You can roll over debt forever as long as one of the following apply: national growth and inflation exceeds interest + budget deficit and/or your creditors offer generous terms / are afraid to pull the plug... the thing about the US is that China holds a lot of their sovereign debt meaning it's going to get fun in about 30 years time!!!
Or, if the debt is denominated in your own currency, your Central Bank just buys it and prints the money to pay for it, aka Quantitative Easing. However, where does that end? At some point in hyperinflation.
The Canadian banker in charge just prints 3 trillion pound notes and hands them out to whoever we owe the money to.
Quite a wheeze indeed. How could it possibly go wrong?.......er......
In the end if everyone did that and/or refinanced all debt into their own currency the whole world's debts could be wiped out. Sadly the rich would suddenly see the value of their assets fall over night but that doesn't strike me as something most members of CL would worry too much about.
The Canadian banker in charge just prints 3 trillion pound notes and hands them out to whoever we owe the money to.
Quite a wheeze indeed. How could it possibly go wrong?.......er......
In the end if everyone did that and/or refinanced all debt into their own currency the whole world's debts could be wiped out. Sadly the rich would suddenly see the value of their assets fall over night but that doesn't strike me as something most members of CL would worry too much about.
The losers would be the poor (as is already the case with QE) - the rich profit from asset price inflation, everyone else gets shafted by negative real interest rates and negative real wage growth. Eventually, unlimited money printing will cause hyperinflation.
Sorry if that is a simple sweeping, one sentence, catch all answer with easily identifiable goodies and baddies but that's how Henry wants it at the moment as he finds thinking too hard ;o)
Those opposing the continued seasonal increases to the debt have my sympathy, I wish we had a second house to call our government to account as the US does, because our problems are much worse. There must be a plan to reduce the increase of indebtedness before an agreement is reached, if not this time then next or at least some time soon. It's just irresponsible to keep adding debt to the economy, some time it will have to be paid back.
In what circumstances will we have to pay it back? The idea that there will be a time when we have to pay it all back in one go at some point in the future is a fallacy. It is also ridiculous to compare the national budget with a household budget. A household cannot borrow money indefinitely. It will only be able to borrow money over a single typical working life of 25 to 30 years.
If the UK only invested what it could afford from the annual tax take in capital infrastructure projects, education and the health service over the last 60 or 70 years the country would be in a sorry state today. Using the anti-government/anti-tax logic of Thatcherites and Tea Party Republicans the previous generations have left us with only massive debts. But the truth is they have also left us with an infrastructure and an educated workforce that is worth, in today’s money, many billions more than those debts. Similarly, the money the current government borrows to invest in new transport infrastructure, telecoms, increased airport capacity, increased security etc. will be worth significantly more to future generations than the debt that we pass down to them.
I am not saying that a rising deficit is not a problem. But it is naive to view it as if you can deal with it by applying principles a typical household would use to balance its budget.
Also, our deficit is not out of control or at an all time high as the figures here (falseeconomy.org.uk/cure/how-big-is-the-problem) show. I know that this website has an agenda but I have checked some of the graphs with other sources and they seem correct.
Excuse me, I did not realised that we never have to pay anything back that we borrow. Well that's ok then, we'll just keep right on borrowing, those nice people that are giving us the money must be very please with their philanthropy.
I think you'll find that the BOE (on behalf of the Government) issue gilts with 3, 5, 7, 10, 20 and 25 year terms. A coupon is paid usually twice a year and at the end of the term the capital is repaid in full, a rollover simply means that the debt is reissued with new paper. If there are no takers for the re-issue then the capital has to come from the current account, that is the circumstance in which we may have to cease the rollover and payback the debt with our own capital.
The principles of indebtedness are the same, no matter who owes whom. Governments may find it easier to divert from their obligations because they control the currency however those obligations remain. My intention was not to compare the two anyhow, it was to show how simply the situation could be explained to an uninterested electorate. Then again I could just be being naïve, because we never have to actually pay anything back do we
I never said that we should not invest in infrastructure projects, only that in order for them to work they need to provide a return on productivity that exceeds the cost or borrowing. I use the HS2 example above because it is hugely expensive and will return very little in terms of productivity increases. However the rollout of high speed broadband is nowhere near the cost of HS2 and will provide productivity gains far greater than the cost of capitalisation. Investments require an adequate return.
