I wrote this in June. In the light of my blog on modern monetary theory today and the comment I made in it that the government must act as the borrower of last resort I think it appropriate to republish it. I do so knowing it contradicts modern monetary theory. Political judgement and the needs of financial markets suggests that doing so is appropriate for the reasons I note. Modern monetary theory is not, in other words, the answer in all cases: it can just inform the process in which a government decides to engage.
_______
In principle a government with its own central bank does not need to issue gilts to cover its deficit: it can simply run an overdraft instead, and pay no interest. In practice there are good reasons why debt is issued.
First, people need safe places to save.
Second, those with pensions need locked in and guaranteed income streams.
Third, the banking sector has, post 2008, needed government bonds as a mechanism to secure overnight deposits.
For these reasons I am not opposed to bond issues at low or effectively no net interest cost. And that is possible right now.
As the FT has noted today, 10 year government bonds have not paid more than 1.5% in the last few years. And the demand for 50 year bonds is so strong that they are paying lower interest rates than 30 year gilts.
The FT's conclusion is that this indicates a capacity to issue more debt because the demand for it exists. I am entirely sure it does.
And if other debt was packaged for a domestic market - as an NHS bond, for example, in an ISA wrapper - then I suspect there would be a very strong take up. What is more the myth that the debt is so bad would be shattered: it would be seen as the simple savings system that it is.
The simple fact is that markets need and would readily buy more government debt. Gilt issues are six times over-subscribed at present. It's completely baffling that the government refuses to supply people with the savings products they want - and most especially longer-term locked in ones - when there is no net cost to doing so in interest terms and the country is crying out for the benefit of the spend which it will not get if these funds are instead directed into private savings arrangements.
Is it really too much to hope that someone, somewhere, might see the sense of what even the FT thinks is the obvious thing to do, which is to issue more debt to assist the provision of improved government services!
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Thanks for the re post. Your writing on this is clearer than any other I have seen, and I will definitely be checking out The Joy of Tax as well as a consequence.
You write above “for the benefit of the spend which it will not get if these funds are instead directed into private savings arrangements.” I think I know what you mean, but can you expand a tiny bit on that as well?
I can’t see what you are quoting when I comment….which is annoying, so I will guess
I suspect I ma referring to the fact that pension funds might otherwise buy useless secon hand co9mmodities like shares and business property that do not actually create new jobs or business capacity
Tom says:
“Pension funds buy useless things like shares”.. how do you think pension funds would have fared if they only owned gilts?? ”
Tom, your faith in the value of shares is predicated on the share prices representing a real underlying value in the companies’ shares and the market having got that assessment correct. Currently it is widely held that relation of price to value is fantasy (or a conventional fiction to be slightly less pejorative) In reality I suggest current high share valuations reflect a possible serious overvaluation of currency they are measured in.
If the only way to make up the difference between price and value relies on government picking up the tab after a market collapse then the share prices are a verging on fraudulent and can’t be compared directly to the value of gilts. Either way the value is backed by government guarantee. BUT there is a lot of zero sum argey bargey going on in the share market, generating winners and losers on a short term basis.
Discuss ?
Why is it better for the gov to pay savers interest than just paying good pensions directly?
Because that’s the way private pensions work
I am happy to have peope save for pensions privately
Aren’t you?
Yes, but you spoke of a “revenue stream” from interest. That is more than them saving privately. It is the government paying them to save. I am asking, what is the difference then?
Sorry, I am losing the thread
I cannot see it when I comment
WHat is your whole question?
The undermining of the state and Governmental apparatus for macro policy has nullified the desire or knowledge to do this.
And I agree with the frustration in the question. I mean so often detractors will say ‘How are you going to pay for it?’
Well the simple answer is: it (the NHS or something else that is socially useful) can be paid for from a long term investment stream such as a bond.
But because the bond is owned by the Government – it doesn’t count! Crazy!
But also what lack of imagination!!
An NHS bond with tax incentive is a great idea. And a large proportion of the renewable energy capacity, that with the cancellation of Moorside we need faster than ever, could be similarly funded. Infrastructure, our energy future and the planet’s wellbeing would provide a massive impetus to take-up. Such ideas are of course too innovative and ideologically incompatible for the time-worn economic theories propelling this government.
I agree….
