Britain’s inflationary route to default
George Osborne’s idea of refinancing the national debt with 100-year gilts, or even gilts issued in perpetuity, is a bit too clever by half.
By Jeremy Warner
14 Mar 2012
Far from being the masterstroke it pretends, it is just another piece of nonsense which is unlikely to find significant traction among investors and merely distracts from the wider priority of reviving the economy and getting Britain back on to a sustainable footing.
Competent management of the public finances – the apparent purpose of this initiative – is a fine ambition as far as it goes, but it is no substitute for the radical economic strategy the nation so desperately needs. Now I don’t want to rain too hard on the Chancellor’s parade. For the Government, it makes obvious sense to attempt to lock in today’s ultra-low interest rates for such long periods of time, or as the Chancellor has put it on a visit to Washington, to take advantage of Britain’s current “safe-haven” status.
Potentially, the saving to taxpayers would be huge if and when interest rates start rising again. Britain’s already relatively long debt maturity profile has stood the country in good stead, making it less vulnerable to the speculative attacks which have bedevilled the eurozone periphery. The introduction of 100-year bonds would further extend the profile out into the long-term future.
The Government’s saving, however, is almost by definition somebody else’s loss. For investors, it would be utter madness to indulge the Exchequer in such a manner. Even Collateralised Debt Obligations would struggle to compete by way of guaranteed wealth destruction.
To see why, look no further than the precedent of War Loan. This salutary lesson in how to lose your shirt to the UK Government bears some repeating. Rewind to 1932, and the nation was suffering under the same high levels of public indebtedness as today, only much worse. Following the ravages of the First World War, the national debt stood at close to 200pc of GDP. Today we are still at a relatively lowly 70pc.