The next bubble – government borrowing

I worried preamturely that the government’s wish to borrow so much would cause strains in the government debt market. Indeed, I underestimated their intelligence in this respect.

Forecasting a huge surge in government borrowing from the £43 billion for 2007-8 heralded in the Budget to around £120 billion, I discovered that the government now thinks the true figure is an eye watering £157 billion for this year, or more than 10% of National Income. (The government has of course got away with telling people half the story, with most journalists and commentators using the £78 billion figure they wanted them to believe). This could have been more than markets would willingly lend, creating new strains on our currency and long term interest rates.

Instead, the worry today is that despite the huge increase in government debt we will witness a further increase in the size of the government debt bubble. Government debt prices have been rising. How can this be?

The government has taken strong steps to ensure lots of buyers for their debt.
They are instructing the banks to buy lots of gilts (government debt) to “increase their liquidity”. Much of the money the government has put into the banks to “strengthen” them will be lent back to the government at a loss!

They preside over a pensions regulatory system which will force many more companies to increase their pension contributions, and will encourage Actuaries and other advisers to insist this new money is stashed in gilts.

Taking interest rates down to very low levels will undermine the returns of most savers in normal deposits. Some of them will be tempted into government debt through National Savings and related products.

Injecting huge quantities of money into the system through the Bank of England will also create large amounts of liquidity to let institutions buy government stocks. They are creating a huge money go round, where the Bank of England bloats its balance sheet, to create the cash to power the government debt bubble.

In the short term the government has designed a system which will allow it to borrow collosal sums at low rates of interest. At some point this will have to be unwound. Just as the property bubble burst and the commodity bubble burst, so one day the government debt bubble will burst. In the meantime, enjoy the show.

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21 Comments

  1. Ian Jones
    Posted December 18, 2008 at 9:59 am | Permalink

    Finally people are waking up to Brown’s latest accounting scam. If he gets away with it he will leave the pension funds and banks holding all the Govt debt and essentially “nationalised” since the people paying the money back are the same people who own the pensions and the bank shares i.e. the Taxpayer.

    I did think it might be part of a great scheme but now just think Brown will do anything to keep going. He bluffed it for 10 years whilst wrecking the economy and now he will make sure it is truly ruined but “fair”….. we will all be poor.

    Lets hope the message gets out as the media seem to be under the control of Labour at the moment…..

  2. Posted December 18, 2008 at 10:03 am | Permalink

    Debt creates the illusion of wealth and gives power to governments.
    Those who create the system of debt remove the power of governments and take it for themselves.

    http://rugfish.blogspot.com/2008/12/illusion-of-wealth-and-our-future.html

    Have a nice day spending on credit, or do something to help change it and take back that power and putting it back where it belongs by not taking credit.

    Regain the reality of life and stop living in the global illusion which is killing the real world.

  3. Posted December 18, 2008 at 12:32 pm | Permalink

    I won’t enjoy the show. My generation will be the one that pays it all back.

  4. Donitz
    Posted December 18, 2008 at 12:37 pm | Permalink

    Government Debt will not stop the inevitable.
    Next year will be dreadful.
    More dreadful that people dare contemplate.

    Last July the country/Government was in denial,still desperately clinging to the belief this was a blip and that the “fun” was not really, really coming to an end.

    This December, particularly around 9/10th the country/Goverment is in even more denial. Some Fund managers are actually forcasting a rally in FTSE 100 to above 6000 by the end of next year.

    My money is on:

    Unemployment will reach 3million.
    We may even get the occasional inner city riot by the winter of 2009.
    FtSE 100 at 3,200.

    The only good news is that the Socialists will be out of power.

  5. Jonathan Cook
    Posted December 18, 2008 at 12:44 pm | Permalink

    What are the consequences of the government debt bubble bursting?

    Are we heading towards bankruptcy an inevitable IMF bail out?

  6. Mark Williams
    Posted December 18, 2008 at 12:57 pm | Permalink

    JOhn,

    I doubt there will ever be a bubble (in the sense of overvalued assets) because the yields demanded by the markets for new issues will increase to unacceptable levels. The goivernment may force the banks to buy gilts but that will never be enough to satisfy demand so the government will always be subject to the yield demands of investors overwhich it has no control.

