So that’s why the Bank buys all that government debt

September 17, 2009

I’ve found the answer to the monetary puzzle de nos jours. The ritual of the UK Treasury’s DMO issuing new government debt one day, only to have the Bank of England buy similar amounts of almost identical stock the next, has puzzled me ever since Quantatitive Easing began.

How much simpler it would be for the Treasury to borrow directly from the Bank – the modern equivalent of running the printing press faster – to pay the government’s bills.

It turns out that the Maastricht treaty (Article 104(1)) expressly forbids European governments from borrowing directly from the central bank. The prohibition was drafted during a period when inflation seemed endemic, requiring strict controls to prevent monetary incontinence among European Union governments.

So QE is a mechanism to circumvent the rules. Perhaps you knew that already. The traders in gilt-edged stock, many of whom are not natural europhiles, should raise their Roederer Crystal to the treaty, as they laugh all the way to the (taxpayer-supported) bank.

2 comments

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

[...] Commentaries » Blog Archive » So that’s why the Bank buys all that government debt | Blogs | I’ve found the answer to the monetary puzzle de nos jours. The ritual of the UK Treasury’s DMO issuing new government debt one day, only to have the Bank of England buy similar amounts of almost identical stock the next, has puzzled me ever since Quantatitive Easing began. [...]

Great comment – very interesting!

Posted by Daniel | Report as abusive

I believe this is why the share market has risen 50% – because the value of the pound has decreased by a third!!!

Posted by bob | Report as abusive