I meet quite a lot of people who work in bond markets. Time and again they tell me about the shortage of good quality bonds — and the need for them.
They need them because an aging population needs the stability of bonds to underpin its risk averse investment profile.
We have an aging population. Look at the bulge of those retiring over the next few years:
The number of 65 year olds is about to jump, enormously. That’s because of the end of the war. people had a lot of sex to celebrate. And once in the habit they carried on. The bay boomers are going to retire over the next decade or so. Many of them will want to but UK gilts to underpin their pensions.
No debt: no security in old age.
That’s the deal for them.
So we need more government debt to ensure they have the old age they want to enjoy.
All of which says now is not the time to make debt reduction the number one economic priority. Creating a growing economy is. And debt reduction and growing economies don’t mix — not when there is mass unemployment at the same time, as we have.
In that case — blow the debt. As I’ve just shown, and as this logic shows, that debt is wholly marketable. The real problem is there are no jobs and so no prospect of growth in our economy. The private sector is doing nothing about that fact. And that’s why right now, as I have also shown, spending pays and cuts will be devastating.
I know there will be howls of protests in response. And every howler is wrong.
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Richard- this seems to be pretty logical economics. How much damage do you believe the current Government is capable of doing? It seems to me you are suggesting the very real possibility of a Depression which would then be most difficult to recover from.
Economic growth in the private sector seems a very remote especially if supposed to be export led- where are we going to export to. Another overlooked fact is that many of the efficency savings proposed in the public sector are actually cutting private sector provided programmes. It would be interesting to establish if any figures were available here regarding the split.
I see public sector cuts, private sector reductions and where a possibly odd mixture of the two- quangos etc- probably choices made in political terms to cut quangos rather than economic terms. The Big Society is also complete nonsense as if for example charities were to help run schools it is the charitable sector that has felt the pinch more than most.
Apart from a few green proposals there seems a complete lack of future vision from most political parties and especially the current government. I really do think a copy of Economcis for Dummies should be sent to the Chancellor.
5 year Gilts yield 2.41% 20 year Gilts yield 4.40%. Take of income tax on the interest, and you are left with a pretty poor return.
RPIX (a better measure of inflation than CPI) is 5.4%
You are happy with, and indeed want, inflation at 5% – you’ve got it.
There is no Gilt across the curve that yields higher than the 5% inflation you advise.
This is the inflation tax in action, and you are advising pensioners to pay it. Not fair.
@James Tyler
What do you propose instead then?
How would you fund an annuity?
@Tim
One of the things that astonishes the Green New Deal group – and I am a member and a principle author in that group – is that the few of use who comprise it continue to be the only people putting forward constructive alternatives for our economic future.
Where are the rest?
We have no prospect of export lead growth – look at the Eurozone.
We have no prospect of private sector growth when their biggest customer – the government – is cutting back.
The best split analysis is, as far as I know, by me – here http://www.taxresearch.org.uk/Blog/2010/05/17/the-only-way-to-cut-government-debt-is-to-increase-government-spending-2/
Cutting state jobs has, as I show, a massive knock on in the private sector
But none of them seem to appreciate that
It’s really very worrying indeed
Richard
Richard,
You are an economist: I am not. So I may be asking a stupid question. But there are 2 things here that worry me:
“The number of 65 year olds is about to jump, enormously”
“The real problem is there are no jobs and so no prospect of growth in our economy.”
If we issue more gilts, I can see there is (or may be) demand for them from baby boomers. But how is the debt to be serviced if, by definition, the proportion of people of working age is dropping.
My concern with the debt is how it is to be serviced. Isn’t debt interest already equivalent to the nation’s entire spending on education? Now, if the revenue raised by debt issuance is used for proper investment that will generate wealth in future, then there is an argument for issuing more debt. But at some point, the amount of debt you have strangles growth because of the amount of money that you spend servicing it, rather than investing.
When I hear that the debt has most recently been used to give discretionary 5 figure bonuses to leading civil servants, I really wonder whether that is “investment” in the future.
And of course, the other issue is that the people who are saying that we should not cut spending wer no making the argument that we should have been cutting spending during the boom. In other words, it seems the problem to me is that the right always wants to cut public spending and the left always wants to increase it, whereas even me, as a non-economist, understand that government spending should be counter-cyclical.
