Or those that need them could buy some of the ~200,000m held overseas or the just under 200,000m held by the Bank of England some of which will need to be released when it starts to reverse its quantitative easing programme, or the 100,000m in ‘other institutions’ could that be the target area?

Also isn’t one of the basic principles of a market that if you restrict supply you increase price, so by reducing the amount of government debt available the interest rate the has to be paid will drop, so long as it’s seen as a good risk an trying to pay back debt seems like a way to promote this.

Don’t argue something as an economic criticism when it’s an Ideological one.

you’re right he uses the wrong term: traders get commissions from trading, bond holders (investors) collect the interest.

you say absolutely nothing about his point that the need to finance interest payments out of taxation reduces the quantity of tax revenue available to finance public expenditure, welfare etc.

you’re just talking utter nonsense about banks and pension funds “collapsing” if gilts are “repaid”. Cutting the deficit entails reducing the rate at which the net quantity of gilts is increased. To start “repaying” gilts (i.e. reduce the quantity outstanding) we’d have to move into surplus and allow the quantity of new gilts issued to fall below the quantity being repaid (of course gilts are repaid all the time as they mature, but new ones are issued. Changes to the stock of outstanding debt come about from the difference between these two flows. Right now new issues vastly outstrip repayments).

You are right that there is a global shortage of safe assets but banks and pension funds will survive perfectly well if the quantity of UK government bonds starts to decline. They will simply increase their holdings of other kinds of asset (and I think banks can hold capital reserves as cash on deposit at the BoE can’t they?).

In fact talking about pension funds and banks “collapsing” if the UK government cuts the deficit quickly is absurd scaremongering rubbish, probably even more stupid than Tories prophesying a run on gilts if they don’t cut like crazy.

I don’t know why this website, which, laudably, criticizes absurd scaremongering rubbish, has chosen to start publishing it instead. I do hope it’s an aberration..

[If you are worried about banks and pension funds, ought you not be worried about a sell-off in the bond markets (that follow if the government followed you advice to ignore the deficit) which would see pension funds and banks make large capital losses on their bond holdings?* ]

* I’m not sure about this point – would be grateful is somebody knowledgeable could confirm or correct

1 and 2 – agree.

Latest numbers on overseas holdings (Q1 2010):

http://www.dmo.gov.uk/reportView.aspx?rptcode=D5N&rptName=70323590&reportpage=Gilts/Overseas_Holdings

Total Amount Outstanding (including inflation uplift for index-linked gilts) = £992.31 billion nominal

http://www.dmo.gov.uk/reportView.aspx?rptCode=D1A&rptName=70243877&reportpage=D1A

So Overseas + BoE QE is almost half the market, meaning half the market can be safely disposed of without any effect on banks, pensions and insurance firms.

(Even if you accept the premise that pensions will collapse if there is no net gilt market, it is quite clear that such a situation is a very long way off.)

Clegg’s finished, isn’t he?

I must agree with Luis @2, this is utter nonsense. Pension funds won’t collapse if they can’t buy gilts any more, they’ll just look for other investment opportunities, most likely remaining in sterling as a hedge against forex fluctuations. It’ll probably shift demand into the private sector.

The whole deficit + QE situation has actually caused a massive problem for pension funds.

QE has driven yields lower, meaning the return from bonds has reduced. This has opened up large gaps in pension funds returns profiles….yet because they are forced to hold more of these things to make up the difference, they are now at risk of large capital losses if bonds sell off.

Of course, as has been said above as well, banks won’t fall over if gilts are repaid – there are many liquid assets out there which count. At the moment at least part of the reason B3 is being pushed through is to force banks to hold more liquid assets is to push them into holding more government bonds….yet governments are pushing them t lend more as well!

Lastly, as again has been said above, all gilts have to be funded out of taxpyer money…reducing the amount available to spend on other things.

I suppose, in reality all the abo ve article proves is that Richard Murphy doesn’t really know what he is talking about.

“Gilts underpin private sector pensions, repay them and the pension system will collapse… Repay them and the banking system will collapse. And so on, and on.”

“Richard is… a chartered accountant.”

Wtf?

Luis has it absolutely right @. Why can’t we have any actual, credible economists (note: this category excludes David Blanchflower and the pathetic NEF) commenting on economics?

“And the real rate of interest on government gilts right now? Under 1%.”

By ‘real’ do you mean after CPI inflation’s taken into account ? Because if so you’re talking about 4.5% – not a negligible rate and one that few High Street investors are getting.

It’s not as if HMGs tax receipts are likely to be rising at that rate, is it ?

And the reason that banks and pension funds hold gilts is that the law forces them to do so.

Change that law and they’ll be just fine….and our pensions almost certainly higher too as the money is put into investments with greater returns.

Like, maybe, corporate bonds so the money will be used to build assets rather than the current subsidy of outreach diversity advisors.

