To Nemat Shafik
Welcome to the Bank of England. As Britain’s top cat at the IMF, it’s amazing that nobody thought of you before, which perhaps shows how closely we watch it nowadays. No matter. Your position, apparently, in the squad of deputy governors, is to worry about how to shift the £375 bn of government stock that the Bank has somehow accumulated as a result of Quantitative Easing.
At £6,000 for every man, woman and child in the UK, that looks quite a challenge, but you know economics doesn’t work like that. The better question is: why bother even thinking about it? If these gilts were old-fashioned, you could use the certificates to fire up the Bank’s boilers next winter. Nowadays, of course, there is no paper to burn; the stocks could simply be wiped out.
The treasury already plans to stop adding the interest to the captive gilts, so perhaps this process has already started. It might do terrible things to the Bank’s balance sheet, but so what? Its obligations are guaranteed by the state, it can print its own money, and if it felt the need to tighten liquidity, it can create new gilts to sell, the way it used to in those distant, pre-QE days.
The state’s finances would be much prettier, and perhaps that’s the real point. Wiping £375bn off the national debt would make it look so small that the politicians would quickly be off down the inflationary primrose path signposted “Zimbabwe.” It’s the moral hazard argument again. Mind you, under your new boss’s predecessor, that didn’t turn out so well, did it?
Get a life
So farewell, then, the impaired life annuity business. It was a terrific moneyspinner while it lasted. The fatal flaws in a model that depends on people being obliged to buy a product that they don’t understand at a price which seems too high have been cruelly exposed at a stroke of the Chancellor’s pen.
Partnership Assurance and Just Retirement piggy-back on the work of the life assurance companies which collect pension contributions. Both have secret black boxes which somehow allow them to offer better terms to those about to retire and are expected to die soon after, and of course the mainstream providers would never notice. Both companies came to market to raspberries from this column last year, and both shares halved after the Chancellor holed the annuity business below the waterline on Wednesday.
As Merrill Lynch put it with commendable understatement: “Although we believe that for many consumers, buying an impaired annuity will continue to be the right option, the lack of visibility on the outlook…means we can no longer maintain our Buy rating.”
An impaired annuity may indeed be the right option, but for those in poor health at retirement, the option to spend the money while they can still enjoy it makes more sense. Annuities have been a rotten deal ever since QE started distorting the prices of long-dated bonds. Since government policy did the damage, there’s a certain symmetry to a policy to undo some of it.
As for the lack of consultation with the death assurance companies, they had been warned often enough about their market failures. Had they been consulted, we may be assured that they would have fought to save the annuity, even if it was only with an impaired life.
Just a little bit
Laydees and gennelmen, a warm welcome please, for the great British bitcoin, as the Chancellor would rather we didn’t call his new-look pounds. Some of us were quite happy with the existing ones, and are mystified at the claim that almost one in thirty is a forgery. If that’s true, they are fine forgeries, and minting and distributing them must be an exhausting business.
The replacement risks unpopularity, since we’re quite fussy about our coins, and nobody asked us whether we wanted a dodecahedron. The original thruppennybitcoin (worth about 70p in today’s money when it was introduced in 1937) featured a charming little sprig of thrift on its reverse side. Of course, the past is no guide to the future, prices can go down as well as up, etc etc.
This is my FT column from Saturday. You can also sign up for “author alerts” on the same page, which would give you this column shortly after it is published, rather than waiting until Monday morning.