Our current borrowing is not to finance productive infrastructure projects, it is to continue the folly of an unaffordable welfare state. The figures in your link may well be correct, however borrowing then was used for real infrastructure improvements; roads, canals, railways, shipping lines, telegraph lines and transatlantic cables and that is simply not the case now (with one or two exceptions).
Yes, you can make it sound like the only reasonable option with well chosen words, but it isn’t. Of course debt has to be managed but if you are going to make an analogy, you can’t ignore the part growth has to play. The household analogy doesn’t do that.
What you have to do is cut spending at a rate that does not inhibit growth, as whilst you may be spending less, this can be wiped out by less money coming in to the coffers and debt increases. I’d use an analogy from Thatcher’s time. Closing an industry down because it isn’t effective. What do you look at – the loss the industry is making full stop – or the overall cost if it is no longer there. So a car factory for example, may make a loss, but if it closed, the tax payer might have to pay for benefits to not only the factory workers, but workers from other areas that rely on the money of the workers. Then there are the parts industries that employ people and all the money that has to be spent to re-generate an area.
Thatcher wasn’t much good at looking beyond the headline figure, but a good economist from left or right has to consider the whole picture. It is very easy for self-appointed clever dicks, in a time of relative crisis to tell us all we are doomed, but things will recover gradually and hopefully the lessons that got us into the mess will be learned. Extreme actions are not always the right options, whether that be increasing spending or decreasing it. It is a tricky path but everything has a net cost and we need people who are capable of making more complex decisions and analogies than housekeeping bills to make them!
Those opposing the continued seasonal increases to the debt have my sympathy, I wish we had a second house to call our government to account as the US does, because our problems are much worse. There must be a plan to reduce the increase of indebtedness before an agreement is reached, if not this time then next or at least some time soon. It's just irresponsible to keep adding debt to the economy, some time it will have to be paid back.
In what circumstances will we have to pay it back? The idea that there will be a time when we have to pay it all back in one go at some point in the future is a fallacy. It is also ridiculous to compare the national budget with a household budget. A household cannot borrow money indefinitely. It will only be able to borrow money over a single typical working life of 25 to 30 years.
If the UK only invested what it could afford from the annual tax take in capital infrastructure projects, education and the health service over the last 60 or 70 years the country would be in a sorry state today. Using the anti-government/anti-tax logic of Thatcherites and Tea Party Republicans the previous generations have left us with only massive debts. But the truth is they have also left us with an infrastructure and an educated workforce that is worth, in today’s money, many billions more than those debts. Similarly, the money the current government borrows to invest in new transport infrastructure, telecoms, increased airport capacity, increased security etc. will be worth significantly more to future generations than the debt that we pass down to them.
I am not saying that a rising deficit is not a problem. But it is naive to view it as if you can deal with it by applying principles a typical household would use to balance its budget.
Also, our deficit is not out of control or at an all time high as the figures here (falseeconomy.org.uk/cure/how-big-is-the-problem) show. I know that this website has an agenda but I have checked some of the graphs with other sources and they seem correct.
Excuse me, I did not realised that we never have to pay anything back that we borrow. Well that's ok then, we'll just keep right on borrowing, those nice people that are giving us the money must be very please with their philanthropy.
I can see now my first couple of sentences were clumsy attempts to make my point which is that there is not a specific date in the future when the UK will not be able to carry debt. Obviously all creditors will be paid as loans mature. If the UK cannot repay maturing loans or service the interest payments on existing loans from its income it will simply issue new loans.
I think you'll find that the BOE (on behalf of the Government) issue gilts with 3, 5, 7, 10, 20 and 25 year terms. A coupon is paid usually twice a year and at the end of the term the capital is repaid in full, a rollover simply means that the debt is reissued with new paper. If there are no takers for the re-issue then the capital has to come from the current account, that is the circumstance in which we may have to cease the rollover and payback the debt with our own capital.
