The Logic of Pension Valuation II: A Response to Andrew Biggs

Advocates of using municipal debt yields or similar instruments in discounting liabilities regardless of the latter’s capital structure exhort that the risk associated with the liabilities should be included in their ultimate valuation. Then, they assume – usually without making that explicit at all – that market yields are a risk-adjusted discount rate that can be used to achieve that. But market rates reveal only participants’ beliefs about risk, if anything at all, and government intervention can and does easily disrupt those signals. US debt markets have been the object of almost unremittent intervention at least since the incorporation of the Federal Reserve System in 1913 and that interventionism has intensified in the past half century.

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