So, instead, there’s a trade that goes on. What happens is that overnight, these large companies with quite probably billions of pounds of money to put on deposit overnight will buy government bonds from banks, keep them from literally late in the evening to early the following morning, and then sell them back to the same bank they bought them from. The price will change very slightly overnight and that increase in price will be the interest rate that’s being paid.
But the critical point is that this provides the security for these companies to save safely in a way that they couldn’t with the bank themselves. So, government bonds do in part exist simply to make the City of London work.
And that’s true for other parts of the City of London as well. For example, pension funds need to match their very long-term liabilities to people who are going to live for a long period of time after they’ve reached retirement age, and they need somewhere safe to put funds to guarantee that they will be able to repay in 25 or more years’ time. Where do they put that money? Quite often, they put it in government bonds.
Life assurance companies will be in the same position.
And there’s another group of people who particularly like buying government bonds as well. That is people who want to save in sterling, our legal tender, and they come from overseas.
Who are those people? Well, some of them trade here and they just want to hold sterling deposits to make that easier. We are, after all, still a major trading nation.
Others have made profits here and don’t yet want to repatriate them to the country where they are. They will want to leave money here. They won’t want to leave it on a bank account any more than will a UK depositor because they will suffer the lack of a guarantee. So, they buy sterling bonds as well.
And other governments want to hold sterling because sterling is still a reserve currency for the world and other governments therefore want to hold sterling balances and therefore they buy bonds too.
Now, for all these reasons, the government issues gilts still.
Does it do so because it needs the money? No, it doesn’t need the money. As a matter of fact, it could simply borrow all the cash it needs to fund its programmes from the Bank of England, pay interest to them, which will go straight back to the government, and that would be the end of the story.
But they issue bonds instead because without those bonds the City of London, the pension market, the life assurance market, and the overseas international trade of the UK probably wouldn’t be able to happen in the way it does.
So, bonds don’t exist to help the government, because the government doesn’t need help, it can create all the money it needs for itself. Bonds exist to let the financial markets work.
Apparently the government spends £100 billion on gilts interest a year beause they want to be nice to financial markets. No other reason, just that.
Back in1990 the house market was tanking and I needed to move for work reasons, we sold and moved out of our house before the people we were going to be buying from were ready. When we were getting close to our solicitors needing the cash, due to legal delays, it was always a few days away. Rather than leaving it in the current account we ended up at Barclays suggestion putting the equity from the house in overnight treasury bonds each day as the legal proceedings got delayed. Despite the base rate being 15% the annualized interest rate on one night was sixteen and seven eighths percent! This was fantastic result as it was essentially money for nothing. I didn’t understand it then and I still don’t.
If a first year analyst wrote this even in a draft email in the bank I work in he’d probably be asked to leave the premises and have his belonging forwarded to him.
Surely the QCA or its higher education equivalent has to be informed that he doesn’t have sufficient expertise or knowledge of anything to be employed as a lecturer?
And explain how this is any different to some batshit tinfoil hatter on X or elsewhere making up conspiracies about plutocrats and ‘Wealthy bankers’? Clearly the association with Hamas is rubbing off.
“government bonds do in part exist simply to make the City of London work”
– Mixing up cause & effect?
“pension funds … put it in government bonds”
– Largely because government regulation requires them to put it in government bonds.
He really is a mucking foron.
andyf shows the problem.
You don’t know how much the price will move overnight if the Federal Reserve or the Japanese central bank changes intetrest rates or some lunatic tries to start a war. The overnight interest rate could be + 16% per annum or -10% per day.
