UK National Debt

[Le Baron]

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

You are paying interest directly on the excess reserves to maintain the interest rate target, rather than the same money being converted into interest-bearing bond agreements. Which means no bonds need to get sold. The main reason they are sold is to meet that short-term rate and as said the central bank can also just adjust its rate to make that problem disappear and leave reserves in the system, with no disasters. And maybe even just stop selling bonds (or so many of them).

However, people like bonds from sovereign currency issuers and want to buy them. There is no default. The UK isn't Greece or any EU country. Bonds are easy income for the buyers, whereas the reversal is not.

Takeaway: bonds are not funding for government, they are income for bondholders.

 

[Sloop John B]

My understanding is that if BoE continually prints money there is the risk of currency collapse and hyperinflation?

Why did Argentina default if all they had to do was print more money (or press that button)?

.sjb

 

[Le Baron]

My understanding is that if BoE continually prints money there is the risk of currency collapse and hyperinflation?

Why did Argentina default if all they had to do was print more money (or press that button)?

.sjb

If this was true Japan would have been 'bankrupt' a long time ago. The BoE neither 'prints' money nor does it issue it beyond real resources. That's what causes inflation. For us more commonly the inflation fears are manufactured because of deliberate targets for deficits (2-3% of GDP, no reason for it) and policies that cut labour resources out of use (NAIRU - so called natural rate of unemployment, used as a demand buffer). Specifically for bond interest payments, they are tiny percentage. The 'debt clock' is registering the entire stock of assets, not the payments.

Think back to 2008, when the large sovereign issuers (UK, US, ECB eventually...) stabilised things. Did the currency collapse? Did hyperinflation ensue?

Argentina was pegging their currency to someone else's. When you do that you relinquish the power of your own currency.

 

[Brian]

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.

Q. What is the point of the Euro? What are the gains? Or shall I say 'advantages', 'long term goal' of having nearly 30 different countries losing control of their sovereign currency? Who really runs the ECB?

 

[PaulMB]

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.

Actually no. The Greeks wanted to be in the Euro and fiddled their accounts to meet the EU requirements to convert their Drachma into Euros. Then they went bankrupt. There was no "surrendering."

 

[Le Baron]

Q. What is the point of the Euro? What are the gains? Or shall I say 'advantages', 'long term goal' of having nearly 30 different countries losing control of their sovereign currency? Who really runs the ECB?

The question of 'motive' for the Euro is debatable, but the stated plan was to remove barriers and create a smooth payments system. However it was created on top of a monetarist system and as such it removes the power of issue from the member states, plus control of their own central bank to manage payments when required. The ECB is run by a bunch of monetarist economists who insist on countries having low deficits even if they need to inject spending according to circumstances and privatisations to remove (they think) responsibility for service provision from the government and the need for spending. Thus baked-in austerity economics.

 

[Le Baron]

Actually no. The Greeks wanted to be in the Euro and fiddled their accounts to meet the EU requirements to convert their Drachma into Euros. Then they went bankrupt. There was no "surrendering."

That they wanted to be in it (on what advice/pressure?) is not inconsistent with saying they surrendered sovereign issue power.

 

[PaulMB]

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.


This does not make sense. If I have some Euro to invest in bonds in another currency, and if Dollar bonds offer, say, 3% REAL interest, why should I buy UK bonds that only offer 1.5% REAL interest? I'll only buy them at a below-nominal price that then provides the going interest in the market for bonds of comparable reliability. So it is the market that decides interest rates. The UK central bank con only manipulate interest rates on its bonds in a very narrow area to sell more or less bonds, and therefore to borrow more or less money. But in the context of the demand of the market.

 

[Le Baron]

Also, they obviously thought converting their Drachma "debt" payments into Euros would somehow be better and that the ECB would pay them like they did with their own central bank. Clearly they didn't understand the concept of the single currency model and what it would mean for them.

 

[Le Baron]

This does not make sense. If I have some Euro to invest in bonds in another currency, and if Dollar bonds offer, say, 3% REAL interest, why should I buy UK bonds that only offer 1.5% REAL interest? I'll only buy them at a below-nominal price that then provides the going interest in the market for bonds of comparable reliability. So it is the market that decides interest rates. The UK central bank con only manipulate interest rates on its bonds in a very narrow area to sell more or less bonds, and therefore to borrow more or less money. But in the context of the demand of the market.

What? You don't 'invest Eurobonds in other bonds'. You just buy them with the money in your account. If you find the rate of interest payment too low, you don't buy it. The rate paid by the government is the same, no matter what happens to them on the secondary bond market. They set the short-term interest rate and the market reacts to that, not the other way around.
As I stated above they are not borrowing any money, I've explained this umpteen times now. And how it is an asset swap. If you don't move past that the discussion can't occur.

 

[ks.234]

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.

Absolutely. Except I would pick up on the observation that the government deficit is everyone else’s surplus. The government deficit is where our money comes from. No government deficit, no money in our pocket.*

*unless you do what Blair and Clinton did and move money creation from government to high street banks where money is based on personal debts, which is where 2008 came from.

