Britain’s ticking debt bomb is now the government’s greatest threat
The Bank of England’s money-printing machine has barely rested since the first lockdown, and the result has been a near-miracle: some £450 billion spent almost as quickly as it was minted. So at every turn in this crisis, ministers have been able to spend. Lateral flow tests? Make them free for everyone. Test & Trace? Here’s £22 billion, just in case it works. Even now, with vacancies surging, Rishi Sunak is still paying millions of people close to their full salaries to stay on furlough. It helped minimise economic damage, but at quite a price.
In times of crisis, it makes sense to go big. Money spent on vaccines was highly speculative at the time, and that gamble paid off. But what has been unusual is that Boris Johnson never worried about finding cash: the Bank of England printed however much he wanted. Quantitative Easing puts the government first in line for loans at rock-bottom rates. It has become the new magic money tree, one which the Tories have never stopped shaking. Might this all get out of control one day, triggering inflation? That’s the risk. But in 11 years of QE, it hasn’t happened yet. …
This is what might change – in a fairly dramatic way. It’s due to what one minister refers to as the “debt bomb,” a side effect of all the money-printing. “It’s like subprime mortgages. It’s hideously complicated but hugely consequential,” says the minister. “If it wasn’t so difficult to understand, a lot more people would be terrified.” …
A complex story but with a simple upshot: all this money-printing has left the UK far more vulnerable to a change in interest rates. The Office for Budget Responsibility has crunched it into a brutal statistic. If interest rates rose by a single percentage point – to a level that would still be very low by historical standards – annual UK interest payments would rise by £21 billion. Sunak would need to find this money, just to pay the UK’s bills. It’s equivalent to twice the entire international aid budget, whose trimming is causing such political heartache. And this £21 billion would not pay the salary of a single nurse or cover the cost of the recruitment of a police officer, it would just go on debt interest.
The damage done by massive money printing will soon become clear. Here’s what we wrote on this last year:
Too few are talking about the massive borrowing underway in all major economies as they fight the coronavirus. Even fewer are talking about the massive level of money printing.
The language is technical. It appears in only the economic pages of the newspaper. But the results will be real, and the amount of money involved is staggering.
Fitch Ratings estimates that the world’s central banks will create a total of $6 trillion this year.
Of course, they won’t literally be printing it. It would be physically very difficult to print that much. You’d have to stack $100 bills 630 miles high before you had $1 trillion. At that height, you’d have to worry about satellites knocking your money pile over. By comparison, $1 billion would be roughly the height of the world’s tallest building, and $1 million only the height of a chair.
We’re in uncharted territory. Banks have never created money this quickly before. From 2009, and the aftermath of the global financial crisis, until the end of 2018, central banks created about $12 trillion. Now they’re creating half of that total—in a single year.
What is going on? It’s worth taking a few minutes to understand how money is made. After all, it very directly affects your wallet.
“Do You Realize How Much Money Is Being Printed Right Now?”, April 28, 2020