For sale: £45 billion of gov’t gilts (beating any month during 2008/9 crisis)

8th April 2020 / United Kingdom
For sale: £45 billion of gov't gilts (beating any month during 2008/9 crisis)

By TruePublica: The Debt Management Office yesterday announced that from last Monday (6th April) it would be conducting additional gilt auctions in order to raise a total of £45 billion this month. This is more than previously planned as greater sums are needed to finance the Government’s interventions in response to the COVID-19 pandemic. £45 billion in a single month is a lot. It is more than three times the largest amount raised in a single month and more than was raised at the peak of the financial crisis in July 2009, at £28 billion. But there’s an even bigger record that sum beats as well.

 

It goes to show that the COVID-19 pandemic is not just attempting to kill as many people as possible but is also ravaging at the systems that sustain us all as well. It is a two-pronged attack by an enemy 1000th the thickness of a human hair, multiplied by trillions to overwhelm us.

And for anything that we do or don’t believe about government – one thing we can say, if we are sacrificing our economy to save people, we are indeed still civilised.

The IFS has calculated that the direct cost of the fiscal responses could easily add £120 billion to borrowing over the next twelve months. A substantial package for the self-employed – announced nearly two weeks ago could add a further £10 billion to this figure. Overall this would bring total borrowing up to almost £190 billion. In the end, reality will prove this likely to be much more.

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In fact, the amount of money lost in the economy and being raised by government debt as a counter-balance is anticipated by the IFS as a share of national income, to be double the effort than that to fight off the bank-led financial crisis.

 

Households

The public health response to the COVID-19 pandemic is likely to reduce household incomes as workers lose their jobs, earnings fall, and plummeting share prices and interest rates lead to lower incomes from savings and investments for those that are retired. Newly released official statistics on incomes and poverty in the UK in 2018–19, published by the Department for Work and Pensions (DWP), show this downturn will come after a sustained period of income stagnation in the latter half of the last decade – which itself followed only a brief recovery from the late 2000s recession.

New data show that median income fell 1% in real terms between 2017−18 and 2018−19, leaving average income essentially unchanged since 2015−16. Recent trends have been worse for low-income households: their living standards in 2018−19 were the same as in 2013−14, amounting to five years of income stagnation. 

What comes next is anyone’s guess. Average household incomes will fall for sure. Average savings will as well, meaning banks will have less on deposit – meaning they will tighten lending policy, meaning there is less to lend to people and businesses that need money to survive. It’s a nasty self-defeating cycle.

More people unemployed means more government borrowing, which means more needing to be raised either by way of yet more borrowing or increasing taxation or more likely both. Both help to strangle the economy as the former requires more capital to pay increased interest payments and the latter takes circulating cash out of the economy to pay for the debts of government. Continued or increased austerity is possible given the circumstances. In 1976 the government of the day was in trouble and required financial stability by way of a loan from the IMF. That December it cut public spending by 20 per cent. For perspective, the Tory government contracted public spending from 2011 to 2015 by 11.7 per cent, one of the biggest squeezes ever and it meant $46 billion was saved against the national debt (at a human death toll calculated to be at least 120,000).

Taking this fact (£46 billion squeezed out of public spending over 4 years) and the fact that the government is to raise that same sum in one month to combat the economic fallout of COVID-19 gives you something to think about.

Another threat from an economic point of view is that inflation shows up. Inflation kills debt over time but it can do all sorts of other damage depending on the scale of it. Two per cent is normal – five per cent is not, but it is manageable – anything more and it’s a another crisis in the making. Like many countries right now, Britain has a lot on its plate to deal with, which will be soon replaced with another set of problems.

 

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