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What happens if BofE writes off its Govt Debt

What would happen if the BofE wrote of the money the Government owes it?

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Government debt is generally held by the insurance and pension companies, wealthy individuals, foreign governments and institutions and the Bank of England.

What intrigues me is what would happen if the BofE and Government decided just to write off this debt owed by the government to the BofE? 

Is it the same as say husband owing wife a chunk of money and wife telling her husband he doesn't need to pay her back? In this case as a couple they are no worse off and the debt is gone.

As the BofE hold around 30% of the national debt does this present a way to cover the estimated 300 billion needed to fund government COVID measures without any tax increases?

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By ireallyshouldknowthisbut
25th Sep 2020 13:42

I have been saying for some time this is the most likely scenario.

The main reason for NOT doing this is that its inflationary.

But inflation is very low (other than in property where there is too much cash chasing too few assets, the lessons of 1920 seem to have been lost) and more inflation lowers national debt.

Moreover most of the money just replaced a hole in the economy which would normally have been working during the first lock down so economically it should actually not make much difference.

I think its a very strong possibility but they will do it in such a way to make it looks like, technically, its not happened. Until it suits to write it off. Eg if they make it some sort of "special covid bond" issued by the BOE, which at some point gets written out of the national debt computation. And then 10 years later written off completely. The current government is not thinking more than 2 weeks ahead so I doubt they have really made a decision yet.

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By Justin Bryant
25th Sep 2020 14:04

This has been mentioned here before and it would have exactly the same inflationary effect (or possibly worse) as if the government simply printed the equivalent (written off) amount of physical money to spend and the pound would crash etc. (due to basic supply & demand laws).

The US Treasury could do similar but this is most unlikely to happen, especially as governments can usually rely on normal inflation to reduce their debt in real terms.

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Hallerud at Easter
By DJKL
25th Sep 2020 14:05

Inflation and exchange rates, but the latter may not be much of an issue if the neighbours all do something similar.

IMHO no real reason to do anything with it, just leave it out there, a high level of National Debt has really only two implications, servicing and constrained ability to raise more debt.

Anyone bother to work out how few are the years since say 1980 that we have actually managed to reduce the National Debt, without looking it up pretty sure I only need a few fingers on one hand to count them.

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By Richard Grant
25th Sep 2020 18:14

As we have a fiat currency (not backed by anything except confidence in stability and the belief that there will be no default), writing this debt off would in effect give the government the right to borrow at will and the central bank to print to make up the difference. Any confidence from external parties in sterling would vanish overnight making it worthless. After all, who would lend (buy bonds ) from a country that writes off its debts when it feels like it?
"ireallyshouldknowthisbut" is correct about inflation and I agree that they will try to do it via Covid bonds and loose it in the small print.

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