Question About Interest Rates On Uk Government Debt

[Saver]

Hi,

So I have seen some articles in the newspapers claiming that interest rates on government debt are fixed until a long time (like 10-20 years time) and therefore the whole worry about the "markets" jacking up interest rates if we don't cut is not true. Are they right or wrong and why?

[leicestersq]

Hi,

So I have seen some articles in the newspapers claiming that interest rates on government debt are fixed until a long time (like 10-20 years time) and therefore the whole worry about the "markets" jacking up interest rates if we don't cut is not true. Are they right or wrong and why?

Yes, most government debt is fixed interest, and so is unaffected by rates. If interest rates go up, the prices of the bonds falls, they dont pay out anymore money.

There are index linked bonds too, which pay out more the higher the rate of inflation.

The problem is on new debt. As bonds expire, they have to be repaid, and if you have a deficit you have to repay expiring debt, and new deficit expenditure, out of new government debt. And that is where the new higher rate of interest gets locked in. If that rate rises too far, then the bond market becomes effectively closed to HMG, at which pint they either print new money to pay back bonds and spend above tax receipts, or they have to slash expenditure to immediately match revenues. Ugly choice.

[19 year mortgage 8itch]

If its not a problem, how come public borrwoing hit a record high last month due to "interest payments on gilts shot up because of higher inflation"?

[interestrateripoff]

Please don't ask awkward questions, the thought police will be onto you.

[clloyd]

If its not a problem, how come public borrwoing hit a record high last month due to "interest payments on gilts shot up because of higher inflation"?

Debt that doesn't "mature" for several years is not a problem (until it needs to be refinanced). From memory our average maturity on govt debt is 7 years ish but some will be say 20 years and some will need refinancing this year (on top of the £150 billion we need to borrow this year to finance the deficit). Overall, I would guess it is the new debt issuance that is the biggest problem now, but not far down the line it could be trying to roll over existing issues.

For balance its worth saying that some debt that is refinanced will currently have a higher interest rates than the present ones.

[scottbeard]

If its not a problem, how come public borrwoing hit a record high last month due to "interest payments on gilts shot up because of higher inflation"?

That was on index-linked gilts

Interest rates on other gilts are fixed

[The Floating World]

Why not check out the wikipedia article on Gilts and then cross-reference with the UK Debt Management Office for further information on recent gilt issuance.

Then take a look at this site, http://www.ukpublicspending.co.uk/, which is very helpful at contextualising budgets over the last thirty years, remember to account for inflation when looking back.

Interest on Gilts this year is forecast to be £31 billion, in 2000 it was £25 billion, in 1990 it was £18.8 billion, in 1980 it was £11.4 billion. Although the nominal amount paid is currently higher than that paid in 1980, accounting for inflation the amount paid in interest in 2010 is nearly a third less in real terms than it was in 1980. To pay the equivalent of the 1980 gilt interest today would require in excess of £41 billion.

The issue of the National Debt has been much exaggerated and continues to be so that the Coalition can push through it's asset stripping agenda.

[The Floating World]

Checking the debt management office shows that over the next ten years approximately £460 billion in Gilts will mature to be redeemed, including five of the index linked issues.

If low interest rate policies continue to reign during that period the majority of new issuance will be made at a lower coupon rate than the redeemed debt further reducing the interest paid. So the national debt will continue to rise but the cost of maintaining the debt may fall and inflation will erode the value of the original debt to insignificant proportions as has been the practice of debt management at the level of the nation state since the seventeenth century.

[leicestersq]

Checking the debt management office shows that over the next ten years approximately £460 billion in Gilts will mature to be redeemed, including five of the index linked issues.

If low interest rate policies continue to reign during that period the majority of new issuance will be made at a lower coupon rate than the redeemed debt further reducing the interest paid. So the national debt will continue to rise but the cost of maintaining the debt may fall and inflation will erode the value of the original debt to insignificant proportions as has been the practice of debt management at the level of the nation state since the seventeenth century.

That tends to be true, until it isnt true.

I am on the other side of the argument to you, and I dearly hope you are right. Good luck paying all those pensions with your theory.

[The Floating World]

That tends to be true, until it isnt true.

I am on the other side of the argument to you, and I dearly hope you are right. Good luck paying all those pensions with your theory.

There have only been two times ever that the national debt has actually been reduced in nominal terms.

Once at the end of the 1980's into the the early 1990's before the recession hit and then from 1998 - 2001 when Brown was running surpluses.

