Reader's Letter Of The Day, Nearly

From today's FT:

Sir, John Plender is wrong to suggest that the ratio of public sector debt to gross domestic product could be reduced by the Bank of England writing off the gilt-edged stock it has acquired through quantitative easing...

No part of the national debt has been suspended as a result of QE, and none would therefore be cancelled by making any element of the QE transactions permanent. For central banks are state institutions, and debts owed between different arms of the same government are a nullity for the sovereign debt aggregates.

What has happened, in all countries undertaking QE, is that a significant slice of sovereign debt held by the private sector has been switched from long-term bonds to cash or near-cash instruments, all of which remain very much part of the national debt. The immediate effect of each QE instalment is a ballooning of commercial bank reserve balances with the central bank...

Andy Thompson, Worcester Park, Surrey.

All good stuff, that letter would have scored 10/10 on his description of the facts. I disagree with his conclusion that "QE has been, I think, an entirely appropriate policy instrument in current and recent conditions", but that's his opinion and he's entitled to it.

The bit that perturbs me is the following from the first paragraph:

... although he is of course quite right to note that such action would make the Bank itself insolvent.

Of course the bloody Bank of England is insolvent, it has been from Day One, it was originally set up to do the bookkeeping for when the English government decided it was a good idea to borrow money from people to invest in the Royal Navy to try and gain control of the high seas and ultimately build a trading empire (in which they succeeded most successfully).

And whatever the history of any Western central bank, they are by and large merely a branch of government, and most Western governments are - on a pure balance sheet basis - totally insolvent and always have been, because they owe, at today's date, far more than they have in assets. Their real assets are the ability to collect taxes in future and a small part of those taxes will be used to repay the national debt.

You can take the whole thing with a pinch of MMT salt anyway - when governments borrow money, it is the same as spending more than they collect in tax or 'printing money', and when they repay the national debt (as even the crappest Western government has been known to do from time to time), it is the same as collecting more in tax than they spend (which is 'unprinting money'). So, for example, an annual tax of 10% on the value of outstanding national debt would see it 'repaid' in ten years.