Should we borrow more? What will happen to interest rates?

[21C101]

Moderator note: Split from https://www.railforums.co.uk/threads/cuts-to-investment-in-rail-infrastructure.211931/#post-4891922

Just wait until external events cause interest rate rises. Then you will see some funding cuts of all sorts of things.

Could be six months, could be five years, but sooner or later it will happen

 

[Wynd]

Just wait until extenal events cause interest rate rises. Then you will see some funding cuts of all sorts of things.

Could bensix months, could be five years, but sooner or later it will happen

History disagrees. Rates have been falling for a very long time, no sign of the trend reversing.

It is more than a coincidence this comes amidst the Crossrail news. Those of us outside London cannot say we are surprised. London gets what London wants and the rest of us starve.

It isn't the smartest move by UK Gov. Then again, what is?

Despite all the issues we have at present, the calls to issue ultra-long dated bonds and ring-fence the money for infrastructure have fallen on the Treasury's as ever willfully deaf ears.

We could raise £500B (?) on 100 years bonds at very competitive rates and sanction all manner of projects that would both increase rail use and put the whole network on a more sustainable footing long term.

Then fidgeting away with a billion here or there wouldn't be the issue that it clearly is.

I for one am bored to death of the treasury acting like they are permanently broke when we now now for a fact they clearly are not and can, within limits, raise phenomenal sums at a stroke.

 

[jayah]

History disagrees. Rates have been falling for a very long time, no sign of the trend reversing.

It is more than a coincidence this comes amidst the Crossrail news. Those of us outside London cannot say we are surprised. London gets what London wants and the rest of us starve.

It isn't the smartest move by UK Gov. Then again, what is?

Despite all the issues we have at present, the calls to issue ultra-long dated bonds and ring-fence the money for infrastructure have fallen on the Treasury's as ever willfully deaf ears.

We could raise £500B (?) on 100 years bonds at very competitive rates and sanction all manner of projects that would both increase rail use and put the whole network on a more sustainable footing long term.

Then fidgeting away with a billion here or there wouldn't be the issue that it clearly is.

I for one am bored to death of the treasury acting like they are permanently broke when we now now for a fact they clearly are not and can, within limits, raise phenomenal sums at a stroke.

The only people buying government debt yielding at a fraction of the rate of inflation are pension funds and because their rules say they must.

There is no such thing as free money.

Reported they are prioritising Northern Powerhouse and Beeching reversal.

Of course they could save some real money and scrap HS2. That didn't have a sound business case BEFORE the pandemic.

 

[Wynd]

The only people buying government debt yielding at a fraction of the rate of inflation are pension funds and because their rules say they must.

There is no such thing as free money.

Reported they are prioritising Northern Powerhouse and Beeching reversal.

Of course they could save some real money and scrap HS2. That didn't have a sound business case BEFORE the pandemic.

If you have a look you will see that the Bank of England is the primary buyer of all new Gilts, not pension funds.

Its not free money, but QE is the fabled magic money tree. Nearing £800B in BOE Gilt holdings when all this is said and done. Thats debt owed to the BOE, by the Treasury, who happen to own all the share of the BOE. Go figure?!

I too was once an opponent of HS2, but I have been convinced on balance by the facts its a worthy project. But could this move be a harbinger of future decision making?

If HS2 goes drastically over, will NR see their budget cut to compensate? Could todays move be the precedent for future cuts?

 

[21C101]

History disagrees. Rates have been falling for a very long time, no sign of the trend reversing.

Sounds like a man holding a 2 supremely confident his next card will be an ACE.

Trends continue until they don't.

The higher the debt, the more vulnerable you are to events, dear boy events. As anyone hocked to the gunnels with credit card debt who loses their job can tell you.

All it would take is a bond issue that they couldn't shift or another major currency jacking up interest rates and the pound falling signuficantly, or an event in the middle east sending oil prices rocketing.

With our debt levels this high, an interest rate rise of a couple of percent would leave us having to find the same amount as the entire ministry of defence budget in extra interest payments.

 

[ABB125]

With our debt levels this high, an interest rate rise of a couple of percent would leave us having to find the same amount as the entire ministry of defence budget in extra interest payments.

