Quotulatiousness

September 20, 2017

Intro to the Bond Market

Filed under: Economics — Tags: , , — Nicholas @ 02:00

Published on 12 Jul 2016

Most borrowers borrow through banks. But established and reputable institutions can also borrow from a different intermediary: the bond market. That’s the topic of this video. We’ll discuss what a bond is, what it does, how it’s rated, and what those ratings ultimately mean.

First, though: what’s a bond? It’s essentially an IOU. A bond details who owes what, and when debt repayment will be made. Unlike stocks, bond ownership doesn’t mean owning part of a firm. It simply means being owed a specific sum, which will be paid back at a promised time. Some bonds also entitle holders to “coupon payments,” which are regular installments paid out on a schedule.

Now — what does a bond do? Like stocks, bonds help raise money. Companies and governments issue bonds to finance new ventures. The ROI from these ventures, can then be used to repay bond holders. Speaking of repayments, borrowing through the bond market may mean better terms than borrowing from banks. This is especially the case for highly-rated bonds.

But what determines a bond’s rating?

Bond ratings are issued by agencies like Standard and Poor’s. A rating reflects the default risk of the institution issuing a bond. “Default risk” is the risk that a bond issuer may be unable to make payments when they come due. The higher the issuer’s default risk, the lower the rating of a bond. A lower rating means lenders will demand higher interest before providing money. For lenders, higher ratings mean a safer investment. And for borrowers (the bond issuers), a higher rating means paying a lower interest on debt.

That said, there are other nuances to the bond market—things like the “crowding out” effect, as well as the effect of collateral on a bond’s interest rate. These are things we’ll leave you to discover in the video. Happy learning!

September 13, 2017

Our Amazing Debt (Cosmos Parody)

Filed under: Economics, Government, Humour, USA — Tags: , — Nicholas @ 06:00

Published on 12 Sep 2017

The math behind the National Debt is so complex that Reason TV decided to lean on “Cosmos” to explain it.
—-
We are about to begin a journey beyond ordinary human understanding. Lost somewhere between immensity and eternity. Join me, as we explore: Our Amazing Debt

We are all made of star stuff. And in America, we are all born more than $61 thousand in debt.

The collective debt we owe as a country now stands at $20 trillion, a level of debt unfathomable to our contemptible caveman ancestors.

How can we comprehend the sheer magnitude of the national debt? With our starship of imagination.

This is the USS Dumbitdownforme and it cost $12 billion to construct: all financed through debt. We didn’t have the money to build it and we didn’t want to raise taxes to pay for it, but we really wanted it. So, like a fiscal wormhole, we’ve used debt to puncture the reality of financial constraints, connecting what we want now to even more money we promise to pay later.

$20 Trillion is not just a lot of money, it’s all the money, and then some.

If we could round up all the US currency in existence–every dollar bill, every quarter, every penny–we’d still need another $18 trillion. All the gold that has ever been mined couldn’t even cover half of our debt.

Yet our story doesn’t end here.

Like our ever-expanding universe our debt is constantly growing larger. This year we will pay more than $250 billion on interest payments. Not the debt, just the fee for borrowing money.

Much as cosmic expansion will inevitably lead to the heat death of our own universe, the debt, too, is unsustainable. As nature seeks balance, so to will our creditors.

Will the government gut spending? Defund entitlements? Devalue our currency?

One day, perhaps in our lifetime, we will discover the answers and reach the limit of our amazing debt. But for now we can only behold this awesome force that binds all Americans, bewitching us with the fascinating possibility, that maybe, just maybe, we’re all f***ed.

Written and produced by Austin Bragg, Meredith Bragg, and Andrew Heaton. Edited by Austin Bragg.

August 23, 2017

On the most recent figures, people do want to pay more tax … just not many of ’em, and not very much

Filed under: Britain, Cancon, Economics, Europe, Government — Tags: , , , — Nicholas @ 06:00

Last month, I posted an item on the Norwegian experiment in encouraging taxpayers to pay more than they owed in national tax. More recently, Tim Worstall reports an uptick in UK taxpayers voluntarily sending Her Majesty’s government more than they owed:

… the greater publicity of this ability to pay more has indeed led to more people making those extra voluntary payments. Further, to a more regular reporting of how many do so:

    Jeremy Corbyn’s claim that many people want to pay “more tax” to clear the national debt or fund public services has been undermined by official figures.

