Anyone good with economic statistics, charts, and feeling a bit bored right now?

I have a little feeling here. Just a suspicion.

That a goodly chunk of the fall in the national debt post WWII was to do with screwing over those who held the gilts which made up the national debt.

The best way, if you can manage it that is, of getting the government out of debt is for the government to inflate it away.

And my suspicion is that that is exactly what they did.

The chart and figures for the national debt as a percentage of GDP are easy enough to find. And they do drop from over 250% of GDP in 1950 for the next few decades.

It\’s also not all that difficult to find the inflation rate for those years.

But the next bit might be difficult to find: what was the yield on gilts over those years? My suspicion is that the interest rate was less than the inflation rate for some/many/all those years. And that that is the minor/part of/major reason why debt fell as a %ge of GDP.

I sorta assume that someone has already done this calculation: hopefully they have at least for it\’s certainly beyond my abilities.

There is of course a current point to make: if I\’m right, and the reduction in debt was largely a result of a slow motion shakedown of investors, we can\’t run this trick again. Partly because a huge portion of our debt is now inflation protected and partly because the markets have woken up to such inflating out of debt and thus long term rates would/will rise on new issuance and rollovers as inflation climbs.

So, anyone know whether this work has been done and if not, anyone want to do it?

10 thoughts on “Anyone good with economic statistics, charts, and feeling a bit bored right now?”

  1. “That a goodly chunk of the fall in the national debt post WWII was to do with screwing over those who held the gilts which made up the national debt.”

    I seem to have some vague memory about those who held gilts forgoing any return from them in order to be patriotic. Could be totally wrong though and it probably isn’t the majority.

  2. You are of course ‘write’, as RM might say. War Loan and all that.

    It is absurd to compare the debt / deficit we have now with the cost of fighting WW1 & WW2.

  3. And the poor sods who still held gilts into Woy’s time as Chancellor then were exposed to a marginal tax rate of >100% on the coupon. Double whammy!

  4. “I seem to have some vague memory about those who held gilts forgoing any return from them in order to be patriotic.

    All a bit prehistory for me but back in my tender years I seem to remember handling certificates for War Loan 5% Bonds rather than the more usual 31/2% redeemable 1951 or after. Can’t remember the redemption date but the notion that these were exchanged for the 31/2’s as a patriotic act does strike a chord.
    Back then I did some work for an investment company running a scheme that exchanged War Loan Bonds for Unit Trust units so I must have seen thousands of certificates, usually for a couple hundred pounds a time. I don’t ever recall trading in War 5% or an entry in the Official List so possibly the voluntary patriotic gesture became compulsory at some point.
    The List doesn’t seem to be an on-line resource. Does it even exist now? The memory is jogged by recollection of Consols 2 1/2% & other undated bond issues.

  5. The Palace of Comedy
    Hansard 1959

    3½ PER CENT. WAR LOAN
    HL Deb 10 November 1959 vol 219 cc463-6 463

    § 2.42 p.m.

    VISCOUNT MERSEY

    My Lords, I beg leave to ask Her Majesty’s Government the Question which stands in my name on the Order Paper.

    § [The Question was as follows:

    § To ask Her Majesty’s Government to consider adding a fixed redemption date for 3½ per cent. War Loan; or alternatively to accept the surrender of the stock at a fixed price for purposes of estate duty.]

    § THE MINISTER WITHOUT PORTFOLIO (THE EARL OF DUNDEE)

    My Lords, the Government have given much sympathetic consideration to the difficulties of holders of this stock. Dating 3½ per cent. War Loan would, however, be likely to involve an increased burden on the taxpayer when redemption was carried out. Furthermore, such intervention, contrary to the market expectations, would be likely to cause a rise in the price of the stock. It would be unfair that the benefit of this should go to those who bought at recent prices, but not to those who sold recently at a loss. The right of a holder to surrender stock at a fixed price for the purposes of estate duty is a fundamental condition of a stock, determined at the time of issue.

    § LORD DYNEVOR

    My Lords, could the noble Earl say who will be the loser if stock rises in price?

    VISCOUNT MERSEY

    My Lords I should like to thank the noble Earl for his reply, but I would add this. If, as it seems to me, the Government reply is based on the argument that there 464 should not be an alteration in the fundamental conditions of the loan, I would point out that in this particular case there has already been an alteration. Originally, the loan was a 5 per cent. stock with a definite redemption date. Under great pressure from the then Governor of the Bank of England, Mr. Montagu Norman, everybody was told that it was almost a patriotic duty to convert.

    SEVERAL NOBLE LORDS

    Order, order!

    VISCOUNT MERSEY

    It seems to me that those who took that view have received the worst of both worlds. They bear that burden of an irredeemable stock bearing interest at only 3½ per cent. I wonder whether the noble Earl may not think that this is a case which deserves some further consideration.

