It’s Time to Print Money and Buy Spain
By “Spain”, I mean Spanish government bonds.
Will the ECB will stand by and let Spain go under? Spain is a nice country with a fairly large economy. It’d be a… shame, right? So if the ECB won’t do anything, I think the UK should act instead.
David Cameron should immediately instruct the Bank of England to print Sterling, exchange it for Euros, and start buying up Spanish government debt. Spain apparently has about €570bn of debt outstanding, so the Bank could buy, say, all of it.
We all know that the Bank of England balance sheet has no possible effect on the UK economy except when it is used to back changes in Bank Rate. Right? So these actions by the Bank can make no difference to, say, the Sterling/Euro exchange rate, and hence no impact on the demand for domestically produced goods and services in the UK. Right?
Sure, the Bank would take on some credit risk and exchange rate risk. But they can do all this in the Asset Purchase Facility (used for conventional QE), which already has a indemnity from the Treasury against losses.
Isn’t this a free lunch? Never mind a few billion pounds of infrastructure spending, think of the benefits to the UK population from getting the “Eurocrisis” out of the headlines. The confidence fairy would throw a party, she’d be so happy. And David Cameron could fly into Madrid and politely ask Mr Rajoy to stop complaining about Gibralta.
(Maybe I have that backwards: perhaps Mr Rajoy will fly into London and blackmail Cameron by threatening to default unless the UK gives up Gibralta. Moral hazard is so tricky!)
Once he’s done buying Spain, Cameron will start thinking about all the free lunches he has available from printing money and buying stuff. Maybe there any other distressed sovereign borrowers which could do with some help? Italy? But let’s think domestic.
First up he can buy back the entire gilt stock. There’s no point paying 2-3% interest on your debt when you can fund that at 0.5% by creating new central bank money. And we can lower that 0.5% to 0% to make it even cheaper. Hell, we could even try negative interest on reserves… no wait, I forgot about the dreaded Zero Lower Bound.
Secondly, unfunded pension schemes. Take the cost of unfunded pension schemes for public sector employees as, say, a £1tn present value. The market cap of the FTSE All-Share is about £1.7tn. So let’s print money and buy the FTSE! We could probably fund a good chunk of that pension liability and still leave a reasonable amount of free float in the market.
Any other suggestions on what assets to buy with freshly printed Sterling? Or any ideas why the above should not be your first policy suggestion if you really believed that UK monetary policy was “impotent”?
Update: Visitors coming via reddit might like to also read Lars Christensen’s more sensible post.