Has this ever happened? I know potentially it could happen if the government completely mis-handle the economy but at the moment (at least in my opinion) it is extremely unlikely in the near future.
The principles of indebtedness are the same, no matter who owes whom.
No. And we are talking about unsecured loans here. I, as an idividual cannot take out a new loan that doesn't have to be repaid until a date beyond my current maximum potential life span. A nation state does not have this restriction when it needs to borrow.
I never said that we should not invest in infrastructure projects, only that in order for them to work they need to provide a return on productivity that exceeds the cost or borrowing.
I did not suggest you did. I was making the point that not all debt passed down to future generations is bad.
I use the HS2 example above because it is hugely expensive and will return very little in terms of productivity increases.
In your opinion! You might be right. But I am sure that there were many people who held the same opinion about all the major infrastructure projects over the last 60 years. In most cases I am pretty sure they have been proved wrong.
However the rollout of high speed broadband is nowhere near the cost of HS2 and will provide productivity gains far greater than the cost of capitalisation. Investments require an adequate return.
Our current borrowing is not to finance productive infrastructure projects, it is to continue the folly of an unaffordable welfare state.
The welfare state is not perfect and something needs to be done to make it more cost effective and fair. But it certainly is not a 'folly'. In fact it is one of the finest achievements in the history of this country. Obviously that is just my opinion.
The figures in your link may well be correct, however borrowing then was used for real infrastructure improvements; roads, canals, railways, shipping lines, telegraph lines and transatlantic cables and that is simply not the case now (with one or two exceptions).
If the goverment did not borrow it simply would not be able to afford any of the current infrasture improvement projects.
Regarding your 2nd point Red - "have we ever been unable to borrow" the answer is most certainly yes, in 1976 when the IMF acted as lender of last resort and forced the Labour Government into substantial cuts to public spending.
Regarding your 2nd point Red - "have we ever been unable to borrow" the answer is most certainly yes, in 1976 when the IMF acted as lender of last resort and forced the Labour Government into substantial cuts to public spending.
It's very tempting to slag off Thatcher (and her "homespun economics") but that is to ignore what a basket-case of an economy the UK had in the 1970s.
I checked that before I posted. I concluded that loan was not because we could not repay our loans but because we needed extra money to support the pound which was being excessively sold off by the international markets.
Yes, you can make it sound like the only reasonable option with well chosen words, but it isn’t. Of course debt has to be managed but if you are going to make an analogy, you can’t ignore the part growth has to play. The household analogy doesn’t do that.
What you have to do is cut spending at a rate that does not inhibit growth, as whilst you may be spending less, this can be wiped out by less money coming in to the coffers and debt increases. I’d use an analogy from Thatcher’s time. Closing an industry down because it isn’t effective. What do you look at – the loss the industry is making full stop – or the overall cost if it is no longer there. So a car factory for example, may make a loss, but if it closed, the tax payer might have to pay for benefits to not only the factory workers, but workers from other areas that rely on the money of the workers. Then there are the parts industries that employ people and all the money that has to be spent to re-generate an area.
Thatcher wasn’t much good at looking beyond the headline figure, but a good economist from left or right has to consider the whole picture. It is very easy for self-appointed clever dicks, in a time of relative crisis to tell us all we are doomed, but things will recover gradually and hopefully the lessons that got us into the mess will be learned. Extreme actions are not always the right options, whether that be increasing spending or decreasing it. It is a tricky path but everything has a net cost and we need people who are capable of making more complex decisions and analogies than housekeeping bills to make them!
Well you see I disagree entirely Muttley, it is the transfer of good sound economic policy into the politically possible that requires it, not the actualities of economic policy itself. I'm sure I said as much above, although I'm not going to re-read.
NB I have not indicated or extolled the closing of down of anything, that is for others to decide, merely the extent to which our indebtedness is causing issue both with social policy and the resurrection of growth.
It's effectively the same thing Red, a collapse in £ is part and parcel of foreigners not wanting to fund us anymore.
You are probably right. I am at the limit of my macro economic knowledge and understanding. I note that in your link it refers to Healey claiming that the crisis was partly due to the Treasury grossly overestimating the public sector borrowing requirement.
