Can the Government simply print money forever?

Linda J. Dodson

The national debt fell as a share of GDP over the decades, and combined with lower interest rates that took payments down to below 5pc of revenues by the eve of the financial crisis.

Debt exploded in the credit crunch, booming from just over 30pc of GDP to around 80pc now. Yet a funny thing happened to the cost of maintaining that enormous mountain of debt.

After a brief rise, it plunged to record lows. Last year the debt-interest ratio fell to below 4pc for the first time ever.

Ever-lower interest rates make higher debts sustainable, for now at least.

Most City economists expect the Bank of England to hold interest rates at 0.1pc until at least the end of next year, while financial markets are trading on the assumption the base rate could go negative later this year.

The UK has also successfully locked in low costs by issuing unusually long-dated bonds, reducing the risk that any short-term spike in market interest rates will derail the national finances.

But can it go on forever?

QE has downsides too. It has not led to surging consumer price inflation as feared when it was launched in the financial crisis, but it can push up asset prices.

Nor is it the same as “monetising” debt – printing money to pay the bills – because it can, in theory at least, be reversed by selling the Bank of England’s bond holdings later, and is determined by independent central bankers who use QE, in large part, to target inflation and keep markets steady.

It still seems unfeasible to keep on printing money to fund ever-greater levels of borrowing year after year, as the newly created funds would lose any link with real economic activity. Bailey has noted that central banks will have to think hard about the way they manage their rapidly growing balance sheets in future.

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