I imagine some people would be very happy if the entire MoD budget was diverted...

And I don't just mean the Russians!

 

[Bletchleyite]

Of course they could save some real money and scrap HS2. That didn't have a sound business case BEFORE the pandemic.

It did. Everyone who says that, near enough, doesn't understand that the business case was capacity on the south WCML, which pre-COVID definitely was needed.

Of course, it's now (post COVID) in question as to whether that is now actually needed or not.

== Doublepost prevention - post automatically merged: 4 Dec 2020 ==

Its not free money, but QE is the fabled magic money tree. Nearing £800B in BOE Gilt holdings when all this is said and done. Thats debt owed to the BOE, by the Treasury, who happen to own all the share of the BOE. Go figure?!

Normally quantitative easing ("printing money") causes devaluation of the currency against the (now-theoretical) reserve. However, because every single country is doing it, it's having no effect this time, so it basically is free money.

 

[jayah]

If you have a look you will see that the Bank of England is the primary buyer of all new Gilts, not pension funds.

Its not free money, but QE is the fabled magic money tree. Nearing £800B in BOE Gilt holdings when all this is said and done. Thats debt owed to the BOE, by the Treasury, who happen to own all the share of the BOE. Go figure?!

I too was once an opponent of HS2, but I have been convinced on balance by the facts its a worthy project. But could this move be a harbinger of future decision making?

If HS2 goes drastically over, will NR see their budget cut to compensate? Could todays move be the precedent for future cuts?

The BoE don't count as they are supposed to issue national debt not buy it back from themselves.

The fact they are doing so proves there is not some great swell of investors willing to clip coupons at 0.25% for the next 99 years.

It will all end in tears.

 

[Bletchleyite]

It will all end in tears.

It won't because literally every country is doing it.

It's not the same as, or even slightly similar to, personal debt.

 

[Wynd]

Indeed, personal finances are not comperable to Government finances. If you or I tried to print/issue our way out of trouble, wed be in jail for counterfeiting.

The BOE issue Central Bank Reserves, not Debt. The Debt Management office (UK Treasury) issue debt. On the contrary, international investors seem perfectly willing and positively enthusiastic to gobble up all new bonds issued to them. The same is true in the US.


Events Dear boy indeed, and the point is an excellent one. One which I made many times myself in 2008/9/10/11 until I saw that it made no difference. We didnt get hyperinflation and Yields didnt rise to levels where we got in to 6 fixure billion debt interest repayment sums.

But as I said, if you issue the bonds for 100 years, you are protected on that capital sum from rising rates. The coupon wouldn't change, so that invalidates your rebuttal.

Oil prices are going nowhere now that there is in aggregate falling demand. The curve is inverting, peak oil wasn't what you thought it was. It was peak demand, not supply.

 

[BigCj34]

The only people buying government debt yielding at a fraction of the rate of inflation are pension funds and because their rules say they must.

There is no such thing as free money.

Reported they are prioritising Northern Powerhouse and Beeching reversal.

Of course they could save some real money and scrap HS2. That didn't have a sound business case BEFORE the pandemic.

I did watch a video on American commuting patterns and highways changing from WFH and did make me think about HS2. While people are not going to want to WFH in perpetuity, people not needing an accessible commute to tech companies (the main example used) and working remotely could see a proliferation in co-working offices in smaller towns so people have somewhere to work and get out of the house, which can in many ways provide a substitute to the human interaction and chance networking opportunities of working at a company's office. Lots of people would work in the same 'office' but working for different companies, and will help towns unconnected to the tech hubs grow with ancillary industries expanding, creating a whole host of mini-Silicon Valleys across the country.

On a UK basis people can work for a London employer without needing to be there often, so people could buy somewhere cheap anywhere in the UK (or even out of the country) if they do not often need to go to London. On that basis is the capacity increase for HS2 as necessary as it was pre-pandemic? A commuter could move to Birmingham with HS2 with the quicker journey times, but if they can now work remotely surely that journey time decrease will also be less of an issue if their presence in London is less necessary (even as we know, speed is not the main argument for HS2).

Might have to split thread here on that note.

 

[21C101]

It won't because literally every country is doing it.

