Here\’s an interesting little opportunity for some economic research.
I\’ll probably get some of the wording wrong here as, as you know, I\’m not an economist, simply an enthusiastic amateur.
There\’s a fairly strong claim out there that markets process all of the available information and thus price things correctly. I\’m not sure I quite believe it (damn near all information and price things as well as can be done I would definitely support) but that is one of the claims.
This leads to interesting toughts: like, it doesn\’t matter whether, say, the PFI debts are on the Treasury\’s books or not, the long term pensions numbers: for the participants in the markets for public debt most certainly know that they are there and are thus already encapsulated in current prices. Whether the Treasury actually owns up to them or not is irrelevant.
We\’ve actually got a method of testing that idea:
Gordon Brown\’s reputation for economic competence has been dealt a severe blow as £100 billion of taxpayers\’ money used to shore up Northern Rock was added to the national debt.
Before the Northern Rock debts were added, the national debt stood at £537 billion, or 37.7 per cent of gross domestic product.
Taking the figure to around 45 per cent catapults Britain up the league table of indebted nations, above the United States and just below Germany, traditionally regarded as one of the highest spending countries in Europe.
Nothing of any significance has happened: everyone knew that this was indeed part of the national debt. Or did they? Is this new information that has just hit the market?
Has adding to the national debt to the sum of 7% of the economy changed the prices of such debt? Or not?
If it were a transaction of importance, or new information, we would expect the price of long term Gilts to slump, interest rates on them to rise. If prices are entirely unchanged then we would probably have to say that he market had already digested this information….that it was not new.