One of our objections to Corbynomics was the plan for renationalisations. We asserted in our letter that this consumed fiscal space. What was meant by that was that the cost of finance for governments, after a certain point, will depend on the amount they borrow, and there will in fact a limit beyond which borrowing lowers the price of the sovereign’s bonds to zero. Borrowing to fund nationalisation limits potential borrowing for other purposes, given this limited fiscal space.
Why? Surely if the government is borrowing to take ownership of a perfectly good revenue stream, in the form of a large company like a railway franchise, there is no problem? This was put to me by Jonathan Portes in email correspondence, and appears also in a footnote to Simon Wren Lewis’ response to the pro and anti-Corbyn letters.
The reasons are these. First-off, our signatories took the position that the state is more likely than not to damage these company operations through incompetence and failure to incentivise them. So the revenue stream is depleted in expected value terms by the purchase.
Second – and here I speak for myself only – these revenue streams are uncertain, and that uncertainty itself puts strain on government finances, for the same reason that household contents insurance ends up costing us money. It was pointed out to me privately that in order to measure this strain, we have to figure out how the revenue streams acquired covary with the other streams of inflows and outflows to the government coffers. My rough answer to this is that those covariances are unlikely to help, and will probably amplify, since one expects that these companies will correlate somewhat with overall tax revenues positively.
Third, aside from questions of efficiency, most states have a history of subsequently appropriating the organisations concerned for other purposes than revenue generation. [This is usually cited as a benefit by old-fashioned socialists like Corbyn]. Benign versions of these non-profit motives are usually that the firm is used as an instrument of progressive policy. (Benign, that is, if one thinks the existing set of transfers bring about an insufficiently progressive outcome, and can’t be done in a better way than nationalisation.) Less benign versions are that they are used as vehicles for patronage, industrial policy, or hidden social security. Either way, and almost definitionally, this appropriation costs money, and that depletes the government’s fiscal space.
Fourth, one has to raise the spectre that, however competent or innocent of ulterior motives the state might be, markets may not have the same high opinion of the likely outcome of nationalisation as the government itself, so fiscal space – read cost of borrowing – may be erroded by this pessimism alone. Presumably, ruling out an international bond market conspiracy [a big leap for many who seem to support the Corbyn camp], such space would re-emerge after a substantial period of good behaviour or good performance by the new state owners.
Of course, to believe that the concept of fiscal space has meaning, you have to be a member of the club that believes that even if you are a sovereign with an independent printing press at your disposal, you can’t simply run those presses to cover any fiscal difficulties you might have. At least not if you recognise that seigniorage generates inflation, and inflation is, beyond a certain point, something costly to be avoided. Corbynomists often deny this, and many times in supporting ‘People’s QE’ this view surfaces.
Looking at their mental processes regarding this policy, one can see it as a kind of fiscal ignorance leading to a bliss in which one can borrow to renationalise whatever you fancy, with no downside.
longandvariable 
I presume one of the rationales for nationalisation is the prospect of reinvesting the profits in lower consumer prices – would this sort of ‘subsidy’ also cut into the govt’s fiscal space?
Perhaps Corbyn plans to confiscate private business without compensation.
Response:
“Corbynomists often deny this, and many times in supporting ‘People’s QE’ this view surfaces.”
This was my view Tony however I have been chatting to Murphy and Neil Wilson and apparently People’s QE will not cause inflation as projects are time insensitive and just wait on the shelf if the real resources are not there:
“To have inflation you have to have people chasing the same resource at the same time. That means you need to have time sensitive projects.
PQE projects are ‘shovel ready’. So you set the price for the job and await bids. If there are no bids (because there is a boom on) then the project stays on the shelf. They are ‘time insensitive’ and therefore operate in a countercyclical manner providing a rudimentary limited Job Guarantee.
Serialise projets by any mechanism and you won’t get inflation. Price competition is just the most primitive mechanism. Delays or planning rules can similarly serialise things and avoid price pressures.”
This was a suggestion of Neil’s to manage demand over time. I’ve noted how taxation could be used to suppress demand for resources (e.g. land) needed for public investment and stressed the need to improve the supply side, particularly on skills gaps. Neil has advocated tightening up on anti-competitive behaviour to reduce prices. Richard has acknowledged that over-expansion could bring inflationary risks that need to be managed.
