Much of that Debt Could Simply Vanish
Instead of selling its huge holdings of UK government bonds bought to finance fiscal deficits, which would push up interest rates and hamper economic recovery, the Bank of England could just “retire the debt” (cancel the bonds and write off the losses), suggests fund manager Jim Leaviss.
His view was the first I have seen published that supports the broader one I first advanced — that much of the public debt that has been accumulating in major economies is not as much of a danger that almost everyone else seems to believe.
Effectively, the debt is created by one government department lending to another. When the lending department also prints the money, as central banks do, it can simply write off the debt.
Leaviss says that in Britain’s case this would reduce its public debt to GDP ratio from 63 per cent to 41 per cent, and cut the annual interest bill from £50 billion to £32 billion.
Brian Durrant of Fleet Street Letter says that in Britain’s case: “Both the Bank of England and the Treasury cannot be seen to be advocating this wheeze at this stage, for fear of spooking the credit rating agencies.”
If implemented – which I reckon that in time it will be, and in other countries as well as the UK – avoidance of massive sales of the sovereign bonds to unwind debt will keep yields depressed for longer.
One implication is that annuities “are likely to remain lousy investments for some time to come.”
CopyRight – OnTarget 2012 by Martin Spring
for more on Martin Spring see – TheBizSense Views – Views & Forecasting
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