if by this point you're a little overwhelmed by  wonky economic language never fear I'm joined by  

Economist and former Market Trader Gary Stevenson  to make it all make sense Gary thank you so much  

for coming back on the show first of all um from  first principles or what is a Government Bond  

okay so the first thing to understand is when  the government borrows money it borrows money  

from people from things like Pension funds  from wealthy individuals and when you lend  

money to the government you get a Government  Bond and basically that that's tradable so I  

can lend money to the government and then sell  the Government Bond and then somebody else will  

be owed the money so essentially it's a tradable  IOU from the government so why has there been this  

movement in the market where the value of British  government bonds has dramatically decreased  

it's completely a response to the the  announcement from the government basically so  

if you look at what the government has  done you know in the last three years  

there's been a massive massive  increase in government debt  

um but that was a one-up emergency because of Kobe  and now suddenly out of nowhere the government has  

decided that they're going to do this bonfire on  taxes of the riches you know um Traders look at  

that and they basically think okay well if you're  not going to tax the rich people who have all the  

world you're not going to be able to to pay the  debt back and that basically leads to sort of  

essentially the reason governments can take  large debts is because the economy grows and  

because there's inflation when inflation happens  it devalues the debt makes it easy to pay back  

Traders and economists don't believe this is  going to have any growth so they're saying really  

the government is going to have to do one of two  things which is not pay the debt back or create  

inflation and they sell the pound because there's  going to be inflation pounds are worth less that  

means there will be inflation because when the  pound collapse in Imports become more expensive  

which means the Central Bank who has a job to  control inflation will then have to raise rates  

and markets are expecting a massive increase in  interest rates so Traders they look at the central  

bank and they think well these guys are going  to raise rates massively so why am I going to  

hold government bonds that give me three percent  when the central bank is expected now to raise  

rates to five six or even seven percent it seems  like the big event that sort of forced the bank  

of England to make this dramatic intervention um  was the potential for a run Dynamic on Pension  

funds so what would a run Dynamic on Pension  funds be why would that be caused by a loss of  

value in government bonds okay so let's explain  this from Basics okay so obviously lots of people  

have money in a pension and a big investment  that a lot of Pension funds do is to buy  

government wants now some Pension funds in order  to sort of boost their buck and get a little bit  

more bang for their money they borrow money to  buy even more government bonds so that way you  

can borrow cheaply you buy more government  bonds you can get a little bit extra return  

um now in the last especially in the last  month but in the whole of the last year because  

Interest Bank of England  interest rates have been rising  

the value of bonds have been steadily falling  because now interest rates have been nearly zero  

for the last 10 15 years that means that a lot  of these bonds have very very low interest rates  

now if the central bank is going to start paying  three four five six percent on cash you don't want  

to be holding a zero interest Government Bond so  Traders have been selling these government bonds  

Pension funds who have borrowed money to buy  loads of government bonds and suddenly in a  

situation where you've borrowed a million quid  you've bought a million quid of government bonds  

and those bonds are only worth 900 800 000  pounds now so the people who lent the money  

are turning around to them and saying okay well  we need you to front up some more money because  

we don't we don't trust you anymore because  the assets you hold are not worth enough  

well then that means the Pension funds to pay  that money have to sell the bonds which drives the  

bond price down even further and you can get this  vicious spiral where institutions such as Pension  

funds continue you have to sell the asset in  order to pay back the debt which drives the price  

further and further down and and the price keeps  falling and these institutions can go bankrupt  

so they called that the Doom Loop don't they  so the value is falling so they have to sell  

it to convert it to cash that makes the  value fall even more so then they have  

to they need to sell it more and then and the  bank of England's intervention was to try and  

stop this Doom Loop happening so the bank of  England they have the power to print lots of  

money and they've intervened they've said look if  no one wants to buy these bonds so the the price  

is falling what we're going to do is we're  going to buy loads of them that will push up  

demand that will push up the price to a point  where these Pension funds aren't in in danger  

um makes sense you know if if you're the one  institution that can very easily print money and  

intervene in the market I can see why they've done  it is is there a problem here why should we or  

should we be worried that the bank of England has  printed a load of money to buy government bonds  

I mean this goes back to the thing I've been  saying a lot whenever I've done media in the  

last couple of years right which is whenever the  bank of England prints a ton of money especially  

when it's a lot of money and whenever the  government gives out a lot of money you need to  

be asking where that money is going to end up so  essentially what we have here is a situation where  

the government has slashed taxes on rich people  this is after the three years which have seen the  

biggest and fastest ever increase in millionaire  and billionaire wealth in the country okay  

the government has now slashed taxes on them  the market has said well we think that's that  

makes you financially unsustainable so we're  basically going to pull a plug on you and the  

bank of England is basically coming in and funding  it so now you have a situation where the bank of  

