#8 The “National Debt” …in two minutes.

Out of intense complexities, intense simplicities emerge”.  W. S. Churchill.

Imagine that you personally own, outright, Britain’s largest bank, and you are legally entitled to put any credit figure you choose in your own account. Would you really go out and actually borrow any money from anyone? Of course not.  But, you are aware that if word gets out that you have unlimited money available, various fools and chancers, (and a few deserving cases) will come knocking, asking for some.

So you hit on the idea of making an elaborate facade of your “borrowing” this money, rather than just typing it into your account. To make it convincing, you allow institutions with substantial funds to invest, (such as pension funds) to “lend” it to you, in return for some interest. You stipulate that all transactions must be in pounds sterling. This “lending” gets called “Bonds”, and you know that when the Bond matures, you can give them their money back. No need to actually use it, as you have plenty of your own funds, and no need to worry about the interest, as you have an unlimited supply of £ Sterling to pay it to them from. You can then tell the fools and chancers that, sorry, you can’t afford to borrow any more to give them. To convince them, you occasionally add up all these Bonds, and call this scary-sounding total “the National Debt”. You can also, if you choose, tell deserving cases (such as public health care, or similar, that you don’t really care about), that you can only “afford” to give them so much. You can also pretend that the Bank is independent of you, and makes its own decisions.

Get the idea? You’re thinking, this can’t be it, can it? But it’s a simplified version of what actually happens. The UK government, of any party, owns the Bank of England outright, and we all know that he who pays the piper calls the tune. And because of this, it can no more run out of £ sterling, than a football stadium can run out of goals, or a marathon runner short of kilometres.

Still not sure? Have a look at these. C, from a politician, is a fib.

And, if you’re still not sure…..here’s Robert Peston, on ITV News at Ten, 14th May:  “…..when you’ve got an independent central bank, as we do, in the shape of the Bank of England, the Government can, er, for a period at least, more or less borrow as much as it likes. The Bank of England buys the debt. That’s what’s going on at the moment. It’s creating new money now.”

(note: The Bank of England is “independent” in name only. It is wholly owned by HM Government and is controlled by HM Treasury. It has a few minor autonomous powers subject to Treasury approval. )

Published by adeibanez

My eyes were opened to the modern understanding of how governments and money work about two years ago. This is usually called Modern Monetary Theory (MMT). I do not claim to be any kind of qualified economist, but my blog is an attempt to explain this modern understanding to non-economists. I am retired, and this blog is entirely non-commercial and non-profit-making. It is for educational and campaigning purposes only.

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3 Comments

    1. Good question, thank you for asking. It’s because that would be damaging, and could get to a point where there is more money than resources to produce what people want, which could lead to excessive inflation. And, it could be spent on things which damage the environment, or do not stimulate the economy to the benefit of society. It is essential that Government spending is for investment, e.g. build hospitals or creation of decent, fairly paid, public service jobs, in such things as reduction of energy consumption or health/social care, or public works such as safer roads or new parks. This sort of spending then stimulates the rest of the economy as the wages are spent into other businesses, which can then grow and provide more jobs, and a fairer society. The only way money paid directly to citizens would benefit us is to provide a fairer safety net of social security, so that people unable to work- sick, disabled, jobs wiped out by Covid, etc- have enough money to eat properly, pay their rent, etc. They tend to spend it in our economy, not hoard it in tax havens!

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