I keep being told by right-wing trolls that I am wrong to suggest the merits of investing in bonds and that no long-term investor would do so. This most recently happened today in response to the repost of my arguments for a new left-wing economic narrative, which focuses on the use of bonds.
Those trolls are wrong. This is data from the FT in December based on data from the Pension Protection Fund that shows there has been a long-term and decided shift in defined benefit investing away from equity towards bonds:
The evidence is very clear: around 70% of these funds are invested in bonds.
You could, of course, argue that these funds are working their way out and have a preponderance of older and even retired members, but that's by no means wholly true so the shift cannot be explained by that alone.
My suggestion is that the shift is more fundamental: equities are not delivering value when the scale of the asset stripping to fund dividends in many companies is taken into account - as one day it will have to be. Professional investors know that and are wisely avoiding the sector.
But what that means is we need more bonds. So why won't government deliver them? That is the real question that needs an answer at this moment.
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I’m not sure why you are labelling them as trolls or even right wing, Richard? Bonds have been lousy investments for some time with record amounts yielding negative returns. The result? We have just experienced one of the largest drawdowns in bonds in history. Bind investors had a terrible 2022.
A couple of months ago, they started to offer “some” value but still not great value. After the carnage inflation linked securities here and in the US started to make sense again.
If we assume that the issuance of bonds is not to finance spending but to play a part in the management of interest rates then the answer to the final question is obvious, if not desirable for some, isn’t it?
Tell me then, why do professional investors put 70% of their funds in bonds?
We are talking about pension funds – their asset allocation is driven by the needs of their clients. Plus, for much of this period, bonds were a good investment and largely a one way bet, helped by QE. But they reached a point when they were not, which is why PFs got caught again recently by seeking higher, alternative returns. We had record amounts of negative yielding bonds not that long ago. The only justification for holding them was the greater fool theory. A poor asset allocation tool.
Just because someone or indeed many people does something, doesn’t make it a correct decision. In mid 2021 and at the start of 2022 many of these so called experts told me to stay invested in both bonds and equities and that my relatively high cash position and U.K. exposure was/were the worst possible investment decision I could make. They were wrong, very wrong.
In answer to Tony below, your “mate” 😉 Bill Mitchell has a quite different view on bonds. For the sake of debate these are his views
http://bilbo.economicoutlook.net/blog/?p=45108
Why not answer my questions
And Bill Mitchell is not the answer
I did, their clients were looking for diverse portfolios that include different sources of income and/or risk.* The problem was that the traditional instruments that they chose have neither offered satisfactory income (negative yields) nor risk mitigation/avoidance. This was the worst year for bonds since records began.
I knew the answer to Bill Mitchell but other readers might want to see what he said!
* this is the polite answer, the less polite one is they did a list job recently.
You’ve been calling for more bonds since 2018.
The data as presented shows that the government has been delivering them.
Ergo, asking why the government won’t deliver them is a bit like asking why people in general don’t live in smaller houses when they already do.
The data does not show that
There were near enough no not net bond issues over the Covid era, for example
Why not do your research?
You are seriously claiming that there was next to no bond issuance during the Covid era?
Yet you yourself claim that covid is not over.
So go back and look at what you said again, I suggest, and you will see that there was positive bond issuance between January 2020 and now. Searching on gilt auctions between 2021 and 2022 will help if you need a suitable search phrase.
I will publish my evidence soon
And I was using the government def8ned Covid era
And note I said net
You clearly do not understand the comment
Please state the date period defined as “The government defined covid era”
Please also explain why you ignore my main point – which is that there has been significant bond issuance in the period of the graph, a graph you use as evidence to call for the government to issue bonds based on an underlying assumption that they are not currently doing so.
I believe that when you figure out what you’re saying you might use 19/7/21 as the end of Covid according to HMG, but will then find that there has been non-zero bond issuance since then.
Check and mate.
