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Government borrowing and why this isn't "the one"


Frank Hovis

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Frank Hovis

Listening to some analysis of the mini-budget from "insiders" there will be another year of running up the debt to keep unemployment down and the economy moving; and more time beyond that if required.

Anything necessary will be done to minimise the contraction of the economy with the understanding that once the economy begins to grow again the props will be steadily removed to start bringing in the tax income necessary to start paying down the debt.

Hearing that this mini-budget reads like simply the opening salvo; temporary measures will be extended and new ones added.

Taxes are not going up any time soon and nor are interest rates.

Anyone who has been hoping for a reset - particularly of house prices - well you are out of luck this time IMO.

 

And here's why:

This is the long term debt to gdp curve.  Note the peaks after the Napoleonic Wars and the WWI peak blending into the WWII peak.

uk-debt-gdp.png

 

And here is the current one:

linechartimage

https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/timeseries/hf6x

 

It has only just breached 100%; it can go higher.  Much higher; with current interest rates 150% is going to be very tolerable.

 

Here's current debt raising from May onwards.  If they can keep the economy from contracting then £1,950bn is at 100% per the above graph which ends in May; to go to 150% means another £1,000bn is available.  Of that £180bn is to be raised by the end of July leaving another £820bn to go.  As the highly expensive furlough scheme is winding down that is £820bn to be used to prop and boost the economy.
 

Quote

 

6. Debt

At the end of May 2020, the amount of money owed by the public sector to the private sector was just under £2.0 trillion (or £1,950.1 billion), which equates to 100.9% of gross domestic product (GDP).

This is the first time that debt as a percentage of GDP has exceeded 100% since the financial year ending March 1963. However, it is important to note that while our estimate of debt is largely based on outturn data and is unlikely to be significantly revised over time, the current estimate of GDP used to calculate this ratio uses forecasts based on expectations published in the Office for Budget Responsibility's (OBR's) Coronavirus Reference Scenario published 14 May 2020 and may be revised substantially over time as these estimates are replaced by outturn data.

On 23 April 2020, the Debt Management Office (DMO) published April 2020: Revision to the DMO's 2020 to 2021 Financing Remit for May to July 2020 (PDF, 264KB), in which it announced that it will raise £180 billion during the May to July 2020 (inclusive) period, exclusively through issuance of conventional and index-linked gilts.

In May 2020, the DMO issued £56.7 billion in gilts at nominal value, raising £62.6 billion in cash. This continues the substantial month-on-month increase in gilts issuance (at nominal value) in the current financial year.

 

 

https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/bulletins/publicsectorfinances/may2020#debt

 

Though think it forward to ?three years time and borrowings already at 150%.  At that point the elbow room has gone.  Any black swan event, say limited war with China, and this track cannot be repeated.

Then you will finally get your house price crash.

 

It would be a good idea to take the events of the last four months as a dress rehearsal because next time will be for real.  So have a think of what you wish to be holding when it is for real, recession drives unemployment, the gvernment unable to borrow has to whack up taxes to fund the benefits bill.

Of course there may not be another black swan and we may gently recover from this as we have previous peaks but I think it would be a good idea to hedge your bets a bit here.

 

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They'll probably reach that point just before the next general election which by the haphazard way things are going will result in a Labour government.

Especially if there's a vaccine resulting in serious side effects.

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Looks like I won't be waiting to get back onto the property ladder for much longer...next year maybe? 

Will look into it once my parents' house sells. 

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42 minutes ago, Frank Hovis said:

Though think it forward to ?three years time and borrowings already at 150%.  At that point the elbow room has gone.  Any black swan event, say limited war with China, and this track cannot be repeated.

 

It would be a good idea to take the events of the last four months as a dress rehearsal because next time will be for real.  So have a think of what you wish to be holding when it is for real, recession drives unemployment, the gvernment unable to borrow has to whack up taxes to fund the benefits bill.

Of course there may not be another black swan and we may gently recover from this as we have previous peaks but I think it would be a good idea to hedge your bets a bit here.

 

So to summarize for people like me who's eyes glaze over when we see lots of graphs and numbers like that:

1. Based on historic trends there is plenty of scope for the government to keep borrowing to prop up the economy for at least a few years to come.

2. However they don't have enough to cope with another another Black Swan like Covid-19.

3. Therefore, you don't want to be all, or even mostly, in cash when/if this happens.

18 minutes ago, UmBongo said:

Looks like I won't be waiting to get back onto the property ladder for much longer...next year maybe? 

Will look into it once my parents' house sells. 

Yeah it looks like I'll have to bite the bullet  and buy next year too. Use maybe a 40% deposit to get the cheapest money available to man and the diversify the rest of my savings.

