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Recovery risk for government borrowing

Robert Peston | 08:15 UK time, Tuesday, 21 July 2009

Whenever I find myself in any gathering of bankers, business people or politicians, the question they ask more than any other is whether the government will be able to borrow all it needs from markets - or whether at some point big investors will lose their appetite for gilt-edged stock, the exchequer's IOUs.

A good person to tap on this - though one who is not without a vested interest - is the Treasury's banker, Robert Stheeman, the head of the Debt Management Office, whose job is to raise all those hundreds of billions of pounds to cover the gap between tax revenue and public expenditure.

This year he has to sell an utterly unprecedented £220bn of gilts. That's more than four times the finance that he's typically had to find in recent years. And it would expand the existing stock of gilts - or the size of the market - by more than a third.

And, what's more, with the government refusing to countenance significant spending cuts or tax rises, he'll have to raise a similar amount next year too (even if a new government were to massively reduce public expenditure, there would be a lag before there was an impact on borrowing).

So - I asked him, in an interview for the Today programme - how great is the risk that investors will sit on their hands? Does he lie awake at night fearing a re-run of the 1970's, when a Labour government had to be bailed out with emergency financial support from the International Monetary Fund?

Well, Stheeman doesn't have bags under his eyes and sees a funding crisis as a very remote danger - largely because the market for gilts is much wider and deeper than it was.

For example, it has become much more international, with a record 36% of gilts now held overseas.

Now, you might point out, he would say that, wouldn't he?

That said, he was much less dogmatic about whether the government might end up having to pay a much higher interest rate to borrow - which is hugely important, because an increase of one percentage in the cost of borrowing £200bn would be £2bn that wouldn't be available to spend on public services every single year till the debt is repaid.

If, for example, the UK lost its impeccable AAA debt rating, that would almost certainly push up funding costs - not least because some of those helpful overseas buyers are central banks which aren't permitted to hold sovereign debt rated at less than AAA (though it was striking that Stheeman told me that he didn't think a downgrade of just a notch would make it significantly harder for him to raise what he needs).

But here's one reason why it's so difficult to judge where the cost of borrowing for the government will settle in the coming few months: the Debt Management Office has sold fewer gilts than have been bought by a separate part of the public sector, the Bank of England.

In April, May and June, Stheeman and his team flogged £57.9bn of gilts, while Mervyn King's traders waded into the market to buy £77.7bn of UK government debt.

The Bank of England is buying as part of its so-called Quantitative Easing programme to increase the stock of money in the economy and cut the cost of credit.

But the Bank has almost disbursed the £125bn allocated in total to the scheme - and was somewhat equivocal a couple of weeks ago about whether it will increase its gilt-purchasing budget.

Investors seem persuaded that the Bank of England will buy a bit more - although we'll have the first test in a gilt auction this morning of whether the Bank's equivocation is seriously unsettling investors.

Gilt prices have been falling after the large penny dropped in markets that there may not be many more weeks before the Bank of England transmogrifies from a massive net buyer of gilts into a potential seller.

Where the gilt price settles then is - as Stheeman implied - not something that can be predicted with scientific certainty.

And here's the great and painful paradox.

If the Bank of England stops buying at a moment when investors become a bit more confident about prospects for the global economy and our economy - if they become less averse to risk and more interested in buying assets other than AAA sovereign debt - well, then it might become altogether more tricky and expensive for the government to borrow.

Comments

Page 1 of 2

  • Comment number 1.

    "And, what's more, with the government refusing to countenance significant spending cuts or tax rises," You can bet they are countenancing taxes and cuts but are not quite ready to tell us. When this double whammy arrives it will simply deepen and prolong the recession. Beginning to parallel the thirties depression?. The eye watering numbers put into context the tight fisted attitude of Brown to the support (often just friendly loans)of our crumbling manufacturing sector.

  • Comment number 2.

    Mr Peston, you hit the nail on the head. The BoE is the gilts buyer of last resort, as well as the UK's off-balance sheet vehicle. Foreign investors have been net gilts sellers recently. Your story is another pointer to an election this autumn, just in time for Brown, before the public wakes up to the fact of the gilts flood.

    Perhaps time the beeb also reports on the 22 billion pounds tax revenue shortfall, well documented in The Times and The Independent today? The Guardian somehow seems also to have missed out on this report, slipped out by the government on the last eve before recess.


  • Comment number 3.

    Robert,

    "And it would expand the existing stock of gilts - or the size of the market - by more than a third."

    Given the current debt burndens taken on by various Gvts, how many other countries will have to make such large increases in the amount of debt they are selling? Has anyone estimated the potential growth of the bond market?

    Surely such a large increase will destabilise the market, potentially creating far more sellers than buyers.

  • Comment number 4.

    "a funding crisis [is] a very remote danger - largely because the market for gilts is much wider and deeper than it was."

    It had better be. Sprott Asset Management of Ontario has calculated that in the US, for instance, there is not enough money in the domestic economy to fund the US's increased need to issue debt - and the US 'only' needs to borrow three times more than normal, whereas the UK needs to up its borrowing by a factor of four.

    AAA ratings count for little these days. With every major Western economy chasing after their cash, overseas investors - now the only lenders of last resort - can sit back and wait for borrowers to bid up interest rates to sell their debt.

    Mr Stheeman's comment in his interview, to the effect that many countries are "facing unique challenges of a similar nature" will surely become an enduring icon of Mandarin-speak. I imagine a policeman surveying the wreckage of a monumental motorway pile-up; hundreds dead, thousands injured, telling the news cameras: "It seems that a lot of drivers found themselves facing unique challenges of a similar nature, all at the same time."

    Can anyone see how the idea of solving a debt crisis by trying to sell much, much more debt won't end badly?



  • Comment number 5.

    Was October 2008 the start of a major change in the world economy and world order?
    Did it mark the start of a 20 year period where the UK and US print money just to survive?
    They've been doing this in Africa for decades, and look at the state of those economies.
    Our future dependent on printing money?
    Perhaps out of that will come our eventual salvation....our currencies will decay and we will become competitive again.
    At what level would we be competitive?....the pound at half its' current value?

  • Comment number 6.

    #4 FiniteResources

    In spite of the rather sinister nature of the example, your policeman analogy gave me a good laugh.

    Well, as long as the music doesn't stop ...

  • Comment number 7.

    If there are £220bn of gilts to be sold this year at possibly increasing returns, is this not going to cause even more hardship on SME's trying to borrow the money they need. Will it impact on funds available to be lent as mortgages, further harming the property market?

  • Comment number 8.

    Instead of borrowing money, the government should become money.

    It works for me -

    [Unsuitable/Broken URL removed by Moderator]/2009/07/i-am-light-of-world.html

    Although it is not easily done. It has taken me years to get to this stage.

  • Comment number 9.

    This article doesn't really say anything, does it? Except to stir up unwarranted worries about public debt levels. It asks a question - can the government finance its debt - without attempting to answer it.

    There are much more interesting issues about how the recovery will take place - and whether using fiscal or monetary policy is best. In short, the best economists would say: stop worrying about printing money, that is exactly the Bank of England's job!

    https://www.knowingandmaking.com/2009/07/monetary-versus-fiscal-policy.html

  • Comment number 10.

    A very interesting report on Today this morning, Robert. We tend to forget those who toil in the depths of The Treasury to make it all hang together for a little while longer.

    Mr. Stheeman deserves our best wishes and prayers for without him and his team we are sunk.

    Having said that though we should consider the circumstances which placed this decent fellow where he now finds himself: trying to raise GBP 200 billion of debt just to keep the ship afloat.

    As you rightly point out this debt only has value as a security for as long as the UK taxpayer has the funds to pay it off with whatever interest which applies. Given the ongoing collapse in government revenues this immediately becomes more challenging.