England is essentially funding a massive cash  transfer from the government to the rich on the  

back of the biggest ever cash transfer we've ever  seen from the government to the rich and I want  

to put some numbers on this you know because I  think it's amazing I don't think people realize  

you know if you were to tax the wealthy enough  now to make them as rich as they were before  

covert started you could give every single  adult in the country 12 000 pounds and that  

is before the energy stimulus which is another  150 billion pounds to the energy companies and  

before the massive tax cuts for millionaires  so what you're seeing here is a continuation  

of a systemic issue where the government  and the Central Bank together are pumping  

hundreds of billions of pounds to the rich and  the consequence for Ordinary People is that  

prices go up and inflation goes up and ordinary  people stand the living decreases you know you  

cannot expect to see the fastest ever increase  in inequality in the history of the country and  

not see living standards for ordinary people fall  so I really want people to push back against this  

and I want your thoughts on the IMF so you  know historically when the IMF have come up on  

Navara media it'll be to critique them they're  normally you know thought of as an institution  

that enforces free market policies on countries  what they normally want to do is cut spending and  

IMF programs normally dramatically increase um  inequality especially in in debtor countries so  

you might think of Argentina or or Greece or many  countries in in Africa and Asia over the years  

why are they suddenly concerned about inequality  why have the IMF released a statement which says  

we've got a problem with what quasi quateng has  announced because it will increase inequality  

plainly and simply because people are  looking at what the government is doing  

now and thinking that is completely insane  it is completely unsustainable you cannot run  

massive deficits permanently it's and you know  normally when you see countries try and do this  

we're on really big deficits for a long term it's  because of some sort of external disaster or some  

sort of really serious situation which requires  an immediate stimulus you know for example covid  

now you've got a government that's trying to do  this purely in the service of given an absolute  

ton of money to millionaires I mean I'm talking  to traders in the city and the biggest question  

here is is what do they think they are doing and  you know we're torn between working out are they  

crazy or are they stupid and the IMF is thinking  that you know I've been in markets for a long  

time I've never seen anything like this I've never  seen anybody tear their countries finances apart  

for something as ridiculous as a massive injection  of cash to the richest people in the country I've  

never seen anybody do it and and it's not just me  it's me the IMF it's everybody in the markets just  

looking at these guys and asking them what what  are they trying to do it's crazy and what should  

happen now I mean I've said the Prime Minister  the chancellor uh you know nowhere to be seen  

they they seem to be a bit flummoxed it seems  like they're kind of rabbits in headlights they  

didn't realize that their announcement on Friday  would cause such a dramatic reaction I mean what  

what could they do to stabilize the markets or  are they just gonna you know keep quiet and hope  

the bank of England sort of does the hard work  for them okay something has to give here and  

the reason that something has to give is because  in the last week we've seen a massive increase  

in interest rates and that is going to cause  an enormous increase in the interest rates of  

mortgages okay so you know mortgages in the last  years have been pretty low you know people are  

getting mortgages one and a half two percent in  the next couple of years if if nothing is done to  

to deal with this mortgage rates are going to go  up to six seven eight percent it's just completely  

unsustainable given the level of house prices and  the size of people's mortgages especially young  

people who have bought recently who have very  large mortgages there's no way they can afford  

these on top of the increasing Energy prices  the increase in food prices this is literally  

going to be another this could be in many cases an  extra one thousand fifteen hundred pounds a month  

people don't have that so something has the given  it's very difficult to understand what because  

if the government is going to do this and interest  rates will be high like that it's as simple as  

that and it's politically unsustainable so either  the government has to back down which you know  

they're stubbornly saying they won't but I think  it's quite possible in the end they may be forced  

to or they need to force the central bank to  massively support them to keep interest rates low  

despite the fact that inflation is probably going  to be very high so in that case what your problem  

is is another big increase in inflation a collapse  in the pound so there's no good options here other  

than the government backing down and you know we  need to do whatever we can to try and force them  

to do that so something's got to give you're in  agreement with the IMF everything's getting very  

strange all very topsy-turvy Gary thank you so  much um for your Insight today we'll get you back  

on soon I'm sure and everyone in our audience  you can check out Gary's YouTube channel which  

we've linked to in the description box below lots  of great explainers a very complicated economics