It is true that there isn't much evidence that countries can cut their way to growth, I agree with the Guardian at face value. But there's an implied message that countries can conversely *spend* their way to growth, and I'm not sure about that either. Surely the message of the last couple of years is that giving people more money just results in inflation, not growth.
Growth is good, but it is also hard! And I'm beginning to get concerned that a generation of British politicians is learning how shouting "growth" can be used to justify almost any idea regardless of how crazy it is (cf Liz Truss).
I think your analysis of the pension scheme dumping of bonds does not reflect the main reason for what happened. In recent years pension schemes have been taking out their exposure to interest rate risk by buying gilts whose coupon and maturity profile match, as exactly as possible, the cash flow profile of their future payments to pensioners through to the end of the scheme. This is the essence of Liability Driven Investment (LDI) and represents real prudence on behalf of trustees. Unfortunately most schemes still had historic deficits and so could could not achieve perfect asset:liability matching and sponsoring employers had become increasingly reluctant to fund deficits with cash contributions. So many schemes, in collusion with employers, decided to use the very long dated gilts being held to maturity as part of the LDI strategy to borrow money to invest in equities to generate long term profits to plug the deficits. When yields suddenly escalated, the value of the collateral gilt fell and trustees often became forced sellers of bonds that were otherwise never intended to be sold. That is why there was heavy selling. And, contra the general belief that LDI was the culprit, it was the gearing layer placed on top of the LDI strategy that was the culprit. LDI per se is inherently ultra prudent.
“The price of government bonds will go up if investors think (a) the government will default or (b) inflation will make them worth less, in real terms, after 10 years.”
Methinks you mean go *down*! Increased risk = higher yield = lower price.
“The state is that great fiction by which everyone tries to live at the expense of everyone else.” - Bastiat
It is true that there isn't much evidence that countries can cut their way to growth, I agree with the Guardian at face value. But there's an implied message that countries can conversely *spend* their way to growth, and I'm not sure about that either. Surely the message of the last couple of years is that giving people more money just results in inflation, not growth.
Growth is good, but it is also hard! And I'm beginning to get concerned that a generation of British politicians is learning how shouting "growth" can be used to justify almost any idea regardless of how crazy it is (cf Liz Truss).
I think your analysis of the pension scheme dumping of bonds does not reflect the main reason for what happened. In recent years pension schemes have been taking out their exposure to interest rate risk by buying gilts whose coupon and maturity profile match, as exactly as possible, the cash flow profile of their future payments to pensioners through to the end of the scheme. This is the essence of Liability Driven Investment (LDI) and represents real prudence on behalf of trustees. Unfortunately most schemes still had historic deficits and so could could not achieve perfect asset:liability matching and sponsoring employers had become increasingly reluctant to fund deficits with cash contributions. So many schemes, in collusion with employers, decided to use the very long dated gilts being held to maturity as part of the LDI strategy to borrow money to invest in equities to generate long term profits to plug the deficits. When yields suddenly escalated, the value of the collateral gilt fell and trustees often became forced sellers of bonds that were otherwise never intended to be sold. That is why there was heavy selling. And, contra the general belief that LDI was the culprit, it was the gearing layer placed on top of the LDI strategy that was the culprit. LDI per se is inherently ultra prudent.
“The price of government bonds will go up if investors think (a) the government will default or (b) inflation will make them worth less, in real terms, after 10 years.”
Methinks you mean go *down*! Increased risk = higher yield = lower price.
Cheers. Corrected.
That apart, the Graun article is incomprehensibly ignorant; it is worrying if their educated readership believes it.