Jim Sillars: Funny money’s beyond a joke

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Do we adults know what we are doing to our grandchildren, saddling them with huge national debt, heading towards £1.4 trillion, the interest on which will far exceed today’s level of £47 billion a year (up from £25.6bn in 2009), which is about the same as spent on defence.

That debt will not be paid off any time soon. Economists reckon 2017 before we get back to the level of output of 2007. So for many years to come, our grandchildren will be paying off that debt, in an economy of part-time work, low wages and job uncertainty.

Once the young realise what is in front of them, they will scarper. Their passports describe them as “subjects” but there is nothing that binds them legally to this country, or holds them responsible for paying its debts once they depart for elsewhere, where as new citizens they will take on their share of that country’s debt, much lower and affordable. As the young working population shrinks, leaving an ageing one, the task of servicing the UK debt will become more difficult, so will sustaining public services.

Like all man-made disasters it can be put right. Yes, you feminists, this one is men-made in the persons of Gordon Brown, Alastair Darling and Ed Balls. The problem is that none in charge of the UK government, or the Labour opposition, has a clue how to go about tackling the problem. Indeed, if people really understood what policies they have been pursuing, we would all join the young in getting out.

Hold your breath while I explain extraordinary jiggery-pokery by the government and the Bank of 
England that makes our errant 
bankers look saintly. It is called quantitative easing (QE). I am sure you have all heard of it. It is an exercise in printing vast quantities of money – £375bn to date. It operates with the Bank of England, a government body, printing new money to buy the IOUs (bonds) issued by its own government. The government pays the Bank interest on its bonds (£35bn at last count) and then, wait for it, the Bank hands back that interest to the government which claims, using that £35bn, it is cutting the debt. A funny money roundabout.

Let’s take a simpler example. A husband and wife have only a single income and single joint account. The husband takes £100 from that income and account, promising to pay it back plus £3 interest. But he cannot do so. He doesn’t earn the extra £3, so doesn’t have it. If he prints £3 of funny money, and tries to pass it into the bank account, he goes to jail.

But the Bank of England can create funny money. That’s what QE is. Flooding the country with this money has meant, as the Bank has admitted, the two million richest households are now £127,000 better off, while the two million poorest households are £310 worse off. How come? As that funny money has sloshed around, financiers have guided it here and there (the rise in stock market prices is an example) to make themselves a profit. The governor of the Bank won’t go to jail, he’ll be made a lord.

How can a government bank simply create more money? What you have in your wallet, and bank account, is called “fiat” money. That is paper which has no intrinsic value, as it is not linked to anything with a universally accepted store of value, like gold. Your tenner says you can present it at the Bank of England and receive ten pounds sterling. Try it. You will be handed back a note exactly the same as you tendered, with a promise to pay you ten pounds sterling. The only value fiat money has is the amount of trust people have in it. That trust depends on the economy and its level of debt. You and I might trust our tenner enough to believe that when we tender it in the supermarket, we’ll get groceries in return. In a real sense, our trust in sterling is based on our general ignorance of the true state of the economy, the real level of debt, and the good or poor prospects of economic growth. I doubt, for example, without seeming to be boastful, if many readers know the level of UK debt interest, how QE actually works, or about fiat money.

But if you are the international finance community that is a different kettle of fish. They are in the business of lending governments money, and if they come to think, based on their analysis, that the economy holding up the UK fiat money is in trouble, then they either won’t lend in case its value plummets, or lend at big interest rates to cover their risk to some extent. That’s why the AAA credit ratings matter.

Loaded with debt, governments playing with funny money, that is the future within the UK. We really would have mince for brains if we couldn’t do better on our own.