Joined: Jun 01 2007 Posts: 12647 Location: Leicestershire.
It is striking how fast the economic mitigation has escalated. 11 days ago Rishi Sunak’s budget included a pledge of £12 billion (roughly £180 per capita) of emergency spending. It was a budget that prompted the most recent former PM and chancellor to warn against abandoning restraint and caution.
5 days ago Sunak returned to the magic money tree to offer business £300 billion of loans (about £4500 per capita) at attractive interest rates. Now they’re paying private sector wages that’ll run into many tens of billions. And we still might see unemployment rise by a million.
I think it is the right thing to do but it is (necessarily) huge.
'Thus I am tormented by my curiosity and humbled by my ignorance.' from History of an Old Bramin, The New York Mirror (A Weekly Journal Devoted to Literature and the Fine Arts), February 16th 1833.
Joined: Feb 27 2002 Posts: 18060 Location: On the road
Mild Rover wrote:It is striking how fast the economic mitigation has escalated. 11 days ago Rishi Sunak’s budget included a pledge of £12 billion (roughly £180 per capita) of emergency spending. It was a budget that prompted the most recent former PM and chancellor to warn against abandoning restraint and caution.
5 days ago Sunak returned to the magic money tree to offer business £300 billion of loans (about £4500 per capita) at attractive interest rates. Now they’re paying private sector wages that’ll run into many tens of billions. And we still might see unemployment rise by a million.
I think it is the right thing to do but it is (necessarily) huge.
Taxpayers will be paying this back for years - I agree its the right thing to do - the bond market will be strong as investors look for safe havens to put money.
It will be interesting to see how much of the 300bn of loans will be taken up and at what interest rates. Even with a government guarantee the banks will only lend to viable businesses.
Your job is to say to yourself on a job interview does the hiring manager likes me or not. If you aren't a particular manager's cup of tea, you haven't failed -- you've dodged a bullet.
Sal Paradise wrote:Taxpayers will be paying this back for years - I agree its the right thing to do - the bond market will be strong as investors look for safe havens to put money.
The debt levels will no doubt reach eye watering levels, but it will almost certainly cost the taxpayer less to pump in the support now in the hope that we can return to something close to normal productivity after the pandemic is over, than allowed businesses to go to the wall and then had to pay the bills of long-term unemployment for years.
Also we had very high debt levels after the war but managed to rebuild the housing stock, set up the NHS and public industries and have close to full employment for the next few decades and the debt was dealt with.
Debt levels became politicised by Osborne and Cameron as they had an opportunistic line of attack after Labour rescued the banking sector to keep credit lines around in 2008/09 and they could then paint Labour as being reckless with public money. Same as the "Tea Party" Republicans in the US attacking Obama for his rescue measures.
The politics of it had changed even before the pandemic as Boris and Cummings are not austerity hawks (supposedly the reason Sajid Javid was booted out was because he was not enthusiastic about Cummings spending plans for regenerating the north). And in the US, Trump has been driving up the US deficit ever since taking over from Obama, he has not cared about the budget balance.
Assuming Labour and the Democrats don't suddenly discover a taste for being austerity enthusiasts I don't think there will be the same political clamour for slashing everything. More likely to take the John Major/Ken Clarke approach to dealing with a 6 to 7 per cent budget deficit in the 1990s: restraint on spending combined with wide spreading, low-impact tax rises which virtually got rid of it in 5 years. You could do the same as that but over a decade. The aggressive austerity just slows the deficit reduction plan anyway by reducing your ability to grow.
One thing which helps governments in a time of economic uncertainty is that there is always a big demand for the relatively most safe form of investment. Even if everything is more risky, private sector assets are more risky than public sector assets. So whilst the risk of default from a government might be greater now than it was before, it may have become safer in relative terms than holding many other assets that have become exponentially more risky. The extra demand for government bonds then drives up the price of the bonds and hence the interest rate on them falls.
After the financial crisis, the countries that got in to trouble with debt unsustainability, because the interest on their borrowing skyrocketed, were the ones trapped in the Eurozone like Greece, Portugal. There it's an issue of cash flow, because of not having an independent central bank. In the UK, in a short-term cash flow crisis, the UK government can just meet its existing obligations to creditors by issuing new bonds that the Bank of England can buy up (pumping more cash in to circulation). You can't do that as a long term strategy as it will just ratchet up inflation, but the owner of UK government debt at least knows that in extremis the government can pay them back through that approach, and they will then reassess whether they want to hold any UK debt in the future. If you held Portuguese or Greek debt though, you had no such security as they don't have independent central banks and the ECB won't do that for individual countries. Hence although they had lower budget deficits than the UK did in the early 2010s, they paid much higher rates of interest on their borrowing than we did.
