Hyperinflation is the scare story threatened by those who want to stop government spending. But it's just that: a scare story. In this video, I explain why the UK's strong institutions, trusted currency, and sound tax system mean we can safely create money and why the real danger is believing the lies told to stop us doing so.
This is the audio version:
This is the transcript:
I'm always told that if the UK creates new money, as I say it does and as I say it should, that we will end up like the Weimar Republic, Venezuela and Zimbabwe with hyperinflation and a ruined economy as a result. But that, I promise you, is not true, and the whole purpose of this video is to explain that the UK government can make its own money, and that is exactly the right thing for it to do.
Now, as a matter of fact, when I say that the UK government can create its own money, that is what it has been doing every day, day in, day out, whenever it spends, ever since 1866 when it took the power to do that.
Every day now, when the government spends, all it does is tell the Bank of England to issue a payment, and the Bank of England has no legal right to refuse the government so long as there is a valid budget in place that it authorises the expenditure, which, of course, there always is. And it doesn't matter whether or not the government has money in its bank account with the Bank of England, the Bank of England will always pay. And it can do that because, like every other bank, it can create money out of thin air. The result is that this year, well over £1 trillion of new money will be created by the Bank of England on behalf of the government.
So, if money creation supposedly leads to economic collapse, which is what those who tell me that we shouldn't be doing this suggest , why is it that the UK is still standing?
Those who say this claim, time and again, that we will end up as a failed state. They always refer to the Weimar Republic. They always refer to Zimbabwe, and what happened there between 1980 and about 2000 athough things still aren't great. And they always refer to Venezuela and the hyperinflation that it's suffered.
The UK has been creating money out of thin air through the Bank of England for 160 years now. So, what's the difference? Why couldn't they do that, and why can we? And this has to be understood because if it isn't, we end up with this type of economic nonsense that is being said about us going to hell in a hand cart because we create our own money when none of it is true.
So, let's just appraise where we are.
The UK is fundamentally in control of its own economy. That is the big difference between it and the Weimar Republic, Venezuela, and Zimbabwe.
We have a functioning government that still has, broadly speaking, popular support from the people of this country.
They are, by and large, law-abiding, and so, by and large, is the government.
We have honesty present in our system, which overall people trust, because at least 90% of all taxes owed in the UK are probably paid.
We have a strong central bank that is able to control the money supply and knows what is going on, even if I don't always agree with its policies, and we have a tax authority that, as I noted just now, collects at least 90% of all the tax owing in this country each year, and that means, that the vast majority of the money that the government spends into the economy each year is pulled back by the government from the economy by way of taxation, which is exactly the reason why taxation exists. Taxation does not exist to fund government spending - it can't because it's already been paid for with money created by the Bank of England - but tax does cancel the inflationary impact of that money creation, and our tax system works to achieve that goal.
What is more, the rest of the money, when there's a shortfall between the amount that the government spends and the amount that it claims back by taxation, which there has been virtually every year this century, is safely deposited with the government through the issue of government bonds, and the bond market is still working well.
The simple fact is that the pound sterling, which is what we obviously use as our currency is still well respected. It is, in fact, a reserve currency in the world. In other words, other countries want to hold it. They want to trade in it. They want to save in it. And that's why, of course, the bond market is so strong.
But nothing like those situations existed in either the Weimar Republic or in Zimbabwe, or in Venezuela. Each of those was, in effect, a failed state at the time that they were heading for hyperinflation. They were subject to international sanctions because of their policies; in the case of Weimar Republic, because they had, in effect, been at war, and we were trying to punish them for it; in Zimbabwe because they had basically taken themselves outside the international system of accountability, and there was a form of revolution going on inside the country under Robert Mugabe; and in Venezuela because the US had basically declared war on it. They had to always borrow in foreign currency, and they did not have functioning economies internally.
They couldn't, therefore, generate the currency that they needed to repay their international debts because their economies weren't strong enough to generate the exports to do so.