And so on. All within a single stream of comments. We know inflation could become an issue, even if it isn’t today. I don’t know any serious contributor to recent debates who believes we can simply run the printing presses to cover any fiscal deficits and it would be good to see that caricature dropped.
“I don’t know any serious contributor to recent debates who believes we can simply run the printing presses to cover any fiscal deficits and it would be good to see that caricature dropped.”
I don’t know of any serious contributor who thinks governments ever spend by “printing money.”
Seriously. I have no idea what Tony is on about here.
Government spending works by crediting bank reserve accounts, which expand assets and liabilities at the bank – the bank gets reserves/vault cash (an asset) and a demand deposit (a liability.)
Say we have a downturn in which, for the sake of argument, spare resources exist. So a project gets done and the money gets paid out. And then, the economy recovers (perhaps because of pump-priming nature of the investment stimulus itself) so that there ceases to be spare capacity. Then what? You don’t take another project off the shelf so that you avoid over-straining the available resources with new PQE investment, fine, but what about the money paid out on the completed projects? That is still circulating, and that is where the inflation comes from.
“what about the money paid out on the completed projects? That is still circulating, and that is where the inflation comes from.”
Right. There is a multiplier effect. The spending will create an amount of tax and excess saving. With 20% VAT the govt will get most of its spending back quickly. That’s what the auto stabilisers are there for.
Spending will lead to additional activity. Hence why the “borrow for investment” Keynesian view does not makes sense in MMT. There is primary and secondary investment.
You respond as usual – raise taxes or cut spending.
But this is just the private sector buying goods freely and effects the distribution of real resources. It has been called “cantillon effects.” The cost of the govt spending was the real resources used, although there is additional effects beyond that point as private sector actors spend and save. You cannot control this, and is the same thing that happens when a bank makes a loan.
“but what about the money paid out on the completed projects? That is still circulating, and that is where the inflation comes from”
It’s not circulating. It is saved. That’s the problem. Your correspondent seems to have trouble with the idea of people having money in wallets (which is saving) or money on deposit at banks (which is saved).
It’s that saving, less the borrowing, that *causes* the deficit.
LOL, we had the whole previous blog defenders of Tony Yates’ positition arguing how important the BoE independence is as it needs to set the base rate (by Monetary Policy Committee) and the long term rates (by quantitative easing),. And now Tony Yates explains to us, that if the plan is to nationalise the railways the cost of borrowing (aka fiscal space) will increase..
Tony, we have an independent BoE, which will make sure that that does not happen!!!! Are you suggesting it is not up to its job? Of course it is, interest rates are at record low levels, government borrowing has never been higher.
So from where comes the logic for Yates’ argument? Does he believe in a simple demand/supply model for money, which sets its price? That surely is wrong if the BoE is setting the rates.
Evidence suggests that the more countries borrow, the higher the debt, the bigger the fiscal space (or the lower the borrowing cost). But correlation is not causation, but still. If we look at the total debt of all industrial countries, there is a pretty good correlation of lower rates, and increased borrowing. So exactly the opposite what Yates is telling us. The level of debt does not seem to influence the cost of government debt.
In extreme cases, Japan with 200% debt/GDP ratio borrows for free, or thereabout. Many European countries now issue bonds with negative yields. All have independent central banks which control rates, so that we should run out of fiscal space is a fairy tale, as far as I can see from the evidence.
The government is in charge of the interest rate for its borrowing, via the Central Bank, the Bank of England can steer the rates whereever it wants them to be, in accordance with the inflation target which is set by the government. That is how it works.
Central banks control the overnight interest rate, just about, but not the rates on longer bonds which will additionally depend on default probabilities and expected paths of short rates.
“which will additionally depend on default probabilities”
Zero, unless the govt goes mad and decides to voluntary default.
In the TINY chance that anyone clicks through these comments, they ought to know that any interest rate is a function of the expected path of short term rates, inflation expectations, term premium and credit spreads 🙂
The original commenter is quite wrong about QE – which had neither the stated objective nor result of bringing down long term rates.
“First-off, our signatories took the position that the state is more likely than not to damage these company operations through incompetence and failure to incentivise them. So the revenue stream is depleted in expected value terms by the purchase.”
It depends on what you want to do surely.
The question is how to get maximum productivity in those industries and therefore maximum public good.
