Despite what the UK right will tell you, appeasing bond markets has actually led to instability
Andy Beckett
Usual idiocies. But lefty plans will be so lovely and so why are bond markets nasty to us? Because you want to do it with the bond markets’ money. If you went off and did all that lovely by taxing then the bond markets wouldn’t give a shit. Shrug.
It is remarkable how thick these people are. Can they not even understand it in personal terms? If you have already borrowed £100 off a mate and now want to borrow £200, do you think boasting you will spaff it on booze and calling him a twat is the way to go?
The bond markets don’t care much about what politicians spend the borrowed money on: they are more concerned about getting their money back and earning interest on it – at low risk. So leftoids are like someone who borrows £100 from a mate and then unrealistically expects his mate to keep on lending indefinitely…
There may be a lot of ruin in a nation, but…
“The bond markets don’t care much about what politicians spend the borrowed money on: they are more concerned about getting their money back and earning interest on it – at low risk. “
Well that’s the point. In order to have some confidence that they will get their money back, they’re quite keen to know what it’s going to spent on…
Yes, markets are thought to care* about whether it is a one-off or a recurrent expense (are you going to come back for more?), whether it’s likely to improve future finances (tax cuts on businesses; getting more people off benefits), and whether it’s going to stoke inflation (supply-side reforms are more acceptable than demand-side ones).
It used to also be that capital spending was viewed more favourably than revenue, but whether that’s still the case after Brown’s misuse of the language, I’m not sure. Hopefully markets can distinguish productive from non-productive investment; but with things like HS2, is there any productive government investment left?
It’s not that they care directly about what it’s being spent on (one way of pissing money away is the same as another; increasing benefits to scrotes is the same as spending the same amount on increasing allowances for the House of Lords), but the likely economic effects are important in judging how likely the lenders are to get their money back, and how much that money is likely to be worth when they do.
* I’m using Theo’s terms, but actually we shouldn’t anthropomorphise markets; what I really mean is that some spending pushes borrowing costs up more than others.
In reality market traders are interested in something rather different. They don’t really care about what government does with their money. Government’s problem. The only thing they’re interested in is, can they unload government bonds without making a loss, or preferably at a profit? So what they’re interested in is the opinions of other traders. Because whether they make loss or profit depends on those opinions. Because it’s opinions set prices.
“what they’re interested in is the opinions of other traders”
True. But the net result of that is generally that some types of spending cause bond yields to rise more than others, because the majority view is that they are more risky.
OTOH Investors (including pension funds) who buy government debt have to think “if I buy and hold until maturity/redemption will the return be high enough to match my contractual liabilities?”. Selling should only be to take advantage of a favourable move in relative prices so that one can reinvest to gain an increase in “expected return” or cash in an absolute gain greater than the originally expected gain to maturity.
Not necessarily. If the UK’s national debt were (say) 10% of GDP, no prospective purchaser of UK bonds would care what it would be spent on.
I suspect these people are buttering the people up for financial repression. This is where the government will mandate the a UK pension fund must hold x% of special government bonds which pay a coupon 1-2% below inflation. No one in their right mind would buy such a bond, which is why you have to force people to buy them. This mechanism was used after WW2 in order to deal with the war debt. The inflation adjusted return of such bonds was something like negative 80%.
Spud has advocated the use of such bonds to nationalise industries in the UK. The owners would be paid market value, but only in the form of bonds paying coupons below the rate of inflation. So if Thames water is worth £20 billion, then the owners would be paid with bonds with a face value of £20 billion. However, with a coupon rate of 0.5%, the resale value of the bonds would be lower than par.
Most people in the country would be happy with this because they simply do not understand the pension system. The think the state pension is a full funded system (it isn’t) and they think the stock market has nothing to do with them (if they have a private pension, yes it bloody well does!).
Brown sort of introduced this a long time ago. From Google AI:
“Pensions Act and Minimum Funding Requirement (MFR): Reforms in the 1995 Pensions Act (which operated alongside his early years as Chancellor) established an MFR, which effectively required private pension funds to hold a minimum proportion of their assets in secure, fixed-income assets like government bonds.”
All my pensions are SIPPs. I wonder if they will try and extend this to SIPPs?
Any headline/article that starts with “Austerity” is bound to be filled with lies.
Beckett seems to thinks that the Labour Party cares about the price of second-hand pieces of paper labelled “Stock” or “Loan”: they only care about their ability to spend other people’s money and consequently, indirectly, about their ability to collect taxes or borrow.
Another Andy, Burnham, thinks we shouldn’t be “in hock to the bond markets”.
Well, Andy, if you borrow money you’re in hock.
But if you pay off your debts you get out of hock. Finding savings on about £3 trillion of government spending might be a bit tough, though.