From MoneyWeek (who ought to know better):
Let's use King, Smith, Williams and Van Boening's 1993 definition: a bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values".
At present the US government can borrow money over ten years and pay under 2% a year. Germany need only pay 1.8%. The UK can borrow at 2.3% – considerably lower than inflation, which sits between 4% and 5%, depending on what measure you use. (And bear in mind that real inflation as suffered by the man who wants to eat, drink, travel and keep warm is considerably higher.)
If somebody approached you and said: "Psst. Have I got an investment opportunity for you! Lend me money and I'll guarantee you'll lose 2% to 3%, year in, year out." Unless that somebody was extremely charming – or armed – it's unlikely you'd see this as an 'opportunity'.
Yet, as Allister Heath writes in The Spectator this week, "UK and American governments can be loaned money – and, in effect, be paid for the privilege. This is crazy. It shows that the bond markets are well and truly in major bubble territory, their valuations as absurd as the rocketing subprime properties of yore."
*sigh*
The basic rule for banks is "loans create deposits" and for governments, the rule is "spending in excess of tax revenues creates debts/borrowings". It's not the case that the government borrows the money first and then spends it, the simple act of spending creates the borrowings. It's basic Modern Monetary Theory.
For example: you're a quangocrat or a corporatist and your chums in the government ask you to do some Very Important Consultancy Work for £400 million, you'd be daft not to accept the offer. They tell you that they can't pay you in cash, but would £400 million in gilts, redeemable in ten years' time be OK?
You say yes, of course, but maybe you bump up the price to £496 million to cover your inflation loss. You then appoint your chum in government as a director of your company, bung him £100,000 "emoluments", maybe make a £1 million donation to his Party and everybody's happy.
*/sigh*
About That Closet
5 hours ago
5 comments:
co-orporations buy things with there own bonds ,which then circulate as money, and If you were to issue a transferable iou to your neighbour it might be accepted as currency with your other neighbours. Some of my friends as broke teenagers, used to do that, it seemed odd to me at the time.
typo -corporation-
De, yes, that's the same sort of thing.
Problem is, corps pay off bonds with profits(their money) and govts pay off bonds with taxes(my money) or by borrowing more money.
The govt borrowed money will ALWAYS be paid off by,sooner or later,taxes(our money).
Gary K.
At the present (depending on who you listen to) levels of debt, USA - $15 trillion, UK - £3 trillion and add the forecasted borrowing $3 trillion for the USA and £1 trillion for the UK it won't ever get paid off, but, seeing as it's only electronic transfers why worry, press the wrong button and presto debt cleared.
Post a Comment