Richard,
I assume you have all you savings and investments in government bonds then, as you are busy telling everyone else to invest in them? I also assume you are qualified to give such investment advice?
Unfortunately what you say in your piece isn’t wholly true.
People do need “safe” places to save, but long dated Gilts are not that place. With Gilts yielding 1.5% you are getting a negative real return – and so are losing money every year just by holding them.
More importantly, you are likely to experience large capital losses on Gilts. With yields so low, the likelihood and margin for yields to go lower is slight, and given the Bank of England is hiking rates the chances of yields going higher is significant – which would leave the holder with significant capital losses on those bonds.
Pension funds do need guaranteed income streams, but their holdings of Gilts are typically at the bare legal minimum, for the reasons I give above. Much of that will also be hedged up with interest rate swaps.
The banking sector do need to hold a fair amount of Gilts, for tier 1 capital adequacy requirements. Holding these Gilts has absolutely nothing to do with securing overnight deposits though. O/N deposit markets are almost entirely unsecured markets.
The market doesn’t really need large amounts of new government debt. I’m not sure where you get your six times oversubscribed number, but not from the DMO (https://www.dmo.gov.uk/data/pdfdatareport?reportCode=D2.1A) where the data shows auctions are typically only twice bid to cover. A lot of those bids will be “cheap” bids given the Dutch style auctions.
Of course, if large amounts of new debt were issued, then yields would more than likely push up, leaving investors in Gilts with losses.
So on the one hand you are saying that the government should issue more debt, yet on the other you are saying people should buy that debt even though they are likely to lose money on the investment.
I really am not sure you have thought what you have said through.
Commenting on maroeconomic policy is not investment advice
But for the record I do follow my own advice.
And for the additional record, you clearly do not understand the repo market, so what you say on that, and I rather think much else, is nonsense
Richard,
Firstly:
As a professional investor, working in the fixed income team at a major pension fund manager, I can tell you for free that the market does not like long dated Gilts. We are not “lapping them up”.
Thanks to legislation enacted in 1997 we are forced to hold a certain amount of them. Given that they are relatively scare it forces the yields down.
It is VERY important to note here that we are not holding 30y Gilts at 1.92% because we think they are good value, or will give us a good return on investment. The chances of yields or inflation remaining low enough for that long to give a net positive return are near zero We are holding them because the government forces us to. So much so, that a large portion of our holdings are hedged out against the IRS.
Whilst there definitely is a time and place for holding fixed income investments, they should not make up the bulk of your portfolio. I will elaborate on this more.
Secondly:
You are making a specific recommendation for people to buy bonds as an investment. I see elsewhere hat you also say people shouldn’t buy equities. This is specific advice which I doubt you are qualified to give.
I am also concerned that the advice you are giving, frankly, is terrible. Someone investing in 10y Gilts is likely to lose about 5% over the life just on the negative real yield, and then could lose a lot more as yields go higher. Every 1% higher in yields is going to cost you over 10% in capital losses.
Which is why I am wondering why anyone in their right mind would suggest them as a good investment. They offer a poor real return, and the risks for yields are skewed heavily to the upside.
On the whole bonds are not a good investment long term. Courtiers have a nice piece on he relative returns here: https://www.courtiers.co.uk/media/Courtiers-Equities-vs-Gilts-June-2018-research-note.pdf
You’ll note (on page 8) that the real returns from Gilts, if you invested £100 in them back in 1900 would leave you with £463 today. Compared to equities which would leave you with £35,228.
If you then say equities are riskier, you wouldn’t be right there either. In the very short term, it is true, equities are more volatile. See page 11. But over the longer term the volatility of equity returns drops to being the same and then LESS than the volatility of Gilts returns – but the equity returns are significantly higher.
Basically, what this tells us that to hold Gilts for the long term, you are exposing yourself to more risk, for less return. One would think that anyone willing to do that might be a little bit foolish.
Thirdly:
I think you are confused when it comes to the money markets. I don’t think you understand the difference between the depo market and the repo market.
The depo market is short term unsecured lending. This is where the vast bulk of short term funding takes place, and has literally nothing to do with Gilts. The borrowing/lending is wholly unsecured. One bank lends another some cash, but there is no other concurrent transaction taking place.
The repo market (in bonds) serves two purposes. It allows people to cover short positions in any given bond, by borrowing them in return for cash. It also, in reverse, allows people with excess inventory or a need for cash to lend those bonds. Lending those bonds encumbers them though, which means that the bonds banks hold for regulatory requirements cannot be loaned out through the repo market in normal conditions.
