UK National Debt

[Le Baron]

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

In reality nothing. The government would pay interest on excess reserves. The other measure could (should) be to keep a zero or near zero interest rate target so they don't even end up with that invented problem. Having excess reserves while not ideal, is not a 'problem'.

 

[Sloop John B]

In reality nothing. The government would pay interest on excess reserves. The other measure could (should) be to keep a zero or near zero interest rate target so they don't even end up with that invented problem. Having excess reserves while not ideal, is not a 'problem'.

No I don't understand this. If the UK government is "locked out of the bond market" - can't borrow - and is running a budget deficit how does it pay the proverbial , NHS staff, teachers and fire service? Where does it get the money to pay social security?

.sjb

 

[Le Baron]

No I don't understand this. If the UK government is "locked out of the bond market" - can't borrow - and is running a budget deficit how does it pay the proverbial , NHS staff, teachers and fire service? Where does it get the money to pay social security?

.sjb

The government doesn't borrow the pound, they issue it. Why would they need to borrow it? From whom? Anyone else issuing it is a counterfeiter. No one else can provide them with the amounts they spend daily on even maintenance spending. They don't get locked out of any bond markets. A deficit is not a 'lack' it is the accounting term for more money flowing out than what is taxed (cancelled) away. If you reverse this you, the public, have the deficit. But you are not a currency issuer, so you can go broke, the government doesn't go broke because it issues the currency.

Spending is spent into existence, not 'funded' from somewhere else. Taxation is not 'revenue' in the way that word is now used. It is French for 'return' re-venue; the money came back to the source, where the debt (the original spending or your/my/the public's credit) is cancelled.

 

[Sloop John B]

Why would they need to borrow it? From whom?

Are you suggesting that the government doesn't issue bonds, i.e. borrow from <somenone>?

.sjb

 

[Le Baron]

Are you suggesting that the government doesn't issue bonds, i.e. borrow from <somenone>?

.sjb

No, I am saying they do issue bonds, that's just a base fact we already know, but that issuing bonds is not them borrowing, which is also a fact. Its not like buying shares or commercial paper; that's buying from currency users, not issuers.

 

[Le Baron]

Are you suggesting that the government doesn't issue bonds, i.e. borrow from <somenone>?

.sjb

I think it's better if I say it this way (though I said it above too). There are often excess reserves in the banking system and banks don't want them because they can't make a profit with them*, so to drain this out they opt for the bond. An interest-earning financial asset. The government could just pay interest on the reserves, but bonds are an old thing from different times and tradition dies hard. The market people also like them because they are guaranteed (I.e. govt can always make the interest payment).

So... the excess reserves got there from government spending in the first place... you mentioned about this being used for funding a deficit, but the fact is the government could just do nothing and spend on top of that. It requires no funding it is fiat currency. It wouldn't be a super idea, but depending upon what they are purchasing with that spending and if the (real) resources are available, it's not a problem. The reserves and asset swap for bonds is not their funding for spending.

(*important note: banks don't need excess reserves, they don't lend deposits and don't consider their reserve position when making loans. This is dealt with at the end of the day).

 

[Sloop John B]

So if the UK government had bonds to sell that no one bought, what would happen?

.sjb

 

[Le Baron]

I've gone to bed. We'll pick it up again.

 

[Le Baron]

So if the UK government had bonds to sell that no one bought, what would happen?

.sjb

They'd go unsold and they'd pay the interest on reserves direct. The thing is the bond market is always popular. Bonds, being iron clad and guaranteed are what many other stock market financial instruments rest on. GovUK never defaults on the interest payment, never will.

 

[Sloop John B]

They'd go unsold and they'd pay the interest on reserves direct

Obviously it's late so we can move on this tomorrow but I don't understand what "they'd pay the interest on reserves direct" means.

.sjb

 

[Le Baron]

Obviously it's late so we can move on this tomorrow but I don't understand what "they'd pay the interest on reserves direct" means.

.sjb

Okay, they'd just pay the interest that the banks would normally receive for swapping the reserves for the interest-bearing bond certificate. That's all the banks want, to have that advantage of getting some profit rather than holding excess reserves. (the issue of 'meeting the overnight interest rate target' is a policy choice. The government chooses that target rate. The notion is that it's somehow caused by 'markets' or some other force, but it's not).

 

[Sloop John B]

Treat me gently.........

they'd just pay the interest that the banks would normally receive for swapping the reserves for the interest-bearing bond certificate.

So for a layman, I have sjb bonds to sell but no-one wants to buy them - so what exactly am I doing ( paying the interest quote above) ?

.sjb

 

[Martin J]

@Le Baron A genuine question from someone with precious little understanding of economics… Could you frame for us what went wrong in Greece?

I am no economist and only took a passing interest in what the press reported but it seemed they were brought down by lax enforcement of taxation and excessive spending on social support e.g. pensions. Were they really broke or just bullied by the EU to conform to rules?

 

[PaulMB]

They were really broke. They failed to redeem state bonds on the established date. The Greeks and the EU did a song-and-dance to avoid using the word "default," but in reality they did default.

 

[PaulMB]

I've been reading some of the posts above and one thing strikes me. It is said that the government and the BoE establish the interest rate on the bonds issued. Strictly speaking they do, but actually it is the market that establishes the interest rates. Depending on the type of bond, if the going rate for Sterling bonds is, say 4%, and the UK issues a bond at 3%, it will only sell for less than its 100 face value.
As to who buys bonds, it is financial institutions (banks, savings and pension funds, etc.) and individuals. But not just in the UK, all over the world. Does anyone know what percentage is bought by UK individuals and institutions and what percent around the world?

