky windfall. The government has the power to print new money to buy its own debt, but has to be cautious in the process. If the remedial measure becomes a careless habit, the currency becomes ultimately valueless, as Zimbabwe, in modern times, and Germany in the aftermath of WWI, discovered.
Nevertheless it is this blog’s view, expressed in several previous posts, that cautious use of quantitative easing to create new wealth, is the only way to escape the debt crisis, still threatening the survival of the free market capitalist financial structure in the West.
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