Challenge Cup winners 2009 2010 2012 2019 League Leaders 2011 2016
Joined: Jun 01 2007 Posts: 12647 Location: Leicestershire.
sally cinnamon wrote:In the UK, in a short-term cash flow crisis, the UK government can just meet its existing obligations to creditors by issuing new bonds that the Bank of England can buy up (pumping more cash in to circulation).
Have they done that as well? I read something about a new £200 billion, but it might have been for existing bonds... if that makes any difference?
sally cinnamon wrote:In the UK, in a short-term cash flow crisis, the UK government can just meet its existing obligations to creditors by issuing new bonds that the Bank of England can buy up (pumping more cash in to circulation).
Have they done that as well? I read something about a new £200 billion, but it might have been for existing bonds... if that makes any difference?
'Thus I am tormented by my curiosity and humbled by my ignorance.' from History of an Old Bramin, The New York Mirror (A Weekly Journal Devoted to Literature and the Fine Arts), February 16th 1833.
Joined: Feb 27 2002 Posts: 18060 Location: On the road
sally cinnamon wrote:The debt levels will no doubt reach eye watering levels, but it will almost certainly cost the taxpayer less to pump in the support now in the hope that we can return to something close to normal productivity after the pandemic is over, than allowed businesses to go to the wall and then had to pay the bills of long-term unemployment for years.
Also we had very high debt levels after the war but managed to rebuild the housing stock, set up the NHS and public industries and have close to full employment for the next few decades and the debt was dealt with.
Debt levels became politicised by Osborne and Cameron as they had an opportunistic line of attack after Labour rescued the banking sector to keep credit lines around in 2008/09 and they could then paint Labour as being reckless with public money. Same as the "Tea Party" Republicans in the US attacking Obama for his rescue measures.
The politics of it had changed even before the pandemic as Boris and Cummings are not austerity hawks (supposedly the reason Sajid Javid was booted out was because he was not enthusiastic about Cummings spending plans for regenerating the north). And in the US, Trump has been driving up the US deficit ever since taking over from Obama, he has not cared about the budget balance.
Assuming Labour and the Democrats don't suddenly discover a taste for being austerity enthusiasts I don't think there will be the same political clamour for slashing everything. More likely to take the John Major/Ken Clarke approach to dealing with a 6 to 7 per cent budget deficit in the 1990s: restraint on spending combined with wide spreading, low-impact tax rises which virtually got rid of it in 5 years. You could do the same as that but over a decade. The aggressive austerity just slows the deficit reduction plan anyway by reducing your ability to grow.
One thing which helps governments in a time of economic uncertainty is that there is always a big demand for the relatively most safe form of investment. Even if everything is more risky, private sector assets are more risky than public sector assets. So whilst the risk of default from a government might be greater now than it was before, it may have become safer in relative terms than holding many other assets that have become exponentially more risky. The extra demand for government bonds then drives up the price of the bonds and hence the interest rate on them falls.
After the financial crisis, the countries that got in to trouble with debt unsustainability, because the interest on their borrowing skyrocketed, were the ones trapped in the Eurozone like Greece, Portugal. There it's an issue of cash flow, because of not having an independent central bank. In the UK, in a short-term cash flow crisis, the UK government can just meet its existing obligations to creditors by issuing new bonds that the Bank of England can buy up (pumping more cash in to circulation). You can't do that as a long term strategy as it will just ratchet up inflation, but the owner of UK government debt at least knows that in extremis the government can pay them back through that approach, and they will then reassess whether they want to hold any UK debt in the future. If you held Portuguese or Greek debt though, you had no such security as they don't have independent central banks and the ECB won't do that for individual countries. Hence although they had lower budget deficits than the UK did in the early 2010s, they paid much higher rates of interest on their borrowing than we did.
I absolutely think the government is doing the right thing - and if that takes higher taxation rather than forced austerity surely that is a good thing. There has to be rules around the government-backed loans otherwise the otherwise the low-life's will simply borrow sufficient to clear enough debt to release them from their PG's and close the business and then pre-pack it and start again. Next they will simply undercut properly run businesses and ruin the market.
