World government debt

Laura Kunessberg had Francis Fakuyama on her panel yesterday, a prominent American political scientist and political economist. He explained the influence of the markets well I thought and the particularly difficult challenges facing the government and for John Healey as chancellor.

Fukuyama said it is impossible and foolhardy for any government to ignore the markets as they hold too much power. He said all focus should be on seeking growth. We have a recent example of how the markets reacted quickly to Liz Truss's unfunded mini budget. I just googled which kind of sums up some of Fukuyama’s key points:

AI Overview

Financial markets hold power over the UK government by controlling the cost of national borrowing and dictating how expensive it is to service the country's multi-trillion-pound debt.
When investors lose confidence in government policies, they demand higher returns to buy British debt. This dynamic gives unelected traders significant influence over public spending and economic strategy.

Controlling Borrowing Costs - Gilt Yields

Gilts and Yields The government issues bonds called gilts (loans from investors) to finance public activities. The yield is the interest rate the government pays back on these loans.
Rising Expenses Total UK government debt sits at roughly £2.9 trillion. Every 1% rise in these yields can cost the government billions of pounds extra every year just in interest payments, reducing money available for public services.
Market Punishment If markets dislike a budget or fear political instability, they sell off UK bonds. This pushes yields up and forces the government to adopt tighter, more cautious spending plans.

Influencing Currency and Confidence

Value of the Pound Financial markets trade the British pound (sterling) around the clock.
Economic Shocks Political uncertainty or unpopular fiscal choices can cause the pound to drop in value. A weaker currency makes imported goods, energy, and food more expensive for everyday citizens, creating intense political pressure for elected officials.

Economic Dominance and Lobbying

Size of the City The financial services sector based in London represents a massive portion of the UK economy.
Policy Influence Because the sector generates substantial tax revenue and jobs, financial firms hold deep access to the HM Treasury and policy-makers. Governments often tailor regulations to keep these global firms happy and prevent them from moving overseas.

Institutions like the Bank of England operate independently to manage day-to-day monetary policy, but they must still navigate the realities of global market reactions.

Fukuyama said it is impossible and foolhardy for any government to ignore the markets as they hold too much power.

Quite.

I agree with all the above post. Except, "all focus should be on seeking growth".
Well yes, ideal situations.

But if the same thing happens as in 1976, the IMF would also be demanding a big cut in government spending I presume, [in return for it's help] like last time.
Which led to a time of austerity.

In fairness, Fakuyanam said achieving growth is very challenging thing to do in current political climate.

It was more the case he was saying, (well at least as far as I understood him and recall, I am not an economist) growth can mitigate the costs of large government debt.

Growth of course would also reassure the markets.

AI can be wrong

This is nonsense for a start

Gilts and Yields The government issues bonds called gilts (loans from investors) to finance public activities. The yield is the interest rate the government pays back on these loans.

The yield is emphatically not the interest rate the government pays on gilts. Gilts are issued for a fixed period of time at a fixed interest rate (the 'coupon'). The interest rate remains the same during the ;life' of the bond. Whether it is purchased on the primary market (i.e, purchased from the government) or the secondary market (i.e bond holders selling their bonds on) the coupon rate is paid.

The 'yield is a product of the secondary market. A full explanation of it is here:

If investors come to expect higher interest rates in the economy as a whole, new bonds will be issued with higher coupons. The old 4% bond then looks less attractive, so its market price falls. A new buyer might only be willing to pay £80 for it. That means the £4 coupon now represents, in simplistic terms (ignoring the time to maturity), a yield of 5% (£4/£80).

If interest rates fall, the opposite happens. The fixed £4 payment looks generous, so buyers are willing to pay more, perhaps £120. The yield therefore falls to 3.33% (£4/£120), again calculated simplistically, which is sufficient for these purposes.

This simple demonstration of changes in value relating to expected interest yield demonstrates the inverse relationship between price and yield. When bond prices go down, yields go up, and vice versa. The key point is that the government's cost does not change. It is still paying the same £4 coupon. What moves is the market's valuation of existing bonds.

To be clear about this, the “interest rate on government debt” reported in the press is not the rate the government is paying on its “debt”. It is the market yield on bonds already in circulation and the rate at which new government borrowing happens. That yield is a snapshot of what buyers and sellers think those fixed future payments are worth at that moment.

www.taxresearch.org.uk/Blog/glossary/B/#gsc.tab=0

Yes, governments will issue new gilts at about the same coupon as the current yields but the increase in its annual interest payments is mitigated by the fact that a significant proportion of the new gilts will be replacing matured gilts and the effective extra interest paid on these replacements will be the difference between the new coupon and the old one. So if a 3% gilt is replaced by a 5% gilt the effective extra interest the govt will be paying is 2%.