I did not say there was no bond issuance since QE ended
But you have totally ignored QE
Oh, and redemptions need to be factored too
Take them into account and issuance was trifling. Nit nil. But trifling
But trolls can’t do that sort of thinking
And I have good reason to think you are a troll
I wouldn’t bother again: I will only delete you like a lot of others who appeared from nowhere to comment today
Undoubtedly pension funds try to asset /liability match and because bonds offer a predictable return at gave value they fit the bill. But then comes valuation and post QE with Central Banks being the marginal buyer Sovereign bonds were pushed to absurd valuations as represented by low nominal yields but more importantly investors were locking into heavily negative real rates of return whilst at the same time carrying enormous duration & inflation risk especially for longer dated maturities. This risk manifested itself with longer sovereign bonds falling as much as 50%. So you are right Pension Funds want to own bonds but not at any valuation. All investors try at the very least to achieve a real rate of return. Bonds for a long time have not provided that.
Why haven’t they left the market then?
You’re all so smart, but you don’t seem able to think up the questions to answer
So tell me the answer to that one
John does have a point about the losses incurred on gilt holdings, it has been brutal for a so called “safe” asset. Whilst it was fairly obvious that yields of 0.5% for 30+ year gilts was likely to be a poor investment, regulation, inertia and lack of imagination meant that most pension funds did not switch.
I have said it before but the manner in which QE was conducted – ie. ‘name the “Q” and buy whatever the price’ – was wrong. It showed a naivety and blind faith in rational and efficient markets. The theory was that lower yields would drive savers into other assets and generate real investment and economic activity… but we know this is nonsense.
Far better would have been to name a yield target and then buy/sell to achieve it…. in the same way that open market operations in the money markets have long been conducted.
But we are where we are and I would make a couple of points about real yields.
First, the war in Ukraine was an inflationary shock that hurt equity investors, too. So a switch out of gilts into stocks would not have improved performance. (Sure you can cherry pick – “ultra long gilts have done worse than value stocks” but equally “medium maturity gilts have outperformed tech stocks”)
Second, real yields are now positive. Prices are forecast to rise by 1.5% in 2023, 1 year rates are 4.25%… that is a big positive rate.
Third, the idea that we have a “right” to positive real returns is false. Even if bonds offer negative real returns they may still be the least worst alternative…. and we might have to get used to poor real returns.
Economic theory says that in order to forgo consumption today we need more tomorrow (in real terms) than today. But (as is often the case) theory is wrong – in this case due to changing demographics. I have all I can eat and drink today so I would accept a real terms loss on my savings so that I can eat/drink in old age. There is a savings glut so we cannot expect large positive real returns over the next few decades.
The last is the key point
And why I made the proposals I did yesterday
Richard, isn’t that a question for the PF managers and their advisers?
For the rest of us, the data is clear. The past year has been the worst year for global bonds since MSCI launched their world bond index in 1990.
They can see the data
Now tell me why they ignore it?
They can see the data. I took it into account and had zero bond exposure this year. Why they chose to ignore the obvious signs is a question for them.
Go back and read the 2022 investment outlooks for the majors Investment houses. They pretty much all made a toast pigs ear of 2022 in both equities and bonds. The biggest of them all was particularly bad. Stay invested through the 1H22 and then recommended to move into cash just before the markets rallied. As normal, I did the opposite of what they were recommended and had a much better year.
FWIW, when US index-linked bonds went back close to 2%, I thought they were a good buy for PFs then.
My pension was wholly in cash this year, just for the record
But what you’re saying is that market professionals are wholly irrational
If so, that also blows neoclassical economics apart
However looked at, this data is bad news for those who believe in the rational investor
Or simply, imperfect. Like most of us, they make mistakes. The big difference is that they still charge us fees to experience their mistakes. Their woeful track record pre and post costs speaks for itself. I am slightly surprised that you are being so generous towards them, frankly.
The good news as I approach retirement myself is that bonds May start to offer some value and offer both income and diversification benefits too. If base rates go to 4.5%-5%, in 2023, this might be the case.
(Note that your source and the one used by the FT is a particular provider. I’m sure you know that)
I’d bank your annuity if they get there
Rates will fall very rapidly as the economy collapses
An interesting discussion. Colin’s congratulatory self-preening is based on “as normal” doing “the opposite of what [the major investment houses] were recommended and had a much better year”. I am not sure how that stands as a reccommendation, save to Colin’s self esteem. Perhaps he can still enlighten us.
The Pension Industry’s recent resilience catastrophe over Lliability Driven Investments, or the policy chaos over the Truss-Kwartang Budget likely to do much for Bonds; and does not suggest that the general critical demand for ‘safe assets’ is actually doing what it says on the tin, or is focused on – um, safe assets.
