World government debt

My AI says:

Start

The claim that “UK government debt and borrowing triggered major financial crises” is much less convincing when the three examples are examined separately.

1976: Britain certainly had a serious sterling crisis, and government borrowing was high. But that does not establish that government debt caused the crisis. The Bank of England's own contemporary analysis said that it was difficult to identify precisely the sources of pressure on sterling, while the IMF emphasised Britain's exceptionally high inflation and the resulting loss of competitiveness. So 1976 cannot simply be presented as “government borrowing caused sterling to fall”.

2008: This is an especially poor example. The crisis originated in the international banking and credit system, following huge accumulations of debt and risk in banks and the private sector. Governments then borrowed more as they dealt with the recession and the banking crisis. In other words, in substantial part the financial crisis caused the increase in government borrowing, rather than government borrowing causing the financial crisis.

There is also a further confusion here between government borrowing and Bank of England monetary operations. From 2009 the Bank of England bought large quantities of gilts under QE, paying for them by creating new Bank of England reserves. The Bank was not obtaining money that somebody else had previously saved and lending it to the government. It was exchanging one form of government liability — gilts — for another — central-bank reserves.

2022: The mini-budget did cause a major market shock, but again the description “government debt caused it” is misleading. The sudden fiscal announcement caused investors to reassess inflation, interest rates and the government's fiscal position. Gilt prices then fell sharply. That exposed severe vulnerabilities in LDI pension arrangements: collateral demands forced funds to sell gilts, producing a self-reinforcing fire-sale.

The Bank of England intervened by creating reserves and buying £19.3bn of gilts. It did this to stabilise the gilt market, not to finance government spending. It subsequently sold those gilts again.

So these three episodes do not demonstrate a simple relationship of:

more government borrowing → more government debt → sterling falls → financial crisis.

They demonstrate rather different mechanisms.

1976 involved inflation, the balance of payments and pressure on sterling.

2008 was fundamentally a banking and private-debt crisis, after which government borrowing increased dramatically.

2022 involved an abrupt fiscal-policy shock which was then greatly amplified by a liquidity and collateral crisis in the LDI sector.

And there is an important monetary point which the AI claim obscures: Bank of England purchases of gilts with newly created reserves are not government borrowing. The Bank creates the reserves with which it buys the bonds. From the perspective of the consolidated government sector, QE changes the composition of government liabilities; it does not mean that the government has gone into the market to borrow money that already existed.

End

AI Overview UK government debt and borrowing triggered major financial crises or near-disasters during specific historical turning points, most notably in 1976 and 2008, alongside a sharp market shock in 2022

To first paragraph 10.51am

friendlygingercat

The traditional system with most people working and paying taxes to support the infrastructure of the welfare state will fall apart. It cannot be fixed in 10 or 20 years.

What will come next?

A transition to hybrid welfare states built on universal basic services, asset‑based taxation, automation‑linked revenue, and bounded universalism. The shift is already visible in UK policy debates and global welfare research.

The collapse of the traditional tax base is already under way due to an ageing population and falling birth rate therefore less workers. Rising health related and welfare claims further reducing labour force participation. The emergence of a side hustle culture which bypasses PAYE and NI.

Burnaham is already making the noises of moving away from council tax to land based tax and taxing wealth and capital gains.

There's always been a side hustle culture, gingercat.

When transactions were largely cash-based it was very difficult to spot & time-consuming to investigate.

It is a dilemma that to improve you need to spend, and there is no spending money in the pot. Building a whole heap of rentable homes will actually reduce the outgoing rents from councils to private landlords, so public sector housing build is good but it costs money. It will also create employment and potentially apprenticeships

There had been talk of the tech bubble bursting, not just AI, our lives are so dependent on tech that we can't let it burst, it has to be supported. We have seen small glitches, Heathrow airport, railway power cuts, JLR systems.
To improve security it simply has to continue

Anyone investing in crypto, knows it is risky. If they do not then they are culpably ignorant. There is so much information online and in the printed media about it and it has been around for a decade or more.