    For as long as the Prime Minister remains in denial about the massive government deficit then the capability of Mr. Stheeman will remain in a complex situation.

    The government continues to spend like a drunken admiral on shore-leave, its revenues are dropping like a stone, it has already incurred massive debts propping up the banks, it was running a budget deficit before any of this happened and the social costs of recession are building by the minute. Yet all we hear from the government is about swine flu. Is this the next big excuse after the Yanks and the banks?

    All the evidence crossing my desk at the moment suggests a second nasty bite of recession will be on us before the end of the year. As usual I hope I am wrong.

    When will this government wake up and not just smell the coffee, but the tea, the chocolate, the toast and the remainder of the full English as well?

  • Comment number 11.

    If the selling of Gilts is a sensible way to raise money, then I presumably the UK is not alone... and if its not, then there is going to be an awful lot of choice out there for the Markets.....

    There may be a lot of demnand for a finite amout of money!

  • Comment number 12.

    Without a shadow of a doubt saving the institution of Govt and saving the banks means that real industry will be starved off funds probaby for a decade or more.

    Inevitably therefore we will become increasingly reliant on inward investment by overseas companies which will of course lead to the smothering of what remains of UK industry except in some very nichey sectors.

    I wonder whether this Govt and it's leaders along with the financial institutions really understand the damage they've done and why they are now so despised and mistrusted.

  • Comment number 13.

    No.11. thinkb4

    I agree with you. If all governments around the world are borrowing and spending, there will be an awful lot of government bonds being issued.

    The only way to attract enough investors is to engineer a further global stock market smash, to scare all the investors into holding government securities instead of equities. Once all this Quantitative Appeasing has worn off, the price of equities (and houses) may start to slide again....

    It took the Dow 2 years to lose 90% of its value back in 1929-1931.

  • Comment number 14.

    Government (BOE) buying its own debt on the merry go round ? Is this not what the banks did ! Until the music stopped.

    The city smoothers and the propaganda machine rolls on whilst the country sinks into its irrecoverable demise.

    Companies are going bust left right and centre, millions loosing their jobs and all Brown and Co are bothered about are headlines. The only thing this useless bunch have been good at is headlines and announcing big spending plans (usually the same plan over and over again )

    Browns maintaining of low interest rates is another attempt to tax the savers, only this time he benefits by his own lower rate borrowing.
    Despite "RBSTemps" previous protests, Britain is bankrupt ! Morally, politically and financially.


    We need change, and a bigger change than the Blair wannabe Cameron will ever have the guts to deliver.

  • Comment number 15.

    We are living through a completely new era. Britain's AAA rating is the remains of a glorious past. It won't be cut until a spectacular crash in gilt demand takes place. Which it surely will, because the Government is trying to cure a disease caused by too much spending on credit by borrowing 4 times as much as last year. Unless that money comes from domestic saving (and I don't think anybody dare say it can, in the near future), sooner or later a ceiling will be hit--and probably sooner rather than later. At that moment, there'll be a crash. It's blood, sweat and tears again--only, few people seem to realize it.

  • Comment number 16.

    Who are the net lenders to the cash-strapped Western economies? - presumably we are largely "owned" by China?

  • Comment number 17.

    #2. Econoce wrote:

    "Perhaps time the beeb also reports on the 22 billion pounds tax revenue shortfall, well documented in The Times and The Independent today? The Guardian somehow seems also to have missed out on this report, slipped out by the government on the last eve before recess."

    It's the top story on the BBC Business page ("Public borrowing hits June record"), and is covered extensively in the Guardian too ("UK budget deficit hits record high in June").

    The repeated accusations of BBC bias from contributors to this blog are predictable and tiresome.

  • Comment number 18.

    This post is on a very prescient point.

    I personally believe that the lack of government debt in the early part of this century as governments both national and local gave up on using government debt through gilts to fund hospitals and schools, for example, and used PFI projects helped and this helped cause the property market crash.

    Traditional buyers of government debt such as pension funds and life assurance companies needed a source of reliable long term income to match their liabilities. Securitised mortgage payments over 20 or 25 years sounded ideal. This extra source of funding for property loans helped push the housing boom on for too long as cheap credit was too freely available.

    A huge jump in government debt now not only will lead to a rise in long term interest rates as governments need to increase yields to ensure that they can sell all their debt but also threatens to crowd out private sector debt either for investments in stock, machinery or other investments.

    I fear we will reap a double whammy from Gordon Brown's ill conceived mantra of keeping government debt below 40% as not only are we gifting our children a huge national debt but any economic recovery will be stymied by a lack of available private sector credit. It will all go to feed that cuckoo in the next UK government debt.

    The government's insatiable need for debt borrowing over the next few years will handicap and delay economic recovery in the UK.

  • Comment number 19.

    Is the Gilts story a swift way of avoiding all that bad news about falling revenues at HMR&C that came out yesterday under all that stuff from McPoison?

  • Comment number 20.

    Yes but can we belive the figures, it imerged yesterday that the National Audit Office will not sign off several departments accounts INCLUDING the Treasurey's own accounts.

    So we are now entering the relms of the EU where our accounts can't be signed off! So much for prudant accounting!

    Perhaps its because for every pound that spent nuLabour anounce it under at least 3 times offtent under different headings and departments like the collage building program actually beleive they have 3 times the budget so over spend?

  • Comment number 21.

    Shocking as it is the 56% of GDP debt isnt the true story as if only includes about 10% of the PFI debt/commitments, dosnt include the nucular power station decomisioning commitment, nor the RailTrack garanteed loan, nor the student load company, nor the state pension commitments, nor the totally unfunded Civil Service pensions....

    the list goes on and on.....

  • Comment number 22.

    Robert, no update now that UK debt has reached a record high and will only get higher in the short term.

    https://news.bbc.co.uk/1/hi/business/8160614.stm

    Surely time for a UK equivalent of the US debt clock.

    For those interested GBP 799 billion, and how convenient it stays below GBP 800 billion before parliament breaks up, is approximately GBP 13,000 for every man woman and child in the UK.

    Does anyone want to guess when government debt will breach GBP 1 trillion or GBP 1,000,000,000,000?

    That's a frighteningly big figure.

  • Comment number 23.

    I sense a mini-budget coming on, just like the good old days. VAT @ 20% and income tax up 5-10p easy isn't it?

  • Comment number 24.

    If there is a problem selling all the new gilts, won't the government just instruct the Bank of England to buy more gilts? i.e. increase its programme of quantitative easing. It seems to me that both labour and conservative governments will do this.

    Furthermore, the amount of gilts that the Bank of England can buy with newly created money is potentially limitless.

    I do not see these actions of quantitative easing by the Bank of England as being inflationary, as the new money that they are creating is not going into the hands of the man in the street who might use it to push up prices on the high street, the new money is going into the hands of investors, and, by definition, investors invest.

    Investors may then use the newly created money to invest in equities and businesses which is good for the economy.

    What's the problem?

  • Comment number 25.

    For a Government not to be announcing what cuts it needs to make now is just criminal to me,faced with the figures you are giving us.

    They have it it woefully wrong and are hell bent on making it worse.....

  • Comment number 26.

    Just keep on printing boys.

  • Comment number 27.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 28.

    It seems to me there are 2 ways this will end.

    1 - There are enough international buyers for Gilts that we can sell what we need without having to raise the interest rates. However this does mean we have 'SOLD the UK to unknown rich foreigners' to whom we will be in debt to for many years. Tax hikes would be needed to settle the debts - effectively taxing the people and the funds going abroad.

    2 - With the printing of money going on in the US and elsewhere, we are effectively in competition with other countries for gilt business. If they appear more attractive to investors then we will be forced to raise rates or further increase QE. Although we are AAA rated - we are going up against other AAA rated countries - and the biggest, being the US. A story on the BBC website shows the US are exposed to 23.7 Trillion - and they may need to raise even more than us - and we may find the markets cannot handle the expected flood of gilts.

