Tuesday, 20 July 2021

Money troubles ahead? Perhaps....

There may be trouble ahead.... I remember that lovely tune. But reports are showing that there may be trouble ahead for real! Financial trouble that is. I have said quite a few times that money seems to grow on some trees in the UK. Not sure how other countries pay for all the excesses but in the UK we just keep on borrowing. How does all this work then? Where does all this money suddenly come from? Quantitative Easing? Have a look on Google and explain it to me. It has something to do with what is called ‘Money Supply’. This is the amount of money circulating in the UK. In January 2019 it stood at about £2.4 trillion but shot up to nearly £3 trillion by January 2021. Eye-watering amounts but where did the extra come from? Don’t think it is all fivers or tenners or coins, these only represent some 3 to 4% of finance, bank accounts and reserves adds more. Anyway, you can see that if the central bank (The Bank of England) increases the money supply through more loans (gilts and bills) to banks, pension funds and insurance companies plus many more and print more money, the whole economic system ‘loosens’ up. But loans, as we all know very well, attract interest. These are very low at present so make it ‘profitable’ to borrow. But and there is always a but, there is a limit at how much can be borrowed. The national debt i.e the amount ‘borrowed’ stands at just over £2 trillion and rising. Over 85% of the Government’s total debt has been raised by selling gilts and bills, mainly to financial institutions. The interest charged, probably at 0.1% means that annually quite a number of billions of pounds go back into the system but out from the government coffers.

It is interesting how it all works but in the end there is an end to it. You cannot indefinitely just print money or sell gilts. Because if the interest payment are more than you can get by selling gilts or ‘bills’ the country can face economic collapse. Hyper inflation can set in, money will be worthless. Just look at what happened to the poor Germans after WW One.

No comments:

Post a Comment