THREAD: I noticed a lot of people are confused about how the government creates money. So I thought I'd put my degree to use and explain, in simple terms, how the magic money tree does actually exist but, no, you can't use it whenever you want. 1/13

Firstly, taxes. We all know what taxes are. Income tax, national insurance, corporation tax, etc etc all contribute. The government collects tax and spends it. Simple. 2/13

A bond is any asset which yields interest. Government bonds (GBs) are a less widely understood form of government revenue and are usually used to bridge gaps in government expenditures or for large projects like HS2. 3/13

GBs are sold by banks or at auctions. GBs are some of the safest investments you can make but, as is always true in finance, low risk = low reward. So GBs have low interest rates and are very long term (5 to 10 years). 4/13

The relationship between price and yield are where governments make money. The price and yield of GBs have an inverse relationship. As price goes yield (interest rates) goes and vice versa. 5/13

Therefore, If the government wants to increase revenue, such as £330bn for corona virus relief, all they need do is decrease the price of GBs which increases the yield. Which in turn increases the amount of investors and thus increases (short term) revenue. 6/13

However, this of course increases sovereign debt. I often see people confused by what sovereign debt is and who the government in indebted to and the answer is investors. The government must pay back the interest and original payment for all GBs. 7/13

As of March 2020, UK debt was at ~80% of GDP and will now increase over the looming recession of 2020/2021. 8/13

Another issue which GBs are speculators. If investors speculate that the government will default (be unable to pay), they will refuse to buy or even sell off bonds before they mature. Thus, shrinking the revenue governments have available to them. 9/13

Another form of creating money is to literally print it. However, increasing the supply of money decreases the value of that currency. This is what we call inflation. 10/13

Although the central bank (BoE) constantly prints money at a slow rate, printing money to cover a debt or gap in expenditure is considered a last resort. 11/13

Hyperinflation (HI) can be caused by printing money and can cause currencies to become almost instantly redundant. E.G. Germany experienced HI before Hitler rose to power and the Soviet Union experienced HI before it fell. Generally, HI is very bad. 12/13

The closer sovereign debt gets to 100% of GDP the greater the risk of entering hyperinflation and general economic badness. 12/13

TLDR: governments create revenue by increasing taxes, selling bonds, and printing money. This increases national debt and inflation which increases risk of crashes, hyperinflation, and general badness. 13/13

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