The most important number about today’s Budget is $12.5 trillion. That’s the amount of money the private sector is likely to save around the world this year*.
This means that the government can raise the £220bn it plans to borrow in the gilt market merely by attracting 2.5 pence for every pound saved**. This is smaller than the share of the UK in the global economy.
It should be quite feasible to achieve this. As Ricardo Caballero has pointed out, the world has a shortage of safe liquid assets. Issuing gilts therefore meets global savers’ needs. This is why the UK - and governments of developed countries generally - has enjoyed very low borrowing costs as debt has soared.
This raises a point which the architects of New Labour glossed over. Globalization makes social democracy more feasible, in one respect at least.
In globalized capital markets, it’s possible for governments to borrow massively without suffering rising interest rates; no Chancellor could have gotten away with today’s borrowing in the closed-economy world of the 1970s. This means counter-cyclical fiscal policy becomes more possible.
This doesn’t necessarily means it’s more effective; the Ricardian objection must still be addressed. Nor does it mean it’s a good thing to lumber future generations with higher debt.
Nor does it mean gilt yields will stay low. I suspect there’ll come a time when Asian savers discover better things to do with their money than lend to highly-indebted governments. But this is more likely to happen when the global economic recovery reduces demand for safe assets, and would hit all government bonds.
All it means is that there’s a message for left and right.
For the right, it means you shouldn’t scare us with stories about a “sea of red ink”. Big borrowing is more feasible, at least in the short-term, than you pretend. I hate to break it to you, but the UK is not the only country in the world.
And for the old Guardian-reading left, it means you shouldn’t complain too much about globalization. If it weren’t for this, the government would be unable to borrow as much as it is, and would have to slash public services right now.
* Figure 1.15 in the latest IMF World Economic Outlook estimates the global savings ratio will be 22.8% of GDP in 2009, with GDP being $54.9 trillion.
** In fact, this is an over-estimate, as perhaps half of the gilts issued might be bought by the Bank of England under its quantitative easing policy.
This means that the government can raise the £220bn it plans to borrow in the gilt market merely by attracting 2.5 pence for every pound saved**. This is smaller than the share of the UK in the global economy.
It should be quite feasible to achieve this. As Ricardo Caballero has pointed out, the world has a shortage of safe liquid assets. Issuing gilts therefore meets global savers’ needs. This is why the UK - and governments of developed countries generally - has enjoyed very low borrowing costs as debt has soared.
This raises a point which the architects of New Labour glossed over. Globalization makes social democracy more feasible, in one respect at least.
In globalized capital markets, it’s possible for governments to borrow massively without suffering rising interest rates; no Chancellor could have gotten away with today’s borrowing in the closed-economy world of the 1970s. This means counter-cyclical fiscal policy becomes more possible.
This doesn’t necessarily means it’s more effective; the Ricardian objection must still be addressed. Nor does it mean it’s a good thing to lumber future generations with higher debt.
Nor does it mean gilt yields will stay low. I suspect there’ll come a time when Asian savers discover better things to do with their money than lend to highly-indebted governments. But this is more likely to happen when the global economic recovery reduces demand for safe assets, and would hit all government bonds.
All it means is that there’s a message for left and right.
For the right, it means you shouldn’t scare us with stories about a “sea of red ink”. Big borrowing is more feasible, at least in the short-term, than you pretend. I hate to break it to you, but the UK is not the only country in the world.
And for the old Guardian-reading left, it means you shouldn’t complain too much about globalization. If it weren’t for this, the government would be unable to borrow as much as it is, and would have to slash public services right now.
* Figure 1.15 in the latest IMF World Economic Outlook estimates the global savings ratio will be 22.8% of GDP in 2009, with GDP being $54.9 trillion.
** In fact, this is an over-estimate, as perhaps half of the gilts issued might be bought by the Bank of England under its quantitative easing policy.
Can always rely on you to prick the headline hype, Chris. Thank you.
Ref the comment on the BoE buying a large amount of the debt, how will that be accounted in the govt accounts? Will it just disappear of the books at a point in time?