The problem is entropy, which you get in any human organisation. Over time things get set in their ways, which is good in one sense in that people have got used to working with each other and are ‘performing’, but can be bad because you end up getting rigidity. It worse in larger organisations as the politics starts to overtake the need to survive.
So it’s never a matter of public or private, but more a question of the age and size of the current operation. You don’t want a very new organisation because they haven’t worked out the best way of doing things yet, but you don’t want a very old organisation that is set in its ways. You don’t want a very small operation because it is inefficient, but you don’t want a very large one either because it becomes an oligopoly.
Capitalism works, if it works at all, when there is an appropriate level of destruction and fear of destruction. Strange as it may sound the supermarket sector in the UK works really well. The operations are large enough to be effective and the competitive heat is enough to ensure constant innovation. It’s not perfect and needs a Job Guarantee to provide sufficient competitive tension in the labour market to prevent exploitation by the supermarkets. But it is a lot better than what they have in, say, Canada.
On the public side my thoughts are that the assets should be owned by the state and the workers should be hired and paid for by the state, but the operational management layer should be outsourced on a fixed income contract. That way you can swap out operational management layers if they fail, and they can make a lot of money if they are able to deliver the service more efficiently. Still playing with that idea in my head to see if the engineering tradeoffs work and whether there is enough destruction.
The push for privatization is supposedly about efficiency but it is really about rent extraction. The same with capitalism as a system. The model, based on perfect competition, supposedly “proves” that capitalism is the most efficient system for allocation scarce resources, increasing productivity through innovation, rewarding incentive and distributing by just deserts. That’s all based on specious assumptions. The reality is that it is a highly inefficient system as chronic unemployment, boom-bust cycles, and high inequality owing to maldistribution go to show. Squeeze out the rent and the ownership and management classes squeal because they can’t extract rent as easily. So they use every means in their power to avoid this.
The real issue is effectiveness, that is, achieving desirable outcomes. It’s about ends. Efficiency is about means, essentially getting the most from resources without compromising other vital factor like effectiveness and resilience. Militaries know this, for example. Efficiency is not tops on their list. Being resilient enough to handle contingencies and winning conflicts is way ahead of efficiency.
Militaries are there to protect society. So is the economy, which is a society’s life-support system. It’s there to support life not make some individuals and families wealthy as the rich presume.
It’s all about the best way of transforming labour power into labour services. And that ain’t as easy as it sounds.
Tony Yates: “First-off, our signatories took the position that the state is more likely than not to damage these company operations through incompetence and failure to incentivise them. So the revenue stream is depleted in expected value terms by the purchase.”
Now, the evidence here is of course exactly the opposite, Both Railtrack, which ran the track network, and the East Coast franchise had to be taken over by the government, as the previous privately owned operations were unable to make a success of it. In other words, the private sector was incompetent and failed, and the services had to be rescued by the government, who is more competent and runs the East Coast franchise at a profit.
“Second – and here I speak for myself only – these revenue streams are uncertain, and that uncertainty itself puts strain on government finances, for the same reason that household contents insurance ends up costing us money. ”
Well yes, if the government is back in the railway business, it cannot be certain of its revenues, as no business can.
This is a risk and cost issue, similar to the PFI contracts which allegedly put the risk of running a hospital onto the private sector, but at a tremendous cost, as the PFI provider wants an insurance premium for the risk. So we now have the certainty how much it costs to run a hospital, but it is extremely expensive.
Same with the railways, the franchise providers, the private railways, will make risk provisions to allow them to make a profit, and that will make it more expensive for us.
Now most of the government revenue is uncertain, so a little bit of additional uncertain railway revenue will not make or brake the government.
Thirdly, can a railway pursue other motives than providing a railway service? Almost certainly not.
“Less benign versions are that they are used as vehicles for patronage, industrial policy, or hidden social security. Either way, and almost definitionally, this appropriation costs money, and that depletes the government’s fiscal space.”
If you can provide any evidence that that has happened in the railway or energy sector in the past, let us have it. Patronage is a much bigger problem in the private sector, I would suggest, where politicians or senior civil servants end up on boards of banks or big industrial groups, which of course costs the same.
