A Neat Way to Get Rid of the UK's National Debt?

posh*spice

Mr_Mumble wrote: »

The FT's economics editor has a scathing commentary on these shenanigans today, the final paragraph:

This bits interesting too:-

If future borrowing was likely to be cheaper than current borrowing, this would be sensible, but the likelihood is that QE will be unwound when economic prospects are better and government bond yields higher than their current historic lows. If we assume that QE breaks even in a profit and loss sense – an optimistic assumption – the Treasury is proposing expensive borrowing in the future instead of cheap borrowing now. It is bad cash management and will harm Britain.
George Osborne likes to warn that the UK will become Greece if his austerity policies are not followed. But the chancellor should remember it was exactly the policy of hiding known liabilities that got Greece into its current mess. He is pushing Britain down Greece’s doomed path.

posh*spice

Back in Japan - they are about to give up on the pretence of QE

"We should set an inflation target and print unlimited yen until we reach that target," Mr. Abe said on the heels of a debate with Prime Minister Yoshihiko Noda, in which the prime minister offered to dissolve the lower house and hold elections next month.

http://online.wsj.com/article/SB10001424127887324556304578118963236738442.html

sabretoothtigger

Yes I think Japan is the lynchpin. Companies and people are better off when they just stop using that currency. If that occurs it'll cascade through out the world as Japan Gov holds so much USA debt

The only reason why not is Japan Gov gives various benefits to its people so I guess it'll be a while more till it tips over. Eventually it'll collapse though because the population are in majority withdrawing capital from gov. Like a ponzi it works fine on the way up but very suddenly bad on way down

http://www.moneymarketing.co.uk/investments/japan-is-bust-says-neptunes-taylor/1028517.article

GeorgeHowell

"If future borrowing was likely to be cheaper than current borrowing, this would be sensible, but the likelihood is that QE will be unwound when economic prospects are better and government bond yields higher than their current historic lows. If we assume that QE breaks even in a profit and loss sense – an optimistic assumption – the Treasury is proposing expensive borrowing in the future instead of cheap borrowing now. It is bad cash management and will harm Britain.
George Osborne likes to warn that the UK will become Greece if his austerity policies are not followed. But the chancellor should remember it was exactly the policy of hiding known liabilities that got Greece into its current mess. He is pushing Britain down Greece’s doomed path"

How many people really understand what that all means -- I mean really understand ?

My immediate reactions are :-

QE will be unwound when government bonds yields are higher -- so what is the signifiance of that ?

If QE breaks even in a profit and loss sense -- what does that mean ? What is a profit or loss in this context and how does it arise ? Profit and loss to whom -- the government ? How would/will such a profit or loss be measured and by whom ?

The Treasury is proposing expensive borrowing in the future instead of cheap borrowing now -- borrowing surely can't always be timed according to the future prospects for interest rates (which are notoriously difficult to predict anyway). Interest rates are just one factor.

it was exactly the policy of hiding known liabilities that got Greece into its current mess -- exactly how is this hiding liabilities ? It's getting a fair bit of press so doesn't that mean that it's not in fact hidden ?

He is pushing Britain down Greece’s doomed path -- how can that be the case when the biggest problem for Greece is being locked into the Euro whereas the UK is not in it ?

No doubt some people at the FT understand it all, and no doubt some of their readers do too. But I bet there's a lot that don't, even if they don't like to admit it.

chewmylegoff

GeorgeHowell wrote: »

No doubt some people at the FT understand it all

i wouldn't bet on it, over the years the FT have reported several financial markets issues which i personally handled; each time their reporting was horribly inaccurate and showed a lack of even a basic understanding of what was going on and what the relevant legal framework was.

their opinion appears to be that we should borrow more money than we need to now (and leave that money sitting on the balance sheet of a subsidiary of the BoE unutilised) because it will be more expensive to borrow that money in the future. that is a fascinating point of view - by that logic we should borrow as much as we possibly can at yields of below, say, 2%, and just stick all the cash in the bank.

Generali

GeorgeHowell wrote: »

QE will be unwound when government bonds yields are higher -- so what is the signifiance of that ?

At the moment the Government can borrow very cheaply by any normal historic measure: real and nominal interest rates (yields) for Government debt (Gilts) are probably at all time lows. Low yields means the same as high Gilt prices, it's just another way of saying the same thing.

With QE, the BoE is going into the market and buying up a lot of debt in order to release cash into money markets in the hope that this cash will be lent to companies by banks and lent out. At some point in the future the plan is to sell back that debt into the market and bring the cash back onto the BoE's books.

However, given that the BoE is buying debt at record high prices it is highly likely that when the debt sold, the Government will be borrowing at much higher rates of interest than now. In effect the BoE is deliberately entering into a policy of buy high, sell low. Not usually the best way to run things.

GeorgeHowell wrote: »

If QE breaks even in a profit and loss sense -- what does that mean ? What is a profit or loss in this context and how does it arise ? Profit and loss to whom -- the government ? How would/will such a profit or loss be measured and by whom ?

This relates to the previous answer. The buy high, sell low policy means that the price the BoE has paid for these Gilts is more than they will be able to sell them for in future. The profit and loss will be measured on the BoE's books when they produce their year end accounts.

GeorgeHowell wrote: »

The Treasury is proposing expensive borrowing in the future instead of cheap borrowing now -- borrowing surely can't always be timed according to the future prospects for interest rates (which are notoriously difficult to predict anyway). Interest rates are just one factor.

Indeed. Generally speaking you borrow when you need the money, not because interest rates specifically suit you. Generally, lower interest rates are consistent with lower borrowing. That is counterintuitive and certainly goes against the standard Economics A-Level text book but Central Banks push down interest rates when times are bad and people aren't borrowing.

GeorgeHowell wrote: »

it was exactly the policy of hiding known liabilities that got Greece into its current mess -- exactly how is this hiding liabilities ? It's getting a fair bit of press so doesn't that mean that it's not in fact hidden ?

I can see what he means but he's undermining his own argument with hyperbole.

GeorgeHowell wrote: »

He is pushing Britain down Greece’s doomed path -- how can that be the case when the biggest problem for Greece is being locked into the Euro whereas the UK is not in it ?.

I think his point is that people won't lend to Greece any more as they've lost all credibility and that's an even bigger problem than being in the Euro. If the UK loses credibility in a similar way, the UK is similarly in trouble.

posh*spice

Generali wrote: »

I think his point is that people won't lend to Greece any more as they've lost all credibility and that's an even bigger problem than being in the Euro. If the UK loses credibility in a similar way, the UK is similarly in trouble.

Similar point here:-

Hitherto, the Bank was proactive in its pursuit of monetary policy. What Sir Mervyn described today is reactive – the MPC being forced to bounce its QE programme off the Treasury's own quasi-monetary action.
Why does this matter? Because UK economic policy is, at present, being carried out on a bed of nitroglycerine.
The Bank of England is sitting on a stock of Government bonds roughly equivalent to the value of the entire housing stock in Scotland and Northern Ireland. This is, with one important distinction, precisely what happened in Zimbabwe and Weimar Germany and led eventually to hyperinflation – and it's significant that other central banks (notably the Fed) have shied away from buying exclusively Government debt, cognisant of how it might look.
And yet Britain's Government bond rates are still below 2%. People are still willing to buy them.
The only reason they are still there is that investors believe that the Bank of England really is sitting on those bonds out of choice rather than because they've been forced to do so by the Treasury. As Sir Mervyn indicated in his speech in Cardiff last month, the worst thing the Bank could do is allow that line to be blurred.
This policy transferring cash to the Treasury doesn't on its own transgress that independence. But in a way that's beside the point. QE's success has hinged on having someone in control at the Bank who is clearly, absolutely and convincingly independent of the Government. Independent Sir Mervyn certainly is, but he certainly wasn't convincing today.
PS: This issue is just one of the reasons why it is absolutely essential that Sir Mervyn's successor is someone who is regarded as absolutely credible by the markets.

http://news.sky.com/story/1011468/the-govnor-talks-as-the-money-walks

Still the next Prime minister of Japan has said he wants the BoJ to print unlimited amounts of money and the yen moved down only a little - so maybe printing money is not really seen as a problem?

