Bond markets are reported to be twitchy this morning. Gilt rates are rising. The City of London is muttering about “fiscal credibility”. And the reason is not hard to find. There is growing uncertainty about the future of the Labour government and, in particular, whether a successor to Keir Starmer might eventually emerge who could shift policy, even modestly, to the left.
The mere possibility that a future government might choose to improve public services, reduce poverty, invest in housing, or restore social security is enough to unsettle financial markets. The threat, from their perspective, is that the government might begin to work for ordinary people instead of primarily serving wealth.
And so the pressure begins. Gilt yields rise. Commentators warn of “market confidence”. Politicians are told there is “no money left”. The same script is rolled out yet again.
But we need to be clear about what is really going on. The fact is that the benefit of the interest paid on gilts in the UK goes, almost entirely, to the wealthiest people in the UK. The top 10% of wealth owners, who broadly coincide with the top 10% of income earners, capture around two-thirds of the benefit. That is worth about £55 billion a year, a sum only just a little less than the annual defence budget and bigger then the entire Westminster sourced budget for Scotland.
In other words, government debt interest is now one of the largest upward redistribution mechanisms in the UK economy.
What is more, every time a government even hints at doing something for the benefit of ordinary people, meaning the 90% outside the wealthiest elite, the financial markets respond by demanding higher returns from government borrowing. The result is perverse. Any threat to improve the lives of more than 14 million people living in poverty in the UK, including more than 4 million children, is used as the excuse for transferring even more money to those who are already wealthy.
This is not an economic necessity. It is political power exercised through financial markets. So, what can be done?
First, the government needs to take back control of interest-rate policy from the Bank of England. The Bank currently operates a system that overwhelmingly benefits wealth holders. UK interest rates are too high, not because inflation requires them to be so, but because the City wishes to attract foreign money into London's financial markets so that financial institutions can profit from managing it. The rest of society pays the price. That has to end.
Second, the base rate should be cut. UK rates should be much closer to those in the eurozone. A cut of at least one percentage point is justified by current economic conditions. At a time of stagnation and insecurity, maintaining excessively high interest rates is economically damaging and socially destructive.
Third, the government should reduce the interest currently paid on reserve balances held by commercial banks at the Bank of England. These payments now cost at least £20 billion a year. With relatively straightforward restructuring, that bill could very likely be cut dramatically. Once again, this is money currently flowing overwhelmingly to the financial sector and wealthy asset holders.
Fourth, the government could refuse to issue new gilts at elevated rates if markets seek to impose punitive terms. Instead, it could borrow directly from the Bank of England if necessary. That would make an essential point. The government is not dependent on financial markets for money. The markets are dependent on the government for the supply of safe assets like gilts.
Right now, we are being told that the UK government, and the Labour Party in particular, must obey the dictates of the City of London or face financial punishment. The correct response in its politest form is simple and is “get stuffed.”
A government that properly understood the nature of its own finances would not tolerate this situation. It would prioritise the well-being of people before the interests of wealth, and it would act accordingly. But, we are not possessed of a government that properly understood the nature of its own finances, and for reason of that failure millions are suffering.
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Given that Financial Institutions are dependant on Gilts I would imagine that turning off the supply would not only call the ‘Bond Vigilantes’ bluff but possibly bring down the wrath of the city upon them.
Financial institutions are very much NOT dependent on gilts – this is a lie.
they will happily buy gilts when the yield justifies the risk, but there are plenty of other asset classes than can provide the security and liquidity that investors are looking for.
That’s why credible fiscal management is critical and a ‘threat’ to just print money, as some on the left propose’ is not a credible or sensible strategy.
It won’t stop some poorly informed commentators suggesting otherwise though.
Thank you.
Is that what Lisa told you?
30 year City veteran here. Politely, you don’t know what you’re talking about.
Investing in the Premier League doesn’t look too healthy currently.
No one “on the left” is “threatening”, or even suggesting, to “just print money”. That is a straw man suggested by supporters of the current system which is then derided for the nonsense it is.
No one is suggesting “just print money”.
Jason, as we say in the east of Scotland “yer doon the cundy”
Could it be that the talk of “threats” is just psychological projection on your own part?
“bond markets” like “debt” are terms lazily left unqualified as primary or secondary for the former and public or private for the latter. Those of us who well know the workings of fiat monetary operations understand from the context what is meant whereas laypersons (and neoclassical economists, of course) will reasonably assume there to be no difference where unqualified.