But we aren't in that situation. They owed their debts in dollars, by and large, not their own dollars, but the US dollar. We owe all our debts in pounds sterling, every penny of which is created by the Bank of England. So, we are therefore never at risk of not being able to pay our debts, but they were; they were failed states, and quite simply, however bad things are in the UK right now, we are not a failed state.
So there is no chance whatsoever of hyperinflation happening in the UK because our system would simply not allow it. We are in a position that we can always safely create the money to pay our bills, and we always will be so long as a few conditions are met.
The first is that we have a competent government and sound tax collection, and I think that will remain the case unless, of course, we have a government that decides to deliberately undermine both, which is the risk if we had a government from Reform, for example.
We must also keep a currency that is trusted internationally. Again, I think that condition will be met unless we had a government that was, for example, run by Reform.
And we must retain a government that is not subject to sanctions or war, and again, I just hope that will remain the case.
The UK system is robust. It is nothing like that of a failed state. So we could not end up like those failed states, the Weimar Republic, Venezuela, and Zimbabwe, that those who try to say we should not print money to meet our needs keep on claiming we will end up like.
So why do they say this? Why do they propagate this nonsense, which is frankly a lie?
Is it ignorance on their part of how the UK finance system works, or is it deliberate misinformation, and is that deliberate misinformation spread because they actually want to cut public services and restrict the scale of state support that people need in this country, usually, of course, to suit the agenda of the wealthy?
I don't know the answer to that question, but I don't think it is ignorance. I think it is actually deliberate misinformation.
And the fact is that the misinformation that they spread is that governments don't create money when they do every single day.
Money creation is the normal activity of a bank, and it's the normal activity of a central bank on behalf of the government that it serves, and it's therefore the normal activity of the Bank of England serving the UK government.
That activity is essential because literally government couldn't work without it, and it's safe.
But what that means is, we must protect strong government institutions in this country, we must protect fair and effective tax collection, which means we must invest in our tax authority, and we must invest in good international relationships, because that means the pound sterling remains in demand.
Don't fall for the scare stories.
They're designed to block fair funding for the services we all need, and they are not for one moment anything like the truth.
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Is it ignorance or deliberate misinformation is a question I ask myself every day as I shout at the TV watching politicians of every stripe talking earnestly about the “unsustainability” of our welfare bill. We might get a better idea if there were just one journalist in the country who knew enough to ask. There is no excuse for this failure, the information you give is hardly arcane or esoteric, before we can hold our politicians to account we need to examine our media
Loans that are not repaid also add money to the economy, and limited liability has a similar effect when companies go bust. So why do people worried about government spending fueling inflation not also worry about excess credit & limited liability?
Agreed.
2 things that worry me…
1 – as our national assets and institutions fall into foreign hands, might they seek payment by other means than pound sterling? (Eg: crypto, or US $)
2 – You mention Reform UK Ltd. and the metal trader who controls it. In government, these crypto/gold maniacs may seek to sideline sterling even allowing payment of tax by non-sterling methods. Do we become Venezuela then?
No, so long as we keep the national debt in sterling and demand payment of tax in that currency. They are essential.
The development of democracy is a natural egalitarian attempt to control government so that it works for the many. Spreading false stories about how the country’s monetary system works is a deliberate attack on that control. The many are made to think there’s no government money available to do what the many want hence the “blackhole” that Starmer and Reeves are constantly going on about, or John McDonnell saying the government operates on a credit card, or Margaret Thatcher, David Cameron, Theresa May saying the government has no money of its own, or Denis Healey saying in 1976 the country needed an IMF loan, or Philip Snowden the Labour Chancellor supporting Churchill in a return to the Gold Standard.
Agreed
That’s a useful discussion to debunk the old canard that printing money inevitably leads to hyperinflation. Thank you.
If the government taxes back the money it spends, or otherwise takes it back by selling gilts, then the money supply simply cannot increase.
And that’s a problem!
Obviously there is much more money now than there was in the past. That money must have come from somewhere. There is only one place it can have come from, the source of all our money, the only place that issues money, the Bank of England. At some time the bank must have created that money.
Now, some say, that banks create money by providing loans. In a sense that is true; they do so by providing loans. But for each loan they make there is a corresponding debt to the bank. The net money, credits less debts, is zero. Furthermore, bank loans are temporary in the sense that they have to be repaid. So, overall, long term, the banks do not create money.
