A month in lockdown – Q is for quantitative easing

Q2020The A-Z blogging challenge is quite straightforward, blog everyday in April, except Sundays, with subjects that follow the alphabet. It’s all a bit of fun. My subject is ‘A month in lock down’.

Q is for quantitative easing. This is one of the levers that governments have to pull in times of economic crisis. It used to be known as printing money but quantitative easing seems so much more considered. It is a modern euphemism.

Let’s get something straight, governments don’t have money, they get it from you and me through taxation. Everything that they spend has to be paid for and when they give us money back in the form of grants and relief, it is really a reduction in the tax burden rather than an act of kindness. I’m not against taxation though, public services need to be paid for and society must redistribute wealth in some way. To what level is open for considerable discussion.

Governments can create money however. They used to simply print more banknotes or mint more coinage but now it is merely a slight of hand on an electronic ledger. Anyone can create money, it is quite easy as long as you have some in the first place. Say you would like to borrow £1,000 from me and I agree but only if you pay me £100 interest. We shake on it, I give you the money and I write on my ledger that I have an asset worth £1,100. I have just created the new money and everyone else will accept this and would even be prepared to buy this asset off me for a reduced fee of course. 

This is what governments do. The UK Chancellor has offered to pump £300 billion in business support grants. In fact he has agreed that the government will underwrite any loss on this debt that will be issued by the banks. He has also offered to pay 80% of a huge number of people’s wages for a few months. In fact he has deferred taxation from the future. We will all have to pay this money back someday.

The problem with quantitative easing though is that it devalues money and causes inflation. The markets eventually correct themselves by adjusting the value of currencies relative to each other. You always have to pay the piper.

Stay safe.

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