The UK debt has risen by billions/month. Who do we owe the money to?

[Crowdedmarket]

As a non-economist, can someone explain to whom the UK is borrowing money from and to whom we will be paying it back? I mean, if we got the loans, then said "go away, we won't pay you back, due to a national emergency, ever" would the entity we owe send in the tanks to the people?

I recall that Iceland refused to pay their debt in 2008, were forecast to be rekt forever, but seem to be fine now.

 

 

 

 

[Locke]

There are a variety of sources of cash for the State.

When they issue Gilts, the creditors are often pension funds seeking a stable, guaranteed return. This means that when States default, some of the bagholders are citizens of that State.

Pension funds are not known to own many tanks.

In the US, we now have "monetization of debt", where entities such as corporations and the State issue bonds, then the Federal Reserve purchases them with the intention of never selling them. This essentially provides the bond-issuing entity with free cash.

When States default, theoretically they need to pay higher interest rates on further debt to reflect the demonstrated increased risk that they will default.

In practicality, default can mean fiscal or policy reform, which could actually lower the interest they are charged to borrow.

Further, as pension funds are essentially forced at gunpoint to invest in government bonds around the world, many place such as Italy or Argentina see ever falling interest rates despite their history of default and unsustainable fiscal policy.

[Gigantic Purple Slug]

10 hours ago, Crowdedmarket said:

As a non-economist, can someone explain to whom the UK is borrowing money from and to whom we will be paying it back? I mean, if we got the loans, then said "go away, we won't pay you back, due to a national emergency, ever" would the entity we owe send in the tanks to the people?

I recall that Iceland refused to pay their debt in 2008, were forecast to be rekt forever, but seem to be fine now.

 

 

 

 

https://www.economicshelp.org/blog/1407/economics/who-owns-government-debt/

Roughly 1/4 overseas investors. 1/4 BOE. 1/2 UK Private institutions (pension funds, banks etc).

It's important not to look at government debt like household debt.

In household debt you cannot magic money out of thin air to pay off your debt.

In government you can, but there are consequences.

[Crowdedmarket]

33 minutes ago, Locke said:

There are a variety of sources of cash for the State.

When they issue Gilts, the creditors are often pension funds seeking a stable, guaranteed return. This means that when States default, some of the bagholders are citizens of that State.

Pension funds are not known to own many tanks.

In the US, we now have "monetization of debt", where entities such as corporations and the State issue bonds, then the Federal Reserve purchases them with the intention of never selling them. This essentially provides the bond-issuing entity with free cash.

When States default, theoretically they need to pay higher interest rates on further debt to reflect the demonstrated increased risk that they will default.

In practicality, default can mean fiscal or policy reform, which could actually lower the interest they are charged to borrow.

Further, as pension funds are essentially forced at gunpoint to invest in government bonds around the world, many place such as Italy or Argentina see ever falling interest rates despite their history of default and unsustainable fiscal policy.

Thank you. 

Presumably we could get a stack load of money, not pay it back, reform a bit, then get another stack load of money and repeat.

No tanks. 

Theoretically, we could also refuse any reforms, and promise to behave better next time. Again, no tanks?

[Warlord]

One third the BoE is 'buying' them with newly created money,.

The rest international investors buying gilts like the Chinese . They're dumb because we wont be paying it back.

Interest on the debt though is like £60bn a year , pre-corona. It probably will get upto 100bn/year which is more than we spend on entire departments. Madness.  And if interest rates rise we're screwed. 

[zugzwang]

6 minutes ago, Crowdedmarket said:

Thank you. 

Presumably we could get a stack load of money, not pay it back, reform a bit, then get another stack load of money and repeat.

No tanks. 

Theoretically, we could also refuse any reforms, and promise to behave better next time. Again, no tanks?

No-one lends money without the expectation of profiting from the transaction; to Argentina, the UK or anywhere else. Poor economic management comes with significant costs over time. Higher inflation, lower living standards, poorer life prospects generally.

[Gigantic Purple Slug]

10 minutes ago, Crowdedmarket said:

Thank you. 

Presumably we could get a stack load of money, not pay it back, reform a bit, then get another stack load of money and repeat.

No tanks. 

Theoretically, we could also refuse any reforms, and promise to behave better next time. Again, no tanks?

Why would we ever not want to pay it back ? We can magic the stuff out of thin air.

The real trouble comes when the debt is not denominated in something you have unlimited supply of/control over.

So for example if a country issues its debt in USD then if there is a crisis it would have no choice but to default, because it is not allowed to print dollars.

[Warlord]

3 minutes ago, zugzwang said:

No-one lends money without the expectation of profiting from the transaction; to Argentina, the UK or anywhere else. Poor economic management comes with significant costs over time. Higher inflation, lower living standards, poorer life prospects generally.

