mrtrench
Well-Known Member
Clint, I think it depends on one's views re scrutiny. When I watch the BBC it always feels like Labour is given an easy ride and the government lambasted.
However, I have now listened to McDonnell and have some points on what he says. I'll be completely open and disclose that I know a lot about financial markets but am self-taught on economics.
1) Issue government bonds to buy back privatised utilities. The first point is that the definition of government debt is issuing bonds. That is the only way that the government borrows (apart from minor initiatives such as NSI premium bonds). I don't understand how he can make out it is anything else but increasing debt. He says that interest rates are low and hence this is affordable. However we mustn't confuse the current base rate with the rate that government bonds pay for, say, 25 years maturity. 25 year gilts yield 1.9%. It's still low but much higher than base.
The real issue here is that once the gilts are issued to shareholders in utilities they can immediately be sold back into the gilt market, increasing supply. That will drive gilt yields higher (indeed I think they would go higher immediately that Labour were elected as the market would be spooked). That, in turn, will increase the cost of further government debt just to service the deficit and the regular renewal of existing debt (as gilts mature, the BoE issues more to pay the principal back). Debt would immediately become more expensive - and that would increase the deficit.
An important point that wasn't challenged is that 'parliament would decide the price to pay'. Why not the market, because by definition that is the true value. If he forces shareholders to sell below market value that would be subject to legal challenge and would immediately reduce trust in the government. That would send markets into turmoil.
Next, he says that he can pay the interest on the government bonds using the income from profitable companies. I agree that this would work initially. However, when these companies were in public hands they didn't make a profit - they were privatised partially to remove the burden from the public purse. How long until this happens again and we now have more debt and a need to support failing utility companies?
2) PFI buy-back. He claims he will make a profit due to savings. This is nonsense. To buy back the contracts he will have to pay the value on the contracts up front. The projected income to the private companies will be discounted to present value and that will be the buy out price. This is the fair way of doing business. If he forces a discount through that will again spook markets and damage the economy. In any case - more borrowing through government bonds and hence higher gilt interest payments...
3) £250b borrowing to invest. He claims funded by a return from the investment. When he says invest he doesn't mean putting the money in a savings account. He means building hospitals; building roads etc. All lovely things I'm sure, but by no means certain to yield any income. The income he anticipates is increased tax income through growth. But what if all this increased debt cripples the country? Very dodgy.
This is why I am so anxious. He's talking about things I understand from my professional life and it's all tosh and very dangerous.
However, I have now listened to McDonnell and have some points on what he says. I'll be completely open and disclose that I know a lot about financial markets but am self-taught on economics.
1) Issue government bonds to buy back privatised utilities. The first point is that the definition of government debt is issuing bonds. That is the only way that the government borrows (apart from minor initiatives such as NSI premium bonds). I don't understand how he can make out it is anything else but increasing debt. He says that interest rates are low and hence this is affordable. However we mustn't confuse the current base rate with the rate that government bonds pay for, say, 25 years maturity. 25 year gilts yield 1.9%. It's still low but much higher than base.
The real issue here is that once the gilts are issued to shareholders in utilities they can immediately be sold back into the gilt market, increasing supply. That will drive gilt yields higher (indeed I think they would go higher immediately that Labour were elected as the market would be spooked). That, in turn, will increase the cost of further government debt just to service the deficit and the regular renewal of existing debt (as gilts mature, the BoE issues more to pay the principal back). Debt would immediately become more expensive - and that would increase the deficit.
An important point that wasn't challenged is that 'parliament would decide the price to pay'. Why not the market, because by definition that is the true value. If he forces shareholders to sell below market value that would be subject to legal challenge and would immediately reduce trust in the government. That would send markets into turmoil.
Next, he says that he can pay the interest on the government bonds using the income from profitable companies. I agree that this would work initially. However, when these companies were in public hands they didn't make a profit - they were privatised partially to remove the burden from the public purse. How long until this happens again and we now have more debt and a need to support failing utility companies?
2) PFI buy-back. He claims he will make a profit due to savings. This is nonsense. To buy back the contracts he will have to pay the value on the contracts up front. The projected income to the private companies will be discounted to present value and that will be the buy out price. This is the fair way of doing business. If he forces a discount through that will again spook markets and damage the economy. In any case - more borrowing through government bonds and hence higher gilt interest payments...
3) £250b borrowing to invest. He claims funded by a return from the investment. When he says invest he doesn't mean putting the money in a savings account. He means building hospitals; building roads etc. All lovely things I'm sure, but by no means certain to yield any income. The income he anticipates is increased tax income through growth. But what if all this increased debt cripples the country? Very dodgy.
This is why I am so anxious. He's talking about things I understand from my professional life and it's all tosh and very dangerous.
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