 

[ks.234]

The National debt is an accounting device. So is tax.

Treat me gently.........



So for a layman, I have sjb bonds to sell but no-one wants to buy them - so what exactly am I doing ( paying the interest quote above) ?

.sjb

if nobody buys them, there is no interest to pay. They are just bits of paper.

The national debt came about when the Bank of England was first created in 1694 (ish?). The BoE bought William III’s debts incurred because of his wars. The first point to notice is that the group of city traders and merchants who bought the debt, saw it as a money making opportunity, otherwise, why would they buy it? The “debt” became an asset. Part of the deal was also that the Bank of England bought the right to print paper money.

Paper money is no more that a ‘promise to pay’, bonds and securities are similarly, bits of paper with a promise to pay. But that promise is ultimately backed up by the governments ability to issue currency to meet that promise. Buying those bits of paper are a safe bet because the ‘promise’ is secure.

Speaking as a non-economist, actually, as someone who finds understanding such things quite difficult, I have found the book by Thomas Levenson Money For Nothing The South Sea Bubble and the Invention of Modern Capitalism which covers the formation of the BoE and the South Sea Bubble in a narrative form that is easy to follow very useful. It sets out the role of people like Issac Newton who used maths to make predictions, and it is similar mathematical predictions that speculators in the city used to sell promises based on predictions of profits in the future. Those promises collapsed with the South Sea Bubble, but the principle, when backed by government promises, became the model for Modern Capitalism. It is well worth a read to see how things started out.

What the book demonstrates is that it is possible to create money from methods other than acquiring more gold or silver (or other commodities like slaves, or spices etc etc). The very promise to pay a profit in the future became a commodity

To bring us up to date, bonds and securities are paper promises, but that promise is built on the guarantee that government does not have to find money to pay out on the promise, it does so simply by pressing a button on a computer keyboard to issuing the necessary Great British Pounds into the appropriate bank accounts. The promise will be kept.

 

[Sue Pertwee-Tyr]

As Le Baron alluded to above, I think the term ‘deficit’ is unhelpful because its normal usage has negative connotations. This allows government to spin having a deficit as an undesirable thing whereas in reality, from what is said above, it is essential to a healthy economy.

 

[Le Baron]

I've been reading some of the posts above and one thing strikes me. It is said that the government and the BoE establish the interest rate on the bonds issued. Strictly speaking they do, but actually it is the market that establishes the interest rates. Depending on the type of bond, if the going rate for Sterling bonds is, say 4%, and the UK issues a bond at 3%, it will only sell for less than its 100 face value.

They do not. This is directly influenced by government policy. The rate the government pays is related to the overnight interest rate set by the central bank. Longer term rates are based upon the actions and setting of that bank, not 'markets'. And the CB can just override things and cap rates.

As to who buys bonds, it is financial institutions (banks, savings and pension funds, etc.) and individuals. But not just in the UK, all over the world. Does anyone know what percentage is bought by UK individuals and institutions and what percent around the world?

As an example (and one often on the minds of people) there is China's holding of U.S. bonds. It has hovered around about $1 trillion. Which represents 5-7% of all treasuries sold. The more important thing of note is that they were bought with the trade surplus account in the Federal Reserve. It is China choosing to have an interest-bearing form of money rather than money just sitting in the FR.

 

[Super Bigote]

@Le Baron A genuine question from someone with precious little understanding of economics… Could you frame for us what went wrong in Greece?

I am no economist and only took a passing interest in what the press reported but it seemed they were brought down by lax enforcement of taxation and excessive spending on social support e.g. pensions. Were they really broke or just bullied by the EU to conform to rules?

The situation is different in Greece because they surrendered their currency sovereignty to the EU. They stopped using drachmas and started using euros. This means that when the Greek government was due to repay loans they were not able to transfer money by a computer entry from their national bank, unlike what the UK government does to meet any payment. The Greek government doesn't issue euros, only the European Central Bank. So to repay the loans they had to generate enough euros through taxation, selling national assets etc in order to meet the loan repayments but this is what they were unable to do.

So what went wrong in Greece is that they surrendered their currency sovereignty and became beholden to the Troika which has led to the country becoming impoverished ever since as austerity is required for the Greeks in order to meet the debt repayments as best they can. With the failure of the ECB to issue enough euros for the Greeks to meet their debts and provide full employment there is only one solution to this, which is to restore the drachma and convert the loans from euros to drachmas. This was the basis of the election of the government of which Yanis Varoufakis was a member. Scandalously they fell prey to the bullying of the Troika and betrayed the electorate by not restoring the drachma. They took bailouts instead so Greece will remain impoverished and effectively a vassal state of the German for the foreseeable future.

 

[Le Baron]

@Le Baron A genuine question from someone with precious little understanding of economics… Could you frame for us what went wrong in Greece?

I am no economist and only took a passing interest in what the press reported but it seemed they were brought down by lax enforcement of taxation and excessive spending on social support e.g. pensions. Were they really broke or just bullied by the EU to conform to rules?

Simply, when they adopted the Euro they lost the ability to issue money to service their own "debt" bond sales. when they took on the Euro all the existing debt was converted to Euro denominations. When the financial crash hit Greece had to make transfer payments to people and institutions to keep things afloat, but there are issues:

• Like all EU members they don't have the power to issue currency or use their central bank like the UK does.
• They all are actually forced to rely on some money circulation unless the ECB decides to allow otherwise.

Greece ended up a slave to bond markets, with a demand for a very high interest payment to cover the risk of a bond from a country that has no sovereign currency and no bank that can clear its payments.