UK government debt yields have reached five per cent.
A couple of years ago the same debt could be issued at 1.5 per cent.
You could argue that both represent negative yields when compared to inflation. But there the comparison ends. The cash cost of 1.5% was small. That cannot be said of 5%. And with governments of the sort we face that matters, because we are suffering government by book balancers. Or, to put it another way, government by people who do not know the first principles of government, economics or accounting.
The result is that we face the most massive crackdown on government investment now at a time when we are in desperate need of it. HS2 is an obvious victim. But so too is the investment that we need in sustainability - where Labour gave the green light to the government to cut spending by cutting back on its own £28 billion promises.
Meanwhile, the massive backlog of repairs expenditure will go undone. The state of our infrastructure will collapse, leaving the problem to the generations who will also have to face climate change. Intergenerational economic decisions do not come much more callous than this.
There are several points to make.
First, interest rates need not be this high. This is all down to the false belief that raising rates tackles inflation when it is now more than likely that the opposite is true. When food prices are falling and rents are rising the evidence of the harm interest rates are causing is there for all to see, unless you are in Downing Street of Threadneedle Street, that is. We need rate cuts, urgently, and are told that they are not on the horizon for years.
Second, the folly of austerity is ever more apparent. Osborne, Hammond and others should have been repairing the UK whilst the interest rate sun shone. They did not. They favoured tax cuts instead. The folly of that is now ever more apparent.
Third, we are heading for a major crisis. Neither business nor households can sustain payment of interest at these rates and neither has any significant opportunity to cut their debt burdens. Increasing defaults are inevitable, as is an increasing poverty / income divide. And that, apparently, is what our politicians want. Either that, or they are too ignorant to know what they are doing. Those are the choices we have got when appraising their behaviour. Neither is appealing.
On top of that, we now we have the government collapsing all around us, and Labour having no clue what they will do, or they would say it.
Do you wonder why I want to spend the day birdwatching?
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You have done enough. Enjoy your bird watching.
And I’ll enjoy my guitar a lot more too, after managing to get the odd affordable home built here and there.
🙂
Have you seen the podcast by Ed Balls and George Osborne about how the two parties colluded for over 20 years? It’s on youtube, but you can read about it on The Conversation.
Depressing
But I guess we knew this
Am I right in thinking that if the government allows the market interest rate to prevail, this does not affect the ability of the government to run deficits, as the BoE can always pay whatever interest payments on bonds are required? If so, does the “problem” arise because economically ignorant politicians think that the government is financially constrained, and it’s financial “headroom” is reduced as a result? Do increased interest payments on Bonds contribute much to inflation? Is it the case that not much of this “gift” to bondholders is spent on consumer goods?
And since issuing bonds does not, in any case, affect the government’s ability to spend, couldn’t we just issue less bonds, or none at all?
Of course the BoE can issue debt
But debt is debt
So the questions why issue it when it is not needed because vastly lower rates would work better
But let’s not pretend issuing debt des not matter: doing so creates ongoing obligations
And we do need the national debt – google this site’s name and why we need a national debt for reasons
Not sure now how your hostility to Labour’s fiscal rules fits in here. I thought you were pro increasing the national debt to fix what needs to be fixed (as well as increasing taxes).
I am – but that was nothing like the issue you raised
Well, yes, I admit to poor understanding of the issues
So you are saying yes to increase the national debt (= national wealth – I get that) but not too much because of the interest payments ? If Labour’s fiscal rules are arbitrary and meaningless, how do we decide what the “right” amount of national debt should be? Which I suppose is the same as asking what is a “sustainable” national debt? (Which I thought MMT regards as a meaningless question.)
I have no problem with increasing the supply of government created money.
I also have no problem with increasing tax to remove the risk of inflationary impact from doing so.
I do have a problem with high interest rates: they transfer money to the already wealthy.
Low interest rates are vital to sustainable societies.
That is the lint I am making.
Thank you – I get that.