    Interestingly I think Vicky Redwood said on Radio 4 last night that the expectation in the market is there will need to be more QE as the last lot doesn't seem to have made much difference.

    I see the country is on the edge - if it goes our way we can escape by the skin of our teeth - but if it doesn't it's a very long way down....

  • Comment number 29.

    With TAX REVENUE FALLING by over 5% PSBR GOING THROUGH THE ROOF

    YOU WOULD HAVE TO BE A NUMPTY TO KEEP BUYING GORDY'S DUD PAPER.

    UNLESS OF COURSE ITS OUR SPECIAL EDITION 2009 FISCAL PRUDENCE LOO PAPER.

    Nulabour HAVE TRASHED THE ECONOMY. . THE 30 YEAR CYCLE:LABOUR DOES NOT

    WORK. . . .

  • Comment number 30.

    #24 QE_Fan

    AS I understand it the QE money is being used to buy Govt and private debt. If this is being bought from the banks, who are now buying up new issues of government debt, then the money is going into the Treasury coffers and is being used to maintain current levels of Government spending.

    That in turn goes mainly into public sector wages etc and so feeds through into the hands of the man in the street.

    I don't see how this can fail to be inflationary. The more money you pump into the economy in this way, borrowing to consume rather than to produce, the weaker the pound will become - and for a country that consumes imports rather than producing exports that will inevitably end with inflation.

  • Comment number 31.

    In order to reflate the economy it is necessary for most of the new national debt to be bought by the BOE, because private sales do not create new money, There is also the advantage that any interest paid to the Bank recycles to the Exchequer as Bank profit.

    Why on earth should credit rating agencies downrate British gilts? They are obviously completely secure because they are denominated in Sterling and at the end of the day the government can create, through the BOE, any amount of Sterling required to repay them.

  • Comment number 32.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 33.

    There were an awful lot of worried faces around in October 2008, particularily among the wealthy.
    People fear poverty more than almost everything else.
    And we all stood on the verge of poverty.
    We still do.
    There are still a lot of crossed fingers in Westminster, the Treasury and The BOE.
    Those fingers will remain tightly crossed for months, or even years.
    1929 is still waving at us.
    But we British have one overwhelming attribute.....Apathy.
    We will always be more interested in what's going on in Eastenders or Corrie than what's happening to our future.
    That was what allowed the government to give the extreme favouritism to City that created this mess. "Elitism" is highly dodgy.
    Apathy among the public may be the way forward.
    After all, they robbed us in creating this wreck, so they can rob us again to get out of it. Printing money always has a negative effect on individual wealth. Inflation will do the rest.
    "But I don't understand finance"......that's exactly what they like to hear.

  • Comment number 34.

    @myself16 - Yup sorry, I should have read this previous debate on the topic before I posted -

    https://www.bbc.co.uk/blogs/thereporters/robertpeston/2009/07/how_long_will_china_finance_am.html

    Well, all I can say is how awfully decent it is of the Chinese to fund our public services for us, especially as public services are basically for poor people!

    Oh crikey, oh my gosh ... I guess that means the Chinese are socialists or something ... this is really, really scary ... I bet they only have loads of money because they tax their own deserving rich folks at punitive levels!

    People, I think I've stumbled across a terrifying international conspiracy to MAKE RICH PEOPLE SLIGHTLY LESS RICH!!!

    Rise up ye downtrodden rich and throw off your tax burdens! Rebel, I say, rebel - before it's too late!

    May you live in interest-free times!

  • Comment number 35.

    > Why on earth should credit rating agencies downrate British gilts? They
    > are obviously completely secure because they are denominated in Sterling
    > and at the end of the day the government can create, through the BOE,
    > any amount of Sterling required to repay them.

    The more Sterling you 'create', the less intrinsic value it has. If I had major holdings in Sterling, the last thing I want to see is the relative value of Sterling decreasing, it would make me want to dump Sterling ASAP, which would only add to the downward pressure on the value of sterling.

  • Comment number 36.

    Pseudo Communism (Aka China) triumphs over capitalisim...............well who else can afford to buy these GILT thingies!!!

  • Comment number 37.

    #22. My guess is next tuesday, about 4.30pm.

  • Comment number 38.

    QE may raise the risk of inflation, but maybe, just maybe a little more inflation would help. As long as it is a little. It would help those who are in negative equity on their mortgages as well as a little help for whatever it is that we export these days, as keeping those jobs going is vital. With a little increased income, manufacturing companies can expand their operations gradually, offer more jobs. Maybe then we can turn the inflation tap on a little more (but watch it carefully) and be able to expand our manufacturing industries.

    The problem I do see is the debt we are mired in, which we have obviously had to borrow in another currency other than sterling. It would make it a bit more difficult to pay off with a weaker pound, but maybe with extra revenues from manufacturing, it may even out in the end.

    I haven't got a degree in this kind of subject, so maybe there is some flaw. But over the long term would more QE be worthwhile if managed this way?

    Can I be Chancellor?

  • Comment number 39.


    Debt,

    As the numbers continue to grow and the amounts become untenable, isn't it about time that UKplc started to investigate its cost base (as would any company). From this, they would realise that their liabilities to its 'staff' are quite onerous in relation to the reduced income now being received.

    There are two ways to tackle this, identify the root cause and implement immediate corrective action or carefully calculate the financial burden costs of a longer term recovery program to see if it is sustainable.

    As i understand matters, the government (and i include all parties) are afraid of taking the necessary immediate action, significantly reducing costs which will impact on the beauracratic operations of this dis-jointed company. Despite what may be claimed, a severe cut in staff will ease the burden as new ways to provide the expected services will be quickly found (as in industry) and the huge pension public service pension scanddal needs restructuring to follow private practice.

    the leaders of UKplc are currently afraid of making the dramatic changes required and are planning the longer term scenario of 'can we afford to wait and see'. As can currently be seen in the market place, this longer term option is not really available, so why do the collective leaders fail to take decisive action.

    When are we going to get someone in charge with common sense, who can get 'the big picture' and make the necessary adjustments. Yes it will be extremely unpopular, yes it will have a counter productive cost (benefits vs salaries), but the economics make sense. i am not advacating a thatcher style, but just a leader who can explain and stand by their conviction.

    there are more people in this country with common sense who can see whats needed, why not elect some

  • Comment number 40.

    As long as what's done does not increase the basic rate of income tax, then we will eventually see light at the end of the tunnel.

    Of course, we shouldn't be in the blasted tunnel in the first place!

  • Comment number 41.

    2 years ago I could of borrowed 6 times my salary with ease and everyone thought this was reasonable.If they treasury believe they can keep issuing guilts no matter what,they are more stupid than I thought.Has no one learnt anything from the last 2 years? The country needs a robust plan to resolve this issue,otherwise we are going to have a situation where 20 to 30 % cuts in public expenditure will be required across the board.Raising additional taxes is just not going to be an option.

    1.We already pay a high percentage in the £,you could raise VAT to 20% but expenditure will decrease pro rata,result no additional tax income.
    2.Watch how the 50% rate produces no aditional tax next year,as the smart people work around it.
    3.How many tax rebates are being paid out be because individuals and companies have already OVERPAID.
    4.Some tax revenues lag spending by at least 18 months - cash flow issue!!!

    The idea that education and the NHS will be spared this cull is complete nonsense.

  • Comment number 42.

    "... the Debt Management Office has sold fewer gilts than have been bought by a separate part of the public sector, the Bank of England. In April, May and June, Stheeman and his team flogged £57.9bn of gilts, while Mervyn King's traders waded into the market to buy £77.7bn of UK government debt"

    Isn't this simply a case of the snake eating its own tail?