Nobody else has ever bothered due to inflation eating into the debt over the long term, which tends to be the government perspective.

Of course we could have deflation, but it seems that the Bank of England can finesse that away with QE2.

Edited September 21, 2010 by The Floating World

[Toto deVeer]

That tends to be true, until it isnt true.

I am on the other side of the argument to you, and I dearly hope you are right. Good luck paying all those pensions with your theory.

Yes. I am on your side too.

I've posted the story below on other forums only to be roundly criticized by certain posters of a more 'monetarist' bent. At the risk of running across this again, I'll tell this history one more time, about debt:

More than 150 years ago, Bahrain was noted for it's natural pearls, and this industry became the mainstay of the economy. It was run by a few wealthy merchants and was a prime source of employment. The divers were paid a pittance though, and in order to make ends meet were enticed to take advances on their pay. They soon found that they could not pay this back.

No problem for the merchants, they just passed it on the the diver's child, to pay back after the father's death. Of course, the child couldn't pay it back either, so they had to be a pearl diver too, and this went on as a perpetual cycle for generations. It was, in effect, another form of slavery, for the purpose of enriching the merchants.

This is true and was eventually abolished.

When I declared that this is exactly what happens with sovereign debt, and that, in principle, there is no difference, I was told that I didn't know what I was talking about.

Well, I stand by this. And in my view the American middle class is nothing more than perpetual debt slaves, with declining income, increasing debt, in order to enrich the merchants (like Buffet and Munger) just like the pearl divers did.

Edited September 21, 2010 by Toto deVeer

[clloyd]

Yes. I am on your side too.

I've posted the story below on other forums only to be roundly criticized by certain posters of a more 'monetarist' bent. At the risk of running across this again, I'll tell this history one more time, about debt:

More than 150 years ago, Bahrain was noted for it's natural pearls, and this industry became the mainstay of the economy. It was run by a few wealthy merchants and was a prime source of employment. The divers were paid a pittance though, and in order to make ends meet were enticed to take advances on their pay. They soon found that they could not pay this back.

No problem for the merchants, they just passed it on the the diver's child, to pay back after the father's death. Of course, the child couldn't pay it back either, so they had to be a pearl diver too, and this went on as a perpetual cycle for generations. It was, in effect, another form of slavery, for the purpose of enriching the merchants.

This is true and was eventually abolished.

When I declared that this is exactly what happens with sovereign debt, and that, in principle, there is no difference, I was told that I didn't know what I was talking about.

Well, I stand by this. And in my view the American middle class is nothing more than perpetual debt slaves, with declining income, increasing debt, in order to enrich the merchants (like Buffet and Munger) just like the pearl divers did.

You don't know what you're talking about!!!

Only joking it sounds about right to me.

Edited September 21, 2010 by clloyd

[Traktion]

Yes. I am on your side too.

I've posted the story below on other forums only to be roundly criticized by certain posters of a more 'monetarist' bent. At the risk of running across this again, I'll tell this history one more time, about debt:

More than 150 years ago, Bahrain was noted for it's natural pearls, and this industry became the mainstay of the economy. It was run by a few wealthy merchants and was a prime source of employment. The divers were paid a pittance though, and in order to make ends meet were enticed to take advances on their pay. They soon found that they could not pay this back.

No problem for the merchants, they just passed it on the the diver's child, to pay back after the father's death. Of course, the child couldn't pay it back either, so they had to be a pearl diver too, and this went on as a perpetual cycle for generations. It was, in effect, another form of slavery, for the purpose of enriching the merchants.

This is true and was eventually abolished.

When I declared that this is exactly what happens with sovereign debt, and that, in principle, there is no difference, I was told that I didn't know what I was talking about.

Well, I stand by this. And in my view the American middle class is nothing more than perpetual debt slaves, with declining income, increasing debt, in order to enrich the merchants (like Buffet and Munger) just like the pearl divers did.

Good post!

I think those who say that future generations will have technology on their side, so we can spend more now, are just being selfish. What right does anyone today have, to steal from those who are not yet born? It's not like the latter can vote to say 'no', either!

EDIT: reworded

Edited September 21, 2010 by Traktion

[easy2012]

When I declared that this is exactly what happens with sovereign debt, and that, in principle, there is no difference, I was told that I didn't know what I was talking about.

Well, I stand by this. And in my view the American middle class is nothing more than perpetual debt slaves, with declining income, increasing debt, in order to enrich the merchants (like Buffet and Munger) just like the pearl divers did.

Basically, what you say sounds right on the first glance. However, that is only half truth.