“Now, the evidence here is of course exactly the opposite, Both Railtrack, which ran the track network, and the East Coast franchise had to be taken over by the government, as the previous privately owned operations were unable to make a success of it. In other words, the private sector was incompetent and failed, and the services had to be rescued by the government, who is more competent and runs the East Coast franchise at a profit.”
That’s a big over-simplification with East Coast.
What happened with the previous franchisee was that they bid too much for the franchise (the market for business first class travel collapsed in the crash) and couldn’t afford their payments to the Treasury. They doubtless made an operating profit on the line.
East Coast’s profit didn’t involve paying anything for the franchise.
The new franchisee’s bid was to pay far more for the franchise than East Coast returned to the government.
It’s an odd system, but earns money for the Treasury (via passengers, of course) for reinvestment, which everybody seems to want, without the public subsidy going up.
Railtrack went bust because it couldn’t afford the compensation payments for all the speed restrictions. Network Rail in that situation would have been bailed out.
Not saying you’re wrong but your examples aren’t quite as decisive as they seem.
Tony Yates: “Fourth, one has to raise the spectre that, however competent or innocent of ulterior motives the state might be, markets may not have the same high opinion of the likely outcome of nationalisation as the government itself, so fiscal space – read cost of borrowing – may be erroded by this pessimism alone. Presumably, ruling out an international bond market conspiracy [a big leap for many who seem to support the Corbyn camp], such space would re-emerge after a substantial period of good behaviour or good performance by the new state owners.”
Pessimism and bond markets do not punish good behaviour, as we said before, we are in charge of interest rates, through the Bank of England, We set them, the markets can choose to buy our bonds or not, they are not taking value judgements, they are making an investment decision.
Now, I do not know who supports the view in the Corbyn camp that bond markets are all powerful, they follow the interest rate decisions of central banks all over the world. It is a myth.
Tony Yates: “Of course, to believe that the concept of fiscal space has meaning, you have to be a member of the club that believes that even if you are a sovereign with an independent printing press at your disposal, you can’t simply run those presses to cover any fiscal difficulties you might have. At least not if you recognise that seigniorage generates inflation, and inflation is, beyond a certain point, something costly to be avoided. ”
I think I would believe in anything you say above, apart from that fiscal space has any meaning and that seigniorage generates inflation by itself. Interest rates, taxes, capacities, unemployment, wages, company profits, commodity prices, etc, will all have an impact on whether more money, seigniorage, will generate inflation.
Tony Yates: “Corbynomists often deny this, and many times in supporting ‘People’s QE’ this view surfaces.
Looking at their mental processes regarding this policy, one can see it as a kind of fiscal ignorance leading to a bliss in which one can borrow to renationalise whatever you fancy, with no downside.”
Obviously, here we clearly differ, and generalising statements like that are just unsubstantiated nonsense.
Somebody has stated that we could just press a button, and create the funds to nationalise the railways. Which is of course correct, as we know that is of course exactly what Ben Bernanke did when he credited billions in support of the banking system following the Lehman crash, That is always an option. But equally we could issue bonds, or use alternative financing options.
Now, no mention is made in your discussion on the pros and cons of nationalisation of the fact that these companies in the railway industries and energy sector often have monopolies or quasi monopolies, it has often not been possible to introduce competition, that they soak up huge payments for capital investments, all paid for by the state, and generate returns for their shareholders above the cost of capital at which the UK could borrow, whilst being hugely subsidized.
No mention either is made on the possible environmental impact of re-nationalisation, so your analysis is only partially useful.
I would think that the case for re-nationalisation would be made on a much more substantiated basis when the Corbyn camp details the exact plans for re-nationalisation.
Matt, I don’t understand the bond market fears. There will be less Gilts issued and more bank reserves, then there will be an increase in demand and reduction in supply. That means prices go up and yields (the price) goes down.
It’s simple supply and demand. Not hard stuff.
There is an important debate to be had around the merits of public v private ownership but I was surprised at the prominence given to renationalisation in the letter to the FT, far outweighing that given to it by Jeremy Corbyn’s campaign.
His core statement on ‘The Economy in 2020’ does not mention renationalisation. Instead, it states:
” Our national infrastructure – energy, housing, transport, digital – is outdated, leaving the UK lagging behind other developed economies. There was nothing in the Budget about boosting public investment, in fact the Budget data shows it will be cut back even further. You cannot cut your way to prosperity. We need to invest in our future. A strategic state cannot leave our infrastructure to deregulated privatised markets. They are failing people and holding backing our economy.
