that bond markets set interest rates, and can withdraw from the gilts market even though they cannot function without gilts,
There are some who must hold gilts because the law says they must. Defined benefit pensions schemes perhaps. But those that are left of those tend to be in run off so will fade from the market over time.
What Spud is really referring to is repos. Where gilts are indeed used. But he’s confusing “are used” with “must be used”.
Of course gilts buyers can withdraw from the gilts market. Every blip upwards in market interest rates is one more of those deciding to do just that…..
Can we stop with this nonsense that certain investors MUST hold gilts. Whilst it often makes sense for DB pension schemes and insurance companies to hold government bonds for a variety of reasons, there is no law or regulation requiring them to do so,
The one-eyed Viking didn’t order it?
Not quite – his regulations required them to hold gilts or a significantly larger quantity of top-rated bonds.
He also changed the tax treatment of dividend received by pension funds so that they could not reclaim the ACT associated therewith.
That wasn’t his worst blunder – taxing banks on imaginary future profits came back to bite *the rest of us* in 2008 when the banks’ capital reserves which had been depleted by this over-taxation were viewed as inadequate.
He’s obsessed with bonds.I think it’s a cargo cult thing. The powerful magic compels people to give you money. He’s probably building a replica bond market out of bamboo as I type.
Spud is publicly attempting to work through these concepts before unveiling his revolutionary debt management strategy: Spud Bonds.
The scheme is elegantly simple. The Government (under the benevolent guidance of Supreme Leader Spud) issues Spud Bonds at whatever price the Government decides they are worth. In exchange, the Government receives money from pension funds, insurance companies and other institutions that it has thoughtfully required by law to purchase them, together with banks seeking a safe place to deposit funds and private investors who clearly have nothing better to do with their money.
Bondholders receive a generous coupon fixed at 3% below the Bank of England base rate for short-term bonds, known as “Chits.” Longer-dated Spud Bonds are rewarded with progressively lower interest rates on the sensible basis that people who are prepared to wait longer obviously need less compensation. The maturity profile is therefore carefully calibrated so that, after allowing for inflation, the Government pays approximately the same amount regardless of the term.
To prevent reckless speculation, neither the Government nor the Bank of England may purchase Spud Bonds and bondholders are prohibited from selling them. They must be held until maturity.
Of course, as Spud has repeatedly explained, investors do not actually expect their money back. They merely enjoy knowing that the Government has it. Since the United Kingdom can never run out of money—it can simply create additional money tokens whenever required—there is no practical distinction between repaying debt and issuing more debt.
Accordingly, on reaching maturity every Spud Bond is automatically rolled into the next longest available maturity. This process repeats indefinitely until the holder eventually achieves Financial Enlightenment, at which point they fully appreciate that repayment was never really the point.
To ensure fairness, all coupon payments are taxed as capital gains at a rate equal to 3% above the Bank of England base rate for Chits, with correspondingly higher rates applying to longer maturities. This ensures that no investor is ever tempted to profit from lending money to the Government.
The Treasury estimates the policy will reduce the national debt to zero immediately, because debt that never has to be repaid no longer counts as debt. Independent economists have described this conclusion as “innovative.”