Friday, December 07, 2012

A look at UK debt.

I've mentioned the current belt tightening (for some at least) and how in theory this could be a long-term good thing. We've just had the news regarding the tax threshold increase which by itself is a good thing and about time too, of course it's not by itself and comes with a whole raft of benefit cuts. That means the salary 'bonus' that we would be spending within the economy will simply be recirculating within the same systems. Stepping away from that micro-economic situation I want to turn to UK debt.

I've already stated that debt of a country is not the same as debt of an individual or family; but it goes deeper than that. Consider a family in debt, the logical thing to do is tighten belts and pay it of before the interest makes it a massive burden. However consider this from the loaning agency's point of view. They want the family to remain in debt. Rather than pay off a £150 loan at a ruinous rate of interest in two monthly £100 payments they want the family to pay it off in thirty monthly £10 payments. They want more money and if they can't pay they can claim the collateral. That's the same principle behind country debt.

Buying debt from a country is a long-term investment, it's the thirty £10 payments, and it's bought for that very reason. But what happens if the country starts paying it back quicker? It's no longer a long-term investment it's a short-term one and gets traded as such. The debt is less likely to be bought or sold because it's bringing in less money. Which means the country in question has the ability to borrow less. Oh sure everyone knows they're good for it, but it becomes a pump and dump stock which requires a sucker for it to be dumped on.

Now take those solid repayments coming from a country with zero growth and ask "How long can they keep doing this?" If the economy goes down the toilet they'll have no money to pay back even the interest they might end up defaulting. So what, if they do the debt-holders can simply take the collateral... ah. A country has no separate collateral, its ability to repay is tied to its economy. If the country fails the debt-holders are left with worthless pieces of paper.

So a country with low (zero) growth quickly trying to repay its debts pretty much screams stay away or draws opportunists trying to make a quick buck, look to Greece as a prime example of this (and consider that this is being seriously propped-up due to it's Euro membership)

So what's the current policy being shouted out by our government - let's pay off our debts quickly with a resultant moratorium on growth.

Run away! Run away!


thomas said...

At the end of the day mate, we have all been ripped off by the powers that be. They are milking the country dry and there is nothing that we can do about it. Its been going on for years but now they have just become too greedy. Just look at the Mp's Expenses and bailing the banks out, it really is a joke, its all been created on purpose to put more people into debt.

FlipC said...

The joke of the banks is that they're supposed to be in competition as part of a free market; yet part of that ethos is that those that fail - fail.

If there's no true punishment for failure they can take high risks, which they did. On the other hand if the government had allowed Northern Rock to go down the others would have been scared $hitless and totally clamped down on lending, though ironically that would have resulted in the same outcome we're currently experiencing.

As for MPs expenses what other institute would allow expenses to be claimed sans proof of payment?

Apocryphal story - a group of MPs went to lunch and each paid for their own food then photocopied the receipt multiple times so each could claim back the full amount.