Forum Topic

Serious question

Might be being a bit dim but..If all nations in the world are borrowing billions to keep their economies going during the virus, who are they borrowing from? If it's just a paper exercise is their a way that this borrowing could be written off ? Or can we move to this place we owe the money to it must be a nirvana. As I say serious question that I was asked by a nephew and couldnt answer

Andy Pike ● 2234d24 Comments

"but could the purchasing power of all currencies reduce at the same time?"I was thinking the opposite - not sure what cooperation there will be with the ECB after Brexit. Interest rates can't go up.I hope it's my lack of economic knowledge but it does seem we will lose two tools if there is a run on sterling.

Ed Robinson ● 2232d

Interesting thought,  Jonathan, and I'm sure I'm jumping in with both feet here! In terms of relative values to each other them currencies can't all devalue at once but - and I know it's unlikely - but could the purchasing power of all currencies reduce at the same time?

Michael Ixer ● 2232d

Concerted financial action is not the EU default as the failure to agree to issue Corona Bonds demonstrates.  Elements of the EU banking system were already weak before this crisis - e.g. Italian banks were not well capitalised and had not resolved underperforming loans from the 2009 financial crisis.

Guy Cameron ● 2232d

Not all currencies can devalue at the same time, whether fiat currencies or not (and most of them are). Except possibly against gold. But gold has fallen in value too over the last few months (vs the dollar). There are a few folk, mainly in the US, who think a return to the gold standard is the answer. But when you work rationally through that idea it soon becomes clear that that would cause even more chaos than we currently have - by wiping out liquidity in the financial markets and strangling the lifeblood out of every economy. There is simply not enough physical gold in the world to back any major currency, especially the dollar. By the way I agree there is some truth in the argument that the global economy is teetering on the brink thanks to ballooning sovereign debt levels.  And that Coronavirus might just tip it over. But concerted action by the major economies and their central banks could hold that off. The problem is that concerted action on anything is no longer the default setting in the White House.

Jonathan Callaway ● 2233d

The financial system of the Western world is a ticking time-bomb waiting to explode.The IMF and the world banks will currently be discussing how to reset the world economies as the debt bubble is about to burst.If the banks continue to bury their heads in the sand then we will all be following the model of Zimbabwe, Venezuela and Argentina, which will lead to disaster.So probably deflation followed by huge inflation to follow.A major devaluing of currencies will pursue, and for most of the population it will be a different world to what we currently know.Most monetary systems only last about 40-50 years and we are due a reset after the last change in 1971.Historically 100% of fiat currencies have always eventually failed. Maybe some type of return to the gold standard is on the cards, when the current fake fiat currencies of today actually followed something of monetary value and purchasing power like gold.The current system of private banks tapping a bunch of digits out of thin air into someones bank account by way of a loan, is fast approaching it's sell by date, as the debt is unsustainable.The confidence will soon erode around the world when more of the population catch on to the fraud.

Mike Essam ● 2233d

"I'd be a "millionaire Rodney" !!"The UK is as safe as houses :)

Ed Robinson ● 2233d

MichaelIn my view the issue is how big a part of the economy is I think what you classify as 'leisure' and I take to mean activities that can only happen if we can get out.Particularly 'hospitality' and entertainment.In the old days (!) when we went out socially or to work, how much was spent on takeaways, coffee, fast food, restaurants as well as impulsive buys like cards, gifts even clothes etc on train stations.Yes some we now buy online (clothes etc) in a planned way but if you were just rummaging through M&S for a shirt you might also spot a tie (shows my age).And of course if we don't travel for work or pleasure we don't stay in hotels and don't make the impulsive buys in that sphere - food, drink, gifts etc or go to the pictures and buy an ice cream.And then there's pubs ....!Re your point about pensions and SIPPs etc, I would hope the managers are easing their way out of fuels and are going hard for the new technology based companies.I remember when I worked for IBM we were told how we had to get ready for these upstart companies like Cisco, Microsoft, Oracle that were going to invade our territorieswhile at the same time we were being told to sell our software to run these new innovative (and loss making) companies like Amazon.If only I had had a light bulb moment and sold my meagre ISAs and found a thousand pounds to buy into each of the above.I'd be a "millionaire Rodney" !!

