Markets. Why they are important.

[Alouiseg]

I've posted this elsewhere on a different thread but it's cropping up all over the place.

In all capitalist and free market democracies the government is kept in check by the bond market. When society requires new hospitals, schools, roads or an increase in its social welfare payments then the bond market decides whether and by how much they have to available to spend.

When you vote Labour because they will provide greater amounts in your benefits each month, or promise pay hikes for your school teachers and nurses or even fix the potholes in the roads they raise the money borrowing from the bond market, which is comprised of worldwide and domestic investors, banks, hedge funds, speculators and traders. If this collective group, known as the bond market decide that the government is spending beyond its means, or continually making poor decisions then it insists on receiving a larger return on its investment to compensate for the increased risk of default.

In the case of Greece, who were charged 15% interest on their Drachma borrowings to then be allowed to borrow at the German rate of 4% when they adopted the Euro, they did not re finance their debt and borrow to invest wisely they started a spending binge to such an extent that the country is now unable to borrow enough money to meet its due obligations without the joint aid of a $960'000'000'000 bailout from the USA, UK (yes its costing us £15'000'000'000) and Europe.

The UK, under "New" Labour have borrowed more than Greece. It is only the fact that we are not in the Euro and still control our own currency and interest rates and its is still likely that the fiscally prudent Conservatives will gain power that the yield charged to our government borrowings has remained fairly low albeit has risen significantly since the hung parliament.

If Labour retain power then it is extremely likely that the bond market vigilantes will punish this by demanding a much higher yield on our enormous New Labour borrowings. We currently pay in excess of £60'000'000'000 in interest alone which would triple if we were on a par with Greece. Sterling, which already fell 1.50 points against the dollar and 0.90 points against the Euro merely because Gordon Brown resigned making it more likely that Clegg could deal with Labour, would collapse in an inflation fueling rout. Imagine if Labour retained power... £1 to $1 and £1 to E0.50 ? Inflation inflation inflation.

« MmeLindt Tue 11-May-10 15:59:16
Well it does really depend what you spent it on. In the same way that if I blow my pay on a diamond ring I don't really have anything to show for it. If I spend it on an OU course, then I may be able to get a better job with better pay because of that.

If GB spent the cash on schools then it is an investment in the future. ?

Only if that investment is sustained and effective. Cuts mean it?s not likely to be sustained and I am yet to be convinced about the effectiveness of what he?s spent on. A lot of paperwork, regulation and reviews from where I?m sat.

Your diamond ring could be a very nice investment ? land and diamonds hold their value very well. Your OU course might be a good investment, but it might not. It depends what you did the course in and what your result ? the return on your investment ? is. By the same token it depends where you invest the money in education and what the returns on your investment are. Sending 50% of people to university is no good if they come out with Mickey Mouse degrees from Donald Duck University.

A swift deal is needed. Not necessarily a Tory deal, not any particular kind of deal but ?a deal? so whoever lent us money knows they?re going to get it back. The markets were boosted by the Euro deal, which helped mask the UK election result, they dropped when GB announced he was resigning and today with a real prospect of a coalition (I don?t think it matters whose) they are more stable. I don?t want to test this theory but someone announcing that it?s all off.

Re: a return on the banks ? that was possibly the most sensible investment decision GB ever took. Banks make money for their shareholders...

And thank you AlouiseG!

FrakkedUp: a large chunk of change was spent on SureStart; another chunk was spent on family tax credits. Neither could be characterised as paperwork, regulation and reviews. Both are clearly invest-to-saves.

Re: return on banks. The reason the banks could make a return was because they had little competition and completely taxpayer-underwritten risk as they lent money to the government to pay for the deficit. Truly, robbing Peter to pay Paul.

RBS and Lloyds are doing better because they have written off most of their bad debts (or insured them, in the case of RBS) and because the economy has now improved and there are lower levels of bad debt.

RBS has also benefitted from strong activity in investment banking - commission on clients trading stocks, bonds, currencies, etc.

The thing I think is missing in this dicussion is the role of tax, which of course is the other main way the government raises money to finance spending.

People should also keep in mind that their own rate for borrowing on mortgages and the like is firmly entwined with the rate the government pays.

And unlike Greece, we can inflate our way out of a debt crisis ...

Family tax credits and SureStart I concede are good investment but both need continued investment. There are areas of SureStart I think could have been managed better and achieved with less funding.

Every Child Matters, B23 and the FS -> EYFS, the new diploma schemes, the Rose report (among others) and stopping compulsory MFL at KS4 with the intention of introducing at KS2 with no proper training for teachers are less effective IMO. Early Years Educations has become increasingly paper-work based, there have been yearly increases in paperwork since I trained (at least it feels like it it!) and you only have to look at the syllabus of the DCE to realise just how much of a shift there has been from practical skills to legislation and paperwork knowledge. Ticking boxes for continuous assessment in schools puts a huge strain on teachers' time and I honestly think my mother spends more time trying to work out the systems she's supposed to be using (with her 1980s postgrad in computer science!) than she does actually planning her maths lessons. The curriculum changes and new ways of terming things thought up by Govt think-tanks mean she hardly knows whether she's standing on her head or her feet and she's a good teacher. Just swamped. And she's not alone...