During the 2020n to 2025 period an extra £8 billion pa was paid out in increased gilt interest payments. Put into the context of the annual UK budget of about £1,4 trillion this is not excessive. While it sounds a great deal it is not a sum which should constrain public spending.

My AI also points out that some of the interest paid on gilts is a source of income for gilt holders, either individuals or recipients of income from pension or investment funds. So there is some return to the government via direct taxation of the income or indirect taxation when it is spent into the domestic economy. How much this would be is, of course, impossible to calculate.

LemonJam

Growth of course would also reassure the markets.

Well, we won't get any growth unless the government stops bowing down to the 'markets' (which have no interest at all in the wellbeing of a country's citizens, just in making money) and starts both injecting more money into the domestic economy (by spending) and making taxation more progressive and redistributive.

They won't get any growth from 'austerity'.

You appear to be suggesting MaizieD that the government should pay no heed to the markets and that the markets have no power of influence over the government?

You appear to be suggesting that the government should just sets out a spending plan in the forthcoming budget and that this spending plan should be funded by setting out a new progressive and redistributive taxation regime - which I am not saying is wrong in principle just seeking to understand what you are suggesting.

Then as a result the market can will just suck it up and there will be no market punishment in that scenario?

Would the challenge be to cost all those spending plans and ensure the increase in tax revenue will fund this plans accordingly?

MaizieD

AI can be wrong

This is nonsense for a start

Gilts and Yields The government issues bonds called gilts (loans from investors) to finance public activities. The yield is the interest rate the government pays back on these loans.

The yield is emphatically not the interest rate the government pays on gilts. Gilts are issued for a fixed period of time at a fixed interest rate (the 'coupon'). The interest rate remains the same during the ;life' of the bond. Whether it is purchased on the primary market (i.e, purchased from the government) or the secondary market (i.e bond holders selling their bonds on) the coupon rate is paid.

The 'yield is a product of the secondary market. A full explanation of it is here:

If investors come to expect higher interest rates in the economy as a whole, new bonds will be issued with higher coupons. The old 4% bond then looks less attractive, so its market price falls. A new buyer might only be willing to pay £80 for it. That means the £4 coupon now represents, in simplistic terms (ignoring the time to maturity), a yield of 5% (£4/£80).

If interest rates fall, the opposite happens. The fixed £4 payment looks generous, so buyers are willing to pay more, perhaps £120. The yield therefore falls to 3.33% (£4/£120), again calculated simplistically, which is sufficient for these purposes.

This simple demonstration of changes in value relating to expected interest yield demonstrates the inverse relationship between price and yield. When bond prices go down, yields go up, and vice versa. The key point is that the government's cost does not change. It is still paying the same £4 coupon. What moves is the market's valuation of existing bonds.

To be clear about this, the “interest rate on government debt” reported in the press is not the rate the government is paying on its “debt”. It is the market yield on bonds already in circulation and the rate at which new government borrowing happens. That yield is a snapshot of what buyers and sellers think those fixed future payments are worth at that moment.

www.taxresearch.org.uk/Blog/glossary/B/#gsc.tab=0

Yes, governments will issue new gilts at about the same coupon as the current yields but the increase in its annual interest payments is mitigated by the fact that a significant proportion of the new gilts will be replacing matured gilts and the effective extra interest paid on these replacements will be the difference between the new coupon and the old one. So if a 3% gilt is replaced by a 5% gilt the effective extra interest the govt will be paying is 2%.

During the 2020n to 2025 period an extra £8 billion pa was paid out in increased gilt interest payments. Put into the context of the annual UK budget of about £1,4 trillion this is not excessive. While it sounds a great deal it is not a sum which should constrain public spending.

My AI also points out that some of the interest paid on gilts is a source of income for gilt holders, either individuals or recipients of income from pension or investment funds. So there is some return to the government via direct taxation of the income or indirect taxation when it is spent into the domestic economy. How much this would be is, of course, impossible to calculate.

I quoted A1 directly at 11. 05 am and I concede A1 can make mistakes. Apart from those 2 sentences

Gilts and Yields The government issues bonds called gilts (loans from investors) to finance public activities. The yield is the interest rate the government pays back on these loans

can you see any more small A1 corrections that may be needed? mistakes in the entirety of A1 overview that need correction? That is the rest was correct?

I put that particular sentence back into A1 to check whether correct and A1 came up with:

AI Overview

Yes, your definition of gilts is correct, but your definition of yield needs a small correction.

