Wednesday, April 23, 2014

Debt doesn’t matter if you plan to default on repaying it

This is why talk of UK recovery is nonsense. Osborne’s shock growth in UK debt.

At 9.30am 2moro @ONS data will confirm George Osborne has grown National Debt more in 4 yrs than Labour did in 90 yrs

Posted by khards @ 01:42 PM (4032 views)
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17 thoughts on “Debt doesn’t matter if you plan to default on repaying it

  • Some sense at last…….nice change from the usual mainstream media propaganda, echoed by a one or two misguided posters on this website.

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  • i remember the 90`s says:

    It was always going to be this amount or higher once it gets out of control its like personal debt ,no way back .The seeds were set 6 years or longer ago.

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  • what is that moron Cameron smoking? The UK is so screwed if interest rates rise.

    http://www.ons.gov.uk/ons/dcp171778_360531.pdf

    I am sure someone will be along to tell us it’s all fine because it’s measured against the manipulated GDP figure.

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  • Absolute figures are all but meaningless. These figures aren’t exactly hard to get hold of. The Telegraph and DM trot out these numbers to denounce people arguing against austerity.

    The deficit was stuck at £120bn for most of those years. Its now £107.7bn and we’ve probably had 20% compound inflation, or at least nominal GDP growth in that time.

    £120bn x 5 = £600bn
    £1398bn – £828bn = £570bn

    So, the deficit is falling absolute terms. You don’t need the national debt to fall in absolute terms, you just need to be borrowing less in a given year than you’re paying in interest (a primary surplus) and inflation and real GDP growth do the rest. That’s still a few years away, but the point is that the deficit is falling now, having been stuck at £120bn for ages, so this announcement is actually rather good news for George Osborne. I realise the graph makes it look like debt is accelerating, but it’s not.

    The FT’s headline is: “UK deficit reduction back on track”

    http://www.ft.com/cms/s/0/07ebc8b4-cac6-11e3-ba95-00144feabdc0.html#axzz2ziXR4hmz

    I know which one I trust. “Mainstream media propaganda” indeed.

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  • Clearly, they just took an old graph that showed the rate of growth on the debt mountain accelerating and changed the number at the top. The reality is that the debt mountain was increasing at a constant slope (in absolute terms) until today. It is now finally plateauing and that was the substance of the announcement.

    For some reason, their graph depicts it as getting steeper. It’s not accurate. Only the number is.

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  • mark wadsworth says:

    Reticent, things aren’t exactly that rosy.

    Sensible measures could be either

    a. debt as % of GDP (as you point out, you can have small annual deficits and debt stable or falling as % of GDP).
    b. Total interest costs (adjusted for maturity, shortening maturity via QE is cheating a bit)

    On either basis, it’s not looking too good under the Tories, Labour were awful, but their deficits were 3% of GDP or less until 2008 when it all went wrong (deficit as high as 7% or 8% of GDP in the worst years), the Tories are continuing seamlessly where Labour left off, they’ve just about got it down to 5% of GDP, well hoorah, I am not impressed.

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  • I didn’t say they were rosy. For any government that spends more than it earns in tax (ie all of them), there is obviously a lead time between between the deficit falling and national debt falling. For a long time, it seemed as if only inflation was eating away at the deficit. Now it is falling in absolute terms.

    A pretty poor track record, I agree. It is impossible to say what would have happened if the pace of tightening had been slower/faster or involved more/less tax hikes/spending cuts. I would contend, however, that:

    a) they avoided making hard decisions by cutting infrastructure spending, which clearly contributes more to longterm growth than most public spending
    b) they concentrated on spending cuts rather than addressing the issue that the tax take had fallen – note that the recent news has been facilitated by the tax take beginning to rise, according to the article I posted in the FT
    c) the only luxury they afforded themselves was to cut corporation tax which was an ideologically-motivated bung that did nothing to encourage entrepreneurship, increase growth nor reduce the deficit

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  • Invesco Perpetual have covered this topic on several occasions (they might even have a link on their website to the actual presentations). The first thing they get really wound up about is people mixing up or merging debt and deficit into one – politicians regularly do this. Their research suggests that it is possible for the current Government to cut the deficit (hence austerity programme etc..) but not the debt because once it reaches around 80% of GDP you have passed the point of no return. The interest payments on the debt are significant at present interest rate levels therefore any increase in interest rates would magnify the problem. Cut the deficit yes, cut the debt No, the latter can only get bigger.

