Here are two Guardian business blog stories from this morning:
Let's be clear that to blame this all on inflation is absurd and wrong. Some does have that cause, but then much of the current inflation (in housing, rents and regulated items) is directly down to cost inflation unambiguously caused by Bank of England interest rate rises, which means that to suggest inflation is at fault is to fail to ask the question as to why inflation is continuing. It also fails to ask the question about whether that inflation rate - and so this cost (including the also absurd cost of paying interest on central bank reserve account balances) could be controlled by government action.
The answer to that is, of course, that this inflation rate could be reduced now by cutting interest rates, and quickly, which the Bank of England says it will not do. But as the second story notes, markets do not believe them:
Markets are expecting interest rates of 4% or less in a year's time.
My suggestion is that the Bank of England deliver on that expectation now because interest rates are already strongly positive within the economy now and are creating a real drag on it. There is a need for a rate cut of at least 2 per cent to be put in place immediately. More should then follow.
That way, we might avoid recession.
And the cost of government borrowing, and all the excuses for austerity that flow from it, would disappear.
Some economic problems are easy to solve. This one really is.
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Also, to quote the ONS methodology statement “we record the uplift in the gilt’s principal as an interest cost each month. While the cash measure only records this cost at the point of maturity, the accruals method records this cost at the point the change in liability occurs.”
So the amount of “interest payable” is not the amount actually paid. The interest that is actually paid is accrued over the previous six months, not recognised in one lump, and I would suggest the accruals basis would require that the uplift in redemption cost is spread over the remaining term of the debt, not recognised in one lump. Or perhaps you could recognise the discounted net present value.
So the “record” £7.7 billion is an accrual for a liability not an amount actually paid, a large chunk is not due for many years, and it overstates the amount.
The ONS say they are accruing this but the ONS does not use double entry accounting – being about 600 years behind the curve in this regard – and so they do not produce a balance sheet to go with national debt figures, meaning that for them to claim they are using the accruals method is deeply misleading as that requires that double entry be in use.
Richard, have you challenged the ONS on their use of the term “accruals”?
The ONS consolidated balance sheet! That is something I would actually pay an entry fee to see.
Here is an idea. Has anyone challenged the NAO to investigate the ONS accounting methodology?
That is a report I would pay good money to read.
I am working on all this
A first draft of an academic paper on the subject should be out in Januaryu – but it will be very first draft
My work with the ONS two or three years ago needs revisiting now
Ah! Single entry bookkeeping: beloved by fraudsters and the UK Gov (is there a distinction?). Simple and easy to use – nothing needs to balance – just insert numbers that “prove” your predetermined outcome. Hence its deployment in (inter alia) the annual GERS report on the Scottish economy and the Scottish Gov’s supposed management of that economy. Ideal for smoke-and-mirror tactics, deceiving gullible readers, producing alarming headlines and for the ease by which Scotland and its government can be undermined.
Your cynicism is wholly justified Ken.
Recording the uplift in capital value of I/L gilts as “interest” is nonsense.
It defies common sense; interest is the regular (semi-annual) outgoing paid as coupon. Simple.
Of course, we need to record the fact that the principal owing (at some point in the future) has gone up – and this IS done; we measure the size of the debt outstanding using the uplifted capital amounts.
The obvious questions that anyone asks about debt are…
Q: What interest have I paid last period? A: Coupon
Q: What interest will I pay next period? A: Coupon – on the uplifted amount
Q: How much do I owe today?
A1 The uplifted face amount
A2 (which I prefer) The market value of all gilts in issue. (This is the equivalent answer that all debtors want to know “how much will it cost to clear my debts?”.
All other questions about the further future cannot be answered in “money terms”. We do not know future inflation rates, we do not know refinancing rates etc.. To pretend otherwise is foolish.
Agreed
And – this is really bizarre – the ONS accrues the supposed cost of the uplift but then refuses to consider the discounted current cost of actually repruchasing the debt now is the only actual figure that they need to take into account when estimating current national debt liabilities (if there is such a thing – about which I am not convinced, as I think this is national capital).
When I see the phrase ‘central government debt’ I am prompted (by you, I think) to ask ‘who lent it this money?’ I bought some 3-year Green Savings Bonds a few months ago at 5.7% interest. Does this mean that the government is now counting the interest it will pay me at the end of the 3 years in the figure they quoted? If so, it may appear to be bad news for the government but it is good news for that part of the country made up of people like me.
What is also bad news for the government is, as you also say, the cost of paying interest on central bank reserve account balances, which seems to be purely voluntary on its part. So ‘the cost of servicing government debt’ which some commentators compare to the cost of the NHS (as if it was a zero-sum game) is a misleading calculation from at least two perspectives.
Have I got this right?
You have it absolutely right
Whilst a 2% cut may seen massive it is the wrong way to look at things.
Imagine, you arrived from another planet and had no idea what rates were. You then, given the data and forecasts currently available, had to “pick a number” for Base Rate. Frankly, you would be hard pressed to come up with anything higher than 3%.
Calling for a 2% cut only looks extreme because the BoE have been extreme getting us to 5.25%.
The failure to understand the time lags of monetary policy along with the “backward-looking” nature of YoY inflation data along with a bizarre expectation that interest rates can control inflation (from wherever that inflation is derived) has led to very poor policy making.
Well put
Thanks
“Some economic problems are easy to solve. This one really is.”
Which begs the question – what do the govenors of the BoE discuss when they meet? The weather? what they ate last night?
It would be amusing & informative if such a meeting were televised and you were there to put the points you just made.
I wonder how they would react? Probably very badly and incoherently.
If nothing else the blog on a regular basis highlights the massive void in what passes for UK “democracy” – where there is no political control over money/finance.
The Bank of England monetary committee has made it clear. They know that growth is negative and at best stagnant. They are following their remit of a medium term 2% inflation target.
Data from this month shows that their expectations made in their November policy report are completely wrong. And that November report explained that their August expectations of the required interest rates were wrong. They were expecting a required interest rate of 6% and increases were needed to continue into 2024.
At least they are not doing that. I expect more U-turns in 2024.
We need it seems to me a 2% cut in the members of MPC – and I know where I’d start – right at the very top.
🙂