A growing economy, and by definition that means there are more goods and services, needs new money. That’s true if only because there needs to be more money in circulation to buy and sell the increased number of goods and services. Without new money prices for individual goods would have to go down, that is we’d have deflation. In addition the economy needs modest inflation, which also requires new money.
So the problem we have at the moment, and for decades past, is that the government, through the Bank of England, does not create enough money, does not create the new money the economy needs. This, fundamentally, is the cause of the relentless push for cuts and austerity.
The government NEEDS to create more money, and it’s failing to do so. Far from being at risk of hyperinflation we are suffering from austerity because the government is not creating new money.
Agreed
Steve Keen argues that credit (bank loans) should, in fact, be considered part of aggregate demand. So they are an alternative to government created fiat money.
Very temporarily
Private debt as a % of GDP has been higher (way higher for most of the time)
than government debt as a % off GDP since the 1970’s
Correct
We watched the recent Adam Curtis series “Shifty”. The 5th dealt with the B.Liar years and gave a bit of space to Brown’s PFI. Brown never, ever justified PFI. In the late1990s economically the Uk was OK and it would have been trivial for the UK gov to have told the BoE “cough up – we are buidling some hospitals”. Exactly the same companies would have biuilt them – but the financiing would have been gov.
Brown has never explained his rationale but one assumes it was no different to that of Reeves = give the Uk finance sector a bung. Brown & the tories caused the 2008 crash (in the UK), the same combo (Tory & LINO) will cause the next crash. It is not a case that they did not learn from the last one: but rather they are functionally incapable of learning, they are owned – certainly Brown was (is?) & ditto all the finance minsters since. The problem is the political structures and the interaction with finance. The way forward is perhaps the total destruction of UK finance as currently organised – particularly the large American orgs which need to (be forced to?) depart asap.
Since the 1990s we have been subject to a giant financial scam. I must do more on that.
I watched a PFI project evolving many years ago. “Off-balance sheet”, “optimism bias”, “discounted cash flow”. All fiddle-factors to get it over the line. All in plain sight.
They usually were
Exchequer finance is ALWAYS cheaper than any sort of private finance. This is why all versions of private finance end up costing the country more, contributing to depressed living standards and deteriorating public services. G Brown led the country down a dangerous path. The Treasury seized on it as it hid further public borrowing from sight.
Political deceit ruled common sense.
Oh & apologies for 2nd post: I did a report for the Japanese gov on PFI – they just could not understand the rationale. Still didn’t after I wrote the report (which was based on interviews with people in the Cabinet Office – amongst other places). PFI = Brown vanity project to show he could deliver new hospitals & get others to pay (= Uk serfs).
Much to agree with
‘Perhaps surprisingly, during the very early years of the Bundestag speakers used hyperinflation more often as an argument for public spending than for fiscal discipline. And that was across the political spectrum, including members of the Christian-democratic CDU and the communist KPD. Their line of argument suggested the need to expand support for those still suffering the lasting effects of 1923. In the following decades, the call for fiscal discipline then slowly but surely gained ground, without yet becoming dominant. This picture changed from the late 1980s onwards. Only then did fiscal discipline emerge as the predominant policy proposition tied to the Weimar memory.’ https://www.ecb.europa.eu/press/blog/date/2025/html/ecb.blog20250620~13431554af.en.html
The use of hyperinflation is often hyperinflated without reference to any metrics – ‘In search of a cornerstone for our definition of hyperinflation, we began with Phillip Cagan’s (1956) widely accepted definition: a price-level increase of at least 50% per month. Under Cagan’s definition, an episode of hyperinflation starts when there is a month in which the price level increases by at least 50%. When the monthly inflation rate drops below 50% and stays there for at least one year, the episode is said to end.’ World Hyperinflations (Hanke and Krus 2012) https://www.cato.org/working-paper/world-hyperinflations
Hi,
One question you might be able to help me with on this. If we can create the money and only borrow from ourselves, then why is the cost of UK Government borrowing so often reported as more expensive than other similar countries, presumably we could set the rate if we control the process if international markets are not involved?