What are Gilts They are official bonds issued by the UK government. They act as a way for the government to borrow money from investors. The government uses this money to fund public spending and activities.

How the Interest Works - The Coupon
The fixed interest rate the government promises to pay investors is called the coupon. This rate is set when the gilt is first issued and never changes.

Should have said coupon rather than yield- thanks for picking up that error MaizieD 👏 😊

It's an error made by most journalists and commentators so I'm not surprised that AI, which is trained on huge amounts of information from multiple sources, picked on a common error to pass on. It is important to correct because it makes people much more fearful than they need to be when they think that the interest rates whole £3trillion is being increased.

As my AI shows, the actuality is a large, but not crippling sum and we have to look at the returns from taxation and (this is my addition) its erosion by inflation over the course of the gilt term.

Yes, I do think that we should be less compliant with the wishes of the wealthy and financial speculators to accumulate ever more money. And if increased government spending has a short term adverse consequence well, we've lived through austerity, are in effect still living through austerity, so what would be the difference if it ultimately resulted in government spending promoting growth?

As it is, we become poorer and unhealthier and worse educated and worse served by the 'public services' all in the interests of 'the markets'.

If they're going to have so much control over the government why bother with a government at all?

Although the interest rate the governments pay on gilts is fixed on issue, they are treated like any other financial asset when traded on the market. this mean that the price of gilts can go up and down with both the market and investors confidence in the government.

For example: If the government offers gilts with a 5% coupon and the price of those gilts goes from a nominal £100 to being traded at £200 the interest rate or yield on that bond drops to 2.5% On the other hand if the government of the country that issued those bonds looks like taking the economy to hell in a hand basket the market value of those bonds may fall to £20 and the yield on that bond is 25%.

Why bother with a government at all if markets have influence and power?

Because a government possesses democratic legitimacy, regulatory authority and public service responsibilities. The markets are driven by profit and loss and have no interest in taking over the responsibility of governing the country.

Governments need to borrow money to run the economy, they could earn money by exploiting resources and exporting, but the demands of voters takes priority at election time, so the economy takes second place.

Most lenders dont care what the money is spent on as long as they get repaid, UK lenders, pension funds and other institutions are not sensitive to currency changes, their investors get full interest rate. Overseas lenders are very concerned that the pound retains its value or improves.

We know that Japan borrows 250% of GDP they can only do that because almost all of the borrowings are to internal lenders. The UK relies a great deal on overseas lenders to invest, it's not just bonds and gilts its every overseas lender including those that invest in PFIs. The UK population needs to invest a lot more in our own needs, not in foreign investments.

LemonJam

Why bother with a government at all if markets have influence and power?

Because a government possesses democratic legitimacy, regulatory authority and public service responsibilities. The markets are driven by profit and loss and have no interest in taking over the responsibility of governing the country.

Govermnents are not exercising any of that if they are letting themselvesbe controlled by 'the markets'.

This from Anne Pettifor. An economist, albeit a heterodox one.

...the Prime Minister gives the strong impression of being powerless: that change is not possible because change would be opposed by the ‘markets’ by bond holders and by the Bank of England and the Treasury. His chancellor has already in effect argued that - There Is No Money.

(And I read this after I had written my previous post)

My view is that successive UK governments exercise public service responsibilities, a regulatory role and democratic legitimacy whatever of a variety of economic model each follows.

We can agree to differ- thats fine 😊

LemonJam says:

The markets are driven by profit and loss and have no interest in taking over the responsibility of governing the country.

MOnica says

the price of gilts can go up and down with both the market and investors confidence in the government.

The problem with the 'investors' who play 'the markets is that they have no more knowledge of macroeconomics than does the average man in the street.

Nor are they rational. For instance, this rush into buying AI shares has no basis in rationality, it is based on a far from rational belief that the share prices will continue to rise and they can sell at a profit. At some point the shares will fall and those who are still holding the shares they bought at the height of the market will lose out (it already happened with Musk's SpaceX flotation). This is no more than expensive gambling.

If they're going to have so much control over the government why bother with a government at all?

Too long a number of reasons to list.

But it is like with households[I know you dont like me saying that word, so this is the first time on this thread I have said it!]when you owe money to a Bank.
You still have control of your budget and life, but are forced to work inside certain parameters.

^The problem with the 'investors' who play 'the markets is that they have no more knowledge of macroeconomics than does the average man in the street.
^

They dont have to. It is up to them what they choose to do with their "spare" cash.

Your last paragraph.
Nothing new since the Stock Market came into existence.

