The FT has noted:
When the question is asked 'how are you going to pay for it?' one answer now is 'the people who lend their money to the government will pay for it'.
We live in interesting times.
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Hi Richard,
I think the point you’re making is somewhat misleading, or could be misinterpreted. Its good news for a supporter of massive government fiscal support in these extremely difficult times, like me, that government can borrow with a negative yield.
But just because there is essentially no interest to be paid on these bonds, the principal still needs to be repaid (or perhaps just rolled over), and so sure, the lenders are making a contribution, but its a tiny part of the overall amount.
If bond yields stay negative however, or very low, and the debt can be rolled over there is, essentially no issue here. I guess if yields are still very low or negative after 3 years when rollover comes around, that might indicate we’re still in the midst of major problem!
Please keep up the good work on your blog!
There is close to zero risk of strongly positive interest rates in 3 years time unless Brexit is worse than even I can imagine
I cautiously agree – the UK is set for a long period not dissimilar to Japan’s experience – a long period of high government debt, but very low interest rates
Why would the government be forced to hike rates if Brexit is going badly?
If there was a major crash in the currency they may be tempered to do so – it’s a knee jerk reaction that is known to happen
Could it be that Neoliberalism is dying on its feet, even as we watch? The first dinosaur discovered was named Megalosaurus bucklandii, the big lizard, named after William Buckland (1784-1856); who was himself something of a dinosaur, in the age of evolution; with his ponderous contribution to the ‘Bridgewater Treatises’.
I suggest naming Neoliberalism as Megalosaurus neoliberii, for both its overbearing scale, and since dinosaurs were not lizards, its basic inaccuracy.
I think it is dying, now…..
What makes you think so? I certainly hope so.
It is very difficult to promote the proposition that only ‘Markets’ work, and can work in the real world, when clearly they have collapsed wholesale, and all the free-marketeers are now rushing to apply for a Government bail-out; including those sheltered in tax havens.
This is not the first time it has been demonstrated that markets are not self-correcting instruments of certainty, able to function in all circumstances. The real world is a tougher place than the markets that pretend to mastery can handle; they need help all too often, and the proof is that regularly throughout history, they keep coming back and asking for bail-outs or special protection when reality impinges on the feather-bedded illusions of stable ‘equilibrium’ – promoted as a norm (!). Real, competitive markets are much more rare than is supposed, and ‘perfect’ markets have never been other than purely theoertical. After every bail-out, markets brush-off the reasons they were saved. They thrive on short memories (actually it is congenital senility) and the illusions of rationality, but their standard disposition is led by hubris.
In the academic literature in economics neoliberalism is increasingly being described by such terms as: “peculiar non-death”, “zombified”, “dominant but dead” (e.g., Green and Lavery; Crouch; Peck; Smith). It is also very difficult to reconcile the neoliberal ideology of free markets as the most-efficient means of allocating resources, minimal state intervention in economic and social affairs, and freedom of trade and capital, within a framework of negative interest rates. Try selling that in the real world.
It may be dying but I bet the life support system will keep it going whatever the cost to the planet and the bulk of its occupants. These people are genuinely evil and will call on sacrifices from everyone to maintain their dominance. It won’t die it will need to be killed and that will require people to act. There is not enough anger ‘out there’ yet and the majority of the population would just like it to get back to normal. We probably won’t get to the necessary level of anger during this crisis and where is the political opposition with any ideas?
The only historical parallels I can think of that match the current death throes of Neoliberalism are all violent. And that bothers me. The Russian and French revolutions were relatively localised in Europe, as was the reformation. There are also similarities to some of the medieval and older chinese revolutions, but again, they were violent. In each of those cases they had weak leadership surrounded by greed and callousness which were unable to stem the tide of the problems that had built up over many decades.
If our leaders do not change, then any revolution, if it happens, is going to be worldwide due to our and our leader’s interconnectivity.
I hope it can be done peacefully, but history is not on the side of humanity
That said, it is highly probable that we’ll keep stumbling on the way we have been and things will get a lot worse instead.
Best be a banker if they’re still paying a positive interest rate on reserves!
https://www.bankrate.com/uk/mortgages/bank-of-england-base-rate/
Yes very interesting times indeed. As usual, it’s not quite that simple and the financial press just picks up on the headline. I was looking at the DMO website yesterday when I heard of the issuance. It must be remembered that this is was auction not a tender, therefore the price is set by the buyers not the seller. The AAP on the guilt is actually slightly higher than a £ therefore the redemption yield is (-)ve. The face coupon is actually (+)ve 0.75%. It is also v short dated (05/23). They have issued another today, 5-yrs longer with a redemption yield of (-)2.8%, but this is index linked. This too has a (+) coupon.
Why would anyone knowingly chuck money away by investing in bonds with a negative interest rate?
Hmmm, unless of course they are bought by financial institutions and other interested parties that are already heavily invested in government bonds and so don’t want to see the UK gov collapse and lose their entire investment. Essentially they are desperately trying to keep the whole system going even if it means losing out with a few billion negative interest bonds.
You have it exactly wrong
The rate reflects new demand for security – meaning the price of bonds has risen
And that’s because the government can always pay – and there is no risk in saving with it
The clue is in the fact that it makes the money – and no one else does at the end of the day
Because They want security
And nothing else can provide it
I see. So at these rates it’s not an investment, they are paying for a service.