Gilts are cash (with a time delay)

Why is Government debt inflationary?

Printing (issuing) Gilts affects the value of fiat held by an individual assigned beyond the term of the Gilt. For example, someone who has sufficient money to easily last for the next year would not differentiate between a one-year Gilt and legal tender... they have no short-term need for cash.

Someone in possession of a Gilt can easily borrow money to meet a short-term need... and so Gilts act as money. The Gilt can be used as collateral for a short-term loan.

A Gilt is the same as legal tender except that you can't use it for a year... assuming no risk of Government default. It is locked-up and suffers from a temporary lack of liquidity compared to cash.

If you wait for a year the Gilt is the same as cash, or so they assume... If you are indifferent between waiting for a year and having the cash now then Gilts are "money" to you. Government debt is the promise of extra legal tender in the future so cash would have a premium over Treasuries only because it can be used in the here-and-now.

Provided you could live comfortably for the next year, why would you distinguish between the ownership of a one-year Gilt and cash? Government debt is the same as legal tender that you can't use for a period of time. If someone gave you a house but said that you can't use it for a year would you have less demand for a house?

You don't care so much about owning cash if you have Gilts and so the price falls. Demand for cash drops because the extra Gilts in circulation meet the same need (apart from in the immediate short-term) that is met by cash.

Another analogy is that the price of Oil would fall if extra Natural Gas entered the market, although they are not the same thing the price of one will affect the other since each satisfy a similar demand in the individual. Or maize and rice...

This assumes no default risk, that the debt would be monetised by the central bank... doubts surrounding their readiness to do that would of course lead to cash trading at a premium and Gilts losing value by comparison. If you're certain the debt will be repaid, Treasuries are as useful to you as cash held in trust for you (by the Government) for a period of time.


Whilst any individual has an unlimited appetite for money, it is the relative value of cash compared to Gilts or Treasuries that affects the price. Government protection (or whatever fiat money is representative of...) is limited in supply and hence the value of any unit of money is derived from the proportion of protection that it provides.

If £100 represents the freedom of one person for a week, then when the money supply goes up £100 will only buy a few days of freedom: it will be worth less. Issuing Treasuries means an expectation that in the future your £100 will buy much less freedom. Issuing one-year debt (assuming monetisation) means that £100 will buy much less freedom a year from now and (by discounting) it trades for less in the here-and-now.

Cash means that you are free today and tomorrow, Gilts mean that you are free tomorrow. (New) Government debt means that the role of cash as a store of value is compromised... because we expect that the scarcity will be reduced when the debt is monetised in the future.

If one person has more money (cash) than another they are more wealthy, but what about their relative wealth when both of them are given an amount of new Treasuries (dated to mature relatively soon)? Surely, they are now more equal in wealth.

30th January 2009