    I accept that a little knowledge is a dangerous thing, but my little knowledge of the finer points of economics tells me that having the Bank of England print money in order to buy Government debt can't go on forever.

    So, where's this heading exactly?

  • Comment number 43.

    All this business of the BofE selling Gilts with one hand and buying them back with the other is just a complicated way of printing money. And surely that is OK.

    This whole crisis is because the banks have lost a quite staggering amount of money. For the economy to keep running that lost money has to be replaced, and the best way to do that is for the Government to print it. We're in a quite unique situation where we can just print money without it being inflationary. There's obviously a limit, but it doesn't look like we're anywhere near it yet and a further extension to the QE allocation is surely the right thing to do.

    Also this shouldn't really be looked at as a temporary thing where we will have to pay it all back at some time in the future. The banks need to be prevented permanently from the excesses of recent years and must lend much less relative to their reserves and capital base. So in effect money printed by the Government will permanently form a much larger part of the money supply.

    During the recession, we need the banks to keep providing loans in order to keep distressed firms and individuals afloat, but once the recession is over we need to be much less reliant on borrowing as a means of funding consumption. It is simply not a sustainable model. We need instead to move to a situation where trade is more balanced internationally and where wealth and income are distributed far more evenly - that is the only stable way of ensuring an ongoing demand for good and services. And again if we are less reliant on borrowing then money printed by the Government forms a much bigger part of the money supply. It is the situation in the past decade that was wrong.

  • Comment number 44.

    The worst kept secret in the world is that the financial markets have ALREADY reduced effective ratings on UK government debt down to AA or even A, but that the embattled rating agencies have agreed to hold back their formal pronouncements until after the next election. That gives international holders a few quarters to adjust their portfolios (read: to dump Sterling), before the next government --Labour under credible new leadership or Tory-- put an end to the present ostrich act.

  • Comment number 45.

    Re 34 magnetic monopole

    Great post.

    "How awfully decent it is of the Chinese to fund our public services for us".

    Keep it up.

  • Comment number 46.

    Gordon
    Wake up and stop pratting around.
    Let the Boe put a noose around the necks of our banks and forget about international competetiveness.
    Slash public spending but do nationalise the utility companies
    Don't raise any more business taxes and finally
    Stop legislating
    It's all about to go pear-shaped. Everyone here can see it. Why can't you?

    Ooh thats much better

  • Comment number 47.

    24. At 11:40am on 21 Jul 2009, QE_Fan wrote:

    If there is a problem selling all the new gilts, won't the government just instruct the Bank of England to buy more gilts? i.e. increase its programme of quantitative easing. It seems to me that both labour and conservative governments will do this.

    Furthermore, the amount of gilts that the Bank of England can buy with newly created money is potentially limitless.

    I do not see these actions of quantitative easing by the Bank of England as being inflationary, as the new money that they are creating is not going into the hands of the man in the street who might use it to push up prices on the high street, the new money is going into the hands of investors, and, by definition, investors invest.

    Investors may then use the newly created money to invest in equities and businesses which is good for the economy.

    What's the problem?

    ----------------------------------------------------------------------

    QE not inflationary?
    Money not going into the hands of the man on the street?

    Are you mad?

    QE may not appear to be inflationary (as it's going on and we have deflation) - but it's like pouring petrol on a BBQ which has died down. It looks out, but then WHOOSH!

    Money always eventually ends up in the hands of the man on the street. Gilt traders will make money from the artifically high prices (caused by the Government purchase) - and what's he going to do with it? Give it back to the BoE? He will be buying goods and services with this money. The reason this is so uncontrollable is because market players are herd animals, there won't be a steady increase in the spending of the additional QE money, we will reach a point where confidence returns and WHOOSH - here we go.

    You logic is akin to saying that I can open a shop and buy all the goods myself and make a heap of cash!

  • Comment number 48.

    33. At 12:11pm on 21 Jul 2009, stevewo wrote:

    "But we British have one overwhelming attribute.....Apathy.
    We will always be more interested in what's going on in Eastenders or Corrie than what's happening to our future."

    ....not once the power cuts start they wont!

  • Comment number 49.

    Dear Gordon (The most successful Chancellor for a decade),

    The first step to recovery is to first admit that you have a problem! (that we are now having to pay for)

    Please find some helpful contact numbers below:
    (Please note that the lines are closed on Saturdays, Sundays and holidays*)

    International Monetary Fund

    Headquarters 1 (HQ1):
    International Monetary Fund, 700 19th Street, N.W., Washington, D.C. 20431

    Headquarters 2 (HQ2):
    International Monetary Fund, 1900 Pennsylvania Ave NW, Washington, DC, 20431

    Telephone Operator: + 1 (202) 623-7000 · Fax: + 1 (202) 623-4661

    Business Hours

    MondayFriday: 8:30 a.m. to 6:00 p.m. (ET).
    Saturdays, Sundays, and holidays*: closed.
    *For holiday schedule, please see the IMF Business Hours, Holidays, and Emergency Closures page.
    Comments or questions about the IMF's website: webmaster@imf.org


    Yours...

    BankRSlicker

  • Comment number 50.

    39. Avalanche dodger

    You need a reality check. Swathing Thatcherite (Cameronite) cuts to public services and public sector employment will deepen the recession. The benefits vs salary trade off simply does not work. A lot of the jobs to go in the public sector would be at lower levels and low skilled jobs, thus creating more long term unemployed, potentially unemployable. Can the UK afford to take another employment/consumption/taxation hit at this point in time? No. The only game in town is to get people spending to stimulate markets. You cut the public services at your peril as the likelihood is that you create a double whammy of lost tax and consumption and longer benefit lines. Best way to cut public spending is to ditch trident, cut defence spending and to stop being the US poodle (both Cameron and Brown have made great show of cosying up to Obama and UK foreign policy is an extension of the US's).

    The simple fact of the matter is that the UK is doing or at least attempting to do the right things to head to recovery. This crisis is UNPRECENDENTED (sorry to go all ALEXANDER CURZON) and as a consequence the response to it largely reactive with some proactive parts. Paul Krugman Nobel Prize Winning Economist agrees with the course of action taken by the UK government and puts us ahead of the curve as the US and the other European economies cannot/have not been as brave. (US due to republicans adding amendments to bills at the senate and Europe because of one large inflexible central banking system.)

    The only true way out of recession is to increase productivity, thereby increasing employment, tax take, consumption and GDP. Any attempt to decrease employment at this time will be entirely counterproductive. If economic activity increases all this talk of cuts/tax rises is moot. A growing economy can pay for itself and service debt. Lets not get caught in a stagflationary, high interest rate cycle.

  • Comment number 51.

    Lukeo1980 various

    Expand manufacturing? Theres no skill base left to do it plus most UK

    citizens wont do it ie WORK!

  • Comment number 52.

    43. random_thought and others supporting QE

    Try to understand this - you can print all the money you like as a country, and you are correct it will 'fill the hole' that the banks produced when their predictions of perpetual growth failed.

    However, consider the Beeny baby - if I have 1 and there are only 5000 in the world, the Beeny baby has a value relative to that which will be quite high (a colectors item).
    If however the Beeny baby can be bought in every corner shop - it's suddenly worth a lot less.

    The only way a market can maintain prices is through the idea of scarcity - that's why air is free and cannot be bought and sold (yet).

    Money is no different, it's essentially a commodity which has 1 purpose - the means of exchange. It serves no other purpose (you can't live in it or on it - only the goods and services you can exchange for it)

    When the world wakes up and realises it's been flooded with the Queens face - they will not regard it as having value. Other currencies will become the 'collectors items' and money will flood to those currencies. The only way to stop this is by attracting it back through punitive (attractive) interest rates.

