How would you feel if you were told that two-thirds of the apparently scary rise in the stock of UK government debt since the start of the crisis has taken the form of ultra-cheap, irredeemable bonds? Would you not feel reassured that the government need never redeem this debt or, if it wanted, even pay interest upon it? Yet as soon as you learn that this ultra-cheap debt is money, the phrase “Zimbabwean economics” might trip at once off your tongue.
Eric Lonergan of M&G Investments has made the point in a post on FT.com’s Economists’ Forum. As a result of “quantitative easing”, the Bank of England’s balance sheet has risen roughly fourfold since August 2007, to almost £350bn. Yet, even as the monetary base has exploded, the broad measure of the money supply (M4) has shrunk by more than 6 per cent since the beginning of 2010. The late Milton Friedman would have thought this highly disturbing.
By engaging in £325bn of QE, the BoE has monetised the government’s debt, by replacing the bonds in the public’s hands with deposits at commercial banks. The latter, in turn, hold reserves at the BoE on which they currently earn interest of 0.5 per cent a year.