It is so important that this issue gets resolved because the lack of effective public investment in our spaces and services is doing so much harm.
Making that investment effective is another whole can of worms but if it was agreed as necessary and more importantly possible without upsetting the markets it would be a huge leap forward.
In tyhree wordss, the Bank of England.
Their policy of quantitative tightening makes UK interest rates too high, forcing austerity on the govermment (in its opinion, but not mine), and the government willingly go along with this because they hate ordinary people and supplying servives to them.
Government borrowing in the UK is expensive, and more expensive than other countries, because our politicians choose it to be so. I’ll give them the benefit of the doubt that they do this through ignorance, because they are told and believe, that they have to pay so much. It is still appalling.
The net effect of overpaying for borrowing is to siphon even more money to the already wealthy. It is those people from whom the government appears to be getting advice and believing it uncritically.
How else could the government borrow the money it needs? (Note I’m going with the accepted term “borrow” even through many think the government, via the Bank of England, could simply create money as they have done previously. But let’s stick with with the term “borrow” for now.).
Well, the government is fortunate that it owns a bank, the Bank of England. Furthermore the BoE is legally obliged to make any payments the government instructs it to. That’s even if the government does not have the funds in its account! So what happens if the government mandates a payment without having the necessary balance in it’s account? Just the same as you or me; it racks up an overdraft. And, just like you or me it may have to pay interest on its overdraft. But here’s where it’s different. Since the government owns the bank, any interest it pays on its overdraft is paid back to the treasury, that is back to the government. The net effect is that it is impossible for the government to pay net interest on the money it borrows from the BoE. The net rate is zero. And, unlike you or me, the government has an infinite overdraft cap with it’s bank, so it can never run out of credit (handy, I wish I had that facility).
In summary, the government can borrow as much as it likes from the Bank of England, interest free. And yet, and yet, it chooses to borrow from those who have spare money and pay them substantial interest. Go figure.
Much to agree with
Sundays are usually a quiet reading day for me and for some odd reason I noticed, in particular today, the phrase ‘public money’. Best use of, a waste of etc. A phrase we all hear so often that most, I suspect, just accept without thinking or questioning actually what IS public money? My belief is that most think of it as their taxes etc but, and just a thought, this might be worth addressing at some point
I have added it to my list
Thank you, Richard, for your tireless efforts to explain what should be common knowledge to your readers and the public at large.
I have no doubt that the powers that be in this country would rather people believed in the household budget as a template for managing our economy, and I am firmly convinced the same powers know this to be false.
This is reminiscent of medieval priests controlling a largely docile populace with mumbo jumbo interpretations of natural events such as eclipses or meteors. The priests were educated enough to know the truth.
The only remedy, and it never fails, is education. Teach or encourage people to ask why? over and over again until they discover the truth. Then, act upon it and get rid of the liars and hustlers who are selling them the snake oil.
Thanks
A major tool in the scaremongering is the “run on the pound” scenario (e.g. Black Wednesday and the Liz Truss crisis). So, any narrative to demolish the scaremongering tactic would also address the challenge “what happens when we run out of foreign currency reserves?” (as Healey used as his rationale for taking his cap to the IMF in 1976 and which, arguably, is when the Austerity Lie took root).
I will add to my list
I listened to Saturdays BBC Newscast podcast titled “Who Is Actually in Charge of The Country” with Laura Kuenssberg and Paddy O’Connell. It started off reflecting on whether Starmer looks weak by removing the whip from 4 Labour backbenchers. But soon they trotted out the old canards of the Bond market being in control, that where does the money come from is a hard question to answer requiring tax increases and/or spending cuts.
When the MSM is constantly pumping out this misinformation, is it any wonder that anyone talking the truth, like you, are finding it hard to get the message out wider.
Now neither Laura or Paddy are economists, but Faisal Islam is a BBC economics editor and should know better, but again he goes with Government finances are like a household.
Long ago I felt Faisal sold out.
We met regularly when he was at Channel 4.