So essentially banks will hold the absolute bare minimum of them to meet their T1/B3 capital requirements and not a single bond more. Yes, they need to own some, but they don’t view them as a good investment – in fact because of the terrible returns on most government bonds they are actually a huge cost to the bank, which is one of the reasons so many larger, more retail focused banks are doing so badly.
When you say “professional people do think thy are necessary” I can only say, we do not. They stink as a long term investment.
Which makes me also wonder when you claim to have sound judgement on this matter.
I have dealt with all these issues this week
With my reasoning
And evidence
And very clearly this is not investment advice. It is economic comment
Now go away and, very politely, keep earning a great deal mismanaging people’s money in your own stated opinion.
But also wonder why regulators needed to prevent you doing even worse
Because that is what they did
Really Aiden!
This is not an investment advice blog.
It is a place where new ideas are knocked around and into shape.
I find your comment very interesting in itself as I am no expert.
Why not make some suggestions that would address your concerns with bonds and gilts? What would make them a better investment from you POV?
One of the suggestions here is to make bonds more widely available (you say that they are scarce and that’s a problem) to boost the economy. So are you saying an expansion in such bonds (which is what I think Richard is suggesting) would not help?
Such an expansion would do what the boosting of other financial products would do – it would create a market just like happened in MBS, CDO, CDS etc.
Don’t just shunt the idea into a siding Aiden. What could we do to make the idea workable so that we have a win/win situation?
Richard,
You haven’t dealt with these issues at all.
You have simply stated that bonds are a great investment and people should buy them, and equities are not.
You have not presented any evidence, other than to show that single stocks might not be better than bonds. This we already know, but even then you have made the leap from saying individual stocks can be poor performers to ALL stocks.
You have not given any evidence why government bonds as an asset class should be preferred by an investor to equities in general. All the evidence out there points to the fact that equities over time massively outperform bonds. Yet here you are making unqualified claims that this is not the case. Some hard, factual, documentary evidence for this would be nice, but I doubt you can provide such things.
You also seem to have degenerated into petty insults:
“Now go away and, very politely, keep earning a great deal mismanaging people’s money in your own stated opinion.”
My salary is my own business, unless you feel like sharing how much you earn as well. As for managing other people’s money – we have a long an successful track record and have managed to provide returns for our customers far in excess of Gilts, with lower overall volatility. I’m sure you would call this a terrible achievement but our customers are much better off following our advice then yours.
“But also wonder why regulators needed to prevent you doing even worse”
“Because that is what they did”
Worse than Gilts? The regulators simply enforced Gordon Brown’s 1997 pension reforms. You’ll notice most of them think those reforms were terrible – a massive tax raid and then forcing people into low yielding government bonds, which was done simply because Brown was worried about his spending spree. The effect of these changes has forced many pension schemes which had surpluses into massive deficits. So who really is the problem? The pensions industry or government, which directly caused a lot of the problems with pensions as a whole through poor legislation.
Nor do I have a vested interest, as such. I might be a fixed income fund manager, but I am not trying get people here to invest with us, and in fact am saying that at the moment bonds are a poor investment choice. There is a time and place for bonds, and they serve a real investment purpose (not least diversification) but putting all your money into negative real yield bonds is possibly the worst, most lunatic advice I have ever heard.
Again, I would be interested to see you provide any documented, factual, numeric evidence that bonds have on the long term provided better returns than equity markets (not individual stocks, which is what your previous blog referred to).
Pilgrim Slight Returns
It’s not an investment blog, yet Richard Murphy is giving investment advice. I think, and the data shows, it is very poor advice.
Feel free to take his advice, but I would suggest you don’t.
As for what would make bonds a better investment:
As I have said before, there is a time and place for bonds. They do serve a role for portfolio diversification, typically as their correlation to equities is negative.
They would also be a lot more attractive if they actually provided a real yield – which is part of my point. At the moment they don’t. If nominal and real yields were significantly higher your real returns would be better and you might stand to make some capital returns as well. As it is, you are likely to suffer losses on both holding them, so in part it is an issue of timing.
Bonds also have a place when funds need defined cash flows for a portion of the fund, to meet defined obligations (pension payouts). They serve well as a pure hedging tool to meet this function – but they are not likely to provide any significant portfolio growth.