    This is the consequences of QE - Zimbabwe are showing the extremes of this - where now the Dollar is being used as currency - which is common when this has occurred before (postSoviet Russia) - or where barter replaces currency.

    However nobody has considered what happens if the Dollar goes the same way. I guess at that point only the Yen will have value and will replace the Dollar as the 'default currency'.

  • Comment number 53.

    I HEAR GORDY IS TAKING HIS HOLS IN THE LAKE DISTRICT: PITY!!

  • Comment number 54.

    PeterWARD

    GOING all ALEXANDERCURZON?

    Now THERE's A THOUGHT!!

  • Comment number 55.

    If it ends up a contest between US T-bonds and UK gilts...then I reckon WE are gonna lose out...as the US dollar remains the worlds reserve currency (for now!).

  • Comment number 56.

    # 43 random_thought

    " ... it is the situation in the past decade that was wrong".

    The situation in the last decade was just right for the Labour Party; it kept them in power under false pretences for 12 years.

    Gordon Brown created the biggest illusion of wealth creation in recorded history, funded by personal and public sector debt, now perilously underwritten by the Government, but in fact underwritten by this and future generations of taxpayers.

    Brown stole money from the UK's future citizens and dumped it unconditionally in today's society so that we could indulge in a house owning/flipping, SUV-driving, consumerist, welfare-dependent, statist dystopia that had one objective to the fore at all times: keeping socialists in Government. You either worked for the Government directly and/or loved the easy money of financially incontinent private and public sector policies.

    In short, governance of the United Kingdom over the past 12 years has been a shameless and unmitigated shambles; a group of political gangsters (led by the Blair/Brown/Balls triumvirate) engaged in a cynical exercise in securing and holding power at all cost ... which is now turning out to be nigh-on bankruptcy.

    Since socialism is, by definition, unsustainable (it despises and stifles wealth creation whilst demanding ever greater levels of debt and/or taxation), we've now reached the point where that unsustainability has tipped into collapse.

    Like I and many others keep saying: I just hope that the Tories understand the potential socio-economic chaos that lies ahead (seriously exacerbated by this nation's grotesque energy insecurity which will smash into our lives like a steam train in the next decade), and have some idea of how they intend to avert disaster. I'm not holding my breath.

    Indeed, I'm preparing myself and my family for what could well evolve into little short of armageddon if our political class keeps performing like it has over the past few years, ie with blistering incompetence.

    Finally, just to make my point: https://tinyurl.com/mnakc2





  • Comment number 57.

    50 Peterward2008 - public emplyees do not pay tax, they are the recipients of tax taken from the productive part of the economy. Using your logic everyone should be employed by the state.

    Writingsonthewall - how would you manage the money supply?

  • Comment number 58.

    #43 random_thought wrote:

    All this business of the BofE selling Gilts with one hand and buying them back with the other is just a complicated way of printing money. And surely that is OK.

    -------------------------------------------

    It's not the BoE that's selling the gilts...it's the Treasury that's selling them and the BoE that's buying them!

    A gilt is just a government IOU (+ interest) put simply

  • Comment number 59.

    50. peterward2008

    I completely agree with your post - except for this one line:-

    "The only game in town is to get people spending to stimulate markets."

    Whilst this is partially true - this is not a sustainable way out as the only way to get people spending again is for them to increase their own personal debt (as most people have been living off credit for sometime now).

    This is a false Economy put out by the desperate free market loonies who criticise the Government for trying to spend their way out of debt - but expect individuals to spend the country out of debt - locking themselves into slave labour for the rest of their lives.

    I completely agree with your final statement that only Production will get us out of this hole. However if you think about it, the expectation was for the Economy to be growing at a 3-4 percent rate, and it's currently shrinking. Seeing as the banks have gambled away the next few years production revenue (and that was at the expected rate of 3-4 percent) - it's now going to be much, much longer before we can produce enough to fill the hole. We would have to get back to pre-bust production levels today to stand any chance of getting out in the next 2 years or so.

    As each day passes the realisation that this is going to go on for a very long time becomes apparent. This is no short term blip and I expect the best case scenario is we return to +ve growth in 2012 - and that's without factoring all the unknowns - like the effect swine flu will have on the Economy.

    If you watch the politicans carefully you will see how worried they are now. They really fear a collapse of unprecedented magnitude and their only option is the one mentioned above - the Ostrich approach.

  • Comment number 60.

    799 BILLION OF DEBT WITHOUT PFI!

    nulabour HAVE SERVED US SO WELL?

  • Comment number 61.

    BankslickerMinustheR

    The dollar remains the worlds reserve currency as long as China allows it. A change in the valuation of the Remnibi would change all that.

    On a separate note...

    Any public spending cuts should target waste not jobs. Waste being adequately displayed by £200m overpayments to defence staff due to a wonky payroll system and £150m of lost secure radios.

  • Comment number 62.

    Moraymint

    1. This is not socialism...lol.
    2. If you beleive all you say then you are seriously deluded.

    Are you digging a bunker and stocking up on tinned fruit and bottled water?

    It is a recession. All politicians of whatever hue are as morally bankrupt as each other. We have our electoral cycle to thank for that. I fear for when the tories get in and I will no doubt look at emigrating as it will be a return to the worst excesses of Thatcher. Remember the rest of the country being left behind as the South East prospered. A return to the bad old days all round I think.

  • Comment number 63.

    #42 moraymint wrote:

    Isn't this simply a case of the snake eating its own tail?

    I accept that a little knowledge is a dangerous thing, but my little knowledge of the finer points of economics tells me that having the Bank of England print money in order to buy Government debt can't go on forever.

    So, where's this heading exactly?

    -----------------------------------------------------

    It's all about credibility...and at the moment, all of this country's credibility lies with a certain Mr. James Gordon Brown!

    The credibility bit is whether the international finance markets believe that the UK Govt (aka Jimmy Brown) can keep up on it's interest payments...otherwise it's a dose of austerity tablets to be administered by the IMF doctor.

    Looks like the public sector pensions provisions will go down the pan.

  • Comment number 64.

    truths33k3r

    Public servants pay tax (unlike a lot of vaunted high earners and masters of the universe lol) spend money in the UK on goods and services and pay VAT. The Companies that public servants spend their money in pay tax on their profits and employ staff. Its called the Multiplier effect. You will find it in any economics text book under Keynes.

  • Comment number 65.

    PLEASE WILL EVERYONE STOP GOING CURZON ON US - IT'S INFECTIOUS AND NOW I CAN'T STOP!

  • Comment number 66.

    Public workers do not pay tax. Period.

    2 Labour disasters should have taught you that Keynes cannot be taken seriously.

  • Comment number 67.

    56. At 1:13pm on 21 Jul 2009, moraymint wrote:

    "Since socialism is, by definition, unsustainable (it despises and stifles wealth creation whilst demanding ever greater levels of debt and/or taxation), we've now reached the point where that unsustainability has tipped into collapse."

    1 - Are you trying to say britain is Socialist? - if so you need to look the word up before you make that assumption.

    2 - Socialism doesn't stifle wealth creation - it merely prevents the un-even distribution of wealth. When a man becomes rich, another becomes poor - or are you suggesting the world is infinitely big thereby allowing the creation of wealth without destroying it elsewhere? As the latest experience has shown - there is a finite level of production and no amount of gambling over and above that will change it - hence why we're going to be paying it all back over the next 10 years.

    3 - The greater levels of tax / debt are solely due to the attempt to produce socialist ideals in a capitalist world. In a truly socialist world the WORKERS own and run the PRODUCTION and thereby there is no extraction of capital by the capitalist and therefore no diminishing profit.

    4- The unsustainability we're experience is the capitalist unsustainability - so unless you're writing this from Cuba you are talking nonsense.

    It's so depressing when I see the 'S' word thrown about by people who don't understand it - but are happy to blame it for their troubles rather than the true cause which is staring them in the face.

