Sunday, 7 March 2021

Some thoughts on debt!

With the furore about an increase for the NHS staff which the incredible wise and up-to-date Westminster politicians have offered one might think wait, have we suddenly won the Euromillions? How does a country like the UK actually deal with money? Hard cash if you will call it that? Bear in mind that as I said before, a country has no money of its own. However that is not strictly true, they are also in charge of providing the means through policy. Although in the UK it is the responsibility of the Bank of England. They supply the banknotes and coins. So by definition they could easily increase the amount of money in circulation.

They can do this when unemployment is high and growth is low, more available cash in the country will stimulate the economy. The opposite of course happens as well. The central bank can take money out of circulation when things are overheating. Dampening the economy somewhat. You might wonder where all this borrowed money is coming from. There are a number of ways I see. The main one is again the central bank. The main way central banks control money supply is buying and selling government debt in the form of short term government bonds. Buying bonds that way gives the government the money to combat Covid-19. But also these bonds could be sold on the open market (gilts). It is now a fact that the Bank of England is owning the UK’s debt. When they want to shrink the money supply, they can sell some of that debt to banks or investors.

Not just that, the government also pays the national pension and social welfare. Another way to increase the money in circulation. There is one problem with it, all this can increase inflation if not linked to actual income from taxation.

In olden times the cash trail started with digging things out of the ground. It started the economic trail. We manufactured stuff. We exported stuff. We made profits on stuff. Now we are mainly an economy based on services.

So, it pays to keep things in check and obviously the amount we have spent on Covid will fuel inflation, hence the tax increases to cool things down, to stop unnecessary spending. The funny thing is that in a services economy you want spending! So, over to you Mr Chancellor, figure that one out.

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