Posted by: Dirk | April 6, 2021

Who is lending to the British government?

The Guardian has published a question and invited other readers to answer it:

The chancellor has borrowed an unprecedented amount of money. Who is lending it to him, and where did they get it?
Sean Boyle, London

The answer from Andrew, Richard and Neil is a genuine MMT answer and I recommend reading it. It was also published in the newspaper.

Here is my answer:

The question as to who lends the UK government money and where they get it from can only be answered by looking at the balance sheets of the involved parties. The short answer to the question is this: The money that the government spends is created by the Bank of England (BoE) at the time of spending. It is credited to the bank of the receiver, which then has more £s in their account at the BoE. The money does not come from anywhere. It is just created in a spreadsheet managed by the BoE and entries are made with the help of a computer (which is where and how “they get it”). This means that the government creates money when it spends. It therefore does not borrow to spend. Political rules force the government to issue government bonds (gilts) that carry an interest rate that is higher than the banks receive when holding funds at the BoE. This means that banks find it profitable to use their reserves to buy gilts. 

The consequence of this is that government spending does not influence the rate of interest. This ensures that the BoE is at the same time executing payments for the government and able to control the interest rate in the money market. Tax revenues are what the name implies – the state’s money is returned (French: revenu). This means that the view that government borrows our money is factually wrong. It is the opposite: we need £s to finance our tax payments (and other expenditures), but the government has a monopoly on £s. It has chosen to let the BoE, which belongs to the state, be the issuer of currency. As the issuer of currency, it is impossible to “run out of money” whereas we as users of currency struggle to obtain what we cannot produce:  £s.


Responses

  1. posted on 06 April 2021

    Who Is Lending To The British Government?

    from Dirk Ehnts, Econoblog101

    Who Is Lending To The British Government? (econintersect.com)

    John B. Lounsbury Ph.D. CFP

    Managing Editor Econintersect.com

    Senior Contributor TheStreet.com

    Highly ranked author Seeking Alpha

    ________________________________


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