As to the idea that any large non-banking company has £billions of idle cash sitting in its current account – well you’re back in the Murphyverse instead of our cosy little universe with occasionally rational actors. The mere suggestion would justify payingthe FTSE-100 CEOs £5m pa to save wasting ten times that much … does any competent company have a ROCE of less than 10%? When I was young (and Wilson’s level of inflation was unimaginable in the UK) ICI had a minimum threshhold of 20% ROCE (so real not imaginary due to inflation) for any capital investment project [I remember this because the central board of Directors turned down a planned investment in my local factory]
It is, of course, possible to ascribe this to Murphy’s invincible ignorance but I have to wonder whether he is hallucinating and living in a world of his dreams.
He writes like he’s talking to 5 year olds.
If his audience were actually 5yo, fairy tales “and they all lived happily ever after in a Fully Automated Luxury Communism nirvana” might be appropriate. But not for 18-21yo students.
Monomania per the American Heritage Dictionary: Derangement of the mind in regard of a single subject only; also, such a concentration of interest upon one particular subject or train of ideas to show mental derangement.
This is junk. It’s hard to read and probably wrong as he thinks the state can fund itself by printing money and paying interest to the money printer.
We buy long dated Gilts as a holding position until we can find something more lucrative to invest in. That often is in the UK as matching adjustment rules mean we need to swap non-GBP cashflows into GBP and very long dated (>20 isn’t long, >40 is long!) swaps are tough to fund*.
Gilt yield >90bps, so nearly 1%, less than other assets so it simply makes no sense to keep money in Gilts for long duration matching. The value you loose is much greater than the credit risk, if you believe our risk models which I am borderline on.
* By fund I mean post collateral as the value changes. Technical boring reasons why it’s difficult.
In the comments the potato name drops Justin Welby as someone who agrees with him. There’s a lot of grift to be had out of the church, perhaps that’s his next career move
In the comments the potato name drops Justin Welby as someone who agrees with him.
And Spud being Spud, he thinks being of like mind with Justin Welby is a Good Thing.
In the comments the potato name drops Justin Welby as someone who agrees with him.
Given that Justin speaks in tongues and Richard writes in tongues, it’s hard to see how they could easily discover they were in agreement on anything.
That being said, watching the two of them play Scrabble would be fun.
And here is where Prof Murphy gets his audience… I don’t have the nous to argue the point.
I can see that borrowing from yourself and thus negating any interest is a sleight of hand, but I’d be buggered if I could articulate why. And I understand that he masturbates over forms of money instead of caring about who gets the value, but again …
Yes, I could learn more about the subject (and I do try), but that’s not my point. What’s the obvious contradiction here that I can’t articulate simply?
@ Dennis
If Murphy (a self-styled Quaker) was of like mind with Justin Welby, that would be a massive improvement.
@ Geoffers
The government spends more than it receives. So it allocates some resources that it does not have to its pet projects. These resources have to come from the private sector that forgoes these in exchange for a promise from the government that it will supply equivalent (or preferably, better) resources at a future date.
Borrowing from itself will NOT provide resources that it does not own.
Accountants who think only in terms of money and not what the numbers *mean* are a problem.
john77 said:
“Murphy (a self-styled Quaker)”
Didn’t he switch from Quaker to Church of England when he got divorced? Or was it the other way around – I can’t remember which was the first to be more lenient in such matters.
@ Richard T
It was from nominal C of E to Quaker
C of E does not allow divorcees to remarry in Church during their ex-spouse’s lifetime
“C of E does not allow divorcees to remarry in Church during their ex-spouse’s lifetime”
Thats not true, you just have to find a suitably ‘liberal’ vicar to do it. Or lie your arse off to convince one of the slightly less liberal ones that you are one of the exceptions (which I’m sure everyone says they are). There is not a blanket ban for sure. That would entail the C of E having at least one Biblical principle, which would never do.
https://www.churchofengland.org/sites/default/files/2017-11/MarriageAFTERdivorceFORM.pdf
@ Jim
Apologies and thanks for updating me.
I resigned from the Parochial Church Council in 1994 when I was sent to Siberia for the winter (tip – the winter at -35 is easier than the summer at +35) and no-one had told me the change in the rules.