Posted by: Dirk | January 15, 2015

The national debt has to be repaid – in some centuries time when interest rates are zero!

The NY Times has recently written about the British retiring some pretty old debt. I had to add a half sentence to the text, I just had to (in bold):

After that financial crash in 1720, called the South Sea Bubble, the British government was forced to undertake a bailout that eventually left several million pounds of debt on its books. Almost three centuries later, Britons are still paying interest and those that own the bonds are receiving interest on a small part of that obligation.

Now, prompted by record low interest rates, the British government is planning to pay off some of the debts it racked up over hundreds of years, dating as far back as the South Sea Bubble.

Apart from the fact of the omission of those receiving the interest, this fact of debt repayment is very interesting. Many economists in Europe claim that government debt has to be repaid. This is doubted by others that make slightly different statements: government bonds have to be (and will be) repaid (given the right set of institutions). So, here is a modern European democracy (the United Kingdom) repaying sovereign debt from 1720 in 2015. So if you think that government debt has to be repaid, then this observation would tell you: yes, but that can happen in almost 300 years. So, the good news is for the UK that whatever sovereign debt they run up now, repayment might come in 2300 only. What the lessons are for today is up to discussion. And if those living in the year 2300 do not like to repay, they can issue new debt and postpone repayment. Or they can tax those that they think should pay a bigger share. Whatever they do, this is only about the distribution of debt and hence income, not about the production potential of the UK economy in 2300. (If it still exists.)


Responses

  1. Reblogged this on alittleecon.

  2. It hasn’t been repaid. If you take out a remortgage have you repaid your mortgage?

    What happened is that the bonds were refinanced at a lower rate on a non-perpetual basis. New bonds were issued and old ones erased.

    Which is all that ever happens – because ultimately the only alternative to buying government bonds is to spend the money, which ends up via spend/tax cycle as extra taxation reducing the need for bonds.

  3. If I understood it correctly, the original bonds were issued as perpetual bonds (http://www.ft.com/intl/fastft/245121/uk-repay-wwi-debts-eyes-all-perpetual-bonds). The holder gets interest every year, but there is no repayment. So in this special case it is correct to speak of debt repayment. Rolling over national debt by issuing new sovereign bonds to repay old ones, which you call refinancing, is what we normally see. Here, one form of debt is repaid (perpetual bonds) which is financed somehow (taxes plus new bonds). Since in a budget it is impossible to see which incomes are going to which use I would say that repayment of these perpetual bonds is partly financed by issuing new bonds with some maturity.

  4. Reblogged this on idontbelieveitagain.

  5. Reblogged this on sdbast.

  6. Reblogged this on Britain Isn't Eating.

  7. So if it was reapyed with new loan that would be “never payed off” just as you implied in 2300 postponed repayment. Government debts are never payed, full stop.
    Many large corporations also never pay their debts. They keep it rolling, or invent stocks that are never repayed. Some stocks pay out dividend which is just as interest on loans, some don’t. But they never repay them.
    And stocks are also a form of debt by corporation with perpetual timeline.
    Different mechanisms and terminology but the effect is the same.

    Sovereign governments and large corporations never repay their debts. Full stop.

  8. Reblogged this on koenigal86.

  9. Reblogged this on A European Diary..


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