They use the printing press. Exactly what we're doing and we will get the same results (inflation, lower standard of living).

There is no difference between the BoE's printing press and Zimbabwe's or Argentina or the Eurozone for that matter . The banksters are robbing us blind. AGAIN...

  

 

Edited May 28, 2020 by Warlord

[zugzwang]

3 minutes ago, Warlord said:

They use the printing press. Exactly what we're doing and we will get the same results (inflation, lower standard of living).

There is no difference between the BoE's printing press and Zimbabwe's or Argentina or the Eurozone for that matter . The banksters are robbing us blind. AGAIN...

  

 

We need inflation! Lots of inflation to counter the deflationary shock of the Covid pandemic.

[Warlord]

Just now, zugzwang said:

We need inflation! Lots of inflation to counter the deflationary shock of the Covid pandemic.

No we do not. Inflation robs us of our purchasing power and hurts the most vulnerable i.e the elderly and disabled.

 

[Gigantic Purple Slug]

10 minutes ago, zugzwang said:

We need inflation! Lots of inflation to counter the deflationary shock of the Covid pandemic.

Unfortunately I think you are right. It is the only way we are going to get wealth transfer from old to young.

If people want high interest rates the only way they are going to get them is devaluation of money and destruction of debt.

[Crowdedmarket]

21 minutes ago, zugzwang said:

No-one lends money without the expectation of profiting from the transaction; to Argentina, the UK or anywhere else. Poor economic management comes with significant costs over time. Higher inflation, lower living standards, poorer life prospects generally.

Iceland 2018

"The GDP growth rate exceeds 7%, among the highest in the world; the World Bank Group notes that GDP has bounced back from a 2009 low of $12.9 billion to more than $20 billion today. Employment is at an all-time high"

Source: https://knowledge.wharton.upenn.edu/article/icelands-economic-recovery/

 

[longgone]

how are you going to get inflation when employers are still paying 90`s wages ?

[Gigantic Purple Slug]

4 minutes ago, Crowdedmarket said:

Iceland 2018

"The GDP growth rate exceeds 7%, among the highest in the world; the World Bank Group notes that GDP has bounced back from a 2009 low of $12.9 billion to more than $20 billion today. Employment is at an all-time high"

Source: https://knowledge.wharton.upenn.edu/article/icelands-economic-recovery/

 

Don't think you can regard all countries equally.

When investors look at countries, they are judging whether or not there will be another default.

If the default is the latest in a long line of defaults, then that's going to be looked on differently than what investors might see as a one off.

It's all about whether or not investors believe there has been systemic change in Iceland, effectively whether they believe they have learnt lessons from what happened in 2009 and are not going to go down that route in the future.

You can contrast that with Argentina, where investors probably view future default as almost inevitable, and adjust their requirements accordingly.

[Gigantic Purple Slug]

4 minutes ago, longgone said:

how are you going to get inflation when employers are still paying 90`s wages ?

Just print a load of money and give it to the workers.

[longgone]

1 minute ago, Gigantic Purple Slug said:

Just print a load of money and give it to the workers.

just give everyone 1k a month 

[gp_]

2 hours ago, Gigantic Purple Slug said:

It's important not to look at government debt like household debt.

In household debt you cannot magic money out of thin air to pay off your debt.

In government you can, but there are consequences.

Critically important to understand this. There is one important caveat: as long as you borrow in your own currency. Countries default when they borrow in a currency that is not their own.

Some countries do not even have their own currency: small countries like Lichenstein, or after facing severe economic problems like hyper-inflation.

The Eurozone has this problem: its countries that do the borrowing, but no country controls the currency. The problem should eventually be solved (and this was the original intention) by further political integration.

 

1 hour ago, Gigantic Purple Slug said:

Unfortunately I think you are right. It is the only way we are going to get wealth transfer from old to young.

Inflation tends to transfer wealth from those with lots of money and unearned income to those with debt and earned income.

But while that is the overall effect, there are lots of exceptions: retired people on modest but fixed pensions, high earners with lots of debt, etc.

In the long run inflation and interest rates tend to move together so sustained high inflation will lead to low house prices relative to salaries, and maybe in absolute terms.

Current levels of inflation and interest rates are far too low. About 5% to 10% for both would be much better (room to cut, sensible house prices, meaningful returns on ordinary savings accounts, some deterrent to high levels of consumer debt.)

[Roman Roady]

Devils Advocate time:- if its as simple as borrowing and printing, why do we all go to work to earn money and pay our taxes? Why dont we all just stay furloughed and let the chancellor borrow ad infinitum.

