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UK National Debt

Discussion in 'off topic' started by Sloop John B, Jul 15, 2022.

  1. Sloop John B

    Sloop John B for more years than I care to remember

    I came across this in the Irish Times today from a usually believable journalist/ economist

    [​IMG]

    The highlighted portion is


    Most governments, including Ireland's,
    have borrowed long term at fixed rates,
    locking in the very low interest rates of th
    last five years. Thus, if EU governments d
    not borrow a lot more money, the limited
    amount of debt that needs to be rolled ove
    in the next few years at higher interest
    rates will be eminently manageable. The
    one exception is the UK, where more than
    30 per cent of its national debt has interes:
    rates linked to inflation
    . As a consequence
    of rapidly rising price levels, its interest
    payments next year will be a serious
    burden.

    Is this generally out there as it would seem a pretty major error on behalf of whoever is in control of borrowing?

    .sjb
     
  2. davidsrsb

    davidsrsb pfm Member

    I would have been cheaper at the time and politicians don't look beyond the next GE
     
  3. Dogberry

    Dogberry pfm Member

    English exceptionalism at it's best.
     
    gavreid likes this.
  4. Le Baron

    Le Baron Unbiased advice at reasonable rates

    It's highly misleading. Especially for the UK. In what way will interest payments be a 'burden'? Upon whom? Before during and after the government pay it from the central bank computer. All the bonds sold have a small fixed payment and what are interest rates at right now? Not very much and they like cutting them, not raising them. Remember that the interest rate target is not a force of nature, or 'market led' it is a policy choice. It could be zero.

    The bonds sold are merely to drain excess bank reserves from the system (from government spending usually which is all deficit spending, though not wholly). None of this is 'borrowing'. Central banks don't need to borrow currency, they supply it to everyone else. They supply it, cancel it (tax) or freeze it (bond sales). If triggering the bond sales mechanism means it is more expensive than simply paying the interest on the excess reserves direct (for holding them rather than swapping them for an interest earning financial asset) the government just pays the interest on reserves. In the U.S. this happens a lot.

    It's more of a problem for Europe than it is for the UK, though even in the ECB they do the same thing. People seem to have a dualistic view of so-called 'borrowing', which I'll be clear again is not what is happening. When the CB sells bonds you hear people saying the government is 'borrowing', and when the central banks went about repurchasing bonds for 'quantitative easing' - essentially reversing the process and converting them back into excess bank reserves - people again seemed to believe it was somehow 'acquiring spending money' - or even 'printing money', from existing assets which is bizarre! Both views are incorrect.

    The very act of leaving excess reserves swilling about in the banking system and then telling member states they can spend more freely is what puts even more excess into the system. Which is why QE is a nonsense. Based upon a similar view that 'surpluses' are funding.
     
    Last edited: Jul 19, 2022
    Vinny likes this.
  5. Ginger

    Ginger pfm Member

    Le Baron: I don’t for a minute understand any of that ! But it leaves me with a question: if you’re correct, then what is the national debt ? Is there actually a debt or is that all incorrect?
     
  6. Le Baron

    Le Baron Unbiased advice at reasonable rates

    The 'national debt' is an accounting record of spending and government bond sales. Our wealth. A record of how much you and me and everyone 'has' rather than what was taxed away (and thus cancelled) or frozen out of use in bond sales*. That, is basically it. Though there is a lot more to say about it.

    Whenever the 'debt is paid down' the economy goes wrong, because it means buying back all bonds and severely cutting spending. In the modern world we know it as: austerity, though bonds still get sold. The bonds themselves don't need to exist. That's another discussion.

    (*since that money is in the central bank system before the bond is purchased and stays there when the bond is purchased! Effectively stopping it being competition for government spending on available resources).
     
  7. Vinny

    Vinny pfm Member

    Common knowledge for those who listen to information radio or read around. It has been mentioned several times over the past few months.
     
  8. Le Baron

    Le Baron Unbiased advice at reasonable rates

    The main problem is most don't. Or they listen but don't hear. I've been at this for years and it's exhausting at times.
     
    Vinny likes this.
  9. Super Bigote

    Super Bigote pfm Member

    The national debt is the sum of extant government gilts issued to the non-government sector. They are issued for a fixed period so at some point they become redeemed. So on redemption of the gilt the holder receives sterling issued by the government.

    Issuing these gilts does not serve a purpose for the government. It is a form of corporate welfare. Whatever interest rate that the government chooses to set on these gilts becomes the risk free rate of interest, ie the lowest rate. Gilts are risk free because the government cannot go bankrupt in its own currency.

    So the national debt, as an aggregate figure, has no real meaning and has no implication for policy.
     
    Le Baron likes this.
  10. Super Bigote

    Super Bigote pfm Member

    The national debt is distinct from the government deficit. The latter is the difference between government income and expenditure in a specified period. The government deficit is, by definition, the non-government surplus. So the greater the government deficit the more money there is available to private households and businesses, ie us.
     
    Le Baron and ks.234 like this.
  11. Sue Pertwee-Tyr

    Sue Pertwee-Tyr neither here nor there

    Such a simple explanation. Why don't people grok this more?
     
  12. ks.234

    ks.234 pfm Member

    It is simple, I think the reason it makes people angry is that it goes against everything they’ve been told and believe for most of their adult life time and to understand it means admitting that they’ve been lied to, and believed the lies, and in there is some sort of insult to their self esteem.

