THE MIDDLE ISA: Pay for the pandemic by reducing the velocity of money.

The has been much concern over how the post-pandemic public debt will be paid for. This is because of the consensus view that: ‚’There is no magic money tree‚’. This is assertion is a derivative of the quantity theory of money (M. V=P.Q) under the assumptions that: 1) The velocity of money (V) is constant. 2) The real economy (Q) is functioning at capacity and 3) The government wishes to avoid inflation (P constant). It follows that the quantity of money (M) must be kept constant and therefore spending must not exceed taxation and therefore there is ‚’effectively‚’ no magic money tree. In a pandemic assumption 1) is clearly false and this is why we have not seen inflation. However, when the pandemic ends there will be a money overhang as about ¬£7,000 per family has gone unspent during the pandemic. If this extra saving is all spent at once post pandemic then not only will Q go back to capacity but the MV will overshoot and P will be pushed up (i.e., inflation). The traditional argument is therefore that the excess spending during the pandemic (spend > tax) must be paid for by higher taxes and or lower spending post pandemic. It is true this would work as this would take some of this extra ¬£7,000 out of the economy and therefore control P. However back to (M. V=P.Q): It is not the only solution. There is a third way of reducing V. This basically means slowing down people‚’s rate of spend or in other words encouraging them to save more. Policy solution is: A new range of Bank of England backed ISAs with intermediate lock-ins of say 2,3 and 4 years but with an annual interest rate of 3,4 and 5% respectively.




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