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  • Spot on reticent. Osbourne is reasonably happy today. One notable development is that receipts are finally doing their bit.

    In the medium term the govts expectation is that shale revenue will plug the recently reducing north sea revenues and that generally increasing tax receipts ( helped by a resurgence of manufacturing due to shale assisted lower energy costs) will continue to reduce structural defecits. The next govt, whoever they are, will delight in claiming absolute victory over debt sometime around the end of 2017 or in early 2018. Politicising debt management is pretty pointless. As long as the government doesn’t do something really crazy, debt tends to rise and fall with the worlds economic cycles.

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  • Jack, we spent about 50 years of the 20th century with debt over 80% of GDP and recovered from it. In earlier centuries we recovered from even larger debt loads.

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  • Flash, thanks for the information I’ll take your comments up with IP at the next meeting June.

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  • Who knows what’s kept off the balance sheet. FLS isn’t included, as it’s regarded as money that will return…unless there is a HPC of course.

    Turning Japanese anyone?

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  • @Flashman,

    I would otherwise be in agreement with you if the fiscal and monetary position, in the UK, when compared between cycles, had at least stayed neutral, but it clearly hasn’t (a steady deterioration seems clear over the last 30 years at least).

    For the record you’re also just quoting government debt which is misleading. If we’re talking about debt we should talk about the debt in aggegate (public + private).

    The UK well may have had much higher public debt after the Napoleonic and two World Wars, but I cannot find any figures to suggest that aggregate levels of debt back then were higher than now.

    I don’t see how making money ever cheaper can solve any of the UK’s problems (and it doesn’t seem to either), unfortunately the politicians seem to think otherwise.

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  • “George Osborne has grown National Debt more in 4 yrs than Labour did in 90 yrs ”

    Look at that graph. Where is the steepest point on it? 2010. It is hardly any wonder that the debt continued to grow significantly since then. Nominal amounts too being compared to amounts from decades ago. And labour have not governed for anything like 90 years so that too is spinning it to sound worse. Its the same situation in America but with the parties reversed, and republicans (conservatives) putting out the same sort of disingenuous commentary as Labour/OP.

    You could probably come up with some just as “startling” figures by looking at the last two years of Labours debt increases and comparing it to decades worth of prior Labour or Conservative governments.

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  • QE and FLS barely scratch the surface.

    Off balance sheet, there’s:

    -PFI
    -Public sector pension deficit
    -Banking bailouts

    Each worth about as much as the debt at one point. But we’re not the only country to have handed out DB pensions to our entire public sector, nor PFI. The bank bailouts have already been whittled down massively. Public sector pensions have been reformed (although there was criticism that the discount factor used was optimistic).

    Portugal had one of the best official debt situations when the crisis hit. It took ages for people to realise how much PFI they had. The bond markets seemed to figure it out first. I’m sure they’re more than aware of how much we have.

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  • stillthinking says:

    RPI looks like a less lumpy version of that chart.

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  • Passingthru, the title graph shows national debt as a percentage of gdp and that is what Jack was referring to with his 80% referfence. I was specifically replying to jack so it would have been inappropriate to discuss any other debt in this context.

    You say that we should also talk about aggregate debt and therefore aggregate private and public debt. That would in fact be hopelessly inadequate. You would actually have to consider at least 8 core ratios in both nominal and adjusted terms (including some debt to asset ratios). You would also have to have a model that permits you to factor in past and current causes of debt and an analysis of past, current and future compositions of our economy and a prognosis of the future domestic and international economy.

    You say you can’t find anything that suggests that aggregate debt has been greater in the past. With respect that’s because you don’t know where to look and as per above you wouldn’t know how to look at it. As a basic pointer beware of unadjusted numbers and beware of looking at any specific debt type without the perspective of several ratios attached, to make full sense of it. Either way debt (aggregate or otherwise has been far worse in the past).

    Regarding your recent point about the bond market being fallible. The bond market is never wrong or right in a binary fashion. You have to understand it deeply to the know the difference between participants making enormous sums of money for themselves in certain aspects of it and it being ‘wrong’. The bond market pays the most and has access to the very best analysts and traders. It should always therefore be regarded as serious. There are certain aspects of this vast market that you can take at face value and others where you’d have to watch your wallet. I’m afraid that only deep participation or study will help you to decipher which is which.

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