Never since.
You say that “this year well over £1 trillion will be created by the Bank of England on behalf of the Government”. It’s true that public expenditure will be over £1 trillion. But this expenditure flows from the Treasury’s Consolidated Fund, which is financed from tax receipts and from gilts. From what I can see, this process involves redistribution of existing money (i.e. the Govts accounts at the BoE already show a positive balance). It does not involve the creation of new money at all, in the way that would happen with QE, or if the Govt had to use its ‘Ways and Means’ facility (overdraft). I understand that the Govt has the *power* to create new money if it wanted to (and does that occasionally via QE) but I can’t understand why you say it routinely creates money with every act of public expenditure? Can you explain please?
The consolidated fund has not been funded by tax and bonds in the fiat currency era, and cannot be.
Please read this. https://www.ucl.ac.uk/bartlett/sites/bartlett/files/the_self-financing_state_an_institutional_analysis_of_government_expenditure_revenue_collection_and_debt_issuance_operations_in_the_united_kingdom.pdf
You are straightforwardly wrong. Sorry.
Thank you for responding. That link is very useful. I will need a while to digest it fully since I’m not an economist! But from an initial look I think you could still argue that *in effect* the Govt pays for expenditure from (past) tax revenue and gilt receipts because the NLF holds a positive balance from those things. And during the Exchequer pyramid sweep at the end of the day, money from the NFL is used to reconcile any expenditure made from CF that day. So although it is true that money *is* created every time, it’s only a temporary creation and gets wiped out every night. That’s not to deny the existence of the magic money tree, it clearly does exist. But there seems to be a very rigorous setup around the magic money tree to ensure the creations are short-lived. In this sense I still feel like your statement “the UK government will create well over £1 trillion” could be a bit misleading to a lay-person listening. Because that £1 trillion is created in small chunks and each chunk is destroyed some hours later.
No. I am saying nothing of the sort.
Government only ever pays for its expenditure by creating new money.
Tax receipts and bond funds have nothing whatsoever to do with govermmnt spending, at all, ever.
And money creation is not wiped out that night. Total government in circulation broadly equals gross debt in issue. If the balance was cleared there would litrerally be no money in the economy.
I have explained this many times. Google it.
Your sumnmation is wholly wrong.
I’m not able to reply to the thread above for some reason, so I hope it’s OK to carry on here.
“And money creation is not wiped out that night. Total government in circulation broadly equals gross debt in issue. If the balance was cleared there would litrerally be no money in the economy.
I have explained this many times. Google it.
Your sumnmation is wholly wrong.”
I have just Googled it and read some more of your articles. For example in your article on ‘Money creation’ published in March 2023 you say that tax revenue destroys the money that’s created, and funds from gilts effectively do something similar by locking it away for a period of time. So if the Govt has money from previous tax revenue and from gilts in the NLF (which I believe it does?), and pays that money into the CF at the end of the day, why is it not right to see that as destroying the money that was created in the CF on that particular day? I’m not talking about destroying all money in circulation, just about roughly maintaining the balance of how much supply is there already? Are you saying that the Government is increasing the overall supply of money by over £1 trillion this year? Because if the money created by the new expenditure was not destroyed, surely that’s what it would mean?
You seem to be quite irritated or frustrated with my questions here. But I am not meaning to be a troll. I actually am in broad agreement with your politics I think. I’m just trying to understand the economics and yes, also apply some critical thought because I find that’s the best way to learn stuff. It could be that I have completely misunderstood the fundamentals, as I said I’m not an economist. Perhaps I’m just trying to understand something that is beyond me, and I need to read some basic text books first, before I engage with this stuff. It is certainly quite confusing. Please try to be patient.
Ben
Whilst you insist on making prior assumptions that are entirely wrong you will come to wrong answers.
See this morning’s post and stop making presumptions which have absoluetyly no suport. Then you will see what is realy happening.
And no, of course, I am not saying the govermment is increasing overall money supply by £1 ttrillion this year. It is increasing money supply by that amount and then tax cancels most of it.
But again, stop making assumptions and work through whay happens.
Then you might get it.