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Frank Hovis
1 minute ago, JoeDavola said:

 

So to summarize for people like me who's eyes glaze over when we see lots of graphs and numbers like that:

1. Based on historic trends there is plenty of scope for the government to keep borrowing to prop up the economy for at least a few years to come.

2. However they don't have enough to cope with another another Black Swan like Covid-19.

3. Therefore, you don't want to be all, or even mostly, in cash when/if this happens.

Yeah it looks like I'll have to bite the bullet  and buy next year too.

Yes.

If similar happens again then we could be back to the thirties or forties / fifties because that's what those levels of government borrowing will bring the next time that the economy contracts.

That would bring, amongst other things, a house price crash but for most people that would be the least of their worries.  I know that it wouldn't be viewed as a "worry" on here!

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3 minutes ago, Frank Hovis said:

That would bring, amongst other things, a house price crash but for most people that would be the least of their worries.  I know that it wouldn't be viewed as a "worry" on here!

Yes so basically the ridiculous house prices are seen as so important to the economy that they'll only be allowed to collapse when the entire economy has collapsed.

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Frank Hovis
1 minute ago, JoeDavola said:

Yes so basically the ridiculous house prices are seen as so important to the economy that they'll only be allowed to collapse when the entire economy has collapsed.

That's it.

I remember reading that in the 1950s house prices were so low that they were actually below the scrap value of their materials; you could make money by buying a house, demolishing it carefully, and selling its materials to the scrapyard.  You could just forget about the land as you are already in profit.

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Why does rising government debt mean everybody has to get out of cash asap? The Japanese government's national debt is at 235% of GDP and the yen is just fine, year after year of low inflation and even some mild deflation.

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DurhamBorn

I think we will get £700 billion Frank printed.Taxes and rates arent going anywhere yet they have around 35 years of dis-inflation to print first.Rates will start to edge up after around two years and mid cycle will seem under control,probably up to 2.5%-3.5%,but will then be following a rising inflation.House prices are going down a lot,but the nature of the declines might alter due to government interventions.I still think 50% down inflation adjusted in the south is certain over the cycle.70% likely.

The inflation building in the broad money measure should see the media refer to the 2nd half of the decade as "the roaring 20s",the big reset should follow.

The CBs have unlimited room to print during dis-inflation,what removes their power (and then the governments liquidity) is inflation.Huge clear outs and wealth destruction happen during and at the end of inflations.

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Frank Hovis
12 minutes ago, Darude said:

Why does rising government debt mean everybody has to get out of cash asap? The Japanese government's national debt is at 235% of GDP and the yen is just fine, year after year of low inflation and even some mild deflation.

I haven't said that.

What I have said is that the government can get away with an economic shock like this one but couldn't get away with another; without being able to do what is currently happening the economy tips into recession and that ratio shoots up from that cause alone.

I haven't regarded cash as an investment for twenty years owing to its sub-inflation returns but if you have it for non-investment purposes then those reasons are still valid.

 

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37 minutes ago, Darude said:

yen is just fine

the yen is a weird one, it's always been considered a 'safe haven currency'....the shitty £ is anything but :P

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eta-carinae
1 hour ago, Frank Hovis said:

That's it.

I remember reading that in the 1950s house prices were so low that they were actually below the scrap value of their materials; you could make money by buying a house, demolishing it carefully, and selling its materials to the scrapyard.  You could just forget about the land as you are already in profit.

No..they weren't cheap, they could afford them because people didn't buy avacados or iPhones. At least that's what I've been told. 

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8 minutes ago, eta-carinae said:

avacados or iPhones

I bought an avocado today :x.....and I bought the very first iphone, hacked it and put it on ebay.....it sold for a crazy amount to some 'hood' in London O.o

The UK has fucked the youth cos they can only 'get ahead' by taking on massive amounts of debt or being a fat iphone abuser on bennies.......crazy times!! Roll on the crash :P 

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King Penda
2 hours ago, JoeDavola said:

 

So to summarize for people like me who's eyes glaze over when we see lots of graphs and numbers like that:

1. Based on historic trends there is plenty of scope for the government to keep borrowing to prop up the economy for at least a few years to come.

2. However they don't have enough to cope with another another Black Swan like Covid-19.

3. Therefore, you don't want to be all, or even mostly, in cash when/if this happens.

Yeah it looks like I'll have to bite the bullet  and buy next year too. Use maybe a 40% deposit to get the cheapest money available to man and the diversify the rest of my savings.