I have long thought the ‘Stop the Exchequer’ blunder by Charles II in 1672 was a bigger factor in the loss of confidence in the Stuarts and Jacobitism, and therefore the loss of his brother’s Crown in 1688-9, than the constitutional historians have ever allowed, or factored in to their academic history. That esoteric aside is really to say; don’t mess around with the necessity of Government to offer cast iron safe assets. Here, I tend to find Clive’s shrewd process solutions persuasive, although not answering all the problems (for example the dynamics of time compression in the digital age),
Somehow two words (Nor is) fell off this paragraph muddling the meaning:
Nor is The Pension Industry’s recent resilience catastrophe over Lliability Driven Investments, or the policy chaos over the Truss-Kwartang Budget likely to do much for Bonds; and does not suggest that the general critical demand for ‘safe assets’ is actually doing what it says on the tin, or is focused on – um, safe assets.
JSW, I am sorry that you found such a simple message so difficult to take in. Nothing to do with preening, merely >30 years in finance tells you to do the opposite of the consensus most of the time. Plus last year it was blindingly obvious that they were talking BS.
So this years I am gathering the same houses’ thoughts and repeating the process. If they are all correct, then this is likely to be already priced in, so not much to lose. if they are wrong (highly likely) then much to gain.
Go to by social media site like LI and their are links to at least dozen of the top investment houses. Ten of them are saying largely the same thing…
Not “difficult to take in”. Just taking note of your vanity. I responded in part because I thought perhaps you were beginning to confuse narcissism with wisdom. A pity that I have to spell that out for you, but somehow, that isn’t a surprise either.
Was that to Colin?
I thought that was self-evident! It is however corrective to ask; it shows how easy it is to lose the thread of what is intended in a discussion!
Why does the government need to make bonds available if it can print the money that it needs to fund services?
Because people want to save safely – and providing that opportunity is a government function
Hmm, well that’s debatable. The FT article covered defined benefit pension schemes, sadly now an endangered species. What do the asset holding of defined contribution schemes loom like? Are they equally bond heavy?
£1.2 trn invested this way cannot be ignored
But you trolls all seem to want to do so
Answer why they do it, and stop making excuses
Tony’s question made me revisit mentally my understanding of MMT.
As I see things, it isn’t that government “can” print (or create) the money it needs to fund services. It does exactly that all the time without having a choice in the matter, that is just a description of the way government spending works with a sovereign currency. However government also has an obligation to ensure its actions don’t drive inflation, so somewhere there needs to be a compensatory removal of money from the economy. That is done by taxation, or by creating conditions where people or institutions save and thus withdraw money from other uses.
Government bonds are just a form of saving (or investment), albeit a form mostly used by institutions rather than private individuals, so Richard’s question is really whether government should facilitate institutions using bonds rather than anything else (like shares or property) for the saving they need to do. Of course institutions buying government bonds creates an obligation for the government to make annual interest payments and pay back the principal at some defined future date, so in the government’s accounts it looks like borrowing.
I am not convinced that somebody “wanting” something is a justification for government to do it, in this case supply bonds to satisfy a pension industry’s want, a responsible government should be somewhat more strategic about its macroeconomic decisions. However it is reasonable for an economist like Richard to challenge the current government’s strategy.
My suspicion is that it is the Conservative government’s naivety, their failure to appreciate that as two sides of the same account one man’s borrowing is another man’s savings. They are dogmatically opposed to government borrowing, without realising that those same bonds are facilitating ordinary people (members of a pension fund) to save securely towards their old age – which I think in isolation Conservatives would see as a good thing.
What that FT data means is a whole other question. Pension funds like government bonds because they are secure and deliver a defined sum of money on a defined future date – and those funds know their future financial needs pretty accurately if their actuaries are any good. They are not particularly good investments in terms of yield, which is why those funds mix them with shares and other things. What actual mix they use depends on how happy they are with the volatility of share values; as Richard says those funds with a preponderance of older members who need to realise the cash sooner will have less tolerance for volatility and will shift to bonds. Richard’s suggestion is possible, that part of the trend might indeed be the fund managers deciding that shares are currently over-valued and shifting to bonds lessens the risk of them falling in value – but I suspect that a bigger influence is the accounting conventions that assess pension funds with a balanced investment approach as having large technical deficits (they are not in actual deficit, and in any realistic future can pay out their promised pension) which look lower if investments are switched into bonds.
