Feeling Queasy?

The Bank of England's Asset Purchase Facility, known as quantitative easing, was extended not so long ago from £175bn to £200bn. They have now nearly spent that fund out (src). The way the scheme works is that the Bank simply declares itself to have some money, and then it goes out and buys government debt — gilts — on the open market. The theory is that the money then works its way through the system from the money markets. In effect, it has been turning existing government debt into money.

On of the chief problems I have with QE has been that it does not simply monetise existing debt. The government is still borrowing money from the markets by issuing more gilts, and if I'm remembering correctly, the Bank's facility was extended at about the same time as the government's borrowing projection was increased from roughly £175bn to roughly £200bn. It is no great stretch to believe that the Bank has in fact been acting in a slightly roundabout manner to monetise the government's new debt.

Since that time, the Debt Management Office, which deals with the government's borrowing requirements, has raised its forecast for this year's net gilt issue from £200bn to £208bn (src). Since the net gilt issue is exactly equal, by a simple piece of accounting, to the government deficit (and since the DMO are more expert than the ONS when it comes to the deficit), that means that the deficit has been expected to hit £208bn this year, up from the governments initial projection of £175bn.

Given this morning's lacklustre economic figures, it seems entirely possible to think that the deficit projection could rise to £225bn: will the Bank extend its facility by a further £25bn? It doesn't seem entirely unlikely: FT Alphaville is reporting that a JP Morgan economist thinks it could happen, although his reasoning is simply 'weak economy = more stimulus' (src).

Remember, if the Bank extends by another £25bn, you heard it here first. (And if doesn't, well, I'm not making a formal prediction. Ahem.)