The 1976 crisis illustrates that we have been here before. We survived that crisis (although I think that had a lot to do with North Sea oil revenues) and I have no doubt we will survive this crisis no matter what party wins the next election.
The Canadian banker in charge just prints 3 trillion pound notes and hands them out to whoever we owe the money to.
Quite a wheeze indeed. How could it possibly go wrong?.......er......
In the end if everyone did that and/or refinanced all debt into their own currency the whole world's debts could be wiped out. Sadly the rich would suddenly see the value of their assets fall over night but that doesn't strike me as something most members of CL would worry too much about.
The losers would be the poor (as is already the case with QE) - the rich profit from asset price inflation, everyone else gets shafted by negative real interest rates and negative real wage growth. Eventually, unlimited money printing will cause hyperinflation.
I disagree. If we see a reduction in the value of the currency any assets tied into that currently will be massively reduced in global terms. The poor (and I'm talking all but the rich) will, probably have loans on their assets. Inflation is great for those with debts as the real cost of them is reduced. Most poor people have a greater level of debt to asset.
Even if asset values increase so will income (and benefits) so the less well of will just be no better off - unless they have some debts because then they I'll be better off.
Thus my suggestion that it would hit the rich was on the basis that those with large assets and low gearing would see their relative wealth destroyed with the inflation that would be caused.
Compare someone with £1m in the bank so someone that has a property worth £200k with a £180k mortgage. If inflation, over a period of time, is 1,000% the house is worth £2m and the loan is still £180k. Thus the 'poor' bloke with £20 equity ends up with 80% more than the millionaire who has no mortgage.
Those opposing the continued seasonal increases to the debt have my sympathy, I wish we had a second house to call our government to account as the US does, because our problems are much worse. There must be a plan to reduce the increase of indebtedness before an agreement is reached, if not this time then next or at least some time soon. It's just irresponsible to keep adding debt to the economy, some time it will have to be paid back.
In what circumstances will we have to pay it back? The idea that there will be a time when we have to pay it all back in one go at some point in the future is a fallacy. It is also ridiculous to compare the national budget with a household budget. A household cannot borrow money indefinitely. It will only be able to borrow money over a single typical working life of 25 to 30 years.
If the UK only invested what it could afford from the annual tax take in capital infrastructure projects, education and the health service over the last 60 or 70 years the country would be in a sorry state today. Using the anti-government/anti-tax logic of Thatcherites and Tea Party Republicans the previous generations have left us with only massive debts. But the truth is they have also left us with an infrastructure and an educated workforce that is worth, in today’s money, many billions more than those debts. Similarly, the money the current government borrows to invest in new transport infrastructure, telecoms, increased airport capacity, increased security etc. will be worth significantly more to future generations than the debt that we pass down to them.
I am not saying that a rising deficit is not a problem. But it is naive to view it as if you can deal with it by applying principles a typical household would use to balance its budget.
Also, our deficit is not out of control or at an all time high as the figures here (falseeconomy.org.uk/cure/how-big-is-the-problem) show. I know that this website has an agenda but I have checked some of the graphs with other sources and they seem correct.
Excuse me, I did not realised that we never have to pay anything back that we borrow. Well that's ok then, we'll just keep right on borrowing, those nice people that are giving us the money must be very please with their philanthropy.
I can see now my first couple of sentences were clumsy attempts to make my point which is that there is not a specific date in the future when the UK will not be able to carry debt. Obviously all creditors will be paid as loans mature. If the UK cannot repay maturing loans or service the interest payments on existing loans from its income it will simply issue new loans.
I think you'll find that the BOE (on behalf of the Government) issue gilts with 3, 5, 7, 10, 20 and 25 year terms. A coupon is paid usually twice a year and at the end of the term the capital is repaid in full, a rollover simply means that the debt is reissued with new paper. If there are no takers for the re-issue then the capital has to come from the current account, that is the circumstance in which we may have to cease the rollover and payback the debt with our own capital.
Has this ever happened? I know potentially it could happen if the government completely mis-handle the economy but at the moment (at least in my opinion) it is extremely unlikely in the near future.
The principles of indebtedness are the same, no matter who owes whom.
