Government borrowing

Government borrowing

Author
Discussion

M22s

Original Poster:

336 posts

113 months

Wednesday 3rd March
quotequote all
Can the PH hive mind help me understand government borrowing?

From what I understand, the government effectively takes loans from institutions which are paid back over a period of time at an agreed rate. Which if I am right, seems simple enough but does that pot have a bottom?

Is this ability infinite?

Does money move from one account to the next? Is it actual cash in the bank so to speak, or is it theoretical money?

Could the government feasibly say ‘that’s it, there is no more money’ and it be real?

I see £x trillions and think - wow, that’s a big problem but I struggle to comprehend the numbers that are being talked about if I’m honest.

greygoose

6,442 posts

159 months

Wednesday 3rd March
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Governments can default on their debts, but it is pretty rare, Argentina did it and was punished with higher interest rates on its bonds for years afterwards. The UK could print more money to pay its debts, obviously this would affect the value of the pound though as there would be more in circulation.

loafer123

12,117 posts

179 months

Wednesday 3rd March
quotequote all
M22s said:
Can the PH hive mind help me understand government borrowing?

From what I understand, the government effectively takes loans from institutions which are paid back over a period of time at an agreed rate. Which if I am right, seems simple enough but does that pot have a bottom?

Is this ability infinite?

Does money move from one account to the next? Is it actual cash in the bank so to speak, or is it theoretical money?

Could the government feasibly say ‘that’s it, there is no more money’ and it be real?

I see £x trillions and think - wow, that’s a big problem but I struggle to comprehend the numbers that are being talked about if I’m honest.
Fundamentally, we can’t go bust, as we have our own currency.

The Bank of England owns about 1/3rd of Gilts, and has bought much of the recent issuance. We also have the longest maturity of most countries, so it isn’t a short term problem.

In principle, we should either get the bonds repaid by the Government over time, but in reality it isn’t an issue unless inflation takes off due to the greater volume of money.

On that point, as people get older, the velocity of money (the speed at which it moves through the system) falls as pensioners save more and spend less, and so you do need more money in the system to compensate anyway.

nw942

366 posts

69 months

Wednesday 3rd March
quotequote all
As I understand it:

As long as there is a willing buyer for the bond then it is theoretically bottomless, although as stated, other considerations come into play.

In the UK the bonds are purchased by various entities including the Bank of England, who purchases bonds through the Quantitative Easing program.

The BoE also buys bonds from banks who can then lend to business etc.

In the US I believe the Federal Reserve is buying a wider range of assets including 'junk' corporate bonds.

The Spruce Goose

27,750 posts

159 months

Wednesday 3rd March
quotequote all
Whilst interests are so low not really an issue. But if they start increasing, well...

PushedDover

3,281 posts

17 months

Wednesday 3rd March
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Any decent reads to learn up on the whole system and principles - Bonds, gilts etc etc?

Not a monster read, but also more than a glossary sheet

thekingisdead

169 posts

97 months

Thursday 4th March
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Monevator has some good articles on Bonds / gilts etc. Although that’s predominantly from an investor perspective, not the system as a whole. But it may be a good starting point.

LeoSayer

6,302 posts

208 months

Thursday 4th March
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It is real money.

Demand mainly comes from pension funds and commercial bank reserves which are based on savings and borrowings.

The UK is one of the most credit worthy countries so there is international demand as well.

Demand is very high at the moment which makes the prices for gilts high, in turn making yields very low, sometimes negative.

It is this strong demand which has allowed QE to take place, with BoE buying gilts from commercial banks reserves creating artificial demand, reducing yields still further with a view to stimulating growth.

It is this 'money printing' which causes much consternation and a fear of inflation.

QE and the size of the debt only become a problem if demand drops because buyers no longer have confidence in the government's ability to repay. In the meantime it's cheap money which the government is making full use of.

Edited by LeoSayer on Thursday 4th March 07:29

LeoSayer

6,302 posts

208 months

Thursday 4th March
quotequote all
PushedDover said:
Any decent reads to learn up on the whole system and principles - Bonds, gilts etc etc?

Not a monster read, but also more than a glossary sheet
https://www.bankofengland.co.uk/knowledgebank

HRH2009

134 posts

142 months

Thursday 4th March
quotequote all
The Spruce Goose said:
Whilst interests are so low not really an issue. But if they start increasing, well...
Am I correct to say that the Bonds sold currently would be at set rate of interest with a maturity date 10/20/30 years down the line?

The risk is when in the future to repay these loans, the borrowings could be much more expensive, if/when interest rates went up?