Maybe there are some pension experts here who can explain.
MMT economists explain it clearly. This from the Gower website
“The Treasury now issues gilts to match all deficit spending under the “Full Funding Rule”. This is designed to separate the accounts of monetary and fiscal policy, not because “funding” of government requires it.”
Interestingly they disagree on winter it is (Gower) and isn’t (Bill Mitchell) part of monetary policy and the control of interest rates.
Several points to make here.
You are only looking at private DB pension funds. Which are a very specific case, and in relative terms a smaller and declining part of the pension market as most schemes are closed to new members. DC pension funds are not in the above data, nor are government backed (unfunded) DB schemes.
Private DB schemes have increased their allocation of bonds, but the data above does not tell the whole story as liabilities (and assets) have roughly halved over the last decade from approx £2.5trn to £1.2trn.
Most DB funds are now in surplus or nearly so, and given most use LDI hedging to manage risk this means that return seeking assets (such as equities) are no longer needed in the same amounts to meet liabilities, so bonds are bought instead. In addition, most funds which are not in surplus receive contributions from their sponsor to make up any shortfall.
So in short, DB pension funds are getting smaller and are fully funded, so have increased Gilt holdings to hedge. The above chart (and your argument) is misleading as in percentage terms the allocation has increased, but in nominal terms it hasn’t really changed.
This doesn’t mean pension funds are clamoring for more Gilts, which is the case you are making. Nor does it mean owning Gilts is a good investment – holders of Gilts are down roughly 25% year to date which is on par with equities and in many cases worse.
I know that a while ago you were claiming that people should be buying “green” Gilts yielding 1% as a great investment. For anyone in a DC scheme, you would simply have to have been mad to do so. Apart from the 25% drawdown you would have faced, you would now be sitting on real returns of -10%. Government debt has been almost without exception one of the worst returning assets over the last year, and hasn’t managed to beat equities over the long term in far longer still.
By all means buy as many Gilts for you own pension as you want, if you are happy to accept massive negative real yields, but that is not a sound investment. Nor should people be forced (which you have also suggested) to buy them.
Politely, total crap
£1.2 turn and 70% in bonds is massive evidence of my case and none at all for yours
Certainly, DB schemes are, on the whole, quite mature… and that does explain their penchant for bonds. However to suggest that all other pension money should not and do not invest in bonds is false.
DC funds will typically weight more heavily towards bonds as the individual approaches retirement and upon retirement many people will still buy an annuity which will be 100% invested in bonds.
20 year gilts are yielding 4% (versus an inflation target of 2% and an inflation forecast for 2023 of 1.5%….. so, yes, I DO think there is a strong investment case for bonds in a pension portfolio. If you have no faith in the BoE meeting its inflation target then real yields are about .50% for 30 years.
In short, bonds (conventional and index linked) are attractive to pension savers.
Richard you have completely lost the plot. Your friend Clive tried to help but you chose to ignore him. Whenever you stray into financial markets you embarrass yourself.
I think you’ll find he justified the behaviour I pointed out
But you didn’t notice that
Coincidently, just read this on LinkedIn and the FT from an industry insider who shares my opinion
“This week in the #FT I write about firing my two pension providers. Big, dumb, expensive and offering only a limited range of prehistoric funds, I should have done it years ago. The pension industry relies on our laziness and making it insanely painful to exit (I’ve spent a fortnight filling in pointless forms). We’ve been promised a consolidation of these rentier businesses for decades yet it’s never happened. Why do these dinosaur firms still exist? Time to put them out of their misery. Manage your own money. It’s not like you can perform any worse… “
For subscribers here’s the article
https://www.ft.com/content/5cd2b97e-d310-4822-90c6-03b546406194
Richard, are you calling me a troll simply because I’ve asked two clarification questions about your article? Was I rude in my approach? If so, it was unintentional and I apologise unreservedly. But if not, what has happened to open debate?
I called you a troll because your comments felt like trolling
There have been many similar ones
And they have been deleted
I have the odd feeling Worstall might be a common factor. He has a lot of mindlessly boring followers
‘My pension was wholly in cash this year, just for the record’.
