Treasury muppets

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/1062

Didn't find your answer?

Have a look at Table B5 on page 31 of the link below.

https://assets.publishing.service.gov.uk/government/uploads/system/uploa...

Almost a quarter of UK gilts are index linked (none of which are owned by BoE) and this table only models up to 4.5% RPI. No wonder we are now paying through the nose on interest on this huge element of Government debt, which has a long maturity and cannot be inflated away of course.

https://www.bbc.co.uk/news/business-62240775

Overall, this looks like a bit of an economic crisis to me and no wonder GBP£ is so low against the USD$ (which of course makes the RPI problem worse) and no wonder in this context that RS says LT's tax policies are fairy tales.

Also, if base rates are increased too much to counter inflation it will cost the BoE too much to service the interest bill on the huge reserves created by QE (the QE money printing has been used mostly to buy normal gilts from the gilt market and interest has to be paid on that money by BoE to the institutions who have deposited the magic money tree cash as reserves at BoE). So it's all rock and hard place stuff, with tax probably a preferable lever (least worst option) to control inflation (simply borrowing more is of course inflationary). 

Replies (29)

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Out of my mind
By runningmate
24th Jul 2022 18:50

Very disappointing to see RS talking about the UK's credit card as if government finances worked like family finances. The guy studied economics at Oxford for heaven's sake!
I cannot see how raising interest rates will reduce inflation when that inflation is not caused by excessive domestic consumer expenditure.
What seems to be on offer is more of the austerity policies which have been operated previously (and we can all see the results of those). There seems to be no recognition of the economic benefits of a healthy public sector.

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Replying to runningmate:
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By Justin Bryant
24th Jul 2022 19:09

Of course raising interest rates reduces inflation, all else being equal. You do not understand how modern money works if you don't understand that.

The point of my post was that there has effectively been a massive wealth transfer from taxpayers to presumably pension funds and the like who bought these index linked gilts when the RPI was next to zero. The Treasury has basically taken a big gamble there and lost at the taxpayers' expense and to dig itself out of that hole (i.e. to reduce RPI) is tricky to put it mildly per my above comments and LT's tax policies certainly won't help in my view as they are (at least short term) inflationary, all else being equal.

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Replying to Justin Bryant:
Out of my mind
By runningmate
24th Jul 2022 19:51

If you are saying that previous Chancellors have messed up, then I would not disagree with that.
With regard to interest rates and inflation, the usual headline rate of inflation is based on CPIH. In turn CPIH includes an element of owner occupier's housing costs. So the immediate and direct impact of increasing interest rates is to increase inflation.
There may also be an impact on UK exchange rates, which might effectively reduce the cost of imports so that may have an effect in reducing consumer prices, and hence inflation. On the other hand, businesses which borrow money will have higher interest costs which may work in the opposite direction.

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Replying to runningmate:
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By Justin Bryant
24th Jul 2022 20:05

You're basically wrong. I suggest you go and read up on how modern money works and how modern money is basically bank account deposits that increase as credit/borrowing increases and vice versa and that the more money there is the more inflation there is, all else being equal. Raising interest rates discourages borrowing and so reduces the money supply, all else being equal.

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Replying to Justin Bryant:
Out of my mind
By runningmate
24th Jul 2022 20:18

I think Milton Friedman and Margaret Thatcher would agree with you.
An alternative view is that the more inflation there is, the more money there is. But whether attempting to reduce the money supply is an effective means of reducing inflation has not been established in practice. It may be that such policies simply result in a breakdown in the normal relationship between money supply and inflation by restraining the money supply without curbing the inflation.

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Replying to runningmate:
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By Justin Bryant
25th Jul 2022 09:41

If you think I'm wrong then it follows that you either must think that very basic economic laws like supply & demand are wrong or you simply don't know what you're talking about.

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Replying to Justin Bryant:
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By zebaa
25th Jul 2022 10:08

I think the topic could be discussed without the disparaging personal remarks.

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Replying to zebaa:
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By Justin Bryant
25th Jul 2022 10:23

But it's true. You only need to take an extreme example to show I'm right. If the government today borrowed £1trn and gave it all away in helicopter money, what do you think would happen to inflation? It would not go down, all else being equal. That's basic supply & demand principles. The muppets in the Treasury aren't much better.

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Replying to Justin Bryant:
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By Tax Dragon
25th Jul 2022 10:34

runningmate's point (as I read it) is that the causes of inflation this time appear to include (eg) a war on* Ukraine and that increasing interest rates won't stop (eg) the war.

