Budget deficits.

Pookah

Hi folks,

I know very little about economics, so please be patient.

I was watching a BBC report, the other day, about the proposed cuts in the UK. The report mentioned the budget deficit in Britain, then went on to list the budget deficits in Germany, France, the U.S. etc

If I understand correctly, the budget defecit is the amount these countries owe. The question I'd like to ask is to whom is all this money owed.

red93

a deficiet means the governments expenditure is greater than its income:)

Pookah

red93 wrote: »

a deficiet means the governments expenditure is greater than its income:)

Ok.

Just that it mentioned, on a different show, Andrew Marr, I think, about the cuts in Britain being because of all the money Labour had borrowed.

Time Magazine

Pookah wrote: »

If I understand correctly, the budget defecit is the amount these countries owe. The question I'd like to ask is to whom is all this money owed.

Banks, basically.

To fund a deficit, governments sell bonds. A bond is a contract that is essentially along the lines of "Buy this for $100m and in five years' time we'll pay you $110m".

These bonds are sold primarily to large investment banks like Goldman Sachs.

Pookah

Time Magazine wrote: »

Banks, basically.

To fund a deficit, governments sell bonds. A bond is a contract that is essentially along the lines of "Buy this for $100m and in five years' time we'll pay you $110m".

These bonds are sold primarily to large investment banks like Goldman Sachs.

So, is it correct to say that all the Western economies are in hock to these large investment banks?

Edit: any links or websites I could read, easily spelling this stuff out, instead of annoying your heads?

Time Magazine

What do you mean by "in hock"?

noodler

Would bond market not be more accurate?

What percentage of the money Ireland, for example, has borrowed this year from the bond markets came directly from banks?

I know we don't know but you reckon they'd be in the 90% range?

I thought that pension funds etc would have made up a reasonable portion.

Time Magazine

noodler wrote: »

Would bond market not be more accurate?

Yes, but more few people intuitively understand what a bond market it

What percentage of the money Ireland, for example, has borrowed this year from the bond markets came directly from banks?

I know we don't know but you reckon they'd be in the 90% range?

I thought it was higher, but via IE Blog we got these figures:

RBS | €4.9bn
AIB | €4.7bn
BoI | €1.4bn
Crédit Agricole | €1.1bn
HSBC | €930m
Danske Bank | €747m
BNP Paribas | €651m
Groupe BPCE | €560m
Société Générale | €516m
Banco BPI| €465m

noodler

Time Magazine wrote: »

Yes, but more people intuitively understand what a bond market it

I thought it was higher, but via IE Blog we got these figures:

RBS | €4.9bn
AIB | €4.7bn
BoI | €1.4bn
Crédit Agricole | €1.1bn
HSBC | €930m
Danske Bank | €747m
BNP Paribas | €651m
Groupe BPCE | €560m
Société Générale | €516m
Banco BPI| €465m

Thanks. Out of curisoity, how are pension funds labelled? Could some of that AIB €4.7bn be AIB managin another company's pension fund?

Time Magazine

noodler wrote: »

Thanks. Out of curisoity, how are pension funds labelled? Could some of that AIB €4.7bn be AIB managin another company's pension fund?

Honestly: dunno.

Pookah

Time Magazine wrote: »

What do you mean by "in hock"?

By 'in hock' I meant are we beholden to the the banks who have bought the bonds?

-Irish government has to cover debts.
-Sells bonds.
-Banks buy the bonds.
-The government now owes the banks.

Is that it, in a nutshell?

noodler

Pookah wrote: »

By 'in hock' I meant are we beholden to the the banks who have bought the bonds?

-Irish government has to cover debts.
-Sells bonds.
-Banks buy the bonds.
-The government now owes the banks.

Is that it, in a nutshell?

Before we go any further, and sorry if this is now painfully obvious to you, but I just highlight the difference between the deficit and national debt.

Example:

2008: We take in 40m but spend 50m. We now have a 2008 deficit of 10m

Our national debt is now 10m (assuming we started from scratch)

2009: We take in 40 but spend 60. We have a 2009 deficit of 20m.

This 20m deficit gets added to our 2008 deficit to give us a national debt of €30m and this process continues.

Of course, there are other things which can count on our national debt as we know all to well (bank bailouts) but which aren't necessarily part of the deficit (generally once-expenditures).

Pookah

Cheers.

And to whom do we owe this national debt?

And where do the bonds come in?

noodler

You owe the national debt to loads of different people. Mainly bondholders of some sort.

Selling Government bonds is the main way for most Governments to balance the books in the years where expenditure > Revenue from taxes. Unfortunately in the boom years we didn't save enough and started using money from stamp duty etc in everyday spending.

When the boom ended such sources of taxation revenue proved to be highly temporary leaving us with a massive hole. To fill the hole we have to borrow.

The bondholders (Government ones as oppossed to bank ones now) get a bad rep sometimes - I mean we wouldn't need their money if we were spending within our means.

Generally bondholders could be absolutley anything. Any investment vehicle you could think off, maybe it's some Italian bank, Irish bank, German bank etc investing on behalf of their clients for a pension fund etc.

FISMA

The US gov't primarily owes: US citizens (bonds for example), Financial Institutions, and other countries such as the Chinese Gov't.

If memory serves correct the debt to China is closing in on a trillion whereas the total national debt is getting to 14 trillion.

Hasschu

Typically large economies fund their deficits from domestic sources. Japan is the best example, at one point the US funded itself but is now deeply indebted to Japan and China. Little countries like Ireland, Latvia, Hungary, Greece, Portugal and others become over indebted to foreigners and thus lose control of their own destinies. There is a very real risk that the Irish gov't will withdraw from the Euro Zone, buy a bank note and bond printing press and hyper inflate away our debts a la Weimar Germany. Our Sovereign debt would still be payable in real money but the banks and other private institutions can go into receivership and pay their external debt using the gov'ts printing press. We would lose credibility internationally, after reading some international newspapers this morning it appears we have already lost it. The narrative goes poverty to boom to bubble to bust to poverty hopefully the cycle continues from here.