Government becomes banker to the private sector
In recent months, investors have been lending tens of billions of pounds of interest-free money to the British government: only when the Exchequer wants to borrow for more than ten years has it been forced to pay a rate of interest that is likely to exceed the inflation rate (see here for more on this).
So the real interest rate on George Osborne's debt is less than zero; that's what we would have called jammy, a few years back.
Now there are two competing explanations for why he can borrow so cheaply.
The chancellor's explanation, which was endorsed yesterday by the IMF, is that in on taking office in 2010 he set out a clear and credible path to reduce the UK's unsustainably huge deficit - which was equivalent to 11% of GDP at the time of the last election and was still very high at 8.3% last year.
The other view, perhaps expressed most eloquently by Jonathan Portes of the National Institute of Economic and Social Research, is that the government's low borrowing costs are a manifestation of the UK's economic stagnation and lousy growth prospects (see here).
This view is that investors disproportionately put their money into gilts - and therefore lend to the government - when they regard the outlook for wealth-creating businesses as relatively poor. So gilt prices rise, and the implied borrowing costs for the government fall, when the risks of putting money into companies are perceived to be too great.
Or to put it another way, if we could be confident that the economy was going to grow at 2% rather than shrinking, then the UK government would be paying a much higher interest rate. But, of course, if Portes is right, a rise in the cost of money for George Osborne would not be a mark of failure - because it would be a corollary of our escape from recession.Why lend to the Treasury?
Now although the Portes and Osborne explanations may seem contradictory, they can both be true: investors may be lending to the Exchequer both because it seems a lot safer than lending to Italy and Spain and because there doesn't seem anywhere else terribly exciting to put their cash.
What matters is which of these two sentiments is the more dominant and more durable one for investors. And here's the comic or tragic paradox: many of the government's critics believe that investors would have more faith in Mr Osborne's stewardship of the economy than Mr Osborne himself appears to do - because they argue that if the UK government started to borrow significantly more to finance significant investment in the productive potential of the economy, investors would be understanding and supportive, rather than going on a lending strike.
That said, the government - with the encouragement of the IMF - is inching towards the view that greater use could be made of the low interest rate it pays. This was made clear in a speech last week by the prime minister, who talked about building on the Treasury's use of so-called "credit easing" to channel cheap finance to housing projects, businesses and infrastructure.
You will recall that earlier this year the government announced that it would guarantee £20bn of borrowing by banks, so that the banks could borrow more cheaply - but on the strict condition that the money raised would then be lent to small businesses at an interest rate 1% lower than would otherwise be the case.
The Treasury is working on a variety of related schemes: to cut the cost of credit for housebuilders currently shunned by the banks; to provide greater certainty for developers that there will be a profitable market for what they build; to stimulate a market for mortgage-backed bonds that could reduce the mortgage rate; and to provide longer-term loans to banks, along the lines of the ECB's three-year LTRO loans to European banks (these last two schemes would be managed by the Bank of England, but with all risks underwritten by the Treasury).
All these schemes, if launched, would put taxpayers at risk to some degree. They would all represent, implicitly at least, an increment to the national debt (at least in an economic sense, if not in a strict public-accounting sense).
So here's what is odd.
Substantial public-sector borrowing to finance public-sector spending and investing - even public-sector investment in roads, or schools, or universities, or airports, all of which would arguably increase the productive potential of the economy - is viewed as dangerous and poisonous: the conventional government view is that way lies the road to bankruptcy of the state.
But somehow it's not perilous - or not so perilous - for the public-sector to take on greater liabilities to finance the private sector. Public-sector financing of the private sector may look like nationalisation, but apparently it is not the putatively bad sort of nationalisation.
All of which, depending on your ideological starting point, may prove either that investors are wholly irrational, or that the IMF is bonkers, or that the Treasury is one fork short of the full picnic basket.
And here is another weirdness: an important strand of Treasury policy is to reduce the implicit subsidy for the banks, to eliminate (as far as possible) the guarantee that banks will be bailed out by taxpayers in a crisis; but at exactly the same time, the Treasury is introducing new explicit subsidies for borrowing by banks.
I suppose most people would say ideological purity and intellectual consistency are all very well, but what is probably more important is whether any of the initiatives to re-direct cheap money from public sector to private sector actually succeeds in improving our economic prospects.
Or to put it another way, if markets are either so irrational or so wise (depending on your point of view) that they think one kind of government borrowing is hideously bad and another is good, probably best to take the supposedly good money and run.