    If you haven't worked it out yet (and it's been 10 years so you must be slow) the reason Labour put 'Nu' in the front was because they were MOVING AWAY from their traditional left wing ideals.

    Even what you say in teh apragraph before makes no sense - you claim Labour supported consumerism (which they did) - but this is the opposite of what a truly socialist government would have done.

    A proper left wing government would have raised taxes long before and would have prevented the over-inflation of the Economy which has just caused the crash.

    I can only presume you're actually 5 years old and therefore it's understandable why your ideas are so mis-guided.

  • Comment number 68.

    66 Truthseeker
    You cannot be serious because monetarism is not a busted flush. lol. We are at the zero bound and still liquidity is more golden syrup than water. Milton Friedman must be really proud of himself.

    Seriously learn some fundamental economics before you come out with such stuff as public sector employees do not pay tax.

  • Comment number 69.

    57. At 1:17pm on 21 Jul 2009, truths33k3r wrote:

    "50 Peterward2008 - public emplyees do not pay tax, they are the recipients of tax taken from the productive part of the economy. Using your logic everyone should be employed by the state.

    Writingsonthewall - how would you manage the money supply?"

    truths33k3r - you're back - and who have you brought with you today?

    1) mmmm - that's odd because every public sector employee has the same NI and tax to pay as the rest of us. Are you suggesting it's a conspiracy? Maybe it's because you can't value something unless it's a monetary value - so I'll remind you of that when you're in hospital awaiting your triple by-pass on the NHS. Only brought to you by other productive areas of the Economy - however should you recover and then return to work - and god forbid - be productive - then you will have slipped back into the 'productive area of the Economy' - where you can then be taxed again.
    Didn't really think about that properly did you?

    2) I don't know which post you're referring to - however generally the money supply is a pricing mechanism and is irrelevant to the actual production within the Economy. All the money supply shows is how far we're over-inflated as an Economy from our true 'value'. Reading the money supply is like looking at the sky to see the weather - you can read what the weather is but you cannot predict it nor change it by looking at it.
    Remember your basing the relevance of the money supply on the premise that Economies are essentially stable and it's the money supply that upsets it. The increase in the money supply is merely the symptom and not the cause of the over-extension of the Economy.

  • Comment number 70.

    peterward2008 - I realise that you are an economics expert but public sector workers do not pay tax, they recycle it. I am not letting you get away with that one, economics expert or not.

  • Comment number 71.

    The UK is in a very real mess, on a scale much bigger than during the 1970s. Here is why:

    1. Unprecedented, jaw-dropping levels of public and private debt which are unsustainable even with 0% interest rates.
    2. House prices are still way over valued.
    3. A continuing fall in the tax-take. Over the previous decade the tax-take has been inflated by a) North Sea oil, b) the City, c) the consumer.

    The North Sea oil production is declining rapidly. It peaked in 1999. Indeed BP announced today that their production from NS will be 9% down this year - and this is not due to lack of demand. It is because of declining flow rates.

    The City has cooked its own goose. The party is over. Bank balance sheets are still wrecked and many are technically still insolvent. Also, new tighter regulation will curtail any desire to restart the casino.

    The Consumer benefited from a double bonanza of absurdly over-valued houses which they used as cash machines and spent on the high street and also exceptionally low prices of consumer goods (and food) while the pound was strong and there were still deflationary pressures to be had in the Asian sweat-shops. About two years ago prices ceased being driven down. There was no more economies of scale and the Chinese were starting to ask for more profit.

    3. Energy. If there is one thing which goes hand-in-hand with debt-based GDP growth it is the requirement of continually cheap and abundant energy. Both in the form of electricity and liquid fuels for transportation. The UK is facing a very real, very serious squeeze on our ability to generate adequate electricity. And the oil markets have never been tighter. The ability for the UK and other countries to grow our way out of debt is going to be impossible. There is not enough energy. I could discuss Peak Oil for ages, but suffice it to say that it is genuine and a clear and present danger and is the final nail in the coffin of business as usual.

    This is not just another recession. It is the start of a very long, and very deep depression. Frankly, the government cant do anything to mitigate the consequences. We are going to be a lot poorer in the future, the glory days are over.

  • Comment number 72.

    62. At 1:29pm on 21 Jul 2009, peterward2008

    You beat me to it!

    Unfortunately there is a long procession of people who want to blame something for the failure of their Economy other than the true cause. Like a bad builder - not fixing the root of the problem but continuously papering over the cracks.

    Hopefully these people will get time to read more over the next 10 years whilst they sit around contemplating where their job has gone to....

  • Comment number 73.

    68. At 1:53pm on 21 Jul 2009, peterward2008

    You should ignore him - he is mis-guided and a wind up.

    There are millions of tax paying public sector workers in the country - however truths33k3r thinks they all actually sitting around doing squat and getting paid for it.
    It's classic selfish mentality - too busy looking at what others are doing and not getting on with doing yourself.
    However I'm sure Truths33k3r doesn't use roads, hospitals, schools, college (well he couldn't have), his GP, the Dentist, railways, social sevices, the library......

    To not use these services must mean he sits in all day writing blogs which have no grounding in the truth.

  • Comment number 74.

    70. At 2:06pm on 21 Jul 2009, truths33k3r wrote:

    "peterward2008 - I realise that you are an economics expert but public sector workers do not pay tax, they recycle it. I am not letting you get away with that one, economics expert or not."


    Still haven't answered my example about the Doctor though? If you return to work in the private sector thanks to an NHS doctor (who is a PS worker recycling tax as you put it) - do you pay him back? or does that simply mean you're not counting that as a contribution?

    In reality we all recycle tax - I use the roads to get to work, tax money is used to keep those roads in good repair. Without that I wouldn't be able to get to work and I would not be a 'productive member of society in the private sector' paying tax. I would sit at home on my hands.

    ....or agian, do you not count that?

    if you really seek the truth - why do you so often ignore it?

  • Comment number 75.

    Hi Writingsonthewall - how is my favourite socialist?

    I see how you are getting confused about public sector tax. Yes they do have NI numbers and a notional amount of tax is deducted from their payslip, but given that all of their salary is tax taken from someone else it is pure recycling.

    Your comments about the HNS are irrelevant given that I paid for the op through taxation - that is how I know the value of it. Are you saying that without the HNS nobody would be providing heart operations?

    Money supply is at the heart of our current issues, that is why I asked you the question, knowing that you would come back and say it was irrelevant.

    I love this game.

  • Comment number 76.

    It is certainly true that the only wealth generators in our country work in the private sector. The public sector may contain socially productive people like doctors and nurses but they don't produce any true wealth. That is done solely in the private sector. Now, don't go and read that as though I think all public sector workers are useless. I don't. But the chap above who argues that they don't pay tax is correct in so much as they don't increase the total amount of tax-take. They are paid via tax, and they recycle it back to the HM Treaury. Only when entreprenuers in the private sector put capital (savings) to work in creating new private jobs is any wealth created - which can then be taxed.

    And the more people at work in the un-productive public sector (some of whom may very well be socially productive), the less the private wealth creating sector can grow.

  • Comment number 77.

    Wringsonthewall - do not put words into my mouth. I said that public sector workers do not pay tax, not that that did not work hard.

  • Comment number 78.

    Oh truths33k3r - I do get tired of correcting you....

    Hi Writingsonthewall - how is my favourite socialist?

    - I am not a socialist, I am an anti-capitalist. I understand what Socialism is which sets me apart from you. It's important to understand all forms of Economy - otherwise you discount important factors and we end up with the 'free market is the only way' attitude.

    I see how you are getting confused about public sector tax. Yes they do have NI numbers and a notional amount of tax is deducted from their payslip, but given that all of their salary is tax taken from someone else it is pure recycling.

