Politics, politics, politics

[the dza]

It doesn't invalidate that at all, but that statement works on the assumption that an increase in debt is not treated by the outside world as an increase in risk.

It also ignores the fact that during the time the economy is growing, we should attempt to reduce that debt because the economy won't always be growing - the basic premise of it all is Gordon Brown's "I ended boom and bust" which is akin to someone holding a balloon and saying "I ended gravity".

I agree that Gordon Brown was a tit who got things wrong.

But if we put aside Tory/Labour, left/right/whatever. Would you say that it is worth at least considering for this government, or the next one, to start a program of investment in things that the country needs, with a view to growing the economy and improving the country for all of us? It would seem to be a good time to do so, imo.

 

[Gilzeantoscore]

Apologies for the left-wing source of this info:

http://www.economist.com/blogs/freeexchange/2015/06/public-debt

For those countries with no headroom (in the red or amber zone on the chart), the IMF’s paper is not much use: they need to take action to reduce their borrowing levels. But for countries well into the green zone (of which America is a star performer and Britain is a somewhat marginal case), the IMF’s analysis has a clear message: don’t worry about your debt.

For these countries, the wonks argue that the costs of raising taxes or cutting useful spending to reduce debt levels outweighs any benefits. For countries safely in the green zone, the authors present an example of a country reducing its debt from 120% to 100% of GDP. They calculate that the expected costs of the higher taxation (for instance, from the disincentives to work created by increased tax rates) are likely to outweigh the expected benefits (from the lower risk of a default in the event of a crisis) by a factor of ten.

What should such countries do instead? The best thing, the paper says, is simply to let economic growth take its course. In the long run, if the economy grows more quickly than debt, the burden of it will fall as a percentage of GDP

Borrowing now at low interest rates to build/replace infrastructure will eventually add to GDP and ENABLE the economy to better pay down debt. It's all pretty basic, but the Stalinists who run our neo-liberal economic policies refuses to countenance it.

 

[Gilzeantoscore]

Those who oppose are the types scared off by the typical Tory line....you know how it goes, you've all heard it..."any good house wife knows, that you have to leave within your means and that means balancing the household budget." Geeze, the analogy isn't even accurate in the original sense, because I don't know too many households that aren't in debt.

 

[scaramanga]

I agree that Gordon Brown was a tit who got things wrong.

But if we put aside Tory/Labour, left/right/whatever. Would you say that it is worth at least considering for this government, or the next one, to start a program of investment in things that the country needs, with a view to growing the economy and improving the country for all of us? It would seem to be a good time to do so, imo.

Itwill be worth considering after we have had a boom and done some significant debt reduction.

So you're looking at a full cyclebefore it could come into place.

 

[scaramanga]

Borrowing now at low interest rates to build/replace infrastructure will eventually add to GDP and ENABLE the economy to better pay down debt. It's all pretty basic, but the Stalinists who run our neo-liberal economic policies refuses to countenance it.

Seeing as we're on the subject of basic economics, let's discuss the source of this money tree shall we?

When the government borrows, it borrows from investors looking to invest. When the government borrows from an investor, it borrows money that would otherwise have gone to the private sector to create more jobs or products, the proceeds of which would then have been spent and increased growth. So the government isn't creating jobs or product, it's just shifting them from the private sector to the public.

This means the government has to be at least as efficient and at least as good as a person or business at maximising the benefits of the spending - something that has never happened before.

Even then, all we're doing is shifting jobs from the boom part of the cycle to the bust. The debt has to be paid at some point, it can't increase forever. So the growth of the economy would have to outstrip the interest rate paid on that borrowing or else we'll just be taking the pain on the next boom cycle. So we'd have to be very sure that these infrastructure investments will definitely pay off in terms of GDP, that they will increase GDP at more than the rate of interest and will have to have little or no future costs so that we can pay back the debt in the future. Again, not things that governments have ever done in the past. You have to stop thinking of government debt as a fixed rate loan. The bonds will have an expiry and that expiry will tend to be short when interest rates are low. Those bonds will need renewing unless we've paid all our debt, and they'll be renewed at the prevailing interest rate. Borrowing low doesn't mean it will stay low.

So what infrastructure that we need could we build?