For some time you’ve been proposing to force individuals to invest their pensions in extremely low yielding ‘green bonds’, yet you don’t actually do this yourself?!
That does appear to be a little bit hypocritical, doesn’t it?
How many genuinely green bonds that are easily accessible are there? Excepting NS&I which is cash, of course. I do have some savings in that.
I began yesterday listening to a podcast from The Economist about the future of arguing! The core message was that the purpose of arguing is to learn not to win! It was a timely reminder, perhaps for us all.
But in the spirit of learning I thought more about these issues.
1. It seems to me that the kick back on bonds was less to do with their theoretical function and/or current role in asset allocation and more to do with the fact that they were priced (until every recently) to deliver neither an attractive return nor a safe alternative to equities. Lots of very smart people and pensions got burnt by the worst year for bonds in history during 2022. Sorry JSW but that was blindingly obvious at the start of the year…
2. There are institutional and retail green bonds offerings available now and more supply is forecast by the DMO next year. That’s said the yield on the retail offering, while better than cash, is not exactly exciting even in nominal terms.
3. Net (and gross) issuance will increase in the U.K. but at a slower rate than recently. Why the slowdown? Because that is part of the governments fiscal target. Of course, just because it’s a target doesn’t mean it’s correct. But at least it explains the why….
Happy New Year!
Let me reiterate why I posted this
It was to show that markets do not do what the ideologies and trolls say
Claiming, as most have, that a market of £1.2trn in the U.K., representing about 25% of oensuin saving, is an outlier is absurd. So, yes, I did win.
You won by arguing this was obvious but pension managers carried in anyway. I won by holding cash – against all advice.
Now, the real question is what Dan we do better? I have already tried to answer that, of course. The trolls don’t like it.
“You won by…”
I won nothing, I did however learn more about certain aspects of the U.K. pension market. For that I am grateful. I found reading the DMO material illuminating….As above its much better to view arguing as a means to learning that something to win.
https://www.economist.com/podcasts/2022/12/29/can-we-learn-to-disagree-better-an-episode-from-our-archive?utm_medium=social-media.content.np&utm_source=linkedin&utm_campaign=editorial-social&utm_content=discovery.content
Jim, I have pensions run by trad funds and personal investments. My comments were more to do with the latter in truth. But I also added the quote from an insider ( and ex-colleague) as I need to consider my pension options soon. I agree with the “FT” commentators that we are very poorly served by existing providers.
Just to undescore the ‘non-ephemeral’ point about safe asset theory I have been trying to make: the reduction of everything to a personal gain or loss leads to a total loss of perspective and priority – and particularly of those destined to manage the sovereign currency and total debt and the overarching responsibilities that are unavoidable. I would like to offer here an excerpt from a New York Fed staff Blog on safe assets, of 2022, but invaluably pointing to the bigger, longer term issue, from an example tied to the March, 2020 crisis in the US market caused by Covid:
New York Fed Staff Report (Eisenbach and Phelan) ’Fragility of Safe Asset Markets’ (2022)
“We show that a safe asset market is stable and well-functioning as long as the market is sufficiently deep. In this case [March, 2020], flight to safety and dash for cash are complementary phenomena, with investors who buy the assets for safety absorbing sales from investors who sell the assets for liquidity. However, we show that the market can break down, with prices falling precipitously, if trade imbalances have to be absorbed by dealers that are subject to balance sheet constraints. The risk of market break-down can be self-fulfilling, as it leads investors without genuine liquidity needs to sell preemptively in order to avoid potentially having to sell at lower prices in the future. Surprisingly, we find that flight-to-safety purchases of safe assets can exacerbate the dash for cash when markets are fragile.
…………… [T]he main sellers of Treasuries in 2020q1: Foreign investors, mutual funds, and households (which includes hedge funds) each sold roughly $250 billion. The figure shows that foreign investors and mutual funds sold Treasuries on an unprecedented scale, in a “dash for cash” an order of magnitude larger than in any previous quarter. In addition, there is suggestive evidence that a considerable fraction of these sales were not due to genuine liquidity needs:”
Quite so
But, this requires an active state in that case
“Sorry JSW but that was blindingly obvious at the start of the year…”
Sorry Colin, but it seems blindingly obvious to me, that you are too caught up in the market moment. I was making a point about the general principle of ‘safe asset’ theory, and the degree to which it has become lost. I was not addressing the timing of who saw what as blindingly obvious first; it is a fatuous point in the greater scheme of things, and in any case the trashing of ‘safe assets’ has I think been going down that route for some time before that; the full reponsbility for all of that, I suspect requires a great deal of teasing out – and I do not claim to have all the answers to that conundrum (perhaps you think you do).