Posted by: Rob C | April 22, 2009 at 08:03 PM
The idea that the rules have changed and more debt is sustainable in globalized capital markets sets the alarm bells ringing for me; it sounds uncomfortably like the "new paradigm"-type rhetoric we have been hearing on all sides for the past 12 years.
Chris Dillow is without doubt the cleverest man he knows; however, anybody happening upon this blog post would be well advised to visit a serious economist's website, such as Willem Buiter, for a proper analysis of our current situation, as below:
http://blogs.ft.com/maverecon/2009/04/darling-is-doing-his-best-to-clean-up-browns-mess/
Posted by: kardinal birkutzki | April 22, 2009 at 09:13 PM
"Nor does it mean it’s a good thing to lumber future generations with higher debt."
Not to mention unconstitutional.
Posted by: Planeshift | April 22, 2009 at 10:09 PM
"...you shouldn’t complain too much about globalization. If it weren’t for this, the government would be unable to borrow as much as it is..."
I'm sorry, but isn't that a bit like a hospital doctor saying to a patient "Don't complain about the fact that you've got cancer, or you'd never appreciate all the treatments we've got for you"
Posted by: Huw | April 22, 2009 at 10:14 PM
"This means that the government can raise the £220bn it plans to borrow in the gilt market merely by attracting 2.5 pence for every pound saved**. This is smaller than the share of the UK in the global economy."
Does that assume that no british individuals or companies also borrow, or is the $12.5trn a total amount people plan to invest in gilts specifically?
Posted by: John | April 22, 2009 at 10:14 PM
Wasn't it globalization of the financial markets that spawned the deregulation, the foolish risk-taking, the exotic investment "mystery meats," and the subsequent financial crisis?
Posted by: John Freeland | April 23, 2009 at 03:26 AM
I think you misspelled "proper analysis" as "paranoid wibbling" above, Kardinal.
Posted by: john b | April 23, 2009 at 06:05 AM
john b
If you are still continuing your temporary stay on the same planet as the rest of us, perhaps you would explain what you mean by describing this as "paranoid wibbling".
I've deliberately chosen an analyst who has not been at heart anti-New Labour so as to avoid accusations of "he would say that wouldn,t he". I could equally well have chosen Hamish Macrae from the Independent; are all such commentators paranoid?
I accept I was being rude about Chris Dillow (I do believe he can take it!) but I was merely trying to illustrate that this is not a time for trying to be over-clever and playing down the current situation; and that we should be seriously worried and be prepared to take firm action to secure the future.
You give the impression that you are not worried. I am sure we shall look back in a year or two and see if such a sanguine viewpoint was justified...
Posted by: kardinal birkutzki | April 23, 2009 at 12:55 PM
The global savings may total $12.5tn, but what are the global borrowing requirements for the same period? Including all governments looking to borrow, companies and private individuals? I suspect it may be a similarly massive sum. Given we are one of the worst placed economies it may not be as easy to find all this money as you think.
But you miss the most crucial point. Borrowing money is easy. Its the paying it back (including the interest) that's the hard part. Ask anyone with a maxed out credit card.
Posted by: JimH | April 23, 2009 at 01:18 PM
This is the best article I've read all day. Thanks.
Posted by: Sam Langfield | April 23, 2009 at 02:17 PM
@ Rob C - QE will show up in the BoE's balance sheet. On the asset side will appear the gilts it buys. On the liability side, the deposits that financial insitutions hold with the Bank as a result of selling the gilts.
@ Kardinal - please distinguish between an explanation for what's happening now, and a forecast. In pointing to global savings, I'm merely trying to explain why gilt yields (and government bond yields generally) are low in the face of so much red ink. I'm pretty confident gilt yields will rise over the medium-term.
@ John - in aggregate, companies and households are net lenders now. Yes,JimH, other governments will be tapping the $12.5 trillion. But if they can borrow easily, gilt yields should be held down to at least some degree, given the substitutability of global bonds.
@ John F - yes, globalization did contribute to the crisis, in the sense that high demand for safe assets led banks to create "AAA" rated CDOs. But just because someone throws you a rope does not mean you have to hang yourself.
Posted by: chris | April 23, 2009 at 03:09 PM