Like I did 8 years ago I figured they are down 20% I can’t see much more of a drop comeing I got lucky .dont forget they could easily bring in a million hong kongers within 12 months

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King Penda
1 hour ago, 5min OCD speculator said:

I bought an avocado today :x.....and I bought the very first iphone, hacked it and put it on ebay.....it sold for a crazy amount to some 'hood' in London O.o

The UK has fucked the youth cos they can only 'get ahead' by taking on massive amounts of debt or being a fat iphone abuser on bennies.......crazy times!! Roll on the crash :P 

I don’t think it’s just the youth maybe it’s those under 35 might even go above that age .maybe an idea for another thread 

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2 hours ago, DurhamBorn said:

Huge clear outs and wealth destruction happen during and at the end of inflations.

From what I can make out that's on top of the huge clear outs and wealth destruction during and at the end of dis-inflations.  

Especially with the greedy self serving imbeciles running the country

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Long time lurking

The western world is turning Japanese they have been flat out printing for decades 

IMO China is the next black swan  they are in the middle of flooding on a biblical scale ,and none of the 7 head honchos have been seen in public for a month now ,what do they know ? 

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I don't understand this. We had one "black swan" event i.e. Covid-19 and yet according to that graph it's barely made a mark. Why would one more black swan event make a difference? According to that graph, we need about 100 more such events.

Not sure that your graphs account for inflation either. If there was a war on the scale of WW2 now, then that line would go right off the top. A Spitfire in WW2 cost £2m to build in today's money, but a Eurofighter Typhoon costs £80m.

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The Grey Man

I am figuring these black swans are more common than we appreciate.

Taking the 2000s alone we have had more than a few. 

Dot com

9/11....think outside the box

The banks collapse

CV

You could even add the shadow Chinese bank system post our banks issue that was rarely highlighted.

The spectre of a cold war.or worse, and who sides with who further spreads risks or gains.

Banked on sterling being crap for the last 15 years and done ok.

That was a gamble and pure luck

With everyone for the most part, racing to the bottom full.cash holdings seems unsafe.

The question of how long plates can be spun..of the view now ....its always longer than I guess.

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Frank Hovis
9 hours ago, spunko said:

I don't understand this. We had one "black swan" event i.e. Covid-19 and yet according to that graph it's barely made a mark. Why would one more black swan event make a difference? According to that graph, we need about 100 more such events.

Not sure that your graphs account for inflation either. If there was a war on the scale of WW2 now, then that line would go right off the top. A Spitfire in WW2 cost £2m to build in today's money, but a Eurofighter Typhoon costs £80m.

First point: look at the second graph; the ratio has shot up from 75% to 100% in a couple of months.

That's massive and it's projected to go to 110% by the end of July and as to government is going to keep spending that's why I am saying it will go to 150%.  Now that's high for peacetime but you can gradually recover from that.

However if there is another big shock on top of that requiring similar spending then you are into post war levels of debt at over 200%; and that won't just be due to borrowing but to economic contraction. Then you are going to get a sovereign downgrade and inflammation will start devaluing the currency.

Second point: it's a ratio of Debt to GDP; in words the amount of government borrowing compared to the size of the economy.

Inflation is automatically brought into account through the GDP measure so that if the debt stays static then inflation-led growth of GDP will drop the ratio.

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sancho panza
20 hours ago, Frank Hovis said:

And here is the current one:

 

https://www.ons.gov.uk/economy/governmentpublicsectorandtaxes/publicsectorfinance/timeseries/hf6x

 

It has only just breached 100%; it can go higher.  Much higher; with current interest rates 150% is going to be very tolerable.

 

 

 

Though think it forward to ?three years time and borrowings already at 150%.  At that point the elbow room has gone.  Any black swan event, say limited war with China, and this track cannot be repeated.

Then you will finally get your house price crash.

Sorry for going all Steve keen here Frank,but you have to include private sector debt in debt to GDP.The current economic Ivory tower mob insist that there's no need to buidl economic models that inlcude but anyone with an ounce of sense.

Also worth consdiering that 12% of current GDP is imputed rents and that back in the 60's imputed rents were something like 2% of GDP.We're not comapring like with like.Impuited rents aren't spent in teh economy,nor are they able to be taxed as theyre effectively a an accoutning fiction.That private sector debt to gdp figure should be even hgiher than it is as the denominator should be lower imho

Keens thesis is that private secotr debt drives credit crises not public sector debt.

We're much closer to the moeny moment than you may think imho

 

I've screenshotte the chart so you can get the jist.Its dated 2017,figures will be much worse now.Video below.Red line is private sector debt to GDP and blue line is annual growth rate in credit.

image.thumb.png.382e4d9f9215b92e47caa4fb63c6c076.png

 

 

https://tradingeconomics.com/united-kingdom/private-debt-to-gdp

image.png.f588ec292d2956d59ddb0113a15fec98.png

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sancho panza
19 hours ago, JoeDavola said:

 

So to summarize for people like me who's eyes glaze over when we see lots of graphs and numbers like that:

1. Based on historic trends there is plenty of scope for the government to keep borrowing to prop up the economy for at least a few years to come.