 

[ks.234]

Maybe it’s time to introduce the IMF?

If people such as Friedman wrote the software for neoliberalism/monetarism, then the IMF is part of the hardware.

When the democratically elected Allende threatened to nationalise industries in Chile, Nixon ordered his Friedmanite economists and ‘the Chicago Boys’ to make the Chilean economy “scream”. This they did and when the CIA overthrew the democratically elected government and installed Pinochet, the IMF then moved in and issued loans with the usual conditions attached for privatisation, de-regulation, and cuts to public spending. Also, those loans were repayable in dollars.

The same methodology has been applied all over Latin America, including Argentina, Africa and South East Asia which not only stifles sovereign currency options, but imposes on the recipient country austerity, authoritarianism, and in the case of Chile and Argentina at least, people being ‘disappeared’ and thrown out of helicopters.

To bring things up to date, places like Greece are now committed to privatisation plans as a cost of being “bailed out” by various loans.

 

[PaulMB]

What? You don't 'invest Eurobonds in other bonds'. You just buy them with the money in your account. If you find the rate of interest payment too low, you don't buy it. The rate paid by the government is the same, no matter what happens to them on the secondary bond market. They set the short-term interest rate and the market reacts to that, not the other way around.
As I stated above they are not borrowing any money, I've explained this umpteen times now. And how it is an asset swap. If you don't move past that the discussion can't occur.

I think you may have misread. I wrote that I use Euros (not Eurobonds) to buy bonds in other currencies.

As for the rest, you've lost me. I am not competent enough to agree or disagree. But I had always understood that the national state issues bonds to borrow money, both domestically and internationally. What I do see, and perhaps this has something to do with what you are saying, the "state" is its 60 million citizens. So if the "state" borrows, each citizen is borrowing. And each citizen carries a share of the accumulated national debt.

 

[ks.234]

I think you may have misread. I wrote that I use Euros (not Eurobonds) to buy bonds in other currencies.

As for the rest, you've lost me. I am not competent enough to agree or disagree. But I had always understood that the national state issues bonds to borrow money, both domestically and internationally. What I do see, and perhaps this has something to do with what you are saying, the "state" is its 60 million citizens. So if the "state" borrows, each citizen is borrowing. And each citizen carries a share of the accumulated national debt.

This is how the neoliberal narrative bakes itself in so deep. Borrowing for a government is not the same as borrowing for a citizen. If a citizen borrows, they have to pay back from their own pile of GBPs. But it is government that creates those GBPs, so when a government ‘borrows’ it does not have to dip into a savings pot of it’s own, or even less into the savings pots of citizens, to pay anything back, it just issues the necessary GBPs.

 

[Le Baron]

I think you may have misread. I wrote that I use Euros (not Eurobonds) to buy bonds in other currencies.

As for the rest, you've lost me. I am not competent enough to agree or disagree. But I had always understood that the national state issues bonds to borrow money, both domestically and internationally. What I do see, and perhaps this has something to do with what you are saying, the "state" is its 60 million citizens. So if the "state" borrows, each citizen is borrowing. And each citizen carries a share of the accumulated national debt.

You can only buy UK bonds in pounds sterling, i.e. the money in the BoE, which is where all final accounts are held. Bonds are an interest-earning financial asset, it is an asset swap, but the money doesn't move. It is the difference between the money being there waiting for whatever use someone wants to put it to, or it can be used for buying bonds, which are in essence a sort of 'savings account' version of your credit being on the BoE balance sheet.

For clarity the money e.g. China is paid in when doing business with the UK is paid in sterling (their account is credited at the BoE) They can either buy stuff with it, leave it there or buy bonds..interest-earning assets. If they buy stuff, their account surplus with the UK goes away and trade is 'balanced'. We're paring it down here for clarity.

The UK state or government doesn't borrow money, it issues it. You borrow money, the UK money markets borrow money. The government is a 'sector', the issuing sector, the other sector is the private/domestic sector made up of businesses and households which are currency users. Everything the latter has flows from the first sector. It either stays there as public 'saving' or it is taxed (cancelled, the credit/debt annulled) or it is managed/transformed for other purposes (the discussion further up and elsewhere about being held aside for 'fiscal space').

 

[PaulMB]

You can only buy UK bonds in pounds sterling, i.e. the money in the BoE, which is where all final accounts are held. Bonds are an interest-earning financial asset, it is an asset swap, but the money doesn't move. It is the difference between the money being there waiting for whatever use someone wants to put it to, or it can be used for buying bonds, which are in essence a sort of 'savings account' version of your credit being on the BoE balance sheet.

For clarity the money e.g. China is paid in when doing business with the UK is paid in sterling (their account is credited at the BoE) They can either buy stuff with it, leave it there or buy bonds..interest-earning assets. If they buy stuff, their account surplus with the UK goes away and trade is 'balanced'. We're paring it down here for clarity.