    Figures disclosed by the Government show that just 15 taxpayers made financial gifts worth less than £200,000 to the Government over the past two years.

15 people is of course more than 5.

    The Debt Management Office said that £180,393 in 2016/17 and £14,558 in 2015/16 was made in these voluntary payments.

    Most of this came from a single bequest of £177,700 in the last financial year. The other donated or bequeathed by the other 14 people were for relatively trivial sums. Someone gave 1p, another gave 3p and a third person handed over £1.84 to the Government.

Although not that much more then if we’re honest about it.

[…]

At which point something economists are most insistent upon. What people say is nowhere near as good a guide to their beliefs as what people do is. Expressed preferences are all very well but the truth comes from revealed preferences. Many might say they will pay higher taxes in order to gain more government. Very few do, so few that we can dismiss the expressed wish as being untrue.

It could of course be true that many would like other people to pay more in taxes, it could even be true that some to many would happily pay more if others did as well. But those are different things, the argument that people wish to pay higher taxes themselves and themselves alone has been tested and been found to be wrong–simply because when the opportunity is made available people don’t.

Once again, for my Canadian readers, it’s totally legal and acceptable to pay Her Majesty in right of Canada any additional monies you might feel are appropriate…

August 13, 2017

Saving and Borrowing

Filed under: Economics — Tags: , , , — Nicholas @ 02:00

Published on 21 Jun 2016

On September 15, 2008, Lehman Brothers filed for bankruptcy, and signaled the start of the Great Recession. One key cause of that recession was a failure of financial intermediaries, or, the institutions that link different kinds of savers to borrowers.

We’ll get to intermediaries in the next video, but for now, we’ll first look at the market intermediaries are involved in.

This market is the combination of savers and borrowers — what we call the “market for loanable funds.”

To start, we’ll represent the market, using two curves you know well—supply and demand. The quantity supplied in the market comes from savings, and the quantity demanded comes from loans. But as you know, we have to factor in price. In the case of the market for loanable funds, the price is the current interest rate.

What happens to the supply of savings when the interest rate goes up? When are borrowers compelled to borrow more? Or less? We’ll cover these scenarios in this video.

One quick note: there’s not really one unified market for loanable funds. Instead, there are many small markets, with different sorts of lenders, lending to different sorts of borrowers. As we said in the beginning, it’s financial intermediaries, like banks, bond markets, and stock markets, which link these different sides of the market.

We’ll get a better understanding of these intermediaries in our next video, so stay tuned!

July 20, 2017

Words & Numbers: The Illinois Budget is a Mess

Filed under: Economics, Government, USA — Tags: , , , — Nicholas @ 05:00

Published on 19 Jul 2017

This week on Words & Numbers, Antony Davies​ and James R. Harrigan​ tackle the disaster that is the Illinois state budget crisis.

Pro-tip: Don’t let it happen to your state.

June 17, 2017

Puerto Rico votes for statehood

Filed under: Government, USA — Tags: , , , , — Nicholas @ 04:00

Andrew Heaton discusses the recent vote by Puerto Ricans to apply for full statehood within the United States and why that might be a good thing for all concerned:

Puerto Rico voted to become a U.S. state this week. Needless to say, we should all be deeply concerned about the island’s engorged debt, destructive fits of socialism, and terrifying chupacabras.

But Puerto Rican statehood also represents a unique opportunity to reform American federalism. Accepting a new state with markedly different problems and programs means acknowledging that states aren’t interchangeable. We should welcome Puerto Rico and, while we’re redefining what constitutes our union, re-examine the power dynamic between Washington and the states.