Not to end Hogmanay on a gruff note – have a good to new year when it comes – Richard, all the readers – yes, including you Colin, but for 2023, to paraphrase brutally a famous observation: do not put your faith in markets, and keep your pension dry. If only the government could do something simple, and well fo a change; offer the community genuine, stable safe asset investment.
I’d raise a glass to that hope
Thank you for your kind wishes JSW which are reciprocated in the same spirit!
FWIW, I addressed both the theoretical argument for bonds as well as the fact that recent pricing ensured that they were not able to fulfil the role that was justified the OW position in many PFs. There was nothing fatuous in pointing out that the pro’s failed many during what has been the worst year in history for bond investors. Sorry, if you feel that it is inappropriate to point this out.
From yesterday’s FT, here are the views again of an ex-industry insider
At the end of a decades-long bull market in fixed income, what I want to know is why you had a large portion of my portfolio in government bonds when they were barely yielding me a positive nominal yield, let alone a real one. The expected return on the asset class at the start of the year was de minimis. You lost me 20 per cent. What were you thinking?
Was he wrong to complain?
I might mischeviously say in response to your main point, that is surely stating the blindingly obvious.
It happens if Government (which is the sovereign manager of the currency) just discards its responsibility to oversee the ‘market’; which is clearly unhinged: there is no equilibrium, and there never was any rationality – save, as you have actually demonstrated, as narrow individual efforts to react rationally through well developed processes of hedging, effectively for the irrationality and lack of Government oversight managment of risk – fine for winners, but not great for anyone or anything else. They were doing it when another bunch of crackpot ideological Tories decided to abolish the National Debt by privatising it. They set up the South Sea Company, and privatised the National Debt. Seriously. Within a few months the whole Ponzi scheme was specatularly Bust in the first and in some ways biggest Financial Crash: the South Sea Bubble. It made the name of Walpole, who managed the problem far better than the last three, four or is it five bumbling PMs of the 21st century.
We are now going through another, Neoliberal Conservative now, crackpot effort to eliminate deficits and drain the National Debt; and risibly allow the Market to let rip. Ironically, most of the ideas of hedging and exploiting the deferred time value of money were developed either for the Treaty of Union, 1707; or were created fast by all kinds of clever dealers and downright crooks in ‘Exchange Alley’ (between Cornhill and Lombard Street), in 1720. Money makes its own rules of engagement wherever it can. The hedging techniques of Exchange Alley survived the Crash.
Why isn’t everyone doing it, with of course no winners? Because the general statement is obvious, the timing is everything. The clever people you said have been caught out this year. Maybe the winners this year will see their reputations trashed next year. It is all a matter of timing, and the problem of timing is contingent, and subject to the unexpected – including the unkown unknowns. And there you have – ‘the Market’.
I have two comments to make.
1. Colin seems to be self investing. DB pension funds are investing for hundreds (in the case of small schemes) or thousands (in the case of medium and large schemes). They have to make different choices because they have different responsibilities…. a fiduciary duty which Colin does not have.
2. Most DB schemes are now closed. Their primary source of liquidity is no longer pension contributions income because there is none other than enforced employer payments required to address funding deficits. They rely heavily on bonds for the liquidity they need. Open DB funds such as the Scottish LGPS funds still invest more in equities than bonds. For example the Strathclyde Pension Fund holds about £16bn in equities out of £26bn total assets (data from September 2021,,,,I haven’t come across a more recent report on their investment portfolio).
A very interesting discussion with some observations on my part.
I have long been dissuaded by the notion that there is any rationality in markets and that the market collective has any form of ‘wisdom’. Why ‘markets’ in their current form are allowed to be such a huge influence on our lives is beyond me.
It’s all knowledge driven yeah? But what is the quality of that ‘knowledge’? It’s poor in my view. That all starts in the accounts of the companies and other actors and Richard has done his bit in exposing the sleights or hand and even downright lies in company accounts. And then there is the velocity of the data itself – so much of it to be analysed and made sense of because of a rabid desire to make money out of it as quickly as possible. ‘Fiduciary duty’? Don’t make me laugh – please. Be serious now.
