Bank of England should retire QE debt Quantitative easing is a party with a nasty hangover. After the binge of creating money and buying debt, the received wisdom is that the Bank of England will sell the debt it has purchased back into the market. But this will be deflationary and raise interest rates. It is an unnecessary hangover. Instead of selling the debt back into the market, the BoE can retire the debt. At a stroke, £325bn of UK government debt disappears. If the US follows suit, about $1.5tn of US government debt will be retired. To understand why this is possible, you have to simplify QE. After buying £325bn of debt from the market, the public sector (the Treasury) is paying interest to itself (the BoE) on debt that it owes to itself. It makes no sense for the public sector to owe itself money. Retiring the QE debt puts an end to this accounting nonsense. QE creates an anomaly: the newly created money is technically a liability that the BoE owes. In theory the joint stock banks could come to the BoE and ask for their money back. To get their money back from the BoE they would have to give the money they received from the BoE back to the BoE in order to claim their money. This is a nonsensical merry-go-round. The attractions of retiring the debt are self-evident. The government avoids the need to sell debt back into the market. The taxpayer is relieved of a burden that does not in practice exist. The main obstacle to retiring the debt lies with the markets and credit rating agencies. They may see this as a slide towards Weimar Republic economics: monetary financing of government debt by printing money. Consequently, both the BoE and the Treasury cannot be seen to advocate retiring QE-acquired debt at this stage. The Treasury needs to stay out of the debate; the BoE must be seen to act independently. The BoE can only embrace debt retirement when two conditions have been fulfilled. First, the markets and credit rating agencies should recognise that QE debt is not real debt. Second, the government needs to get its deficit under control. This will avoid the looming spectre of Weimar economics. So there is no £325bn windfall for the politicians today, but there is a £325bn reward for them tomorrow if they put their financial house in order. Technically, there are obstacles to retiring the debt. From an accounting perspective, the BoE will have to retire the debt and at the same time cancel the money it created. This means the money it issued to the commercial banks would not be backed by anything, and that makes purists uncomfortable. But in reality, the money used to buy the gilts in the first place was not backed by anything. Retiring the debt brings what was hidden out into the open. Other technicalities include the Treasury's letter of indemnity to the BoE against any losses on the debt it has acquired. The BoE can simply waive its rights under this letter. There will also be mutterings about the inflationary impact of retiring the debt, if the banks use their new-found liquidity to fuel another credit boom. That risk is largely over: the liquidity has been created and there has been no credit boom. To maintain market discipline, the BoE may choose to retire the debt slowly so it has the option of selling some debt back into the market in the unlikely event of needing to control another credit boom. In theory, the US and Japan could follow a similar course of debt retirement. The European Central Bank is not so lucky. It faces two obstacles. The minor obstacle is legal. Article 123 of the Treaty on the Functioning of the European Union explicitly forbids monetary financing of government debt in the eurozone. This is minor because the history of the Growth and Stability pact shows the eurozone will break its own laws when it suits. The bigger obstacle comes in the form of a question: "Whose money is it and who benefits?" Greece and other troubled countries will argue they need the money. That raises the problem of moral hazard and other countries will argue it is their money that bought the debt, so they ought to benefit. They could sell tickets to watch that debate unfold. There are times when having your own central bank is well worthwhile. This is one of those times. The writer is a former strategy partner in Accenture's financial services group and author of "How to Lead"