    - .....and where is your salary from? Do you work in an industry that receives no public grant? one that doesn't deal with the Government (local or National) as a customer? Do tell me, what is this industry?

    Your comments about the HNS are irrelevant given that I paid for the op through taxation - that is how I know the value of it. Are you saying that without the HNS nobody would be providing heart operations?

    -- So you pay exactly the right amount of tax for all the public services you use? What about if you get run over? Have you accounted for that too? You must be the ONLY person in the world who has reach tax parity.

    Money supply is at the heart of our current issues, that is why I asked you the question, knowing that you would come back and say it was irrelevant.
    -- So tell me - how does restricting the money supply actually influence anything? Take it to the extreme and tell me how the theory works then? Where is the evidence of it working? Chilie? Thatchers Britain? As I said before it's merely and indicator of the symptoms and not the cause. I presume you'll be treating your swine flu with a handkerchief.

    I love this game.
    - ah well, that's because you think it's a game, well unfortunately it's not, it's very serious. People will die as a direct result of this recession but I presume as long as 'you're all right jack' then you will keep smiling.
    ....just make sure your doors are locked at night as recessions always increase the crime rate...

  • Comment number 79.

    76

    Sorry to go through this well rehearsed argument again. You assume that all public sector workers do is recycle tax. So public sector do not consume goods and services from private entrepreneurs, who then use this spend (net of tax paid) to invest in their business and produce more products and employ more people. In this way the consumption of public sector workers can create capital and revenue. The multiplier effect as it is known and is broadly accepted.

  • Comment number 80.

    76. At 2:30pm on 21 Jul 2009, sectornitad
    ...or are you truths33k3r in disguise?

    Read my post at 74 and explain how this is not ensuring the generation of wealth in the private sector as a direct result of the public sector?

    Maybe that's the solution - we withdraw the use of all public services by the private sector (including contracts won by private sector businesses) and we'll see how productive, we the private sector is on our own.

    How you going to get to work in the productive private sector without the public roads to use? Helicopter maybe? - well you'll need a serious amount of pay rises then...

  • Comment number 81.

    Sensible and realistic posters today with varying degrees of accuracy and trepidation on what lies ahead.

    The world is in such a mess and the imbalances between China and the rest are widening at a time when there should be plans to place a check on these. We are all being led up the garden path by one vested interest after another. Truth at the moment is hidden in the dark shadows.

    Who can possibly know the outcome of a situation where China is printing money to buy debt from the west and pulling in massive amounts of debt interest into its economy. How frightening is that?

    Desperation has set in for no-one knows what to do so everyone keeps printing more money and selling more debt to whoever can print the money to buy it.

    This is buying time until the whole situation implodes. Back to square one.

    Gordon Brown will remain where he is as long as is possible because everyone knows his policies have been rubbish but we're too far down the line now for them to be reversed. He will take the flak at the end of the day.

    How long it will be before the final crash is difficult to say but even the IMF won't be able to raise enough money to pay the debt interest required by China from the rest of the world.

    In the meantime while those at the top continue to play their games of monopoly billions of ordinary people have to sit it out waiting for the final outcome. It will not be pretty.

  • Comment number 82.

    Thank goodness I'm moving to New Zealand next year.

  • Comment number 83.

    writingisonthewall -

    I believe if you re-read my post you will see that I do make reference to 'socially productive' workers in the public sector. I have no doubt that the private sector requires law and order in order to turn a buck, and that they therefore require a police force. The point that is always lost in this debate is that the the tax gathered is infact a cost to the private sector. The public sector does not, never has and never will actually create that tax revenue.

    Take your argument to the extreme and assume that we all work in the public sector. Where does the tax come from? The Treasury taxes us all at a marginal rate - say 30% - and then pays us 100%. Sure you can see that this is voodoo economics?

  • Comment number 84.

    now is the time for all good men

  • Comment number 85.

    re 45 stevewo - thank you - likewise your posts - always thought-provoking and substantial.

  • Comment number 86.

    I recall from the 2009 budget/red book figures that Alastair Darling has made a forecast that the UK will come out of recession during the last half of 2009 - this now looks over-optimistic just as it did in March 2009 and so the government's borrowing problems are compounded by having to borrow more and the markets (mainly overseas speculators) can sit on their hands and pressurise the interest rate on those borrowings.

    But in reality does anyone think that anyone in the current government gives two hoots how much needs to be borrowed or from where or whom or as to the percentage rate on those borrowings? Gordon Brown has only one interest as a committed megla-maniac and that is in hoping that the UK economy recovers sufficiently by June 2010 for him to argue that the recession is on its way out - in time for peddling spin and lies at the general election.

    If the UK borrowings go sky high Gordon Brown knows that his tax bureacrats will sweep down like a great vulture (in the unlikley evenet of a successful general election by Labour) on the English PAYE taxpayer and give them the biggest 'double whammy' of all time and will cut services in England and tax those PAYE mugs until their 'pips squeek'. This will maintain the English taxpayers' perennial net subsidy of Wales, Northern Ireland and SCOTLAND - Yes ... Scotland is subsidised because Gordon Brown has said so (if you can believe him?).

    Interesting piece about who amy be concerned aboyt paying what - but the Labour government's attitude is that the English taxpayer will always bail them out under any economic conditions - the final question is how many miscalculations have Brown/Darling made here?

    No .. let's not keep blaming Brown/Darling (as they are not in control anyway as abdicators from that illusive but non-existent entity the British economy/banking system as we're all now part of the global economic mess according to Gordon Brown) - so can we blame the Whitehall Mandarins instead? (i.e. those who keep supplying Darling and Brown with bad GDP/economic data and 'bent' figures for budgetry statements) - even though the National Audit office does not seem to care much about the fraudulent budgetry statements?

    By the way I have a Grade A star GCSE in English Language so please no more remarks about the quality of my grammar!

  • Comment number 87.

    virtualsilverlady -

    spot on. And about the IMF, it has no money. It is a fund into which the wealthy nations place money to bail out the poor nations in trouble. The problem now is that the wealthy nations are now the ones in trouble! Just last week the US had to issue bonds to the tune of $100 Billion to cover its commitment to the IMF. Absurd or what! The US is in such a terrible mess, literally insolvent, yet it is still donating a huge wedge to the IMF!

  • Comment number 88.

    The multiplier effect may be "broadly accepted" but not by me.

    If you are an anti-capitalist what is your solution to the issues that we face?

    We live in under corporatism, and as such is is impossible to operate in any industry without the government being involved somewhere. That does not mean that I have to like it.

    With the government setting the tax how do I know whether I have paid the right amount of tax for the services I consume? I do not. That is why government should not be fixing prices.

    Controlling the money supply helps prevent bubbles, like the housing one that still threatens to engulf us, which is why we are printing more money to try and prop up prices. The recession is not a game, but everyone that suffers can look at one place for the reason - big government.

  • Comment number 89.


    Why aren't other leading economies with considerably larger budget deficits facing credit downgrade or debt default?

    The bank of england if truely independent should have been purchasing high grade(whatever that means) private debt instead of monetising government debt. All that quantitive easing appears to have done is to allow the government to significantly increase it's borrowings without penanlty on the coupon it has to pay, cheap money for the government to waste on bureaucracy. I hope before the BofE decides to increase interest rates it sells all those treasuries it's purchased to tighten monetary policy, which will also mean Darling and Brown will HAVE to start tightening their belts!

    I also hope Mr Bootle is correct in his assessment of the macro economic landscape over the next few years (I'm not a public sector worker), it seems to me to make a lot of sense. Anyone agree or disagree?

    https://www.telegraph.co.uk/finance/comment/rogerbootle/5675634/We-can-afford-to-keep-interest-rates-at-record-low-for-many-years.html

  • Comment number 90.