    It is easier to ridicule the idea than accept it and change their thinking.
     
    Le Baron likes this.
  13. sean99

    sean99 pfm Member

    I don't understand this post. It appears to treat the Treasury and the BoE/Federal Reserve as a single entity. I'm not saying you're wrong - just that I don't follow it.

    As I understood it the Treasury sells bonds to fund the government and the BoE / Federal Reserve may "purchase" these bonds (QE) as a means of putting new money into the economy (because if a private buyer purchases the bonds the money is transferred from the private buyer to the government but no new money enters the system. The BoE / Feds may later sell government bonds, which in effect removes the money from circulation (sometimes called quantative tightening - I believe that's what the Fed has been up to for the past few months).

    The Treasury can choose between cutting spending, raising taxes and selling bonds, and the BoE/Fed can "cooperate" during hard times by purchasing bonds, thus increasing the money supply and lowering the interest rate that the Treasury must pay (since interest rates are inversely proportional to the volume of buyers/bids).

    So when governments run large deficits either it transfers money out of the private sector (since the bonds are purchased by the private sector) or it can create new money if the central bank purchases the bonds.
     
  14. Le Baron

    Le Baron Unbiased advice at reasonable rates

    Okay, I'll try for better clarity. They are a single entity. The BoE is the government's bank, its financial arm. They appoint the governor, they can override any decisions. The BoE doesn't make policy (apart from interest rate juggling), they just make payments.
    The first sentence is not right. The bond sales mechanism is triggered to drain excess reserves in the banking system. There is no funding mechanism in this (although the bank actually funds some people to buy bonds!). The government doesn't need to scout around for funding, they issue the currency. If they purchase bonds they just reverse the mechanism and swell the reserves (banks don't like holding excess reserves). But note well, this is not 'funding' the excess is already there because of spent/issued currency and that was deficit spending (overt money financing). Do you see the conundrum in stating that the bonds are funding?
    If selling the bonds is 'quantitative tightening' it can't possibly be funding for spending can it? Spending only happens when it is spent/issued. Otherwise there is nothing.
    The money supply is only increased by issuing money (that's direct spending or bank loans - they are all money issue). The BoE always cooperates, they are not policy makers. The interest rate policy, and bonds to drain the reserves to meet the overnight interest rate is a policy choice. They could set it to zero and the problem goes away.
    Nothing in a deficit comes from the private sector. The government deficit is equal to public saving/wealth. If you reverse that ... That's why it is a government deficit. The bonds are not funding. New money is not created from recycling. Money from bonds is merely held in abeyance to create 'fiscal space'. They are a choice rich people can make, they are a way of creating fiscal space - that is agreeing to lock the money so as not to compete for possible resource purchase in exchange for a small fixed interest payment - much better for them than taxation.
     
  15. Sloop John B

    Sloop John B for more years than I care to remember

    You've totally lost me.

    Sounds very Dire Straitish the bits I think I can understand.

    I can't help but think that this seems like the stuff spouted about vaccines, which I do know about, so I knew it was rubbish.

    .sjb
     
  16. Le Baron

    Le Baron Unbiased advice at reasonable rates

    It's a lot easier than vaccines. Counter-intuitive compared to the last 40-odd years of orthodox theory I grant you, but coherent. Just taking what I (and others) said about currency issue vs the claim of 'no magic money tree', is a small clue that the conspiracy comparison is good, but that it flows in the other direction with regard to economics.
     
    ks.234 likes this.
  17. Sloop John B

    Sloop John B for more years than I care to remember

    Okay in a effort to not be blinkered can I ask the following

    Who buys UK government bonds ( and Irish for that matter or would you differentiate between UK, Irish, Greek, Italian and Spanish government bonds?)?

    .sjb
     
  18. Le Baron

    Le Baron Unbiased advice at reasonable rates

    Usually and initially (private) banks, but also people who want to hold them (usually as a risk-free base for an investment portfolio) and have the money to buy them. For the main buyers, the banks, their money is already there as an entry in the banking system so it is merely shifted (the numbers) from their account to the BoE and they get the bond certificate. It's why it's sometimes called left-pocket/right-pocket accounting because the money really doesn't move much.

    The individuals mostly buy bonds on the secondary market. Not the primary market sold from BoE to banks. In any case it doesn't matter who the person is or where they are, they pay for them in pounds sterling and this is held on the balance sheet in the BoE.

    There is a difference between UK government via BoE 'gilt-edged securities' (bonds) and those issued by the European Central Bank. For a start only the ECB has issue power, the individual EU member states don't really. Issue of currency or bonds independently.
     
    Joco and ks.234 like this.
  19. Sloop John B

    Sloop John B for more years than I care to remember

    So my next question is what happens if people don't buy the bonds the UK government are issuing?

    This is based on hearing about countries being "locked out of the bond market"

    .sjb
     
  20. Le Baron

    Le Baron Unbiased advice at reasonable rates

    I'll just add something. There are two contrary claims being made, in that article and in general when people talk about bonds, and I mentioned it to Sean99. They - at the ECB say - claim the sales are for 'funding', but when they repurchased bonds en masse for 'quantitative easing' this was supposedly to create the 'funding surplus' to allow member states to spend more freely.

    See the disconnect. Sales are funding they say, but also repurchasing is funding. It's not coherent. The reason for and mechanism of bond sales is part historical, part habit and part policy choice.
     
    ks.234 likes this.

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