Repaying the COVID 19 Debt Pile

The UK Government’s debt pile that is, not yours. It's eye wateringly massive although just after the Napoleonic wars, it stood at 250% of GDP and took an Industrial Revolution to bring it down.

It has to be repaid though doesn’t it?

Well, it doesn’t, so let me explain why. I want you to listen carefully to this – not a lot of people know. And as mortgage advisers, you need to know.

During World War 2, my Grandad helped to finance a Spitfire. He and all his neighbours bought War Bonds, enough to build a Spitfire fighter plane. No one wanted their money back, just 5% interest. Many of these bonds are still around, but the government are cleverly refinancing these now and paying back the capital. Refinancing at a fraction of the interest rate paid before – at about 0.5%, saving billions.

The UK Government is now the largest holder of its gilts. Weird that, although strictly speaking it’s the Bank of England who owns the gilts, but the government pretty much runs the B of E. Blame this on Quantitative Easing – QE – the practice of printing money to buy back gilts.

So interest payments of £18 billion roughly are being paid on these gilts. Interest payments are being paid by the government, to the government. You can’t make this up.
The government debt office has been refinancing older gilts, paying hefty interest rates, to long term low rates – around 0.5% saving billions in the interest payments.

The total interest paid on gilts is the lowest since 1980. When interest rates are low, you can afford to ramp up debt, especially if you’re borrowing at long-term – 20 years plus.
The government plans to start buying other assets via QE soon, FTSE 100 shares are top of the shopping list.

None of these ideas reduces the debt pile; however, there’s a rumour that the UK government will slowly and secretly start cancelling the debt it owes to itself. Clever eh.

That’s how COVID 19 debt pile will be repaid but the upshot, according to monetarist economists, is inflation. Not yet, but within ten years. As a mortgage broker, you need to know this. Inflationising away the National Debt – now that’s what they used to repay the debt after WW2 with inflation peaking at 27% in 1975. I remember those days.

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