Best of the Week
Most Popular
1.Election Forecast 2015 - Opinion Polls Trending Towards Conservative Outright Win - Nadeem_Walayat
2.UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - Nadeem_Walayat
3.Gold And Silver - When Will Precious Metals Rally? Not In 2015 - Michael_Noonan
4.Preparing for the Next Stocks Bear Market - Forecast 2015-2016 - Gary_Savage
5.Is a Stock Market Crash Imminent? - David Eifrig
6.Gold Price Slumps as US Dollar Soars, What's Next? - Nadeem_Walayat
7.US Dollar Forex Pairs and Gold Chartology - Rambus_Chartology
8.Election Forecast 2015: The Day Labour Lost the General Election - Nadeem_Walayat
9.The ECB Should End QE Next Month - EconMatters
10.Silver Price Poised to Surge - Zeal_LLC
Last 5 days
How Stock Investors Should Play the 2016 Presidential Race - 26th Mar 15
MidEast Energy Alert: Why the Crisis in Yemen Could Get Ugly Very Fast - 26th Mar 15
Stock Market Downward Spiral of Dumbness - 26th Mar 15
The Monetary Approach Reigns Supreme - 26th Mar 15
Stock Market Large Gap Down, Despite the Algos' Push Back - 26th Mar 15
Crude Oil Surges, Gold price Spikes as Middle East Tensions Escalate - 26th Mar 15
The U.S. Housing Market Recovery Is Fabricated Optimism - 26th Mar 15
Why Yemen Is The Next Saudi-Iranian Battleground - 26th Mar 15
The Crude Oil Price Crash and China Economic Slow Down - 26th Mar 15
Global Financial Markets Are More Distorted Than Ever Before - 26th Mar 15
One More Stock Market Rally and Then a Huge Drop Expected - 26th Mar 15
Danger Will Robinson - Stock Market Crash Warning - 25th Mar 15
Learn the Basics of Corrective Elliott Waves - 25th Mar 15
Why CNBC Is Hazardous to Your Financial Health! - 25th Mar 15
Will Your Retirement Accounts Survive The Coming Tax Code "Revolution"? - 25th Mar 15
US Dollar - Americas Phoenix - 25th Mar 15
California’s Epic Drought: Only One Year of Water Left! - 25th Mar 15
What’s Wrong With Silver? - 25th Mar 15
SPX Futures Appear Weak. WTIC and Gold May Be at Max Retracement - 25th Mar 15
We’re at the Dawn of a “New Energy Age” - 25th Mar 15
A Very Weak U.S. Economic Recovery - 25th Mar 15
Zero UK CPI Inflation Rate Prompts Deflation Danger Propaganda For Fresh Money Printing - 25th Mar 15
Stock Market NYSE Hi-Lo Index Aggressive Sell Signal - 24th Mar 15
Palladium Commodity Price Forecast - 24th Mar 15
Bitcoin Price Gearing Up for a Fall - 24th Mar 15
Safety Deposit Boxes In UK Being Closed By ‏HSBC – Not Closing Gold Vaults - 24th Mar 15
Japan Short Term Gains And Long Term Disaster - 24th Mar 15
China's Fragile Evolution - 24th Mar 15
David Cameron Announces Resignation Even Before Being Re-elected, Handing Labour 6 Seats - 24th Mar 15
City of London's Ownership of American Colonies - 24th Mar 15
Stock Market Reversal May Have Begun - 24th Mar 15
Casey Gathers Top Gold Experts to Share Secrets for Making Money in Any Market - 24th Mar 15
Thoughts on The Current Crude Oil Market - 24th Mar 15
U.S. Economy Still on Life Support - What Your Governments Hiding From You... - 24th Mar 15
UK Election Forecast 2015 - Budget Bribes Fail, SNP Insurgency Catastrophe - Video - 24th Mar 15
Is Stock Market Minor Top Taking Hold? - 23rd Mar 15
Greece and EU Running Out of Time as Bank Runs Intensify - 23rd Mar 15
Stock Market Slightly Negative Expectations Following Last Week's Rally - 23rd Mar 15
This Rising Interest Rates Play Could Make You a Quick 55% - 23rd Mar 15
Platinum Commodity Price False Break Low - 23rd Mar 15
The Real Reason The American Dream is Unraveling - 23rd Mar 15
Election Forecast 2015 - Budget Bribes Fail to Impress Voters, Tory's Lose Seats in Opinion Polls - 23rd Mar 15
Silver Price Reliance During U.S. Dollar Rally - 23rd Mar 15
Gold Price Outlook Dramatic Improvement Following US Dollar Topping Action - 23rd Mar 15
Wall Street Doesn't Want You to Do This - 22nd Mar 15
The "Natural Interest Rate" Is Always Positive and Cannot Be Negative - 22nd Mar 15
Exploring The Gold Market: The Fed, The Charts. The COTS and GLD - 22nd Mar 15
Stocks Bull Market Continues - 22nd Mar 15
Gold And Silver - China's AIIB Spells U.s. Dollar Demise, Not Clear For Precious Metals - 22nd Mar 15
Cocoa Commodity Price Technical Outlook - 21st Mar 15
Yield Curve, Futures, Suggest No U.S. Interest Rate Hike Until December - 21st Mar 15
Three Iconic Stocks Are Poised for a Dive - 21st Mar 15
We're All Hedge Funds Now! - 21st Mar 15
Why Stock Market Seasonality May Be Critical in 2015 - 20th Mar 15
Yellen's Tiger Riding Dilemma Keeps Interest Rates Near Zero - 20th Mar 15
FOMC is boxed in, Gold and Silver - 20th Mar 15
Silver Price Poised to Surge - 20th Mar 15
Why Aren’t These Investors Worried About The Gold Price? - 20th Mar 15
Gold Price Downside $850/oz; Upside Jump to $2,000/oz on ‘Grexit’ - 20th Mar 15
Cheap Paper Money - Precious Metals Technical Outlook - 20th Mar 15
Best Cash ISA vs Budget 2015 Scrapping Tax on Savings Interest on First £1,000 - 20th Mar 15
GDXJ / Gold Ratio - 20th Mar 15
What the “Yellen Effect” Ultimately Means for Crude Oil - 20th Mar 15
Sharp Fall In USD Index And Its Implications - 20th Mar 15
UK Solar Eclipse - End Time Sign, Judgement Day, Doomsday! - 19th Mar 15
How Many Shale Oil Plays Make Money At $37 Per Barrel? - 19th Mar 15
Gold Price Rises 2.1% – Fed Signals Loose Monetary Policies to Continue - 19th Mar 15
The Hottest Investment Opportunities in Tech Stocks Sector Right Now - 19th Mar 15
China's Deflationary Economic Bust and Beyond: Anne Stevenson-Yang Presentation - 19th Mar 15
T-Mobile CEO: "Sprint couldn't give away service...their network is completely dead" - 19th Mar 15

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

US Economy Still on Life Support

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.


© 2005-2015 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

Free Report - Financial Markets 2014