borrowing

[BJS]

I keep reading in the papers or on the news about the huge amounts of money the goverment are borrowing. WHO do they borrow it from as if it from another country and if so what is the collateral.

[factor-fiction]

The government borrows the money this way: It prints and sells �gilt edged securities�, also known as stocks, bonds and Treasury bills. These are simply pieces of paper which promise an additional return to the buyer, sometime in the future. The securities are auctioned several times a year to meet the shortage of government revenue as it arises. They are bought by individuals, insurance companies, pension funds, trust funds, and banks. The government takes the money it has raised by these sales, and spends it on its public projects.

When the non-banking sector (individuals, insurance, pension and trust funds) buy government securities, saved money is being recycled back into the economy through government spending.

However, when banks buy government securities, entirely new money - which has been created out of nothing by the banks specifically for these purchases - is spent into the economy by the government.

These securities are becoming due, or �maturing� regularly. Servicing these securities is known as �paying the interest on the National Debt�. The government has to find the money to repay them in full.

Of course, the government does not have the money to repay them - that is why it had to sell securities in the first place. Therefore, how does it repay them? Answer: It raises the money to repay the previous securities by selling even more securities and by putting up taxes even further.

That is to say: The government is raising money it doesn�t have, by printing bits of paper and selling them to banks, which buy them with money they don�t have either, but which they create out of nothing. The government then expects us, through our taxes, to pay back the banks with the real money that we�ve worked for.

[sandmaster]

Good answer Factor. Sometimes the bonds may be undated - in which case the government can redeem them 'sometime in the future' - but of course interest is still payable in the meantime. If the interest on these bonds is low then there is little incentive to repay them, but these are usually issued below par anyway to make the interest rate more attractive.

[BJS]

Thanks for the response factor30 a tad confusing for a wrinlie. It just makes one wonder what goes on in the seats of power.

[Pimpernel]

Very good answer Factor30!
If the British government was a private individual, what do you think its credit rating would be?
I'm especially about tax rises in 2009. Was hit by the suppression of the 10pc tax rate in 2008, eventually found a better paid job, but still had to make do with a lower salary for 6 months.