Tuesday, 10 March 2009

Sell them gilts, buy them gilts, sell them gilts ...

Emailed by Denis Cooper and reproduced with kind permission:
This would be quite funny, if it wasn't so deadly serious.

Today and on Thursday the Treasury's Debt Management Office will hold auctions to SELL gilts, according to its calendar. Like the two auctions it held last week, and the two it will hold next week.

While tomorrow, sandwiched between those two auctions to SELL gilts, the Bank of England will hold its first auction to BUY gilts, see The Telegraph.

Surely it should be obvious to even the most dull-witted Tory - I don't necessarily mean George Osborne - that by getting the Bank to (in effect) RIG THE GILTS MARKET by buying up existing issues with newly created money, the government has made it much easier for the Treasury's Debt Management Office to sell new issues to fund the government's budget deficit, and so the government will be able to borrow much more before investors finally lose their appetite for gilts, and so it will be able spend much more in its efforts to get re-elected, while piling up an even greater burden of public debt for itself or its successor to deal with.


John B said...

Err, that's what quantitative easing *is*. So it'd be a bit dull-witted of the Tories to say "but, but you're just funding government borrowing by printing money", as Alastair Darling would say "yes I know, that's what said we'd do and it's what we're doing"...

Anonymous said...

Yes, that is what quantitative easing is, and Denis' email shows why a sensible constitution should make it illegal for any government to ever do it.

Anonymous said...

No, John B, "quantitative easing" doesn't mean printing money to fund a government's budget deficit - not unless the scheme is actually set up to do that.

And nor has Alistair Darling said that.

What he actually said in the Commons was that the asset purchase facility would be used "an additional way for meeting the inflation target"; he certainly didn't say that it would be an additional way to fund his spending:


Plus, "in recognition of the importance of supporting the flow of corporate credit, up to £50 billion of that should be used to purchase private sector assets".

Because those "private sector assets" won't be replaced by anything similar sold by the government, that £50 billion won't help him with his budget deficit.

However £100 billion will have that effect, because it'll be used to buy up gilts, which will be replaced by new gilts sold by the government.

Today the Debt Management Office has sold gilts to the value of £3 billion, while tomorrow the Bank plans to buy gilts to the value of £2 billion and take them out of circulation at least for the duration of the recession:


On the assumption that the Thursday auction will be another £3 billion, that means that this week there'll be a net addition of £4 billion to the stock of gilts available to investors, rather than £6 billion.

As reported here earlier this afternoon:


"... even the head of the Government's own Debt Management Office (DMO) warned of the possibility of failed gilt auctions in 2009 as the sums required seemed to be unmanageable.

So instead the Government is in effect deliberately under funding its fiscal deficit by printing a significant proportion of the money required. It is having to do this in a convoluted route as the Treasury cannot sell gilts directly to the Bank of England as this is not allowed (for very good reason) under the Maastricht treaty."

Whether the £50 billion will do what he says he wants it to do is itself a moot point, but the £100 billion spent buying gilts certainly won't do it.

What it will do is enable the government to borrow more, and spend more, in the hope of buying more votes, in the year before the general election.