* Edited to change "in" to "on", which to me seems the more appropriate preposition.

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Replying to Tax Dragon:
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By Justin Bryant
25th Jul 2022 10:43

That's besides the point. Would you blithely take on an RPI linked mortgage?

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Replying to Justin Bryant:
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By Tax Dragon
25th Jul 2022 10:47

Justin Bryant wrote:

That's besides the point. Would you blithely take on an RPI linked mortgage?

It's besides your point. That doesn't make it wrong.

Anyway you caveated with "all else being equal"... maybe not all else is equal in today's world?

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Replying to Tax Dragon:
paddle steamer
By DJKL
25th Jul 2022 16:11

ceteris paribus.

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Replying to Justin Bryant:
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By Tax Dragon
25th Jul 2022 10:43

Justin Bryant wrote:

But it's true. You only need to take an extreme example to show I'm right. If the government today borrowed £1trn and gave it all away in helicopter money, what do you think would happen to inflation?

I'm not an economist, but I'm going to have a stab at this.

Would the price of helicopters go up?

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Replying to Tax Dragon:
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By zebaa
25th Jul 2022 11:37

See below for more information.

https://en.wikipedia.org/wiki/Helicopter_money

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By zebaa
25th Jul 2022 11:41

Just as a matter of interest what would PM & Chancellor Bryant ( doing both jobs at once) do ?

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Replying to zebaa:
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By Justin Bryant
25th Jul 2022 12:14

I would only employ competent people at the Treasury and BoE or at least sack the incompetent people.

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Replying to zebaa:
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By Tax Dragon
25th Jul 2022 13:56

Thanks zebaa.

You've made it clear to me I should never, ever, try to be funny in Aweb's presence again.

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Replying to Tax Dragon:
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By Justin Bryant
25th Jul 2022 13:59

Don't worry. Even I got the joke (albeit it very bad).

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Replying to Justin Bryant:
paddle steamer
By DJKL
25th Jul 2022 16:10

What about with a high marginal propensity to import goods/services, when the released wall of money ceases to chase mere domestic goods and services, and mainly runs away abroad, are your outcomes always one size fits all?

It is all well and good suggesting there are simple rules in economics, if A then B, catch is economies produce some strange manifestations; as if they have not read their own instruction booklet.

My best man had a honours degree in economics whilst I merely slotted a couple of years of study in during my first degree, the one thing he was very clear about was there were very few certainties, the further one delved into the models and theories the fewer certainties there were, as one advanced up the economics tree the early school/year one uni teaching was just far too simplistic.

The catch is that whilst in physics I can run a truck down a slope into another truck, and use ticker tapes etc to measure speed/acceleration etc, effectively I can isolate the variables, in economics isolating the variables is really cannot happen.

Nobody ever gives anyone a real economy to practice on with just two variables to inflict whatever economic theory is todays fad, there are always a lot more moving parts.

So IMHO nothing in economics is ever straightforward re certainty of outcome.

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Replying to DJKL:
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By Justin Bryant
25th Jul 2022 16:51

NB I qualified what I said above with: "all else being equal".

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Replying to zebaa:
By Ruddles
03rd Aug 2023 13:12

zebaa wrote:

I think the topic could be discussed without the disparaging personal remarks.

.

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By Justin Bryant
12th Sep 2022 10:07

Well done LT.

https://www.bbc.co.uk/news/uk-politics-62869880

At last some accountability at the top of the Civil Service. Hopefully JH is next.

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Replying to Justin Bryant:
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By Hugo Fair
12th Sep 2022 12:47

Now isn't the time for being shy of bloodletting ... there's no shortage of suitable candidates, with J R-M making a typically low-key bid to head the list.

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By Justin Bryant
14th Sep 2022 17:29

Nice to see Lord Agnew agrees with me:

"However, former minister Lord Agnew argued in The Times (13 September) that the prime minister was right to sack Scholar. ‘Having worked in his department for nearly two years, I saw at first hand the malign influence of the Treasury orthodoxy at play,’ he wrote. "

https://www.taxjournal.com/articles/fiscal-event-expected-next-week

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By Justin Bryant
21st Sep 2022 09:35

More on this here (unsurprisingly): https://www.bbc.co.uk/news/business-62977832

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By Justin Bryant
29th Sep 2022 11:41

From the ICAEW link below:

"The consequence is that the majority of public debt is exposed to changes in interest rates or, in the case of index-linked gilts, to changes in retail price inflation, driving interest costs higher and higher each time the Bank of England raises its benchmark central bank deposit rate."

https://www.icaew.com/insights/viewpoints-on-the-news/2022/sept-2022/cha...

