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Who do we owe all this money to?! Watch

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    In response to the original post: countries can default on their debts if they want, but then it's impossible for them to get any more loans. Governments usually borrow substantial amounts of money every year, so being unable to get any more loans would be a bit of a spanner in the works. For the 2010/2011 year (not sure exactly where it starts and ends) the UK government intend to borrow £149 billion or 12.6% of GDP.

    One might argue an econonic system based on borrowing huge sums of money every year in the belief the economy will keep growing forever has some flaws, but anyway.
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    This is what I don't understand right.. if the UK and USA owe money to other countries, and the UK and USA refuse to give it back what then? it's not like this is school where you can just punch the guy or something or tell a higher authority becuase the UK and USA are pretty much the most powerful countries in the world..so...??
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    PENSION FUNDS

    Government debt is seen to be a very secure long term investment.
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    before the start of the year (in most countries - right about now) the government has to issue the budget plan (similar to what Chris Ban posted) for the nex year. how much for education, how much for healthcare etc. if the country doesn't have enough money to fund all those sectors, it cannot just leave them without money. what would happen if the government refused to pay social grants, maternity grants and so on because the country simply doesn't have enough money, that would be crazy and unfair, wouldn't it? therefore the government takes a loan from various funds, usually the international monetary fund, and that's how it gets into debt. if the government doesn't manage to control the budget so that the income into it would be higher than the money spent, the government has to take a loan again.
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    Firstly, the deficit is not what the Treasury owes, it is the current annual running amount by which government expenditure exceeds government receipts, it is for the year, it is not the total.

    Therefore for the year the government issues bonds to the market, these as already mentioned are purchased by myriad entities; in the UK pension schemes are major purchasers, as the bonds have a fixed interest rate and a fixed term they give pension schemes a certainty of cash flow to meet each year their obligations to pay pensions.

    In an ideal world the government would not require to issue bonds each year, some years they would have a surplus and they could reduce their total debt, which is in effect the cumulative total of past years deficits less surpluses.

    However the last administration ,after their first few years in office, allowed deficits to be the norm, thus increasing the total debt. If receipts had continued as previously this likely would not have been a major problem, they could have used current year receipts to service earlier years debt financing.

    However already having a running deficit and a high total debt when the downturn happened left the UK (And other economies) unbalanced. Yes they could keep issuing bonds, if the bond markets were confident in their ability to service the interest/ repay at redemption, however already having high debt levels was not a good place to start, therefore to ensure that the interest rate on new bonds would not become too high the Government required to prove to the markets that they would take steps to start reducing their annual deficit and eventually maybe get back to surplus.

    Just to be clear, the starting circa £161 billion deficit was the amount during that year that the debt would have increased, even with the cuts now taking place we will still be in deficit, just hopefully a lower annual figure. It is likely that the total debt will get as high as £1,500 -£1,700 billion before the deficit is brought under control.

    The shake out in the financial markets was somewhat akin to the "Emperor's new clothes" A large number of private/quoted banks turned out to have a substantial amount of assets on their balance sheet of doubtful value, this caused a severe loss of confidence. Wholesale lending amongst banks dried up, no bank with available surplus liquidity was prepared to lend to the others, in effect they did not trust each others balance sheets. The market for these less than clear bank assets stopped working, banks could not sell them on to other banks, there was no market and therefore without a market no accurate pricing. Banks who had borrowed on the wholesale markets to lend to customers found that whilst they had lent the funds over say 20 years, they needed to replace their own borrowing on a shorter time frame, with no wholesale lending they could not borrow. To alleviate this problem the Bank of England stepped in to give liquidity to the banks.

    I have a small degree of confidence that as long as the Treasury does not rush things, eventually all the funds invested/ lent to the banks will be recovered, Sweden had a similar issue in the 1990s and ended up making a profit from their bailout.

    However all of the foregoing creates a lack of confidence, without confidence business entities around the world reduce production, they cannot afford to create widgets if there is a risk nobody wants to buy the widgets. This reduction in world demand impacts company profits and therefore Governments income from taxes.

    With a little time world economies will stabilize, however this could well take 7 years.