    Some points worth noting on net debt, interest rates and pensions:

    1. There have been press reports that the government might take on the Roayal Mail pension fund as part of the restructuring of the Royal Mail. As Alan Duncan has pointed out, if this goes ahead the government might try to pull the scam of recording the pension fund’s £15 billion of assets in government accounts to reduce the national debt, but exclude the approximarely £22 billion of liabilities on the basis that it does not report public sector pension liabilities.

    2. If the goovernment is trying to force down interest rates to the point that market rates of interest show little or no premium to the rate of inflation, then presumably the actuarial value of the government’s public sector pension liabilities will increase. Perhaps they could be asked to quantify the additional actuarial liability for each percentage point of reduction in the rate of interest relative to assumed future RPI.

  7. Hawkeye
    Posted December 18, 2008 at 1:27 pm | Permalink

    John,

    I presume you have actually met these people (Gordon, Ed Balls, Yvette Cooper, etc) in the House of Commons from time to time. How stupid are they? Your explanation is clear and concise and I can see exactly what you are talking about.

    Why doesn’t Labour see that it is building a far, far bigger problem which could blow up at any time?

    What is wrong with these people?

  8. Rare Breed
    Posted December 18, 2008 at 1:33 pm | Permalink

    Gulp……

  9. Pete Chown
    Posted December 18, 2008 at 1:39 pm | Permalink

    “In the short term the government has designed a system which will allow it to borrow colossal sums at low rates of interest.”

    Yes, except that the banks are bust, so the government has to lend the money straight back to them again. The government makes a notional profit because it charges more interest than it pays. On the other hand, it can’t realise the profit because the banks don’t have any money. All it can do is keep rolling the loans over, making bigger and bigger paper profits.

    But you are the “do nothing” party. You would stop all this activity, and then where would we be? 😉

    Changing the banks’ reserve requirements was a really poisonous blunder, wasn’t it? Until that point, the banks were in trouble, but RBS and HBOS had managed to raise finance from the markets. Bradford and Bingley was the only one looking as though it would need government support. Then the government moved the goalposts, and we know what happened next.

    Do you remember Robin Cook asking Blair to apologise for Iraq? Perhaps we need to do something similar for the economic problems. Obviously we can’t change the past, but it would be a nice gesture if Brown apologised for creating the bubble, and for the reserve ratio blunder.

  10. Kay Tie
    Posted December 18, 2008 at 1:53 pm | Permalink

    ” Indeed, I underestimated their intelligence in this respect.”

    I think you meant “cunning” not “intelligence”. Their low peasant cunning will go one step further very shortly: the imminent quantitative easing. When Gordon Brown discovers how easy it is to print money he won’t stop (as the Archbishop of Canterbury says, Gordon Brown is addicted to spending money). I am sure it’s no coincidence that the 1844 Bank Act has been amended so we (and more importantly, the markets) can’t see the Bank of England editing the values in its spreadsheet (physically printing money is so 20th century).

    Interestingly, the index-linked gilt prices have been falling. For example, the 2% 2035 gilt had a price of £160 at the beginning of October, falling to £142 at the beginning of December. In the last week or so it’s risen to £156. Perhaps the market is beginning to cotton on to what’s around the corner?

  11. Adam
    Posted December 18, 2008 at 1:59 pm | Permalink

    And of course all this money that will be going into gilts won’t be lent to individuals or companies – thus making the credit crunch worse and driving Britain down into the recession. It would be REALLY nice if the Conservatives could make more noise about how Gordon Brown’s reckless borrowing is driving the country downward into recession!

  12. R.Rowan
    Posted December 18, 2008 at 2:42 pm | Permalink

    The clearest and funniest account of the proposed government economic stimulus is on Guido’s blog if anyone hasn’t seen it, they should,it should be in the next conservative TV broadcast.”Fred Explains Bailout Economics”

    • mikestallard
      Posted December 18, 2008 at 5:34 pm | Permalink

      Thank you for recommending this outstandingly convincing little chat from a leading American financier during the Holiday Period. “Ask not….” “Yes, We Can!”. Inspiring!.