The UK state or government doesn't borrow money, it issues it. You borrow money, the UK money markets borrow money. The government is a 'sector', the issuing sector, the other sector is the private/domestic sector made up of businesses and households which are currency users. Everything the latter has flows from the first sector. It either stays there as public 'saving' or it is taxed (cancelled, the credit/debt annulled) or it is managed/transformed for other purposes (the discussion further up and elsewhere about being held aside for 'fiscal space').

Are you sure about this? I know that Italy, for instance, issues bonds in currencies other than Euro.

Also, are you saying that the following is not true:

A country has a National Debt of, say, 100% of GDP. Therefore, if the average interest rate on the extant bonds is 2.5%, it will cost that country each year the equivalent of 2.5% of the GDP. If, in that same country, state spending accounts for 50% of the GDP, the state will have to spend 5% of what it spends in servicing that debt.
If interest rates required to sell new bonds on the market rise to 5%, the state will have to issue new bonds at 5% to replace old bonds as they are redeemed, and to pay interest of the new bonds as they replace the old ones. So, when all the old bonds costing 2.5% have "died of old age," and have been replaced by bonds that pay 5% interest, servicing the debt will double in cost to 10% of state spending. Therefore, there will be less money available to pay salaries of state employees, build and maintain schools and hospitals, pay state pensions, etc.

 

[Le Baron]

Are you sure about this? I know that Italy, for instance, issues bonds in currencies other than Euro.

Also, are you saying that the following is not true:

A country has a National Debt of, say, 100% of GDP. Therefore, if the average interest rate on the extant bonds is 2.5%, it will cost that country each year the equivalent of 2.5% of the GDP. If, in that same country, state spending accounts for 50% of the GDP, the state will have to spend 5% of what it spends in servicing that debt.
If interest rates required to sell new bonds on the market rise to 5%, the state will have to issue new bonds at 5% to replace old bonds as they are redeemed, and to pay interest of the new bonds as they replace the old ones. So, when all the old bonds costing 2.5% have "died of old age," and have been replaced by bonds that pay 5% interest, servicing the debt will double in cost to 10% of state spending. Therefore, there will be less money available to pay salaries of state employees, build and maintain schools and hospitals, pay state pensions, etc.

I am sure. Italy is not the UK - we can do comparisons for broader discussion, but this is about the UK system which is a sovereign currency system in complete control of its own money of account, its own bank and its own monetary and fiscal policy.

You are sticking to this idea that somehow the UK government is held hostage to some independent market interest rate. They are not, the government through the bank sets the short-term overnight interest rate targets and they set the rate on which bonds will be paid. Point. Market interest rates are 1) a secondary bond market phenomenon and 2) reactions to what the government interest rate setting does. The market is not monetary policy.
There's not less money available to government at any time. Theoretically they can issue it into infinity - they are stopped by one thing: real resources space.
What you are saying only holds if one posits the view that the government doesn't issue its own currency and 'borrows' it from somewhere else, but they don't. That's what a sovereign currency issuer is. The idea that somehow all 'the money' is in private hands and government 'borrows' it do do stuff, is wrong.

 

[Super Bigote]

Are you sure about this? I know that Italy, for instance, issues bonds in currencies other than Euro.

Also, are you saying that the following is not true:

A country has a National Debt of, say, 100% of GDP. Therefore, if the average interest rate on the extant bonds is 2.5%, it will cost that country each year the equivalent of 2.5% of the GDP. If, in that same country, state spending accounts for 50% of the GDP, the state will have to spend 5% of what it spends in servicing that debt.
If interest rates required to sell new bonds on the market rise to 5%, the state will have to issue new bonds at 5% to replace old bonds as they are redeemed, and to pay interest of the new bonds as they replace the old ones. So, when all the old bonds costing 2.5% have "died of old age," and have been replaced by bonds that pay 5% interest, servicing the debt will double in cost to 10% of state spending. Therefore, there will be less money available to pay salaries of state employees, build and maintain schools and hospitals, pay state pensions, etc.

The government chooses the rate of interest. If no-one wants to buy them at that rate of interest it doesn't matter. But they always will buy them because that sets the risk-free rate of interest and the banks have reserves that need to be held in this way.

Whatever the interest rate is doesn't reduce the amount of money available for public services. When the government is the currency issuer there is no limit upon how much it can issue.

 

[Le Baron]

Compare this to Greece, where they are not issuers and are therefore unable to guarantee that they won't default. So the market demands a higher interest return for the risk. The UK is not in that position.

 

[sean99]

This is how the neoliberal narrative bakes itself in so deep. Borrowing for a government is not the same as borrowing for a citizen. If a citizen borrows, they have to pay back from their own pile of GBPs. But it is government that creates those GBPs, so when a government ‘borrows’ it does not have to dip into a savings pot of it’s own, or even less into the savings pots of citizens, to pay anything back, it just issues the necessary GBPs.

Within limits. There is no free lunch.

https://www.bloomberg.com/opinion/a...ontinues-to-surge-what-would-mmt-followers-do