The Chris Giles Plan to Reflate The UK Economy
Chris Giles has doubled down on his previous position, and has an excellent plan to reflate the UK economy by printing money and buying gilts, though he doesn’t phrase it quite that way:
All George Osborne has to do is tweak the Bank of England Asset Purchase Facility Fund, the special purpose vehicle set up to manage QE. I am sure the good people at the Bank would be happy.
All I am proposing is a small tweak to the operations of the BEAPFF that would extend its scope a little. On top of the £375bn of money printing for gilts purchased, it would, under my plan, have a second purpose of making more efficient use of government cash.
The first thing it would do is buy the rest of the gilts market. That way, according to the Office for Budget Responsibility it would receive total gross interest payments of £46bn in 2013-2014, when new tweaks would would be ready to roll.
So, what is the up shot? A simple extension to QE operations and coupons on debt can wipe out borrowing. Magic! Deficit problem? Problem solved.
Obviously, at maturity, the BEAPFF would be insolvent and would need to make use of the indemnity the Treasury would offer. But that is an issue for the future. Not now.
Mr Giles is being a tiny bit sarcastic. But this plan is exactly what we need, with one minor tweak. There are two possibilities for this plan if announced exactly as described:
a) it has zero difference to inflation expectations or any other forward-looking macro indicator such as the stock market, or the value of Sterling.
b) it massively raises inflation expectations, the stock market soars, Sterling plummets.
In the last few years, relatively small unexpected shifts in UK monetary policy have had significant influence on the markets. Sterling has often moved sharply when the MPC minutes say something the markets didn’t expect, for example.
So I’d say that the announcement of a plan to buy up the remainder of the £1000bn gilt market would very much fall under (b), and would trigger what David Beckworth calls the “mother-of-all portfolio adjustments” as people race to dump their “safe assets”. Sterling would plunge, inflation expectations would soar. What would be the effect on the domestic economy? It would boost spending. Which is fortuitously exactly what the UK needs! Over to Professor Bernanke:
A nonstandard open-market operation without a fiscal component, in contrast, is the purchase of some asset by the central bank (long-term government bonds, for example) at fair market value. The object of such purchases would be to raise asset prices, which in turn would stimulate spending (for example, by raising collateral values). I think there is little doubt that such operations, if aggressively pursued, would indeed have the desired effect, for essentially the same reasons that purchases of foreign-currency assets would cause the yen to depreciate. To claim that nonstandard open-market purchases would have no effect is to claim that the central bank could acquire all of the real and financial assets in the economy with no effect on prices or yields. Of course, long before that would happen, imperfect substitutability between assets would assert itself, and the prices of assets being acquired would rise.
I can’t think of a better definition of “aggressive” bond purchases than promising to monetize the £1tn gilt market.
There is one question: if the 2% inflation target remained credible people might expect the monetary injections to quickly be reversed, though I doubt that the 2% target would remain credible for long with such a large shift in policy.
If it did, then Chris is exactly right: this is a free lunch and we should do it straight away. We can go much further: why issue zero coupon gilts when we could be paying negative interest on central bank reserves? If people really want to hoard £1tn of money which loses 2% real value per year, why not pay negative interest on reserves and charge them even more for that privilege? What’s not to like?
So the minor tweak needed to Chris’ plan is to dump the 2% inflation target and announce a nominal GDP level target; and have the government signal that they will keep printing money, buying stuff, and eating free lunches, until we hit that target. This would make the plan much more credible.
Fast rising nominal GDP will of course provide all the tax revenue the government needs to recapitalise the BoE in the future if that ever proves necessary. If monetizing the entire gilt market is not sufficient to move nominal GDP we should definitely promise to buy up the Spanish bond market too, I’m still up for that plan since the despicable ECB are intent on prolonging the suffering across Europe.