No. And we are talking about unsecured loans here. I, as an idividual cannot take out a new loan that doesn't have to be repaid until a date beyond my current maximum potential life span. A nation state does not have this restriction when it needs to borrow.
I never said that we should not invest in infrastructure projects, only that in order for them to work they need to provide a return on productivity that exceeds the cost or borrowing.
I did not suggest you did. I was making the point that not all debt passed down to future generations is bad.
I use the HS2 example above because it is hugely expensive and will return very little in terms of productivity increases.
In your opinion! You might be right. But I am sure that there were many people who held the same opinion about all the major infrastructure projects over the last 60 years. In most cases I am pretty sure they have been proved wrong.
However the rollout of high speed broadband is nowhere near the cost of HS2 and will provide productivity gains far greater than the cost of capitalisation. Investments require an adequate return.
Our current borrowing is not to finance productive infrastructure projects, it is to continue the folly of an unaffordable welfare state.
The welfare state is not perfect and something needs to be done to make it more cost effective and fair. But it certainly is not a 'folly'. In fact it is one of the finest achievements in the history of this country. Obviously that is just my opinion.
The figures in your link may well be correct, however borrowing then was used for real infrastructure improvements; roads, canals, railways, shipping lines, telegraph lines and transatlantic cables and that is simply not the case now (with one or two exceptions).
If the goverment did not borrow it simply would not be able to afford any of the current infrasture improvement projects.
There is no date at which debt can no longer be rolled over, in that you are right, I don't believe I said there was, our ability to do so however will cease. As it became apparent how much trouble Greece were in they were paying 50% interest on two year notes (I believe it did get even higher) to service their then current debts. That is unsustainable and was above called Wonga territory (or Wronga to give them their correct title).
Once we get into that, the base rate will have to climb, that will mean an explosion of mortgage defaults and another huge headache for our banks. Just as the balance sheets are being rebuilt they will go into slide again as will our economy. To keep interest rates low we need to manage the market perception of our ability to paydown our debts and that requires restraint.
Does a credit line simply stop, rarely but the costs become unserviceable. The more you borrow the greater the risk of default, this adds to the risk premium. Once a currency is under fire markets quickly add to that premium as speculation and uncertainty regarding eventual outcome spreads. Money can become unaffordable in a very short space of time. We are no where near that but, it is a possibility as our debt continue to grow.
The folly of our welfare state is that it is unaffordable and unsustainable at current levels, what you say is our greatest achievement could quickly be destroyed by our inability to manage it and expectations of it. 67% of Government income is spent on it, our PSNCR dipped when this government took over but has since bobbed along well in excess of £100 billion. Growth is key but to get it we must start to reduce the extent of our state.
I reiterate "The principles of indebtedness are the same, no matter who owes whom." I am not trying to compare domestic and national, I simply state that it is a good way of explaining the situation to an electorate that is otherwise disinterested and disengaged. In order that we can manage the necessary reduction in state spending the political will must be shared by the electorate, to that end they must understand it. Most people cannot be arsed with this sort of discussion and care not for the reasons behind the decisions, the simplistic view is the only way to convey that message.
The size of the numbers is quite incredible but confidence can be maintained and the situation can be managed if the major parties face up to the massive inefficiencies and subsidies being poured into the system namely public sector workers retiring at 50 in many cases and living another 30 years, housing benefit subsidies paid to private landlords due to insufficient housing stock and and the minimum wage being paid by wealthy companies which is then supplemented with benefits because the minimum is too low.
The UK national finances were in balance not so long ago but we have had a global shock and new rules need to be written including a European / global approach to corporate taxation which the OECD have undertaken - already the Irish are closing loopholes which led to so called stateless companies enjoying profits syphoned away from the major European consumer centres namely UK, France Germany +
What I am saying is that the electorate and state need to agree a new covenant for this century which deals with the government deficit AND creates jobs AND maintains competitiveness... blaming foreigners gets nowhere and has actually been counterproductive when it comes to foreign students. These so called think tanks need to come up with something convincing for both UK and EU.
So the Government will be able to continue to borrow as long as the deficit is managable and there is growth. Re. Peanuts Malloy concerns on QE - I am not sure how they propose to unwind this - never been done before - I will ask around!
