That said, this means that government bonds are an asset with very low inherent risk. As a consequence, gilts have the lowest interest rate paid in any market. Despite this they still have great appeal to pension fund trustees and insurance companies, both of which have an obligation to settle liabilities far into the future.
Despite isn’t the right word there, because might be. Assuming we leave aside the regulatory insistence that they hold gilts that is, a form of financial repression.
In particular, companies seeking to place millions and even billions of pounds on deposit overnight seek security for their cash. They achieve this security not by placing the funds in bank accounts, but by temporarily purchasing government bonds from banks. These they then sell back to government the following morning at a very marginally higher price to cover the interest earned. This is called the ‘repo’ market.
Repo involves purchasing from banks and selling back to the government, does it? Blimey, the things you find out in a policy briefing.
A growing economy requires general price increases, or inflation.
It does? Or perhaps this is to misunderstand the point, which is that a tad of inflation eases the relative price changes that come about from a growing economy. Need therefore being the wrong word.
Except under unusual circumstances, a general increase in prices requires an increasing money supply.
Not really, no.
A fiscal deficit is the only way in which money can be injected into an economy continuously.
It follows that governments must run a near perpetual deficit or face the risk of creating a liquidity crisis due to a shortage in the money supply, which would then create a risk of deflation.
And now the set up for our question:
A government can never default on a bond that it issues in its own currency because it can always instruct its central bank to create the money required to make repayment of a bond when redemption is due. As a consequence the owners of gilts have an absolute guarantee that their funds are safe. This is fundamental to the financial security of an economy.
If you bought a consol in 1945, just to give a date, then held it until Osborne bought them in a couple of years back, were your funds safe?
Show your workings and define your terms.
My own intuition, without looking anything up, is that you might have got back a thruppeny bit on your £. As capital that is, not going to try and headwork the interest received….