twisted logic of foreign aid
What happens if UK chooses to finance its aid by simply printing money? Will the money minted by Bank of England and handed over to an African country create any difference in the lives of British citizens?
Assuming that there is a reasonable cap on the size of the aid provided, foreign exchange markets will easily absorb the conversion of these newly minted pounds. In other words, the British pound will retain its value against other major currencies. Hence the total effect of the foreign aid will depend only on what is actually bought with the money.
A price ripple caused by the purchases could in principle drive up the prices of goods that British citizens are consuming. Since UK aid to Africa consists of poverty reduction schemes that focus on health and education, this inflationary effect will probably be negligable . (Note that it is tough to gauge where the money will flow after it is spent on health and education. In other words, the total effect on UK price levels may accumulate over time in unpredictable ways.)
Similar Examples:
When a Turkish farmer sells grain to local wholesale buyers in dollars, he does not cause a price ripple that is relevant for US economy. When a German Bank buys a derivative product from a French Bank in dollars, it does not activate the inflationary forces in US economy.
(If all the dollars circulating around the world somehow find their way back into the US real economy, then the net result will be a massive inflation. However this scenario is extremely unlikely since most of the circulation stays completely outside the US real economy.)
Assuming that there is a reasonable cap on the size of the aid provided, foreign exchange markets will easily absorb the conversion of these newly minted pounds. In other words, the British pound will retain its value against other major currencies. Hence the total effect of the foreign aid will depend only on what is actually bought with the money.
A price ripple caused by the purchases could in principle drive up the prices of goods that British citizens are consuming. Since UK aid to Africa consists of poverty reduction schemes that focus on health and education, this inflationary effect will probably be negligable . (Note that it is tough to gauge where the money will flow after it is spent on health and education. In other words, the total effect on UK price levels may accumulate over time in unpredictable ways.)
Similar Examples:
When a Turkish farmer sells grain to local wholesale buyers in dollars, he does not cause a price ripple that is relevant for US economy. When a German Bank buys a derivative product from a French Bank in dollars, it does not activate the inflationary forces in US economy.
(If all the dollars circulating around the world somehow find their way back into the US real economy, then the net result will be a massive inflation. However this scenario is extremely unlikely since most of the circulation stays completely outside the US real economy.)