Each person has to decide their level of risk and act accordingly.

Yes, bursting bubbles ruin the lives of the involved and uninvolved, We and many we know have suffered when bubbles have burst, but trying to protect everybody from everything is the quickest way of sending the economy to hell in a handcart that I know of. But other's gain from bursting bubbles.

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.

I am aware that bubbles are not unusual, MOnica. They do usually involve harm to those involved.

With global finance so firmly established the bursting of a bubble can have far wider repercussions. Look at the 'Global Financial Disaster' of not so very long ago.

I think that crypto is going to ruin many people, too. Trumps crypto has already done so.

At least government bonds (aka the debt) are a nice safe investment for those who are not speculators.

MaizieD

I agree with MOnica in that so called 'government debt' doesn't indicate financial disaster. Our governments have lived with it quite comfortably for 300+ years.

On the other hand, I do see the AI bubble, with AI share prices skyrocketing when the AI companies show no signs of being profitable, being a financial disaster in the making.

Time will tell...

Bubbles are a recurring event since the stock market started. The first was, I believe the 'South Sea Bubble' in 1720. There were many more before 1929, and others before the dot.com bubble of 1999/2000.

The bursting of the AI bubble has been forecast for several years now. It will come, but probably not for a year or so.

I agree with MOnica in that so called 'government debt' doesn't indicate financial disaster. Our governments have lived with it quite comfortably for 300+ years.

On the other hand, I do see the AI bubble, with AI share prices skyrocketing when the AI companies show no signs of being profitable, being a financial disaster in the making.

Time will tell...

M0nica

I see no signs of a financial disaster at the moment. high interest rates are not synonymous with financial collapse.

But Burnham is showing worrying signs of being a one trick pony. His eloquence and 'charm' have got him the job, but now he has it, he doesn't know how to do it.

If you say so!

He's only been in post 5 minutes!!

Investors behaviour has nothing to do with AI, it's not complicated it's all about risk and reward, if you invest in anything that may be worth less next week or next year you want a higher interest rate to compensate.

An extreme example is credit card interest you are borrowing to buy something that may be worthless next week so the interest is 30 or 40% and some borrowers will no repay you.

The main thing is how it affects your average person. Will prices soar ? Will things become more difficult in the job market? Will it become harder to get a house? Not many give two hoots about the debt, so long as it doesn’t impact on their lives.

Well, David, my AI says that your AI is making sweeping claims not even justified by the references it cites. Hmmm…

MaizieD

David49

It doesn't matter what economic theory you follow the sure result of higher borrowing is a fall in the value of Sterling and a higher interest rate on borrowings.

Personally, I think the prospect of imports costing more and even more interest being paid on borrowings is a bad thing. Until there is a change in the way investors access risk that isnt going to change

Woould you like to cite the evidence for that statement, David? The one about 'borrowing' causing a fall in the value of sterling.

British governments have been 'borrowing' since the inception of the Bank of England 300 years ago. People, right from the start, bought government bonds (gilts), i.e what you see as them 'lending' money to the government, to provide themselves with a reliable income. There has been no correlation between debt issuance and devaluation of sterling over the whole period...

When lenders loose confidence in government policy they sell sterling the price falls, maybe you've forgotten Brexit and all the other crises maybe you've forgotten Truss, confidence lost a big problem for the UK.

You can propose whatever changes you like but if confidence is lost in government policy value falls. This is why interest rates are quite high, lenders are not quite sure if sterling will hold its value. Investing in sterling at $1.35 today is not good if it falls 10% which could easily happen if too much spending is planned.