In other words, and in very simple terms, whilst your are saving, you should mostly be invested in equities, with a small portion of bonds to act as portfolio diversification. When you have retired and are drawing on your pension, the part that is giving you an “income” should probably be invested in bonds, to smooth that income stream, with anything left over should being geared towards growing your portfolio as the likelihood is that the income from those bonds won’t keep up with inflation.
So no, I don’t think an expansion in the already very substantial government bonds markets will help anyone. Not least because significant increases in government debt will lead to higher rates and losses for holder of that debt. Just look at the US, where US treasury holders have taken a beating. There isn’t even enough evidence to show that hugely increasing a country’s debt pile will massively increase GDP growth enough to pay for it all. Short term multiplier effects are normally greater than 1, but long term the multiplier effect is often less than one. Simply put, if it were the case that government spending always increases growth by MORE than that amount of that spending, governments wouldn’t be sitting on large and ever increasing debt burdens.
The other parts of the fixed income market, such as Credit (corporate bonds), CDOs and MBS also serve a purpose – mostly yield enhancement/diversification. Fixed income funds will own them to improve the overall yield of their portfolios over a pure government bond fund. Again, they have a place and real function – but what Richard Murphy is saying is buy Gilts.
CDS is a different thing altogether. Credit Default Swaps are protection against bonds defaulting, insurance essentially. The prices of CDS typically go up as bond prices go down. You can almost think of them as reverse bonds. Being derivatives, the offer certain advantages over the underlying bonds, and are most useful as a hedging tool in the pension fund industry, but are sometimes used for yield enhancement by shorting the CDS.
If you do want to invest in bonds, which as I say should form a small part of your portfolio, I would do it through an experienced fund managers global bond fund. This gives you access to the whole global fixed income investing space, where the fund managers can enhance your returns through finding bonds with much better risk/return profiles than just buying Gilts. It enables you (via the fund manager) to switch into similar bonds which are likely to perform better.
For example, now that US treasuries have sold off so aggressively, which would you rather own? 10y USTs yield 3.2%, with a real yield of about 0.9%, where 10y Gilts yield 1.5% with a real yield of -0.7%. The US has already done much if it’s hiking cycle, and the rest of it has already been priced in to the market, where the BanK of England has barely even started, meaning Gilts are likely to sell off. USTs are safer than Gilts as well. Pension funds will typically do such trades to improve the returns they get, and will almost always hedge out any currency risk. Timing of course matters – when USTs were yielding 1.5%, pre hiking cycle, they wouldn’t have been a good buy either.
That is just a very simple example, but again reinforces why just buying Gilts, as Richard Murphy suggests, is such a terrible idea.
I suppose part of what I am saying is that timing does matter. Sometimes equity indices will be a poor choice, and sometimes Gilts will be a good choice. However, in the long term and especially if you are not going to directly manage your portfolio on a day to day basis, Gilts provide poor returns when compared to equities, and especially at the moment anyone who is mostly invested in Gilts is likely to see significant losses over the next few years (and are already well behind an equity portfolio).
https://www.taxresearch.org.uk/Blog/2018/11/08/stock-markets-do-not-create-value/
Some stocks perform very well
Overall markets extract value
The trend is accelerating
The short termism is staggering
All I can say is thank heaven regualtions overrule your undoubted inability to chose which stocks are the right ones
But please feel free to continue to extract your rent from the markets despite this
And please do not say I have not provided the evidence – I have
Honestly, what you have just written is utterly staggering. In it’s total lack of a clue, that is.
The article and paper you link to clearly states that overall equity markets perform far better than bonds. It shouldn’t come as a surprise that individual stocks – of which there are many thousands, don’t – as many companies will fail over time.
That is not a ringing endorsement for buying bonds over equities though.
Let’s look at your other statements (as they are presented without any evidence):
“Overall markets extract value”
Presented without evidence. Yet people investing in equity markets will have done very well over the long term. So how is this extracting value? Are you also saying that bond markets don’t extract value? Or are you saying that people shouldn’t get a return for their investments?
“The trend is accelerating”
Again a statement, not a fact, and without any evidence to back it up. If anything though, fees for investing directly or through fund managers have on the whole gone down dramatically over time. Typically actively managed funds cost about 1% these days, and index trackers much much less – I’ve seen annual fees as low as 0.1%.
