ursaminortaur wrote:1nvest wrote:88V8 wrote:And once again the market has taken a dive.
Govts want inflation. They need inflation to deflate their debt. So it will happen.
Just not like the 70s, I hope.
The only good thing about the 70s was hot pants.
2008 UK debt was around £500Bn and costing around 5%/year to service.
Since then there's been 36% inflation so in inflation adjusted terms = 680Bn which at 5% = £34Bn/year interest payment cost in 2021 money (inflation adjusted) terms. More recently the debt is around £2.1T and costing 2%/year, but the BoE has printed £900Bn and in effect bought up a large chunk of that debt (older higher cost to service Gilts) and returns all interest paid on those gilts back to the treasury. So more like £1.2T debt costing 2% to service = £24Bn/year interest payment costs. The repayments (gilts maturing) occur over many years/decades, and as each matures so another might be issued (debt rolled) or repaid.
High inflation = higher interest rates = higher cost to roll Gilts is less desirable than if inflation/interest rates remain low, with mildly negative real yields.
As in how Covid/lockdown saw a dip in inflation/GDP, so coming out of Covid might see a peak in inflation/GDP, perhaps 4% before inflation drops back down to more around 2% BoE remit target level. And where interest rates also rise from current very low levels back to 2% type levels.
Sorry, since the 2008 UK debt was mostly at fixed interest rates rather than indexed gilts the 36% inflation since then will have inflated the debt away rather than increased it in line with inflation. A large amount will also by now have been rolled over at much much lower interest rates (the governments since then have also been successfully replacing short term debt with longer term debt so even if interest rates were to rise in the near future it wouldn't affect the low interest rates being paid on that debt for quite sometime).
I scaled up the 500Bn of 2008 debt for inflation as a comparison of the amount of debt back then in present day money terms. With the BoE having QE'd 900Bn so far, that's like it having printed to buy up all of that old debt (and more), so eliminated older higher cost (yield) gilts, whilst the Treasury issued new Gilts that pay lower yields and as you say stretched out even further in time. So on a service basis I was striving to indicate that the current 'large' debt costs no more, likely less than it cost to service the debt back in 2008 (pre financial crisis). There is still the issue that that lager capital debt will have to be either paid down or rolled, but inflation erodes that.
Somewhat like 600Bn costing 5% (yields) versus twice as much, 1200Bn, costing 2% ... and its cheaper to service the latter (30Bn interest payments versus 24Bn). Where the BoE in effect printed money to buy all of that 600Bn of gilts and returns all of the interest the treasury pays on those gilts back to the treasury (little different to having torn up those gilts).
Higher/rising interest rates would just make it more subjective of a case of whether debt should be expanded or not. When you can borrow for relatively little that's a easy choice. If interest rates/yields were higher then the treasury might opt to increase taxes rather than borrow. All pretty much business as usual, except where QE/QT might be employed instead of revising interest rates. And excepting that the chancellor will tend to use the 'large £2.1T debt' as a excuse for tightening spending/raising taxes (smoke and mirrors).