The US has a lot of uncertainty too, China us doing all it can to bypass the dollar

AI Overview Historically and in modern markets, there is a strong, inverse correlation between aggressive debt issuance and the valuation of the British pound (sterling). When the UK government rapidly increases public borrowing or signals unfunded spending, sterling generally depreciates or devalues against major currencies like the US dollar and the euro. [1] (https://uk.finance.yahoo.com/news/pound-dollar-euro-government-borrowing-interest-rates-091322627.html), [2] (https://www.wsj.com/world/uk/u-k-long-term-borrowing-costs-climb-sterling-falls-as-political-uncertainty-grows-53950456), [3] (https://www.currencytransfer.com/blog/expert-analysis/how-government-debt-impacts-currency-markets), [4] (https://russellinvestments.com/us/blog/sterling-crisis)However, this relationship is not entirely linear. It operates through distinct economic mechanisms depending on whether the UK was under a fixed exchange rate system (historical "devaluations") or a free-floating system (modern "depreciations")

David49

It doesn't matter what economic theory you follow the sure result of higher borrowing is a fall in the value of Sterling and a higher interest rate on borrowings.

Personally, I think the prospect of imports costing more and even more interest being paid on borrowings is a bad thing. Until there is a change in the way investors access risk that isnt going to change

Woould you like to cite the evidence for that statement, David? The one about 'borrowing' causing a fall in the value of sterling.

British governments have been 'borrowing' since the inception of the Bank of England 300 years ago. People, right from the start, bought government bonds (gilts), i.e what you see as them 'lending' money to the government, to provide themselves with a reliable income. There has been no correlation between debt issuance and devaluation of sterling over the whole period...

MT62

David49

Private debt is sky high, but lenders are flexible these days it's surprising how many borrowers are paying "interest only" on property. Short term thats not a problem, if the economy take a does take a downturn lenders are going to be hard to find.

Burnham is trying hard to create a "feel good" atmosphere in the UK, it's up to his own MPs to back him and stop asking for unrealistic changes. If he does fail to control the economy it will go downhill fast.

Sorry I am not feeling it 🙃

So far Burnham has put the economy first and "the market" has not devalued sterling, we will see what is in the budget, as long as spending balances with revenue confidence will continue.

Im surprised and pleased with his start as PM but the honeymoon is over, now it gets serious.

David49

Private debt is sky high, but lenders are flexible these days it's surprising how many borrowers are paying "interest only" on property. Short term thats not a problem, if the economy take a does take a downturn lenders are going to be hard to find.

Burnham is trying hard to create a "feel good" atmosphere in the UK, it's up to his own MPs to back him and stop asking for unrealistic changes. If he does fail to control the economy it will go downhill fast.

Sorry I am not feeling it 🙃

It doesn't matter what economic theory you follow the sure result of higher borrowing is a fall in the value of Sterling and a higher interest rate on borrowings.

Personally, I think the prospect of imports costing more and even more interest being paid on borrowings is a bad thing. Until there is a change in the way investors access risk that isnt going to change

I feel we should be worried about Britain's level of debt which is climbing towards a 100% of GDP. However I believe Japan's is something along the lines of 250% and they appear to function as a country. Although I dread to think what rates of interest apply to their borrowings.

Global markets have been gripped by fears over inflation and soaring debt this week, resulting in a bond market sell-off which has caused government borrowing costs to spike across the world.

Britain – which already pays the highest borrowing rates among all G7 economies – has been especially vulnerable at a time when investors are increasingly worried about how the Chancellor will make the sums add up in next month's Budget

Britain's economy is facing 'very, very substantial challenges', Bank of England governor warns Burnham amid spiralling UK debt

fancythat

Not the point in the slightest.

The reason I didnt answer!

How isn't it 'the point''? You're talking about government 'debt'.

Presumably it worries you and you would like to see it diminish. The only way to cut it is either to 1) repay those who hold it or 2) cut government spending so that there is no need for bond issues...(there isn't really any need for 2) because government spending actually puts money into the economy but that seems to be a really hard concept for people to grasp)

Asking if you'd like any government 'debt' you hold to be repaid to you seems to me to be entirely relevant.

The ways and means account hasnt been used since 2009 it was replaced by QE. It could be revived BUT the amount borrowed would be more difficult to determine from day to day being less transparent.