Conservative MP and former Treasury Minister John Redwood has warned that the Bank of England’s quantitative easing programme could result in a bubble in the gilt market.
In a blog on his website, he says: “My worry is that on both sides of the Atlantic, the governments are trying this at the same time as running colossal government deficits and issuing huge quantities of bonds to pay for them. Markets are being told that buying different Government bonds is a ‘flight to quality’ which can never be criticised. Those who think this have not read their history books.”
He adds that in the past, countries have defaulted on their public debts while the UK and US have often inflated their way out of the “full rigour” of repayments, paying lenders back in depreciated dollars or pounds.
He says: “Even if this time round, they do prevent a return of high inflation and meet all the repayments, it is still possible to lose money from a ‘flight to quality’ if you buy a long bond on too low a rate of interest.
“There can be bubbles in gilt-edged securities as well as in properties and private sector shares. One of the problems that the Japanese encountered when trying money printing in the 1990s was deciding how quickly to withdraw the cash once it seemed to be working to avoid triggering a great inflation. They also discovered that if you did not first mend the banks, it was difficult for anything else to work.