The National Debt has to be Repaid – in Some Centuries Time When Interest Rates are Zero!

by Dirk Ehnts, Econoblog101

The NY Times has recently written about the British retiring some pretty old debt. I had to add a half sentence to the text, I just had to (in bold):

After that financial crash in 1720, called the South Sea Bubble, the British government was forced to undertake a bailout that eventually left several million pounds of debt on its books. Almost three centuries later, Britons are still paying interest and those that own the bonds are receiving interest on a small part of that obligation.

Now, prompted by record low interest rates, the British government is planning to pay off some of the debts it racked up over hundreds of years, dating as far back as the South Sea Bubble.

Apart from the fact of the omission of those receiving the interest, this fact of debt repayment is very interesting. Many economists in Europe claim that government debt has to be repaid. This is doubted by others that make slightly different statements: government bonds have to be (and will be) repaid (given the right set of institutions). So, here is a modern European democracy (the United Kingdom) repaying sovereign debt from 1720 in 2015. So if you think that government debt has to be repaid, then this observation would tell you: yes, but that can happen in almost 300 years. So, the good news is for the UK that whatever sovereign debt they run up now, repayment might come in 2300 only. What the lessons are for today is up to discussion. And if those living in the year 2300 do not like to repay, they can issue new debt and postpone repayment. Or they can tax those that they think should pay a bigger share. Whatever they do, this is only about the distribution of debt and hence income, not about the production potential of the UK economy in 2300. (If it still exists.)