I completely agree with the maths KHA but rich people don't tend to have all of their assets sitting earning bugger all in a bank account. They typically have the vast majority of their wealth in real assets (most particularly property) and equities (which are also relatively inflation-proof). The calculation you outline is relevant as much (more in fact) to the wealthy who are just as likely to be leveraged in financing their property as others, thereby benefitting from the reduction in the real value of fixed rate debt caused by inflation. The most financially strapped (and of course these days the younger generation unable to afford to get on the property ladder, particularly in the south east) are unlikely to be well-endowed with real assets. There is a famous and excellent book titled "When Money Dies - the nightmare of the Weimar hyper-inflation" by Adam Fergusson which recounts the destructive consequences (ultimately for rich and poor alike) of becoming addicted to printing money. Different times and circumstances of course but the Weimar catastrophe is, naturally, the reason for the extreme reluctance of the Bundesbank to agree to the ECB following the Fed's and BoE's QE.
Greece's problem was primarily that it did not collect its taxes efficiently. Many people simply avoided paying taxes but the government kept borrowing.
I read last week that if Obama was allowed to make a relative small increase in tax rates alongside the spending cuts the US would very quickly come through its current fiscal crisis. Unfortunatly he has no chance of getting such tax increases through the existing House of Representatives.
In my opinion the UK also needs tax increases (especially for the rich) as well as spending cuts in order to address the current fiscal problems. The government has to increase its income as well as reduce its outgoings.
HS2 is a desperate project - politicians understand that they have to spend money on infrastructure to promote growth and this at first site seems to tick a lot of the boxes. Unfortunately, on second sight the problems and issues show themselves.
I see it has been announced that EDF will build a nuclear power plant - which will create lots of jobs (people not on benefits) and will make them (a french company) about 10% profit. Why can't the government fund and build that plant?
There are lots of other better ways of spending the HS2 money which will have a greater impact. There is a view (with some evidence to support it) that Governments are not much good at these sort of things and they should be left to private companies. My view is, that many of these are not rocket science and the public sector needs to become better at them - things like a nuclear power station can be built, run and sustained to a set of principles that can be written down on an A4 piece of paper. It doesn't need sharp entrepeneurial spirit.
The government of whatever colour, should be looking to build things that create jobs and profit - I think there are a whole host of safe things that would fit this description.
I see it has been announced that EDF will build a nuclear power plant - which will create lots of jobs (people not on benefits) and will make them (a french company) about 10% profit. Why can't the government fund and build that plant?
Because they're not much good at building power plants or managing businesses. They're lumbered with a highly unionised and inefficient workforce. They don't have the capital. They want to blame someone else when it goes wrong.
Don't agree with governments making up jobs. Governments should be slim and create the econimic environment that encourages companies to create jobs and people to come to this country and that discourage scrounging.
They have the capital for HS2 - and my point is that they have to start getting good at it. I don't mean run complex industries, but this sort of guaranteed profit scheme shouldn't be beyond the public sector - the fact that it is, and is accepted is a mistake IMO. We should be challenging the government as to why it is no good at these straightforward things!
Why cant they run utility and train comapnies - the model to make profits is not that complex - the customers are captive after all!
There is a sort of fear of anything public making a profit with politicians and I don't quite undertsand it. So when the Dome was built, a village idiot could have worked out what a lot of potential was there for something like the O2, but politicians think they have to do something educational and laudible with it! In many ways, governments can make these things work much easier than private companies because they can make sure rules/legislation doesn't get in their way!
And when I say government - I meant governments of all colours.
Building more affordable housing in the South East would be a good start, along with the infrastructure that is also required.
Why should the government subsidise housing?
I keep reading about the need for affordable housing but if the land costs x and the build cost is y and the house is sold for less than x+y, someone is picking up the bill for the difference. When we say the Government we really mean the tax payer and as I've have to pay full price for my house, along with all the various taxes I've had to pay along the way, I don't really want to pay more for someone to be able to buy a house for less than it costs to build it!
After god knows how many hundreds of years of having a parliment to run our country, why arnt thing running like a well oiled machine? I'd privatise that lot.
