Today’s “rally against debt” should be called the campaign against the UK’s pension fund industry.
What I mean is that government debt is not just a liability. It is also an asset, and a tremendously useful one.
Imagine that the rally’s aim were to be pushed to its logical conclusion and that government debt did not exist - which, given that that rally thinks such debt is “immoral” is not a wholly unreasonable imputation.
Pension funds and insurance companies - who hold £294.1bn of the £994.9bn stock of gilts (pdf) - would then face an acute shortage of long-term sterling safe assets. They could not transfer into corporate bonds, as this market is just not big enough. Nor would cash be a good alternative, as this carries reinvestment risk - the fact that you can’t be sure of its future returns. And of course equities and commodities are just far too volatile. (Anyone who thinks gold is a safe store of value is just a prat.)
Worse still, fund would face a terrible shortage of inflation-proofed assets - as hardly any private sector companies issue index-linked debt.
Institutions which have long-term liabilities - such as pension and insurance companies - would then be in a terrible mess. They would not have the assets which offer a safe match for their huge future liabilities.
Government debt, then, is pretty much necessary for the existence of the pension industry.
Now, one might have two objections to this.
One is that as government debt falls, pension funds will switch into corporate bonds and this will encourage firms to issue more of them, with the result that private sector supply of safe assets will replace government supply.
This is unlikely. I’m not sure that top-quality borrowers want to expand their balance sheets by £294bn; there just aren’t that many profitable investment opportunities for them. And if they issue debt to buy back equities, the increase in gearing means they won’t remain safe firms.
And it’s extremely unlikely that firms will issue index-linked bonds to replace government ones.
Another objection is that the rally doesn’t really want to abolish debt, but merely moderate its increase. You can, after all, have too much of a good thing.
But is there too much of this long-term safe asset? There’s one obvious test - to look at its price. If the price of government debt were low and falling the rally would have a point.
But it’s not. Yields on the debt are close to multi-year lows: 3.4% for nominal 10 year debt and 0.2% for its index-linked counterpart. The market, then, is telling us that this asset is still in short supply - that there’s not enough of it.
Which brings me to a paradox. Most of those who are marching today are, I suspect, supporters of the free market. They believe the market, in general, knows better than governments.
When it comes to government debt, though, they abandon this faith in the market, and expect the government to over-ride its wishes.
It’s enough to make me suspect today’s march might be just a silly stunt.