Have a look at what we had to pay in debt interest in the 1992-93 period when Norman Lamont ran an enormous PSBR to pay for the Major government’s tax cuts it needed to win the 1992 election. Positively eye-watering. I wonder who was Lamont’s political adviser at the time?

How on earth have you managed to write this egregious thing without once mentioning interest RATES?

Irish feminist history is obviously not strong on basic mathematics. Have you thought about doing the sums for what we would currently be paying in debt servicing if interest rates returned to their trend rate of 5% or so rather than their current 0.5%?

Also worth pointing out that since spending was also higher (as a percentage of GDP) under Major than under Labour – pre-recession,anyway – debt interest was taking up a bigger share of a bigger share of the overall pie. So assuming that percentage of GDP is a better measure of affordability than percentage of spending, the cost of servicing debt was in fact somewhat less affordable under Major and somewhat more affordable under Labour than your figures suggest. (By the same token, of course, the cost of servicing our debt *now* is somewhat less affordable than your figures suggest, since spending has risen as a percentage of GDP and so debt interests payments are again taking up a bigger share of a bigger share of the pie.)

@3 – Yes, anything to ignore the statistics when they’re inconvenient, eh.

5 – who’s ignoring statistics? You chaps appear to have very short memories – I was only 13 when the UK crashed out of the ERM, but the thing I do remember was that interest rates were hiked to 15%. That may have been temporary, but I suspect that if you average out the rates paid on Government debt 92-97 with the rates paid 10-11 you’d see a vast disparity – a disparity that entirely explains why, although total indebtedness was so much lower back then, the sums spent servicing it were higher.

Worth mentioning no? Especially because the risk that no-one here appears to want to acknowledge is that interest rates will have to rise again – and what will happen to our debt bill then?

@6 – Such a glowing example of how to run a country that interest rates got that high, isn’t it. What matters is what’s paid, of course.

And yes, what WILL happen if a lack of growth has prevented us from reducing the debt in the meantime, Tim?

Low interest rates now are an argument for being even more relaxed now about debt interest – they are not going to rise soon and the world is awash with capital (so no crowding out of pvt investment)

Such a glowing example of how to run a country that interest rates got that high, isn’t it.

True enough, entering into a fixed-exchange rate system in a non-optimal currency zone was indeed a disaster. Someone ought to tell the Lib Dems.

Lucky too that Labour weren’t in power then, as shadow Chancellor Gordon Brown had advocated earlier entry at an even less sustainable exchange rate – proof that it really doesn’t matter what oppositions say, it’s what Governments do (cf Tory adoption of Labour spending plans c. 2007).

Low interest rates now are an argument for being even more relaxed now about debt interest – they are not going to rise soon.

I’m sure Italy were saying precisely the same thing just a few months ago. A return to Balls-onomics would provide a pretty good test of just how relaxed international lenders would be.

And yes, what WILL happen if a lack of growth has prevented us from reducing the debt in the meantime, Tim?

Shall we look out all those pieces from earlier in the year saying that austerity had destroyed the Irish economy?

The national statistics office said Thursday gross domestic product in the three months to June was 1.6% higher than in the first quarter and 2.3% higher than in the same period of 2010.

That was the fastest year-to-year expansion since the last three months of 2007, after which Ireland’s previously fast-growing economy was felled by the financial crisis and the collapse of a debt-fueled property boom.

The Central Statistics Office also raised its calculation of growth in the first quarter to 1.9% from the previously estimated 1.3%. The growth was broad-based, including manufacturing, agriculture, transport and communications.

http://www.theatlantic.com/business/archive/2011/09/is-irish-austerity-paying-dividends/245522/

Punk Keynsianism isn’t the answer.

[deleted]

Since the cost of borrowing is very low at the minute but may well rise in the medium term (say the next 5 years), and since there’s no way around the fact that we are going to have to keep borrowing for the next few years, and since the high rate of inflation means that a pound borrowed in, say, 2014 will be worth less than a pound borrowed in 2011, is there not a case for ‘front-loading’ some of that borrowing – especially the portion earmarked for capital investment?

If a road needs widening some time in the next 3 years, say, and if that work is inevitably going to be carried out using borrowed money, and if both the cost of borrowing and the cost of widening roads are likely to be higher in 3 years’ time, and *especially* if the widening of that road is likely to help grow the economy, it would be silly to wait till later to borrow that money and do that work, wouldn’t it?

I assume this is the logic behind ‘bringing forward capital investment programs’, but since that’s an idea I generally hear from left-wingers rather than right-wingers, I’m wondering if there’s some objection to that way of thinking?

Genuine question.

The moment anyone in the UK government takes onboard any of the “advice” proffered on this site then (market) interest rates would go sky high! In total contrast to pieces written here (and in the Guardian), the City generally appreciates the deficit reduction focus and this has been rewarded (if that’s the right word) with a flight to quality.

The argument made by the OP is that we would get the benefits from the flight to quality without taking the actions that caused it.

(And yes, the other reason for the flight is that the UK is non-euro Europe, but this secondary to the point above.)

This constant dripfeed of misinformation is getting disturbing.

@12 in the real world what you are suggesting is being considered by the government and various ideas for schemes are being readied. There is an opportunity for the UK state to take advantage of low interest rates but this opportunity must be balanced against the all-too-real threat of mismanagement of this debt.