    Even with stability the UK government cannot afford to relax spending controls, the interest on the £1,500-£1,700 billion debt will need to be serviced each year from tax receipts, it will take time for this debt to be eroded by repayments from increasing tax receipts/ reduced in real terms by inflation.

    Regarding who is owed monies by the world's governments, try China and India for starters; a recent presentation I attended at Clydesdale Bank had one strong suggestion;

    ensure your children learn Mandarin.
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    (Original post by CoffeeStinks)
    This so called multibillion pound deficit is absurd.

    If every country in the world is in debt who is the entity that we owe it to?

    Or if it's one of those I owe you, you owe her, she owes him....

    Then could we not wipe the slate clean?

    Am I missing something?
    can't expect a woman to understand anything serious, yet alone the economics under which she lives


    this bacon is raw. cook it
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    (Original post by TheLloyd)
    Well America are in debt to China, they literaly can only pay the intrest of these debts. But China can't really do anything for 2 reasons;

    1. The size of the US military
    2. The main importer of Chinese exports is America


    China hold the most bonds for countries.
    What do you mean China can't do anything? They can sell US treasury bonds if they want. Well they couldn't do a huge sale, although that has nothing to do with the size of the US military :p:
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    (Original post by ChrisBan)
    Really? Unless I'm mistaken, if the government is spending more money than it receives, they have to borrow. As with any loan you pay interest. The bigger pot of money you owe, the more money you shell out on interest.



    This year, the government will spend £44 billion on loan interest. How does it not mean "****" if we're spending the equivalent of half the education budget on paying our debt off?
    To be strictly correct, it is even worse, we are not paying our debt off we are merely servicing our existing debt whilst incurring further debt. However I concur with your sentiment.
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    (Original post by CoffeeStinks)
    But aren't those other countries in debt too?
    Not all countries are in debt, China and other asian countries have surplus's. Countries like Japan might have stagnant growth, but their citizens save lots of money. In the USA and here, people had stopped saving and were heavily in debt, we are now going through a very painful period of paying of personal debts, asset prices are still falling, our governments are still borrowing and the banks still have toxic debt on their books. The credit markets are split into different markets(where governments buy and sell their own bonds and ususally large institutions such as pension funds etc participate - this is the soverign debt market, and then there is the market where Corporations buy and sell their bonds and so on.

    All these bonds have different levels of risk assoicated with them which is why the Euro Zone is in so much trouble,as the bonds issued by Ireland, Greece, Portugal, Belgium and soon Spain have been hit hard by lack of confidence so the interest repayments they have to pay on their bonds have gone through the roof and are unsustainable for them to repay. Germany, the IMF and us (in the case of Ireland) have had to lend hugh sums of money to try and stablise the economies and win back the confidence of the markets. However, should things in Spain get any worse then the whole Eurozone will be in very serious trouble and is unlikely to survive in its present form.
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    (Original post by Ewan)
    What do you mean China can't do anything? They can sell US treasury bonds if they want.
    But given China want the US export market, selling US bonds in significant amounts will further weaken the $ relative to China's currency, thus reducing USA demand for chinese products.

    I suspect they, the Chinese, will continue acquiring raw materials via foreign companies invested in iron/copper/ coal etc
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    (Original post by DJKL)
    Firstly, the deficit is not what the Treasury owes, it is the current annual running amount by which government expenditure exceeds government receipts, it is for the year, it is not the total.

    Therefore for the year the government issues bonds to the market, these as already mentioned are purchased by myriad entities; in the UK pension schemes are major purchasers, as the bonds have a fixed interest rate and a fixed term they give pension schemes a certainty of cash flow to meet each year their obligations to pay pensions.

    In an ideal world the government would not require to issue bonds each year, some years they would have a surplus and they could reduce their total debt, which is in effect the cumulative total of past years deficits less surpluses.

    However the last administration ,after their first few years in office, allowed deficits to be the norm, thus increasing the total debt. If receipts had continued as previously this likely would not have been a major problem, they could have used current year receipts to service earlier years debt financing.