Modern housing, transport, digital and energy networks are the foundation stone of a modern economy, and we need to ensure they are among the best in the world. Public investment in new publicly-owned infrastructure so that a future chancellor can deliver a sound economy, not just sound-bites. We need to drive investment and lending to reshape and rebuild the economy:
Focused on hi-tech and innovation and the infrastructure to support that, rebuilding supply chains to stimulate private sector demand. The ‘rebalancing’ I have talked about here today means rebalancing away from finance towards the high-growth, sustainable sectors of the future. ”
Certainly this recognises the failure of the deregulated privatised model to provide the national infrastructure we need but the emphasis is very much on new forward-looking public investment.
On rail, Jeremy has issued a statement entitled ‘A People’s Railway’ that does indeed start “We need to rebuild an integrated publicly owned railway network that is run by the people for the people.” The document then argues that franchising has been expensive and wasteful and that experience (e.g. East Coast mainline) has shown that public management can perform at least as well as private. It then proposes that “a Labour government under this leadership would introduce a new Railways Act in 2020 to progressively bring the railways back into public control, run in the public interest to meet social, economic and environmental goals.” The approach is not dogmatic but specific and should be responded to in those terms.
It has been disappointing to see those within the economics profession who have opposed Jeremy’s proposals pay so little attention to what has actually been written and to engage with that. Instead, the argument seems to be directed against what they imagine a left-wing candidate would say. Indeed, I wonder how many of those signing the letter had even bothered to read his statements carefully, or at all.
There are important issues at stake here and the public deserves better.
As I’m trying to set the record straight let’s see what Jeremy Corbyn actually said on the deficit in ‘The Economy in 2020’:
” We all want the deficit closed on the current budget, but there was no need to try to do it within an artificial five years or even the extra five years George Osborne mapped out two weeks ago. As I said on the Sunday Politics, if the deficit has been closed by 2020 and the economy is growing, then Labour should not run a current budget deficit – but we should borrow to invest in our future prosperity. You don’t close the deficit fairly or sustainably through cuts. You close it through growing a balanced and sustainable economy that works for all. And by asking those with income and wealth to spare to contribute more.
If Osborne’s forecasts are right there won’t be a deficit by 2020, but if – like last time – he is proved wrong and he only again manages to halve the deficit then I make this pledge: Labour will close the current budget deficit through building a strong growing economy that works for all. We will not do it by increasing poverty. The discussion about the deficit leads us to the clearest possible choice. Rather than remove spending power from the economy and damage growth and
future prosperity, Britain needs a publicly-led expansion and reconstruction of the economy. ”
There is plenty of scope for economists to disagree over the respective contributions of growth, cuts and taxation to closing the deficit. But there is nothing in the quoted statements to suggest that Jeremy Corbyn either considers the deficit to be irrelevant or believes that printing presses can resolve fiscal difficulties.
So, please, can we debate the real issues?
Straying a bit from your hood here, Tony.
A few quibbles…
You’re assuming the worst, again. There’s a range of options for nationalisation. Many of which are not far removed from what we have now.
Even so, what we have now isn’t necessarily that good compared to other countries similar where they have state ownership
The impact on fiscal space depends, a lot, on how much we pay and at what rate we borrow. Rates are low. I’m not sure who’s on top for negotiations on price but the government could wait until share price are low ans/or force them down
Parliament is sovereign. If it says the asset is nationalised, it is nationalised.
It is above the Law as it makes the Law
How much compensation is paid depends on the views of the electorate.
In theory, yes. In practice, no. Confiscation has costs and us probably EU law wise.
In particular, part of the fiscal space equation is that the government could always sell it again. It won’t be worth much if people worry they might just take it back.
‘Fourth, one has to raise the spectre that, however competent or innocent of ulterior motives the state might be, markets may not have the same high opinion of the likely outcome of nationalisation as the government itself, so fiscal space – read cost of borrowing – may be erroded by this pessimism alone. Presumably, ruling out an international bond market conspiracy [a big leap for many who seem to support the Corbyn camp], such space would re-emerge after a substantial period of good behaviour or good performance by the new state owners.
