Home > Monetary Policy > It’s Time to Print Money and Buy Spain

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.

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Categories: Monetary Policy
  1. dwb
    June 14, 2012 at 16:16

    good idea: probably want to start with Cyprus. A lot of brits vacation there and its strategic, keep it from falling into Russian hands. Plus cheap beachfront property in a nice location.

  2. June 14, 2012 at 16:49

    Excellent point, dwb. Imperialism, market monetarist style. Are you a sovereign state with good weather, beaches, decent food, and a deficit problem? No problem! Phone the Bank of England NOW to sell your bonds.

  3. Ravi
    June 14, 2012 at 21:15

    i hear george osborne is looking for a new BOE governor, and is looking outside the bank – any interest?

  4. June 14, 2012 at 21:52

    Ravi, Osborne should hire Lars Svensson from the Riksbank, if not one of the Market Monetarist clan. Svensson would be perfect.

  5. Ravi
    June 14, 2012 at 22:14

    I’d stand up and cheer, and perhaps Lars Svensson would too. I always enjoy reading the Riksbank meeting minutes: “Lars Svensson says the rest of you are hopeless dreamers; everyone else complains about their hurt feelings.” That said, I wonder if it’s politically feasible to appoint a foreigner to the top position (has it been done before?). I can see the comments now: “Look how much we paid that Sven Goran Eriksson, and he was rubbish, wasn’t he?”

  6. June 14, 2012 at 22:49

    I too would love to see Svensson ruthlessly cut down the crazy loons who got in his way.

    You might be right about the politics. The hard money wing of the Tories would probably embrace anybody they expect to be as hawkish as Jean-Claude Trichet, though Cameron/Osborne seem generally happy to put Tory party electoral prospects above satistifying the liquidationists.

    • June 27, 2012 at 16:49

      I did, Lars! Suddenly everybody discovers what Bernanke and Svensson were saying… ten years ago.

  1. June 14, 2012 at 13:34
  2. June 26, 2012 at 23:04
  3. November 21, 2012 at 22:22

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