[Gigantic Purple Slug]

27 minutes ago, gp_ said:

Critically important to understand this. There is one important caveat: as long as you borrow in your own currency. Countries default when they borrow in a currency that is not their own.

Some countries do not even have their own currency: small countries like Lichenstein, or after facing severe economic problems like hyper-inflation.

The Eurozone has this problem: its countries that do the borrowing, but no country controls the currency. The problem should eventually be solved (and this was the original intention) by further political integration.

 

Inflation tends to transfer wealth from those with lots of money and unearned income to those with debt and earned income.

But while that is the overall effect, there are lots of exceptions: retired people on modest but fixed pensions, high earners with lots of debt, etc.

In the long run inflation and interest rates tend to move together so sustained high inflation will lead to low house prices relative to salaries, and maybe in absolute terms.

Current levels of inflation and interest rates are far too low. About 5% to 10% for both would be much better (room to cut, sensible house prices, meaningful returns on ordinary savings accounts, some deterrent to high levels of consumer debt.)

This is true, but macro policy is not about targeting individual needs. It's about doing what is best for the collective.

As an individual, you are better off realising that the government acts in the interests of the collective and plan for that, rather than being surprised and outraged when it actually happens.

 

 

[Locke]

19 minutes ago, Gigantic Purple Slug said:

the government acts in the interests of the collective

Imagine believing this! Imagine!

[Gigantic Purple Slug]

Just now, Locke said:

Imagine believing this! Imagine!

I don't have to, I do !

Although I will add in a bit of a modifier.

The government action is to do what the collective thinks is best for them. As opposed to what is actually best for them.

 

[Crowdedmarket]

22 minutes ago, Gigantic Purple Slug said:

It's about doing what is best for the collective.

Who decides what "best" is? Suspicious individuals may view Dom Cummings actions as those of someone who doesn't care if he spreads Covid-19 into hitherto non Covid-19 regions, killing portions of that region. The most likely to die would be the elderly. He may believe this is in the best interests of his collective.

The Sunday Times reported that those present at the private engagement claimed Mr Cummings had outlined the Government strategy as: ‘Herd immunity, protect the economy and if that means some pensioners die, too bad.’

https://www.dailymail.co.uk/news/article-8140795/No10-denies-claims-Dominic-Cummings-said-pensioners-sacrificed-virus-protect-economy.html

 

 

 

[Gigantic Purple Slug]

5 minutes ago, Crowdedmarket said:

Who decides what "best" is? Suspicious individuals may view Dom Cummings actions as those of someone who doesn't care if he spreads Covid-19 into hitherto non Covid-19 regions, killing portions of that region. The most likely to die would be the elderly. He may believe this is in the best interests of his collective.

The Sunday Times reported that those present at the private engagement claimed Mr Cummings had outlined the Government strategy as: ‘Herd immunity, protect the economy and if that means some pensioners die, too bad.’

https://www.dailymail.co.uk/news/article-8140795/No10-denies-claims-Dominic-Cummings-said-pensioners-sacrificed-virus-protect-economy.html

 

 

 

I think one thread on Cummings is enough.

The point is about macro behaviour, not about any particular one of hundreds of decisions the government might make.

Ultimately the government acts on behalf of the collective. If the collective doesn't feel the government acts in its best interests it gets to vote the government out. It doesn't get much simpler than that.

[Locke]

50 minutes ago, gp_ said:

Inflation tends to transfer wealth from those with lots of money and unearned income to those with debt and earned income.

Inflation is good for people with assets such as gold, farmland and mines (i.e. the rich) and devastating for people who subsist on selling their labour and save in fiat (i.e. the poor).

52 minutes ago, gp_ said:

Countries default when they borrow in a currency that is not their own.

Governments always default, regardless of what they borrow in.

Hard currencies such as precious metals or bitcoin simply make it much more difficult to maintain the fugazi and thus the scheme fails much more quickly.

24 minutes ago, Gigantic Purple Slug said:

The problem should eventually be solved (and this was the original intention) by further political integration.

Italians will never be Germans will never be French will never be Greeks. If they wanted fiscal unity, they would have created a gold Euro.

The intention of the Euro was indisputably for Germany to beggar its neighbours.

[Locke]

23 minutes ago, Gigantic Purple Slug said:

The government action is to do what the collective thinks is best for them. As opposed to what is actually best for them.

The purpose of a government is to maximally extract wealth from the populace in order to enrich the politically well-connected, while minimising the probability that the populace will revolt.

This premise explains almost every action taken by almost every State in the history of Man.

A notable exception was the early United States at the writing of the Constitution. Every action by the US government since then has undermined its founding principles, in accordance with the above premise.