QE is Probably Going to Have to be Paid Back

I’ve already taken a pop at Richie today over QE and now I’m going to have a go at Chris, which is an all the more worrying prospect, intellectually speaking.

1. Richard Murphy is basically right to say that this means that government debt is lower than official figures show, if we consider the government and Bank of England as a single entity. What’s happening is that government borrowing is being financed not by debt sales to the private sector but by an increase in base money. This is entirely consistent with the government budget constraint (pdf). Warren Buffett was quite correct to say that you cannot have a debt crisis if the authorities can print their own money.

I think the collorary to this is that if actual government debt is lower than the official figures then the price level is about to become much higher than it is now. QE is backed by a credible commitment to unwind it to reduce the amount of base money circulating. Taking the Bank and Government as one does not lead us to the situation described above where some debt does not exist. We have a situation where some debt exists in the odd form of a credible promise that at a future date someone will be being burning money.

Evidence for this abounds. The price level is not significantly above where it should be if the Bank of England had fanatically maintain an inflation rate of 2%. According to some rough calculations, since 1997 the price level is about 20% higher than a 2% level rule would suggest. Since QE was initiated in 2009 it is somewhat above even than high trend, but that was the point of QE, there is very little evidence that investors view QE as bound to be inflationary due to it being later monetised.

That low inflation isn’t consistent with a large scale monetisation of Government debt unless there is significant slack in the economy such that nominal increases mostly show up as increased real activity. I think there is room for more monetary expansion, and a little credible commitment to recklessness may be useful at the moment, but I know Chris holds that this is unlikely.  

If markets are pricing in a monetisation of UK debt (and subsequent change in price level) they are pricing in only a very modest erosion of the Bank of England’s holdings. Chris can argue that we don’t need to consider Gilts held by the Bank of England under QE as real liabilities, but he needs to take that up with the markets, not me, it is they who are predicting much lower inflation for the UK ahead.


When there is a shortage of safe assets it is easy to sell safe assets


We’ll never sell those gilts back. The IFS says we have £280bn of new gilts to sell over the next three years to fund the deficit. There is not a hope we’ll add £350 billion of resale of gilts on top of that. The only likelihood is in fact of more QE: over that period there is no way the market can absorb £280 billion of new debt.

From Richie via Tim.

If the UK can issue safe assets in the form of Government debt (which judging by our interest rate we can), then we categorically will be able to sell it. There is a global shortage of safe assets as this graph illustrates and large global demand for them.

Asians save lots, but don’t have robust enough state or financial institutions to produce safe assets. That is, they want to be able to transfer consumption from now into the future but lack an infrastructure capable of delivering this at prices which are satisfactory.

The UK can issue lots of debt so long as people believe it will pay it back in full in a currency still worth more or less how much they expect. There is no danger of not finding buyers so long as those conditions hold, and they look like they will for the foreseeable future.

The same is true of nearly all developed economies with their own currency. Look at the US, belching out debt and facing record low interest rates and a market hungry, begging, ravenous for more (via Delong).








This strengthens Richie’s case for larger budget deficits but weakens his case for unwinding QE by monetising the debt. I do not know how he can hold both opinions simultaneously.

I’ve been Threatened with Legal Action (CC: @Unity_MOT and @bloggerheads)

As of Friday 3rd February, my main worry for this site was that I had not been blogging frequently enough. You know how it is, work gets on top of you, you move house, you decorate, you get to know the local area (Hackney, since you ask, lovely) and on top of all that I have a Masters to study for: blogging just slipped down my priorities list.

That all changed, briefly, on Friday. A past commenter – who, out of undeserved politeness, I will allow to remain anonymous for the purposes of this discussion – e-mailed to ask me to remove a comment from an old post. To maintain my erstwhile commenter’s anonymity I cannot link to the post or the comment, but I will say it was a post mocking one of the stupidest things I’ve ever seen and the comment in question was written in support of this “dumber than a bag of hammers” event.

I informed my commenter that I more of less only remove comments which are libelous (which I don’t believe I’ve had to thus far) or abusive etc (which has occurred here) and that I considered the matter over with. Anyway, I told him helpfully, his comments were in the cache anyway, so there is no way he can completely erase his internet trail. If you think you might regret saying something really stupid, the last thing you should do is write it down on the internet where it will stay forever.

Next came the boring part, a blogger was issued with a vague legal threat. My commenter was applying for a government job and doesn’t want anyone to be able to find out he holds ludicrously silly beliefs so get his own way he has taken to bullying people on the internet. Pfft, I thought, but held fire just in case. I e-mailed Tim Ireland and Unity for advice and in short was recommended to respond with a brief “fuck off.” All’s well that ends well as they say, crisis over.

My goodbye e-mail was along similar lines to those suggested but a little more verbose:

Hello [Redacted],
Please forgive my late response.
First of all, may I say that I do not respond well to bullying. Threatening to pursue “legal remedy” is just that, bullying, and there is now zero chance of my helping you.
Sadly (for you) and happily (for me), after seeking advice with regard to your legal threat, I am now confident that it was completely specious, empty and vexation and, as such, your comment will be staying put.
Please consider this email a request that you cease and desist any further attempt to contact me about this matter; I will regard any further attempt to intimidate me as harassment under the Protection from Harassment Act 1997.
In short, I refer you to the reply given in the case Arkell vs Pressdram.
Yours Sincerely,