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One solution to government borrowing

  • 04-10-2010 10:23pm
    #1
    carrolls
    Registered Users, Registered Users 2 Posts: 1,011 ✭✭✭


    The government recently sold six and 10-year bonds with a hit of 6-7%.
    The whole action of showing our hand to the international market is humiliating and there is possibly another answer.
    Here is what they should do.
    People are saving like mad even though the banks interest rates are at all time lows.
    Simply offer the public a guaranteed 4.5% long term interest rate at the post office. Billions in capital would be guaranteed to flow in, thus giving the government a better rate than the 6-7% they are getting now.
    Any flaws in this strategy?


Comments

  • #2
    [Deleted User]
    Posts: 0 ✭ [Deleted User]


    carrolls wrote: »
    The government recently sold six and 10-year bonds with a hit of 6-7%.
    The whole action of showing our hand to the international market is humiliating and there is possibly another answer.
    Here is what they should do.
    People are saving like mad even though the banks interest rates are at all time lows.
    Simply offer the public a guaranteed 4.5% long term interest rate at the post office. Billions in capital would be guaranteed to flow in, thus giving the government a better rate than the 6-7% they are getting now.
    Any flaws in this strategy?

    pretending that people had billions stashed away that they could put into this post office account........what are you gonna do with the money? spend it? What happens when people go to take out money and their balance is zero :eek: The bond markets arent just for bank recapitalisations its for day to day govt spending:pac:


  • #3
    dynamick
    Closed Accounts Posts: 724 ✭✭✭dynamick


    carrolls wrote: »
    The government recently sold six and 10-year bonds with a hit of 6-7%.
    The average cost of borrowing to the state this year has been 4.7%. This is the same rate that was paid last year.
    source: http://www.ft.com/cms/s/0/d7bcff58-cf1c-11df-9be2-00144feab49a.html

    The fact that our debt is trading at 6.3% in secondary markets doesn't mean that we are paying that rate.
    Simply offer the public a guaranteed 4.5% long term interest rate at the post office. Billions in capital would be guaranteed to flow in, thus giving the government a better rate than the 6-7% they are getting now.
    Any flaws in this strategy?
    The national solidarity bond pays 47.5% net over 10 years or 3.96% net/annum.
    http://www.statesavings.ie/products/Pages/NationalSolidarityBond.aspx

    You can get this from any post office.


  • #4
    carrolls
    Registered Users, Registered Users 2 Posts: 1,011 ✭✭✭carrolls


    Deleted User wrote: »
    pretending that people had billions stashed away that they could put into this post office account........what are you gonna do with the money? spend it? What happens when people go to take out money and their balance is zero :eek: The bond markets arent just for bank recapitalisations its for day to day govt spending:pac:
    Oh god, you really don't understand how financial institutions work.
    When people put the money in, they can't just take it out again the following week. They agree to a fixed term.
    Actually households have €187bn stashed away in the banks.:pac::pac:
    If they obtained just 10% of this via the post office, they wouldn't need to go to the international markets looking for capital at 6-7%. Their only outgoing is the 4.5%.
    The money would be used for day to day spending just as if they obtained it through selling debt.


  • #5
    SkepticOne
    Closed Accounts Posts: 6,718 ✭✭✭SkepticOne


    dynamick wrote: »
    The average cost of borrowing to the state this year has been 4.7%. This is the same rate that was paid last year.
    source: http://www.ft.com/cms/s/0/d7bcff58-cf1c-11df-9be2-00144feab49a.html

    The fact that our debt is trading at 6.3% in secondary markets doesn't mean that we are paying that rate.
    I think the worrying thing is that the longer term 8 year bonds that were sold in the most recent auction went for just over 6%.


  • #6
    cson
    Registered Users, Registered Users 2 Posts: 14,500 ✭✭✭✭cson


    carrolls wrote: »
    Oh god, you really don't understand how financial institutions work.

    Oh god, you really don't understand how Countries work.


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  • #7
    carrolls
    Registered Users, Registered Users 2 Posts: 1,011 ✭✭✭carrolls


    dynamick wrote: »
    The average cost of borrowing to the state this year has been 4.7%. This is the same rate that was paid last year.
    source: http://www.ft.com/cms/s/0/d7bcff58-cf1c-11df-9be2-00144feab49a.html

    The fact that our debt is trading at 6.3% in secondary markets doesn't mean that we are paying that rate.

    The national solidarity bond pays 47.5% net over 10 years or 3.96% net/annum.
    http://www.statesavings.ie/products/Pages/NationalSolidarityBond.aspx

    You can get this from any post office.

    The average over the last three months has been 6%. And is going to be higher in April.
    I am not talking about any 10 year national solidarity bond, just a 1 year fixed savings post office account with an interest rate of 4.5%.
    This is guaranteed to be extremely popular. And it will give the Government a new source of lower interest capital.


  • #8
    carrolls
    Registered Users, Registered Users 2 Posts: 1,011 ✭✭✭carrolls


    cson wrote: »
    Oh god, you really don't understand how Countries work.
    In what way? What does this have to do with "Countries" in general. Or are you just being conceited for the forums sake?


  • #9
    ashleey
    Registered Users, Registered Users 2 Posts: 2,005 ✭✭✭ashleey


    What happens if everyone moved their deposits out of aib etc to buy this deal? It would make last Thursdays re caps look tiny.


  • #10
    carrolls
    Registered Users, Registered Users 2 Posts: 1,011 ✭✭✭carrolls


    ashleey wrote: »
    What happens if everyone moved their deposits out of aib etc to buy this deal? It would make last Thursdays re caps look tiny.
    Not everyone is going to jump on this deal, anyway I can't see AIB having a huge amount of deposit accounts on their books, with the interest rates they have offered over the last 10 years.


