I have suggested that if the government was to create £50 billion of new money in the next year then the worst of the poverty crisis that we are facing could be averted. In response it has been suggested to me that the cost of interest as a result of doing so might not be affordable. This, I very strongly suggest, is not true, as data shows.
First, it is important to note that I am using Office for Budget Responsibility data: the argument I am making is based on official data.
Second, this is the OBR inflation forecast issued last month:
Note that from 2024 the official forecast for inflation is that it will be approximately two per cent per annum. I am accepting this forecast on this occasion.
Third, this is the data from the OBR on two further issues. Note first the left hand chart, which shows the forecast official interest rate. Note that this is never forecast to reach two per cent, after which it is then forecast to fall to 1.25% by 2027.
Fourth, note the chart on the right. This shows the forecast value of the government's own bonds that it acquired under the QE programme that it will own over the next few years.
The forecast is that almost £300 billion of these debts will be resold to the financial markets between now and 2027. No rational reason for doing so is available, but this net sale is forecast nonetheless.
However the key point is that the interest rate on these bonds owned by the government is not the rate due on them when issued but is instead the interest rate paid entirely voluntarily on the balances held by the commercial banks with the Bank of England that were created as a result of repurchasing these bonds. The voluntarily paid interest is settled at the official Bank of England base rate.
Now note that if the inflation rate is compared with the forecast official interest rate over the next five or so years at all times the inflation rate is higher than the interest rate. In other words, allowing for inflation the real cost of this borrowing will almost certainly be negative over the next few years.
Three consequences follow. First, creating this debt has no cost at present, meaning there is literally no reason to repay it. Second, repaying the debt makes no sense right now as it will increase the cost of servicing it, almost certainly. Third, putting this together, there is no actual cost to creating this money in real terms.
Tackling the poverty that we are now facing by creating the money to do so is then an option available at no net cost to the government. Why would it not want to do that? Again, I wish I knew why it does not.
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They’d rather flog Channel 4 and use the receipt for tax breaks in the 2024 election.
Apparently Channel 4 will be ‘free’ to go into debt to expand it’s services!!!!
The Tory party: What a bunch of idiots.
PSR, I despair thinking this, but I am afraid that the current crop of Tories in charge are worse then idiots. But I know you know this. What I really think of them I can not say for obvious reasons.
It now becomes much clearer, Richard. Send this to John Glen and ask for his response!
Money creation creates inflation!! We have a massive problem with inflation at the moment . You are insane. Thank god no one takes any notice of you..
Provide the evidence
How come it had no impact from 2009 to 2021?
Why was that?
Terry Hurlock, if this simplistic suggestion is correct, then why are you not demanding the commercial banks stop creating money at their uncontrolled rate and pumping it directly into the housing sector via mortgage lending? Sectoral prices have risen by 10.7% per annum in CoViD calendar year 2021 (13.5% from June to June 21).
You ask How come it had no impact from 2009 to 2021?
I think the answer is that it did. It’s right there in that graph you presented.
If you want another source check out the BoE inflation calculator. It says £10 in 2009 would cost you £14.27 in 2021 – that’s an average of 3% a year.
Inflation is complicated for sure – globalisation, free markets, easy access to diverse supplies, allowing technology such as home deliveries and cashless, all bring the price level down. Bank lending increases the money supply and increases the price level but the period in question started with a collapse in lending. Housing is a particularly problematic as it’s not amenable to globalisation benefits and the big constraints on supply are due a centralised policy.
This doesn’t support your ‘no impact’ view though.
How can a growing economy survive without an increasing money supply, which all reasonable economists think requires low levels of inflation?
would you risk deflation?
Your assumptions re productivity defy reality
Most housing costs are not in the commonly quoted indices
Try again