A tax by any other name…

Posted by: Paul Donovan

22 Mar 2019
  • In 1945 UK government debt was about 250% of GDP. In 1970 UK government debt was about 50% of GDP. The UK did not inflate its way out of debt. Bond investors can punish a borrower faster than inflation can cut debt ratios. The UK did not really grow its way out of debt. The UK taxed its way out of debt. A special tax helped. The UK forced investors to hold bonds at low interest rates. This works like a tax on saving.
  • The UK's bond market manipulation has gone global. In spite of recent interest rate rises, many bonds still have negative yields. Bond markets have pools of "captive" investors who have to own bonds. Banks and financial companies have to own bonds. (Banks chose between very low or negative yielding cash reserves, and slightly less-low yielding bonds). Central banks' foreign exchange reserves are often limited to bonds. Some investors have self-imposed rules that make them buy bonds.
  • Captive investors are giving money to governments. This is literally true when interest rates are negative. It is effectively true when rates are below fair market value. Economically, financial regulation in a low interest rate world works just like a tax. 

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