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Increased national debt is of no significance to the average punter. It’s not a debt the government pays back in the same way you or I do.
I must have missed those. Explain it again. As far as I am aware the govt has huge debt interest payments in it's budget every year. Borrow more those payments go up. Or do they?
https://news.sky.com/story/national-debt-interest-payments-rise-to-record-70bn-12599336
Blimey, things must be getting really serious when the Daily Mail starts sounding all leftie and riling up against greedy and incompetent bosses.
"But the actions of 31 energy company bosses have added to the burden – since the billions needed to bail them out when they went bust is being heaped on to bills.
MPs last month concluded some bosses filled their pockets while running up debts and not taking steps to protect their firms from volatile wholesale prices.
By not ‘hedging’ against rises, the suppliers saved themselves hundreds of millions of pounds. Much of this was taken out in eye-watering salaries and dividends".
I can't believe I read that in the Daily Mail. It is hard to imagine a situation more ripe for exploiting by the Opposition, with even the Daily Mail now denouncing greedy bosses.
We live in strange times!
I wonder if it's just when price hikes start to hit the pockets of the 'better off' .. Then things might start changing.
I must have missed those. Explain it again. As far as I am aware the govt has huge debt interest payments in it’s budget every year. Borrow more those payments go up. Or do they?
Well firstly they're not really debt payments as such.
Off the top of my head there is about 2.4 trillion of so called 'debt' - bonds issued that are matched to the deficit spend. So that is 2.4 trillion that the government has spent into the economy that has not been taxed back. It's just a counter of government spend.
Note: the government spends first in this sequence. It then issues bonds to the private sector to match deficit spend. The spend has already place. It doesn't need to borrow money to make the spend. It issues bonds to help control interest rates from money entering the system. Bonds are a drain of reserves out of the private sector to make way for the new spend. The money the bonds are purchased with in the private sector is largely money already spent by the government that has made its way through. So we call this a swap of reserves from non interest bearing money to an interest bearing asset - the 'debt' as we like to call it.
Next - out of that 2.4 trillion the BoE owns roughly 40% of the debt or bonds through Q/E. So in affect a debt to itself.
So what about the interest payments - well the government can always meet its obligations it's the currency issuer.
It actually sets the rate at auction and always meets the payments.
So the *debt* payment is never an issue. If it is a problem the government can create the money to pay it.
And finally given where we are with inflation the interest payments are likely inflated away to a degree so the bondholders (of the 'debt' lose out.)
Hopefully that covers it. The limit or number of the debt itself is largely irrelevant it's just a scoreboard of money transfer from the public purse into the economy.
So when you hear debt as % of GDP as some sort of limit - ignore it - it's a useless metric in this context.
The limit of government spending is excessive inflation caused by too much money being spent and not being absorbed by the economy - which can be controlled by taxation (deleting the cash.)
However inflation can be caused by supply-side shocks too so this can create a complex picture as we have now. Only a small percentage of current inflation is/was being driven by money - and that was a blip whereas the supply-side inflation takes longer to fix.
Next – out of that 2.4 trillion the BoE owns roughly 40% of the debt or bonds through Q/E. So in affect a debt to itself.
The bonds are UK Government bonds held by financial companies and bought by the BoE using £££. The value of UK bonds bought through QE is an eye-watering £895bn. That amount has increased year-on-year since the first QE purchase in 2009 and we've never "sold" any of that debt. This simply isn't sutainable because as the quantity of £££ increases so do prices and inflation; the value of money is determined by the amount in circulation
@rone
What do you mean by "by supply-side shocks"?
There is a school of thought that macro-economics is about actions rather than shocks
That amount has increased year-on-year since the first QE purchase in 2009 and we’ve never “sold” any of that debt. This simply isn’t sutainable because as the quantity of £££ increases so do prices and inflation; the value of money is determined by the amount in circulation
The BoE owns the debt the government issued.
I've no idea what conclusions you are coming to with Q/E. Sorry.
The BoE created the money to purchase them. It's a standard operation.
This last round of Q/E was done when the government created the covid package as a back door way to do the borrowing/bond issuance.
The previous rounds of Q/E were different and provided liquidity.
This simply isn’t sutainable because as the quantity of £££ increases so do prices and inflation; the value of money is determined by the amount in circulation
No it's not. The pounds value is not pegged to anything and the value is determined by the markets. It's a floating currency.
Japan and US both do Q/E too.
There's talk of unwinding but it's not necessary.
What do you mean by “by supply-side shocks”?
As in - what just happened with just-in-time supplies/shortages/supply chain issues during the covid period.
It's well documented.
I’ve no idea what conclusions you are coming to with Q/E. Sorry. The BoE created the money to purchase them. It’s a standard operation
The BoE view QE as a "standard operation" as well, however the House of Lords Economic Affairs Committee published a report in July 2021, "Quantitative easing: a dangerous addiction?" https://publications.parliament.uk/pa/ld5802/ldselect/ldeconaf/42/4203.htm#_idTextAnchor001
Mervyn King, a member of that committee was Governor of the BoE from 2003-2013, a Member of the BoE Monetary Policy Committee, which instituted quantitative easing in 2009. He's also a School Professor of Economics at the London School of Economics and Professor of Economics and Law at Stern School of Business and School of Law at New York University
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The BoE view QE as a “standard operation” as well, however the House of Lords Economic Affairs Committee published a report in July 2021, “Quantitative easing: a dangerous addiction?”
If Q/E is put to good use then it's not in the least bit a dangerous operation. These guys like to keep the charade the BoE can't directly the finance government spending. That's all that's going on there.
The alternative is that Covid sunk the country without this support so they're talking rubbish.