2. However they don't have enough to cope with another another Black Swan like Covid-19.

3. Therefore, you don't want to be all, or even mostly, in cash when/if this happens.

Yeah it looks like I'll have to bite the bullet  and buy next year too. Use maybe a 40% deposit to get the cheapest money available to man and the diversify the rest of my savings.

There is scope to borrow and spend whislt price infaltion remains low.Without going full Shaun Richards,there are real issues with the wya we calcualte inflation,not limted to but including

1) not inclduing hosue prices

2) using hedonic adjustments that can massively suppress real price inflation eg cars -if you use a car to get from A to B then whether it has electric windows makes no difference, but ONS will make an hedonic adjustment for the windows.

3) inflation is related to what you spend on.aggregsate figures masively mask what is happenign to various income deciles.

4) shrinkflation

Shaun ricahrds has educated me some on these matters and there are a host of otehr issues if you wish to learn from him.key take home for the laymen is that the infaltion figs are heavily gamed.

 

The problems come for govt spending when inflation starts runningg-using their own shitty measure-.and rates at the long end have to rise.

Further problems come when the method of stimulus stops working.Eg cutting rates needs people willing to borrow and spend.UK credit card data showed that in April/may,at the first sign of trouble ,people paid down revolving credit.

 

Worst outcome of all for govt is a debt deflation occuring at the same time as we get price inflation.

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sancho panza
16 hours ago, stokiescum said:

Like I did 8 years ago I figured they are down 20% I can’t see much more of a drop comeing I got lucky .dont forget they could easily bring in a million hong kongers within 12 months

Chinese will implement capital controls and keep their cash.The savvy will have got some out but much like the Uganadan Asians int he 70's,they'll get robbed blind.

Personally,I'll be glad to have them and it will help pay for the benefits bill.

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sancho panza
18 hours ago, DurhamBorn said:

I think we will get £700 billion Frank printed.Taxes and rates arent going anywhere yet they have around 35 years of dis-inflation to print first.Rates will start to edge up after around two years and mid cycle will seem under control,probably up to 2.5%-3.5%,but will then be following a rising inflation.House prices are going down a lot,but the nature of the declines might alter due to government interventions.I still think 50% down inflation adjusted in the south is certain over the cycle.70% likely.

The inflation building in the broad money measure should see the media refer to the 2nd half of the decade as "the roaring 20s",the big reset should follow.

The CBs have unlimited room to print during dis-inflation,what removes their power (and then the governments liquidity) is inflation.Huge clear outs and wealth destruction happen during and at the end of inflations.

I lvoe how you say so much in a few lines.

In terms of wealth destruction,imagine how wealthy some CRE owners felt in January 2020.Now bust.

Hello,CRE owner,meet Mr Market.

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Frank Hovis
11 minutes ago, sancho panza said:

Sorry for going all Steve keen here Frank,but you have to include private sector debt in debt to GDP.The current economic Ivory tower mob insist that there's no need to buidl economic models that inlcude but anyone with an ounce of sense.

Also worth consdiering that 12% of current GDP is imputed rents and that back in the 60's imputed rents were something like 2% of GDP.We're not comapring like with like.Impuited rents aren't spent in teh economy,nor are they able to be taxed as theyre effectively a an accoutning fiction.That private sector debt to gdp figure should be even hgiher than it is as the denominator should be lower imho

Keens thesis is that private secotr debt drives credit crises not public sector debt.

We're much closer to the moeny moment than you may think imho

 

I've screenshotte the chart so you can get the jist.Its dated 2017,figures will be much worse now.Video below.Red line is private sector debt to GDP and blue line is annual growth rate in credit.

image.thumb.png.382e4d9f9215b92e47caa4fb63c6c076.png

 

image.png.f588ec292d2956d59ddb0113a15fec98.png

 

Fair point and I didn't know that about imputed rents; though I have had to calculate them in the past.

I accept that personal debt and corporate debt (I'm assuming that the graph includes both) will have gone up recently but not to the degree of the public debt.

The shorter timeframe UK debt curve looks fairly benign to me; we hit high debt in the early years of Blair / Brown at 220% and it's declined from the 2008 peak back towards 220%.  The low interest rates mean that there has been a lot of personal debt in the form of mortgages paid down and the low housing transcations / mortgage approvals that have become the new norm for the last tweleve years mean that the number of people holding the high levels of personal debt is going to be much lower and so less people will be affected if rates go up than in "normal" times.

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