Mr Whippy

23,604 posts

205 months

Thursday 4th March
quotequote all
Government creates a bond and sells them.
People, other countries banks, and institutions buy them.
BofE prints money and buys lots to ‘stimulate’ the economy.
Government now has £££ to spend.


How that latter part of printing money impacts the economy is then a whole other story.

As western countries slip into UBI funded like this, essentially we’re stimulating the economy by printing money and giving it directly to people to spend on stuff.

The issue here is that other countries and even people won’t want to buy these bonds because they’re a clear sign of the snake eating its own tail.
If they live off debt to fuel GDP, the risk of not getting your money back or values plummeting is high.
To sell these bonds you then need to offer a higher return to get punters in.
But that risks interest rate rises which makes the cost of debt servicing higher.
This means the central banks buy more to keep prices under control as they’ll take the “risk” as they just print money.

This accelerates the process of watering down the value of the money and eventually a country is just running off its own printing press.


This is a widely global phenomenon. But Japan has been doing it decades and has had deflation and a stagnant economy.

Our mileage may vary.

PushedDover

3,281 posts

17 months

Thursday 4th March
quotequote all
LeoSayer said:
PushedDover said:
Any decent reads to learn up on the whole system and principles - Bonds, gilts etc etc?

Not a monster read, but also more than a glossary sheet
https://www.bankofengland.co.uk/knowledgebank
Many thanks

LeoSayer

6,302 posts

208 months

Thursday 4th March
quotequote all
PushedDover said:
LeoSayer said:
PushedDover said:
Any decent reads to learn up on the whole system and principles - Bonds, gilts etc etc?

Not a monster read, but also more than a glossary sheet
https://www.bankofengland.co.uk/knowledgebank
Many thanks
I discovered this youtube channel recently which has loads of well presented material on all financial market topics:

https://www.youtube.com/watch?v=Aaw05GvQ6YU


stichill99

551 posts

145 months

Thursday 4th March
quotequote all
I watched a youtube video last night with a forecaster warning that after the US QE package that their debt will be heading for 30 trillion. Many many times what the bank bailout was.He said that if interest rates went to their historic average of 5% USA would be bankrupt. So I guess it's no bank interest for the next 25 years then?

Lucas Ayde

2,429 posts

132 months

Thursday 4th March
quotequote all
This is worth a watch, spells it out quite nicely:

https://youtu.be/HcLqyUyP5XY

M22s

Original Poster:

336 posts

113 months

Thursday 4th March
quotequote all
Some great explanations and things to explore a bit more - thanks a lot folks!

It hadn’t occurred to me other nations would buy these bonds, but that really explains the concern over rapid inflation as a potential outcome of borrowing.

Japan is an interesting example and one I hadn’t really considered beyond them being quite static.


BlackG7R

523 posts

145 months

Thursday 4th March
quotequote all
I remember the Tories in the run up to the election of 2010 saying they were very worried about the debt levels Labour had run up, because eventually all the national income could be eaten up just making interest payments, leaving nothing to actually "run the country"

Our finances and debt levels were farcical then following the financial crisis, but now it's just off the scale ridiculous. This is a debt that cannot be repaid, so it will not be repaid. I'm guessing it will end with massive inflation, or default, or both.

x5x3

2,366 posts

217 months

Friday 5th March
quotequote all
BlackG7R said:
I remember the Tories in the run up to the election of 2010 saying they were very worried about the debt levels Labour had run up, because eventually all the national income could be eaten up just making interest payments, leaving nothing to actually "run the country"

Our finances and debt levels were farcical then following the financial crisis, but now it's just off the scale ridiculous. This is a debt that cannot be repaid, so it will not be repaid. I'm guessing it will end with massive inflation, or default, or both.
debt is an illusion - UK issues GBP so it does not matter how much they print or owe, suggest you read some MMT theory.

Clive Milk

304 posts

4 months

Friday 5th March
quotequote all
A government can borrow money and pay interest.

It can also print money and increase inflation.

It can do both.


Currently all of the above are in vogue.


The bailiffs are nowhere to be seen. As yet ......

Clive Milk

304 posts

4 months

Friday 5th March
quotequote all
x5x3 said:
BlackG7R said:
I remember the Tories in the run up to the election of 2010 saying they were very worried about the debt levels Labour had run up, because eventually all the national income could be eaten up just making interest payments, leaving nothing to actually "run the country"

Our finances and debt levels were farcical then following the financial crisis, but now it's just off the scale ridiculous. This is a debt that cannot be repaid, so it will not be repaid. I'm guessing it will end with massive inflation, or default, or both.
debt is an illusion
laugh

Just out of interest, do you personally have any illusionary debt, and do you pay any illusionary interest on it?

Yes or no?