It’s also worth noting that most fund management companies don’t make astronomic profits. When you compare the company revenues to the assets under management for most of these firms, you are typically looking at 0.1-0.25% of AUM as revenues. Profits are lower still.
And before Richard Murphy tries to misinterpret this as well – this is nothing to do with the performance of the funds these companies manage. It is about the company itself.
“The short termism is staggering”
Nobody suggests people should invest short term. Quite the opposite – the professional fund management industry is buy and hold, long term and advises their clients to do the same.
“All I can say is thank heaven regualtions overrule your undoubted inability to chose which stocks are the right ones”
Several things to point out here. Notwithstanding that you have literally got everything wrong.
Firstly, I personally am not an equity fund manager. I am fixed income fund manager. So I don’t pick stocks at all – I pick bonds and other interest rate products.
Secondly, no serious fund managers ever “pick” single stocks as you are suggesting. The closest you get to that is going slightly overweight a stock against underweight a different stock as part of a large basket portfolio of stocks, all as part of an index.
Thirdly, regulation doesn’t stop anyone from picking stocks. It’s a very bad idea from an investing point of view, but there are no rules against it. You are at liberty to put all your investments in a single stock should you wish to, and there are no rules on fund managers doing the same thing other than their own. Regulation simply does not play a part in equity portfolio construction.
“But please feel free to continue to extract your rent from the markets despite this”
I see rudeness is one of your strong points. It certainly isn’t knowledge of the finance industry.
“And please do not say I have not provided the evidence — I have”
No, you haven’t. You have made various statements and proclamations, but you have not provided a shred of evidence other than a link to an article. Which you seem to have not understood or deliberately misconstrued, as the paper talks about single stocks, not equities as a whole.
The paper you are referring to actually says, as someone helpfully posted:
“The question posed in the title of this paper may seem nonsensical. The fact that stock
markets provide long-term returns that exceed the returns to low risk investments, such as
government obligations, has been extensively documented, for the US stock market as well as for many other countries. In fact, the degree to which stock markets outperform is so large that there is wide spread reference to the “equity premium puzzle.”
Yet you are claiming – in the face of evidence – that bonds perform better than equities as a whole.
I ask you again – have you got ANY evidence of a factual, numerical nature, that shows that bonds perform better than equities, long term. It is becoming pretty obvious the answer is no – one would have thought if you had such a thing you would have presented it by now.
I fear we all know the answer is no, and the best you will be able to do is make some more ill-thought out statements and present them as “evidence”.
Tom and Pilgrim Slight returns
I was actually thinking about this whilst out for a walk.
Tom’s suggestion is pretty sound. Why invest in a long term, relatively risky asst like a Gilt yielding 1.5% fixed for it’s life, when you can put your money in shorter term savings vehicles like Tom mentions.
Putting your money in Marcus Bank for example (not an endorsement, and I have nothing to do with them) gives you the same 1.5%, but you are not exposed to capital losses should yields rise. Given it’s a bank account you also have the advantages or ready access to your money, and consumer protection for a portion of it. You would also hope that as yields rise the interest they pay will also rise – essentially making the savings account look like a floating rate note in fixed income land.
It really is a no brainer, Marcus over Gilts. You would have to be particularly stupid to invest in Gilts given the less risky alternative.
Aiden
It is very hard to respond to someone who has so spectacularly missed the point of almost everything I say, and who appears to have such little understanding of the issues that this blog addresses.
It is also very difficult to comprehend how someone can comment when they claim to have responsibility for bond investment, presumably on behalf of fee-paying clients, and then hold that product in such contempt that I must doubt your ability to act rationally in your client’s best interests.
It is also hard to argue with someone who clearly does not know what rent is in economic terms.
Or who cannot differentiate macro and micro interests.
And who is entirely indifferent to the long term – which is the curse of the UK imposed by the City and its fund managers.
And who is utterly indifferent to the use made of invested funds.
I’d be talking past you if I did reply because all you can think of is your next quarterly figures. Some of us have much bigger perspectives on life based on differing evidence that each of us weights entirely differently.
So I won’t waste more of time.