  • #11
    stepbar
    Closed Accounts Posts: 6,123 ✭✭✭stepbar


    carrolls wrote: »
    The government recently sold six and 10-year bonds with a hit of 6-7%.
    The whole action of showing our hand to the international market is humiliating and there is possibly another answer.
    Here is what they should do.
    People are saving like mad even though the banks interest rates are at all time lows.
    Simply offer the public a guaranteed 4.5% long term interest rate at the post office. Billions in capital would be guaranteed to flow in, thus giving the government a better rate than the 6-7% they are getting now.
    Any flaws in this strategy?

    Prey tell where would the banks find the money to shore up their balance sheets after the flight of funds to the state?


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  • #12
    hobochris
    Registered Users, Registered Users 2 Posts: 2,164 ✭✭✭hobochris


    carrolls wrote: »
    The government recently sold six and 10-year bonds with a hit of 6-7%.
    The whole action of showing our hand to the international market is humiliating and there is possibly another answer.
    Here is what they should do.
    People are saving like mad even though the banks interest rates are at all time lows.
    Simply offer the public a guaranteed 4.5% long term interest rate at the post office. Billions in capital would be guaranteed to flow in, thus giving the government a better rate than the 6-7% they are getting now.
    Any flaws in this strategy?

    you mean like the National Solidarity Bond?


  • #13
    Justin Collery
    Closed Accounts Posts: 192 ✭✭Justin Collery


    carrolls wrote: »
    I am not talking about any 10 year national solidarity bond, just a 1 year fixed savings post office account with an interest rate of 4.5%.

    - Be careful not to mix up maturity dates. The government many well have to pay 6% on 10 year bonds if it went to the market, it would not have to pay close to that for 1 year bonds which is what you are describing. They would not have to pay 4.5% so this would be a bad deal for the government

    - There isn't €187bn waiting to be tapped. Household deposits currently stand at €96bn, thats your pool

    - The banks don't have enough capital right now. Every € taken out of the banks has to be replaced. These days that generally means the government replacing it...you see the problem

    The reason this will not work goes to the heart of our problem, namely

    - the government has too much debt
    - the banks have too much debt
    - the population have too much debt

    If it was just one of these three we could do what you suggest and move the money from one to the other, it's a good idea. If it was two of the above, your idea may still work, it would be hard, but we'd probably make it. All three = screwed.

    I can't see any easy answer here. We need to stop borrowing, now.


  • #14
    ei.sdraob
    Closed Accounts Posts: 9,376 ✭✭✭ei.sdraob


    jcollery wrote: »
    The reason this will not work goes to the heart of our problem, namely

    - the government has too much debt
    - the banks have too much debt
    - the population have too much debt

    Very well said! all our problems go back to having too much debt at all levels,

    And even if some people personally managed to avoid the trap (no mortgage, company etc debt here) these people will have to pay directly and indirectly via increased taxes and reduced services, socialism for ya :(


  • #15
    [Deleted User]
    Posts: 0 ✭ [Deleted User]


    carrolls wrote: »
    Oh god, you really don't understand how financial institutions work.
    When people put the money in, they can't just take it out again the following week. They agree to a fixed term.
    Actually households have €187bn stashed away in the banks.:pac::pac:
    If they obtained just 10% of this via the post office, they wouldn't need to go to the international markets looking for capital at 6-7%. Their only outgoing is the 4.5%.
    The money would be used for day to day spending just as if they obtained it through selling debt.

    ok lets be clear here...do you want this money for day to day spending? I.e would you need this amount of money every year or are you looking to use it for once off purposes? The title says its a solution to govt borrowing.


  • #16
    johnnyskeleton
    Moderators, Entertainment Moderators, Politics Moderators Posts: 14,550 Mod ✭✭✭✭johnnyskeleton


    carrolls wrote: »
    Oh god, you really don't understand how financial institutions work.

    Like I always say, that's what happens when you don't have BATTONEFFECT in your username.
    carrolls wrote: »
    When people put the money in, they can't just take it out again the following week. They agree to a fixed term.

    Unless of course they have demand deposit accounts.
    carrolls wrote: »
    Actually households have €187bn stashed away in the banks.:pac::pac:

    Source?
    carrolls wrote: »
    If they obtained just 10% of this via the post office, they wouldn't need to go to the international markets looking for capital at 6-7%. Their only outgoing is the 4.5%.

    But if I take my money out of Anglo and put it into An Post the government are, in your analogy, borrowing off me to refill the hole I have left in Anglo. So moving my money from a bailed out bank to a bailing out government makes no difference.
    carrolls wrote: »
    The money would be used for day to day spending just as if they obtained it through selling debt.

    We could demand that everyone drawing the dole must invest a portion of their dole into an An post savings account. Then the snake would really be eating its own tail.


  • #17
    Économiste Monétaire
    Closed Accounts Posts: 2,208 ✭✭✭Économiste Monétaire


    carrolls wrote: »
    Actually households have €187bn stashed away in the banks.:pac::pac:
    .
    Irish households? The latest figures available (that I'm aware of) for deposits from Irish residents are here (xls file); this shows that Irish households have €96.5bn on deposit and half of that is in overnight deposits.


  • #18
    [Deleted User]
    Posts: 0 ✭ [Deleted User]


    Deleted User wrote: »
    pretending that people had billions stashed away that they could put into this post office account


    just to clarify that when i said that above ^^ I assumed it was gonna be "new" money because if it wasnt it would be exactly as johnny skeleton said - the snake eating its tail. Can the OP clarify if this is for the deficit every year?


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