Will they keep lending to this government?

Offering another drink to an alcoholic because he promises to sober up next year is not necessarily a kind thing to do.

Offering too many loans to a debtaholic just puts off the day when he has to start paying it all back, and makes that task more difficult.

One of the ideas behind quantitative easing was to get the interest rates down that the government has to pay, to take some of the pain out of being addicted to debt. So how are they getting on?

Over the last month the interest payable by the government for borrowing one year money has risen by 31 basis points (up to 1.06%), on five year money has risen by 42 basis points (up to 2.61%), on ten year money gone up by 10 basis points (to 3.45%) and on 39 year money by 20 basis points (to 4.33%). Quantitative easing is not working in one of the ways intended.

Indeed it is now dearer for the government to borrow long term money than it was a year ago before all the interest rate cuts, showing that markets now fear inflation a bit more and will make the government and taxpayers pay more for it.

Of course the main strategy to avoid a debt crisis is still in place. The banks are going to be made to buy loads more gilts in the name of “Prudence”! This will enable the government to be less prudent. It now appears that despite all the printing, it will be against the background of dearer money. The failed gilt auction was a fixed income bond. The next successful one was an inflation linked bond, which went a lot better. The markets don’t buy the deflation scenario. They are rightly worried about excessive debt and persistent inflation in food and public sector prices.

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3 Comments

  1. Brian Tomkinson
    Posted April 8, 2009 at 8:48 am | Permalink

    Who did buy the deflation “threat” except gullible, acquiescent journalists who willingly disseminate the government’s propaganda?

  2. mikestallard
    Posted April 8, 2009 at 9:07 am | Permalink

    You were so right a year or so ago when you mentioned that the danger was, in fact, deflation not inflation. Bearing in mind the power of the Unions over Labour, I, like several others, doubted your judgement (heresy!)
    Now we have had both.

    And let me keep repeating; the real problem is of the massive, gross and wasteful state spending which has simply got to be controlled eftsoons or right speedily. That is why Mr Cameron holds out so much hope for the country.

  3. Denis Cooper
    Posted April 8, 2009 at 2:20 pm | Permalink

    The answer to the question is: “Yes, probably, up to a point”.

    There could be a conflict between Darling and King if the next Inflation Report, due in May I believe, shows that the risk of deflation is receding.

    In that case, the justification for “quantitative easing” will be weakened, and then it will be for Darling to lean on King and pressure him into continuing the policy of creating new money and using it to prop up the gilts market.

    But I’m sure that King knows the score: that without the Bank of England buying up existing gilts, the Treasury would find it increasingly difficult to sell new gilts to cover the government budget deficit, and what would happen then?

    Although apparently George Osborne hasn’t yet sussed out what is going on, because he hasn’t said a word against it.

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    John Redwood won a free place at Kent College, Canterbury, and graduated from Magdalen College Oxford. He is a Distinguished fellow of All Souls, Oxford. A businessman by background, he has set up an investment management business, was both executive and non executive chairman of a quoted industrial PLC, and chaired a manufacturing company with factories in Birmingham, Chicago, India and China. He is the MP for Wokingham, first elected in 1987.

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