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They don't need to. Saying that yields are low is the same as saying that bonds' prices are high. It would make more sense for the government to buy bonds when

They don't need to. Saying that yields are low is the same as saying that bonds' prices are high. It would make more sense for the government to buy bonds when their prices are low (and yields high).

tempestn 12y ago
Except that they're not buying them on the open market; they're redeeming them for face value. At least that's my understanding. The only reason it hasn't been done previously is that there is significant administrative overhead in some cases to do so (up to and including an act of Parliament), and only recently have market interest rates fallen below their coupons.
- conistonwater 12y ago
  You're right, they are redeemable. But even so, to make it worth repaying the 4% bond, they would need to believe that their interest rates would remain below that. If the rate at which the government borrows is higher, then it would be better to do something else with the money. But that's a rather odd belief, isn't it? It's unlikely to happen except in the case that the BoE fails to relax the monetary policy that has been too tight for quite a while now (as evidenced by the current low rates). Isn't it a bit like betting on your own failure? I suspect there is more than economics to this.
  - tempestn 12y ago
    Good point, although there may also be administrative overhead in just keeping these ancient bonds on the books, so the total cost may be higher than 4%. As far as future interest rates, there is an argument that as a civilization matures, interest rates trend toward zero. The more mature the economy, the lower the perceived risk (on average), and so the lower the rates. Apparently in the later stages of the Roman Empire for instance, interest rates were very low. So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. (Nor that they won't, of course.)
    - conistonwater 12y ago
      > there is an argument that as a civilization matures, interest rates trend toward zero. I'm inherently suspicious of any argument that is supposed to apply to "civilizations". Not that it doesn't matter, but there are usually much more simple explanations to be found elsewhere. For example, whatever we know about money in the Roman empire, we know far more about money in Britain, US, France, Germany, etc., in the last several centuries. > So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. The way I understand interest rates work, from conventional macroeconomics, is that some people have money to spend and invest, and some people want to borrow money and spend it on something that will make them more money. So when you look at the interest rates, you aren't really looking at the riskiness of a modern government (US is definitely risk-free, UK also probably), you are mostly looking at the "price" of the people's savings. When lots of people want to save, interest rates --- the price others are going to pay to borrow --- will go down to balance the supply and demand of savings. So one way of looking at low interest rates is to see this as a situation where there is an excess of desired savings (i.e. the interest rate that would truly balance savings and investment is below the current rate, which is already almost zero in real terms). This explanation is incomplete (you need to introduce another constraint, and do more macroeconomics), but it's more conventional, and I think also more robust than most theories of civilization.

They don't need to. Saying that yields are low is the same as saying that bonds' prices are high. It would make more sense for the government to buy bonds when their prices are low (and yields high).

tempestn 12y ago

Except that they're not buying them on the open market; they're redeeming them for face value. At least that's my understanding. The only reason it hasn't been done previously is that there is significant administrative overhead in some cases to do so (up to and including an act of Parliament), and only recently have market interest rates fallen below their coupons.

conistonwater 12y ago
You're right, they are redeemable. But even so, to make it worth repaying the 4% bond, they would need to believe that their interest rates would remain below that. If the rate at which the government borrows is higher, then it would be better to do something else with the money. But that's a rather odd belief, isn't it? It's unlikely to happen except in the case that the BoE fails to relax the monetary policy that has been too tight for quite a while now (as evidenced by the current low rates). Isn't it a bit like betting on your own failure? I suspect there is more than economics to this.
- tempestn 12y ago
  Good point, although there may also be administrative overhead in just keeping these ancient bonds on the books, so the total cost may be higher than 4%. As far as future interest rates, there is an argument that as a civilization matures, interest rates trend toward zero. The more mature the economy, the lower the perceived risk (on average), and so the lower the rates. Apparently in the later stages of the Roman Empire for instance, interest rates were very low. So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. (Nor that they won't, of course.)
  - conistonwater 12y ago
    > there is an argument that as a civilization matures, interest rates trend toward zero. I'm inherently suspicious of any argument that is supposed to apply to "civilizations". Not that it doesn't matter, but there are usually much more simple explanations to be found elsewhere. For example, whatever we know about money in the Roman empire, we know far more about money in Britain, US, France, Germany, etc., in the last several centuries. > So it isn't a foregone conclusion that interest rates will ever return to the "normal" levels of the 20th century, at least until a new global paradigm comes along. The way I understand interest rates work, from conventional macroeconomics, is that some people have money to spend and invest, and some people want to borrow money and spend it on something that will make them more money. So when you look at the interest rates, you aren't really looking at the riskiness of a modern government (US is definitely risk-free, UK also probably), you are mostly looking at the "price" of the people's savings. When lots of people want to save, interest rates --- the price others are going to pay to borrow --- will go down to balance the supply and demand of savings. So one way of looking at low interest rates is to see this as a situation where there is an excess of desired savings (i.e. the interest rate that would truly balance savings and investment is below the current rate, which is already almost zero in real terms). This explanation is incomplete (you need to introduce another constraint, and do more macroeconomics), but it's more conventional, and I think also more robust than most theories of civilization.