They have the capital for HS2 - and my point is that they have to start getting good at it. I don't mean run complex industries, but this sort of guaranteed profit scheme shouldn't be beyond the public sector - the fact that it is, and is accepted is a mistake IMO. We should be challenging the government as to why it is no good at these straightforward things!
Why cant they run utility and train comapnies - the model to make profits is not that complex - the customers are captive after all!
There is a sort of fear of anything public making a profit with politicians and I don't quite undertsand it. So when the Dome was built, a village idiot could have worked out what a lot of potential was there for something like the O2, but politicians think they have to do something educational and laudible with it! In many ways, governments can make these things work much easier than private companies because they can make sure rules/legislation doesn't get in their way!
And when I say government - I meant governments of all colours.
But you are not recognising that the people attracted to politics and the skills required to get to the top have little to do with generating wealth and creating jobs. The nature of the political system of lobbying etc means that people spend as much time trashing the other side and blaming individuals / departments as they do on finding solutions. For instance the railways were privatised in a rediculous way to overcome the strength of the unions - this can be fixed now but no one is rushing to do that
Comments
The Canadian banker in charge just prints 3 trillion pound notes and hands them out to whoever we owe the money to.
I think you'll find that the BOE (on behalf of the Government) issue gilts with 3, 5, 7, 10, 20 and 25 year terms. A coupon is paid usually twice a year and at the end of the term the capital is repaid in full, a rollover simply means that the debt is reissued with new paper. If there are no takers for the re-issue then the capital has to come from the current account, that is the circumstance in which we may have to cease the rollover and payback the debt with our own capital.
The principles of indebtedness are the same, no matter who owes whom. Governments may find it easier to divert from their obligations because they control the currency however those obligations remain. My intention was not to compare the two anyhow, it was to show how simply the situation could be explained to an uninterested electorate. Then again I could just be being naïve, because we never have to actually pay anything back do we
I never said that we should not invest in infrastructure projects, only that in order for them to work they need to provide a return on productivity that exceeds the cost or borrowing. I use the HS2 example above because it is hugely expensive and will return very little in terms of productivity increases. However the rollout of high speed broadband is nowhere near the cost of HS2 and will provide productivity gains far greater than the cost of capitalisation. Investments require an adequate return.
Our current borrowing is not to finance productive infrastructure projects, it is to continue the folly of an unaffordable welfare state. The figures in your link may well be correct, however borrowing then was used for real infrastructure improvements; roads, canals, railways, shipping lines, telegraph lines and transatlantic cables and that is simply not the case now (with one or two exceptions).
What you have to do is cut spending at a rate that does not inhibit growth, as whilst you may be spending less, this can be wiped out by less money coming in to the coffers and debt increases. I’d use an analogy from Thatcher’s time. Closing an industry down because it isn’t effective. What do you look at – the loss the industry is making full stop – or the overall cost if it is no longer there. So a car factory for example, may make a loss, but if it closed, the tax payer might have to pay for benefits to not only the factory workers, but workers from other areas that rely on the money of the workers. Then there are the parts industries that employ people and all the money that has to be spent to re-generate an area.
Thatcher wasn’t much good at looking beyond the headline figure, but a good economist from left or right has to consider the whole picture. It is very easy for self-appointed clever dicks, in a time of relative crisis to tell us all we are doomed, but things will recover gradually and hopefully the lessons that got us into the mess will be learned. Extreme actions are not always the right options, whether that be increasing spending or decreasing it. It is a tricky path but everything has a net cost and we need people who are capable of making more complex decisions and analogies than housekeeping bills to make them!
http://www.ft.com/cms/s/2/11484844-b565-11df-9af8-00144feabdc0.html#axzz2iTI43SrN
It's very easy to slag off Thatcher (and her "homespun economics") but that is to ignore what a basket-case of an economy the UK had in the 1970s.
nationalarchives.gov.uk/cabinetpapers/themes/sterling-devalued-imf-loan.htm
NB I have not indicated or extolled the closing of down of anything, that is for others to decide, merely the extent to which our indebtedness is causing issue both with social policy and the resurrection of growth.