Puerto Rico is a test case in one-size-fits-all solutions and federal intervention ruining an economy. The island has significantly lower income and productivity than the continental United States, but it is still subjected to a national minimum wage crafted for the mainland. That disparity squeezes entry-level jobs out of the market and ratchets up unemployment rates. The slumping job market is worsened by the fact that federal programs like food stamps, Social Security benefits, education grants, and disability payments aren’t pegged to local cost of living. In a region poorer than America’s poorest state, it’s not surprising that people would opt for generous federal handouts over scrambling for jobs the minimum wage hasn’t yet outlawed. Puerto Rico would benefit from an opt-out clause on the mininum wage — an option that should be available to all states.

Because Puerto Rico is an unincorporated territory and not a state, it’s more vulnerable to federal intervention. The Jones-Shafroth Act exempted Puerto Rican bonds from local, state, and federal taxes. The feds might as well have sprinkled cocaine and cronuts over the bonds. Investors bought dumpsters full of Puerto Rico’s sovereign debt, leading the island to further lurch into exorbitant deficit spending.

Federal trade laws also hobble Puerto Rican prosperity. The Jones Act prohibits foreign ships from moving goods between American ports. That means a foreign flagged vessel can’t stop at Puerto Rico on its way to or from the mainland, but must instead offload and reload goods at another American port so a more expensive U.S. ship can transport them. Peter Schiff explains: “Even though median incomes in Puerto Rico are just over half that of the poorest U.S. state, thanks to the Jones Act, the cost of living is actually higher than the average state.” The Jones Act would be a great issue to bring up when Congress deliberates on Puerto Rican accession. Abolishing it would benefit everyone, most of all Puerto Rico.

April 19, 2017

A graphical representation of the difference between the US federal deficit and the debt

Filed under: Economics, Government, USA — Tags: , , — Nicholas @ 03:00

In USA Today, Jon Gabriel shows why it’s important to know the difference between a deficit and a debt, especially when discussing the US federal government:

It’s an imperfect analogy, but imagine the green is your salary, the yellow is the amount you’re spending over your salary, and the red is your credit card statement. Then tell your spouse, “Don’t worry, dear, I just increased our debt ceiling with a new Visa card!”

The chart is brutally bipartisan. Debt increased under Republican presidents and Democratic presidents. It increased under Democratic congresses and Republican congresses. In war and in peace, in boom times and in busts, after tax hikes and tax cuts, the Potomac flowed ever deeper with red ink.

Our leaders like to talk about sustainability. Forget sustainable — how is this sane?

Yet when any politician hesitates before increasing spending, he’s portrayed as a madman. When Paul Ryan, R–Wis., offered a thoughtful plan to reduce the debt over decades, he was pushing grannies into the Grand Canyon and pantsing park rangers on the way out.

I’m sure that my chart will be criticized. A few on the right will say it’s too tough on the GOP while those on the left will claim it doesn’t matter or it’s all a big lie.

Wonks will say the chart should be weighted for this variable and have lines showing that trend. All are free to create their own charts to better fit their narrative, and I’m sure they will. But the numbers shown can’t be spun by either side.

All the figures come directly from the federal government, and math doesn’t care about fairness or good intentions. Spending vastly more than you have, decade after decade, is foolish when done by a Republican or a Democrat. Two plus two doesn’t equal 33.2317 after you factor in a secret “social justice” multiplier.

And my chart doesn’t mention future projections due to exploding entitlements, which Trump didn’t touch. Turn to the much scarier Congressional Budget Office chart for that.

February 23, 2017

Words & Numbers: The CBO Can’t Count

Filed under: Economics, Government, USA — Tags: , , — Nicholas @ 04:00

Published on 22 Feb 2017

In this episode, Dr. Antony Davies, Professor of Economics of Duquesne University in Pittsburgh, and Dr. James R. Harrigan, Senior Research Fellow at Strata, in Logan, Utah discuss the way the Congressional Budget Office works, and outline its history of failure at accurately forecasting increases in the national debt.

