Thursday, September 24, 2009

Gilts Bought by Bank of England

Since the policy of Quantitative Easing has been introduced this year, the composition of those holding public sector debt has changed signficantly. Typically, government debt is held by the private sector - banks, pension funds, investment trusts both domestic and from oversees.

However, by September 17th, the Bank of England had completed the purchase of £147bn of government gilts. By contrast commercial paper and corporate bonds account for just £1.8bn.
Asset Purchase facility at the Bank of England.

The Bank of England now owns 20% of the outstanding stock of nominal gilts.

It means, in recent months, the Bank of England has become the main buyer of government debt. Raising concerns that if the Bank of England stopped buying gilts or had to reverse its policy of quantitative easing - by selling gilts on open market, the government would face difficulty in selling sufficient bonds and gilts to finance its budget deficit.

Some market analysts suggest it is not as bad as it looks.
  • Markets are taking advantage of the Bank of England to sell now whilst price is rising. If bank starts to sell its gilts, banks will probably be able to buy back at a profit.
However, it is an unusual situation for the Bank of England to be buying so much government gilts. As the IMF suggested, it has definitely helped reduce the yield on gilts. Without the Bank of England buying so many gilts, interest rates would be higher. This means that the cost of servicing the national debt would be higher without the Central Bank intervention.

There is also concerns about whether the purchase of gilts from banks is actually affecting the economy. In August M4 money supply growth was only 3%, -the lowest since 1999. This has led some to suggest the main beneficiary of quantitative easing is not increasing economic activity but financing government spending and government debt.

There is pressure on the Bank of England to use its asset purchase facility to buy more private sector bonds and try target private enterprise.

Related
  • UK Debt Burden - historical perspective showing we have faced much worse burdens of government debt
  • Graph showing main buyer of gilts in past few months has been Bank of England

4 comments:

Giles said...

And what do you think of the policy? What do you think of that pressure? And what do you think the Bank can achieve if inflation expectaitons remain muted?

Josh said...

I think The projections imply that further easing in monetary policy may well be required. That is likely to include actions aimed at increasing the supply of money in order to stimulate nominal spending.

eiweibshake

Ralph said...

So roughly £150bn of the National Debt is actually a debt owed by the nation’s government to the nation’s central bank. This is a bit like saying my right hand pocket owes my left hand pocket some money: it scarcely merits the name “debt”.

Indeed, about £150bn could be wiped of the so called National Debt by telling the Bank of England to shred the gilts in its possession. Sighs of relief all round. This would leave the small matter of the £150bn added to the monetary base: a potential source of inflation. But reining this is in by means of increased taxes by the right amount at the right time should not be difficult.

And these “taxes” unlike normal taxes would not constitute a sacrifice on the part of taxpayers. Reason is that if this money is left in their pockets, it would exacerbate inflation, which would make said money worth less. So to summarise, we can wipe £150bn off the National Debt just like that, and deal with any remaining problems with taxes that aren’t really taxes.

I’ve taken a patent out on this idea, and I’d charge government a mere 0.1% for using the idea. That’s £150m for me, and everyone else can sleep easy on account of the much reduced National Debt. It’s a “win win” situation (especially for me). I would also expect Nobel Prize, of course.

Ralph said...

So roughly £150bn of the National Debt is actually a debt owed by the nation’s government to the nation’s central bank. This is a bit like saying my right hand pocket owes my left hand pocket some money: it scarcely merits the name “debt”.

Indeed, about £150bn could be wiped of the so called National Debt by telling the Bank of England to shred the gilts in its possession. Sighs of relief all round. This would leave the small matter of the £150bn added to the monetary base: a potential source of inflation. But reining this is in by means of increased taxes by the right amount at the right time should not be difficult.

And these “taxes” unlike normal taxes would not constitute a sacrifice on the part of taxpayers. Reason is that if this money is left in their pockets, it would exacerbate inflation, which would make said money worth less. So to summarise, we can wipe £150bn off the National Debt just like that, and deal with any remaining problems with taxes that aren’t really taxes.

I’ve taken a patent out on this idea, and I’d charge government a mere 0.1% for using the idea. That’s £150m for me, and everyone else can sleep easy on account of the much reduced National Debt. It’s a “win win” situation (especially for me). I would also expect Nobel Prize, of course.