Following the financial crisis of 2007/08 the UK government needed to inject huge amounts of money into the financial system to prevent it from collapsing.
They did this by selling gilts (fancy IOUs) to the Bank of England and using the money to buy back gilts that it had previously sold to financial institutions like your pension fund and insurance company.
The money that the Bank of England used to buy the gilts from the government was created, by the Bank of England, out of thin air.
The Bank of England can do this because it is the central bank and sterling is a sovereign currency.
This practice where a central bank creates money to buy debt from the national government is known as quantitative easing, or QE for short.
It would be better if everyone involved was more honest and called it money creation, because that’s exactly what the Bank of England’s website says that it is:
Between 2009 and 2016 the Bank of England did £445 billion of money creation on behalf of the government.
In March of 2020 when the government shut down much of the UK economy to try to slow down the spread of the Covid-19 virus it was again in need of lots of money at short notice to compensate individuals and businesses for loss of earnings.
The money creation machinery was fired up and, up to the end of November will have provided the government with another £450 billion of spending money.
So the UK government currently owes the Bank of England a total of £895 billion.
But the Bank of England is effectively owned by the UK government, and ultimately by us, the citizens of the UK.
So we owe £895 billion to ourselves.
And the interest payable on this “debt” that we owe to ourselves, along with the interest payable on the rest of the public debt (which is owed to someone else), can obviously be paid using money created by the bank of England rather than money collected by the taxman.
Repayment of public debt need never be a burden on the taxpayer thanks to the Bank of England’s ability to create money for government spending.
So why, you might wonder, are our news reports full of doom and gloom about government borrowing?
Robert Peston, ITV News’ political editor, wrote this week that the Bank of England funds QE by borrowing the money from commercial banks:
“…when the Bank of England buys gilts, it has to finance this purchase by creating reserves. In practice it is buying the gilts by borrowing from commercial banks at Bank Rate, the benchmark interest rate for the whole economy.”
This is utterly and completely wrong, contradicting the Bank of England’s own explanation of QE which can be found in a matter of seconds via any good search engine.
It’s not jut Peston.
Laura Kuenssberg, the BBC’s political editor, said in a discussion (2:10) about the national debt:
“This is the credit card, the national mortgage, everything absolutely maxxed out.”
“There is no money left.”
Again, both of her statements are utterly and completely wrong.
The Bank of England can create money in whatever quantity the government needs at zero cost.
The money that the Bank of England creates and “lends” to government never has to be repaid.
The UK government cannot run out of money, ever.
Peston and Kuenssberg are far from alone. I have picked on them because of their prominence on our television screens but they are merely two among a bewildering consensus of journalists and economists who are perpetuating the dangerous lie that the UK has run out of money.
It’s a lie that has been used to justify the austerity that has been imposed on us for the last decade, and will continue to be imposed on us until we call out the liars and begin to manage government spending in a more honest way.
What I don’t understand is why the likes of Robert Peston and Laura Kuenssberg are perpetuating the lie.
Is it because they lack the curiosity and professionalism to go and check if their assumptions about public debt are accurate?
Or is it because they fear that exposing the lie will put their high-profile very well paid jobs at risk?
Whatever the truth, they should be ashamed of themselves.
Perpetuation of the lie that the country has run out of money is going to make life miserable for a lot of people for a very long time.