Of course, to believe that the concept of fiscal space has meaning, you have to be a member of the club that believes that even if you are a sovereign with an independent printing press at your disposal, you can’t simply run those presses to cover any fiscal difficulties you might have. At least not if you recognise that seigniorage generates inflation, and inflation is, beyond a certain point, something costly to be avoided. Corbynomists often deny this, and many times in supporting ‘People’s QE’ this view surfaces.”
Correct. “Fiscal space” is defined as the real resources the country has. There are no financial constraints to government crediting a bank reserve account (even self imposed govt having access to the Ways and Means Account) , despite the BS in the above comment. All government spending works by crediting bank reserve accounts (creating money.)
No government anywhere in the world spends by “printing money.” What the hell are you talking about, Tony? Total straw man, which you then proceed to attack.
To spend a bank account is credited. An amount of central bank liabilities are transferred to the private bank. That causes the private bank to increase its own assets and liabilities via the fixed exchange rate structure. Those private bank liabilities are then transferred to the target of Treasury’s beneficence.
You’ll note that mechanism is functionally the same as the private bank issuing a loan. Assets and liabilities are increased and the private bank receives an income from the assets (interest on reserves). It is forced private bank money creation.
Similarly in reverse. The overburdened taxpayer presents some private bank liabilities to the Government Banking Service at a private bank. The private bank transfers some central bank liabilities to the Treasury central bank account and the private bank extinguishes an amount of its own assets and liabilities under the fixed exchange rate mechanism to maintain parity with the central bank.
Again functionally the same as paying off a private loan. Assets and Liabilities go down and the private bank loses the income from the assets. In other words forced private money destruction.
The relationship of Government to central bank is generally one of beneficial owner (and often legal owner). Therefore it can direct the bank and Treasury receives the bank dividend. Pretending otherwise is a fantasy.
So not only can it drain its account balance to spend, it can ultimately ‘borrow’ from the central bank and cause the central bank to enter into money creation – unless the Government as a whole has signed up to some supranational pact preventing that by treaty (and the Government wishes to abide by the treaty).
And that’s the key to Treasury Bonds and Cash. Both are the same thing really. Cash is a bearer bond directly representing Central Bank liabilities. Treasury bonds are Treasury liabilities operating as a proxy for Central Bank liabilities.
To purchase both you have to have central bank liabilities. So issuing either of them to third parties is destructive to private bank money via the fixed exchange mechanism. In the same way as tax or paying off a loan they both reduce the assets and liabilities of the private banks – and therefore their income.
Treasury Bonds then wander off value-wise on their own merry way. But Treasury Bonds denominated in the liabilities of the Central Bank will always be worth the same as Cash the day before the Bond redemption date.
“Fourth, one has to raise the spectre that, however competent or innocent of ulterior motives the state might be, markets may not have the same high opinion of the likely outcome of nationalisation as the government itself, so fiscal space – read cost of borrowing – may be erroded by this pessimism alone.”
No it fucking doesn’t. This is such bullshit. Spell eroded right too.
The entire conclusion you put forward follows from the premise that the bond markets can decide things.
However if it is clear to the markets that the government believes it ultimately controls the Bank of England and the understanding is that the Bank of England will prevent yields from rising, then they will not rise.
Any bond that drops below par can be purchased by the Bank of England and cancelled. That means that the private sector gets less back than it paid out for the bond.
And that is a tax. Show me a financial person that will voluntarily queue up to pay a tax and I’ll show you a unicorn.
So it matters not what the bond market thinks. It matters whether the government decides to voluntarily tie its hands.
What you put forward is a slippery slope logical fallacy.
And of course the alternative is to leave it at BoE. Which can lend via “Ways and Means.”
I am confused by this post. Are you saying that the bank of england habitually attempts to control gilt yields? If you are I must (as a gilt market participant) correct you. It’s hard to imagine how such a thing could be achieved.
If push comes to shove, it can.
@Socialist in the City (@TonyYates)
“In the TINY chance that anyone clicks through these comments, they ought to know that any interest rate is a function of the expected path of short term rates, inflation expectations, term premium and credit spreads 🙂
The original commenter is quite wrong about QE – which had neither the stated objective nor result of bringing down long term rates.”
INFLATION EXPECTATIONS is probably the big one for longer dated gilts. There is no credit spread for gilts, they will always be repaid.
