Home > economics > Robbing Merv to pay George

Robbing Merv to pay George

A difficult one for Grauniad readers, this: Bank of England to hand over gilts interest payments to slash national debt, says Larry Elliott, the paper’s economics editor.

This is George Osborne’s idea, so it must obviously be a bad one. Cue a lot of conspiratorial stuff in the comments about how this will all end in ruin. Some even compared it to the creative accounting employed at Enron. Yikes!

But the Uneconomical blogger Britmouse has a more convincing theory:

The idea that we should be trying to hedge against “future losses” on the QE portfolio is totally crazy.   The only case where the Bank makes losses on QE is when gilt prices fall significantly, and long term interest rates rise.  The only case where long term interest rates rise is when nominal GDP is growing fast.  When nominal GDP is growing fast, tax revenues will be growing fast.  Getting to that point is (or should be) the sole aim of UK demand management policy.

You don’t hedge against winning.  You hedge against losing.  The government is already hedged against losing, having bought back a third of its own long term debt with zero-maturity liabilities, a.k.a printing money.  So we don’t need to hedge against winning by issuing more gilts than necessary and hoarding the cash.  We should instead instruct the Bank to try much harder to make massive losses on its investments; until they do, we’ll remain stuck with low growth.

Of course, conducting monetary easing and fiscal tightening at the same time is totally stupid. The bank is adding money to the economy through QE, as the government is removing it through austerity.

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