Who's got the cash?

People buy government bonds (gilts). They are used as "safe" guaranteed investments by the likes of life companies for annuities etc. They're usually regarded as rock solid, which means government pay less interest than commercial companies would, but in these time investors are starting to worry - look at Greece, we may be next...

Ah, the mists begins to thin a little. So we see that they are not actually 'safe' at all then. Are they guaranteed in any way?

Is that *it* - fundamentally? Countries borrow cash from investors (the likes of Life Companies - commervial organisations), who presumably obtain it (drip-feed) from customer policy premiums. I used to understand that a country's value was based on Gold reserves. Am I correct in believing this has been done away with for some time? If so, what has replaced it - a balance sheet?

I realise the actual management of this model is complex and obviously volatile but the concept seems to be staggeringly simple. I don't quite know what I was expecting to hear but I guess it was something more widely structured and based fundamentally on the intrinsic wealth of countries moving capital between themselves rather than the investment companies/general public funds -- simply naive of me!

Thanks for the quick insight Andy. I'd still like to learn more (high level) about the model so if anybody would like to share their take on it please do.

A long time. :-) Being tied to something solid was a horrible handicap for politicians. They had to live within their means and weren't able to dive into cesspools of Keynesian debt to get their countries through difficult periods.

As far as I can tell the backing is 100% reputation, and 0% net worth. As long as investors think you're a safe bet for paying it back eventually (ie you have the power to milk obliging, law-abiding taxpayers), and not inflating your debts away to nothing, then they'll happily hand over trillions for governments to p*ss down the drain.

The world is a very curious place these days. I can't help wondering if the Roman Empire went through a similar period towards the end.

Only back then they were nibbling bits off the coins to make new ones, not adding zeroes to the BoE's spreadsheet. They were paying over the odds for increasingly rare wildlife to slaughter in the amphitheaters, not bidding to run up the Olympic overdraft. And they were supplying cheap bread to the citizenry instead of tax credits.

On reflection.... no, they were nothing like us at all. ;-)

Andrew McP