18:30

Why doesn't the bank of England cancel the Gilts they hold? (2)

In December I quoted a rather civilised blog conversation about whether it was possible for the Bank of England  - probably in unison with other central banks to stop a currency run - simply to cancel some or all the Gilts that it holds as a result of QE. 
http://www.charlesellingworth.com/2014/12/why-can-bank-of-england-cancel-all.html. 
The reason that this would not be inflationary is that the money creation has lacked velocity - and has simply become an accounting exercise. This piece by Richard Duncan, the chief economist at Blackhorse Asset Management in Singapore takes it all a stage further and sees a unique opportunity for governments to print money without the nemesis of hyperinflation - due to the one-off factor of globalisation as a countervailing deflationary force. The New Deal of the 21st century? 
"When central a bank buys the government’s debt, it is the same thing as cancelling the debt— although few people dare recognize this fact. The government pays interest on its bonds to the central bank and then the central bank returns to the government the profits it earns from that interest income. That means the bonds have, in effect, been cancelled...unless, the central bank actually sells the bonds back to the public one day—which I don’t think they ever will.
Technically, then, perhaps we should say QE is debt suspension. I believe this “suspended” debt can be, should be and will be cancelled. Regardless of whether it remains permanently suspended or actually cancelled, this reality of trillions of dollars of “debt with no cost” has enormous implications. Governments have much less debt than is generally understood—and that means they could spend more and finally end this global economic crisis.
When the Fed makes a profit, it gives it to the government. The Fed has given the US government $500 billion since 2008...
[The Fed’s total assets have] increased very radically since the crisis started. The Fed has created $3.5 trillion fiat. Now according to all theory and textbooks, this kind of paper money creation by central bank, should very quickly lead to very high rates of inflation, or even hyperinflation. But it hasn’t. The U.S. and the world are now confronted with the threat of serious disinflation and even deflation.
So why has there been no inflation? Quantitative Easing is only possible due to globalization. Fiat money creation on the current vast scale has only been possible because of globalization. Globalization is deflationary because it has caused a collapse in the marginal cost of labor. Without globalization, so much fiat money creation would have caused very high rates of inflation, or even hyperinflation. The combination of globalization and fiat money creates unprecedented opportunities to support economic growth with fiscal and monetary stimulus...
How Globalization makes QE possible. We now have a global economy with 7 billion people, 2 billion of whom live on less than $2 per day. That means we don’t hit full labor capacity or have wage inflation for many decades. We also have excess industrial capacity across almost every industry globally, which also puts downward pressure on the price of industrial goods. That’s why we can print money without causing inflation. In fact, that’s why we will have deflation if we don’t.
A once-in-history opportunity. The combination of fiat money and globalization has never occurred simultaneously before. That means we can print money without causing inflation. This is a once-in-history opportunity and the developed economies should take advantage of it. The government debt held by the central banks should be permanently “suspended”, perpetually rolled over (i.e. cancelled). Then it would be clear that governments understood.
And that would mean the governments could spend more to end the global economic crisis. Governments should borrow more and invest that money in new industries and technologies to restructure the economy and to retrain and educate the workforce at the post-graduate level to ensure that the standard of living in the developed world continues to improve, instead of sinking down to third world levels. This could be financed by fiat money creation, more QE. The Fed used to print $85 billion a month. Think about what could be achieved by investing $85 billion a month over just one year! For instance, think GQE: QE to finance investments in Green technologies."

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