Friday, 6 July 2012

Quantitatively Uneasy

The Bank of England is addicted to Pringles -once you pop you can't stop. As was predicted here way back in 2009, QE is something once started that you find hard to end.

With the economy in reverse gear ever since the Financial Sector blew up, the Bank has just kept printing more money. Now nearly 50% of Gilts are owned by the Bank of England.

How will this ever be unwound. Back in April Andrew Tyrie, so well known after this week, as the BOE what preparations had been made - umm, none, came the message from the Debt Management Office - its too far off to bother.

One option is to hold these gilts to maturity, but this would mean a huge build up in debt as more are issued over time, before these all mature. Another way is to only offer long-term debt and make QE the short -term paper - that way it unwinds quickly, but the longer dated issues sink in value too.

Or you can try and dump it on eh market and see interest rates rocket and inflation fall back rapidly as liquidity is withdrawn. There is no good way to do this, although Japan did well in 2006 when it withdrew all its QE in just a few months, conditions were very benign, nothing compared to the cataclysm we have today.

It is not surprising there is no plan to unwind QE, but with more and more QE being done, it is worrying that yet again we have no plan. As usual in the UK, this will be a problem left to our children to sort out.

The lessons of the Baby Boomers - i.e. a boom for them and a bust for their children, are going to be repeated again.

(The picture is £500 shredded, how many bowls for £375 billion pounds - so only 750 million bowls needed of this then....)

11 comments:

Anonymous said...

Is that your daily cereal CU?

Anonymous said...

But what do you mean "interest rates rocket"

even returning to our historical long term average of around 5%-ish? would be considered high by recent standards, but nothing compared to the 80's.

Where do you see rates going?


Seems to me these ultra low interest rates were an act of desperation from people who thought the economy would bounce back with enough tricks thrown into the mix.
To recover we should surely recognise this is a long term problem and return to normal interest rates, letting the chips fall as they may.

Electro-Kevin said...

So that's what happens when an economy goes Snap, Crackle and *Pop*

Anonymous said...

When should I move my pension account - 65% UK government bonds, out of Gilts?

Maybe into Icelandic Crowns....

Budgie said...

It's all about money in versus money out, as Dickens had Micawber say. And despite the tricksters it applies to governments as well as families. We have been living beyond our means too often too long.

There are plenty of savings to be made without compromising state run services but our governments will not take the opportunities.

The UK should depart the shambles that the EU has become (saving: around £100B); scrap DfID (saving: c£10B); sell the BBC (one off: £5B??); scrap so-called green policies - windmills, solar, "carbon" fetish - (saving:£20+B????).

Additionally government could be more efficient - but that would take actual hard work rather than the posturing Cameron, Clegg 'n' Ozzie engage in.

Lord Blagger said...

When should I move my pension account - 65% UK government bonds, out of Gilts?

==========

Inmost cases, you're forced to. The government wants to borrow and what better than forcing people to lend to it.

On the unwind, my guess is that they just cancel the debt they owe themselves.

Anonymous said...

2% tax on the capital assets of 'hoarders' (> £100K savings) coming soon.

Tom Seddon said...

"Hoarders" - I like it.

The money could be used to help reduce mortgage interest rates. It would then go to assist productive, hard-working members of society, rather than simply sitting around in the bank accounts of the rich, who don't really need it.

In fact, it wouldn't even be a tax. More like simply them paying back what they already owe to society. 2% is, if anything, too generous.

Budgie said...

Tom Seddon said: ""Hoarders" - I like it. ..... 2% [tax on savings of £100k+] is, if anything, too generous."

There speaks the genuine socialist/statist, control-freak mentality. God preserve us from such envious nit-picking.

Tom Seddon said...

Apologies - I may have fallen foul of http://en.wikipedia.org/wiki/Poe's_law. Sorry. It wouldn't be the first time.

Nevertheless, I stand by my opening comment. I'm don't think I'd vote for this particular tax, but "hoarders" WOULD be good branding.

Budgie said...

Since you stand by your opening comment that branding people who save as "hoarders" is "good", you merely confirm yourself as having exactly the sort of envious control freak mindset I indicated.

Moreover it is not difficult to make a parody reasonably obvious despite the pompous Poe's law, which works both ways anyway. So far you still haven't claimed your first post was a parody.