For now, I’d like to share with you another suspicious aspect. For a while in Coffee House we’ve been saying that the markets wouldn’t let Brown borrow more: what if the Arabs and Chinese tire of buying all the debt? This presumed Brown’s hands would be tied by the market. But, as so often, I underestimate him. Now he has his new toys, he can tweak banking regulations to have the nationalised British banks buy his crappy debt instead, and thereby divert the nation’s savings into the Treasury’s coffers. And let’s not forget what the £150 billion “quantitative easing” package does – provides money that is to be spent on, well, government debt. Using the G20 as political cover, Brown now has the tools he needs to launch a massive pre-election tax cut - and post the bill to a Conservative government. So QE could turn out to be the prelude of what economists describe as “helicopter money”.
Complexity is the second-last refuge of the scoundrel (pension funds are the first) and all the banking arrangements make it harder than ever to work out what Brown is up to. But please, bear with me. Look at the below graph. The rest of the world (green line) is running as fast as it can from UK government debt. Ditto the British investors. In any other circumstances, this would leave Brown with a major funding problem – and we’d be in Dennis Healey IMF bailout territory. But look at the grey lines. These nationalised banks have been gripped by a mysterious sense of patriotism and have started to buy Brown’s IOU notes.
In the old days, when banks lent money to people and not vice versa, UK banks would scour the globe looking for the best investments. Now, having been net sellers from 1998-2007, the British holdings of UK gilts and t-bills has surged by £30bn in the last three months – the highest since data began in 1997. No surprise, you might argue: flight to safety. But it’s funny how foreign and non-bank UK buyers seen to be able to find several better forms of safety than buying the debt of a desperate government that has just started to print money. As he so rightly says, it’s a whole new world.