The notion that government debt held by its own central bank can be cancelled is incorrect. When a central bank purchases government bonds, it creates corresponding liabilities to the private sector, such as banknotes and commercial bank reserves. Therefore, the debt is not eliminated but is instead transformed into a different form of liability within the financial system, where the government's debt to the central bank is matched by the central bank's liability to the private sector.

Transformation of Government Debt via Central Bank Purchases

The concept of the government owing debt to its own central bank raises a significant accounting question: should the official government debt figures be reduced by the amount of government bonds held by the central bank? For example, this would imply that the UK's national debt in March 2021 was effectively £800 billion lower than the reported total.

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A conceptual paradox arises from quantitative easing due to the government's ownership of the central bank. Since the government is the owner, the massive volume of government bonds purchased by the central bank—such as the UK's \£800 billion holding in March 2021—effectively represents debt that the government owes to itself.

The Paradox of Government Self-Debt Through QE

To cite the ebook, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/.

To cite a unit, use The CORE Econ Team 2023 The Economy 2.0: Macroeconomics Open access e-text https://core-econ.org/the-economy/ Unit [unit number] (url).

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