    64 peterward2008

    ''Public servants pay tax (unlike a lot of vaunted high earners and masters of the universe lol) spend money in the UK on goods and services and pay VAT. The Companies that public servants spend their money in pay tax on their profits and employ staff. Its called the Multiplier effect. You will find it in any economics text book under Keynes.''

    Public servants may pay tax but they are paid in money collected in tax from the private sector. Tax revenues can only come from the private sector which creates the wealth, all else is just tax recirculation, diminishing on each recirculation. It has nothing to do with multiplier effects. It is the false belief that the public sector is somehow divorced from the reality of the state of the wealth creation in the economy that has cause the bloated public debt with public expenditure running absolutely flat out during Browns Bubble. If your wealth creation is money manipulation then it is vulnerable. If your wealth creation is undermined by low wage zones then it is vulnerable. If you cannot create the wealth then your tax revnue drops, if your tax revenue drops then your public services and public servants must also drop. Wait for the drop.

  • Comment number 91.

    "Pay us more and we may buy more of your bonds"

    Presently these is a 'fraud' taking place and that is the deliberate destruction of the price of money by sticking to a zero interest rate policy combined with printing money. The market will ensure that this does not go on very much longer. If the central banks stick to a worthless money policy, sooner or later they will suffer a terrible retribution from the market. They know it, but are hoping against hope that they can con investors for a few more weeks or at best a month or so.

    However the first central bankers to raise rates to a proper level, a sustainable level (5 percent), will get the advantage of not having to raise rate so much as later central banks. They are all waiting to see who blinks first!

    Given their past pathetic performance I don't hold up much hope for the Bank of England in this race. Too little too late has been their pattern for the last decade or so. The same cowards are running the place - so that would be my prediction! Total inaction until after the election! At huge medium term cost to the Nation - as per usual.

  • Comment number 92.

    It seems a racing certainty that the interest paid on gilts is going to have to rise to enable the government meet it's borrowing requirements. Will this mean that the Bank of England will have to raise the base rate? Or can there be a dislocation between base rate and what the government has to pay on the interest rates on gilts? Or will it be the case that because the rate offered on gilts is better than what banks can achieve on loans to the private sector that this 'crowding out' of debt provision to the government has the automatic effect of raising interest rates on private loans?

    Appreciate comments.

  • Comment number 93.

    88

    Monetarism and the exploitation of it caused this bubble.

    So you want penal interest rates? Repossessions etc. The thatcherite solution is bust. The control of the supply of money using interest rates does not work. Interest rates are near 0% yet the supply of money and finance is worse than ever, ask any SME how easy it is to get credit out of a bank. The deregulation of the banking sector that forced the US to drop Glass Steagall caused a lot of this by allowing retail banks to get too big to fail. Central banks cannot hope to control the supply of money as long as China keeps saving and turns that saving into cheap money. This cycle will be repeated if monetarist control returns. Then you end up with wild fluctuations in exchange rates, devaluations that cost billions to underpin a la the ERM debacle.

    Monetarism and control of the supply of the money is a busted flush with the structures we have place (both regulatory and commercial).

    The multiplier effect is accepted the argument tends to be around the value. A look at the history books at the American experience of the New Deal and the Military Industrial Complex shows that. Your view on value added is interesting if you extend to include shipyards with one contract that is a government one...surely all the people here are public sector employees who merely recycle tax.

  • Comment number 94.

    88

    You and other intellectual heavyweights George W Bush and Ronald Reagan would agree with your views on big government.

  • Comment number 95.

    79 peterward2008

    ''Sorry to go through this well rehearsed argument again. You assume that all public sector workers do is recycle tax. So public sector do not consume goods and services from private entrepreneurs, who then use this spend (net of tax paid) to invest in their business and produce more products and employ more people. In this way the consumption of public sector workers can create capital and revenue. The multiplier effect as it is known and is broadly accepted.''

    Just wait till the tax revenue drops. It is as simple as that. I can't remember whether it was Friedman or Greenspan - An economy is - 'I can spend my money or your money. You can spend my money or your money'. Its as simple as that. If I have no money and you have no money then nothing happens. As for your multiplier effect, fine its looks great, perpetual motion, problem solved we can all sit on the dole and use public money and the multiplier effect will take care of it. Nobody objects to paying taxes in return for services, that is the principle of taxes. Taxation runs at 46 percent total direct and indirect and has done for years, that figure is the same across developed western european economies and is needed for welfare provision. It is a percentage so if the economy drops the the tax take drops. In the private sector competition stops most lunatic behaviour, what competition doesnt stop government regulation is supposed to stop. In the public sector there is monopoly, no competiton and excesses do not stop. it is as simple as that. Your multiplier effect will not save you.

  • Comment number 96.

    If all the net surplus countries do not buy up all of our public and private debt then we wont buy their oil and cheap toys, it's what is commonly known as a virtuous circle. We end up being effectively mortgaged up to the eyeballs with the above countries but what are they going to do when we default, repossess our hospitals and roads? We actually hold all the trump cards because we can also allow inflation to erode the value of both our debt and their assets. But whisper it quitely because they are going to be mighty peeved when they work all this out. That'll teach em to try and achieve world domination through manipulation of exchange rates.

  • Comment number 97.

    NeedaFilip -

    The real interest rate to watch is not the BoE base-rate. That is a purely academic rate (almost). The real rate to watch is the inter-bank rate. This is the rate upon which all consumer and business loans are made and floats above the base rate. The inter-bank rate (LIBOR) is typically priced around the AA rating, but moves up and down even as the BoE rate is static. The secondary market for gilts will start to price in a higher yield requirement (prices will fall). This means that new gilts will need to equal or beat the prevailing rate in the market on that part of the maturity curve.

    I said that the BoE rate (which is actually a repo rate) was almost academic. It is the rate at which the BoE will pay banks for over-night deposits - which are mandated by the capital requirements ratio.

  • Comment number 98.

    Gordon Brown is out of control and I think Mandy realised this a while ago...hence Mandy's recent comments regarding reduced budgets.

    Maybe Mandy can act as a restraining hand on Gordon!

  • Comment number 99.

    95
    I am afraid that your understanding of Keynesian economics is tainted by your Friedman and Greenspan references (both stewards of this current problem). The multiplier does work and does not apply in the same way to benefit payments as benefit payments do not have any added value. Benefit payments do not lead to tax being increased and have minimal impact on consumption (on a macroeconomic level). No matter how we cut it, consumption and production drives growth. In order for goods to be produced, they require a market and to be demanded (otherwise there is no point in producing them). An entrepreneur/producer will take the £1 in my pocket whether its my money or your money. Utilise it to produce more inventory to sell or to grow their business.

    That in a nutshell is the multiplier, in a way its how markets work and its around a measure of return on capital. On the question of monopoly in the public sector. Thats now becoming more of a myth. I can send my children to any school within reason and these schools compete to attract the best students, same goes for unis and colleges too. I can now also travel to get operations done by other PCTs.

  • Comment number 100.

    NeedaFilip -

    "If all the net surplus countries do not buy up all of our public and private debt then we wont buy their oil and cheap toys, it's what is commonly known as a virtuous circle.... We actually hold all the trump cards because we can also allow inflation to erode the value of both our debt and their assets. But whisper it quitely because they are going to be mighty peeved when they work all this out. That'll teach em to try and achieve world domination through manipulation of exchange rates."

    No. This argument is flawed. They do not need us. China is busy try to stimulate its internal markets. If we try to inflate away our debt we will cause massive problems for own citizens. The pound will tank and seeing as we are net energy importers, net consumerable importers, net clothing importers and most importantly net food importers there would be very real social unrest and the economy would implode. And all this while real wages are decreasing or at best stagnant. If we even begin to think we can inflate our way out of debt we are playing with hell-fire.

 

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