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Simpleton Question - Where Does Our Government Borrow From?


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You can call me an idiot if you like, although I do have an OK grasp on financial gubbins, but I'm a little confused about something that I wondered if someone could clear up for me?

Labour came to power owing nothing. Then they borrowed money. Lots of it. If the target of 40% of the GDP (or whatever it is - I'm sure I've got that wrong) is exceeded then they - I disassociate myself from Crash Gordon and his cronies - must have borrowed a hell of a lot.

My question is, where did they borrow all of this money from? The BOE? Surely there isn't an unlimited pot, and if they continue borrowing does it lead to hyperinflation of some such financial faux pas?

A simple-ish answer would be gratefully received!

Ta muchly.

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They Borrow it from You and Me.

They go to the bank of England and say we need £1000. The bank issue a bond to the public (you and me) saying the government will pay you a small amount (5% of the value of the bond) every year for 10 years in return for borrowing your money and then after the term (10 years) expires, you'll get your bond (£1000) back.

So, to borrow £1000 from you and me, the government would 'pay' us 5% pear year (£5) and then give us back our investment (the £1000 we lent them) after 10 years. A fairly safe investment for us, we get a guanteed income, and unless the country goes to the dogs, we get our money back. If we decide we wan't our money back sooner, we go to the bond market, and sell our bond to someone else, who will give us something for it's remaining term income and final value. Depending on how interest rates move, you can make or lose lots of money buy buying/selling bonds in this market.

This is generally how the government raises funds. Substitute larger denominations and international organisations for you and me, but you get the idea. They go to the bank for money, the bank sells securities to the public to raise money. Government spends the money. As governments have income (Taxation) they can nearly always make good their bonds. Therefore they usually have a very low rate.

If times are troubled, they have to offer investors a higher rate of interest to entice them to lend them the £1000. If times are good, they can offer a really low rate. I believe there are war bonds out there from WW1 offering something silly like 1%.

At least that's how governments used to raise funds.

The danger at the moment is, as there is no commodity backing the value of the currency (pound/doller), that instead of coming to the public to sell bonds (actually called Gilts) and raise finance, they can simply create (print) more money out of thin air. The bank of England are the only money issuing authority in the country and the government owns it. If the Chanceller wants to print an extra £1000, the bank prints it and gives it back to the govement. Who spend it. On buying Northern Rock. Which is hugely inflationary. Governments very rarely do this kind of thing on a grand scale as it usually has the by product of destroying the economy in which it happens. However it does happen from time to time.

Under benign conditions this money creation is where your base "rate of inflation" comes from, the extra money in existence printed/credited/created into the banking system that was never earned. Whenever you read about inflation, think of it as currency debasement because.

At present, the US government is printing money at a hugely fast rate, to stop asset price deflation in America, this is super inflationary, which is why so many posters here say the $ is toast.

Cheers

Q.

edit spelling

Edited by Questiondog
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bombardier:

Not quite an answer to your question, but you may find this informative in general.

http://en.wikipedia.org/wiki/List_of_count...y_external_debt

I know it is Wikipedia, but it references the CIA factbook. Just a big picture look at debt.

This may also answer many of your questions:

http://www.bankofengland.co.uk/publication...in/qb040406.pdf

I have not had time to check it is the right report (it is taking ages to download) but I believe it includes aon the UK assets and liabilities (including whom we owe what to), and may make interesting reading for you. However, it is not the whole picture.

For fractional reserve banking you may be interested in this amd for the state of UK debt overall, this.

Questiondog:

Great introduction to the subject :)

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Thanks Questiondog - you've given me hope - I am not the dolt that I thought I was becoming! I agree with Cynicus, that really was a great introduction to the subject and has explained it in nice, simple terms for me. It has done nothing to reduce the fears I have of this country being shafted, but makes me feel better that I understand a bit more about it now.

@Cynicus - Thanks for the links. Admittedly that all seems a bit over my head at a first glance but I will persevere in the hope that I can 'get it' a bit more.

Thank you both.

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You can call me an idiot if you like, although I do have an OK grasp on financial gubbins, but I'm a little confused about something that I wondered if someone could clear up for me?

Labour came to power owing nothing. Then they borrowed money. Lots of it. If the target of 40% of the GDP (or whatever it is - I'm sure I've got that wrong) is exceeded then they - I disassociate myself from Crash Gordon and his cronies - must have borrowed a hell of a lot.

My question is, where did they borrow all of this money from? The BOE? Surely there isn't an unlimited pot, and if they continue borrowing does it lead to hyperinflation of some such financial faux pas?

A simple-ish answer would be gratefully received!

Ta muchly.

"Labour came to power owing nothing" is completely misleading. Debt as a % of GDP was around 38% when they came to power, it fell in the first few years but has risen and currently stands at about 37.8% - not too high (and excluding NR which is scheduled to be paid back - though there is a risk it will not be.

the alleged problems are it is forecast to rise to over 40%, though this is still not too high and not as big a problem as made out in the media. Under Lamont, for example, it rose to >45%

They raise this money by issuing Government Bonds, Gilts, etc which anyone can buy

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...Debt as a % of GDP was around 38% when they came to power, it fell in the first few years but has risen and currently stands at about 37.8% - not too high (and excluding NR which is scheduled to be paid back - though there is a risk it will not be.

...

Does this 'Debt as a %' include all the other off balance sheet stuff as well, or is that like NR not included and if so just how much is it?

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The answers are all in this article from the Spectator:

http://www.spectator.co.uk/the-magazine/fe...ons-books.thtml

Hope it helps :unsure:

How interesting, an estimated increase in debt of 25% to £581,000,000,000

So if Paolo's figure is correct then debt is now at 38 + 25 = 63% of GDP

Labour haven't quite doubled the debt of the country, well they might have but as they won't tell us only an estimation can be provided because the debt has been hidden in the same type of mechanism that banks have been told is wrong. When forced the banks came clean and this was the driver for the latest round of the credit crunch, the bit that gummed up the Interbank lending

If banks don't trust each other because of hidden debt and refuse to loan between themselves then can countries also refuse to loan. Is it possible that the next round of the credit crunch will be countries refusing to buy gilts or treasury bonds of other countries until they come clean on debt?

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  • 1 month later...
  • 3 weeks later...

we borrow money from each other on the promise we will borrow more money in future to pay each other back....

ie. simplistically

Person A lends person B a tenner

Person B lends person A a tenner

they both spend ten quid....

A year later

Person A lends person B a tenner

Person B lends person A a tenner

they both spend ten quid....

repeat until the end of time, most money is borrowed into existance.

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  • 1 month later...
stupid question then ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

Not stupid at all. Possibly many who think they know what it is, probably do not. It is the International Monetary Fund. Their description of themselves is as follows:

The International Monetary Fund (IMF) is an organization of 185 countries, working to foster global monetary cooperation, secure financial stability, facilitate international trade, promote high employment and sustainable economic growth, and reduce poverty around the world.

Not very helpful really. More of a mission statement than what they do....

As such, good old Wikipedia describes it here.

The real question is whether the IMF is a tool of the devil, or a jolly useful institution. For the answer to that question, you will need to form your own views....

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