Let’s not leave it to Lewis Carrol’s Humpty Dumpty when referencing either of those terms.
Agree with most of that. Last evening on R4, Jim O’Neil who calls himself ‘Lord O’Neil of Gatley’, was wittering on about how the govt need to get a grip on public finances. He seemed to think the triple lock was the biggest threat to the countries finances. He is one of those who is economically illiterate and rather well off so I guess if the state pension was limited or abolished he would not notice! There are too many like him – David Willets, Michael Gove – very affluent who get too much media coverage. [Another reason to remove ‘Lords’ from Parliament and the other bodies they inhabit].
Agreed
Thank you, both.
Jim O’Neill coined the term BRICS and, later, MINT (Mexico, Indonesia, Nigeria and Turkiye) in his newsletter to clients of Goldman Sachs and has traded on that ever since. In the land of the blind, Cameron in this case, he was king.
I just wish you could get on the media especially on BBC. Which other economic commentator is saying this?<p>
The ‘bond markets’ have now become the ‘almighty god’ looming over any political /economic discussion. It is now omerta on questioning whether bond markets do or should impose constraints on what we can do to improve people’s lives.<p>
Margaret Hodge on R4 Today programme could say the Greens are antisemitic, but no one is allowed to question the power of the bond markets. <p>
Nineteen Eighty Four.
A good reminder of the things I have learned from you on this topic, handy for the next letter… thank you. SO frustrating that politicians appear to be blind to this information.
Somehow we need to get the correct message as you outline above, into the MSM. I listened to Wake Up To Money (BBC Radio 5) this morning and the host had a bond market guy on to wax lyrical about how 10yr Gilts were now up at over 5%. I sent an email to them pointing out that they are pushing disinformation on what this really means.
So what if a new 10yr Gilt pays over 5% interest. This has zero impact on all existing Gilts, and only a marginal difference in the total monthly Gilt interest bill the Government pays. The BBC and other reporters talking about Gilts all make it sound like suddenly the Government is paying interest over 5% on everything forever, then extrapolate to an absurd future.
It is also not clear whether the person means on the secondary bond market, that an existing 10yr Gilt is now trading at an effective interest rate of over 5%, which is also of zero impact to what the Government pays out for that Gilt.
Until we can get the financial reporters on the BBC and other MSM to fully understand what they are talking about, we will be left with this bogus and destructive narrative.
Exasperated!
Exasperated, and rightly so.
Current market prices are relevant under the current full funding rule (I’m not defending this but it is the rule by which the government does its sums) though as there are circa £250b- £300b of gilts issued each year. This is a mixture of funding the annual deficit and to raise £££ to repay maturing prior issues.
The impact will be quite marked on QE era gilts. They will have had coupons of circa 2%-3% (and often lower) but will be refinanced via issues of gilts with circa 5% coupon.
You are aware of average gilt age aren’t you?
Re Richard’s question about the average age of gilts, per the Debt Management Office website, the average issue date of conventional gilts due to mature by the end of 2027 is mid-2017, so average age at maturity of circa 10 years, with an average coupon of circa 2.50%.
There’s £223b of such maturities, which will be refinanced via gilts with a coupon of circa 5% unless something dramatic happens in either direction. (Entirely possible.) So the debt interest bill will go up by circa £6b pa as a result of maturities by the end of 2027.
As an example from prior years, there were £107b of maturities in 2024. The average coupon on the maturing gilts was 1.29% and the average coupon on the gilts issued that year (new issues plus refinancing of maturities) was 4.18%. So the debt interest bill went up by circa £3b as a result of 2024 maturities.
I assume 2022, 2023 and 2025 maturities tell a similar story though I’ve not done the analysis.
So prevailing market rates are highly relevant to the cost of financing the existing debt pile.
You do realise how insignificant £6bn is and I have shown how to save much more this morning?
You have not onky not done the data, you have not done the thinking.
One of the great political myths of the last forty years is that governments must borrow their own currency from financial markets before they can spend it.
In reality, states like the UK, with sovereign currencies and central banks, operate very differently from households. Markets do not create pounds. The state does.
Gilts and bonds largely function as safe assets for wealth holders and institutions, as well as tools for interest-rate management. They are not evidence that the government has “run out of money” or must go cap in hand to the City of London before it can build houses, fund healthcare, or reduce poverty.
The irony is that the same neoliberal system that lectures the public endlessly about “living within our means” has repeatedly created vast quantities of money whenever banks and financial markets faced collapse. We saw it after 2008, during quantitative easing, and again during Covid.