Also have a look at the bar charts. What did I tell you in my OP? Maybe I should be working at a hedge fund earning £millions betting against GBP£ and UK gilts like Crispin Odey (just in case he's reading this)?

This link is a good metaphor for how the recent mini-budget improved things there:

https://www.bbc.co.uk/news/av/uk-england-suffolk-63075105

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By Justin Bryant
22nd Jun 2023 17:21

My above doom-mongering economic predictions from last year have been proved to be pretty sound and accurate I see.

"The rise in interest costs of £8bn primarily relates to a £3bn or 18% increase in central government debt interest charges in the first two months of 2023/24 and a £5bn swing in net Bank of England debt interest payments. This arose from a combination of higher interest rates and the effect of the retail price index on inflation-linked gilts."

https://www.icaew.com/insights/viewpoints-on-the-news/2023/jun-2023/Risi...

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By Justin Bryant
03rd Aug 2023 11:27

From the Telegraph last week:

"disastrous decision that gave Britain one of the world’s worst debt problems
After dining out on cheap debt for years the nation is now faced with the true cost
JEREMY WARNER26 July 2023 • 11:00am
Beyond bond traders, pension fund managers, Treasury mandarins and economic anoraks like me, few people will have even heard of the Debt Management Office (DMO).
Yet in dealing with the nation’s ever growing mountain of debt, this obscure backwater of the Treasury performs a rather crucial role, and like much else in Britain these days, it seems to have badly lost its way.
Careful husbandry of the gilts market so as to ensure a debt profile with a particularly long maturity by international standards used to be the DMO’s calling card. But today things look cruelly exposed.
It is not of course the DMO’s fault, or that of its chief executive, Sir Robert Stheeman, that the national debt has spiralled out of control and now stands at more than 100pc of GDP.
That particular responsibility lies entirely with the politicians who make the decisions on tax and spend.
Nor is it directly the DMO’s fault that the cost of servicing this debt is breaking all records.
Yet part of the reason it is doing so is that the coupon on a very high proportion of that debt, or around a quarter of the total, is indexed to the rate of inflation.
The DMO is very much complicit in allowing this element of the national debt to become so dominant.
With today’s spike in inflation, it is in part Britain’s exposure to these so called index-linked gilts – or “linkers” – which is causing debt servicing costs to go through the roof.
So much so that, according to analysis by the credit rating agency, Fitch Ratings, the UK will this year have the highest debt interest payments as a proportion of government revenues in the developed world at slightly more than 10pc, or around £110bn in cash terms.
Not even Italy, with an even more eye-popping debt burden than our own, comes anywhere close. But nor does anyone else have such a high exposure to “linkers”.
Money spent servicing bondholders, it scarcely needs saying, is money not available for other things.
For all the time exhausted arguing over a few extra billion for defence, or whether in these straitened times we can afford another frigate, and by how much we need to cut the army’s headcount to stay within spending limits, it is worth noting that this year’s debt servicing costs would pay for the entire defence budget more than twice over.
And yet we have locked ourselves into a dynamic where we have little or no control over how much is spent on debt interest.
How on earth did we get here? The first “linker” in the UK was issued back in the early 1980s when Geoffrey Howe was still chancellor.
It seemed like a good wheeze at the time. There was overwhelming demand for such instruments from pension providers and insurers looking for assets that would match liabilities similarly guaranteed against the vagaries of inflation.
Against the alternatives, it also looked like a relatively cheap form of debt finance for the government. Such was the demand that, at auction, each issuance would often command a considerable premium over its face value.
Buyers were in essence paying the Treasury to insure them against returning inflation...."

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By Justin Bryant
11th Aug 2023 16:40

More massive HMG/HMT muppetry here I see re UK Government Bonds: https://www.theguardian.com/politics/2023/aug/09/labour-accuses-governme...

Maybe they should have employed this bloke (on the other side of the trade by the look of it) instead: https://www.reuters.com/business/finance/odey-asset-management-fund-ends...

As taxpayers we'll be paying all this off for decades, like after WWII (although there wasn't really a relatively easy plan B Dubai etc. option for UK taxpayers back then).

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