Find out more about the CBO and debt projections here:
https://fee.org/articles/the-congressional-budget-office-cant-count

here:
http://www.usnews.com/opinion/economic-intelligence/articles/2017-02-01/the-cbo-federal-budget-predictions-are-dangerously-optimistic

and here:
http://www.huffingtonpost.com/entry/58a0810be4b0e172783a9daa

Plus, check out this great 360 Video from Learn Liberty with Antony Daves that helps put the massive scale of the current US Federal debt into perspective: https://www.youtube.com/watch?v=ErUZjM16r1M

And track the National Debt in real time here:
http://www.usdebtclock.org/

January 16, 2017

Why do millennials earn some 20% less than boomers did at the same stage of life?

Filed under: Economics — Tags: , , , , — Nicholas @ 03:00

Tim Worstall explains why we shouldn’t be up in arms about the reported shortfall in millennial earnings compared to their parents’ generation at the same stage:

Part of the explanation here is that the millennials are better educated. We could take that to be some dig at what the snowflakes are learning in college these days but that’s not quite what I mean. Rather, they’re measuring the incomes of millennials in their late 20s. The four year college completion or graduation rate has gone up by some 50% since the boomers were similarly measured. Thus, among the boomers at that age there would be more people with a decade of work experience under their belt and fewer people in just the first few years of a professional career.

And here’s one of the things we know about blue collar and professional wages. Yes, the lifetime income as a professional is likely higher (that college wage premium and all that) but blue collar wages actually start out better and then don’t rise so much. Thus if we measure a society at the late 20s age and a society which has moved to a more professional wage structure we might well find just this result. The professionals making less at that age, but not over lifetimes, than the blue collar ones.

[…]

We’ve also got a wealth effect being demonstrated here. The millennials have lower net wealth than the boomers. Part of that is just happenstance of course. We’ve just had the mother of all recessions and housing wealth was the hardest hit part of it. And thus, given that housing equity is the major component of household wealth until the pension is fully topped up late in life, that wealth is obviously going to take a hit in the aftermath. There is another effect too, student debt. This is net wealth we’re talking about so if more of the generation is going to college more of the generation will have that negative wealth in the form of student debt. And don’t forget, it’s entirely possible to have negative net wealth here. For we don’t count the degree as having a wealth value but we do count the loans to pay for it as negative wealth.

October 17, 2016

Hillary Clinton tells us to expect a major US recession shortly after January 20, 2017

Filed under: Economics, Government, Politics, USA — Tags: , , , , , — Nicholas @ 04:00

Fortunately, as Tim Worstall explains, politicians can rarely be believed — especially when it comes to economics:

Hillary Clinton Vows To Slam The Economy Into Recession Immediately Upon Election

This probably isn’t quite what Hillary Clinton intended to say but it is what she did say at a fundraiser on Friday night. That immediately upon election she would slam the US economy into a recession. For what she has said is that she’s not going to add a penny to the national debt. Which, in an economy running a $500 billion and change budget deficit means tax rises and or spending cuts of $500 billion and change immediately she takes the oath. And that’s a large enough and fierce enough change, before she does anything else, to bring back a recession.

[…]

Now, what she meant is something more like this. That she has some spending plans, which she does. And she is also proposing some tax rises. And that her tax rises will balance her spending plans and thus the mixture of plans will not increase the national debt. Which is possibly even true although I don’t believe a word of it myself. For her taxation plans are based upon static analyses when we really must use dynamic ones to measure tax changes. This is normally thought of as something that the right prefers. For if we measure the effects of tax cuts using the dynamic method then there will be some (please note, some, not enough for the cuts to pay for themselves) Laffer Effects meaning that the revenue loss is smaller than that under a static analysis. But this is also true about tax rises. Behaviour really does change when incentives change. Thus tax rises gain less revenue in real life than what a straight line or static analysis predicts.

That is, as I say, probably what she means. But that’s not actually what she said. She said she’ll not add a penny to the national debt. Which means that immediately on taking office she’s got to either raise taxes by $500 billion and change or reduce spending by that amount. Because the budget deficit is that $500 Big Ones and change at present and the deficit is the amount being added to the national debt each year. The problem with this being that that’s also some 3.5% or so of GDP and an immediate fiscal tightening of that amount would put the US economy back into recession.

