The things Ritchie doesn’t know about economics

Quite a long list as you can imagine. But here it’s specifically on interest rates:

Larry Elliott has noted in the Guardian this morning that 10-year gilts are edging towards a 3% interest rate and the pound is rising against the dollar and the euro.

OK, long term interest rates are rising.

But with the City paying more heed to evidence of an incipient housing boom than to Carney’s forward guidance, it is at a loss as to what to do next.

OK, markets doing what markets do, look forward.

And the next best question is who will be brave enough to get us out of it again – by bringing interest rates back under Treasury control so that integrated economic policy can play its proper role in national life again?

And the solution is for interest rates to be set by the Treasury, not the Bank of England.


Apparently the Murphmeister is completely unaware that the markets have always set long term interest rates. The BoE (or Treasury) has only ever had control of short term interest rates. Switching control of said short term rates back to the politicians ain’t gonna change the way that long term rates are set.

11 thoughts on “The things Ritchie doesn’t know about economics”

  1. He’s simply confusing yield and coupon, isn’t he?

    The coupon can be easily controlled by the issuer of the gilts (which I think would the Treasury, so he actually has what he’s calling for already), but the yield can never be controlled by the Treasury, the Bank of England, or anyone else – at least not without completely restructuring how gilts work, say by banning their sale for anything other than nominal value.

    He also seems to be confusing the BoE base rate with interest on gilts. I’m not an economist and it’s a long time since my exam training covered this sort of thing, but I do seem to remember them being entirely unconnected.

  2. And (let’s assume it would have any effect), why does the Treasury need to take control? All the politicians need to do is to change the guidance to the BoE as to their mandate for making the interest rate decisions.

    Unless we assume that there is some sort of miraculous competence difference between Lothbury and Whitehall.

  3. Funnily enough, a couple of months ago, writing about the far right in Hungary, Ritchie expressly labelled political control of the central bank as a badge of fascism. Anybody surprised he turns out to be in favour of it then?

    Please bear in mind though, he has said that Political Economics trumps macroecnomics any day and has taken to calling himself a “political economist”. So base rates, coupons, yields on gilts…do me a favour!

  4. Wouldn’t how long term rates are decided change if the method of setting short term ones does? In other words, if the City knows that for the next ten years short term interest rates are going to be set by a politician with 1.75 eyes on forthcoming election, doesn’t that affect them?

  5. Yields on gov’t bonds will indeed be affected by gov’t policy, or rather the market’s view of gov’t policy. The present evidence suggests though that the stated (I emphasise stated) policy for setting short term rates is far less important than the market’s view of what circumstances will ultimately force that policy to be.

  6. Yes, better to say that the centre has only ever had an influence on short-term rates, and never had much of an effect on the long-term; the DMO is more at the mercy of the money markets than the Bank. It’s banks who are at the mercy of the Bank, since they often borrow short.

    But have we not yet given up on the idea that Murphy will understand these points? We’re talking about someone who appears to think it is possible, somehow, to strong-arm everyone into lending to the Government no matter what coupon is on offer.

  7. An open question for anyone with a better grasp of macroeconomics than I have: given the store of gilts in his hands after successive rounds of QE, is the base rate evem Mr Carney’s primary anti-inflationary tool at the moment? Are commentators looking at the wrong thing?

  8. In the end long term bond yields are more influenced by inflation expectations. Ritchie’s central bank/treasury can offer whatever coupon or overnight cash rate they want but if investors think that inflation is going much higher than the long term bond yield will sky rocket, irrespective of what the courageous state thinks and wants.

  9. Harry Lime is partly correct.

    Long terms rates are decided by the supply and demand of the market for long-dated bonds. The long term rate is a measure of market expectations for future interest rates (which takes into account inflation expectations) and will incorporate some risk premium for the disadvantage of lending for a long period than a short one. There is also a convexity effect which is too complicated to explain here.

  10. Another comment:

    The BoE has had a significant influence on long term rates via QE which involves buying long dated bonds from the market. This has pushed down yields at the long end. If QE stops then long rates will invariably rise.

  11. “If QE stops then long rates will invariably rise”. Which is also Bernanke’s problem at the moment with tresury rates and “tapering” announcements.

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