scrumpyjack wrote:But much of the new 'Gilts' issued to pay for Covid were simply issued to the Bank of England. They did not even bother issuing them to the market and then buying them back. The BoE hands the interest back to the Treasury, so effectively there is no interest cost and no 3rd party who needs to be paid back or persuaded to roll them over for a new Gilt. There really is no urgency to do anything about this. It was a once in 100 year event so if anything needs to be done, it should be over a 100 year timescale. All that Rishi needs to consider is bringing the current annual budget a bit nearer to balance so the markets don't get too edgy. Everything is relative and our position is not as bad as many other countries.
Yield curve manipulation primarily affects the likes of pension funds that are obliged to hold x% of liabilities matched by Gilts. Pushing yields down means pension funds have to buy more (at higher prices) - feeding further demand. When that starts to unwind so the pension funds might reduce Gilts, lowering demand, pushing yields upwards - again self feeding. There seems to be quite a bit of pent up pressure towards higher inflation, higher yields and as real yields move move positive so each of stocks, bonds and gold will all tend to drop. Even at 4% real, that's a swing of 5% from current -1% type levels. Much more a expensive rate at which to borrow. As such I see things moving more like Japan, where low yields are more likely to remain for the longer term, perhaps with the BoE reducing its holdings by selling to the open market piecemeal over time (very slow/gradual Quantitative Tightening). But I guess flat/no returns for a decade or two is better than others who are more directing towards taking big hits - however sometimes bearing a short duration big hit (pain) followed by a progressive recovery that usually follows can be better than a more constant flatness.
The collapse of the 1970's saw great returns across the 1980's/1990's which to a large extent has resulted in the likes of 4% safe withdrawal rate rules-of-thumb. Outside of that era and it was common for investors to invest in bonds, return-of rather than return-on money, cash-is-king type mindsets. Where -1% year cost is seen as acceptable compared to a rapid -33% or -50% (or more) risk factor.
I suspect no matter what, for other than if a large hit, subsequent progressive increases, that the West will see relative lag/decline. The US has vastly abused its Bretton Woods pledges which has facilitated US dominance. Many such as Ray Dalio are directing their investments towards the East.
Perhaps rather than nothing-has-to-be-done, something should be done. Bailing out the banks for instance has subsequent costs, permitting failure and dealing with that and then more often seeing good progress (short sharp pain and be done with it) can be better than prolonged/extended milder pain.