    However already having a running deficit and a high total debt when the downturn happened left the UK (And other economies) unbalanced. Yes they could keep issuing bonds, if the bond markets were confident in their ability to service the interest/ repay at redemption, however already having high debt levels was not a good place to start, therefore to ensure that the interest rate on new bonds would not become too high the Government required to prove to the markets that they would take steps to start reducing their annual deficit and eventually maybe get back to surplus.

    Just to be clear, the starting circa £161 billion deficit was the amount during that year that the debt would have increased, even with the cuts now taking place we will still be in deficit, just hopefully a lower annual figure. It is likely that the total debt will get as high as £1,500 -£1,700 billion before the deficit is brought under control.

    The shake out in the financial markets was somewhat akin to the "Emperor's new clothes" A large number of private/quoted banks turned out to have a substantial amount of assets on their balance sheet of doubtful value, this caused a severe loss of confidence. Wholesale lending amongst banks dried up, no bank with available surplus liquidity was prepared to lend to the others, in effect they did not trust each others balance sheets. The market for these less than clear bank assets stopped working, banks could not sell them on to other banks, there was no market and therefore without a market no accurate pricing. Banks who had borrowed on the wholesale markets to lend to customers found that whilst they had lent the funds over say 20 years, they needed to replace their own borrowing on a shorter time frame, with no wholesale lending they could not borrow. To alleviate this problem the Bank of England stepped in to give liquidity to the banks.

    I have a small degree of confidence that as long as the Treasury does not rush things, eventually all the funds invested/ lent to the banks will be recovered, Sweden had a similar issue in the 1990s and ended up making a profit from their bailout.

    However all of the foregoing creates a lack of confidence, without confidence business entities around the world reduce production, they cannot afford to create widgets if there is a risk nobody wants to buy the widgets. This reduction in world demand impacts company profits and therefore Governments income from taxes.

    With a little time world economies will stabilize, however this could well take 7 years.

    Even with stability the UK government cannot afford to relax spending controls, the interest on the £1,500-£1,700 billion debt will need to be serviced each year from tax receipts, it will take time for this debt to be eroded by repayments from increasing tax receipts/ reduced in real terms by inflation.

    Regarding who is owed monies by the world's governments, try China and India for starters; a recent presentation I attended at Clydesdale Bank had one strong suggestion;

    ensure your children learn Mandarin.
    This is an excellent post!
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    (Original post by Blondshavemorefun)
    Not all countries are in debt, China and other asian countries have surplus's. Countries like Japan might have stagnant growth, but their citizens save lots of money. In the USA and here, people had stopped saving and were heavily in debt, we are now going through a very painful period of paying of personal debts, asset prices are still falling, our governments are still borrowing and the banks still have toxic debt on their books. The credit markets are split into different markets(where governments buy and sell their own bonds and ususally large institutions such as pension funds etc participate - this is the soverign debt market, and then there is the market where Corporations buy and sell their bonds and so on.

    All these bonds have different levels of risk assoicated with them which is why the Euro Zone is in so much trouble,as the bonds issued by Ireland, Greece, Portugal, Belgium and soon Spain have been hit hard by lack of confidence so the interest repayments they have to pay on their bonds have gone through the roof and are unsustainable for them to repay. Germany, the IMF and us (in the case of Ireland) have had to lend hugh sums of money to try and stablise the economies and win back the confidence of the markets. However, should things in Spain get any worse then the whole Eurozone will be in very serious trouble and is unlikely to survive in its present form.
    As is yours.
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    (Original post by CoffeeStinks)
    So the government will be fully aware of this and allow it to create propaganda. If the government wanted to redistribute the money around then they would. They chose not to so that they have an excuse to put forth their proposals and make it seem in the interest of the government.
    Not sure if I'm being really thick here, what?:confused:
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    well seen as most of you know who the govenment are in debt to, would you really be happy to pay towards the debt? I know i wouldn't! Then again it's being taken out of our accounts anyway and our voices are not going to be heard so who are we to complain and to waste our breath? Taxes are taken out anyway, the whole world is a joke!
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    (Original post by DJKL)
    To be strictly correct, it is even worse, we are not paying our debt off we are merely servicing our existing debt whilst incurring further debt. However I concur with your sentiment.
    Oops bad typo there... should have said equivalent of half the education budget on interest :teehee:
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    (Original post by Noodles1995)
    well seen as most of you know who the govenment are in debt to, would you really be happy to pay towards the debt? I know i wouldn't! Then again it's being taken out of our accounts anyway and our voices are not going to be heard so who are we to complain and to waste our breath? Taxes are taken out anyway, the whole world is a joke!
    You do not have a choice. Given the amount of goods we import, including food, if we were to not honour our debts the exchange rate of the £ to other currencies would plummet, the cost of all these goods we consume would spiral upwards, eventually nobody would be prepared to deal with us in sterling. Look at the Euro exchange rate and its movement relative to sterling over the last 12-18 months.
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    (Original post by DJKL)
    You do not have a choice. Given the amount of goods we import, including food, if we were to not honour our debts the exchange rate of the £ to other currencies would plummet, the cost of all these goods we consume would spiral upwards, eventually nobody would be prepared to deal with us in sterling. Look at the Euro exchange rate and its movement relative to sterling over the last 12-18 months.
    I do strongly agree with what you are saying but this debt is never going to end, even though they are increasing everything.
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    (Original post by Noodles1995)
    I do strongly agree with what you are saying but this debt is never going to end, even though they are increasing everything.
    It will improve, it will just take time.