It is bizarre that the one conclusion people posting here have taken from the debt crisis is that it’s fine to borrow excessively when lending conditions are good. This is precisely what caused the crisis in the first place.

Tyler

“Per capita, including pruivate debt, the UK is the fourth most indebted country in the world, after the USA, japan and italy”

How is this relevant? A two-person household on £300,000 a year and with a mortgage of £200,000 is per capita more indebted than a four-person household on £30,000 with the same size mortgage, but I don’t imagine they’d be losing any sleep over it.

This post could be boiled down to: interest rates are at historic lows.

whether this means we should borrow more … well, maybe.

people would do well to remember what a debt spiral looks like – it’s when people become worried about your ability to repay debts, so interest rates start to rise, and at some point rising interest rates means you have to borrow more just to cover the interest payments, making people even more worried, making interest rates rise even more …. and there’s the spiral. So there’s a big self-fulfilling element. This is kind of like the situation Italy is in – if interest rates stay low, it might be able to squeak through, if they rise, it’s a gonner, and that’s because it has a large stock of debt.

The UK has a reasonably large stock of debt. Interest rates are currently low because lenders believe the government is relatively safe, and demand for safe assets is high.

I have no idea how far we could get away with borrowing more – these questions are hard to answer, and my guess is that even scholars who have really studied this stuff (i.e. more than me, certainly more than LC’s constellation of economics commentators) would have little confidence answering that question. Plenty of people (Martin Wolf etc.) think the UK is some distance away from a public finance crises danger zone.

The only point I want to make here is that it’s dangerous to look at interest payments and infer this means you can take on lots more debt, and that you need to keep an eye on a stock of debt, and think about what things will look like when interest rates start to rise.

(How “austerity” affects the quantity we need to borrow, is another question).

@10 – Yes, and growth? Long-term prospects for paying off the debt, when exports are falling fast, as they are here? Oh, right.

@11 – So, why is this government depending on increasing private debt (at FAR higher rates than government debt) to get the economy moving again? It’s working SO well isn’t it. Oh wait, it’s not.

@14 – No, that’s YOUR argument. The argument which is proposed from the left is borrowing to get the economy moving again and employment up. The ensuing recovery will, in the medium to long term, pay down MORE debt than double-dipping.

The argument which is proposed from the left is borrowing to get the economy moving again and employment up. The ensuing recovery will, in the medium to long term, pay down MORE debt than double-dipping.

The magic money tree, in all its glory. The idea that things would be hunky dory if only our deficit were 20% rather than 10%, is quite jaw-dropping. The new addition – that all this borrowed money is free because, because… growth – is still better.

Tim J,

there is a reasonable argument that if the government had not announced all these (or so many) cuts, and had decided to use the public purse to fund some job-creating infrastructure projects, investments in maintaining and upgrading public buildings etc., then the economy would be in better shape, tax revenues would be higher, welfare payments lower etc. possibly even to the extent that the deficit actually falls, rather more likely to the extent that the deficit is not increased nearly as much as just thinking about “extra spending” might suggest … you might argue that would you would see is a temporarily higher deficit followed by growth-caused deficit reduction, but I don’t think anybody (sensible) would argue we’d be better off with a 20% deficit rather than a 10% one, full stop.

[the thing to do is shift spending from recurrent to investment]

19 – aren’t we then back to arguments about multipliers and ‘shovel ready projects’? If our aim is solely to trigger short term GDP growth, aren’t we best off slashing consumption taxes?

But if all this is paid for by additional borrowing, then you have to suspect that people will start to become a touch cagy about lending it at current rates.

Tim J,

yes, back to those old arguments. The argument is as much about how large negative multipliers are (the harm done by cuts) as positive (things aren’t nec symmetrical). As for whether tax cuts would be better, I think the question is about which route reduces unemployment more quickly – maybe hiring via govt. projects hits the spot faster than leaving more money in people’s pockets, maybe not. Some lefties don’t like the sound of tax cuts – Duncan W would argue for efficacy of tax cuts, I think.

as for whether people would be willing to lend at current rates – well that depends on whether people believe it will work or not. If you think the govt can stimulate growth, then sure, lend away. The argument works in the other direction too – lenders may be reluctant to lend if they think austerity is doing too much harm.

@18 – So, instead you want us to double-dip, and end up with high interest rates, high inflation and bigger debt, on top of the people dead from starvation and cold. What a wonderful answer.

All to save 5% or so GDP borrowing, which could get the economy kick-started again. No, we need to beat this country more, to slash the social infrastructure which saves money in the medium/long term and to act like the one-party banana republic we’re well down the road to becoming.

The argument works in the other direction too – lenders may be reluctant to lend if they think austerity is doing too much harm.

We do at least have some evidence on that though don’t we – at least to date? What’s happening to the UK’s cost of borrowing?

So, instead you want us to double-dip, and end up with high interest rates, high inflation and bigger debt, on top of the people dead from starvation and cold. What a wonderful answer.

I think for the good of the site in general, and my Friday in particular, this is probably the point where I back away slowly.

Tim J,

yes, no sign (yet) lenders are so worried about austerity killing growth that they want higher interest rates. Still, my guess is the govt could pass a stimulus bill (less cutting and some projects) and the interest rate would stay where it is, because I think all that matters there is where the UK sits relative to other OECD borrowers, and some extra spending / less cutting, would not turn us into Italy.