The 1976 crisis illustrates that we have been here before. We survived that crisis (although I think that had a lot to do with North Sea oil revenues) and I have no doubt we will survive this crisis no matter what party wins the next election.
Even if asset values increase so will income (and benefits) so the less well of will just be no better off - unless they have some debts because then they I'll be better off.
Thus my suggestion that it would hit the rich was on the basis that those with large assets and low gearing would see their relative wealth destroyed with the inflation that would be caused.
Compare someone with £1m in the bank so someone that has a property worth £200k with a £180k mortgage. If inflation, over a period of time, is 1,000% the house is worth £2m and the loan is still £180k. Thus the 'poor' bloke with £20 equity ends up with 80% more than the millionaire who has no mortgage.
The UK national finances were in balance not so long ago but we have had a global shock and new rules need to be written including a European / global approach to corporate taxation which the OECD have undertaken - already the Irish are closing loopholes which led to so called stateless companies enjoying profits syphoned away from the major European consumer centres namely UK, France Germany +
What I am saying is that the electorate and state need to agree a new covenant for this century which deals with the government deficit AND creates jobs AND maintains competitiveness... blaming foreigners gets nowhere and has actually been counterproductive when it comes to foreign students. These so called think tanks need to come up with something convincing for both UK and EU.
So the Government will be able to continue to borrow as long as the deficit is managable and there is growth. Re. Peanuts Malloy concerns on QE - I am not sure how they propose to unwind this - never been done before - I will ask around!
The most financially strapped (and of course these days the younger generation unable to afford to get on the property ladder, particularly in the south east) are unlikely to be well-endowed with real assets.
There is a famous and excellent book titled "When Money Dies - the nightmare of the Weimar hyper-inflation" by Adam Fergusson which recounts the destructive consequences (ultimately for rich and poor alike) of becoming addicted to printing money. Different times and circumstances of course but the Weimar catastrophe is, naturally, the reason for the extreme reluctance of the Bundesbank to agree to the ECB following the Fed's and BoE's QE.
I read last week that if Obama was allowed to make a relative small increase in tax rates alongside the spending cuts the US would very quickly come through its current fiscal crisis. Unfortunatly he has no chance of getting such tax increases through the existing House of Representatives.
In my opinion the UK also needs tax increases (especially for the rich) as well as spending cuts in order to address the current fiscal problems. The government has to increase its income as well as reduce its outgoings.
I see it has been announced that EDF will build a nuclear power plant - which will create lots of jobs (people not on benefits) and will make them (a french company) about 10% profit. Why can't the government fund and build that plant?
There are lots of other better ways of spending the HS2 money which will have a greater impact. There is a view (with some evidence to support it) that Governments are not much good at these sort of things and they should be left to private companies. My view is, that many of these are not rocket science and the public sector needs to become better at them - things like a nuclear power station can be built, run and sustained to a set of principles that can be written down on an A4 piece of paper. It doesn't need sharp entrepeneurial spirit.
The government of whatever colour, should be looking to build things that create jobs and profit - I think there are a whole host of safe things that would fit this description.
Don't agree with governments making up jobs. Governments should be slim and create the econimic environment that encourages companies to create jobs and people to come to this country and that discourage scrounging.
Why cant they run utility and train comapnies - the model to make profits is not that complex - the customers are captive after all!
There is a sort of fear of anything public making a profit with politicians and I don't quite undertsand it. So when the Dome was built, a village idiot could have worked out what a lot of potential was there for something like the O2, but politicians think they have to do something educational and laudible with it! In many ways, governments can make these things work much easier than private companies because they can make sure rules/legislation doesn't get in their way!
And when I say government - I meant governments of all colours.
I keep reading about the need for affordable housing but if the land costs x and the build cost is y and the house is sold for less than x+y, someone is picking up the bill for the difference. When we say the Government we really mean the tax payer and as I've have to pay full price for my house, along with all the various taxes I've had to pay along the way, I don't really want to pay more for someone to be able to buy a house for less than it costs to build it!
I'd privatise that lot.
For instance the railways were privatised in a rediculous way to overcome the strength of the unions - this can be fixed now but no one is rushing to do that