And who is doing the sense making? The ratings agencies for example did not cover themselves in glory on the lead up to the ‘Credit Crunch’ and then got out of it by saying that their shitty optimistic ratings for MBS products were only ‘opinions’. Oh right – thanks for that! I didn’t hear George Osbourne dismiss the rating agencies when they de-rated HMG as just having opinions. He used that to justify further cuts.
The financial markets eh – what a way to drive an economy? I think Colin’s comments are a good indicator that what the markets want to do is lock you in with a deal and get a fee and then – ‘see ya later sucker’. As I understand it, after so many crashes in the equity markets a lot of the bozo’s who worked in equity/shares rotated into the bond markets and brought their corruptive short term practices and expectations with them. Bonds were supposed to be safer long term instrument . And the greed and easy money making factors that are inherent in finance have made that much less so. But hey! The finance sector can always find excuses for that (regulation for example and the big lie – the government not taxing to fund social spending).
What should we have instead? My view is that government should step in and not out of pensions. And then get the banking sector to do what it should do – support business instead of hollowing it out as it still often does – serve others instead of serving itself as one very clever Frenchwoman once said.
So – surprise surprise!! – I agree with Richard about government bond issuance. However there is a caveat with that. It would have to be a competent government that was aware of its social responsibilities. We don’t have that now.
What we have now is a government, treasury and BoE who have declared war on workers. They think it more important to use austerity to help their funders in the private sector maintain the status quo. Because they know that a lot of people know especially since 2008 that capitalism as it is does not work fairly. And they’re scared actually. Rather than accept they were wrong, they have to keep going like all fanatics do.
I’m reading Clara Mattei’s ‘The Capital Order: How Economists Invented Austerity and Paved the Way to Fascism’ (2022). Austerity is meant to disrupt business to such an extent, that it breaks down union and worker power and prevents change (better working conditions, a fairer share of output). Yes – that’s right – the rabid capitalists at the top of our society are even willing to sacrifice business in order to suppress the rest of society and maintain their money-power position. It’s all just collateral to them, and cheap pickings in other markets from failed companies afterwards. And our government – in fact many governments – seem to be in cahoots with them.
So coming back to Richard’s blog, there is no way I can see this government issuing bonds in the way he suggests because it’s just not them is it? They don’t want to do anything for anyone except those who fund them. And the Tories rely on out-funding the opposition these days since they have no new ideas and no moral or intellectual basis for ruling anymore.
But they could and they should issue bonds as Richard suggests. We ordinary folk should be able to rely on the State – just like the bankers who know that they will be bailed out if they are naughty from a hugely inflated CBRA. After all, its only fair isn’t it don’t you think?
PSR
Many thanks
One of your best
Mattei beside me right now
PSR,
A splendid and very appropriate peroration to the comic absurdity in the middle of a disaster, that is Britain at the end of 2022. Could I also say a word for Philip Mirowski, ‘Never Let a Serious Crisis go to Waste: how neoliberalism survived the financial meltdown’ (2013)? Oh, I just have! Happy New Year PSR.
PSR – pension funds do have a fiduciary duty so this is a serious point and not a laughing matter. That is what distinguishes them from an individual self investing in their own personal interest. The serious problem we have with regard to “fiduciary duty” is the legal and regulatory meaning given to that concept. That meaning is a nonsense and underpins the short term-ism of pension fund governance and investments as well as the failure of institutional investors to invest in supporting the green transition, their continued support for the fossil fuel industry and their complicity in green washing.
PSR, the problem with your argument about debt issuance is that official forecast indicate that net issuance will exceed the pre-COVID levels over the next few years, even thought the government is seeking to reduce the net debt/GDP ratio.
At the end of 2027, the net debt to GDP ratio will still exceed the pre-COVID ratio.