March 30, 2016

QotD: The spendthrift governor, Nelson Rockefeller

Filed under: Government, Quotations, USA — Tags: , , , — Nicholas @ 01:00

In 15 years as governor of New York, Nelson A. Rockefeller, popularly known as “Rocky,” was as careful with the public’s money as he was with his own — which is to say, he spent lavishly, impulsively, and often indiscriminately. New Yorkers have been paying the bill ever since. As portrayed in Richard Norton Smith’s new biography, Rockefeller believed that there was no problem (least of all a lack of cash) too big to yield to a big-money solution. “As much as I loved Nelson,” Smith quotes the financier Frank Zarb, “his meter didn’t start until you reached a billion dollars.”

Rocky’s meter began to spin soon after he became governor of New York in 1959, and it accelerated as time went on. To be sure, every level of American government was expanding during the 1960s and 1970s. But Rockefeller made an outlier of the Empire State. He quadrupled the state budget and quintupled state debt, including off-the-books public-authority borrowing. He created the nation’s most lavish Medicaid program, designed to draw down maximum federal aid to the state while saddling New York City and county governments with half the non-federally reimbursed cost. He pushed through a collective bargaining law that would bequeath to New Yorkers the nation’s highest level of public-sector unionization. Though New York had been a cradle of open-handed liberalism, its state and local taxes, relative to personal income, were slightly below the national average when Rockefeller took office, according to Census data. By 1974, the combined burden had nearly doubled to a level well above the 50-state norm — where it has remained ever since.

Smith demonstrates that Rockefeller’s profligacy was at least as much a matter of personal disposition as political preference. There’s no small irony in this: Rocky’s grandfather, John D. Rockefeller, Sr., built his Standard Oil mega-fortune on penny-pinching attention to detail. As one story goes, even as a wealthy man, “Senior” was delighted to discover he could eke out a slightly larger profit by encouraging his employees to use one less drop of solder on each tin can of Standard Oil kerosene.

E.J. McMahon, “Hiya, Big Spender! For good or ill, Nelson Rockefeller’s legacy lives on”, City Journal, 2014-12-04.

October 1, 2015

US tax cut proposals fail the laugh test

Filed under: Economics, Government, Politics, USA — Tags: , , , — Nicholas @ 05:00

At Ace of Spades H.Q., Ace responds to a recent Kevin Williamson post:

It is standard conservative theory that tax cuts and spending cuts go hand in hand. But after decades of ever-rising spending, coupled with occasional tax cuts, I’m not so certain of that any longer.

I believe it was after Reagan that Republican theorists began justifying his model of tax-cuts-now-spending-cuts-later as the “starve the beast” theory of limiting government — if we cut taxes, therefore cutting government’s resources, we should, logically, force the government to adapt itself to living with fewer taxpayer dollars. Ergo, spending should be forced down by the practicalities of the situation — either you start cutting spending, or else you start running up dangerous, Greece-level of debts.

The problem is that this country has always elected the “or else” part of this syllogism: We are racking up dangerous, Greece-levels of debts, and we’re barely even talking about that any longer.

The problem has grown so immense that we’ve decided to declare it officially a Non-Problem. (It will decide to re-assert itself as a Really Big Problem in a short period of time.)

So I no longer believe in the “starve the beast” theory, because the “starve the beast” theory relies upon Americans understanding the mid-to-longer term trajectory of their spending choices, which they plainly do not.

Since Americans are not capable of understanding the mid-to-longer term trajectory of their spending choices, it seems to me the only way to impose budget discipline and spending rollback is to offer Americans an immediate, as opposed to future, confrontation with reality: that is, if Americans wish to have so much government, they should be forced to pay for the level of government they are choosing, and not defer that payment (as they apparently will choose, every single time) into the future, to be imposed upon their children.

But, instead, they must be forced to reckon with the level of government they are choosing now by paying the full freight and cost of that government now.

That is to say: I believe that rolling back spending is only possible when Americans are made to feel the costs of the government they’re choosing, and that will only happen when they’re forced to actually pay for it.

