This was the damn point

He made an interesting comment. It was that his employer now holds no gilts in its pension fund. It has invested in much riskier corporate debt instead. This, as he put it, was being done in a ‘chase for yield’ and a need to ‘match the liabilities’. In other words, the trustees have abandoned caution in an attempt to match income to their obligations. Short term accounting demands have made them leave prudence behind.

But, as he noted, this explains where the debt is in the UK economy. In 2008 it was on bank balance sheets, and they failed.

This time regulation will have reduced bank exposure so it is on pension fund balance sheets instead.

The aim of QE was to get people out of gilts and into corporate bonds. That’s the damn point.

Sigh.

As is explained to him in the comments:

QE has had the impact of sending investors such as pension funds further down the rate curve, and ultimately into higher rated corporate debt. This is not the trustees ‘abandoning caution’ as you term it, but because of an obligation, mandated by legislation, that certain liabilities need to be matched. (Something that Gilt investments are not able to do because their yields are so low, because of QE).

To which:

So, QE has created risk fir the next financial crisis

As I said it would in 2010

All you have done is confirm that

Well, that and a blasé indifference

Sigh.

That’s the QE that Ritchie says should be our major government funding mechanism with MMT, right?

14 comments on “This was the damn point

  1. Its Wednesday so its ‘The world is going to hell in a hand cart ‘ day. Tomorrow it will be ‘The State can print and spend as much money as it likes as long as inflation doesn’t take off’ day and Friday will be ‘Tax is vitally important to finance public services’ day.

    Different day, different stump hole.

  2. Ah, but, as the great sage says, he warned against QE in 2010. That was when he was saying that everything had to be funded by tax, the only thing stopping that was the tax gap, and QE was an evil capitalist conspiracy.

    When was People’s QE – 2014 or 2015? Wasn’t it his big thing in the run-up to Corbyn becoming Labour leader? And I think it was only after that when he seemed to first hear about MMT.

    So yes, the sage was correct in his predictions, as he always is. Pointing out any contradictory comments over the intervening eight years is neo-liberal sophistry.

  3. As a layman( and part time idiot ),I thought the point of QE was to increase the money supply to prevent deflation sustain demand in the economy and buy bits of Banks that needed cash
    My recollection is that it was about £50bn of actual cash and about £800bn of guarantees of various sorts
    I don`t understand how QE reduces the yield on bonds or why it should ?Doesn`t the price of a Bond depends on the stability and opulence of the government in question essentially ?
    If the market price goes down then the yield goes up ( I think) so wouldn`t issuing QE send the yield up?
    I can see why you would switch of corporate debt if they are not paying but .. puzzled otherwise

  4. He’s got neither the intelligence, the wit, nor the bollocks, to publish the follow up question from another Simpsons character pointing out his inconsistency.

    Perhaps one of his fawning little toady sad cases could point this out to him ? Marco ? Andy (Andrew) ?

  5. @Newmania
    As I understand it, QE in the UK works by the Government issuing new gilts which the Bank of England then buys at a very low yield. The idea is that the money created (essentially by the BoE crediting the “proceeds” to a Government bank account) is retired when the gilts are redeeemed (by the Government paying back the loan) so it’s not printing money.

    The fact that there is a guaranteed purchaser at a very high price/low yield validates these yield levels thus depressing the yield for everyone. Consequently, investors are supposed to seek higher yields by funding corporations through corporate debt or equity—lashings of ginger beer all ’round.
    This is also why (as Tim says) current gilt yields inadequately reflect the time-value of money

  6. Oh dear, Newmania is vague on details and dates again. The bank bailouts happened in 2008. QE started in March 2009.

  7. From wiki

    “During its QE programme, the Bank of England bought gilts from financial institutions, along with a smaller amount of relatively high-quality debt issued by private companies. The banks, insurance companies, and pension funds could then use the money they received for lending or even to buy back more bonds from the bank. Further, the central bank could lend the new money to private banks or buy assets from banks in exchange for currency.[citation needed] These measures have the effect of depressing interest yields on government bonds and similar investments, making it cheaper for business to raise capital. Another side effect is that investors will switch to other investments, such as shares, boosting their price and thus encouraging consumption. QE can reduce interbank overnight interest rates and thereby encourage banks to loan money to higher interest-paying and financially weaker bodies.
    Beginning in March 2009, the Bank of England had purchased around £165 billion in assets as of September 2009 and around £175 billion in assets by the end of October 2009”

  8. Newmania: in simple terms QE acted as a customer buying vast quantities of gilts which drove the price of gilts up and hence the yield down.

  9. British pension funds invested more money in gilts in 2016 than in any of the years since 1963, as institutional investors looked to protect cash from choppy equity markets.
    FT Adviser

  10. Corporate debt is riskier than Gilts – there is a risk that it might provide positive investment returns enabling the pension fund to meet its obligations to retired members. There is no risk of that with gilt-edged – they provide certainty of failure because real returns are negative..
    End of discussion.

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