In principle a government with its own central bank does not need to issue gilts to cover its deficit: it can simply run an overdraft instead, and pay no interest. In practice there are good reasons why debt is issued.
First, people need safe places to save.
Second, those with pensions need locked in and guaranteed income streams.
Third, the banking sector has, post 2008, needed government bonds as a mechanism to secure overnight deposits.
For these reasons I am not opposed to bond issues at low or effectively no net interest cost. And that is possible right now.
As the FT has noted today, 10 year government bonds have not paid more than 1.5% in the last few years. And the demand for 50 year bonds is so strong that they are paying lower interest rates than 30 year gilts.
The FT's conclusion is that this indicates a capacity to issue more debt because the demand for it exists. I am entirely sure it does.
And if other debt was packaged for a domestic market - as an NHS bond, for example, in an ISA wrapper - then I suspect there would be a very strong take up. What is more the myth that the debt is so bad would be shattered: it would be seen as the simple savings system that it is.
The simple fact is that markets need and would readily buy more government debt. Gilt issues are six times over-subscribed at present. It's completely baffling that the government refuses to supply people with the savings products they want - and most especially longer term locked in ones - when there is no net cost to doing so in interest terms and the country is crying out for the benefit of the spend which it will not get if these funds are instead directed into private savings arrangements.
Is it really too much to hope that someone, somewhere, might see the sense of what even the FT thinks is the obvious thing to do, which is to issue more debt to assist provision of improved government services!
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Why would there be strong take-up amongst retail investors for debt with an interest rate of zero or close to zero?
Because people want to save securely – and billions of cash is already uselessly deposited in banks at this rate
Isn’t NS&I also government borrowing? If so, they have just reduced the maximum you can invest in guaranteed growth bonds from £1m to £10,000. They don’t want our money.
NS&I is government borrowing
And it is crazy that they are capping this.
Well, not really. Current accounts pay no interest. Deposit accounts almost always pay a rate higher than the gilt rate, at least for relatively small amounts.
Vast numbers of people do not earn 1.5% on their deposit accounts now
“Vast numbers of people do not earn 1.5% on their deposit accounts now”
But they don’t have to:
https://www.nationwide.co.uk/products/current-accounts/flexdirect/features-and-benefits (offers 5%)
https://www.tescobank.com/current-accounts/ (offers 3%)
There are others, offering monthly credits and/or rewards as well as over 1.5%
Oh come on
Read the small print
Yes, already have.
You mean that they offer introductory rates, well, after the rate expires, move to the next best at the time.
The current account market has been competitive for a while now.
First Direct have been offering switch incentives for a good few years now.
Ha ha, I’ve just posted this as a response to a toryboy’s query: “Given that you clearly think we should simply give the NHS whatever it requests, how would you fund that bottomless pit of spending?”
With over a trillion(?) pounds in savings out there (much already in the form of Gilts) at very low rates of return doesn’t it also show the much vaunted private sector in aggregate is lacking the desire, imagination or ability to invest in a productive fashion?
I know MMT says the problem ultimately falls at the door of the sovereign currency issuing government and says that the cause is a slow down in the entire economy due to the government’s refusal to create sufficient net financial assets in the private sector to meet both the private sector’s desire to net save AND deliver on the government’s democratic mandate. But if you think about it both the state and the private sector have a role to play in affecting the private sector’s desire to net save. Surely it is possible that the private sector can get into a pattern of behaviour where the aggregate desire to net save is excessive?
In our present situation I’d argue that a sclerotic private sector with whole sectors dominated by monopolists and oligipolies sees rents flow to a minority of individuals who have no use for the money beyond maneuvering to maintain their monopoly position.
In particular rents associated with oligopolies in land ownership, energy and water production/distribution, transport/communications and especially banking/finance cause vast flows of money to leak from the system into the hands of people desperate to maintain the existing land use, energy use and private consumption/debt patterns. This is, in my opinion, the root cause of our disasterous climate-change/ecological collapse situation.