The biggest hurdle, after the economic illiteracy of the voting public, is the starkly clear self-interest of the politicians: they can get re-elected only if they pander sufficiently to the voters. The voters, who do not understand how the government works (and refuse to believe it when you tell them) … want ever-more of it to benefit them as soon as possible. Telling the voters that you’ll not only not give them more but that you’ll be giving them significantly less is a great way to lose your next election (assuming you don’t get thrown out of office before that even comes up).

July 23, 2015

The breakdown state of Greece

Filed under: Economics, Europe, History, Religion — Tags: , , , , , — Nicholas @ 03:00

David Warren, earlier this month, on the slow-motion financial, economic, and political disaster that is modern-day Greece:

Now seriously, gentle reader, we are being reminded that there is truly no way out — no foreseeable practical and material escape — from the Nanny State web we have woven. Except by catastrophe, and/or miracle. My fascination with Greece is, as I have said, to see what happens as that state breaks down. Greece is unrepresentative in some ways; she never was a truly Western country, and thus even her way of abandoning the Christian faith is different from the Western. Since the West freed her from the Infidel Turk, Greece has had the luxury to pick and choose between spiritual destinies. The West offered three: the Catholic, the Protestant, and the Revolutionary. Greece chose to dress her post-Byzantine, Orthodox self in the robes of Marianne, goddess of fake Liberty. They don’t fit, can’t, and she has experienced one wardrobe malfunction after another. Whereas the French, whom she most likes to emulate, at least know how to carry off satanic modernism in style.

Notwithstanding, the material facts of Nanny State are universal, and Greece can now serve as an illustration of their consequences — for the simple reason that she has made more mistakes, faster, than any other European country.

My fondest hope was that the failure of Greece would provoke a genuine re-assessment of the European Union. My worst fear is that it would instead make Europe’s commissars circle their wagon (the EU flag unintentionally represents this), and advance the continental nannyism in the vain belief that they can somehow save it. This, I observe, is what most likely happens. Or to put this another way, for the third time in a century, Europe has embarked on a mission of self-destruction, and will not turn back.

The correct response, to my humble mind, would have been on two fronts. First, to acknowledge that Greece can’t pay, and therefore write off the debts. Let them start again from scratch, according to their lights, providing whatever humanitarian aid can be afforded, but making clear it is a gift, and therefore delivering it through visibly European (and North American) agencies. Never let anyone think he is receiving gifts by right, and thus confuse gifts with payment. But don’t kick Greece out of anything; they have as much right to use euros while unwinding as the Argentines had to use U.S. dollars through their last bankruptcy. In defiance of post-modern sentimentalism, I would say it is possible to be both charitable, and firm.

Second, to begin a peaceful disassembly of most of the pan-European scheme, including the euro currency, which doesn’t and can’t work. Restore marks, francs, lire, pesetas; but also gradually downsize the Brussels bureaucracy to what it can and did do reasonably well — as a clearing house for trade transactions. This would be sane, now the ambition of a “European nation” is proved to have been foolish in itself. It would be insane, politically, to leave it to the member countries’ respective nationalist lunatics to achieve the same end by jingo, with the violence that follows inevitably from that.

It is in this greater (political, not religious) light that I think another bailout for Greece is a horror. It means Europe’s politicians are accelerating down a blind alley — the political equivalent of “the spirit of Vatican II.”

February 17, 2015

In praise of “dynamic scoring”

Filed under: Economics, Government, USA — Tags: , , , — Nicholas @ 02:00

Dan Mitchell explains why there’s a need to change the way the Congressional Budget Office (CBO) and Joint Committee on Taxation (JCT) “keep score” on how proposed legislative changes will impact the US economy:

cartoon-cboThe CBO, for instance, puts together economic analysis and baseline forecasts of revenue and spending, while also estimating what will happen if there are changes to spending programs. Seems like a straightforward task, but what if the bureaucrats assume that government spending “stimulates” the economy and they fail to measure the harmful impact of diverting resources from the productive sector of the economy to Washington?

The JCT, by contrast, prepares estimates of what will happen to revenue if politicians make various changes in tax policy. Sounds like a simple task, but what if the bureaucrats make the ridiculous assumption that tax policy has no measurable impact on jobs, growth, or competitiveness, which leads to the preposterous conclusion that you maximize revenue with 100 percent tax rates?

