As the FT has reported this morning:
Last year, UK pension funds put the highest level of money into domestic government debt since 1963, in an attempt to shield their assets from heightened political uncertainty and market turmoil. According to data from the Office for National Statistics, published on Thursday, UK pension funds put £31bn into gilts in 2016.
They add:
The independent producer of official statistics said UK schemes' shift towards gilts was probably “an attempt to avoid the relative volatility of equity markets”. At the same time, institutional investors including insurers, trusts and pension funds, pulled money from riskier assets such as equities and overseas assets last year. These large investors withdrew £22bn from UK corporate bonds and equities, and £45bn from overseas assets.
The message is abundantly clear. Britain (and the whole world) needs more government debt to meet the demand for stable, secure places to invest. And the UK government is a particularly good provider of that stable, secure investment opportunity. And such is the demand for it that people are willing to, in effect, earn no interest at all (after inflation is allowed for) on those funds just to make sure they're in safe hands.
Any rational government would meet this demand by issuing more of the debt the markets demand. They would be consciously using the offered chance to borrow at zero per cent real, and actually incredibly low nominal rates, to pour debt into the market and on very long terms. Thirty year, fifty year or even perpetual debt would sell right now. The funds could then be used to build the future those pension funds want for their membership, including homes for their grandchildren.
But instead the government is determined to reduce debt. You literally cannot get more irrational behaviour in the face of market demand than that.
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“Any rational government would meet this demand” – this is true & I will leave it to a Tory MP to express his views on the tory party, rationality & by extension the current “government” (this with respect to Tory election fraud)
“They have been utterly useless,” the MP said. “They should have been providing solicitors and assistance and statements. I’ve had colleagues on the phone to me in tears. They could have done this a year ago … It’s not dishonest, it’s not a conspiracy, it’s plain, simple, total incompetence. It’s absolutely disgraceful, and there are no excuses.”
This is how the Tories treat THEIR OWN MPs – if they cannot even look after their own MPs their actions in the country & a lack of simple financial nous is perhaps not so surprising. Perhaps the see these MPs as cannon/lobby fodder?
The article (on gov bonds or indeed secure performing assets) is highly relevant to, for example, Scotland & the independence debate. Working with a very large multi-national corporation we will be making some suggestions/proposals to the current Scottish gov that would, amongst other things, solve some of their energy problems (warm houses), provide large-scale employment, whilst at the same time addressing a lack of long term securities that pension funds, amongst others, are looking for. Oddly, we are in “cake & eat it” territory – which only leaves the question: if I can see this why can’t the Tories? – asnwer – loop back to begining of article.
Sounds like you’re rediscovering the Green New Deal….
No harm if you are
But inflation is going up & its likely to go up a lot more. Brutally, the opportunity has passed.
The BoE will shortly start pushing up the interest rate.
If you did Green QE now the £ would go down like a one-legged man doing the hokey-cokey.
I have to disagree: the UK may still need it in modest amounts
If interest rates go up, wouldn’t that lead to a sizeable number of defaulting mortgages, exposing the banks’balance sheets as the fictions they are? I gather it would, so we can probably forget about that 🙂
I think that is probably the best reason why it won’t happen here
That and the fact that our inflation will last a year at most
Sorry, I don’t agree.
I think this idea of ‘passing’ inflation comes back to Maggy’s emasculation, in fact evisceration of the unions. In the old days if prices rose then the workers would insist on wage rises to restore their standard of living (SoL) which, of course, pushed up costs. This caused an ‘inflationary spiral’
These days, I think the BoE thinks, without unions, a price increase will simply lead to people having a lower SoL with no means to combat that. What they don’t seem to have followed is that the NHS, care homes, most of our agrarian agriculture rely on workers from abroad who are doing it mainly to send remittances back to their families. If the £ keeps falling they will need much higher wages (denominated in £) or will find another country to work in.
So, sorry Richard, I don’t see inflation just “passing through”. I see it staying for a while yet.
I’m also not sure you have taken into account Cameron’s disastrous “triple lock” entered into to win election at any price. If the headline inflation rate starts running well over 2 towards 3% then we’ll literally end up giving every penny we raise in tax revenue straight to the pensioners!
Good pints
My argument is that the exchange rate adjustment is a one off and will pass through
You argue it will take longer
You have a point
In reply to Eurigenus, Duncan Smith has a cunning plan to impoverish the pensioners, notwithstanding they’re core Tory voters… he’s going to charge many of them the bedroom tax… “…The same Universal Credit will see all pensioners living in social housing become subject to the back-door bedroom tax which has also been confirmed by the DWP and … that can be as much as a £1500 per year cut to the Housing Benefit of pensioners.” https://speye.wordpress.com/2017/03/15/universal-credit-means-the-pensioner-bedroom-tax-and-24-billion-added-welfare-cost/” No worries there then 🙂
Richard
Thanks for your comments,
Since you ask about ‘good pints’ I always find you can’t go wrong with anything from Castle Brewery in Nottingham, Thwaites golden (truly delicious), Badger Tanglefoot or, if you like Cider, Natch.
At this time of year of course, a creamy Guiness is always welcome
Cheers!
🙂
“In the face of market demand”. Ironic and sad that a government that believes in the market so resolutely fails to satisfy it.
Further proof that, as you’ve implied elsewhere, this is the most incompetent government of our lifetimes.
Has anyone read this from Bill Mitchell? I wonder if it has any bearing… http://bilbo.economicoutlook.net/blog/?p=35572 It’s a bit like the government here, despite all their theatrics about leaving the EU, are in reality intent on observing EU economic policies, maintaining austerity, in the face of all sensible, practical and indeed moral, objections. I’m not saying anything either way except maybe there’s a piece of the puzzle here. Food for thought.
