The UK’s debt is apparently now over 2 trillion, but it’s not clear where this money comes from or if they ever actually pay it back.
Is the debt real/repayable? Could we just write it off?
In: Economics
The UK Government issues it’s own money.
This money is structured like an IOU.
The “debt” is more accurately called a deficit – it’s the difference between the amount of money the Government has issued into the economy and how much it has taxed back.
Since they are the ones issuing the money, any debt incurred can be honoured, in full, at any time.
The money supply in the UK, USA and Australia is much like frequent-flyer points, store credits, scrip or IOU vouchers.
Let’s have a little look at that …
If I were to produce my own IOU voucher (or a scrip) – yakkbux (YB$) – and I spent 50 of them but gathered none back, I would be in deficit for YB$50 if I then ‘taxed’ 10 of them, without spending more, I’d be in deficit for YB$40.
If I authorised my wife to issue loans denominated in yakkbux, people (compaines, industry, whoever) using them could then take out loans (against their future earning potential). If I then decided to increase the taxation of yakkbux so that now I will spend out less than I tax every year, I will start to run a ‘surplus’ of yakkbux. This will require the people, businesses and domestic industry using them to take loans to create enough yakkbux to pay those taxes.
Or I would have to be able to do enough foreign trade to collect yakkbux from the excise, tariffs and other taxes levied from that sector.
You might realise that, since I create yakkbux out of thin air, I never diminish my capacity to generate them if I’m in deficit nor do I actually end up with more of them when I have a surplus. The private sector isn’t able to produce their own yakkbux (they can create some supply using loans, etc) so can be in “real” debt. The same can be said of the foreign sector – they can’t make yakkbux either – they may not even have the authority to create loans, either, and must trade to get them. I, the sovereign issuer of yakkbux, am the only entity immune from the accounting of yakkbux; I can generate them via spending (and bonds, etc) at any time and I can destroy them when I tax them.
The deficit, the debt, is no more than the difference between how much of the made-up thing I create and spend vs the amount of the made-up thing I destroy via tax.
Writing off the “debt” doesn’t make sense – the size of the number isn’t particularly important in isolation; why write off a simple accounting identity?
There are a lot of confounding issues, of course but inflation is not driven by the “big scary debt number” or a ratio of GDP to spending. Rather, it’s when aggregate spending outstrips the production that inflation can occur; spending alone can’t cause inflation but it must be done in such a way as to prevent inflation – bulk spend on welfare, infrastructure and the like (which are known to bolster economic activity) and reduce spending on the rich, big business, etc (which are known to slow monetary trajectory by hoarding and offshoring monetary assets and avoid taxation).
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