No, really, MMT will never work - just like Keynesianism didn’t

So if the BoE fiddles with bond sales it can save lots of money.

Taxpayers would save up to £5bn next year if Andrew Bailey overhauls the Bank of England’s controversial programme of bond sales, analysts have calculated.

Deutsche Bank has said Rachel Reeves would be spared from transferring billions of pounds to Threadneedle Street if it stopped selling long-term debt amid a dramatic drop in bond prices.

The Bank is currently unwinding the stockpile of gilts it amassed during the financial crisis and lockdown, when it created almost £900bn to boost the economy.

When interest rates were at record lows of 0.1pc during the pandemic, the Bank earned far more on its returns from government bonds than it had to pay in interest to commercial banks.

However, this reversed dramatically once interest rates started to rise.

The Bank is now also actively selling gilts back to the market as part of so-called quantitative tightening (QT), crystallising billions of pounds of losses for the taxpayer.

And no, it can’t. It’s possible to delay having to recognise the losses by not selling the bonds. But that’s all that is possible. The BoE collects less interest now than it pays out. So, there’s that annual loss. Or, given that bond prices are a function of their coupon, the BoE can crystallise those losses through selling them - QT. But those are the only choices.

For the loss has already been created - when the BoE issued that vast amount of new bonds paid for by printing money. It was, as above, profitable at first. Now it isn’t. And, well, Ho Hum, that’s the way it works. Vast, gargantuan, hundreds of billions that politicians got to spend. Now that’s all got to be paid for.

This is why Keynesianism didn’t work - no one ever would repair the roof when the Sun shone by running a budget surplus of any size. This is why QE/QT is such a problem - the squinnying by all and sundry about the BoE losses here. Everyone was very happy to do the spending and no one’s willing to put up with the subsequent and inevitable belt tightening. This is also why MMT will fail - or will lead to uncontrollable inflation. Sure, sure, print to spend when necessary. But no one at all is willing to have the subsequent primary budget surplus to suck that excess money back out of the system.

Spending money is fun, collecting taxes not so much. Upon that simplicity all clever schemes about government finances will wreck themselves. No political class will ever limit itself to the necessary spending limits over the entire cycle of any of these policies.

Tim Worstall