The case for gilts is exceptionally strong (and another link just posted notes why) unless you’re a fund manager who holds client interests in contempt
And that’s most of them as far as I can work out
Richard
I notice you are posting other poeple’s comments, but not mine. I hope this is an oversight on your part. Or is it simply that you are unable to deal with criticism and having it pointed out that you are factually wrong on a lot of what you are saying. I will repost my last comment and the decent thing to do would be to post it and let your readership decide who is right and who is wrong.
Honestly, what you have just written is utterly staggering. In it’s total lack of a clue, that is.
The article and paper you link to clearly states that overall equity markets perform far better than bonds. It shouldn’t come as a surprise that individual stocks – of which there are many thousands, don’t – as many companies will fail over time.
That is not a ringing endorsement for buying bonds over equities though.
Let’s look at your other statements (as they are presented without any evidence):
“Overall markets extract value”
Presented without evidence. Yet people investing in equity markets will have done very well over the long term. So how is this extracting value? Are you also saying that bond markets don’t extract value? Or are you saying that people shouldn’t get a return for their investments?
“The trend is accelerating”
Again a statement, not a fact, and without any evidence to back it up. If anything though, fees for investing directly or through fund managers have on the whole gone down dramatically over time. Typically actively managed funds cost about 1% these days, and index trackers much much less – I’ve seen annual fees as low as 0.1%.
It’s also worth noting that most fund management companies don’t make astronomic profits. When you compare the company revenues to the assets under management for most of these firms, you are typically looking at 0.1-0.25% of AUM as revenues. Profits are lower still.
And before Richard Murphy tries to misinterpret this as well – this is nothing to do with the performance of the funds these companies manage. It is about the company itself.
“The short termism is staggering”
Nobody suggests people should invest short term. Quite the opposite – the professional fund management industry is buy and hold, long term and advises their clients to do the same.
“All I can say is thank heaven regualtions overrule your undoubted inability to chose which stocks are the right ones”
Several things to point out here. Notwithstanding that you have literally got everything wrong.
Firstly, I personally am not an equity fund manager. I am fixed income fund manager. So I don’t pick stocks at all – I pick bonds and other interest rate products.
Secondly, no serious fund managers ever “pick” single stocks as you are suggesting. The closest you get to that is going slightly overweight a stock against underweight a different stock as part of a large basket portfolio of stocks, all as part of an index.
Thirdly, regulation doesn’t stop anyone from picking stocks. It’s a very bad idea from an investing point of view, but there are no rules against it. You are at liberty to put all your investments in a single stock should you wish to, and there are no rules on fund managers doing the same thing other than their own. Regulation simply does not play a part in equity portfolio construction.
“But please feel free to continue to extract your rent from the markets despite this”
I see rudeness is one of your strong points. It certainly isn’t knowledge of the finance industry.
“And please do not say I have not provided the evidence — I have”
No, you haven’t. You have made various statements and proclamations, but you have not provided a shred of evidence other than a link to an article. Which you seem to have not understood or deliberately misconstrued, as the paper talks about single stocks, not equities as a whole.
The paper you are referring to actually says, as someone helpfully posted:
“The question posed in the title of this paper may seem nonsensical. The fact that stock
markets provide long-term returns that exceed the returns to low risk investments, such as
government obligations, has been extensively documented, for the US stock market as well as for many other countries. In fact, the degree to which stock markets outperform is so large that there is wide spread reference to the “equity premium puzzle.”
Yet you are claiming – in the face of evidence – that bonds perform better than equities as a whole.
I ask you again – have you got ANY evidence of a factual, numerical nature, that shows that bonds perform better than equities, long term. It is becoming pretty obvious the answer is no – one would have thought if you had such a thing you would have presented it by now.
I fear we all know the answer is no, and the best you will be able to do is make some more ill-thought out statements and present them as “evidence”.
Tom and Pilgrim Slight returns
I was actually thinking about this whilst out for a walk.
Tom’s suggestion is pretty sound. Why invest in a long term, relatively risky asst like a Gilt yielding 1.5% fixed for it’s life, when you can put your money in shorter term savings vehicles like Tom mentions.
Putting your money in Marcus Bank for example (not an endorsement, and I have nothing to do with them) gives you the same 1.5%, but you are not exposed to capital losses should yields rise. Given it’s a bank account you also have the advantages or ready access to your money, and consumer protection for a portion of it. You would also hope that as yields rise the interest they pay will also rise – essentially making the savings account look like a floating rate note in fixed income land.
