The story so far. The Bank of England has magicked into existence three hundred and seventy-five billion pounds and used to money to buy UK government bonds. Bonds of course pay a form of interest called the 'coupon'. So naturally, the Bank of England has dutifully being paying interest to itself. It has been keeping the money in a special account called the Asset Purchase Facility, and the cash has been mounting up: there will be £35bn in the account by the end of this financial year (April 2013).
So what to do with all this lovely lolly? (Over-looking for the moment that it doesn't really exist.) Well the government has decided that it is going to transfer the money from the Bank to itself (ie to Her Majesty's Treasury) and spend it. Specifically, they are going to spend it on redeeming government debt. Yes, they are going to pay off the national debt with money they got by buying the debt with money they never had.
George Osborne, Chancellor of the Exchequer, has said as much to Mervyn King, Governor of the Bank of England, in a letter. Merv has replied that that's a very good idea, also can he have a peerage next year when he retires? (Only he didn't put that last bit in the letter.)
If this money-go-round makes your head whirl, that's because it is supposed to. You're supposed to be watching all the plates they've got spinning on sticks and wondering when the first is going to fall. That way you won't notice when they sneak around behind you and take some money out of your pocket.