@23 – Why? Because you can’t stand people discussing the direct and clear results of what austerity is causing? Of the mass social cleansing which is really kicking off in a week? Of the deliberate harrassment of the disabled in the name of “assessment”?

No, your social darwinists are just being subtle, the longer term aims ain’t changed. At least Thatcher wasn’t part of your little circle, she was ruthless but not that kind of evil.

24 – What’s your view on the Irish numbers? Seems a shame that it’ll all get washed away in the Eurozone crisis, because there might be some genuine insights into stimulus vs. austerity as a response to a fiscal crisis.

Tim J,

I don’t know. Here’s Brad DL with some nice graphs that suggest caution in making too much of short-term data:

http://delong.typepad.com/sdj/2011/09/department-of-huh-ireland-cuir-siao-ar-ghabhar-agus-is-ghabhar-edition.html

Ireland did have a pretty strong export orientated economy afaik, which does put it in a better position than some to recover. Maybe those graphs just show that Ireland hit bottom (unlike Greece, which has had the ground open up beneath it) and don’t really tell us anything about Keynsian versus other accounts of things.

@26 – The larger picture is all that matters. Austerity has left Ireland without the kind of growth they’d need to succeed in the face of that situation. But no, the solution is ever-more of the same thing…and Britain is hardly immune to the same effects, and yet our economy is so brittle now that minor tremors from the Eurozone now seriously threaten us.

27 – the Megan McArdle line in other words!

Related thoughts: whatever events unfold, a lot of pundits who insist on treating whatever has happened in the last five minutes as if they were the final events of the crisis, are going to look like idiots.

Lordy, Éoin – don’t you know how this works yet? If a government is nominally of the right, then there’s not a deficit-causing borrowing/spending plan the conservatives/right-libertarians don’t like – especially if it either pays for or shores up tax cuts for the rich, military hardware spending and/or aggressive military interventions.

However if a government is nominally of the left then every single deficit-causing borrowing/spending plan is thoroughly irresponsible, and if it pays for maintenance of state services and assets – welfare in particular – then it’s downright evil.

@30 Regardless of what you’re spending the money on, you shouldn’t borrow to meet day to day requirements if there is any way to avoid it. Doing so just stores up trouble and necessitates a painful period of readjustment, (sound familiar?).

on Ireland see also:

“Seeing some growth in Ireland, then, is not at all a refutation of Keynesian economics — it’s exactly what you’d expect, given that Ireland is in fact gradually achieving an “internal devaluation” via relative deflation. What would have posed an intellectual puzzle would have been a rapid bounceback to full employment. And that isn’t happening.”

http://krugman.blogs.nytimes.com/2011/09/23/irish-confusion/

[deleted, for earlier abusive language]

@33 – So, again, for the want of getting the economy moving again, we need to emulate Japan’s lost decade. Except the poor will be hammered far harder. Never mind that the debt will grow, rather than shrink. Never mind the human suffering. Never mind anything but a one-track ideology which benefits only the rich.

The UK is toast BECAUSE we’ve killed growth, and the recovery and made the economy so fragile. America will pull through. Most of the EU will pull through. Britain? Er…

Tim J

“The magic money tree, in all its glory. The idea that things would be hunky dory if only our deficit were 20% rather than 10%, is quite jaw-dropping.”

But nobody denies that it’s in our long-term interests to run a higher deficit rather than a lower one this year, and next year, and the year after that.

George Osborne, for instance, thinks the optimal size of the deficit this year is around 8% of GDP – not 4%, or 2%, but 8%. Otherwise he would have cut spending much more sharply and raised taxes much more steeply. He didn’t, because he thought that in the medium to long term, that would do more harm than good by stifling growth.

Similarly, Osborne thought that the optimal time to start trying to cut the structural deficit was late last year, when the recovery seemed to be well under way – not the year before, while we were still in recession.

So in spite of the silly hyperbole about people (who?) wanting to double the deficit to 20%, plainly there’s nothing in the least bit jaw-dropping about the idea that Osborne started cutting 6 or 9 or 12 months too early, or the idea that we should be aiming to bring the deficit down by 1% or 1.5% of GDP year-on-year rather than 2%.

Even on a common-sense level, your reasoning doesn’t ring true. There are plenty of situations in which it might be advisable for in indebted person to keep borrowing in the short term. You don’t have to believe in a ‘magic money tree’ to believe that it might be reasonable to borrow the money you need to finish a degree, retrain as a plumber, fit out a shop, conduct some market research or buy a suit for a job interview; you just have to believe that sometimes spending money today can put you in a stronger position tomorrow.

@35 all very reasonable. Though complaints about hyperbole from critics of the OP come a little rich when we have another commenter here accusing his opponent of starving people to death!

There is a odd and major inconsistency with the position put forward in general by posters on this site. On the one hand, excessive borrowing is singularly the fault of private sector lenders rather than borrowers, and such lenders should be punished by having their debts (ie their assets) erased. On the other hand, posters on this site repeatedly argue that the UK state should borrow as much as it can to take advantage of short-term dynamics in the global credit markets.

I can’t help but guess that if the UK did increase its borrowing substantially and then got into trouble the position of this site would be to blame the lenders!

