The Government should consider cancelling more than £300 billion in gilts that the Bank of England has accumulated through its quantitative easing programme, M&G’s Jim Leaviss argues.
Leaviss, manager of the £947.5m M&G gilt & fixed interest income fund, writes on the Bond Vigilantes blog that this move could significantly improve the UK’s financial health and safeguard the country’s AAA rating.
“The Bank holds these gilts on behalf of the Treasury anyway, so the Treasury is effectively paying interest to itself on assets that it bought with ’free’ printed money,” he explains.
“Could we decide that this is a waste of time, that we are unlikely to sell these gilts back to the market in any case, and that we may as well just cancel the gilts we bought for the nation?”
The manager notes that this move would slash the UK’s debt to GDP ratio from 63 per cent to 41 per cent and lower the country’s interest payments from £50 billion a year to just £32 billion. The permanent liquidity injection would allow bolster economic growth and help bring down employment.
“So who would be unhappy with this? No default has taken place (no CDS trigger, no D from the ratings agencies who are only interested in failure to pay private investors), the UK’s public finances become sustainable, the economy gets a boost from the knowledge that the QE cash injected will stay there for the foreseeable future, and a mechanism exists to remove cash from the economy should inflation return,” Leaviss writes.
“Apart from the fact it all feels a bit banana republicy everybody’s a winner.”