Writing for Investor’s Business Daily, former Treasury Department officials Ernie Christian and Gary Robbins explain why the controversy over these topics – sometimes referred to as “static scoring” vs “dynamic scoring” – is so important.

    It is Economics 101 that many federal taxes, regulations and spending programs create powerful incentives for people not to work, save, invest or otherwise efficiently perform the functions essential to their own well-being. These government-induced changes in behavior set off a chain reaction of macroeconomic effects that impair GDP growth, kill jobs, lower incomes and restrict upward mobility, especially among lower- and middle-income families. …Such measurements are de rigueur among credible academic and private-sector researchers who seek to determine the true size of the tax and regulatory burden on the economy and the true value of government spending, taking into account the economic damage it often causes.

But not all supposed experts look at these second-order or indirect effects of government policy.

And what’s amazing is that the official scorekeepers in Washington are the ones who refuse to recognize the real-world impact of changes in government policy.

    These indirect costs of government, in particular or in total, have not been calculated and disclosed in the Budget of the United States or in analyses by the Congressional Budget Office. The result of this deliberate omission by Washington has been to understate many costs of government, often by more than 100%, and grossly overstate its benefits. …It is on this foundation of disinformation that the highly disrespected, overly expensive and too often destructive federal government in Washington has been built.

December 4, 2014

If you think your mortgage is bad, here’s a bit of perspective

Filed under: Britain, Economics, History — Tags: , — Nicholas @ 00:02

Britain is deeply in debt, like most western countries, but some of the debt is much longer term than usual:

Britain will pay off all of its debt used to fund World War One next March, when it redeems a government bond first issued more than 80 years ago to help pay for the conflict.

The finance ministry said on Wednesday that it would redeem the 1.9 billion pound ($3 billion), 3.5 percent War Loan — a perpetual bond which means it has no fixed maturity date — on March 9 next year.

Issued in 1932, the War Loan was used to refinance debt accumulated during World War One, which ended in 1918.

Some market experts said they would miss the bond as a rare historical curiosity in modern finance.

“For those of us who’ve been looking at the gilt market for a long time, a little bit of magic has fallen out of the market,” said Barclays fixed income strategist Moyeen Islam.

What needs to be pointed out however, is that they’re not actually paying off the WW1 debt: they’re eliminating that particular interest-bearing bond (because it’s now paying a higher rate of interest than the UK government’s other debt instruments). The money to pay off the current holders of those bonds will be borrowed on the market at current market rates. That’s the government equivalent of paying off one credit card with another … you still have a debt, it’s just being held by a different lender now. Tim Worstall explains:

As background, yes, Britain ran up big debts in WWI. Those were those National War Bonds. And interest rates changed a bit, finances moved around, and in 1927 it was decided that those National War Bonds should be changed. And the change was to turn them into perpetual bonds: the capital would never be paid off, there would just be a stream of interest off into the indefinite future. The government retained the right to buy them in at any point (a “call option” on them) which is what Osborne is exercising now. One more thing: there were other bits and pieces of debt lying around. Odd bits and pieces from the 19th century, debt from the Crimean War, from those (not large enough) attempts to deal with the Great Famine in Ireland, bits and pieces relating to the Napoleonic Wars and even, would you believe it, some parts that related all the way back to the South Sea Company and the South Sea Bubble of the 1720s (although that connection is pretty remote).

All of these pieces were dumped into the same pot and “consolidated” into these perpetual bonds. They were and are thus known as “Consols”.

What Osborne is going to do is exercise that call option and bring those bonds back in. But he’s not actually “paying off” those debts. He’s going to issue other, more conventional, gilts in order to have the money to give to those sending in their Consols. He must be doing that: the government really is borrowing £100 billion a year and change at present. This is no more “paying off” those debts than my taking out a bank loan to pay off my credit card is paying off debts. It might well be a very good idea to do that, given the difference in the terms of the debts and the interest rates, but it’s still not paying off, is it?

H/T to Elizabeth for the original link.

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