The argument put forward by the OP has much of the same logic as a company using a low-interest-rate credit card to pay for essential costs of the business. It might work out but there are substantial risks in doing so.

“Seeing some growth in Ireland, then, is not at all a refutation of Keynesian economics — it’s exactly what you’d expect — it’s exactly what you’d expect, given that Ireland is in fact gradually achieving an “internal devaluation” via relative deflation. What would have posed an intellectual puzzle would have been a rapid bounceback to full employment. And that isn’t happening.”

That does smack rather of shifting the goalposts. So, we can’t say if austerity has worked until we see a bounceback to full employment? When was the last time we saw full employment? The measure he used most frequently was cost of borrowing, and he used Spain as the comparitor as a non-austerity model. How’s Spain doing? Highest cost of borrowing for three years.

If we did see a rapid increase in irish employment, I suspect that Krugman’s reaction would be to say that until Irish alchemists succeeded in turning base metal into gold, we couldn’t say that anything had been proved.

So, again, for the want of getting the economy moving again, we need to emulate Japan’s lost decade.

You do know what Japan did to try and prevent its lost decade, right? Substantial deficit spending on capital projects? Just like you’re advocating?

Why do you want to kill the poor?

“Brown did fix the roof when the sun was shining and John Major’s debt interest was not allowed to accrue.”

Wow. Just.. Wow.

How do balance that amount of cognitive dissonance without having an aneurism?

@ 35 GO.

Your analogy misses a couple of things….there is a point where the extra earnings from your debt financed degree gets swamped by the debt financing itself….and that assumes you have someone to buy your debt – a problem greece is facing right now.

Much of the western world already is at, near or over that tipping point already. Government bonds are simply an absolutely terrible inestment.

More importantly it is becoming clear that the multiplier for government spending/QE is becoming negative long term. Debt fuelled growth now comes at the cost of futuregrowth. There are a couple of good papers just released on the topic – zerohedge has one froma day or two ago.

@31

Well, that depends on your position. What Brown’s policies tried to do was to correct nearly two decades of deliberate underfunding in existing public services (performed for the ideological reason that it would boost private providers and/or force privatisation), and at the same time fix the unemployment problem – caused by a private sector that made its money by downsizing and offshoring to increase shareholder dividends and executive bonuses – by getting the public sector to take up the slack.

I note that our resident free-marketeers are having a field day on this thread today. Has Elizabeth Warren’s statement got your back up?

@38 – Funnily enough, you’re making up total bullshit and defaming me.

I don’t support spending on capital projects. I never have done. I support cancelling the welfare cuts. Of a VAT holiday. Of getting consumer confidence up and generating jobs. Of funding university expansion and tuition. Of cancelling the NHS reorganisation. Of taxing capital gains at the same rate as other income. Of giving small tax breaks to cooperatives Of adopting much of the nordic model…

All polices I HAVE advocated. But no, defame me for something I never said, right.

We’re now in a situation where we DO need to open the faucets, because of how bad a situation we’re facing. We *were* recovering. Now we’re not, and long-term? Who can worry about the long-term when we need to get through the next few years without crashing in a way which would make 2008 look mild. There’s nobody to bail US out.

Eoin,

You are doing the exact same thing that coalition members do every week on Question Time. Reciting how much bigger the interest payments budget is compared to other budgets and how much we are spending each day on interest payments is irrelevant waffle. What matters in terms of debt affordability and debt burden on the economy is interest payments as a ratio of total managed expenditure or interest payments as a ratio of tax receipts. However, generally interest payments as a ratio of GDP is sufficient to work out whether debt is sustainable or not. If GDP in real terms is not growing then debt at any level may not be sustainable as the debt snowball effect takes over as the market starts charging a higher interest rate.

Your chart is relevant, but not as relevant as you think. The coupon payments that any government are paying on legacy debt depends on the interest rates charged to previous governments. So governments can’t be blamed or take all the credit for the average interest rate on the total stock of debt. What the market looks at is debt sustainability. Although the total stock of debt and the debt burden may be rising for sometime. What is meant by debt sustainability is whether there is a credible plan where the debt burden stops rising. Note the stock of debt could continue to rise and it is completely irrelevant as simultaneously the debt burden could be falling. That is why GDP growth matters in terms of debt sustainability.

The eurozone periphery blew up because there was little prospect of their debt burden stopping rising. Historically issuing lots of debt at the front of the yield curve because it was cheaper there until such time as it wasn’t. Therefore, when it came to refinance the short-dated debt the market wanted a much higher interest rate because risk had been repriced. The lack of a liquidity preference effect in the periphery because they are in a monetary union. Investors can exit the euro denominated periphery and reinvest the same euros in stronger euro denominated members because it is the same currency union.

It might be good politics for the coalition to say we must go all hairshirt or we will end up like Greece or Italy. Only problem is we are not members of the monetary union so different dynamics apply. Liquidity preference dominates in the UK. Holders of sterling assets can only reinvest their sterling in other sterling assets. They do not have the option of reinvesting sterling in other sterling denominated countries like they do in the EZ.

If UK growth prospects are thought to be poor risk assets such as equities will sell off and the capital will flow into the gilts market reducing yields. For example, banks are deleveraging by selling property assets etc. They are then reinvesting the capital in the government debt market. It would be better all round if they invested in the economy. On one hand, it is good that the government can borrow at low or even negative real rates. On the other hand, that is because the economy is so shit. So it is a dubious achievement for the government to point approvingly to low yields. The worse the economy gets the lower that yields will go, which gives an indication what is driving gilt yields low.