Well, the question has to asked Bill.
The reason why Europe is celebrating 60 years is the same reason May and her Tory goons keep telling us they are are on the side of ‘hard working people’.
If you keep repeating bullshit, it will unfortunately eventually be accepted as the truth. It is the neo-lib modus operendi and has served them well.
I am currently reading Michael Hudson’s book ‘Super Imperialism’ which attempts to chart America’s dominance as the major creditor nation in the world. This role even exerts an influence on the EU and its ability to deal with the post 2008 crash.
As MrShigemitsu points out below – it’s all about keeping people up to their ears in debt – especially if you have to pay the creditor back in their own money (the dollar).
@Pilgrim. And manufacturing consent – George Osborne has entered the bullshit manufacturing industry.
“But instead the government is determined to reduce debt. You literally cannot get more irrational behaviour in the face of market demand than that.”
It’s not irrational if your plan is to take the country back to the C18th, to a time when the wealthy few owned literally every single thing in sight, while the impoverished majority owned practically nothing – in some cases, not even a pair of shoes.
And that’s exactly how Tories like it – well, it’s just the natural order of things, isn’t it?
It’s not irrational; it’s deliberate – and this deficit-reduction nonsense and the accompanying ‘Government as Household’ narrative is just the cover they need to get away with it.
Agreed
I totally agree with the ‘Government as a Household’ narrative. Those households that run balanced budgets are usually one bad week at work or one missed benefit payment away from asking for a voucher from the food bank.
Successful and happy households do not operate this way and government should take note.
There no no relationship between governemnts and households
Households cannot print money
Governemnts can, must and do
Who cares what you “believe”? Facts aren’t a function of your belief in them.
The government is just like every household sat around the kitchen table working out its monthly budget, provided that household also issues its own sovereign currency, can borrow over 40 years at 1.5%, and whose spending decisions have macroeconomic consequences.
I don’t actually know any households like that but maybe things are different in your universe?
You are Wong: government also has the advantage of in reality never having to repay its debt
It would be dangerous if it did: there would be no money left
The new “rent seeking” monarchy or war-lords are the bankers. Neo-Liberal Junk Economics with its austerity programmes is the banker’s push for a return to an exploitative pre-democracy age:-
http://michael-hudson.com/2017/03/why-deficits-hurt-banking-profits/
So what happens when the mountain of debt issued at today’s zero real rates, propped up by QE which has reduced yields on government bonds, needs to be rolled over into new debt?
After a certain point the government won’t be able to do so at zero real rates, and will be storing up a huge problem for the future.
I suppose at this point you will simply say that the BoE can do more QE and then write the debt off – but this becomes little more than printing money, which the associated dangers for inflation and the economy as a whole.
I have already explained. You just issue new perpetual debt. And no interest is paid on QE debt. So there is never a cost
And if this was done the low rates could be locked in
And have you noticed how much debt QE created? Brexit is the only thing that has managed that for a decade
“And have you noticed how much debt QE created? Brexit is the only thing that has managed that for a decade”
Richard, are you sure you don’t mean ‘inflation’, as opposed to ‘debt’?
I did
Sorry….
The FACTS are that between 2009 and 2012 the total NET bonds issued by the UK government went from £640 bn to £1,320 bn, an increase of £680 billion.
Only £305 billion of that was financed by the Private or Foreign sectors. £375 billion was financed by money created by the BoE. It’s already been printed and spent into the economy and as Richard pointed out there has been no runaway inflation – the boogeyman of neo-liberalism. Any unwinding would represent a fiscal tightening of government expenditure. The printing and spending has been done and all that’s left is the government holding promissory notes to itself. Any other explanation is self delusion.
If you want to check it out, you can find the UK bond details at: http://www.dmo.gov.uk/index.aspx?page=publications/Quarterly_Reviews – look at Quarterly Review for Apr-Jun 2009 and Quarterly Review for Oct-Dec 2012.
QE purchase months were:
Between March and November 2009, the MPC decided to purchase £200 billion of financial assets (i.e.QE), mostly UK Government debt or ‘gilts’. Since then the MPC has decided on further purchases: £75 billion in October 2011; £50bn in February 2012 and £50bn in July 2012. That brought total assets purchases to £375 bn – market value, as quoted in the reports, of these gilts will be different from the purchase price.
You are ignoring the recent purchases and the rollovers
But you are quite right, of course
If there’s significant appetite for UK government debt, then it’s time for the BoE to unwind QE and sell the debt it bought back onto the market. There’s no magic money tree.
No: we need new debt, and lots of it
As for the magic money tree: there’s nothing magic about it. All money is made out of thin air
That was a much more measured response than I could have managed, Richard!
I try….
Honest, I try
Have a good weekend Nick
Thank you Richard. Why can’t the official opposition understand this? Is it willfull?
I have no idea
Well, I have: it’s a refusal to do the right thing. I have explained it to them
On the “governments as a household” narrative could you point me towards a primer or two that I could use in my discussions with people who have bought wholesale into the necessity of austerity (even if it’s to their own detriment)? I am semi-literate when it comes to economics & monetary policy, but struggle to explain it to those who really don’t know a thing about the economy. Which is exactly why they find the “government as a household” narrative so convincing and why disabusing them of that notion seems impossible at times.
You could try my Joy of Tax
Thanks, will check it out.
You could try the business analogy. They borrow to invest and grow.
It’s weird that this has not worked