QE fails – it cancels both interest and debt on the funds.

You’ve been highly critical of QE in the past. Could you elaborate on some of its shortfalls?

The result of QE is that the central bank of a country owns debt issued by the government of that country. However, because the central bank is itself owned by the government of that country, then in reality the government owns its own debt.

There are three consequences of this. First, interest on that debt is effectively cancelled. After a QE purchase of debt by the government, any interest then paid on that represents the government, in effect, paying itself. That amounts to little more than the government shifting money from one of its pockets to another.

Second, the debt that has been purchased is effectively cancelled. This is a hotly contested suggestion by some because technically the debt does still legally exist and the government does still technically owe it to its own central bank, but for all practical purposes an organisation that repurchases its own debt somewhere within in its own structure [does] effectively cancel it. This fact is confirmed by the UK Government’s own accounting; in that the debt is shown as effectively cancelled.

Third, because QE debt is not bought from the government by its central bank but is instead bought from the debt’s previous owners (usually pension funds, insurance companies or banks) then something else also happens: new money is created and injected into the financial system. It is important to understand that this is not new money raised from taxpayers. This is instead new money created by the central bank in the same way that all banks create money when they make loans.