A Particularly Stupid Analysis Of UK Government Borrowing Costs From Richard Murphy

If only any one of the Tre Professori knew what they were talking about. For Richard Murphy, who does indeed hold three professorial positions from British universities, tells us the following:

And:

And:

About which we are told:

Then there’s the question of the interest rate…(…)…But before you think that’s high, it’s because so much of the debt is old.

That is, the statement is that the effective interest rate is so high, as compared to current borrowing rates, because some portion of the debt was issued back when interest rates were higher.

That being real, complete and total idiocy.

It is the coupon which is higher from back in those days of nicely positive real interest rates. The effective interest rate is the yield. That is, not the interest rate that the debt was issued at – that coupon – but what would be the interest rate – the coupon – to issue the same debt today at today’s interest rate and market prices.

Our Man employed to teach economics to people is attempting to explain the price of the national debt to us and getting it entirely, completely, and totally, wrong.

The reason the effective interest rate is higher than the 10 year borrowing rate is because some of that debt, as the charts presented show, is for terms longer than 10 years. Longer bonds do tend to pay higher coupons, higher yields, than shorter dated stock. This before we get to the point about inflation proofed bonds.

This all stems from this noted expert not actually knowing what “effective interest rate” means. Which is just not a good starting point for someone trying to explain bond yields and coupons, is it?