It's not the same as, or even slightly similar to, personal debt.

China are not, many other non western countries are not.

If it dosen't end in tears (for the west) it will be the first time in human history that such policies have not

 

[Wynd]

Thing is, the first 4 reserve currencies dominate global markets. The fall off is pretty significant after that, and so is the influence. What they do others eventually follow.

If you want a case in point, look at the Swiss Franc a few years back. After massive appreciation against the Euro, (or Euro depreciation 2008-2011 if you like) the peg was smashed out by global forces, not domestic. The Central bank eventually had to capitulate to external forces. Irritating for those who bet the other way and thought it would be smart to denominate their £ savings in Francs....

You can add China to that list in the very near future.


We have been hearing this argument since the closure of the Gold window, and fundamentally it may be correct. But at this time the experiment is rumbling along just fine. Sure we have inflation and even hidden inflation, but it hast as yet destabilized our way of life or our society.

 

[miami]

In 2012 after growing during the 08 crisis, gold reached £1100/oz, then dropped back to £700.

In January it was £1200 an ounce. It's currently £1300 an ounce.

The largest jump was in 2016, where it went from 720 to 980 an ounce in a year (the brexit collapse in the value of the pound)

Looknig at the graph you'd struggle to see when covid started - there was a major jump in the second half of 2019 which continued at the same rate until mid 2020.

Look at it in Euros and it's even less interesting - flat from 2013 to 2018, then shoots up to mid 2020, then drops off.

 

[21C101]

Indeed, personal finances are not comperable to Government finances. If you or I tried to print/issue our way out of trouble, wed be in jail for counterfeiting.

The BOE issue Central Bank Reserves, not Debt. The Debt Management office (UK Treasury) issue debt. On the contrary, international investors seem perfectly willing and positively enthusiastic to gobble up all new bonds issued to them. The same is true in the US.


Events Dear boy indeed, and the point is an excellent one. One which I made many times myself in 2008/9/10/11 until I saw that it made no difference. We didnt get hyperinflation and Yields didnt rise to levels where we got in to 6 fixure billion debt interest repayment sums.

But as I said, if you issue the bonds for 100 years, you are protected on that capital sum from rising rates. The coupon wouldn't change, so that invalidates your rebuttal.

Oil prices are going nowhere now that there is in aggregate falling demand. The curve is inverting, peak oil wasn't what you thought it was. It was peak demand, not supply.

Someone on another forum made a pertinent point about the date for banning new petrol and diesel cars being brought foward from 2040 to 2030, saying that this reflects the latest estimate of Saudis real reserves not the reserves they claim to have.

Michael Moore demonstrated that the revewals were little if any greener in net terms than fossil fuels. But my goodness they make sense in national energy security terms for the UK.

With electric cars being so expensive to purchase and the government planning a 75p a mile automated levy to replace fuel duty, it seems that the government is planning to get a lot of people out of cars and onto bus and rail. Hence HS2, beeching reversal and increased bus subsidies.

 

[DB]

China are not, many other non western countries are not.

If it dosen't end in tears (for the west) it will be the first time in human history that such policies have not

Is this the first time which QE has been widely used to fund was is basically operational expenditure? I agree that's it's dangerous - and so far as I'm aware when done before it has normally been to fund capital projects, which is a bit different and doesn't pose the same level of inflationary risk.

 

[miami]

the government planning a 75p a mile automated levy to replace fuel duty

Such a levy would raise £267b a year based on miles driven last year, about 1/3rd of all government revenue.

What other numbers are you pulling out of the air?

Michael Moore demonstrated that the revewals were little if any greener in net terms than fossil fuels.

Ahh, that's where you get your numbers from.

Is this the first time which QE has been widely used to fund was is basically operational expenditure? I agree that's it's dangerous - and so far as I'm aware when done before it has normally been to fund capital projects, which is a bit different and doesn't pose the same level of inflationary risk.

Furlough etc is a one-off expenditure, the benefit being keeping a functioning economy. It's not the same as borrowing to pay wages of state employees.

 

[stuu]

China are not, many other non western countries are not.

China's state-owned banks have leant trillions of dollars to state-owned enterprises, that is functionally the same as QE