10 November 2012

Smoke and mirrors

Let us see if I have understood this.

When the government borrows money, it sells what are known as gilts (essentially IOUs), to banks and other financial institutions.  Like anyone else, when it borrows money, it has to pay interest on the loan.

In order to ease the UK.s economic problems, the Bank of England has been creating money which it then uses to buy up government IOUs, mainly from banks which it hopes will use the money to lend out to businesses and individuals.  Because the Bank of England has bought up these loans, it now receives interest from the government.

It is now proposed that the Bank of England should return all that interest to the government which will use it to pay back (some of) its borrowing.  Conveniently, this will enable Chancellor Osborne to meet his target that by 2015-2016 the overall national debt will be falling.

It's just as well that I am not a financial genius - otherwise, I might think that there was something fishy going on here ...


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