Financing tidal power

Have you ever received a cheque from the government?

If you have then you might have noticed that it is not drawn on any bank. When the government issues a cheque, or makes a payment in any way, it creates the money.

When the money goes into your bank account, it becomes real, spendable money that didn’t exist until the government created it.

The truth about money

Your shiny new £500 from the government means that you’ll spend an extra £10 on a meal when you go out. More money to spend increases demand. Increased demand pushes up prices. Simple economics.

So, if the government creates money it causes inflation. How do you deal with that? Simple – tax. Tax destroys money. Again, it doesn’t go into a government bank account when you pay your tax – the money ceases to exist.

What then is “government borrowing”? This is a temporary alternative to tax that means the government can keep taxes lower.

The government “sells” bonds. Institutions buy those bonds on the understanding that their money will be repaid to them after a number of years (5 year, 10 year, 20 year bonds) and during that period they will receive an agreed level of interest on their money. So when the bond is purchased, the money paid is temporarily removed from the economy.

So “government borrowing” is just the temporary destruction of money, and therefore far less efficient than tax, but allows taxes to remain lower.

What does all this mean? Well simply put, if the government creates more money by whatever means (the most recent being “quantitative easing”) than it destroys with tax or “borrowing” then it risks increasing inflation.

The banking factor

It’s a bit more complicated than this. Banks also create money when they issue loans. However, we will concentrate on the government’s role here. You can find out about banks and money creation here:

How to Fuel the Economy Without Increasing Debt

This piece also explains why the creation of “sovereign money” by the government can be a very good thing.

The government’s chosen current way of dealing with inflation is through interest rates. This reduces the amount of money created by the banks (higher interest rates reduce the demand for loans, hence the banks create less money), and hence should reduce inflation. If the government spends all this money on investments into tidal power and so on, won’t the money pumped into the economy push up inflation?

We are already seeing high rates of inflation so surely we don’t need anything else pushing it up? Well normally this would be a good argument, however our current level of inflation is not being created by too much money in the system. Current inflation is down to problems with supply not demand.

The war in Ukraine, the pandemic, the way that Brexit has been implemented have all impacted on our supply lines. Reducing supply has much the same effect as increasing demand. Prices go up.

Even the Bank of England have stated that the rise in interest rates that they are pushing through can affect no more than 20% of the current inflation rate. It can be argued that it could be worse than that. If you push up the cost of mortgages at the moment, there must be a risk of increasing inflation.

Restricted supplies of oil and gas pushing up costs

Inflation up

Restricted supplies of oil and gas supplimented by renewables

Inflation down

The Cost of Tidal Power

Making the Government Listen