I doubt we'd be allowed to put another 6 lanes on the M25 - the locals wouldn't like that. We need at least another runway at both LHR & LGW - can't do that it seems. We don't have the time or knowledge to build nuclear power plants, we don't have the technology to make renewable energy usable on a large scale. We need to completely rebuild all the railways but we've spent the last 200 years building right alongside them so we can't do much there. Training/education won't improve or pay off in the timescales we need.

 

[Danishfurniturelover]

And people might say "well, if we borrow money, then the rates won't stay low."

But under Osborne, the country has borrowed more money than under Labour -- yet the rates of interest remain very low. Why should borrowing to invest in infrastructure, grow the economy and grow tax revenues mean a huge jump in rates of repayment? Particularly if it is deemed to make economic sense (as seems to be the opinion of that IMF paper talked about in The Economist).

Osborne had to borrow, Labour left him in such a mess we were on the brink.

 

[monkeybarry]

I agree that Gordon Brown was a tit who got things wrong.

But if we put aside Tory/Labour, left/right/whatever. Would you say that it is worth at least considering for this government, or the next one, to start a program of investment in things that the country needs, with a view to growing the economy and improving the country for all of us? It would seem to be a good time to do so, imo.

For good governance - yes I would.

Sadly we cannot separate out those parties and labels until the electorate spend more time researching their vote rather than voting on historical lines or rhetoric.

 

[Gilzeantoscore]

Seeing as we're on the subject of basic economics, let's discuss the source of this money tree shall we?

When the government borrows, it borrows from investors looking to invest. When the government borrows from an investor, it borrows money that would otherwise have gone to the private sector to create more jobs or products, the proceeds of which would then have been spent and increased growth. So the government isn't creating jobs or product, it's just shifting them from the private sector to the public.

This means the government has to be at least as efficient and at least as good as a person or business at maximising the benefits of the spending - something that has never happened before.

Even then, all we're doing is shifting jobs from the boom part of the cycle to the bust. The debt has to be paid at some point, it can't increase forever. So the growth of the economy would have to outstrip the interest rate paid on that borrowing or else we'll just be taking the pain on the next boom cycle. So we'd have to be very sure that these infrastructure investments will definitely pay off in terms of GDP, that they will increase GDP at more than the rate of interest and will have to have little or no future costs so that we can pay back the debt in the future. Again, not things that governments have ever done in the past. You have to stop thinking of government debt as a fixed rate loan. The bonds will have an expiry and that expiry will tend to be short when interest rates are low. Those bonds will need renewing unless we've paid all our debt, and they'll be renewed at the prevailing interest rate. Borrowing low doesn't mean it will stay low.

So what infrastructure that we need could we build?

I doubt we'd be allowed to put another 6 lanes on the M25 - the locals wouldn't like that. We need at least another runway at both LHR & LGW - can't do that it seems. We don't have the time or knowledge to build nuclear power plants, we don't have the technology to make renewable energy usable on a large scale. We need to completely rebuild all the railways but we've spent the last 200 years building right alongside them so we can't do much there. Training/education won't improve or pay off in the timescales we need.

Borrowing to improve economic efficiencies boosts productivity and helps to drive down debt. We borrow at low interest to build infrastructure projects that boost productivity, the boosted productivity leads to growth in tax receipts, it boosts exports, so that down the track, it ends up being a net benefit, not a debt. Your point re public and private competition for funds is mystifying. Rates are low, because there is no competition for borrowed funds.

 

[the dza]

Seeing as we're on the subject of basic economics, let's discuss the source of this money tree shall we?

When the government borrows, it borrows from investors looking to invest. When the government borrows from an investor, it borrows money that would otherwise have gone to the private sector to create more jobs or products, the proceeds of which would then have been spent and increased growth. So the government isn't creating jobs or product, it's just shifting them from the private sector to the public.

The main investors in government debt are pension funds and insurance companies iirc. They were never going to take that money and put it into riskier, private sector ventures were they?

Likewise foreign central banks, they purchase gilts as part of their foreign currency reserves.

Then of course, there are the times when the BoE buys gilts. In 2009, the 3rd biggest holder of UK debt was the Bank of England. Again, this wasn't money that was ever going to go anywhere else.

Also, the government borrows money to spend it. The spending ends up in the private sector, surely? That's why government investment can boost the economy for everyone.

