The chancellor has borrowed an unprecedented amount of money. Who is lending it to him, and where did they get it?
Sean Boyle, London
Post new questions below or send them to nq@theguardian.com.
Readers reply
Much of it is coming from the Bank of England (BoE) – in effect it’s printing money. This is not as bad as it seems as money has been “destroyed” by the actions necessary to address the pandemic and it is the role of government to replace it. If you want to understand this better, may I recommend The Deficit Myth by Stephanie Kelton, which explains the basis for Modern Monetary Theory. It does not mean that governments can print money regardless but it does explain how the abandonment of fixed exchange rates pegged to the gold standard has changed everything. After reading it you will understand why the UK joining the euro was a really, really, bad idea. Forlornehope
The answer is really very easy. In the last year it has been the BoE. Using quantitative easing the bank has bought, in real terms, almost all the net debt issued by the government to pay for the coronavirus crisis. The crisis has cost £400bn. Quantitative easing might turn out to be a little more or less than that in the past year. So, in other words, the government has borrowed from its own bank. And for the record, it had to do that because as data makes clear, everyone else in the economy has been saving. That’s what happens when most people cut their spending. Saving reduces the money supply by taking money out of circulation. The government had to make good that shortfall to keep the economy going. This is not rocket science, but almost no one in the Treasury and almost no politician seems to understand that this is the case. That lack of understanding is the biggest economic problem that we face. Richard Murphy, Cambridgeshire
We are the authors of a 200-page study entitled An Accounting Model of the UK Exchequer, which explores how UK government spending works in great depth. In the UK, the Crown, in the form of HM government, asks for money and parliament authorises its issue. Alongside this is an elaborate Wizard of Oz routine involving gilts and Treasury bills that distracts from what is happening behind the curtain. There is a belief among the government and their advisers that exchanging sterling for gilts and Treasury bills (after the spending has already happened) helps support monetary policy in some way. Over-emphasising the importance of what is a largely useless financial instrument swap provides a convenient excuse for government inaction. An excuse that is suddenly forgotten the minute a bank needs bailing out or a pandemic strikes. Andrew Berkeley, Richard Tye and Neil Wilson, London
Generally it’s pension funds and other governments (in the form of sovereign investment vehicles) who lend money. This is through bond instruments known as gilts. There are very few armchair investors who buy UK gilts, mainly because their volume is simply too small. Contrary to the wild fantasies of many doom-mongers, the UK government is actually a relatively very safe bet. If you lend the UK government money, you’re extremely likely to get your money back plus a (small) return over the term of borrowing. ranelagh75
Historical habit to call it “debt” but in reality it’s better thought of as just “net imbalance”. It’s no more “debt” in the legal sense of obligation to repay than you have a legal obligation to refill your cistern after flushing your loo. HaveYouFedTheFish
In reality it is a combination of borrowing on the open market, from our pension funds and similar investors, and “printing” more money to let the BoE buy the debt. minimind
No it isn’t, a large part of the purpose is to provide the financial sector including pension funds with a safe investment to balance their riskier investments, they are not doing the government a favour by borrowing from the government, the government is doing them a favour by providing them “risk free” paper. If the government ran perpetual surpluses so it had no need to issue bonds then it would still have to “borrow” or the financial sector would crash as its unbalanced risks went bad.
A government that wishes to spend creates money from nothing then it pulls in existing money from the economy so that can’t be spent by other people and stabilises the money supply. Essentially you agree not to spend that money you have for a period of time, the length of the bond, and when the time is up then you’ll get the money back so you can spend it, plus interest. However, if the government doesn’t want the money spent at the end of that time then it just issues another bond and sucks an equivalent amount of money back in. It can also perpetually issue bonds to cover the interest. There has permanently been debt since about 1694. spotthelemon
This question exposes a misunderstanding of how this type of finance works. The government is lending this money to itself. It is creating money out of nowhere, and to balance the books this money must eventually be destroyed. This is in effect borrowing from the future to help out the present.
However, this isn’t the problem it may at first appear, it’s how the economy works. In order to get usable products, resources must be expended. Those resources consist of raw materials, labour and land primarily. These resources must be expended and paid for before usable product can be created. So these are expended and paid for by borrowing from the future. In effect spending now some of the gain that will come when the work is completed. The premise is that there will be sufficient profit that the borrowing today will be negligible by the time it needs to be paid back.
Our problem at the moment is that a far too many of the expended resources are being siphoned off by the ultra-rich and the hangers-on of government. This massively decreases the return from the investments. In effect, the privatisation of government provision has both increased the need for government borrowing and decreased the profit gained from it. This is why privatisation is a poor method to run essential services. ReidMalenfant
The Chancellor’s increased borrowing during the Covid crisis has been neatly covered by the BoE’s quantitative easing (QE) programme, which involves the central bank creating new money to buy government debt. Since the start of the pandemic the BoE has bought up £450bn of government debt in this way. The BoE is a publicly owned institution, so this debt is essentially owed from one arm of government to another, and interest payments are ultimately recycled to the Treasury. As such this use of QE has often been described as a form of “indirect monetary financing”, which refers to government spending being financed through the creation of new money.