This is because the Pearl merchant managed to enforce their debt because they have access to violent while nobody exactly is going to

send a riot police to Whitehall if Gordon Milliband says sorry...we are not paying.

This is not to say that there won't be dire consequences but it is not a like for like comparison with the pearl merchant.

Also, I agree it is unfair to load the next gen with debt

Re: Buffet - actually, it is pretty tough to create real value, so many get rich via inflation, at the expense of those who are not in the financial/property world.

Munger/Buffet are probably the more well behaving capitalist and they are just playing by the rule of the game.

Edited September 21, 2010 by easybetman

[19 year mortgage 8itch]

That was on index-linked gilts

Interest rates on other gilts are fixed

I know but its a good riposte to those who suggest that keeping rates low and letting inflation rip for a few years is somehow a panacea that can't go wrong.

How many fixed and how many variable commitments do we have?

[Toto deVeer]

Munger/Buffet are probably the more well behaving capitalist and they are just playing by the rule of the game.

A few years ago I would have agreed with that statement. But Buffet's credentials are gone, in my view. since his only reason for existence since October 2008 is government bailouts (follow his actions personally lobbying Congress and discover that his 10 largest investments required government bailouts to survive) and as for Munger:

From Mish:

"You know what? It would have been a damn good thing if the culture died and assholes like Munger got wiped out. Munger just proved beyond a shadow of a doubt Wall Street's culture was not worth saving."

Munger's comments here.

Buffet and Munger are no more than a part of the parasitic swarm that are bleeding the system dry and adding absolutely nothing of value. It is alleged that Buffet tried to corner the silver market via industrial players in the late 90's and that he was asked to back off for the sake of the US economy. He could have brought it to it's knees. Nice guys.

Edited September 21, 2010 by Toto deVeer

[LiveAndLetBuy]

Why not check out the wikipedia article on Gilts and then cross-reference with the UK Debt Management Office for further information on recent gilt issuance.

Then take a look at this site, http://www.ukpublicspending.co.uk/, which is very helpful at contextualising budgets over the last thirty years, remember to account for inflation when looking back.

Interest on Gilts this year is forecast to be £31 billion, in 2000 it was £25 billion, in 1990 it was £18.8 billion, in 1980 it was £11.4 billion. Although the nominal amount paid is currently higher than that paid in 1980, accounting for inflation the amount paid in interest in 2010 is nearly a third less in real terms than it was in 1980. To pay the equivalent of the 1980 gilt interest today would require in excess of £41 billion.

The issue of the National Debt has been much exaggerated and continues to be so that the Coalition can push through it's asset stripping agenda.

Interest payments on gilts and National debt are not the immediate issues at hand, and are not the reason for the cuts. The budget deficit is.

[The Floating World]

Interest payments on gilts and National debt are not the immediate issues at hand, and are not the reason for the cuts. The budget deficit is.

The budget deficit is currently high due to the 08/09 recession and consequential reduced tax receipts, given growth following the recession the tax base will rise and close the deficit gap.

As has been noted elsewhere the treasury has projected that nominal spending will rise each year until 2015. The 'cuts' comprise sub-inflationary annual spending increases, an increase of just over 2% in spending instead of 5%.

The whole point about 'cuts' and closing the deficit was that unless action was taken now the interest on gilts would rise to unmanageable proportions as the National Debt got swollen. This is misleading as the debt which is being retired over the coming years is mostly being replaced at a lower interest rate and the new debt being issued to fund the deficit is also issued at a historically low rate. Larger total debt but same interest payments.

Given that the majority of public spending is involved with providing Retirement Pensions and the NHS, neither of which can be touched without committing political suicide the only real way to close the deficit is by encourging economic growth so that tax receipts increase.

[porca misèria]

Hi,

So I have seen some articles in the newspapers claiming that interest rates on government debt are fixed until a long time (like 10-20 years time) and therefore the whole worry about the "markets" jacking up interest rates if we don't cut is not true. Are they right or wrong and why?

Some debt is index-linked: that's got a lot more expensive even now ('cos there's so much of it).

What the government pays on non-index-linked debt is indeed fixed over its lifetime (though what the lenders get varies as they trade it). Yields (interest rates) fell substantially when we got a new government promising to draw back from Weimar economics.

What matters in the short term is new borrowing, as well as renewing the government debt that falls due for repayment on Nov. 25th, and next year on March 7th, July 12th and Dec. 7th, and so on. What happened to Greece was that they *suddenly* faced much higher rates for renewals like these.