This means the government has to be at least as efficient and at least as good as a person or business at maximising the benefits of the spending - something that has never happened before.

In light of who holds government debt and why, I would disagree. See the previous points.

Even then, all we're doing is shifting jobs from the boom part of the cycle to the bust. The debt has to be paid at some point, it can't increase forever. So the growth of the economy would have to outstrip the interest rate paid on that borrowing or else we'll just be taking the pain on the next boom cycle. So we'd have to be very sure that these infrastructure investments will definitely pay off in terms of GDP, that they will increase GDP at more than the rate of interest and will have to have little or no future costs so that we can pay back the debt in the future. Again, not things that governments have ever done in the past. You have to stop thinking of government debt as a fixed rate loan. The bonds will have an expiry and that expiry will tend to be short when interest rates are low. Those bonds will need renewing unless we've paid all our debt, and they'll be renewed at the prevailing interest rate. Borrowing low doesn't mean it will stay low.

Don't gilts get paid back at a fixed amount, the rate of interest at the time of issue? As long as there is demand to buy them (and when there isn't, the Bank of England are willing to create it by buying them themselves) and the government can service the debt, then there is no problem. Borrowing for a program of investment that boosts growth and tax receipts doesn't seem like something that would put off the main bulk of the purchasers of gilts.

So what infrastructure that we need could we build?

I would hope that the government of the day could take a proper review and come up with detailed proposals.

I doubt we'd be allowed to put another 6 lanes on the M25 - the locals wouldn't like that. We need at least another runway at both LHR & LGW - can't do that it seems. We don't have the time or knowledge to build nuclear power plants, we don't have the technology to make renewable energy usable on a large scale. We need to completely rebuild all the railways but we've spent the last 200 years building right alongside them so we can't do much there. Training/education won't improve or pay off in the timescales we need.

See above.

 

[scaramanga]

The main investors in government debt are pension funds and insurance companies iirc. They were never going to take that money and put it into riskier, private sector ventures were they?

Likewise foreign central banks, they purchase gilts as part of their foreign currency reserves.

It's all money that has to be invested. If the government isn't selling debt then someone will. It's not gilts alone that these funds will want, it's just low risk profile investment.

Then of course, there are the times when the BoE buys gilts. In 2009, the 3rd biggest holder of UK debt was the Bank of England. Again, this wasn't money that was ever going to go anywhere else.

Also, the government borrows money to spend it. The spending ends up in the private sector, surely? That's why government investment can boost the economy for everyone.

I intentionally left out increasing the amount of money in the system as that's an entirely different problem. Increasing the level of cash in a system to keep liquidity is important, but doing it to increase spending will just increase inflation over the long run. It won't happen immediately, but as the economy picks up then inflation will rise faster than it would have. Again, we're just shifting jobs/spending from the good times to the bad - we're not creating anything.

Don't gilts get paid back at a fixed amount, the rate of interest at the time of issue? As long as there is demand to buy them (and when there isn't, the Bank of England are willing to create it by buying them themselves) and the government can service the debt, then there is no problem. Borrowing for a program of investment that boosts growth and tax receipts doesn't seem like something that would put off the main bulk of the purchasers of gilts.

Unless we're reducing the overall level of debt (something we're not nearly able to do until much better times) then those gilts have to be repurchased - that's exactly what happens now. When they're repurchased, it's done at the prevailing rate of interest at the time - if the economy has started to improve but is not fully into a boom, then you're paying at a higher interest rate without being able to reduce debt. Even worse, if you're still in a bust when they expire, and your level of risk is perceived to have increased (due to high borrowing) then you have to borrow even more at a higher rate and you are still not generating the tax returns to cover it.

We were actually at risk of that quite recently. There was a large chunk of borrowing becoming due for renewal when the UK was at risk of having its credit rating downgraded - I believe we renewed before it was, but that kind of thing can very quickly start a downward spiral. Look at payday loan effect for example.

I would hope that the government of the day could take a proper review and come up with detailed proposals.

So would I, but would you bet your house on any government of any colour doing so perfectly? Because this is the economic equivalent of going all in on a pair of 9s.

