A Neat Way to Get Rid of the UK's National Debt?

GeorgeHowell

Thrugelmir wrote: »

To pay the interest to the BOE. The Treasury borrows money on the open market. Currently around £35 billion. So no makes no sense.

Its like you borrowing a £1,000 on your credit card to make a purchase when you already have this sum in a savings account. As the net effect is to cost you money unnecessarily.

The whole thing is very confusing, but it seems that it's nothing for HMG or the B of E to be criticised about, nor anything for us to worry about. Don't understand why it made the news. But then we don't understand why Lord McAlpine did either.

sabretoothtigger

The headline for this should read BOE does 35bn more QE

They gave more money to government, if they ever get it back is a maybe

purch wrote: »

Yes. The Treasury has indemnified the Bank against any loss they may make by purchasing the Gilts via QE.

Therefore the coupon payments being handed over to the Treasury now will need to be made good at some stage in the future.

This about sums it up. There will be losses and in theory the treasury bails out the BOE.
I imagine QE will never reverse, so the losses are to sterling worth to UK population

Generali wrote: »

My guess is that the BoE will let the debt expire and then pay back the coupon and principal payment to the treasury.

That shoves the needle from QE over to money printing. They always insisted its not that, QE implies all monies are returned and balanced properly.
If we create new money, buy bonds, give back the interest then the actual worth all we have left in the equation is new money and no worth given in exchange

That is money printing then. Mugabe gave the new money to his war veterans, the supporters. HMG gives the new money to civil servants, Quangos, contractors basically supporters. The only difference is HMG receives some work for this, but it seems very similar otherwise

Graham_Devon wrote: »

Is it just coincidence that the pound has seen roughly 0.5% wiped off it's value against every other currency?

Japan will print as much as us. USA will, Europe probably will debase and other major countries have inflation and no fixed link or exchangable worth.
The only thing for sure is the price of something solid will go up like gold or oil. Even oil is industrial so yea it should be taken as coincidence but generally money is worth less.

For example the minimum wage has risen since 2004 but in 2012 people are paid less when using it to shop, the value dropped

Graham_Devon wrote: »

Any losses on the bond purchases will now have to be met by the taxpayer rather than the interest buffer on the bonds.

Since BOE can just create money how can they have a negative balance. They will nullify not via taxes but an exchange back and forth that depreciates sterling notes.
This HMG swap helps the whole game progress, like the 3 queens trick someone mentioned its just another jump

shaggydoo

GeorgeHowell wrote: »

The whole thing is very confusing, but it seems that it's nothing for HMG or the B of E to be criticised about, nor anything for us to worry about. Don't understand why it made the news. But then we don't understand why Lord McAlpine did either.

Only if you thnk QE is ok in the first place?

GeorgeHowell

shaggydoo wrote: »

Only if you thnk QE is ok in the first place?

The recession has been kept to a bump along the bottom, and not a prolonged depression, and inflation has not run out of control. So QE could be deemed a success, particularly as they don't appear to be hooked on it and they most likely will not do any more any time soon.

chewmylegoff

I don't think that this is an accounting trick and it is also not getting rid of the national debt. There is no free lunch here.

When the APF buys gilts in the QE auction it pays, say £120 as used in another poster's example above, for £100 nominal value.

That £120 essentially reflects the fact that the govt has to pay interest to the gilt holder until it matures, as well as repaying the £100 of capital value.

So, when the APF holds the gilt, the govt can either borrow money to pay the interest to the APF and then have the cash sit on the APF's balance sheet doing nothing, or it can not do that and just net the accounting entries off against each other.

However, each interest payment made reduces the market value of the gilt - so if you don't pay the cash to the APF there is an accounting loss created because the value of the asset the APF is holding has reduced. The APF is not consolidated into the BOE's books because the BOE has no economic interest in the APF's assets, because the govt has pledged to make good any losses from QE. If the govt doesn't make good the losses then the BOE would be insolvent.

The only way it can make good the losses is by borrowing money and transferring it to the bank. So at best this just delays the govt's need to borrow by a bit.

Graham_Devon

GeorgeHowell wrote: »

The whole thing is very confusing, but it seems that it's nothing for HMG or the B of E to be criticised about, nor anything for us to worry about. Don't understand why it made the news. But then we don't understand why Lord McAlpine did either.

From my understanding, from articles read, the thing to worry about is this interest is supposed to be used as a buffer againsy any losses on the bonds bought with QE.

Losses are apparently quite a high risk, especially so as we've sold them as 0.5% interest rates.

We now have no buffer, and indeed, none going forward, so the taxpayer will be on the line for any losses.

To be fair though....everyone seems to have a different take. Theres certainly not concensus of what this actually is.

My question would be...if there is nothing inherently risky or abnormal about this....why wasn't it setup as such initially? Why change it now?

sabretoothtigger

The rate of return value wise is already negative, that'll just keep on happening. In price the bonds pay but not vs inflation, the taxpayers wont be making up the difference any more then we do presently.

Its the other way round if anything, the BOE is subsidising the government budget. How can they do that at all is the magic trick, the losses are occurring in sterling so its not tax payers its anyone who has a contracted fee fixed in sterling.

It might be clearer to say what if BOE 'bought' 1 trillion of gov debt, all bonds belong to Merv.
They hand back the interest, this debt costs gov nothing and tax payers nothing.
This makes interest rates zero but with sterling worth 1tn less overall ? So if thats 10% deprecation on all sterling worth, they have created 100bn in their own favour ?
Tax payers didnt pay, the holders of plain notes did. The bonds are ultiamtely worthless because no return is ever given. There is good reason BOE involves the wider market in buying I guess.
Tax payers are actually paying 10% less tax because the value has dropped

On the basis of arbitrage, money or capital value should flow abroad to gain better returns and/or UK assets become owned by foreigners who are easily able to gain access to sterling.

GeorgeHowell

Graham_Devon wrote: »

From my understanding, from articles read, the thing to worry about is this interest is supposed to be used as a buffer againsy any losses on the bonds bought with QE.

Losses are apparently quite a high risk, especially so as we've sold them as 0.5% interest rates.

We now have no buffer, and indeed, none going forward, so the taxpayer will be on the line for any losses.

To be fair though....everyone seems to have a different take. Theres certainly not concensus of what this actually is.

My question would be...if there is nothing inherently risky or abnormal about this....why wasn't it setup as such initially? Why change it now?

You may be right. But like most things in banking it's so shrouded by smoke and mirrors that the ordinary mortal has little chance of fully appreciating the significance.

In Alistair Darling's autobiography I understand he describes how the CEO of one of the big bankrupted banks said to him, "We're no longer going to take risks with things that we don't understand." Says it all really.

posh*spice

GeorgeHowell wrote: »

The recession has been kept to a bump along the bottom, and not a prolonged depression, and inflation has not run out of control. So QE could be deemed a success, particularly as they don't appear to be hooked on it and they most likely will not do any more any time soon.

Talking about being hooked on QE - Japan has being doing QE for 12 years now since 2000 (and looks to be planning another load) - does anyone know - or know how can I find out how much of Japan's massive National Debt is owned by the BoJ? or does it not work like that?

Mr_Mumble

The FT's economics editor has a scathing commentary on these shenanigans today, the final paragraph:

So far, the reaction to Mr Osborne’s ruse has been indulgent eyebrow-raising. People appear to feel that ripping off future taxpayers, polluting statistics and undermining independent monetary policy is benign. Unless the policy is reversed or some independent authorities put a spanner in the works, Britain’s economic credibility has died. Financial markets and credit rating agencies have not noticed yet. They should and I fear they will.