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Britain Betrayed

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Not sure if I fully understand (or ageee) with all of this but it did make me smile :D

from the dailyreckoning.co.uk email newsletter:

Adrian Ash, spitting distance across the office:

- Nine out of ten borrowers today, says the FT, get credit without the banks ever checking whether or not they can repay. Reckless lending is rife in the bond market, too. Ten-year gilt yields slipped another two clicks last week as prices rose higher. Gordon Brown can now borrow until 2016 at just 4.04% per year.

- But as gilt yields fall, other governments find themselves having to pay more to borrow against their citizens' future income. Ten-year US bonds closed Friday paying 4.37% per year. German 10-year bunds now yield 3.37%, up eleven clicks from last Monday.

- So how come UK gilts are rising in price, pushing yields lower, when the rest of the world is headed in the other direction? If you're already having problems borrowing enough cash to make ends meet, Gordon Brown's recipe might just help you out. Here's how to cook up a never-ending line of cheap credit...

- First, beat together new laws forcing private pension funds to match their assets to their liabilities. In other words, the regular pay-outs owed each month to retired workers must be funded by a regular income earned on, say, government bonds.

- Then issue a handful of super-long dated government bonds. Fifty years is far enough away for no one to care about who'll repay the principle. And for extra flavour, link the annual interest paid on these bonds to inflation - just the sort of kick your new pension laws force pension fund managers to look out for, in fact.

- Don't over-egg it though, not at this stage. Only put out a few of these index-linked bonds, worth less than

£2 billion say. You don't want to rush things only to watch your soufflé collapse!

- Next, set up a fund of your own, promising to insure all those private pension funds against going broke and leaving retired workers without a pension pot of their own. Get the funds to pay for it, of course, by charging them a fee to take part – and be sure to make taking part compulsory! Link the size of the premiums to the risk of default, judged from the gap between each funds' liabilities and assets.

- Here comes the clever bit. Base your calculations for each pension fund's deficit using the yield paid by that measly £2bn of index-linked bonds you just issued.

Remember, the funds are all chasing these things higher in price, thanks to the way you've rigged the market.

That means the yield paid by those bonds will boil away almost to nothing...all the way down to 38p for every £100 invested last week, in fact, over and above inflation.

- Hey presto! With your "risk model" using such tiny rates of return, the sum of money each fund needs to have stashed away will rise beautifully. It grew a staggering £20bn larger this month alone, says Mercer Investing Consulting. Now you're ready to set a date to assess everyone's deficit and thus set their insurance premium

– 31st March 2006 should do the trick. Pop your scam into the oven, open a nice bottle of wine, and sit back while the pension fund managers fight over the scraps of interest offered by your index-linked bonds. In no time at all, they'll stop fighting and start begging for you to issue huge new quantities of public debt via more index-linked bonds!

- The proof of this pudding? It's showing up in strategy meetings across the Square Mile. "The [Debt Management Office] is obliged to do something," moaned one fund manager to the Financial Times on Wednesday. And a former Old Lady at the Bank of England, William Buiter, even says all outstanding government debt should be re- financed through new 50-year gilts.

- "You can do it gradually," he says, "or you can do it all overnight." Either way, "you keep on going until [supply rises to cover demand and long-term rates] look more reasonable."

- In short, the Government must "do something" – and quick. But we've been before, sharp-eyed readers will note. "In March 03 at the bottom of the equity bear market the turn was called by intervention from the [Financial Services Authority]," says our friend, Simple Simon, in an email today. "They relaxed the rules and in one swoop took away the forced selling [of equities] by insurance companies that was due to [pension fund] regulations. Three years on, and the forced buying of long dated gilts - again thanks to the wisdom of regulators - has horribly similar characteristics..."

- "Who in their right mind would lend 50 year money at 3.5% to a bunch of half-baked politicians?" Simon begs to know. "If only homebuyers could have some of the action! It would solve the mortgage burden at a stroke..."

- But now the City and the pensions industry have got such a hunger for yield, only reckless lending to the Government can fill that hole.

- Mmmmm....tasty!

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  • 301 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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