Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Stock Market Volatility (VIX) - 25th Mar 24
Stock Market Investor Sentiment - 25th Mar 24
The Federal Reserve Didn't Do Anything But It Had Plenty to Say - 25th Mar 24
Stock Market Breadth - 24th Mar 24
Stock Market Margin Debt Indicator - 24th Mar 24
It’s Easy to Scream Stocks Bubble! - 24th Mar 24
Stocks: What to Make of All This Insider Selling- 24th Mar 24
Money Supply Continues To Fall, Economy Worsens – Investors Don’t Care - 24th Mar 24
Get an Edge in the Crypto Market with Order Flow - 24th Mar 24
US Presidential Election Cycle and Recessions - 18th Mar 24
US Recession Already Happened in 2022! - 18th Mar 24
AI can now remember everything you say - 18th Mar 24
Bitcoin Crypto Mania 2024 - MicroStrategy MSTR Blow off Top! - 14th Mar 24
Bitcoin Gravy Train Trend Forecast 2024 - 11th Mar 24
Gold and the Long-Term Inflation Cycle - 11th Mar 24
Fed’s Next Intertest Rate Move might not align with popular consensus - 11th Mar 24
Two Reasons The Fed Manipulates Interest Rates - 11th Mar 24
US Dollar Trend 2024 - 9th Mar 2024
The Bond Trade and Interest Rates - 9th Mar 2024
Investors Don’t Believe the Gold Rally, Still Prefer General Stocks - 9th Mar 2024
Paper Gold Vs. Real Gold: It's Important to Know the Difference - 9th Mar 2024
Stocks: What This "Record Extreme" Indicator May Be Signaling - 9th Mar 2024
My 3 Favorite Trade Setups - Elliott Wave Course - 9th Mar 2024
Bitcoin Crypto Bubble Mania! - 4th Mar 2024
US Interest Rates - When WIll the Fed Pivot - 1st Mar 2024
S&P Stock Market Real Earnings Yield - 29th Feb 2024
US Unemployment is a Fake Statistic - 29th Feb 2024
U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - 29th Feb 2024
What a Breakdown in Silver Mining Stocks! What an Opportunity! - 29th Feb 2024
Why AI will Soon become SA - Synthetic Intelligence - The Machine Learning Megatrend - 29th Feb 2024
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Mervyn's Pringle Problem

Interest-Rates / UK Debt Oct 07, 2011 - 04:28 PM GMT

By: Adrian_Ash

Interest-Rates

Best Financial Markets Analysis ArticleBank to Treasury: Forget credit easing. It's your debt that needs queasing...

UNLIKE PRINGLES tasty potato snacks, quantitative easing doesn't come with a resealable lid. So the famous sales line is only more true for central bankers:

"Once you pop, you can't stop!"


This, warns the historian, lurching out of the library stacks, is how Germany's infamous Weimar Republic moved from something like sanity to madness inside three years. A trickle when it started, "more and more paper [poured] from the Reichsbank presses" by January 1923, writes Adam Ferguson in his well-thumbed history, When Money Dies.

"During February the note circulation was being increased by a matter of 450 milliards every week. On a single day in early March, by way of Treasury bills discounted at the Reichsbank, the floating debt was increased by 800 milliards."

A milliard? It used to mean 1,000,000,000 – formerly known as 1,000 million but now called one billion even though it's a thousand times smaller. Still, that's inflation for you. One billion buys much less than it used to. Just ask Mervyn King.

"There is not enough money in the economy today," the Bank of England governor told ITN News on Thursday (and Sky, and the BBC, and everyone else) as he tried to explain why his team is adding £75 billion ($115bn) to the £200bn of quantitative easing they tried in 2009.

"That is why we have taken this measure to create money, in order to ensure that there is sufficient money to support the recovery, to support jobs, while ensuring that inflation remains close to our target."

Oh yeah? Mervyn King's target – of 2.0% annual inflation on the UK's official Consumer Price Index – hasn't been hit since autumn 2009. Inflation is now running at 4.5% per year and has exceeded Mervyn's official 3.0% limit in 20 of the 29 months since he first got his hands all covered with ink. So whatever this apparent "lack" of money might be doing to the UK today, it's hardly pulling down prices.

Nor will the new money help private-sector investment, not directly, even though – just this Monday – UK finance minister George Osborne declared he wanted "Credit Easing" to kick-start new borrowing by business to jump-start new growth. Poor George! He must have thought his birthday had come on Thursday morning, when Mervyn wrote to say the Bank wanted to print a fresh six per cent's worth of GDP in new cash.

"The structure and operation of the Asset Purchase Facility would be unchanged from that described [by] your predecessor," the governor winked in his letter.

"The APF continues to include facilites for eligible private sector assets," the chancellor winked back, "authorised up to a maximum of £50 billion."

But no! Within minutes of this cheery exchange being posted for the world to enjoy on the Bank's website, up went the Bank's plan for how it will spend this new money – every last penny on government bonds, and none of it on private-sector assets or loans!

And here's why...

Of its first £200bn in quantitative easing, the Bank of England spent all but £1.7 billion on UK government debt. Like the name says, the effect was to "ease with quantity" – pushing down longer-term interest rates, which the Bank can't ordinarily change through trading short-term debt bills, by bidding up longer-dated government bonds.

Government bonds pay a fixed income each year, so the higher the price, the lower the yield to new buyers. Hence the lower interest rates for other borrowers in the economy.

Trouble is, government bonds don't stand still. They shuffle towards maturity – that happy day when the current owner gets repayment of the money first borrowed from the bond market by the government. And as our chart shows, this slow shuffle has changed the way the Bank of England's gilt holdings stand, even though it's holding the very same UK gilts it bought between March 2009 and Jan. 2010.

QE1 is moving towards the short-end of maturities. Time for QE2. Because since the start of last year, that 70% of the Bank's £198bn spent on medium and long-dated gilts has turned into 60%. That means the 30% of its money spent on "Short dated" gilts has now become 40% held in "Short" and – yikes! – "Ultra-Short dated" gilts, set to mature in 3 years or less.

You won't need reminding how tight the UK's public finances are right now. Mervyn King certainly doesn't. But he does seem to think the chancellor needs telling – and pretty much in public, too. Fully 16% of that money printed last time around is starting to pile up at the short end...about to turn back into real cash. So to rebalance the queasing, trying to keep long-term rates down but with the government's total debt very much larger, the Bank has no choice but to target medium and longer-term gilts once again, buying (no kidding) 3-10 year gilts on Mondays, 25-year-and-over on Tuesdays, and 10-25 year debt on Wednesdays.

Now it's started, it can't stop.

By Adrian Ash
BullionVault.com

Gold price chart, no delay   |   Buy gold online at live prices

Formerly City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2011

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in