    Inflation, if under control, has an interesting effect on debt. Receipts will rise each year due to inflation, if we have got to a surplus position then the real debt will erode.

    I do however have a slightly gloomy view as to the role of European and North American economies over the next twenty years or so. The new economic centre of the world will be China/ India the Pacific countries. (I am not sure re Russia)

    Germany is apparently currently doing well exporting machine tools to the East.

    However the coupling of manpower/ raw materials/ education will likely see China overtaking the USA as the country with the highest total GDP (I think they have just gone ahead of Japan) UK trade with China is limited, I expect it will grow, but what we have to sell is also our technical expertise.

    Eventually, as their labour costs increase, we may be able to restart manufacturing in Europe; instead of us purchasing lots of cheap product from Korea/ China/ Taiwan, they will be purchasing cheap product from us labelled made in GB.( Hope is has a better quality perception)

    The USA overtook the British Empire in total GDP circa 1900/1910, as did Germany: 120-130 years later China will likely do similar versus the USA.

    No region can hold a permanent position as economic top dog, through history there are always changes, my prediction is now is one of these changes.

    The above is one of the reasons I believe the current policy re education funding is short sighted; yes we cannot afford it now, however if we do not compete re education where else can we compete, if we lose our technical edge what else do we have?
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    (Original post by alanr)
    This is what I don't understand right.. if the UK and USA owe money to other countries, and the UK and USA refuse to give it back what then? it's not like this is school where you can just punch the guy or something or tell a higher authority becuase the UK and USA are pretty much the most powerful countries in the world..so...??
    A bond has risk. If you buy a bond, as an investor you are looking at several things. The major ones are:

    Interest rates from a "Zero risk" investment, commonly seen as US treasury bonds (Lets say 2%)

    A liquidity premium (how hard it is to get rid of the assets and how much that costs, basically how close the asset is to cash) which will be basically 0% for bonds because you can trade billions in days comfortably

    A risk premium, this is the level of risk above the "0 risk" investment. (lets say its a risky African government, you might look for 4%)

    So we would expect 6%. The point is, if the bond is for a more risky government/Company, you will get a higher % of interest on it



    If, and that's a big if (especially in the Euro zone as Germany will bail ANYONE out rather than have the Euro fail) the government defaults... And you own their bonds, you are just another creditor when they send the administrators in (not sure what that would look like for a nation) and you are ahead of shareholders but still you won't necessarily get a decent amount of your money back.
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    (Original post by Ewan)
    What do you mean China can't do anything? They can sell US treasury bonds if they want. Well they couldn't do a huge sale, although that has nothing to do with the size of the US military :p:
    Its in their best interests to keep the bonds, they will always have something over the US. Neither country is strapped for cash and America has the federal reserve and everything is traded in dollars.

    In theory they could legally take over American states etc.. But it is far from logical when you take into account America is paying off the interest and imports the most things from china.
 
 
 
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