John Plender’s concern that “ . . . central banks cannot recapitalise themselves in the event of insolvency through seignorage without generating unacceptably high inflation” is misplaced (“Test of central bank credibility looms on risk of bond losses”, Markets Insight, November 17).
The permanent increase in money supply that generates his concerns about inflation has already taken place at the point at which the central bank sells a bond at a loss that generates his concern about solvency.
If a central bank buys a government bond at a price of 130 during a period of low bond yields and then sells it back to the market at a price of 100 once bond yields have risen it has permanently increased the money supply by a net 30. Any subsequent recapitalisation of the central bank to make good that loss and avoid insolvency is a mere accounting nicety that has no effect on the money supply. That horse has already bolted.
London N1, UK
Letter in response to this letter: