Government bonds to the public?

veryintrigued

Is it likely (or are they already) going to be offering bonds to Joe Public to help through this situation? Ala war bonds.

Am sure many of us might consider taking a hit for the greater good and display a little forbearance? 

bowlhead99

The last time they did the war bonds, global financial markets weren't as sophisticated and joined-up. There shouldn't really need to be a special fundraising to the retail investing public to help them raise money, as they can follow the usual established bond issuance /qe process.

If wealthy members of the public are feeling patriotic enough to take more of an allocation than the one to which they might get exposure in the pension funds they buy or which their employer arranges for them, or in their favourite investment trusts or Oeics, they could of course buy whatever bonds are issued via the secondary markets, imperceptibly increasing the price through extra demand vs supply and therefore helping the government get away more of its new issues at lower yields. Though retail direct demand for new UK gilts is a drop in the ocean compared to what the institutions are putting in to the bond markets generally.

wmb194

Just deposit your money into NS&I's lousiest account.

tropic_of_Username019

Interestingly, the 1914 War Loan issue failed, and this was covered up by getting Bank of England employees secretly to make applications to buy huge amounts of War Loan to plug the gap, obviously financed by the Bank itself. With the BoE itself effectively buying a large part of the gilts issued, this in many ways had the same end result as the more recent Quantitive Easing (QE) programme.  Except that QE is done completely openly, the the War Loan purchases were covered up at the time.

For more historical detail on this aspect of War Loan, see bankunderground.co.uk/2017/08/08/your-country-needs-funds-the-extraordinary-story-of-britains-early-efforts-to-finance-the-first-world-war/

What this should tell us is that the gilt buyers are completely dispensable. The crucial thing for whether the Government can finance its spending is just whether everybody (people and businesses) in the UK accepts £ in payment; which in fact, not only are we prepared to do, but it's exactly how we want to be paid — it's so obvious that it seems an odd thing to bring up!

Paying our taxes is something that helps the UK, because most Government spending does need to be reclaimed through taxation, otherwise there would be run-away inflation, and we might have to change our minds about accepting £ in payment after all. Most, but not all, Government spending needs to be reclaimed via taxes; and it is perfectly normal for a smaller proportion to be reclaimed in times of crisis — that helps support the finances of struggling households and businesses, and so helps us get through the crisis.

So I don't think we need to worry about how Government spending will be financed. But we should pay our taxes, i.e. not avoid them by dodgy means. (For the avoidance of doubt: making normal use of ISAs, pensions, etc, isn't dodgy at all.)

Linton

Excellent explanation from tropic....
Also there is little danger of inflation through excess cash as many people’s income has been cut and there is little opportunity or inclination to spend. In a truly capitalist economy toilet rolls would be rationed by price, but the supermarkets wont want to be seen as profiteering and the government would not let them.
Government expenditure such as paying wages when employers cannot and delivering free food parcels to elderly/infirm people stuck in their homes does not risk inflation since it is merely replacing normal expenditure that is no longer  happening.

Alexland

Linton said:

the supermarkets wont want to be seen as profiteering and the government would not let them.

Supermarket revenues will be up in the short term through increased volumes, less promotions and people making more expensive choices as the cheaper items are sold out. However it's yet to be seen if that will transalate into profit as they are increasing headcount and overtime hours to cover higher demand and absence rates.

EdGasketTheSecond

No the gov't will simply create money out of thin air; it's the latest fashion. Once the depression is over watch out for the hyperinflation. Back in the war money was linked to gold so couldn't just be printed like now, better times except for the war that is.

tropic_of_Username019

Money being linked to gold was a major cause of the depression; we're better off without the link.

Linton

 The major cause of inflation is that the amount of money in circulation available to be spent by people who want to spend it exceeds the current cost of the goods available - all other things being equal the cost of the goods must increase because of supply and demand.  In current circumstances people's abilty to spend is being severely constrained by loss of income and the opportunity to spend is limited to the essentials.  This applies even more so to many companies.  Therefore the amount of money in circulation is dropping very quickly. Government creation and expenditure of money is essential just to keep the economy running at all. It is not adding to the money in circulation prior to CV-19.  In fact it is not even sufficient to replace it.

Once the situation recovers the government expenditure on supporting incomes, failing companies and the NHS emergency will automatically drop off.

In my view talking about hyperinflation is irresponsible scare-mongering unless someone can come up with a convincing mechanism as to how it might happen.

EdGasketTheSecond

Linton said:

 In my view talking about hyperinflation is irresponsible scare-mongering unless someone can come up with a convincing mechanism as to how it might happen.

How about creating trillions of dollars/billions of pounds out of thin air? Then giving cash to everyone as Trump is doing and the UK are paying people to do nothing too. Where do you think it will all end Linton? Currency creation devalues everyone's existing dollar or pound.

Thrugelmir

Gilts used to be marketed directly to retail investors. Ultimately it was decided not to be cost effective. All new issues are placed / auctioned through the DMO straight into the capital markets these days in significant tranches.