Some folks ask what would happen if interest rates returned to historical trends. First thing is that is years away. The other thing is that would be wonderful as the economy would be normalising. How could we finance such a large deficit at higher interest rates? Well we would not need to as the requirement for such a large deficit would simultaneously fall. However, we do need deficit reduction even now to eliminate the structural deficit. We just do not need to kill the economy while we are doing it.

It might be a trivial point but the impression I get on this thread is that some people think that when interest rates rise the interest on all issued gilts also rises. Gilts are issued with a fixed coupon for the duration of the security. Issuing a 30-yr gilt today at around 4% interest rate is fixed for 30 years, regardless what happens to interest rates over the next 30 years. The payout on Index-linked gilts of course varies with inflation. Borrowing more to pay higher social security payments would be nuts. That would just be a pointless demand fetish. However, some people including me say that the government should borrow at low or even negative long-term interest rates and use the money for building infrastructure or even investing in R&D and training. It is one-off spending that does not impede their deficit reduction strategy on current spending. Moreover, the cost is fixed and will not rise with higher interest rates. The only question should be is it something that we need. By all means reduce the size of government, but purposeless hairshirtness is not the way to improve the UK economy.

@43 – Yes, I think it’s a common misconception that the rates change. I thought that myself until a few years ago when I did the research.

Low interest rates now are an argument for being even more relaxed now about debt interest

Sunny have you rushed out and acquired a giant mortgage then ? After all we could all afford one with these interest rates. Or do you find that with your own money this argument for borrowing is less persuasive ? Oi tink I know duh answer.
This whole debate has really been won by the fiscally prudent and this particular bit of childish posturing has been thrown over the garden fence many times. Time to move on .

@45 – Oh, is that what our current economic slide is called on the right. What will the collapse be called, “a minor inconvenience”

Stiff upper lip, chap!

Blue Pintillion -Well, that depends on your position. What Brown’s policies tried to do was to correct nearly two decades of deliberate underfunding in existing public services

So lets see, then we had hose the public sector with cash in an over heated boom so as to bring them up to standard ( how does vast salaries and pensions achieve this ..? ) . Now we have to hose the public sector with cash to compensate for lack of demand …. what will the next reason for hosing the Public sector in cash ? Could it be the real one, that you are six times as likely to be unionised you bought the Labour Party leadership for little ted and finance it,close to 100% ?

Or is that a coincidence ?

@47 – Let’s see…attracting good quality candidates, who apart from you said that it was the public sector who needed specific inducements and to fix the damage the Tories have done to wages and pensions. There, easy.

Leon , you have lost me there but can we for the avoidance of confusion establish what sort of deficit you had in mind , 15%..16% maybe ?

So we are borrowing money for teachers et al to put in a sock for twenty years before sucking our children`s blood by virtue of an index linked guaranteed pension.
I don`t see “money stuffed in a sock” as the best demands sustaining strategy and I `m not sure the ” throwing it around the world ” is so cunning as all that, either.
Anyway the Keynesian spiel says properly allocated capital will be destroyed by allowing the plane to fall out of air, so to speak. Lovely stimulation ( oh baby) stops that in a down turn. Oops what about the bit Brown forgot, the boom will be too boomy he reckoned, leading to mis-allocation of capital . Saving stops mis-allocation by de-stimulating .
We did not do the boom dowsing bit
We have crap supply side consequently
Throwing cash at it ( see how that is always the answer) is unlikely to be efficient.

Keynes, you see, did not ignore the supply side, only the exhumed corpse of Keynes union puppets have use to stick hand up its arse so it says ‘give me more money’ think demand is the only thing that matters

@41 – No dice. The argument over how much public spending should be isn’t really relevant. You could have high public spending but high taxes to pay for it or low public spending and low taxation, (my preferred option but again irrelevant). What you really shouldn’t do is have high public spending on the never never. Living beyond your means will catch up with you sooner or later.

@49 – I’m not an economist to run the figures. I know the principles I support, and I’m happy to let the specialists do the math. Also, bear in mind I support Nordic-level transfers.

(I know how hard it is to run a small MMO’s economy…heh)

@50 – Supply Side. Really. No wonder your post is incoherent.

Debt to GDP ratios: the usual rule of thumb is that you start to have serious problems at 90% and you’re almost certainly going to go bust/default over 120%.

Current UK ratio is 61% or so. So we’ve got lots of room.

Umm, except we’re running an annual deficit of 11% or so. So we’ve three years, maybe 5 until complete doom. Might be worth trying to cut the amount we’re borrowing in such circumstances.

And yes, amazingly, Eoin has managed to miss the point that how much interest you have to pay does not depend just on how much debt you’ve got but what the interest rate on the debt is. With gilts it’s the rate at issue of course.

And interest rates declined from above 10% to 6.5% (around when Major left office) to 0.5% now.

Which, you know, might have something to do with why we’re paying out less interest now?

@53 – And for that we need growth. Otherwise borrowing will only rise. A couple of percent for growth now means we don’t need to borrow far, far more later.

