Wherein Spud misunderstands again

The message is abundantly clear. Britain (and the whole world) needs more government debt to meet the demand for stable, secure places to invest. And the UK government is a particularly good provider of that stable, secure investment opportunity. And such is the demand for it that people are willing to, in effect, earn no interest at all (after inflation is allowed for) on those funds just to make sure they’re in safe hands.

Any rational government would meet this demand by issuing more of the debt the markets demand. They would be consciously using the offered chance to borrow at zero per cent real, and actually incredibly low nominal rates, to pour debt into the market and on very long terms. Thirty year, fifty year or even perpetual debt would sell right now. The funds could then be used to build the future those pension funds want for their membership, including homes for their grandchildren.

Not entirely sure how you build a pension on bonds carrying negative interest rates to be honest.

But the real misunderstanding from Spudmonster is that he’s right, the market is shouting that it would like more government debt. So the Bank of England should sell that debt it owns to the market, right? Unravel that QE which Spuddy insists will never be unravelled.

This leads us to what he’s ignoring. The4 price of government debt is deliberately and specifically raised by the BoE owning so much of it. Meaning that we cannot, without unravelling that distortion, say very much about the true price of government debt can we?

11 comments on “Wherein Spud misunderstands again

  1. You say “the price of government debt is deliberately and specifically raised by the BoE owning so much of it.” That’s true. The question is by how much.
    A decent estimate of the 1st £200bn of QE is that it cut yields by 50-100bps:
    http://www.bis.org/publ/bppdf/bispap65p_rh.pdf
    The later QE seems to have had a smaller effect:
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2858204
    A roughish estimate of the total impact of QE, therefore, would be around 150bps. This would suggest that without QE, longer-term real yields would be around zero. This is well below the 3%+ yields we had in the 90s.
    I emphasize that this is a rough estimate; numbers don’t have to be precise to be useful. But it does suggest that QE doesn’t fully explain the extraordinarily low levels of yields.Even without QE the “true” gilt yields would probably be low.

  2. “They would be consciously using the offered chance to borrow at zero per cent real, and actually incredibly low nominal rates”

    Fabulous. According to Ritchie, people are willing to pay the government to look after their money in perpetuity. No, not to protect it against inflation for a year or few, but simply to hold it forever.

    As in, I give the government £5, and they keep it.

    I know he’s always arguing everyone should pay more tax, but now he’s even confusing paying tax with buying government debt.

  3. The problem is that institutions seem to be queuing up to be harangued by the fat fool. There is a chance that the fat buffoon influences policy

  4. The supply and demand balance for gilts at different durations is actually rather complex, as I understand it. Short dated for collateral except now the rules are changing and cash is king for derivatives. So the gilts are good for liquidity to generate cash collateral and therefore still in demand.

    Long dated gilts are good for matching annuity liabilities but earn nothing so insurers have moved to higher yielding non traded assets. They still like gilts for liquidity and to park money in whilst originating the higher yield long term stuff.

    Pension funds gambling for redemption still need a bunch of gilts to persuade everyone they are safe.

    Fundamentally No one wants a zero yield asset for long unless it has another purpose that creates value. I can’t pretend to understand the full dynamics but one thing is for certain. Ritchie is wrong.

  5. Is there a formula to express the probability of Murph being right about any subject under the sun?

  6. I’m only an ‘umble telecoms engineer (retd) and I’m really having difficulty keeping up:

    Britain (and the whole world) needs more government debt to meet the demand for stable, secure places to invest.

    I thought Governments didn’t need debt because People’s QE, Green QE, Magic Money Tree Modern Money Theory, pink fairies at the bottom of the garden or reasons?

    And the UK government is a particularly good provider of that stable, secure investment opportunity.

    Just an idle thought, but could that be because some grown ups are running the shop (not very well, I’ll concede) rather than a bunch of drunken sailors lefty MPs in thrall to one R Murphy lining the pockets of the local whores civil servants while they manage failing projects or the rest of their mates in non jobs?

    And such is the demand for it that people are willing to, in effect, earn no interest at all (after inflation is allowed for) on those funds just to make sure they’re in safe hands.

    Name them. I for one don’t want my pension funds or other long term investments anywhere near Governments of any stripe, let alone those following your policies.

    Anyway, I thought the whole point of QE and low interest rates was to get investors to go out in search of investments that will have higher returns?

  7. Diogenes,

    I’m a fan of Chris Dillow* and don’t have a problem with Govt borrowing under the right circumstances. I really can’t abide the likes of Murphy, Corbyn and Sturgeom getting their grubby mits on my money.

    *he has been letting himself down recently and getting tribal

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