The idea that pension funds and banks could collapse if the increase in the number of gilts slows or stops is ridiculous. They will simply switch to some other investment that meets their requirements if the cost of gilts rises too high. However should gilts ever loose their AAA status, thanks to continuing the massive deficit and debt compounding, then pension funds really could collapse. If gilts ever loose their AAA rating then all of the pension funds would be forced by law to dump them onto the market and take a huge loss as the price falls through the floor. This is something that actually could happen, unlike Mr Murphy’s fairy story about their only being one type of AAA rated investment in the world, as Moody’s has already stated that the UK would endanger its AAA rating if it continues with large budget deficits.

you say absolutely nothing about his point that the need to finance interest payments out of taxation reduces the quantity of tax revenue available to finance public expenditure, welfare etc.

This is only a problem if those interest payments get out of control. What is that point?

And while I agree that this would mean lower money for welfare – you also have to weight up the costs of reducing the debt – cutting services and unemployment massively. which in turn could exacerbate the deficit.

So I think you’re being a bit disingenuous too Luis.

Clegg is just using the old nominal gross figure as a scare story. They love to quote the interest bill vis-a-vis other budgets as if it actually means something. It does not. Why not tell the audience 1/3 of the debt interest is paid by government to itself? Moreover, why not tell them after the interest is taxed the net bill is only half of the notional gross budget? He is a politician and they are in the scare business.

Of course the OP is right to point out that the interest payments represent a transfer to the insurance companies and pension funds. However, they would not collapse with the government reducing the deficit. If the gilts market did not exist i.e. there was no national debt those institutions would have a much more risky profile. They are currently net buyers far in excess of legal requirements. The institutions are not traders they buy and hold for the revenue stream to match their liabilities. Yields rising leading to a notional capital loss is an accounting identity. However, yields rising will probably be because the economy is improving so notional capital losses in gilt prices is offset by increases in their other assets.

Foreigners can reduce their holdings in the gilts market but they cannot reduce their net position in sterling assets other than through selling less stuff to us. An improving trade balance is what we want.

One of the main causes why the banking crisis was worse in Britain than elsewhere is because there was a dearth of short-dated government debt securities. The banks did not have liquid assets. Their assets were a load of crap and nobody knew what it was worth. The only liquid asset in a liquidity crisis is short-dated government debt. No matter who collapses the government will still be standing after the crisis. That situation will not be allowed to arise again so the banks do need a constant stream of debt securities for capital requirements.

Sunny,

what the hell? “disingenuous”?

If we keep accumulating debt at pace, then even if interest rates only rise a percentage point or two (as you’d expect, medium term) then it’s quite reasonable for Clegg to think that cost too burdensome.

If you think my “disingenuousness” consists of raising a point that only becomes salient should interest rates “get out of control” then you are quite wrong. Is that “nearly £70bn” Clegg mentions predicated on interest rates getting “out of control”? No. Is spending £70bn on debt service too much? I don’t know. Obviously you have to weigh that future cost against the present benefits of being able to run that deficit (or the costs of having to cut it). R Murphy does not tackle that question hence me briefly pointing out he does not address the substance of Clegg’s argument, before I moved on to addressing the substance of his. I can assure you I was being quite sincere and straightforward in making that point.

on the subject of not addressing the substance of arguments, you seem to have avoided the issue of the substance of this post being total garbage. This is the left-wing’s equivalent of crazy global warming denialism etc. and I’m sorry to learn that the editors of this site cannot spot stinking garbage when they see it*. As I said, it hope its an aberration.

* unless you’ve given Murphy editor rights, in which case I urge you to rescind them.

nb Richard makes good points, but even if you want to say that the true cost to the government of financing its debt is some fraction ‘q’ of the nominal interest bill ‘X’, i.e. true cost= q*X, then it still makes sense to think X has gotten to large and want to cut it. I’m sure Richard wouldn’t say that government debt can never be too big.

for avoidance of confusion, I meant Richard W makes some good points @13

Sad to see LibCon publishing articles by a man who smears his opponents as having mental health issues:

http://bellagerens.com/2010/08/21/ive-finally-discovered-richard-murphy/

Still, politics trumps all I suppose.

Murphy is an exemplar of the Dunning-Kruger effect.

@14 – “… on the subject of not addressing the substance of arguments, you seem to have avoided the issue of the substance of this post being total garbage. This is the left-wing’s equivalent of crazy global warming denialism etc. and I’m sorry to learn that the editors of this site cannot spot stinking garbage when they see it.”

Just wanted to echo these sentiments.

The post is utter nonsense and devalues the site simply by being on it. It lends credence to those who argue (without merit, in my opinion) that the left is economically illiterate – as Luis said, it’s the equivalent of the right-wing lunatic fringe.

Get rid of it.

Does anyone else know what Luis Enrique’s beef is at No.2?

A rather spittle flecked rant without much substance.