Apparently there is always money available to rescue asset prices and financial institutions. The objections only become absolute when the discussion turns to ordinary people, public services, wages, pensions, or social security.
At some point we need to stop pretending this is purely economics. It is also about power, priorities, and who the economy is ultimately designed to serve.
Agreed
“One of the great political myths of the last forty years is that governments must borrow their own currency from financial markets before they can spend it.
In reality, states like the UK, with sovereign currencies and central banks, operate very differently from households. Markets do not create pounds. The state does.”
A cogent explanation of the absurd that clearly sounds absurd. May I use that in my attempt to dismantle the miasma of disinformation?
I fully endorse this post.
Surely though, if the markets wanted higher interests rates then could the government increase and levy taxes on those profits and transactions? This is what seems to be missing to me. If The City believes that they and the tax payers give the government its sending power, well, tax away I say. I certainly think that financial activity that turns in a profit is severely undertaxed – not because of any atavistic feelings about finance in general, but the implication of taxation at a sufficient levels would curb the ‘animal spirits’ of the bond vigilantes in the first place.
And to be clear are we talking about the original agreed returns in black and white on the bonds or is this second hand market talking up their pretend power again?
Taxes can be hard to target
Maybe we do not need too much targeting though
And yes it is the seond hand amrket that is increasing the price
What do you think will happen to inflation if the government just starts printing money as you propose?
Can you point to examples in history where money printing has been a successful solution to a problem?
I do not propose “the government just print money”
I never have and I never will
Now tell me something, which is what would happen if you tried engaging your brain before you wrote drivel here?
@Linda Mayers
The government doesn’t “just print money”, nor does anyone advocate that it should do so (see my earlier comment). However, sometimes it is both necessary and beneficial to “print” some money. What actually happens is that the government borrows from it’s own bank, the Bank of England and some people equate that with “printing money”. Alternatively government can also “print” money if the Bank of England buys government debt.
Assuming that you don’t understand, and that you are asking a genuine question let me answer your question directly.
“Can you point to examples in history where money printing has been a successful solution to a problem?”
The last time the UK government “printed” significant amounts of money (in excess of tax and savings deposits from gilt sales) was during the pandemic. It printed about £400 billion. It did so to prevent the economy collapsing. This was successful. It was highly beneficial. There are other examples but this is a significant recent example that, I hope, answers your question.
The sad reality is that as far as most of the general public they will either just accept the news verbatim with little thought or many who believe the current government are economically incompetent (not to say they are not) will just agree with it from a position of cognitive bias.
The average persons understanding of the economy (and I considered myself in this group until a few years ago before discovering your work among others) is really poor and our politicians aren’t much better. The only prominent politician I remember even challenging this system in recent times was Andy Burnham saying we should not be in hock to the bond markets but he didn’t really cover or outline why or how we should deal with them.
My only hope was that Zack Polanski started talking about Modern Monetary Theory shortly after you appeared on his podcast but he doesn’t seem to be mentioning it these days which is unfortunate. Maybe it thought it was too hard a sell to his potential voting base?
We can live in hope
I suspect that Polanski is being dis-informed by the Green think tank Verdant, and one of its self-appointed denizens, ‘Dr’ James Meadway. He thinks RM has no economic qualifications, Steve Keen is totally wrong and MMT is ‘toxic nonsense’.
Agreed, I wish Zach would spend more time learning the detail of MMT and non-orthodox post-Keynesian economics so that he could become more confident. A two week course with you Richard and Steve Keen would empower him greatly!
Thank you, Richard.
Could you, please, tweet BBC Breakfast as, this morning, the youngster who reports on a range of issues, said the cost at which banks lent the government money was rising. There I was, a bankster for thirty years, thinking it was the banks saving with the government. Thank you.
🙂
For someone with a claimed 30 year experience in the City (I’m now at 32 years), you seem to be unable to understand both sides of the arrangement.
If the government is not to print money, then it needs to borrow from the markets – in order to do the latter, it needs to offer an appropriate return to investors to justify the risks they are taking on. For nominal gilts, the biggest risk is inflation, which is why when the market doesn’t trust the government to manage the economy appropriately, the rate demanded increases.
In contrast, key investors such as pension funds and insurers do not need to buy gilts – they are significant holders in these assets and there are regulatory benefits for them to do so, but they are not forced to buy new gilts (or reinvest maturity proceeds) if the yields are not attractive. There are plenty of other assets (that are also capital efficient) that they could use instead.
