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Tuesday, 1 February 2011

To Whom Does the British Government Owe All this Debt ?

To Whom Does the Government Owe All this Money?

Much is made of the ‘government debt’ which is the prime cause of the budget cuts currently ripping their way through Britain’s infrastructure, but to who exactly is all this money owed? The British National Party’s Andrew Moffat supplies the answer.
Economics – The Dismal Science
By Andrew Moffat—An earlier article on the site referred to the ‘mysterious and unnamed’ borrowers who finance the UK’s debt. In November, the article continued, the UK’s borrowing requirement was put at £23.3 billion.
The position, in fact, is not quite so mysterious. The government, via the relevant debt management office, simply issues a range of gilt-edged securities, i.e. bonds, bearing a redemption date and a coupon.
Often, new bonds are issued merely to cover the redemption of bonds issued in earlier years, often under previous administrations.
The proceeds from the sale of these bonds finance the government’s liabilities.
The British government has never reneged on its debts or the coupons (interest) attached thereto. For this reason, UK government debt is referred to as ‘gilt-edged’.
Given its record, the government borrows at favourable rates. At the opposite end of the spectrum, by contrast, the Greek government borrows at far higher rates; its financial record is poor.
The buyers (on the international money markets) usually comprise a range of institutions,
largely domestic but also foreign. 
Many are pension companies, and government bonds are favoured by them as secure investments to safeguard the contributions of ordinary men and women, who usually save through a collective scheme, via one of the many large pension companies, such as Aviva or Prudential.
Other investors will include, for example, unit trusts and life insurance companies, on behalf of their retail clients.
A portion of government debt, sold at the regular auctions, will also find its way into the banking sector, where it will form part of the banks’ capital ratio requirements.
Because of the foregoing, it is not possible to name all the buyers as they would stretch to an enormous list of many hundreds each time, often buying in small lots of millions, depending upon the terms of the auction concerned.
Ordinary people may buy gilts, too, and many do so. Gilts are listed and priced on the London Stock Exchange. On Monday, for example, I might purchase, via my broker, Treasury Stock 4.75 percent 2020 at approximately 108.4p, the approximate price at last Friday’s close.  Here, the coupon (interest) is 4.75 percent per £1.00 nominal or 4.75p/year.
As a percentage, however, the yield is 4.38 percent, given the market price is £1.084.  The coupon rate from month to month and year to year usually reflects the market interest rate at the time — interest rates fluctuate.
Currently, with interest rates as 0.5 percent, the above return of 4.38 percent may seem attractive. Were interest rates to rise more than the markets expect, then the market price of these instruments would fall.
Bear in mind, also, that the gilt will be redeemed at £1.00 in 2020, or some eight pence beneath its current market price.
If we descend into 1930s deflation, then bonds will rise in price as the income stream from them becomes more valuable.
This is what has occurred in Japan over the past 20 years and it was a notable feature in the ‘30s in the UK and the USA, in a time of deflation — i.e. falling prices.
Where do we go from here and will bond prices rise or fall? No one knows for certain but conflicting views and opinions instruct market prices.
In the UK inflation is presently high at between 4 and 5 percent, depending upon the measure employed. Because wage rises are well below this (excepting for senior bankers, who are hoarding money), then it follows that there has been a fall in real terms of take-home pay.
Inflation is high for a variety of reasons, not least the fall in the value of Sterling.
This translates into higher energy costs and imports. Poor crop yields and additional factors, including the fall in Sterling, has caused a rise in food prices. VAT rises have also contributed to inflation.
These are considered by some to be ‘one-off’ factors and they believe inflation will fall considerably in a year or two.
Given the spending cuts to come, still to have an effect on the economy, there are considered to be disinflationary prospects over the next year or two.
There are many unknown economic factors, including the level of Sterling and the ongoing impact of Quantitative Easing (QE), the process of creating money to offset the deleveraging that has occurred since the financial crisis.
No one has yet answered the question of why it is that QE can be employed in a recession but not during a period of normalised growth.
QE is, in effect, nationalist economics and it is an economic lever nationalists have long advocated. It has taken a financial collapse to achieve it.
One final point: at a time of unprecedented spending cuts, no one will have failed to notice that the areas not being cut are those politically-correct projects whose end ambition assists the extirpation of the nation state: the EU, Overseas ‘Aid’, Climate Change levies and multiculturalism. In aggregate, these annual costs amount to some £60 billion per annum.
The British National Party would cut, absolutely, every one of these costs and place the money back into the pockets of those who earn it and into a programme of massive national rejuvenation