 

[Gilzeantoscore]

The debt bogey is just a tactic to justify the Tory ideological aims of winding back all forms of government intervention in the economy and to also justify austerity policies which aim to remove welfare provisions. They bang on about this regardless of the state of the economy.

 

[scaramanga]

Borrowing to improve economic efficiencies boosts productivity and helps to drive down debt.

We borrow at low interest to build infrastructure projects that boost productivity, the boosted productivity leads to growth in tax receipts, it boosts exports, so that down the track, it ends up being a net benefit, not a debt.

If and that's a very big if, our borrowing improves productivity then we're only moving that productivity from the private to the public sector - unless we're in a situation where there's no private investment at all and nobody is lending to the private sector.

And productivity doesn't drive down debt, it just creates extra revenue that can be used to pay down debt if that's at a higher rate than the interest and inflation. Paying this off in the boom periods just means that we're shifting government spending from the booms to the busts - not a terrible idea if managed properly, but in order to work, we have to pay down debt in the booms. We didn't do that, so now we can't do the spending bit.

Your point re public and private competition for funds is mystifying. Rates are low, because there is no competition for borrowed funds.

Rates are low because governments all over the western world are essentially printing money and giving it to banks for lending. They're storing up an inflation problem that will make paying off debt more difficult in the longer term.

 

[the dza]

I thought this was an interesting article. Maybe possible to painlessly knock a few hundred billion off the national debt? I'm sure there are plenty of opinions to the contrary! As far as I know, this isn't a left wing author:

https://www.bondvigilantes.com/blog...e-gilts-held-by-the-boe-who-would-be-unhappy/

The UK sits unhappily at the very boundary of what debt burden is acceptable for a AAA rated economy. If growth continues to disappoint, or if more austerity becomes socially impossible, the UK will be downgraded – and neither of these possibilities look very remote.


At the moment the UK public sector net debt to GDP ratio is about 63%, equivalent to about £1 trillion (these numbers exclude the debt of the part nationalised banks). Debt servicing costs are over £50 billion per year – a large chunk of our annual deficit. Additionally our debt position is likely to deteriorate before it improves.


But do we really need to be paying interest to the Bank of England on the £300 billion+ of gilts that it holds as part of the Quantitative Easing programme? In fact the Bank holds these gilts on behalf of the Treasury anyway, so the Treasury is effectively paying interest to itself on assets that it bought with “free” printed money. Could we decide that this is a waste of time, that we are unlikely to sell these gilts back to the market in any case, and that we may as well just cancel the gilts we bought for the nation? Gold bugs and inflationists will at this point be spluttering into cups of tea – what about all of the printed fivers that have been set free into the economy like in a modern day Weimar Republic? Well, how about this for a potential statement from the authorities on gilt cancellation announcement day:


“Today the Treasury announces the cancellation of £350 billion of gilt-edged stock held by the authorities. These gilts were bought as part of the Quantitative Easing programme started in the aftermath of the financial crisis. The purpose of Quantitative Easing was to boost nominal growth after what we thought was a temporary fall in UK output. Several years later it appears that this fall in output was permanent – the fall in UK GDP remains more severe than that experienced during the Great Depression. We will therefore make this liquidity injection permanent in order to boost UK growth and reduce unemployment. The Bank of England of course remains fully committed to its inflation target of 2% – a cornerstone of UK economic policy. Should inflation rise, or be forecast to rise above the target range, the Bank may raise interest rates, or sell Treasury Bills to the market in order to drain excess liquidity from the system and return inflation to its target. Today’s action also reduces the UK’s debt to GDP ratio from 63% to 41%, and slashes our interest bill from £50 billion £32 billion per year. This prudent action safeguards the UK’s AAA credit ratings and leaves holders of gilt-edged securities in a stronger position than before.


Note from the Debt Management Office: the gilt cancellation will take place using the same process and precedent set with the cancellation of £9 billion of UK gilt-edged securities acquired from the Post Office pension scheme in April 2012.”


So who would be unhappy with this? No default has taken place (no CDS trigger, no D from the ratings agencies who are only interested in failure to pay private investors), the UK’s public finances become sustainable, the economy gets a boost from the knowledge that the QE cash injected will stay there for the foreseeable future, and a mechanism exists to remove cash from the economy should inflation return. Apart from the fact it all feels a bit banana republicy everybody’s a winner. In fact the genius of this idea is that it doesn’t need to be done at all – if the Bank of England were to start paying gilt coupons and maturing gilt proceeds over to the Treasury automatically you would have an equivalent economic impact, without any of the awkward Zimbabwe comparisons.