Having started in the City in 1985 I claim 40 years experience…. and the Colonel is right.
Bit late to this thread (sailing from Ireland to France with brief connectivity in the Scilly Isles) but Richard, the thrust of your argument is correct. All I would say is that the it is the unwillingness to tax that is a problem. We need honesty from this government on this issue.
Thanks Clive.
Go well, literally
Wish you would send this post to Paul Johnson on twitter – he says ‘all that’s being achieved at the moment is higher borrowing costs'<p>
https://x.com/PJTheEconomist/status/2054107867779563953
Alas! We have Paul Johnson coming to Keele World Affairs next season!!
I can fire Qs at him but his right to reply will be longer and genially corrosive to any Q I pose(:::
Good luck
The same “failed” script? Is not a definition of insanity is repeating constantly the same approach in the hope (irrational) that the outcome this time will be different? We have had nearly fifty years of: cut taxes for the rich, trickle down will follow, deregulate and growth will result. But “growth” never happens yet the politicos just keep on repeating the old arguments and policies. Will they ever learn? I am switching off the news today because it is all about government borrowing costs even though none of the journalists and presenters appear to have a clue about the subject. It reminds me of the comment attributed to the late Queen when visiting a City institution just after the 2008 financial crash: if you have all of these economic experts how come no one saw it coming?
Active Quantitative Tightening should presumably also be stopped – creating a loss that need not be incurred while also competing with more bond issues to push rates higher. The Treasury underwrites that 100% of that loss, so it’s ultimately us that pay.
With a 1% drop in interest rates, more people would be upset if it was highlighted how much of a difference this makes. An average mortgage is around £200k, and rents also reflect the owner’s costs and are similarly affected by interest rates. That 1% then represents around £2k higher costs each year for the average household.
The £20bn interest, if provided to households instead, would be around £700/year.
Add in the impact of Quantitative Tightening and everything else and quantify what the per-household impact looks like, and that might be a clearer message to why people should care about things that otherwise may seem relatively technical.
When I purchased my stone cottage in Ireland I checked all the banks and building sociaties for the best rate, I got % 1/2 above the bank rate. So why is the government borrowing from the market instead of the bank of England where theoretically it could at 0%.
By the way the government is still printing bank notes.
“No one is suggesting “just print money”.
Really? So if your proposal is to market gilts at a yield that is below the required yield demanded by investors to compensate for the risks they are facing, where is the money going to come from?
Just go and read the MMT Sourec Book https://www.taxresearch.org.uk/Blog/downloads/
Then when you have a sensible question come back
If you can’t grow, can’t increase tax and can’t borrow you have to reduce public expenditure: and if you want to increase defence (war) spending to such an extent that you want to be in a position to defeat China or Russia you have to reduce public expenditure again and again and again. This is the logic that we are presented with by the political / media establishment.
Meanwhile Hedge Funds can borrow the money that we licence banks to create so that they can invest in crypto related ventures. And the Leader of the Reform Party thinks that this is a good thing.
Meanwhile the share of national income going to capital is increasing whilst the share going to labour is decreasing. AI and Crypto will accelerate this inequity. And Starmer talks his father being a toolmaker.
I am confused by the statement:
“Fourth, the government could refuse to issue new gilts at elevated rates if markets seek to impose punitive terms. Instead, it could borrow directly from the Bank of England if necessary. That would make an essential point. The government is not dependent on financial markets for money. The markets are dependent on the government for the supply of safe assets like gilts.”
If I understand it the supposed purposes of issuing gilts are to provide a safe savings instrument and maybe to control inflation due to excessive currency availability to the private sector. If there are no buyers for newly issued gilts then savers will have to put their money elsewhere, and a different mechanism would potentially be needed to control inflation. Why would the government need to borrow money from the Bank of England when it creates it through spending? Or have I completely misunderstood?
@JohnR
You ask an interesting question, “why would the government need to borrow money from the Bank of England when it creates it through spending”.
I think the answer is, custom and practice. The Bank, the Treasury, politicians, and many economists, not to mention most journalists, find it very difficult to accept the truth that the government can simply create money. They want to think of the government’s account with the BoE as if it were a domestic or household account (spoiler: it’s not). This is another aspect of the household analogy.
When a person spends from their bank account, when they don’t have funds, they create an overdraft. So that’s what the Bank, politicians, et al expect when the government spends without having a covering balance. The difference with the government is, first that it has an unlimited overdraft, and second that it pays no interest on its overdraft (I should be so lucky). This means that the government can, in principle, spend without limit (there would be bad consequences if it spent toooo much).