Oh, and “rule of thumb”? One paper. 120%? Not in there. 90% costs you *1%* long-term growth. And the UK’s debt has a reasonably long maturity time.

Also, why are you boasting about the high interest rates that the Tories inflicted on the nation? Want to boast now about how you’re driving inflation up?

“And the UK’s debt has a reasonably long maturity time.”

Indeed it does, 14 years I think on average? But part of “This Time is Different” is that the worse the financial situation becomes, the shorter the maturity of the debt becomes. Because interest rates rise at the long end so governments issue at the short end of the maturity spectrum, betting that they’ll be able to roll it over.

And that’s great except that when interest rates do rise, rolling over your debt short term means that rising interest rates now affect *all* of your debt……because you’re rolling it over, see?

“Also, why are you boasting about the high interest rates that the Tories inflicted on the nation?”

Dennis Healey started it actually……..

@55 – Which makes it even more urgent to take the hit on borrowing NOW, to get the economy moving again, rather than stagnating and debt at best remaining static.

I love how you Labour supporters always compare to 1997. Why do you never look at 2001 and think “hey, that was a pretty good time. Maybe we could have lowered the debt ratio from then as well too”

Look at the graph. 1997-2001, interest payments went down from 9% to 5%, and then stayed at 5% from then. Wouldn’t it have been swell if you’d, oooh, I don’t know, maybe reduced the payments even further?

@57 – Too much Tory damage to undo.

@ 43 ricahrd and @ 44 leon

You guys don’t understand bond maths properly.

The effective interest you pay DOES change over time, and is roughly the cost of the 15y gilt yield in the UK.

Issuing lots of debt now because rates are low simply doesn’t work. Governments can issue bonds with zero coupons…but they still haver a yield to maturity the same roughly as a bond with a 10% coupon, so over the life of the bond the cost to government is near enough the same.

And please, befoire you try and argue, I am an interest rate trader. I specialise in this stuff, and what you say is true simply doesn’t work.

The cost to government of it existing debt changes with the prevailing yield of its debt in the market and is NOT dependent on the coupons it issues debt with.

59. Tyler

” The effective interest you pay DOES change over time, and is roughly the cost of the 15y gilt yield in the UK. ”

The 10-yr gilt is the benchmark. Truly bizarre that you think it is the 15-yr.

” Issuing lots of debt now because rates are low simply doesn’t work. ”

Yes it does, that is why the Debt Management Office have been buying up old issues in the secondary market from GEMMs over the last two years and refinancing at a lower cost.

” Governments can issue bonds with zero coupons…but they still haver a yield to maturity the same roughly as a bond with a 10% coupon, so over the life of the bond the cost to government is near enough the same. ”

This is just gibberish. Conventional gilts have a fixed coupon nominal cash payment cost for the government until maturity. The coupon cash payment does not vary with the yield. A conventional bond price is always anchored to its final maturity because it is a time dimension security. Therefore, the yield being the inverse of the price on that security will change each year i.e. the gilt is one year closer to maturity and has one fewer years embedded coupon payments. These are market prices and yields and do not affect the nominal coupon payments that the government have promised to pay on previously issued gilts.

However, the price issued gilts are trading at in the secondary market gives a gross redemption yield for the whole stock of issued gilts and this will act as a reference price for gilt-edged market makers when it comes to buying new issues from the DMO. So of course the prevailing yields in the secondary market will affect the cost to the government of issuing new debt in the primary market. Can’t see anyone who said anything different. However, falling bond prices and rising yields due to inflation or interest rate changes only affects the value of those issued bonds. The government coupon payment is fixed on conventional gilts.

” And please, befoire you try and argue, I am an interest rate trader. I specialise in this stuff, and what you say is true simply doesn’t work. ”

LOL, clearly not a successful one with your novicey errors. I retired at 43, sixty five is it, Tyler?

” The cost to government of it existing debt changes with the prevailing yield of its debt in the market and is NOT dependent on the coupons it issues debt with. ”

See above. Only the cost of issuing new conventional gilts or rolling over existing gilts are affected by the fluctuating prevailing yield. For about the sixth time coupon payments are fixed on conventional gilts when they are issued. Rising yields in the secondary market just means that previous issues prices have fallen and they are less valuable. Therefore, investors will charge the government a higher interest rate on new debt.

@ Richard w

You might have retired at 43 but you don’t seem to understand simple bond maths.

About the only thing you got right is that the 10y is the benchmark.

BUT

The UK debt stock has an average modifed duration of just under 15 years, and this is what the treasury (rightly) use to estimate financing costs. Let me show you with a simple example;

You say the DMO have been doing buybacks to cut the cost of financing. Let’s say they want to buy back an old bond with a 5% coupon, when let’s say the secondary market yield is 2%, and they want to replace the bond with a new 2% coupon bond.

The new bond would trade at par, 100. The old bond dos not. For arguments sake let’s say it trades at 120 (becauise an investor is happy to buy the old 5% bond for more, as it pays more interest). So, to buy back the old bonds, the DMO would have to pay 120 in the secondary market for the old bonds…but to pay for that would have to issue 120m of the new ones…NOT 100m worth. So the DMO has to pay less interets per bond…but has to pay it on a lot more bonds.

The timings and hence cashflow management is different on the two bonds but the yield to maturity and thus the total present value of the bonds will be the same…which means the cost of financing will be the same.