I will be doing more on this in the new year
I have done a lot of analysis
Colin
To what debt are you referring to? Government debt or private? There are different types of debt as I’m sure you know. I suggest that you look at the most socially useful first and take away the most socially useless which I am sure outstrips the former. Then you will be able to scale the problem you are talking about because I’m not clear to be honest. Are you saying that the government will not divide up socially useful debt to speculative debt and we’ll get even more austerity and interest rates? As Mattei shows us (pp. 90-92) the British Treasury and BoE are capable of causing trouble if they want to in the interests of capital. Also, be aware that sometimes we call government investment ‘debt’ which I will never ever be comfortable with. The joys of the English language eh?
Other than that, although I appreciate that we need to challenge ourselves on blogs like this, I haven’t quite worked you out. I’m not sure if you are very highly developed troll (who will end up creating circular arguments back to Neo-liberal dogma) or a well meaning contrarian. Only time will tell, but I do wish you would be clearer about the points you are making. Maybe its me. If it is me, then I’m quite happy for your talk to me as you would a Red Setter dog for example just so that I can get a gist of what you are saying so that I can engage meaningfully within my obvious limitations. Happy New Year.
And Happy New Year to you John Warren – a compliment from you is a nice way to end 2022. I’ve got Mirowski – my copy of the 2013 book is well thumbed and has my scribble all over it. I’m hoping Colin will read it too.
Happy New Year Richard.
Government debt, PSR. That is the only topic under discussion. Not quite sure why you have chosen to add complications. The clue is in the title of the thread. Richard is asking why governments are not supplying bonds for pension funds.
And you have got very boring
Why thank you Richard – most kind.
I am not a technician on these matters – Clive Parry and Mr Warren (and others – too many to mention – yourself included) for example leave me standing on those. I can only minister from the POV of ethics, morality, sustainability and humanity (and a bit of law) – that these should be balanced as outputs alongside wealth creation and they are not.
You see, like the whistle-blower at 3 Mile Island whose belief in nuclear power drove him to tell the truth about the private sector who ran the plant in a way that led to its failure , I believe in capitalism. I believe it can be made to work better. I want it to work for everyone and the planet. It is not. But renewed and truly democratised – it could.
But until Government starts do its job properly and stops seeing markets as a panacea for everything this will not be the case. markets need to do less – like pensions and funding huge projects like the channel tunnel – and government needs to step forth.
Reading Mattei reminds me of just how undemocratic government has become. I’m at p. 98 and the Geddes Axe of 1922 where Parliament essentially reneged on its post war promises. Utterly disgraceful behaviour.
Government is once again reluctant today to share power with those who vote for it, but happy to share with those now who pay for it.
Government is being bent to the will of a small elite. Frankly, this is NOT acceptable.
I am behind you….
Well, I am glad everyone had such a good time in discussing the rise and fall of the bond markets and the esoteric goings on involved and the various theories regarding the added or diminishing values theroff.. Well done for sussing out the trolls and putting them into their place.
Happy New Year……………
Richard, I am afraid on this occasion I think that Colin is right and you are wrong.
For 16 years I was a lay trustee of a DB pension scheme and developed my own views.
First, rather than separating bonds and equities, I now look at all investments as “income stream” or “greater fool”. Shares in a well-run business have value because they should provide a stream of dividends. (Rather as you argue that a currency has value because of tax). A bond has “income stream” value in the same way.
In general, I think equities are the better long-term match for index-linked liabilities (yes!!!). If a mixed economy remains about the same size in real terms, companies overall should be making about the same profits in real terms, even if the £ is worth 10p.
Some of the time, a lot of “income stream” equities will give better and safer returns than bonds, but at other times one or other class will be mispriced. (And, yes,we have asset stripping and other games)
(By the way, I classify as “greater fool”, investments that rely purely on someone paying more to own the same thing. Cryptocurrencies are the perfect example.)
Second, I was worried by your assertion that pension funds “want” bonds. Pension fund trustees have charge of immense amounts of money, but in my experience, only a minority of trustees are prepared to question or challenge actuaries, advisors, and managers. This article by a Dutch professional is on the Liability Driven Investment debacle, but I think it shows how narrow and herd-mentality the UK pension investment process can be.
https://macrohive.com/hive-exclusives/ldi-the-uk-pension-problem-and-the-risks-in-europe/
So that I worry that “wanting” may be a very small group of people with very conformist thinking.
Ok – if you are right why do so many trustees buy bonds?
That was my question from the start
You are following theory – butnorsctuce is quite different
So, it’s not right or wrong, it’s why? Or, alternatively, why do they think you are wrong?