Of total government debt, as of the third quarter of 2020 more than 30% was owed to the BoE, 28% owed to pension funds and insurance companies, and 27% owed to foreign investors, with the rest mostly owed to other financial institutions. But there’s no rush to pay down the debt – although the amount borrowed has increased, the government’s borrowing costs are at historic lows, and look to stay low.
As well as the money created by the BoE, the rest of the money being lent to the government was created by the private banking sector. Though Positive Money’s polling of MPs revealed that only 15% were aware of this, commercial banks create new money when they make loans. This is where the majority of money in our economy comes from.
There is strong demand from the private sector to lend to the government because in return investors receive government bonds, which are among the safest assets to store wealth, as states that issue their own currency will never default on their debts. As such government bonds are also highly desirable collateral that can be leveraged to increase borrowing, and constitute a key building block for the architecture of our financial system. Simon Youel, Positive Money
The chancellor hasn’t borrowed it in the sense that you or I would borrow money from a bank, relative etc. The UK, like most countries, has a fiat currency which means it is not backed by gold (as used to be the case) but is literally created from nothing by the government and has value only so long as the market agrees on its value. This is how the US government can suddenly come up with more than $1tn for Covid purposes. The danger here is currency devaluation and hyper-inflation similar to what happened in Germany before the war and, more recently, in Zimbabwe. This is why bitcoin is exploding in value as it is mathematically limited to 21m units while at the same time fiat currencies are being devalued by the central banks’ money creation policies. interrupt
Another way of expressing the way money circulates in the economy is: too much money chasing too few goods/services = inflation. Conversely: too little money available to purchase a lot of goods/services = deflation. The problem is that most of the money all governments are issuing currently is not being used to buy consumption goods, but instead is being used to inflate already extremely over-priced assets owned by the super-rich. anthonynewey
The answer is very simple. The source of all British pound sterling originates from the BoE, which is a governmental body. The government of the United Kingdom is the monopoly issuer of sterling. Unless you violate the laws of logic, the government must have spent those pounds into existence before they were later “borrowed” or taxed back. If you disagree with me then explain how anybody had money in the first place to “lend” the government. Dylan Baker, Lincolnshire
I work on a desk at a bank which buys and sells UK government debt. There are various “end buyers” – banks are some, as are asset managers (eg Blackrock, who will put the investments in a “long UK gilts” fund that you can buy a share of in an Isa or Sipp). The biggest buyer of UK debt (ie lender to the UK government) is UK pension funds, in particular those that are “defined benefit” funds (ie final salary pension schemes). This is a huge UK industry, and the reason that UK government debt some of the longest dated in the world, because this industry has such a demand for it. Also the elephant in the room, the BoE. For the last year, “net issuance” by the UK government has been pretty much zero, as the BoE have bought an equal amount as being sold. The assumption is that this will be unwound at some point (and so a proper “end user” would have to be found. A lot of people are cynical that it ever will be unwound, in which case the UK has just conducted monetary financing. Financial_worker
Most of the time nowadays what they mean by lending is printing, which is borrowing from ourselves. The only reason this hasn’t resulted in hyperinflation so far is that, since the collapse of the global financial system’s ponzi scam and the consumer frenzy it drove in 2008, the spending power of the masses through austerity, a credit drought, unemployment and wage and welfare stagnation has been hugely reduced. Demand suppression has kept inflation down but it has killed capitalism. When consumption for the broad mass of humanity has been reduced to the pure necessities, continued lending or printing will start to impact on inflation big time, but there is no other way that the UK can pay even the interest on its debts. It’s a Versailles imposed not by treaty on the defeated Germans by the victorious west, but on the whole of the west by a handful of super-rich and corporate creditors of the failed banks by their wholly owned and corrupted politicians. Revolution101
The government sells bonds (AKA securities). So it can receive money from corporations, other governments, or anyone with cash in exchange for a bond. So you could buy a gov bond for £100. Gov now has your £100, and you have a bond. This bond will mature at some fixed point in the future at which point the government takes the bond back and you get £100 back (its “maturity”). In the meantime it will pay you interest at a fixed rate, set when you bought it. So if a five-year bond, it might pay you 2% (£2) each year. (This is very simplified.) You can sell the bond on before it matures, in which case you get money and the recipient would get the interest payments and value at maturity.
So the bond has two parts: a lump sum at maturity and interest payments until then. These can be sold on separately.
Who’s buying? Indirectly, most people with a pension. Pension companies can spend your money now to effectively get a discount on money in the future, which is/should be risk-free.
Corporations are free to issue securities in the same way but are typically considered slightly higher risk, so would pay more interest to make it attractive. Roughly anyone having to issue bonds with more than 7% interest is probably in trouble as it’s difficult to sustain. (A corp can issue more securities in future to pay off those about to mature but not for longer.) OnceAMonkey