MazieD- said "Well, we won't get any growth unless the government stops bowing down to the 'markets' (which have no interest at all in the wellbeing of a country's citizens, just in making money) and starts both injecting more money into the domestic economy (by spending) and making taxation more progressive and redistributive".

We are in agreement therefore that the markets have no particular interest in the wellbeing of a country's citizens- hence why it falls to governments to exercise public service responsibilities.

LemonJam

My view is that successive UK governments exercise public service responsibilities, a regulatory role and democratic legitimacy whatever of a variety of economic model each follows.

We can agree to differ- thats fine 😊

Any government does not have to borrow money they do so to provide more services to the population or sometimes stimulate growth. The principle of borrowing is usually to pay back the loan but all that happens is that another loan is taken out, so interest just keeps increasing.
Lenders whether internal or foreign just want interest, we don't have to borrow if we do it's on their terms, if we try to set our own conditions they can just walk away
.

Nothing I disagree with in your post David49.

Peaseblossom

He only got the job because everyone else was warned off. I can't believe he was the best of 400 MPs. Nobody wants a commie Prime Minister.

What a strange and ignorant comment?

Maizie:
As it is, we become poorer and unhealthier and worse educated and worse served by the 'public services' all in the interests of 'the markets'.

If they're going to have so much control over the government why bother with a government at all?

Because it is government that decides many of the parameters that the market responds to.

Experience has shown neither the extremes of complete government control, as we had in post-war Russia and communist Eastern Europe, nor in countries where the market runs rampant, as in the US, gives us anywhere near to a station where all benefit.

The nearest we have is in Scandinavia and Demark where there is more of a balance between public and private interests.

We are in agreement therefore that the markets have no particular interest in the wellbeing of a country's citizens- hence why it falls to governments to exercise public service responsibilities.

But they're not doing it, are they?

I repeat:

...the Prime Minister gives the strong impression of being powerless: that change is not possible because change would be opposed by the ‘markets’ by bond holders and by the Bank of England and the Treasury. His chancellor has already in effect argued that - There Is No Money.

David49

LemonJam

My view is that successive UK governments exercise public service responsibilities, a regulatory role and democratic legitimacy whatever of a variety of economic model each follows.

We can agree to differ- thats fine 😊

Any government does not have to borrow money they do so to provide more services to the population or sometimes stimulate growth. The principle of borrowing is usually to pay back the loan but all that happens is that another loan is taken out, so interest just keeps increasing.
Lenders whether internal or foreign just want interest, we don't have to borrow if we do it's on their terms, if we try to set our own conditions they can just walk away
.

I'll quote my economist again:

There are three ways the government can deal with additional spending or investment:

Borrowing – Under the Full Funding Rule, the Debt Management Office issues gilts (government bonds);

Raise Taxes;

Create money – this can be done in many ways: both forms of Quantitative easing used in the UK were forms of money creation; even more simply, the government can create money simply by spending and leaving the overdraft in the Ways and Means account

The standard objections, outlined below, can be refuted.

“Government debt is dangerously high, so we can’t borrow.”

British public debt today is below our historical average and our government has the power to create money when needed. The public debt to GDP (income) ratio will only fall if economic activity (investment and employment) rises along with incomes and profits.

“Taxing the wealthy would stop-trickledown and the poor would suffer.”

The so-called ‘trickle-down effect’ has no evidential basis. Both economic and wage growth were higher when top rates of tax were higher.

“Creating money just leads to dangerous inflation.”

The Bank of England has created £895 billion since 2009, and this was not the cause of inflation. (Supply bottlenecks after COVID and the Iran War were the main causes of inflation).

The third option – creating money – is considered so outlandish that it is seldom even discussed. And yet, as Lord Turner wrote in 2016,

….inadequate nominal demand is one of very few problems to which there is always an answer.Central banks and governments together can create nominal demand in whatever quantity they choose by creating and spending fiat money.Doing so is considered taboo – a dangerous path toward inflationary perdition.But there is no technical reason money finance should produce excessive inflation, and by excluding this option, we have caused unnecessary economic harm.….money finance of fiscal deficits is technically feasible and desirable, [and] it may be the only way out of our current problems.”

She is not the only economist who is saying these things today. I strongly suspect that Keynes would have said this is the way to go. It's just we're wedded to the contrary ideas of another school of economics, with the demonstrably bad effects for a very significant number of citizens which we have seen over the period of time since they were implemented.

"But they're not doing it, are they?"

Is the market paying attention to the interests to the well-being of UK citizens? Not that I've noticed.

Is the government exercising responsibilities for public service responsibilities? Well I have not noticed the markets stepping in to do so instead or the government stopping.