(As an aside - do you think Godwin's law should include mentioning Hyperinflation and the Weimar Republic?)

Generali

posh*spice wrote: »

Similar point here:-

http://news.sky.com/story/1011468/the-govnor-talks-as-the-money-walks

Still the next Prime minister of Japan has said he wants the BoJ to print unlimited amounts of money and the yen moved down only a little - so maybe printing money is not really seen as a problem?

Well the Bank of England increases the money supply each year: if the money supply doesn't increase with GDP, deflation is highly likely to be the outcome.

There isn't a problem with printing money right up until there is.

posh*spice wrote: »

(As an aside - do you think Godwin's law should include mentioning Hyperinflation and the Weimar Republic?)

It certainly is almost always a massive and crass over-simplification. Perhaps we could call it posh*s Law.

ETA: I just realised that second thing about posh*s Law could be seen as an insult (i.e. call it posh*s Law because posh*spice's posts are crass and over-simplified). It's not meant like that!!!

sabretoothtigger

future prospects for interest rates (which are notoriously difficult to predict anyway)

The stated interest rate is unpredictable because its inaccurate and reflects political policy not economic demand

We can be certain cost of money will be higher then now. Even if we defaulted, refused to pay out sterling interest and capital. So reducing that supply of money we would still need to import goods in some way.
The rate of return for any capital used will be higher then now because we likely do not have any excess even when stealing money we still lack feasible ongoing production.

If we could destroy demand as well as money in future I guess that'd do it.
We could eliminate a big percent of the UK people and not let them take any money with them and at the same time improve productivity, this would be immigrants and beggars BNP type argument I guess (actually immigrants are often more productive but anyhow)
If we become self sufficient and import nothing that'd help, I think all of this means higher investment and so higher interest rates.

Unless we became satisfied with growing all our food in the garden, swapping plants between ourselves and using less overall. This would be massive deflation so lower or equal interest rates to now ?


If we went to war and took over another countries assets and production this would reduce our cost of capital. War is usually expensive though.
I think seizing assets must be the most viable option but within our own borders, like Argentina has done. Also USA did this by taking citizens gold ?


Greece lost when they failed to balance a budget. The euro just forced deflation on them I guess. If they had kept drachma locally we might see more liquidity for them but the negative problems would still be there.
They still restrict business from starting and operating even now, only government can expand freely.


USA is worse off then Greece but they will not realise the same effects till later. Nobody can force them to do anything but it'll occur through arbitrage and various other natural processes

Graham_Devon

It's now being reported that this has left a £48bn black hole.

Under quantitative easing (QE), the Bank has created £375bn of new money to buy government bonds – gilts – from pension funds, insurers and banks, with a nominal value of just £327bn. As a result, if the Bank holds the gilts until the date they mature, it will incur a £48bn loss on the principle value of those investments.

The figure has not been disclosed before but can be found buried in the Bank’s statistical releases. The first bond matures in March next year, when the Bank will crystallise a £500m capital loss on a £6.6bn investment.

The disclosure will pose fresh questions about last week’s decision by the Treasury to transfer from the Bank the £37bn of interest payments made on the gilts. The move will make the public finances look better when the Chancellor updates his forecasts at the Autumn Statement next month.

Andrew Lilico, an economist with Europe Economics, said that, by grabbing the surplus cash “the Treasury is essentially taking a £37bn dividend on a project that is £48bn in the red”.

http://www.telegraph.co.uk/finance/economics/9684452/Treasury-leaves-Bank-of-England-with-48bn-black-hole.html

Essentially, this means the treasury (us) may have to make payments to the BOE to cover the losses. Something admitted by George Osbourne last week. But at that point, the scale was unknown.

Sir Mervyn has stated all this is a lot of fuss about nothing!