It really is a no brainer, Marcus over Gilts. You would have to be particularly stupid to invest in Gilts given the less risky alternative.
I know you are arrogant enough to think you are my priority on a Sunday
Let’s put the record straight: you’re not
And it is your belief that the world revolves around you that is at the heart of your fallacy
I will respond but I am working intensively for the next couple of days, so I will decide when to do so
Aiden
Thank you for coming back.
I am not here for investment advice – please be assured. And I do not think that Richard is advising at all. He is creating debate about how to make the bond/gilt system more socially productive. That’s all. And it needs to be Aiden. It really needs to be.
I will do a fuller reply when I can
But you get the whole point PSR
Do you think interest rate policy is effective?
If so, via what mechanisms, and is it distorting as well?
No I don’t
It is unsubtle at best
And it does not work when we have low interest rates
We do have low interest rates
And that is not going to change, much
Shares in the UK have been underperforming Government paper for the last 30 years and before that it was the reverse – Barclays have a 2016 paper. In the USA most shares over long periods don’t make money – the exchange is buoyed by just a few successful shares. ` I’m talking real not nominal. With pension funds public and private still talking 7.8% every year, nearly everyone is asking how and if these claims are true. ` Some of the accounting contains 10 year PE stuff that may not perform either. ¬Hey ho, not the point. I’d just add that government paper might be a price signal and check on prudence.
“…. the banking sector has, post 2008, needed government bonds as a mechanism to secure overnight deposits….”
Are overnight deposits, in real terms, anything other than banks squaring their account transactions at the end of the day ? Rather as a bank teller will reconcile cash in the till with the day’s transactions.
Banks will n ot lend to each other unsecured now and there is no guarantee on their depositis with each other. As a result they buy and sell gilts from each 9ther overnight instead
Admittedly, some of these are borrowed
But without gilts the repoint market would fail
If “….the demand for 50 year bonds is so strong that they are paying lower interest rates than 30 year gilts….”
This indicates that the bond purchasers are betting on the rate of inflation being greater than government (BofE) is estimating over the longer term. Doesn’t it?
“Gilt issues are six times over-subscribed at present. It’s completely baffling that the government refuses to supply people with the savings products they want -….”
That’s what keeps the stock market at inflated prices. That is deemed (inappropriately) to be a good thing. Those with spare money have to put it somewhere and are desperate to find any sort of return on it. Many are going to be shafted in the next market crash unless the government piles money in to shore up share prices. That’s the nature of the gamble I think. It’s either that or buy gold and bury it. In the short term the shares are looking like a better bet, and everybody thinks they will know when to sell. Most will be wrong as they always are, and will watch their paper profit (and a portion of their starting capital) evaporate as the market crashes (again).
Government is doing what it is doing because government foresight does not extend beyond the next election.
You could add in a great deal from the ‘periphery’ to what Richard is saying such under-utilized resources as what is lost in, say, David Graeber’s bullshit jobs and the ever-present 25% of working-age people not working and what we are not doing in producing green capital and even homes for our young.
RM: “Overall markets extract value”. Indeed, they extract surplus labour value without any effort on their part – just more rent seeking. It’s not as if the second-hand share market has anything to do with real investment in capital goods. All the private pension industry does is extract a bit more without creating any value and the only reason it functions at all is because of the tax breaks. Using MMT it’s possible to pay decent pensions to everyone and tax the excess back. Nothing to stop private saving whilst working to enhance retirement spending.
In the same way that people can’t get their heads around the reality of money as described by MMT, and plenty of others in the past. This thread has some great examples of arguing about the macro using micro understanding. The key failure of understanding, or lack of a care, is:-
what may be best for you, your specific customers, your sector, etc doesn’t automatically follow that it is best for a society.
Saying that if it wasn’t for those pesky rules/regulations/laws/kids(sorry a bit Scooby Doo at the end there) then you’d be better off is just a one sided argument. Half the stuff here is only one step removed from wealth creator and trickle down nonsense.
Precisely
Richard, I see bond expert Brian Romanchuk has an article in “Seeking Alpha” in response to your post entitled “Do Central Governments Need To Issue Bonds (Again)?”
https://seekingalpha.com/article/4221062-central-governments-need-issue-bonds
It seems I have someone who agrees with me
Largely because he can look beyond the dogma and self interest