    § THE EARL OF DUNDEE

    My Lords, in 1932, when conversion took place, every holder of 5 per cent. War Loan was offered repayment at par. The Government were in a position to redeem the 5 per cent. War Loan at par, as they had the right to do, at that time. Those stockholders who did not elect to have their stock redeemed at par were given the option of converting into a new stock on different conditions at 3½ per cent., which was then the prevailing rate of interest, instead of 5 per cent. I think that everybody who either buys or retains an undated Government stock must be aware that the capital value of that stock is bound to go up or down in inverse proportion to the prevailing rate of interest.

    § VISCOUNT ALEXANDER OF HILLSBOROUGH

    My Lords, would it not be quite impossible for the Chancellor of the Exchequer to grant this request received from the noble Viscount without giving consideration to the conditions of all the other undated Government stocks?

    § THE EARL OF DUNDEE

    My Lords, the noble Viscount is entirely right. I think that it would undermine confidence in the financial proceedings of the Government if they were to favour one particular class of stockholder.

    § EARL FORTESCUE

    My Lords, I should like to ask whether, if the proposal regarding the 1932 3½ per cent. War stock were adopted, it should not be 465 applied to all other similar stock. There is one notable example, 2½ per cent. Consols, which when I first went to the City forty years ago were called “reduced” Consols and “Goschens”. I should also like to ask the noble Earl whether he is aware that only a year ago it was possible to exchange 3½ per cent. War Stock into 3½ per cent. Funding Stock dated 2,004 without any loss, and that that was done on a considerable scale, but that it is not now possible.

    § THE EARL OF DUNDEE

    My Lords, the questions of whether stock is dated or not, whether it can be changed into another stock or whether it can be used to repay death duties, are all fixed at the time when the stock is issued, and I do not think that the Government can arbitrarily alter the conditions of a security from time to time to meet isolated requests of this kind.

    § LORD LATHAM

    My Lords, would the noble Earl agree that the proper policy for the Government to pursue is to secure a lower rate of interest?

    § THE EARL OF DUNDEE

    My Lords, I think that that is quite a different question. It is a question that goes to the root of our whole economic policy, but it does not arise out of the Question on the Order Paper. The point which affects this Question on the Paper is that when interest rates are high the capital values of all Government stocks are depressed, and when interest rates are low, they go up correspondingly.

    LORD HAWKE

    My Lords, would the noble Earl inquire from the noble Lord, Lord Latham, the names of those investors who are willing to lend to the Government at lower rates of interest than there are at present?

    LORD SALTOUN

    My Lords, as a trustee who lost heavily by the reduction of interest on War Loans after the First World War, I would ask whether there is not a case for special treatment of this kind of stock. If the Government can treat it to the detriment of stockholders, why should they not treat it for the benefit of stockholders?

    § THE EARL OF DUNDEE

    My Lords, if the noble Lord had elected to do so in 466 1932, he could then have been paid off at par and could have invested the money in some other stock.

  6. “We can’t run this trick again” ??
    But we already are. And, as seen above, it has been done before with the conversion of war loan from 5% to 3,5%.
    A forced recalibration of index linked bonds and index linked liabilities (govt pensions) is a virtual certainty, somewhere soon.
    Incidentally, the frogs have floated their equivalent of war loan recently, a fixed rate tax free bond specifically for the “petit porteur”. Take up was so poor that there are no plans to do another issue.

  7. That the debt was partly inflated away is a well known fact. I’m not so sure it can’t be done again – the inflation rate (RPI) is higher than the yield on gilts, after all, and they are already issued, the interest rate cannot rise on them (and they have quite long maturities). Also inflation adjusted bond are not that large a part of the issuance, are they?

  8. Incidentally the calculation you really want to look at is nominal GDP growth, ie real GDP growth plus inflation (the GDP deflator). Real growth has been pretty much 2%-3% for the entire post-war period if memory serves me, but obviously the inflation component has changed. If nominal GDP growth is higher than the yield on gilts then debt falls as a % of GDP each year (ignoring new issuance, but the impact can be so large that new issuance can be quite large and still see the ratio fall).

  9. I can’t offer to do the analysis but one source might be the annual Barclays Equity Gilt Study. I haven’t had a copy for a few years but I seem to recall it had data on long-term yields for gilts (and lots else), and it may be possible to glean some back-of-the-envelope calculations to compare yields vs coupons from what they have. (I assume that’s the main missing piece here, we have GDP, CPI/RPI, debt stock, debt issuance, and coupons, but not necessarily the market pricing of the debt at the time, no?)

    Tim adds: You’re right. I was sent a copy of this very study. And while I couldn’t work out the numbers someone else indeed could. 80% of the debt reduction came from the fall in the price of gilts. Only 20% came from the growth in GDP. And some portion (I would say most but that is arguable) of the fall in gilts prices came from inflating away the value of the debt.

Leave a Reply

Your email address will not be published. Required fields are marked *