Starting to get more and more tinfoil hatty. WW3?

[shocker]

I know this is very simplistic and naive, but large borrowing (we are told) is at very,very low interest - so why not borrow the money at low rates and pay off our debt with that ? And repay the low interest loans instead ?

Obviously I am a complete idiot regarding finance, I freely admit but even so.....

[jaffab]

So there are all kinds of borrowing....

1) Public Borrowing unsecured - the borrowing we do in terms of overdrafts, loans, credit cards etc
2) Company Borrowing - same as per public borrowing, but generally (not always) at the same % as (1)
3) Public Borrowing secured - against property. I.e, morgages
4) Bank borrowing - they can borrow from the bank of transactions (ie Bank of England) or bank of registration (bank of China for HSBC)
5) Central bank borrowing - national banks can borrow from central banks (world bank, Central European bank, or Fed in the USA)
6) Government borrowing - in the form of yields/bonds/guilts etc. Effectively an IOU against pensions and other long term investments

They are arranged by the % of interest charged/paid. So (1) generally has the highest interest rates charged, and (6) has the least. All are tied to the layers below them, and are also tied to inflation. So for instance, when the Bank of England (5) puts interest rates up (to control spending), so (4), (3), (2) and (1) goes up.

The public debt of most countries are in the form of a mixture of (5) and (6) - depending on what they can deal. For instance, Greece has an awful lot of (6), but all the big 'bail outs' have come from (5).

So in answer to your question, there is nowhere cheaper to borrow from. (6) is as cheap as it gets. And yes, (6) is currently very cheap- here in the Uk a 2 year guilt is 0.07% and 10 years is 1.14% - nice and cheap. For now. If interest rates go up to 6%, those figures go up to 4%, and the cost of paying the interest goes through the roof.

[shocker]

Thank you. I did warn you that I was a financial idiot

[Mortblanc]

I know this is very simplistic and naive, but large borrowing (we are told) is at very,very low interest - so why not borrow the money at low rates and pay off our debt with that ? And repay the low interest loans instead ?

Obviously I am a complete idiot regarding finance, I freely admit but even so.....

This is one of the things that caused the crash of 2007 in the U.S.

People purchased homes on variable rate mortgages and lived in them a while and built up equity.

Interest rates fell so the individuals refinanced their homes for the full value, at 3-5%, and used their equity to pay off credit card debt (20%). Many were not qualified for normal loans and the lending institutions gave them money anyway, they had too based on our finance laws. (this is where the whole thing was blamed on the bankers when it was government regulations at fault)

The homeowners then went out and bought more stuff on their credit cards at 20% rather than eliminating the card debt. They swelled their high interest debt rather than reducing it.

When the new home loans eventually adjusted for the variable clause their house payments doubled, or tripled. Since they were mortgaged to the limit they could not now refinance for a third time to keep the payments at a reasonable level. They did not qualify for a loan on the loan they already had because they owed ore than the home was worth.

They could not pay the adjusted payments and their homes went into foreclosure, while they tried to shift blame to the banks, Montague companies or everyone but themselves.

[Plymtom]

They could not pay the adjusted payments and their homes went into foreclosure, while they tried to shift blame to the banks, Montague companies or everyone but themselves.

Over here our banks went down as a result or had to be saved, but by and large with individual debt in that era (and judging by the amount of adverts and junk mail which still plagues us) banks and credit card companies have to accept some of the blame, transfer your balance and take out a shed load more debt offers were rife back then, my wife fell foul of it, now there will be no credit cards, or loans, no matter how they pester, as Jansman said "cash is king" and not got, can't have!

[jaffab]

And this is the whole reason for the growing national and public debt. Its all a big engine... they MUST keep people spending, but people don't have money to spend so they make credit cheap and easy, so the debts grow - pushing the problem down the road. But as it moves down the road, the problem grows in size at an exponential rate.

If people stop spending (on consumer goods, electronics, and holidays, rather than say food), then shops struggle, then they stop ordering goods from suppliers, the suppliers order less goods from factories, who find they cash flow failing, so have to lay off staff, who are members of the public at the start of the chain, who tighten their belts, so spend even less, and the cycle goes around and around, tighter each time.

We are no longer a capitalist society, we are now a socialist consumer led society (from my POV). If we were still capitalist, then when a bank failed, it would fail rather than being bailed out.