But really this is just the bank and the treasury tying themselves in semantic knots, trying to make the government account seem like a domestic account (when it’s not). The government could run up a large overdraft. But this would only be the government owing itself that money. That’s a very strange sort of debt – not really a debt at all. The Bank could write off that overdraft at any time and it would have no substantive effect.
Really, the government “borrowing” money from the BoE is actually creating new money. But those involved don’t want to admit it so they disguise it by calling it “borrowing”.
Basically agreed
Robert Reich on a similar theme
https://robertreich.substack.com/p/what-no-one-will-tell-you-about-the
Somebody in another forum has suggested that it would help if the UK issued Eurobonds.
I don’t see why it would. Is there any merit in the idea?
It would be totality disastrous.
I write about this a couple of days ago.
Bill Mitchell is very fond of using Japan as the example of how to raise a finger to the money markets and not have the sky fall in. One of their tactics has been for the Bank of Japan to buy virtually all the government issued bonds issued over the last 15 years plus a large proportion of those previously issued.
My expertise on economics is limited but is this not equivalent to simply borrowing from the central bank with no expectation of every paying it back? The government pays itself the interest and for all practical purposes is simply printing new money as required. The road to Hell if most ‘experts’ are to be believed.
Some pundits have been predicting the collapse of the Japanese economy for over 30 years now but are continuing to be proved wrong.
One of Bill’s posts from 2022:
https://billmitchell.org/blog/?p=50560
Is there any need or justification to pay interest on reserve balances at all?
Reading the contributions here, and then turning to yesterday’s statements from Labour List (Streeting) and Tribune, full of “fiscal responsibility” and both pretending that government (the issuer of our fiat currency, the source of gilts, the ultimate controller of the base rate) has to kowtow to the bond “markets” – makes me realise how steep the road is. Just the politicians, the pundits, the press, the broadcasters left to convert!
But, to encourage, I think, perversely, that despite that, the public may be “getting” it before the establishment.
For example, above, someone asked the equivalent of, “what did government spending ever do for us?” and was given the obvious answer answer, “got us through the pandemic”.
Homo-omnibus gets that, even if they struggle with the niceties of “classical endogenous growth theory”.
Homo-omnibus may not understand much economics but they are getting very very tired of “we can’t afford it” as an excuse for not responding to real life-threatening (for them) emergencies.
🙂
Gordon Brown’s recent visit to Number 10 doesn’t yet seem to have had any impact on the bankers’ rich rewards from interest on reserves. The best distraction from toxic leadership debate is to actually do something substantive in economic policy. https://www.itv.com/news/2024-03-27/gordon-brown-says-the-government-can-raise-billions-of-pounds-from-banks
Isn’t it time to dust off the Richard Murphy alternative plan for Keir Starmer.
Starmer could survive if he sacked Reeves , the head of BoE and directly funded an investment drive.
Maybe
Clearly the secondary gilt market is an area that needs to be addressed to enable serious economic reform. You mention in point four above that the government could refuse to issue new gilts at elevated rates if markets seek to impose punitive terms and could borrow directly from the bank of England. This sounds like a perfect step forward. If you haven’t done so previously, I’d love to see an expansion of this idea. (Perhaps from a political perspective it shouldn’t be framed as punishing the markets for the way they behave )
See the MMT Source Book https://www.taxresearch.org.uk/Blog/downloads/
I just found the recent BoE paper by Matthew Keep on the BoE’s opposition to paying interest on (tiered) reserves:
“Central bank reserves and government’s debt interest”
https://researchbriefings.files.parliament.uk/documents/CBP-10455/CBP-10455.pdf
Andrew Bailey rasies the bogeyman of impairing the BoE’s ability to intervene and ensure financial stability in a crisis. The paper also points out that tiering could amount to a “tax on banks” – Shock Horror!
However, in a longer list of concerns sent to Meg Hillier at Public Accounts Committee:
https://www.bankofengland.co.uk/-/media/boe/files/letter/2025/letter-to-dame-meg-hillier-apr-2025.pdf
he maintains that UK banks behave differently and don’t deserve the criticism levelled by Paul de Grauwe, for example https://cepr.org/voxeu/columns/extraordinary-generosity-central-banks-towards-banks-some-reflexions-its-origin
In my opinion, Bailey’s response has more to do with inertia and self preservation than it has to do with stability, given that the scale of the next crisis will likely be beyond intervention anyway.
Thank you