The UK government needs to remind the debt market who the strongest player is – ThinkScotland | Vette Leader

MARKETS ARE BRUTAL and will abuse anyone perceived as weak. Bizarrely, it is the strongest player in the market right now to be bullied after last Friday’s bazooka fiscal event. Markets only heard about tax cuts but also wanted to hear about cutting wasteful government spending and curbing inflation. This is easily solvable.

First, the Chancellor should announce that the government will aim to slash tens of billions of pounds in bloated government spending, just as we all seek to squeeze household budgets.

Second, the government should work with the Bank of England to starve bond markets just when the market expects these bonds to be in surplus.

The Bank of England began printing money through bonds for its own account in 2009 in a process called quantitative easing (QE) to help the government weather the financial crisis. This was imperative as the external credit markets could not fund the funds needed at almost any cost.

The Bank of England had around £900 billion of QE debt on its balance sheet. Remember that this is essentially internal debt created by the bank and not external debt. Diligence is required but can be a valuable control mechanism in times of stress.

The bank “pretends” that it is foreign debt by nominally assigning it the same “interest rate” and maturity profile as the foreign debt being sold in the credit markets by the Treasury Debt Management Office at about the same time.

The Bank of England recently announced that when the QE processes run from here, it will seek to sell equivalent debt on the external market rather than simply roll it over on its own computer. This means it will destabilize the outside market by selling at least £10bn a quarter more than normal. The result is that the credit markets know that the bank is a forced seller. This is driving interest rates higher, which is largely responsible for the pound’s decline in the currency markets.

This is completely the wrong strategy and costs the taxpayer enormous sums of money. Confidence in the British economy is being damaged. The Bank of England must immediately end its program to sell QE bonds back to the external market.

I’ve been saying for over 15 months that all of the Bank of England’s QE debt, which now stands at around £875bn, is swapped internally at the Bank of England into a 75-year Corona War Bond with a nominal interest rate of 1% per year should be converted . It should then be left on the bank’s computer for the entire duration. It will drain into insignificance over time. This immediately tightens the external market, tightening interest rates and removing all refinancing risk and interest rate risk on QE debt.

QE debt is around 36% of the total government debt of around £2.4 trillion, which is around 95% of total UK GDP. This total debt is easily manageable, both compared to our history and to international benchmarks such as the US. For 30 years between two world wars the UK had a debt of over 150% of GDP, which fell below 75% after WWII with 2 decades of high growth. The key is that we have to grow out of a crisis. We cannot steer ourselves out of the quicksand of low growth.

History now repeats itself with some adjustments. In order to get out of this energy crisis as part of its current strategy, the government needs to launch a massive new QE program as the external market simply won’t pay for the £200bn plus borrowing needed over the next 18-30 months.

We are in a warlike situation with a global energy war and the government must respond in a warlike manner.

The government must not allow itself to be bullied by the markets. It needs to regain control. It can semi-starve the external credit markets of new gilts to lower gilt interest rates through the use of QE.

To do this, the Chancellor must inform the Governor of the Bank of England that strategy has changed to adapt to the warlike situation. This saves the taxpayer tens of billions of pounds in interest payments every year, freeing up more money for other uses or reducing the strain on the overall budget.

The scrutiny mechanism is designed to ensure that Parliament has to approve an overall debt ceiling in terms of amount and percentage as a percentage of GDP, as is the case in the US. A government would need Parliament’s approval to exceed these amounts.

The government is the strongest player in the market. It’s time to act and not be pushed around.

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