Borrowing on a wing

Borrowing on a wing

26 Jan 2024

I forgot who it was who said that he wasn’t afraid of flying but of landing. The same philosophy may be applied to borrowing. Borrowing is rather like flying – rewarding, useful and even exhilarating. The scary part is landing the debt and returning it to its hangar.

It is worth asking why the US seems uniquely able to borrow with impunity compared to other countries which feature at various stops on the slope downwards to habitual insolvency.

I would argue that the three main impediments to foreign investment anywhere are distrust of a government, distrust of its currency and, recently, distrust of the reliability of energy supply. There is one policy that Presidents Trump and Biden appear to share – that if you want to sell in America you need to manufacture in America: and according to UN investment data, the rest of the world is happy to fall in line.

Despite apparently going along with the COP religious movement, Biden’s government has been careful to continue America’s pursuit of cheap and independent energy and to be a willing exporter of LNG to the world. In 2022 the US became the leading exporter of LNG and, to the horror of the lobbying organisation Covering Climate Now, a “massive expansion” of export terminals is proposed.

“Taken together, if all US projects in the permitting pipeline are approved, they could lead to 3.9 billion tons of greenhouse gas emissions annually, which is larger than the entire annual emissions of the European Union,” wrote a group of scientists in an open letter to Biden in December urging the president to halt the expansion.

STOP PRESS : President Biden has just “paused” new export licences. Lobbying works, sometimes.

Financing public spending by borrowing feels irresponsible. Politicians rarely dare to advocate it. Instead, they do it stealthily. In the US the Biden administration launched the comically named Inflation Reduction Act to lend a sense of responsible purpose to its continuing accumulation of a debt pile now standing at $34 trillion (it was $10 trillion in 2000).

Before we believers in prudent finance throw up our hands in horror we must be quite clear about why or whether this matters and the probable implications. The market capitalisation of Apple Inc is $3 trillion or 9% of the entire national debt. The combined capitalisation of the so-called Magnificent Seven that have been the basis of US stock market performance in 2023 is £11.9 trillion, or more than a third of US national debt. There is an argument that says that if the US economy incorporates such global powerhouses there can’t be much wrong with it.

If confidence in the US dollar needed any further validation it was provided by Cuba this month. Not only has its government raised fuel prices fivefold, it has opened twenty nine gas stations that will accept only US dollars. (Public wages are paid only in pesos – such is life in a one-party state).

The market capitalisation of all US stocks is around $47 trillion or 138% of US government debt. .


The UK’s market capitalisation is £3.6 trillion or, by coincidence, also around 138% of government debt.

The Bank of England is officially independent though it generally seems to do the bidding of the Treasury. Or perhaps their goals invariably coincide.

The first QE in 2009 was a response to the global financial crisis that was obviously much bigger than anything within the scope or competence of the UK government. Originally the idea was to prop up private banks’ holdings of toxic rubbish that could have led to a domino-like collapse of confidence. Then with a fairly subtle shift of emphasis, QE carried on with the purpose of stimulating the economy. This is not normally the function of the Bank of England and essentially made it more political (Osborne and Carney were such a lovable couple).

During this exercise the Bank of England bought £445 billion of gilts, state borrowing in all but name.

Amazingly, baling the country out of the cost of lockdown was slightly more expensive (£450 billion). For this, as someone said, the middle classes were able to hide while the working classes brought them things. As a bonus, numerous industries had to be supported and schools were closed. Oh yes, and we had an energy support scheme in 2022, implemented by transient PM Truss but unanimously supported by all political sides.

I think that lockdown was an egregious waste of money and an unforgivable sacrifice of children but never mind. The point for now is that our politicians are putting up a show of believing that the plane will one day come into land. Further borrowing plans are inevitable but regrettable. The UK will not default on its debts.

Given that the current debt crisis is the worst since but not as bad as the two world wars it is probably rational to believe that the UK will make good on its debts. But we should be aware that this was achieved by a long rebuilding of the economy in conditions of post-war emergency.

Most countries now struggle to borrow from anyone but their own citizens and institutions. Around 25% of UK gilts are owned by foreigners, which seems like a creditable sum.


The ECB negative rate policy began in 2014 and lasted until 2022. Its Asset Purchase Programme (EU QE) began in 2015. Prior to that the official policy was to let individual countries stand for their own debts: hence the runs on the debt of some countries (the so-called PIIGS), in particular Greece. There was much speculation that Greece would exit the euro (“Grexit”).

In response, the ECB Asset Purchase Programme was a way of indicating that EU debts would be socialised without, as far as I know, actually saying so. The stock of ECB bonds stood at €3.2 billion by the end of 2023.

I cannot find any evidence of non-EU institutions owning EU debt. Outside the ECB I assume that it must be held by EU banks. It seems likely that many of those banks must be sitting on big losses from unwise bond purchases, just as happened with Silicon Valley Bank early last year. But despite the demise of Credit Suisse and nasty rumours about contagion risk at Deutsche Bank, all appears calm at the ECB.

It is interesting that Christine Lagarde, ECB President, frequently calls for pan-euro fiscal cooperation. If liabilities are to be socialised she would seem to want all EU national governments to know that they are in it together. No doubt the implication that the ECB has to save the EU from the follies of elected representatives is wearing rather thin.

The understanding that the EU will make good its debts is central to the whole euro project. But is looks like a private club that does not court or receive international investment.


Japan has a market capitalisation of 867 trillion Yen, just 67% of its 1.3 quadrillion (there it is!) debt. If you ask who would want to lend to such a country the answer is that 43% of this debt is owned by the Bank of Japan. Japan is the pioneer of borrowing from itself, having started QE in 2001. Foreigners own 15% of Japanese government debt, which seems a surprisingly high number to me.

One obvious impediment to investing in Japan is its demographics. Japan’s population has been declining since 2010. The median age in 2010 was 44 and is now 49. Births per woman are 1.3, well below the 2.1 “replacement rate”.

Western liberals would probably suggest that immigration could be the answer. Japan does not have high immigration and, whether it be the language or wider cultural issues, there appears to be a mutual lack of enthusiasm on the topic. We hear much in the UK about the relatively high success rate of asylum applications (63%) – the corresponding figure in Japan is 0.2%.


The slogan at Davos this month was “rebuilding trust”. I would observe that the way to inspire trust is to be trustworthy. Nowhere exemplifies both the problem and the challenge more than China.

China is sometimes described as uninvestable, especially by entrenched sceptics like Kyle Bass of Hayman Capital. He is strongly averse to Communism. But even for those who are more tolerant of a planned and heavily monitored economy there should be a big flapping red flag over Chinese statistics.

One of the greatest washouts of many years has been the lack of performance of Chinese shares. The Shanghai Composite Index is the same level that it was sixteen years ago. This is in shocking contrast to the growth of GDP which according to official numbers has tripled over the same period.

It is quite true that a stock market is not a perfect reflection of an economy but even so, how can one be zero and the other 300%? My answer is that one of those statistics is garbage and it’s not the stock market performance.

From time to time one commentator or another will suggest that the Chinese make up their GDP numbers. It is somewhat remarkable that Chinese numbers are released around twenty days after the end of the reported period. I know of no other country that manages that.

If China has been cooking its numbers for forty years (a suggestion I have seen) then the effect of compounding (inflating a fake number with another again and again) could mean that the Chinese economy is half the size it is supposed to be. No wonder the stock market is disappointing. No wonder that no one wants to invest. Foreign ownership of Chinese debt is said to be 2%. Anything above nothing looks high to me.

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