Many commentators - from Robert Peston onwards - are obsessing that if interest rates rise then the government will be overwhelmed with debt servicing costs. In this video I explain why given the long age of our debt and the improbability of official interest rates getting anywhere near 1% in the next few years this is a complete non-issue.
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Absolutely right that it is a non issue.
The assumption of many is that near zero interest rates is a natural phenomenon. Like a sunny couple of weeks in summer to be enjoyed before the autumn rains set in. The reality is that interest rates are this low because Govt wants them this low. If Govt want 1%, 2% or 10% then that’s what they can have too.
It’s always been like this. They could have been this low since the pound stopped floating in the 70s if the Govt had wanted them this low. But they didn’t and that’s why they were much higher.
I have no idea how interest rates affect the situation when the money in question has been created and not borrowed – as is the case here is it not?
The BoE is nationalised and effectively owned by the Government who has issued money to itself – why would you worry about interest rates as if you had no control over them which is not the case (which seems to be the basis of pesky Peston’s thinking).
OTOH – if this ‘created money’ has been turned into gilts of bonds (has any of it yet?), then the interest rate offered and the lock-in term (14 years is it?) is at Treasury discretion and the buyer either agrees to this or doesn’t buy?
What’s the problem Bob? It all goes back to who created the money – and this is real money – not credit – and nor is it from God.
As you often say, one party’s debt is another party’s credit/profit. So isn’t it the case that, even if interest rates do go up significantly, Banks, Insurers, pension funds etc. who hold Treasury Bonds, would increase income which will enable o more lending to Joe Public, some of which ultimately feeds back to the treasury in taxes?
I found this excellent; but the numbers were hard to keep up with.
How about a one page sheet giving: What is; source; and value. It should be downloadable as a PDF.
Makes your words easier to follow, and provides us with ammunition to argue the case.
If I get time….yes
And the BoE can write off the debt that it holds at any time it wants to. I think the NHS had £12 Bn of its debt written off in Mar 20 at the start of the pandemic. The game of confusing household type debt with sovereign debt was up in 2008. The banks themselves can create debt on their ledgers and magic it about when mortgage loans and deposits get worked through the clearance system.
I think their have only been a few cases recently where UK debt auctions have not been fully bought requiring the BoE to step in and purchase remaining debt. In standard MMT theories the only reason why the central banks issue debt is to control the overnight clearing rate so that the banking system does clear. If interest rates do climb for external reasons high interest rates means the bond prices collapse which also means that the bonds are far cheaper to repurchase.
There is still no real free lunch the limits of the economy remain the inflation boundary. In my opinion high interest rates are a proxy for inflation nodes and other policy instruments can be used. So Preston’s point is misleading and unhelpful. Better regulation of banks and mortgages would have contained house price inflation. Modest temporary
VAT rises on holidays, alcohol, new cars, cinemas, meals out might go some way to contain inflation bursts next year. Bizarrely rationing might be a better policy instrument to keep interest rates low rather BoE operations.