So while I’d like to see the government get more idle money back into use driving productive activity via further issuance of Gilts I’d also like to see the old and stale monopolies broken up so that the private sector can actually start innovating and investing in the real economy in something more akin to a truly free market than we’re currently used to. Then both the state and private sectors could actually pull in the same direction vis a vis climate change.
I fear that without regulation to permanently disrupt monopolies the private sector (at least the sectors controlled by monopolists) will remain permanently at loggerheads with any state that tries to persue a democratic mandate to address climate change and ecological collapse (don’t even mention reducing inequality!). I fear that until the monopolies are broken up further government spending, however it is financed, risks merely further enriching and thereby strengthening existing monopolists.
Richard, it is so important not to have a bond that has the name of any public service attached to it, including the NHS.
It is vital that people understand that neither taxes nor “borrowing” pays for UK Government spending. Only then can we as a nation have proper discussions about what should and should not be funded.
An NHS bond would play into the myths, not dispel them.
I see all the logic of that
And none of the logic of that
I utterly oppose hypothecated taxes
But re saving: I see no problem. I think the government does have a role to play as a secure place for saving, and to suggest that this is the case and to show that government debt is not a negative but has a positive role to play in the economy is important, I think.
Theory and political reality have to mix here.
I worry that there is already a sense of those who are entitled to use the service and those who are supposedly not.
There is enough talk of “I’ve paid in through my taxes so I deserve to get treated” whilst wanting to deny treatment to others because they’re “lazy” or foreign.
Having a savings vehicle specifically linked to the NHS will make this problem worse.
We need people to understand that the funding comes from central government, not taxpayers or savers.
Access to the NHS must be a right, and seen as one be all.
The right to the NHS is absolute
I am not sure I am in any way challenging that
I agree, but I suggested it (as I did here yesterday) as an alternative to the mainstream narratives for which there is already precedent, that being the 1st World War bonds. They were ignored by the public and eventually purchased by money created from nowhere by the BofE, something in the public domain but not widely understood. It’s an idea which the public of today should find acceptable and I would hope it would be difficult for May et al to argue against it, frankly, so the idea can act as a spearhead to breach the absurd and restrictive mainstream narrative. This could open the door to very useful discussion. Let’s get talking about it.
I agree Bill
Playing into those myths would make the Tories more likely to adopt the idea. Once it was under at least discussion, we could then buttress it by reminding people of how Britain’s WW1 effort was paid for by bonds, and then once that was agreed upon and discussed, remind people of how those bonds were paid for by the BofE creating money as a loan, (in the public domain, this) and suggest the same idea be used now. Be difficult for them to say no, really, especially when the hundreds of billions currently created from nowhere on to the BofE’s balance sheet are themselves in the public domain too. It could consign the current limited narrative to the oblivion it deserves.
You and I are on a wavelength here Bill
You encourage people to invest in Gilts? Why when you are guaranteed to lose money in real terms. If you want to tie your money up (I.e not in a current account) then much better to invest in a term deposit with a bank as your money is Government guaranteed (up to £85k) and you will get much higher rates.
“And the demand for 50 year bonds is so strong that they are paying lower interest rates than 30 year gilts.”
That’s insane isn’t it ?
Yes….
The demand for long term gilts is so high because of the Pension Trustees having to match liability with the duration of the asset and be AAA secure. There is only such supply and that is a 30 or 50 year Govt gilt.
This demand from the Pension Fund Trustees to abide by Blairs rules is what is causing the mismatched supply and demand curve as any professional investor knows inflation compounded will erode away the capital purchasing power as governments/borrowers create more money and prices rise.
£2 trillion UK pension industry needs to match the duration to its clients. £2,000bn divided by 40 working years equals £50bn. Issuance doent match that so the rules fix has rigged the market.
And why do you think the rule exists? Because the market was rigged or would fail without it?