In what are often called the ‘bad old days’, governments raised taxes to pay for their decisions.
Arguably, governments have got into paying for many more things than they should. Remember, Otto Von Bismarck introduced the old age pension for employees of the Prussian State railway system who had reached 65, at a time when the average age of death was below 60.
But as you will undoubtedly have noticed in recent years, sometimes there is a shortfall between taxes coming in and the figures of cash going out. There are only two ways for governments to finance that: one is to borrow, and the other is to print more cash.
I’m sure the recipients of the extra cash are delighted to continue to get the benefits they had last year, and all the services, at no extra cost to themselves – at least not for that year. So, let’s suppose the government borrows the shortfall and spends it keeping the public happy.
Remember, once you give something to someone, it is almost impossible to take it back. Those benefits and services are not going to be taken away, despite all the rhetoric of cuts. The following year, the government has to finance the current spending – and almost certainly more, because there is an element of inflation – AND the interest on the borrowed cash.
Let’s suppose the spending is £100 and tax receipts amount to only £90. In that situation, £10 has to be borrowed from somewhere, which would both have interest paid on it and have to be repaid in the future. In year two we have, say, £102 of spending plus interest of £3, which takes us to £105. And taxes are up marginally at £93. Instead of a shortfall of £10, you now have a shortfall of £12. Which again has to be financed – and so on.
This is why growth in the economy is so important. The more people employed, the more is raised through tax, and hopefully at some point would exceed the expenditure. But however you want to cut it, the public is paying their taxes and if the total from a population remains below expenditure, then taxes will have to go up.
So even a fairly benign scenario ends up costing people more of their hard-earned cash. But what happens if the government just creates more money? There is still interest to be paid – we’ve seen the massive increase over the last year of government debt servicing; not all of it down to interest rate increases. And, sadly, printing money results in inflation which both reduces the value of the cash you have and increases the prices of the items you buy.
I was amused to read about the price of Tiptree marmalade – size of jar down 25%, price down 7%, fooling people into thinking the price had dropped, when in reality the actual cost per 100 grams was up nearly 25%. So much for falling inflation – the public pays again.
As a result, despite blundering around like elephants on fermented marula fruits, the Bank of England and the US Federal Reserve are both right to say we need to tame inflation properly. As it stands, it is proving – as it often does – remarkably resistant to blunt interest rate rises. And don’t forget, inflation rates falling does not mean prices have gone down. It simply means prices are not going up as quickly and, when the lower prices drop out after a period, the actual price will still be substantially above where it started.
This is why the creation of the UK’s central bank digital currency (CBDC) – aka Britcoin – will be a game changer. The beauty is you can drop ‘Brits’ directly into the public’s wallets. You can program it to expire in three months, or however long; there’s no interest paid on it; and it gets spent on what people need. You can’t hoard or save it – you have to spend it. And the extra beauty is, when it makes its way back to the Bank of England, it doesn’t need to print any fiat money to cover it.
The companies getting it would be allowed to keep it – no interest, of course – and spend it to buy goods and services. They can then build infrastructure, manufacture new products, or provide whatever it is they offer. If for some reason the companies really wanted fiat, they could get it – at a 25% discount, say, which would probably be enough to change their minds.
I was asked the other day what the crypto world thought of the current situation. The best answer is that it is estimated that crypto wallets held will increase at a compound rate of nearly 25% from now until 2030. Despite what the Ripple judgement may throw up, the fraud and scams – which are negligible compared to the fiat world – and all of the ongoing FUD about crypto generally, the market continues to grow at what can only be described as breakneck speed.