Ahem. Sorry. Pet rant.

I agree that there's lots of bureaucracy and paperwork, I just disagreed with the implicit contention that that was all we'd had for our money. I also agree more could have been done for less, but that's true of all human activity!

goodnightmoon - A HELL of a lot of the debt is index-linked now - inflating out way out may not be as easy as last time.

We will almost certainly make a whacking profit on the banks - but if will be small in comparison to the national debt.

There are key differences between the UK and Greece from a credit ratings standpoint, including

1. The UK is in control of its tax base, ie. people here actually pay their taxes.
2. There is broad consensus among all the main political parties over the need to cut the deficit and pay down debt; the differences between them are over the exact timing and the mix of cuts and tax rises needed to do it.
3. The UK is among a tiny handful of countries, most of them fairly new, that have never defaulted. Hence the sanguine tone of the bond and currency markets - today's Gilts auction was 2.5 times oversubscribed, which doesn't suggest the panic of Tory fantasy.

I did read somewhere that the voices of doom were predicting meltdown so that when it doesn't happen, the Tories can be credited with having avoided it.

Agree with Schnitzel's comments about Greece, it is just silly to compare the two situations. I'm not saying our deficit is not a serious issue but I do think we should talk about it sensibly.

I agree the we aren't in the same situation as Greece and that we need to talk about this without all the drama and hyperbole. But I suspect that the conclusion is still that we need to make massive cuts to avoid becoming Greece. Psychologically we just need to get on and DO IT. Once we have made the cuts, then it will feel like spending is starting to rise from the new base and we will feel that things are getting better again.

The OP's post is extremist nonsense wrapped up as economic logic. Utter rubbish, very anti-British citizenry, very anti-democratic.

The way right wing people constantly seek to undermine the prospect of democracy is frightening. Why do they hate it so much? Why do they always defer to power? Is it genetic?

The markets like the coalition deal. This morning the Pound Sterling is up a lot as is the Gilts market.

With confidence and financial stability the Govt can now make policy with less pressure, We all benefit from lower interest rates and cheaper imported goods too.

If thsi coalition had not happened the markets would have reacted very differently. The meltdown would have happened.

The UK dodged a bullet.

Lost money BeenBeta?

BeenBeta - " The meltdown would have happened. " - but we will never KNOW will we? I agree with your argument, but disagree with your certainty ;)

He might have been investing in the country - but there are limits. What sort of investment is it if you're spending so much - and are so over-confident that you don't need to be prudent because you've ended boom and bust - that you end up seeing the country harmed when the people you're borrowing from inevitably get nervous and cuts have to be made?

Ok Coolfonz Let's have your explanation?

SchnitzelVonKrumm - I am feeling happy this morning.

Wasn't the meltdown going to happen if there was a hung parliament?

It was going to happen with a hung Parliaent and minority Govt struggling to get its Budget through Parliament.

If the coalition hangs together the markets will be happy. If it falls apart and the budget deficit is not cut the markets will dive. We are not out of the woods yet but hopefully the markets will now go after Portugal/ItalyGreece/Spain instead of the UK.

Protestors storming Parliamant in Ireland over their second bank bailout does not look good so they may be vulnerable too.

If you don't want creditors to have a hold over you, you don't borrow at all or you borrow prudently. End of.

I think Brown's problem was that he believed he was investing in the country AND in political stability by means of a bought Labour vote.

Do people really believe that everything would have come to a juddering halt if the Tories hadn't got their man into number 10?

The image of the markets 'going after' Portugal, etc is vile. Under-regulated greed capitalism is indeed an ugly thing.

I think Brown's problem was that he thought he'd delivered the end of boom and bust. Consequently, he didn't treat the additional income from bankers' taxes as a one-time boost, and structurally readjusted spending on the basis of a bigger sustained income stream than we really had. When that income stream collapsed, he focused efforts on rebuilding it, with two unfortunate side-effects:

1. It pissed off lots of people, including me, to see him showering money on financial institutions and individuals, and using such a light-touch in dealing with individuals who had done wrong. He created a massive moral hazard.
2. He ignored second- and third-order effects. Second order: the bank income stream was shored up, but tax receipts from other parts of the private sector will fall (have fallen?) and he's done not very much about that. Third order: the budget cuts are going to collapse receipts from the millions of people employed by the state.

I have a chart that i am attempting to post on here but it is proving a little tricky.

Ok, i've put in my pictures but predictably it's resized and you can't see the annotated detail.

If you can enlarge it on your system then you will be able to see exactly the reaction since the election.