We have to minimise the job losses - that is crucial to the recovery - and good companies need to be supported through this - they will lead the charge of the recovery when it all calms down. Italy must be a worry - strict social measures have not reduced the death count the opposite has happened. Do we have to accept death on a significant scale is inevitable and move forward on that basis - was the herding strategy combining with social isolation of the old and vulnerable a better option?
Something needs to be done about the self employed but what? It is difficult to get monies to them especially if don't charge VAT - where do you access what is the right level of support.
Just think what the debt levels would have been if either party - especially Labour - had been well into the term. Then the debt levels would have truly eye-watering.
Your job is to say to yourself on a job interview does the hiring manager likes me or not. If you aren't a particular manager's cup of tea, you haven't failed -- you've dodged a bullet.
Joined: Feb 27 2002 Posts: 18060 Location: On the road
Mild Rover wrote:Have they done that as well? I read something about a new £200 billion, but it might have been for existing bonds... if that makes any difference?
Bank loans will only be government borrowing if they default - my understanding is the loans will be issued by the normal banks - although my bank was unable to be specific on Friday!!
Mild Rover wrote:Have they done that as well? I read something about a new £200 billion, but it might have been for existing bonds... if that makes any difference?
Bank loans will only be government borrowing if they default - my understanding is the loans will be issued by the normal banks - although my bank was unable to be specific on Friday!!
Your job is to say to yourself on a job interview does the hiring manager likes me or not. If you aren't a particular manager's cup of tea, you haven't failed -- you've dodged a bullet.
Joined: Jun 01 2007 Posts: 12647 Location: Leicestershire.
Sal Paradise wrote:Italy must be a worry - strict social measures have not reduced the death count the opposite has happened.
The comparison should be with what the numbers would be without those measures. Which we’ll never know because it isn’t be being run as a controlled experiment, but ‘worse currently’ isn’t an unreasonable leap of logic.
The Washington Post article Cronus linked to is pretty good, with the trade-offs for different scales of short-term interventions/restrictions described and explained.
'Thus I am tormented by my curiosity and humbled by my ignorance.' from History of an Old Bramin, The New York Mirror (A Weekly Journal Devoted to Literature and the Fine Arts), February 16th 1833.
Mild Rover wrote:Have they done that as well? I read something about a new £200 billion, but it might have been for existing bonds... if that makes any difference?
It's the same concept but what is being done now is slightly different as its for existing bonds as you say.
When the Bank of England buys all those government bonds now it has two main effects: it puts more liquidity (ie cash) in to the economy and it reduces borrowing costs (both for government and business).
When the BoE carries out its asset purchase, it credits the seller's account with the sale price as a deposit. Eg if a pension fund sells £1m of UK government bonds to the BoE, the BoE stashes those bonds in its reserves and the pension fund is credited with £1m cash. That cash will not earn any return so is worthless to a pension fund to let it sit there, so they will use it to purchase some other form of interest-bearing asset (which will be someone else's borrowing, eg bonds issued by the private sector).
By entering the market on a large scale to buy UK government bonds, the BoE is adding to the demand for UK government bonds and therefore driving up the price. By crediting the sellers with cash, it will also increase the demand for other forms of interest-bearing assets that those sellers will then go off and purchase, so will drive up the price of private-sector issued bonds.
Driving up the price of those bonds effectively reduces the interest on the borrowing because the bonds are a promise to pay a fixed amount in the future. If you issue a bond promising to pay back £100 in a year's time, and you sell the bond for £95 now, you're borrowing at a rate of [(100/95)-1]*100=5.26%. If you can sell that bond for £96 now, you're borrowing at [(100/96)-1]*100=4.17%
[If you are Greece after the financial crisis, nobody trusts that you are actually going to pay back that £100 in a year's time, so they'll only offer £90 for the bond, and you're borrowing at 11%]
The asset purchase from the BoE will both reduce the rate at which government borrows and also the rate for private sector firms that need to borrow by issuing debt.
What's the catch....? The additional cash released in to the system by the BoE will wind up somewhere, which means there is more cash splashing around which is a good thing when you're at risk of recession because the last thing you want is people/businesses that want to buy, being unable to access liquid funds to make a purchase. But it is additional money in the economy, that is not backed up by additional production of goods and services, so in the long run that will wind its way out through prices just adjusting upwards. Same reason that transfer fees in football rise so much - the players today aren't better than Maradona, Baggio, they are just denominated in higher values as there's more cash in the system. So you risk getting inflation.
