The short answer is because inflation. The longer answer is because maybe inflation.
Just so we’re clear on that.
As to why, it’s all rather simple. Quantitative easing is the process of creating new money to go buy government bonds. Whether it’s just to buy some bonds to lower long term interest rates, or it’s to buy the bonds that are funding some hundreds of billions of government spending doesn’t really matter for the point of the argument here. At some point it’s highly likely that QE will have to be reversed. The bonds sold back to the market, the money taken back into the Bank of England and there destroyed.
This has implications – one of which is that yea, even those bonds held by the Bank of England (or, if you prefer, the Federal Reserve) are still part of the national debt. Even only contingent liabilities are still on balance sheets, right?
So, note the caveat being applied here. If we start to have inflation then we’re going to have to do something about QE. Reverse it that is. This depends upon MV=PQ.
Yes, I know Milton Friedman liked it but it is still true. It’s an identity. Money times velocity is equal to prices time quantity. Or, more colloquially, the amount of money times the number of times money is used is equal to the price of things we use money for times the quantity of things we use money for.
We can also think about this in a slight different and not wholly, 100% and accurate manner. M is narrow money, M0 or M1 in the usual listings. Multiply that by V and we get wide money, M4 and possibly further out than that. That’s not right, but it’s useful as a description.
Inflation depends upon some version of wide money, not upon narrow money. That’s gotta be true because we do know that if we had this much money around – this post-QE amount – 15 years ago we’d have had stonking inflation. Something’s changed and V is it. It’s M0 that has soared here, not M4, which is why we’ve much more money without the inflation – it’s the wide money that matters.
OK. So, this is American but still useful:
And one more:
Note that this isn’t accurate. But it’s good enough as an example. Our contention, in fact our identity, is that the first one, M, time sthe second one, V is MV. Or, narrow money times velocity is wide money. And that it’s the wide money that matters for inflation.
So, If that V stays where it is forever then sure, we don’t need to do anything about M0 or M1 and this QE can just carry on as it is – not that doesn’t mean more of it, just that we don;t have to sell those bonds.
OK, so, hands up everyone who thinks that we’ve nailed it so that V never rises again? You know, like it did for decades?
Well, yes, and there’s our problem, isn’t it? If the economy and the relationship with the amount of money in it – that V – ever returns to something like it was 10 years ago, or even 1 year ago, we’ve quite an inflationary problem stored up, don’t we?
Which is exactly why we do need to treat the QE debt as part of the national debt. QED. Even if we want to say that it’s not a debt in the strictest sense of the word it’s still a contingent liability.