 

[scaramanga]

I thought this was an interesting article. Maybe possible to painlessly knock a few hundred billion off the national debt? I'm sure there are plenty of opinions to the contrary! As far as I know, this isn't a left wing author:

https://www.bondvigilantes.com/blog...e-gilts-held-by-the-boe-who-would-be-unhappy/

The UK sits unhappily at the very boundary of what debt burden is acceptable for a AAA rated economy. If growth continues to disappoint, or if more austerity becomes socially impossible, the UK will be downgraded – and neither of these possibilities look very remote.


At the moment the UK public sector net debt to GDP ratio is about 63%, equivalent to about £1 trillion (these numbers exclude the debt of the part nationalised banks). Debt servicing costs are over £50 billion per year – a large chunk of our annual deficit. Additionally our debt position is likely to deteriorate before it improves.


But do we really need to be paying interest to the Bank of England on the £300 billion+ of gilts that it holds as part of the Quantitative Easing programme? In fact the Bank holds these gilts on behalf of the Treasury anyway, so the Treasury is effectively paying interest to itself on assets that it bought with “free” printed money. Could we decide that this is a waste of time, that we are unlikely to sell these gilts back to the market in any case, and that we may as well just cancel the gilts we bought for the nation? Gold bugs and inflationists will at this point be spluttering into cups of tea – what about all of the printed fivers that have been set free into the economy like in a modern day Weimar Republic? Well, how about this for a potential statement from the authorities on gilt cancellation announcement day:


“Today the Treasury announces the cancellation of £350 billion of gilt-edged stock held by the authorities. These gilts were bought as part of the Quantitative Easing programme started in the aftermath of the financial crisis. The purpose of Quantitative Easing was to boost nominal growth after what we thought was a temporary fall in UK output. Several years later it appears that this fall in output was permanent – the fall in UK GDP remains more severe than that experienced during the Great Depression. We will therefore make this liquidity injection permanent in order to boost UK growth and reduce unemployment. The Bank of England of course remains fully committed to its inflation target of 2% – a cornerstone of UK economic policy. Should inflation rise, or be forecast to rise above the target range, the Bank may raise interest rates, or sell Treasury Bills to the market in order to drain excess liquidity from the system and return inflation to its target. Today’s action also reduces the UK’s debt to GDP ratio from 63% to 41%, and slashes our interest bill from £50 billion £32 billion per year. This prudent action safeguards the UK’s AAA credit ratings and leaves holders of gilt-edged securities in a stronger position than before.


Note from the Debt Management Office: the gilt cancellation will take place using the same process and precedent set with the cancellation of £9 billion of UK gilt-edged securities acquired from the Post Office pension scheme in April 2012.”


So who would be unhappy with this? No default has taken place (no CDS trigger, no D from the ratings agencies who are only interested in failure to pay private investors), the UK’s public finances become sustainable, the economy gets a boost from the knowledge that the QE cash injected will stay there for the foreseeable future, and a mechanism exists to remove cash from the economy should inflation return. Apart from the fact it all feels a bit banana republicy everybody’s a winner. In fact the genius of this idea is that it doesn’t need to be done at all – if the Bank of England were to start paying gilt coupons and maturing gilt proceeds over to the Treasury automatically you would have an equivalent economic impact, without any of the awkward Zimbabwe comparisons.

That suggestion sounds lovely, but it neglects the very reason that QE is currently non-inflationary.

The difference between QE and just printing a load of money is that QE has a time limit in which it must reverse. As the gilts that have been bought expire, the money put into the economy reduces again - this reversible nature of QE (along with a continued global depression) is what's keeping inflation low.

If you take away that reversibility then you take away the block to inflation that is baked into QE - apart from thoroughly ruining the credibility of the UK government and the BoE, you also ruin the value of Sterling.

 

[Gilzeantoscore]

If and that's a very big if, our borrowing improves productivity then we're only moving that productivity from the private to the public sector - unless we're in a situation where there's no private investment at all and nobody is lending to the private sector.