  13. Acorn
    Posted December 18, 2008 at 2:45 pm | Permalink

    JR, any similarity between US and UK policy is purely coincidental. “No country has ever depreciated itself into prosperity”.

    http://www.marketoracle.co.uk/Article7838.html

  14. mikestallard
    Posted December 18, 2008 at 5:02 pm | Permalink

    One of my happiest moments yesterday was watching Irwin Seltzer’s eyebrows as the discussion with the expert panel faded out.
    The government is about to deal with Labour’s unemployment surge through the JobCentres. So that’s all right.
    When Irwin Seltzer asked the minister merely to consider encouraging small and medium businesses with tax relief, he was told that that was not in the plan. So that’s all right too.
    I quite agree: watch the show. That’s all we can do. And do not bet on an early election either: Mr Brown doesn’t believe in going to the country. Neither does Lord Mandelson.
    Silly me – I often wonder, in an ideal world, what would happen if taxes were slashed at this moment instead of dropping money out of helicopters?

  15. Johnny Norfolk
    Posted December 18, 2008 at 5:04 pm | Permalink

    Just how can labour do this to our country.

    They have no idea. As i have said for the last 10 years Labour only know how to spend money, never how to make it.

    Can the Queen not disolve the government and call an election, as that is what is needed.

  16. Adrian Peirson
    Posted December 19, 2008 at 12:08 am | Permalink

    We know where we are headed, think Argentina, think Cuba, Zimbabwe, 1920’s Germany.

    We need a suprise, no questions asked overnight election and for the Next Occupier of No 10 to be wearing a Green and Brown suit.

    This is all by design.

    Radio
    http://www.infowars.com/infowars.asx

  17. Atlas shrugged
    Posted December 19, 2008 at 1:07 am | Permalink

    As I have been told not to mention, those that can not be mentioned. I will not mention them. Other then by calling them, those that can not be mentioned.

    So John I hope we have sorted that one out.

    Surly JOHN it is obvious that Gordon Brown could not be doing what he is doing, or indeed would be allowed to be doing what he is doing. Unless, what he is clearly and obviously doing, was being sanctioned by the private corporation that controls all of the worlds central banks?

    Namely the B.I.S. ( The Bank of International Settlements) in Switzerland.

    Could you explain why Gordon Brown insists that there should be a body to co-ordinate international control over the actions of individual Central Banks. When such a body already exists, and has done I believe since the Bank of England was supposed to have been first nationalized?

    Why is this organization never mentioned anywhere on the MSM. Or the words ‘The Bank of International Settlements’ ever reported to have left the lips, in that order, of any elected official. Either of the Conservative, Lib/Dem or Labour Party, or indeed any other party for that matter?

    When especially as, officially this organization is directly responsible for making sure that what has actually happened to the worlds economy, never actually does. That is under any circumstances, including a 3rd World War if at all possible.

    Yet the words conspiracy, government, and establishment bankers never seem to meet up at the same time at The BBC. However much it is now completely obvious to even a half dead, deaf, dumb, and blind bat , that none of all this could possibly have happened without some kind of gigantic international top level highly dangerous poverty creating, property owning democracy destroying, control freaks big money and big government conspiracy going on.

    You see I asked the question, without mentioning those that can not ever be mentioned. So could you please do me the pleasure of a long and sensible reply?

    No one would like to be convinced more then myself that this country is not basically a bankers plaything that periodically gets cropped and scammed by those that can not be mentioned. For no better reason than to simply keep us down here and them up there, for eternity.

    For there is absolutely nothing conservative about any of this, and you surly must know it.

    Reply: I do not accept your conspiracy theory. The west’s Central banks have made similar errors at the same time, but I do not think that means they are under some central undemocratic control. It is still free for Parliaments and Presidents to change things as they see fit.

    • StevenL
      Posted December 20, 2008 at 7:12 am | Permalink

      Is there not a case for getting rid of conspiracy theory links as spam? From what I can make out all they are doing is selling media products and bulk-loads of dried foodstuffs?

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    John Redwood won a free place at Kent College, Canterbury, He graduated from Magdalen College Oxford, has a DPhil and is a fellow of All Souls College. A businessman by background, he has been a director of NM Rothschild merchant bank and chairman of a quoted industrial PLC.

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