The Bank of England has a tool to stop that because while it has those bonds in its vault it can 'unwind' the asset purchase by just selling them (in practice some of the bonds will have matured but they can get round that by taking the payment due on them and using it to buy new bonds). When it sells the bonds back you get the reverse of the original effect, it sucks cash out of the system and increases the supply of bonds, reducing their price and increasing the rate of interest on the borrowing.
So this kind of bond purchase technique is useful if you think you have a short-term recession, you can do it now to tide things over, then as the economy starts to recover and you fear inflation setting in, just slowly 'unwind' it by selling the bonds back.
If you have a long-term economic slump though you have a problem! Monetary policy tools like this aren't going to be effective against a long-term slump.
Mild Rover wrote:Have they done that as well? I read something about a new £200 billion, but it might have been for existing bonds... if that makes any difference?
It's the same concept but what is being done now is slightly different as its for existing bonds as you say.
When the Bank of England buys all those government bonds now it has two main effects: it puts more liquidity (ie cash) in to the economy and it reduces borrowing costs (both for government and business).
When the BoE carries out its asset purchase, it credits the seller's account with the sale price as a deposit. Eg if a pension fund sells £1m of UK government bonds to the BoE, the BoE stashes those bonds in its reserves and the pension fund is credited with £1m cash. That cash will not earn any return so is worthless to a pension fund to let it sit there, so they will use it to purchase some other form of interest-bearing asset (which will be someone else's borrowing, eg bonds issued by the private sector).
By entering the market on a large scale to buy UK government bonds, the BoE is adding to the demand for UK government bonds and therefore driving up the price. By crediting the sellers with cash, it will also increase the demand for other forms of interest-bearing assets that those sellers will then go off and purchase, so will drive up the price of private-sector issued bonds.
Driving up the price of those bonds effectively reduces the interest on the borrowing because the bonds are a promise to pay a fixed amount in the future. If you issue a bond promising to pay back £100 in a year's time, and you sell the bond for £95 now, you're borrowing at a rate of [(100/95)-1]*100=5.26%. If you can sell that bond for £96 now, you're borrowing at [(100/96)-1]*100=4.17%
[If you are Greece after the financial crisis, nobody trusts that you are actually going to pay back that £100 in a year's time, so they'll only offer £90 for the bond, and you're borrowing at 11%]
The asset purchase from the BoE will both reduce the rate at which government borrows and also the rate for private sector firms that need to borrow by issuing debt.
What's the catch....? The additional cash released in to the system by the BoE will wind up somewhere, which means there is more cash splashing around which is a good thing when you're at risk of recession because the last thing you want is people/businesses that want to buy, being unable to access liquid funds to make a purchase. But it is additional money in the economy, that is not backed up by additional production of goods and services, so in the long run that will wind its way out through prices just adjusting upwards. Same reason that transfer fees in football rise so much - the players today aren't better than Maradona, Baggio, they are just denominated in higher values as there's more cash in the system. So you risk getting inflation.
The Bank of England has a tool to stop that because while it has those bonds in its vault it can 'unwind' the asset purchase by just selling them (in practice some of the bonds will have matured but they can get round that by taking the payment due on them and using it to buy new bonds). When it sells the bonds back you get the reverse of the original effect, it sucks cash out of the system and increases the supply of bonds, reducing their price and increasing the rate of interest on the borrowing.
So this kind of bond purchase technique is useful if you think you have a short-term recession, you can do it now to tide things over, then as the economy starts to recover and you fear inflation setting in, just slowly 'unwind' it by selling the bonds back.
If you have a long-term economic slump though you have a problem! Monetary policy tools like this aren't going to be effective against a long-term slump.
Challenge Cup winners 2009 2010 2012 2019 League Leaders 2011 2016
Joined: Aug 09 2011 Posts: 1906 Location: Deepest North Yorkshire Woodland
Eventually god willing we will overcome this virus, the debt to the country will be massive. Companies will be bankrupt or trading with very little cash reserves. The only crumb of comfort will be all of Europe will be starting afresh with the same high debt. The exception will be Italy, potentially they will be hardest hit as they started off from a weak position. Without restarting the Brexit debate again, the eu have some massive decisions to make regarding loans to various countries. On top of which poor old Greece have the massive problem of migrants. Which certainly won’t go away and now summer is on the way will intensify. Depressing times indeed, you can’t even go to the pub for a couple of pints.
Users browsing this forum: No registered users and 147 guests
You cannot post new topics in this forum You cannot reply to topics in this forum You cannot edit your posts in this forum You cannot delete your posts in this forum You cannot post attachments in this forum
