So what is the reason for the obsession with the remaining £36bn or so cost? It can’t be because it is excessive in proportion to the sums owing in our recent past, because it clearly is not. What is also very obvious is that the cost of our national debt is running at exceptionally low levels. We paid a lot more interest as a proportion of GDP in past decades when the debt to GDP ratio was much lower. If you want evidence that the paranoia about the national debt is misplaced right now then this is that.
And as and when interest rates rise again that interest burden is going to grow, isn’t it? Given that no government (copyright R. Murphy) ever does pay off the national debt.
Say the gilts yield returned to 5%. That’s not out of historical experience at all. At which point the interest bill is rivaling the NHS as the biggest single expense.
£36bn eh? Pfft. Nothing. I wouldn’t write a shit blog entry and abuse the commenters for that.
Er, don’t you just create more money to pay the interest?
My understanding is that a large (majority?) proportion of BoE borrowings are actually at a fixed rate, so rate rises are not a particular risk.
@Matt Wardman – they are until they mature… at which point you have to repay or, more likely as we run a deficit, replace with more borrowing… at the new higher interest rates…
We know Ritchie can’t manage first order effects* of his wild ejaculations. Why we even bother considering what the 2nd order effects might be …
* The only one that seems to be any consideration is that he feels the smug satisfaction that comes from his adoring vermin.
If you can just create money, why pay interest? Why borrow at all, in fact? Why borrow something you can simply create out of thin air?
Apparently, because pensions will be destroyed if there isn’t enough government debt available. Ritchie-‘logic’, not mine.
“Apparently, because pensions will be destroyed if there isn’t enough government debt available. Ritchie-‘logic’, not mine.”
I think pensions are going to be destroyed regardless if this lot get into power…………..
I would have said take advantage of low interest rates to pay off the capital before interest rates rise.
To Jim’s point
Anyone know what pension provision is like in North Korea or Venezuela out of interest? – be good for people to see what the opposition is offering….
With QE is the BoE buying Gilts direct from the Treasury or is it buying them in the secondary market? I always assumed the latter but I’ve just seen something that implies the former.
@BiND. It’s supposed to be that bonds are bought in the market by the BoE rather than directly as if bought directly it isn’t quite the same thing. Buying in the market reduces the supply and therefore reduces the gilts rate which is used, well used to be anyway, as a reference rate for discounting things. The lower the rate the more long term investment appears to pay off encouraging corporate spending. It also reduces savings rates but that is more linked to the BoE base rate (if my understanding is correct) than gilts. The BoE can change the yield for 5y 10y gilts by reducing supply. BoE was also buying corporate bonds recently. As as ECB.
If the BoE buys from the government directly the gilts supply in the market never gets to see the long dated stuff that gets issued so the rates effects are not the same as the short dated stuff is still out there. Also it is pretty blatantly monetising the debt so it looks naughty. Not much of a real difference to be honest in the long run except for the discount curve effects and forcing firms to invest in higher yielding assets i.e. More Speculative projects. Now go look for evidence that happened rather than money going into property….. find any yet?
The Snippa’s best point, which he grazed at, is that it’s the cost of servicing the debt that matters. As this has been coming down then it makes it look like the Coalition and then the Tories did a good job on monetary and fiscal policy.
But don’t worry, in a few months he’ll be back stating that national debt usually increases less under Labour and that this is the important thing.
Thanks, Andrew, that was how I understood it but I have to admit maco economis dirs my head in most of the time.
Am I also right in thinking that the BoE is buying the higher yielding Gilts to stop the sellers just going back and using the money to buy more Guilts?