The two bonds are totally interchangeable to an investor or govt. They yield the same for the same amount invested. Over the life span of the bond, you will get the same back if you invest in either. The 5% bond with have a higher cash price, so for the same nominal investment you buy fewer, but you get more interest back. The cash prices of the bonds will refelct that in the market.

By your logic governments should always issue zero coupoin bonds as their financing costs would be lower still….and of course this is nonsense. In reality, higher coupon bonds often trade at a slight premium, meaning their financing costs are marginally lower, as simply the investor gets his money back quicker and thus they are less risky. The DMO wan’t doing buybacks to cut the cost of finance, but for QE and to remove old, small and illiquid issues and replace them with newer larger and easier to market issues.

The main point to note though is that as we have shown above the cost to finace those bonds DID NOT CHANGE, and was at the secondary market yield to maturity.

The TIMING of the payments changed, but the total present value cost of financing to the government DID NOT. Cashflow mamagement is important – governments try and keep redemptions, and thus new issuance regular and smooth, but with a bond market as large, deep and long dated as the UK this is not really a problem, and neiither is cashflow management itself. It only really would be if we were totally locked out of debt markets like greece, where they physically don’t have cash and can’t borrow it to pay couppns.

Unless you are telling me that two bonds of identical maturity with differing coupons trade at vastly different yields, then simply put, you are very very wrong. And given that I know, the markets wknow and all the textbooks will tell you that this isn’t the case, I think you’ve got a problem….and you are someone I *really* want to trade bonds with.

@ Tyler

That would be interesting if we were discussing bond pricing math, which we are not. The DMO buybacks point was neither here nor there to the point. Moreover, I never said the buybacks yielded a one for one gain for the DMO. Just redeeming early, old high-yielding stock and reissuing say 30 year issues at lower coupons gives them a gain.

The point was this statement, which is nonsense.

59. Tyler 8:29 am, September 25, 2011

” The cost to government of it existing debt changes with the prevailing yield of its debt in the market and is NOT dependent on the coupons it issues debt with. ”

Probably best to ask the DMO themselves for a pretty straightforward refutation of your silly contention that the cost to the government of existing debt changes with prevailing market yields. Any idea what they mean by ‘ fixed? ‘

” Conventional gilts are the simplest form of government bond and constitute the largest share of liabilities in the Government’s portfolio. A conventional gilt is a liability of the Government which guarantees to pay the holder of the gilt a fixed cash payment (coupon) every six months until the maturity date, at which point the holder receives the final coupon payment and the return of the principal. The prices of conventional gilts are quoted in terms of £100 nominal. However, they can be traded in units as small as a penny.

A conventional gilt is denoted by its coupon rate and maturity (e.g. 4% Treasury Gilt 2016). The coupon rate usually reflects the market interest rate at the time of the first issue of the gilt. Consequently there is a wide range of coupon rates available in the market at any one time, reflecting how rates of borrowing have fluctuated in the past. The coupon indicates the cash payment per £100 nominal that the holder will receive per year. This payment is made in two equal semi-annual payments on fixed dates six months apart (these payments are rolled forward to the next business day if they fall on a non-business day). ”
http://www.dmo.gov.uk/index.aspx?page=Gilts/About_Gilts

@ richard w

You clearly don’t understand bond pricing or debt finance and management.

Bonds have a fixed coupon. This is true. It is also immaterial. Totally and utterly.

If I buy a bond from the government in an auction, the YIELD TO MATURITY is all the matters, as that will be the return I get from the bond. And it will be almost exactly the same regardless of the coupon on the bond if the bonds have the same matuirity, because I will have to pay more upfront for the higher coupon boinds.

If they cost the same upfront, everyone would always pick the higher coupopn bond…so there would be a risk free arbitrage. Which of course doesn’t happen.

Now, who do you think funds these bonds? Oh yes, that would be the treasury….so if my yield if X, the govt will over the life of the bond end up paying me that X. They don’t have the cash sitting there, so to fund couponds and redemptions they
issue more bonds.

You are making the novice mistake of saying fixed income means fixed value. If interest rates shoot up tommorow, I can reinvest my couponss going forward at a higher return/yield. Likewise, the government will have to fund that cash at greater cost as well.

You are also wrong in saying bonds are issued at the prevailing rate. They often are, but not exclusively, and nor does it matter. For example, the south african 5y gilt (the R157 issue bond) has a 13% coupon but a 7% yield….it was issued till failry recently…but the SA govt is only going to have to pay 7% to finance those bonds as to buy one I have to pay 125 for a bond which redeems at 100. I get that 25 back over the life of the bond thanks to the pick up of the coupon over the yield.

As I say, the coupon rate DOES NOT significantly effect the YIELD of the bond. Maturity does, so buying back 2y bonds to issue 30y bonds does, but that is again NOTHING to do with the coupon. Its about liquidity management. In theory, the government would have to redeem and reissue the 2y bond 15 times to get the same profille as the 30y bond, and so the market, being mostly efficient will price as such (we call it bootstrapping the curve). If I bought one of each today at market prices both would be at ‘fair value’ given the yield curve of the market. I, as a trader, can use my discretion to say that I feel the yield curve, created by market prices, is wrong and I believe the 30y is too cheap as rates will not go up for a lot longer….and there is uncertainty in the path of rates, and more general risks over a lifetime of 30y.