And productivity doesn't drive down debt, it just creates extra revenue that can be used to pay down debt if that's at a higher rate than the interest and inflation. Paying this off in the boom periods just means that we're shifting government spending from the booms to the busts - not a terrible idea if managed properly, but in order to work, we have to pay down debt in the booms. We didn't do that, so now we can't do the spending bit.


Rates are low because governments all over the western world are essentially printing money and giving it to banks for lending. They're storing up an inflation problem that will make paying off debt more difficult in the longer term.

How does building new and improved docks, better airports, new bridges etc, so that private industry can move their exports more efficiently move productivity from the private to the government sector? You don't seem to understand the great strength of a REAL mixed economy. One helps the other.

 

[scaramanga]

How does building new and improved docks, better airports, new bridges etc, so that private industry can move their exports more efficiently move productivity from the private to the government sector? You don't seem to understand the great strength of a REAL mixed economy. One helps the other.

If we do it properly and efficiently, great. The problem is that most government projects, from both sides of the fence, end up as a millstone around the necks of the public.

As I specified above, there are a lot of projects that could massively enhance the country's profitability but how many of them are actually likely to come to fruition? A new runway for both Heathrow and Gatwick are clear wins but neither have been built yet. The M25 needs at least two, probably three more lanes in each direction but that hasn't happened either.

I was part of a group lobbying MPs for an improved port at Portsmouth, but EU environmental restrictions meant it couldn't happen - too many lorries on the surrounding roads.

 

[the dza]

That suggestion sounds lovely, but it neglects the very reason that QE is currently non-inflationary.

The difference between QE and just printing a load of money is that QE has a time limit in which it must reverse. As the gilts that have been bought expire, the money put into the economy reduces again - this reversible nature of QE (along with a continued global depression) is what's keeping inflation low.

If you take away that reversibility then you take away the block to inflation that is baked into QE - apart from thoroughly ruining the credibility of the UK government and the BoE, you also ruin the value of Sterling.

I thought this was addressed in the article. (there are some very interesting comments below it too, for and against).

Would some inflation be a bad thing in this economic environment, which has been near deflationary at times? I would have thought that some inflation would be preferable when you have a big pile of debt.

I wonder what would happen if the Federal Reserve, the ECB and the BoE all decided to cancel the debt that they owe themselves at the same time? All have done some substantial QE.

 

[scaramanga]

I thought this was addressed in the article. (there are some very interesting comments below it too, for and against).

Would some inflation be a bad thing in this economic environment, which has been near deflationary at times? I would have thought that some inflation would be preferable when you have a big pile of debt.

I wonder what would happen if the Federal Reserve, the ECB and the BoE all decided to cancel the debt that they owe themselves at the same time? All have done some substantial QE.

When I mention inflation here I don't mean the "Oh, my shopping cost an extra £10 this week - might have to consider Sainsburys" kind of inflation - it's more at the "Moving cash around in wheelbarrows" end of the scale (although obviously not that bad).

 

[the dza]

When I mention inflation here I don't mean the "Oh, my shopping cost an extra £10 this week - might have to consider Sainsburys" kind of inflation - it's more at the "Moving cash around in wheelbarrows" end of the scale (although obviously not that bad).

I reckon that would only happen if they decided to cover the whole debt and more government spending via QE and subsequent cancellation of the QE'd debt. But as a one-off course of action (as in the article) in response to what happened in 2008, perhaps that sort of rampant inflation would be avoided (because it's a one off and because the downturn in 2008 was so severe that we haven't been able to properly recover from it).

I used to be a lot more familiar with economics, but after awhile the '4 economists = 6 opinions' thing does my phucking head in.

 

[scaramanga]

I reckon that would only happen if they decided to cover the whole debt and more government spending via QE and subsequent cancellation of the QE'd debt. But as a one-off course of action (as in the article) in response to what happened in 2008, perhaps that sort of rampant inflation would be avoided (because it's a one off and because the downturn in 2008 was so severe that we haven't been able to properly recover from it).

I used to be a lot more familiar with economics, but after awhile the '4 economists = 6 opinions' thing does my phucking head in.

There's just something thoroughly off about it in my head.

The main problem is that if one could magic up money at any time without any cost, we would all do it all the time. For the same reason perpetual motion doesn't exist, neither can free money.