All this is far too clever. Too much cleverness lets people play tricks on themselves. "Why not just borrow more and we can have more stuff?" Except borrowing doesn't make more stuff. The farmer throwing rocks in a bucket to count his sheep doesn't get more sheep if he throws in more rocks, or borrows them, or quantitatively eases them.
If people are lending money to the government, what are they now not doing with that same money? That which is not seen?
Maybe not a trillion pounds but there definitely was a market for lots (by which I mean hundreds of millions) more gilts in that period, even at ridiculously low yields. I speak of U.K. private sector final salary / defined benefit pension schemes.
During this period virtually all were closed to new members and were becoming mature, ie paying out their liabilities to pensioners rather than funding for long distant pensioners. Accordingly their trustees (I chaired the board of one with £1.4bn of liabilities so was in the thick of this stuff) were increasingly focussed on becoming independent of sponsoring employers who were getting more and more reluctant to cough up fresh contributions when deficits widened, often caused by interest rate fluctuations.
So as the overall funding position allowed they were becoming more and more focussed on removing their exposure to interest rates by very precisely matching the cash flow profile of their liabilities with their assets, in practice almost all gilts; adding lots of fresh credit risk into the mix wasn’t particularly desirable. There simply weren’t enough gilts available to do this and there were (no doubt still are) plenty of gaps in the longer end of the liability profile where there were no gilts available with commensurate maturities. Interest rate swaps with investment banks had to fill the gap but at a cost. So one of the reasons for the long term collapse in gilt yields - apart from all the other well rehearsed reasons - is that pension fund demand was bidding for an inadequate supply. Index linkers were in even shorter supply and would have been loved to hedge inflation risk, but of course wouldn’t satisfy Danny’s wish to lock into almost zero cost of funding. A few hundred million of them would have been hoovered up.
So while your general view that the market wouldn’t have lent to meet the full scale of the need it’s not entirely true.
All this is far too clever. Too much cleverness lets people play tricks on themselves. "Why not just borrow more and we can have more stuff?" Except borrowing doesn't make more stuff. The farmer throwing rocks in a bucket to count his sheep doesn't get more sheep if he throws in more rocks, or borrows them, or quantitatively eases them.
If people are lending money to the government, what are they now not doing with that same money? That which is not seen?
I like Austrians. Not too clever.
Maybe not a trillion pounds but there definitely was a market for lots (by which I mean hundreds of millions) more gilts in that period, even at ridiculously low yields. I speak of U.K. private sector final salary / defined benefit pension schemes.
During this period virtually all were closed to new members and were becoming mature, ie paying out their liabilities to pensioners rather than funding for long distant pensioners. Accordingly their trustees (I chaired the board of one with £1.4bn of liabilities so was in the thick of this stuff) were increasingly focussed on becoming independent of sponsoring employers who were getting more and more reluctant to cough up fresh contributions when deficits widened, often caused by interest rate fluctuations.
So as the overall funding position allowed they were becoming more and more focussed on removing their exposure to interest rates by very precisely matching the cash flow profile of their liabilities with their assets, in practice almost all gilts; adding lots of fresh credit risk into the mix wasn’t particularly desirable. There simply weren’t enough gilts available to do this and there were (no doubt still are) plenty of gaps in the longer end of the liability profile where there were no gilts available with commensurate maturities. Interest rate swaps with investment banks had to fill the gap but at a cost. So one of the reasons for the long term collapse in gilt yields - apart from all the other well rehearsed reasons - is that pension fund demand was bidding for an inadequate supply. Index linkers were in even shorter supply and would have been loved to hedge inflation risk, but of course wouldn’t satisfy Danny’s wish to lock into almost zero cost of funding. A few hundred million of them would have been hoovered up.
So while your general view that the market wouldn’t have lent to meet the full scale of the need it’s not entirely true.
https://www.youtube.com/watch?v=q56DrAJWW1k
Found this interesting interview with Liz Truss who says the BoE runs things for their benefit not ours.
Has 'Danny' (not his real name) ever been right about anything? Asking for a friend.
Tell your friend the answer is "No"!