Low interest ratesd does make govt financing cheaper….but lower coupons really don’t matter. The coupon is NOT the yield or return on the bond. As I say, if it was always better to issue lower coupons why not just always issue zero coupon bonds? Some govts and the IBRD and EBRD already do.

Again, given you lack of knowledge on this matter – bond maths really does matter in govt financing – my guess is that you don’t really know what you are talking about. You might have retired at 43 but I doubt it was from a fixed income desk at a bank. If you displayed this kind of knowledge you’d probably have been fired.

Fabozzi is a good text book if you do want to brush up on a bit of the knowledge.

37 – Further to the point that Krugman’s ‘what we would have expected’ comment looks a shade goalpost moving, here’s Tyler Cowen on what Krugman said he was expecting at the time. For example:

In early 2011 Krugman noted that Ireland’s “medium-term” prospects look “desperate” and he calls it an especially hard case within the eurozone. No mention of the pending recovery in output and aggregate demand.

http://marginalrevolution.com/marginalrevolution/2011/09/the-luck-of-the-irish.html

Richard, Tyler

I think you are both (Tyler in particular) talking out of your silos of knowledge.

Richard makes some of the best points but fails to link up with the wider central bank outlook – that of the yield curve. I’m not sure why. I’m a corporate bond guy and I know that government debt is all about the yield curve rather than coupon payments.

In that, Tyler is correct that individual issues don’t matter, it’s the overall picture (the yield curve). However, surely – and this is where I’m straying out of my knowledge area – the yield curve flattens in a low interest rate environment (particularly currently when low interest rates are expected out to the medium term).

I’d also add in another factor, briefly alluded to by Richard – that demand for STG bond issuance is relatively parochial compared with global currencies such as the USD or EUR. As such, small groups of big investors can have a significant influence on issuer behaviour – I know that early 2000s securitisation of pubs (for instance) was partly driven by a lack of long-dated STG IG bonds.

@ Tyler

You are arguing things that I never said or believe. Absolutely no one does not believe that what is happening in the secondary market or previous auctions affects financing costs for the government. It does, and I never said it did not. I was responding to you saying that the cost to the government of issued debt fluctuates with market prices. It does not. No one disputes that will affect them when they refinance or issue new debt. So you are arguing with a strawman.

@ AnotherTom

You can’t get a flat yield curve when short-term interest rates are at the zero bound. Interest rates can’t be cut any further, but they can be raised, which means long-term interest rates must be above short-term rates. So no flat yield curve in the current environment. A flattening to inverted yield curve usually signals an imminent recession. Greenspan was perplexed for years with a booming U.S. economy and an inverted yield curve with no sign of recession. China was responsible by buying up so many treasuries at the back end of the curve.

@ another tom

You are quite correct in saying that the YIELD curve is all that matters in terms of cost of funding.

@ richard w

You really don’t get it do you? Which leads me to believe you are telling porkies about working in the industry given this is truly basic stuff.

Bond COUPONS are indeed fixed. The YIELD and therefore cost to govt IS NOT. The only way you could fix the cost is via an interest rate swap.

If the cost to govt was fixed, where do you think the money comes from to pay investors when the yield changes…..oh yes, that would be the govt again. Let alone the fact that the DMO re-issues old bonds at secondary mkt pricesN not new issies at every auction.

Eoins graph above shows some of the story. Govt debt interest payments came down. But it was NOT because the UK paid off any significant amount of debt. It was because the yield curve came lower with interest rates and the debt interest payments on the UKs aggregate debt stock, most of it in those days made up of bonds with much higher coupons, came down.

Debt financing costs are a function of YIELD, not coupon.

Ley me ask you a question;

If the DMO issued 2 new 10y bonds today, one at say 2% coupon, and the other at 5%, with mkt 10y at 2%, what would the differences be in their cash price be (higher,lower or the same will do) and will the funding cost to government be different?

“I will not let house prices get out of control and put at risk the sustainability of the future.”
Gordon Brown 1997.

From 1996 to 1997 the average house price was purposefully manipulated to rise by an astronomical 300%. It then carried on rising. Consider without the bank bailouts house prices would merely have reverted to their long erm average affordability as a proportion of income. Instead millions have been forced to work for nothing. To pay for the banks assets, other peoples houses. We are in forced slavery. Working for nothing No capital.

I dare not print what we would do to Brown and Co if we ever saw them.

The Labour Party. The Evil, utterly disgusting destroyer of dreams and aspirations.

“I will not let house prices get out of control and put at risk the sustainability of the future.”
Gordon Brown 1997.

From 1996 to 2006 the average house price was purposefully manipulated to rise by an astronomical 300%. It then carried on rising. Consider without the bank bailouts house prices would merely have reverted to their long term average affordability as a proportion of income.
Instead millions have been forced to work for nothing. To pay for the banks assets, other peoples houses. We are in forced slavery.
Working for nothing No capital. Nothing to show for over a decade of hard work

I dare not print what we would do to Brown and Co if we ever saw them. I really mean that. As far as I am concerned they are the mortal enemies of the UK. Hatred does not convey our feelings about Labour. There is absolutely no point in working. any more. To pay off someone else’s mortgage and retirement.
The Labour Party. The Evil, utterly disgusting destroyer of dreams and aspirations.