So buying up 1/4 quarter of the total issued debt of the UK, (which is what the BoE did when buying 375bn of gilts) is not supposed to have had an effect on the price of gilts? Nonsense, the price goes up, yields , that is interest rates, go down. How can it be otherwise?
If the BoE had not intervened, gilt rates would have shot up (their price fallen) as their had not been a market for them, but probably a liquidity need by sellers. That would have pushed longer dated rates up, resulting in a very steep yield curve, which is probably not what the BoE wanted to see.
Or is the BoE now telling porkies?
Click to access qecomp.pdf
Or what did the Economist say at the time:
http://www.economist.com/node/13248177
Or what does the Socialist in the City say about the ECB’s QE:
“The ECB does not subscribe to the quantity theory of money, it is not trying to create an excess of cash, because growth in base money is not a determinant of inflation or output. Rather, it seeks to do two things:
1. Lower long term interest rates, and therefore real interest rates. All things being equal this should discourage financial saving.
2. Force portfolio rebalancing by removing the option to own government bonds. All things being equal, investors will therefore be forced to allocate to equities and ‘real’ assets (infrastructure, property etc) ”
Or let us put it another way. What did Mario Draghi mean, when he said we will do everything support the Euro. That means they will burn any traders trying to manipulate bond yields upwards, They will intervene in the market through direct market operations. The threat is enough for anybody thinking anything dodgy to back off, The ECB will otherwise take them on.
So, the Central Banks are also in charge of the longer dated gilts. They do not intervene often, but when they do very decisively.
So the power of the bond markets, and the need to be fearful of bond vigilantes is indeed a complete fiction, but a useful myth to bamboozle the public. Also, a nice excuse for politicians (not our fault, it is the markets).
The fact is that it is politicians, who control ultimately the Central Banks, are also in charge of their own interest rates in their country. They might set up mechanisms to grant the central bank “independence” for inflation control purposes. But politicians are in charge of the inflation target. So the independence can only do what the politicians tell them, as they could change the inflation target any day they want. That bond markets can dictate rates is a complete fairy tale, its “pessimism” or “optimism” completely irrelevant, although it still seems that people like Tony Yates believe it themselves.
(The only reason where that is vaguely true is when the debt management office is advised by investment banks at which rate to price new issue of gilts for the tender process. Investment banks effectively set the new rate for new issues. They set the rate which the government is supposed to pay them for them providing the money for the gilts. That is just is a racket by the financial services industry, similar to payday loans and payment protection insurance, only on a bigger scale, of course. When do economists write about that inefficient mechanism and criticise that, as that really is a rip off. – Also, why does the government not just borrow overnight, at the cheapest possible rates, the bottomof the yield curve, and roll-over its borrowing every day?)
So, the argument that the “fiscal space” (translation into English: “government borrowing rate”) could in any way be influenced by nationalising industries, is also a fairy tale.
Straight from this is the idea that the bond markets. But they don’t.
And they like their corporate welfare.
I just found that on railways, if anybody is really interested.
http://weownit.org.uk/evidence/railways
Railway Season Ticket Prices
(Source: Daily Mail – 6 February, 2012)
UK – Woking (Surrey) to London, 22 miles, £3,268
FRANCE – Ballancourt-sur-Essone to Paris, 24 miles, £924
GERMANY – Strausberg to Berlin, 21 miles, £705
SPAIN – Collado-Villalba to Madrid, 22 miles, £653
http://www.dailymail.co.uk/news/article-2097089/Britains-railways-expensive-comfortable-efficient-Europe.html
Public Subsidy to Rail Networks as % GDP
Germany 0.497
France 0.330
UK 0.326
Spain 0.205
The level of public subsidy in France & the UK are virtually the same yet the season ticket price in France is less than a third of for a similar distance in England
NB. Of the above, the UK alone operates a completely privatised rail network.
Since privatisation the level of subsidy provided to UK train operators has TRIPLED.
One thing that has been missed in all of this is Corbyn’s plan to expropriate privately held assets as part of his re-nationalisation policy. As I cover in my own blog, this is likely to have a dramatic impact on private incentives to 1) acquire any of the assets that the current Conservative government would privatise over the next five years; 2) invest in the energy and rail industries that Corbyn has said he already wants to re-nationalise; and 3) invest in other industries in the UK.
We mentioned this in our FT letter