@mad foetus
The old are only ever kept by the following generation
They must bequeath to the next generation enough capital to compensate that generation for the income they forego to keep the old
That’s the pension contract
Which means we must invest in a Green New Deal now
It’s the only way this equation works
“The old are only ever kept by the following generation”
I can see how that works when each following generation is bigger than the one before.
How does it work when there are as many retired people as there are workers, and the workers blame the retired people for exploiting the environment to an unprecedented degree and leaving them with the bill for cleaning up.
I can see the young turning on the old. That’s my fear about the debt we are incurring now.
There is a glaring mispricing of bonds. Either inflation is way too high, and will fall rapidly, or bonds are way too expensive, and will fall rapidly.
Why is this so?
In one word. Government. Bond markets have been massively distorted via QE. All of last year’s net bond issuance has been soaked up by freshly minted reserves issued by the BoE. This artificial buying leads to the mis-priced bonds.
(And, incidentally, all of this newly minted money is why inflation is now over 5% and begining to spiral out of control).
To advise anyone not wishing to eke out a retirment in penury to buy Gilts now is just wrong. To advice a pension fund to take decisions that purposely erode its memebers capital is shameful.
Either,
In a couple of years time the markets will have corrected, and either you win – and inflation is 5% and Gilts yields are inflation + a premium to allow a holder to retain his real value. In effect, this will mean a huge capital loss for anyone foolish enough to buy bonds now.
-or-
You are wrong, inflation will fall to sub bond yields, and bonds will again be a safe(r) buy.
If you advocate 5% inflation, you really should advise people to wait until Gilt yields are above 5%, otherwise, well…..
What should be done?
Control the evil of inflation.
@mad foetus
I agree
It’s why more needs to be done on pensions – urgently
I’m on the case
@James Tyler
You do write complete tosh
Inflation is up because of oil prices and a VAT increase
If you had your way we’d increase interest rates to beat inflation and stop consumption when consumption has already been hit by a VAT increase
To describe that analysis as economically illiterate is being kind to you
There you go again. You turn rude and change the subject.
Leaving aside the supreme (and easily debunked) folly of Keynesian analysis to another time, you still haven’t adressed why buying gilts at 4%, demanding politicians get inflation up to 5%, and watching your retirement income decline at 1% a year is anything other than a recipee for poverty?
How is that tosh? Which bit is wrong?
“Inflation is up because of oil prices and VAT.”
If you check the records, spot oil was $70 a barrel a year ago, it is $71.23 now: hardly budged.
However, the £ was worth $1.65 a year ago – it is $1.428 now, so in fact it is the £ that has devalued not oil that has gone up.
In fact the value of pretty much everything has ‘gone up’ in terms of the pound. Oil, wheat, equities, gold, bread, baked beans – you name it.
Please, get over your prejudices. It is the value of the £ that has collpased, not the price of goods that has gone up.
@James Tyler
And your alternative is?
Please explain
In plain English
@James Tyler
Yes we’ve devalued
It’s a pre-condition for growth
So is inflation
Both are “good things” as a result
Growth puts people into work and creates real welath
Your problem with that?
Inflation is the amount of money tokens in excess of economic wealth. That’s the only reason why general prices rise. Any fool should know that money does not equal economic wealth, it is merely a proxy.
Extra money tokens do not equate to, or in themsleves create, wealth. The rearrangement of the factors of production more efficiently is the only way that an increase in economic wealth can be created.
The lesson of history is that artificial credit bubbles lead to the mis-allocation of resources, and economic disaster. Again and again and again, when credit growth is stoked up by a central bank, disaster follows. 1905-7, 1926-29…… 1997-1999, 2003-7 and so that tragic story of Keynesian folly continues.
The horrible truth is that the damage has been done. The massive growth in credit over the last decade has meant trillions being poured into fruitless ventures, and your inflation tax is the price being paid now.
Inflation at 5%, average earnings increasing at 2%. This generation is paying 3% to pay for the follies of the noughties.
In plain English, the only solution is sound money that people can depend upon to hold its value (therefore an end to credit boom and bust), an appreciation that we have to defer consumption in order to be able to investment in our future, and hard work.
To pretend you have magic potions in the form of inflation and stoking up aggergates is Noddy in Toy-town stuff. Always has been, that’s why we are in the mess we are in now.