John Hawkes ● 2233d

Daily Mirror in 2015:-"Just three years ago, taxpayers were still paying off government debt borrowed to pay millions in 'compensation' to wealthy slave owners.While some were well aware of the payments, which finally stopped in 2015, a lot of people had no idea modern Brits were paying off money the British Treasury gave to people made rich through human suffering.The government pledged in 1833 £20 million in order to reimburse the owners of slaves when slavery was abolished in Britain. The sum, while big now, was monstrous in 1833, and it took the British taxpayer 182 years to pay off.The information was revealed by the Treasury after a freedom of Information request, the Bristol Post reports. Bristol was known then as the 'slave capital' of Britain, due to the relative volume of owners in the port city. Only London had more. Exeter was also significant."Slave owners were compensated for their losses. Slaves were not compensated, and the modern descendants of these slaves were, of course, helping to pay off this debt.

David Ainsworth ● 2233d

In the same way as we repaid the debts of WW2 and our patents those of WW1 and 2. It's not just this generation that pay the debts of the past

Andy Pike ● 2233d

John, yes interesting. On a slightly different note, I was wondering about the current economy. Obviously, traditional sectors - aviation, shipping, automotive, leisure, fossil fuels, etc - are being damaged but there most be those servicing us at home - deliveries (Amazon, Deliveroo, Ocado), telecommunications (Zoom, Microsoft, Cisco), home entertainments (Sony, Netflix, Amazon, online games), renewable energy for home power - who ought to be growing into more profitable businesses? Perhaps I've missed something? Ok, I believe a fifth of UK pensions are underpinned by income from BP and Shell dividends but if the investment managers are doing their job properly shouldn't they be spreading some of that risk over emerging technologies when investing our SIPPS, ISAs, etc?

Michael Ixer ● 2233d

I will make no attempt to explain how this might be handled 'cos it's too difficult for me !Money and debt are funny stuff !But here is a link to an article from the academic considered to have written the definitive analysis of the 2007 financial crisis - Adam Tooze.https://www.theguardian.com/commentisfree/2020/apr/27/economy-recover-coronavirus-debt-austerityNot an easy read but the subject is complex.But some interesting points.

John Hawkes ● 2233d

Who would have thought a loo roll would ever be worth more than a barrel of US produced oil ... still, if you're stuck at home for 6 weeks without any loo rolls a barrel of oil isn't much help :-(

Michael Ixer ● 2233d

A lot of it is new money in the sense that the Treasury issues new gilts (government bonds) and the buyers overwhelmingly are the Bank of England, pension funds and the commercial banks. Basically yet more QE (quantitive easing) which in more normal times would generate the sort of inflation we see in Venezuela and Zimbabwe. As others have said, these debts will be repaid not by us but by our children and grandchildren. Though we can expect hefty tax increases at some point, aimed (in my view) at the softest target: those with accumulated wealth in the form of our homes and pension pots.  Again, as others have noted, very much what we saw in the last Labour manifesto, you know, the one rejected by the electorate but where Corbyn still reckons he won the argument.

Jonathan Callaway ● 2233d

"there's never been a cheaper time to borrow."What are you going to buy?Inflation, depreciation and normally factors unless its toilet rolls!

Ed Robinson ● 2233d

The only upside to all the extra debt is that there's never been a cheaper time to borrow.I would have thought that the extra taxes will start sooner rather than later so the people who are buying government bonds will be paying them too.

Frances Clarke ● 2233d

At last someone with the correct answer!Then in order to repay those individuals (who may include people outside the country too), the government will in the future raise extra money in taxes.So future generations are the ones who will have to repay the loans, not the ones who are lending the government the money.

Michael Winstanley ● 2233d

"It's only relatively recently that the UK paid off the loans incurred during WW2"That is right - although that was a loan was mainly to the USA and in US dollars.

Ed Robinson ● 2234d

They're borrowing from individuals who prefer the safety of government bonds to other forms of investment.There are 65,000,000 people in this country. Many of them have savings even though many of them don't.

Frances Clarke ● 2234d

I  guess the simple answer is they're borrowing from the future. It's only relatively recently that the UK paid off the loans incurred during WW2.

Katrina Black ● 2234d

Like in "Superman":-Superman:- Easy, Miss. I've got you.Lois Lane:- You, you've got me? Who's got you?

David Ainsworth ● 2234d

Bonds issued in the marketd and BoE overdraft ...https://www.reuters.com/article/us-health-coronavirus-britain-boe/bank-of-england-to-finance-uk-government-if-markets-turn-sour-idUSKCN21R0PA

Michael Ixer ● 2234d

Perhaps China has skin in this game.  I seem to remember that years before the Trump era, China held zillions of US Treasuries.

Elizabeth Balsom ● 2234d

Thanks Ed

Andy Pike ● 2234d

Excuse my simple economic understanding.I assume most are issuing government bonds which will be sold on the various markets.When the bonds mature they will need to be repaid ultimately.So they are borrowing from future tax payers depending on term future generations

Ed Robinson ● 2234d