Liz Truss and LDIs
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From Liz Truss’ article in today’s Telegraph.
At no point during any of the preparations for the mini-Budget had any concerns about liability-driven investments (LDIs) and the risk they posed to bond markets been mentioned at all to me, the chancellor or any of our teams by officials at the Treasury. But then, late on the Sunday night, came the jitters from the Asian markets as they opened. I was alerted to this on the Monday morning, at which point the Bank of England governor was wanting to make a statement on LDIs.
Readers will not be surprised that, given their impact on events, since leaving office I have spent some time looking into LDIs. I was shocked by what I discovered.
In the early 2000s, pension funds were heavily underfunded. To increase their returns, they used LDIs – which use bond derivatives – freeing up cash for the pension funds to invest in other assets. This works when markets are calm but becomes problematic when the price of government bonds falls within a short timeframe. As LDIs entered the financial mainstream, with the Pensions Regulator seemingly encouraging their uptake, warnings started to be issued on the risks they could pose to financial markets – all unbeknownst to me at the time.
Astonishingly, it turns out that the value of total assets in LDI strategies is equivalent to around 60 per cent of the UK’s GDP.
Truss was surprised that pension funds are so huge, and that they have embraced futures as a way of protecting their commitments. Mildly worrying.
But, frankly, we were also pushing water uphill. Large parts of the media and the wider public sphere had become unfamiliar with key arguments about tax and economic policy and over time sentiment had shifted Left-wards. This is partly because we Conservatives had failed to make these arguments enough since 2010 – instead triangulating with Labour policy. It was also clear that, internal disagreements within my own party aside, there was a broader consensus in favour of raising taxes.
Nice to see so much of my analysis in the Standard confirmed from the horses mouth.
She is, essentially, right, with more time and preparation she could have pulled it off, but, instead, she fucked it by rushing.
You use the term “could have pulled it off”. I assume you mean that she could have remained prime minister and implemented her policy of reducing taxes on businesses in the expectation that they would invest more and so bring about “growth”.
Maybe but there is no evidence that this policy would have led businesses to invest more. As they say, you can bring a horse to water but you can’t make it drink. Businesses wouldn’t have drunk unless there was the prospect of making a profit — and that she wouldn’t have been able to pull off.
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