When there is a shortage of safe assets it is easy to sell safe assets


We’ll never sell those gilts back. The IFS says we have £280bn of new gilts to sell over the next three years to fund the deficit. There is not a hope we’ll add £350 billion of resale of gilts on top of that. The only likelihood is in fact of more QE: over that period there is no way the market can absorb £280 billion of new debt.

From Richie via Tim.

If the UK can issue safe assets in the form of Government debt (which judging by our interest rate we can), then we categorically will be able to sell it. There is a global shortage of safe assets as this graph illustrates and large global demand for them.

Asians save lots, but don’t have robust enough state or financial institutions to produce safe assets. That is, they want to be able to transfer consumption from now into the future but lack an infrastructure capable of delivering this at prices which are satisfactory.

The UK can issue lots of debt so long as people believe it will pay it back in full in a currency still worth more or less how much they expect. There is no danger of not finding buyers so long as those conditions hold, and they look like they will for the foreseeable future.

The same is true of nearly all developed economies with their own currency. Look at the US, belching out debt and facing record low interest rates and a market hungry, begging, ravenous for more (via Delong).








This strengthens Richie’s case for larger budget deficits but weakens his case for unwinding QE by monetising the debt. I do not know how he can hold both opinions simultaneously.


3 thoughts on “When there is a shortage of safe assets it is easy to sell safe assets

  1. I do now know how he can hold both opinions simultaneously.

    I know, it’s amazing, isn’t it?

    We won’t sell the gilts we’ve monetised because no one wants to buy more gilts. But we can sell more gilts to borrow more to have fiscal stimulus.


  2. ah, you can see I have been ploughing this furrow at Tim’s.

    also, if you polarise RM’s argument somewhat he is saying

    “we don’t have a debt crisis because this debt will never be resold by the BoE; if this debt as resold, we would have a debt crisis”

    because the likelihood of the BoE reselling the debt is increasing in the strength of the economic recovery, we conclude that any policy which helps economic recovery is going to herald a debt crisis.

  3. Ah, I didn’t realise you were already on it Luis!

    But yes, it is a stupid position to hold on many levels.

    It also seems Richie is unaware that unwinding QE will be the last thing the BOE does. Interest rates will rise a great deal before QE is wound down. They know roughly what happens with interest rate changes so they are going to “normalise” those and then sort out their gilt holdings, we’ve years (a decade?) to sort out the BOE’s balance sheet.

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