The day that HM Treasury showed us the future11th November 2012

Nothing but outrage should have greeted the news on Friday that interest on Bank of England owned gilts will be returned to HM Treasury to reduce the annual Government deficit. What we got instead from most media was a whimper.

The news was not unexpected, but it starts our journey on the slippery slope of monetizing debt that will undoubtedly follow. This may in time become known as “The Road to Perdition.”

As the populace at large go about their day-to-day activities, most will remain ignorant of the economic perils as the policy is more easily spread to not just cancelling the interest, but also cancelling the capital, yet continuing to meet future “democratically desirable” spending requirements through printing money.

The cancellation of capital is not yet formally proposed, and as a gentleman at the Bank of England pointed out to me a couple of months ago this would be accounting trickery. I quite agree. And yet one of the candidates for Bank of England Governor has openly raised this as an opportunity to be seized.

One great thing about Great Britain and Northern Ireland is that in sterling we have a sovereign currency, and if tax collections can’t repay debt we can always repay our debts by issuing some more sterling and so avoid open default. It is this that enabled us to bankroll Europe in the fight against Napoleon and fight our corner during subsequent wars. But that doesn’t mean that the purchasing power of sterling has remained stable, indeed quite the opposite.

If the supply of something increases, even money, it generally becomes worth less, and Governments of all colours have debaunched our currency through inflation and other evils. Borrow something, never to repay it, or to just repay it with monopoly money, and you eventually get found out. The burden falls upon the people.

We are opening a wonderful can of worms here, with principles of government financing, central banking, private bank money-creation and modern monetary theory. It will be fun exploring these topics together over the coming year.