Best of the Week
Most Popular
1.Putin’s World: Why Russia’s Showdown with the West Will Worsen - John_Mauldin
2. Stocks Bull Market Grinds Bears into Dust, Is Santa Rally Sustainable? - Nadeem_Walayat
3. Gold and Silver 2015 Trend Forecasts, Prices to Go BOOM - Austin_Galt
4.Gold Price Golden Bottom? - Toby_Connor
5.Gold Price and Miners Soar on Huge Volume - P_Radomski_CFA
6.Stock Market and the Jaws of Life or Death? - Rambus_Chartology
7.Gold Price 2015 - EWI
8.Manipulated Stock Market Short Squeezes to Another All Time High - The China Syndrome - Nadeem_Walayat
9.Gold, Silver, Crude and S&P Ending Wedge Patterns - DeviantInvestor
10.Is the Gold And Silver Golden Rule Broken? - Michael_Noonan
Last 5 days
Ruble Takedown Exposes Cracks in Putin’s Defense - 20th Dec 14
Oil Drilling Our Way Into Oblivion - 20th Dec 14
Stocks Bull Market Resumes - 20th Dec 14
Gold And Silver Nothing Is Ever As It Seems And No Respite For PMs - 20th Dec 14
What Are Technical Indicators Saying About the Stock Market? - 20th Dec 14
Here’s How You Can Still Make 27% With Apple Even if You Buy Now - 20th Dec 14
Gold Stocks to Shine in 2015 - 19th Dec 14
Why Alibaba Stock Shares Are a Screaming Buy - 19th Dec 14
China, Dollar, Japan, Europe Burning Questions for 2015 - 19th Dec 14
U.S. Economy is in a Sweet Spot! - 19th Dec 14
US Dollar and the Gold Fairy Tale - 19th Dec 14
Show Me The Money (Flow)! Tracking Money-Flow Through Value Shifts In Stock Markets - 19th Dec 14
The Commodities Market Is Not Dying, It’s Just Hibernating - 19th Dec 14
The Price Of Gold And The Art Of War - 18th Dec 14
Euro Succumbs to ECB QE Expectations and FOMC - 18th Dec 14
John Williams: A Downhill Run for the U.S. Dollar in 2015 - 18th Dec 14
Outrage at Taliban Islamic Fundamentalists Massacre of 132 Pakistani School Children in the Name of God - 18th Dec 14
How Inflation Changes Retirement Benefit Choices - 17th Dec 14
The Real Reason It's Tough to Beat the Stock Market - 17th Dec 14
Russian Currency Crisis and Debt Defaults Could Create Contagion in West - 17th Dec 14
How to Profit From Russia's Stock Market Crash - 17th Dec 14
Russia Crisis - If You Put Your Money in the Bank Will You Get it Back? - 17th Dec 14
Crude Oil Price Crash, U.S. Employment and Economic Growth - 17th Dec 14
Opposing Forces At Play In Gold and Silver Precious Metals Complex - 17th Dec 14
Wall Street Will Always Find An Excuse For Not Raising U.S. Interest Rates - 17th Dec 14
Torture, Terror And Elite Schizophrenia In The UK - 16th Dec 14
Eurozone Conflict Will Bring a Major Stocks Buying Opportunity - 16th Dec 14
Viewing Russia From the Inside - 16th Dec 14
Gold and Silver Stocks Bottom - Are We There Yet? - 16th Dec 14
The Financial Industry Pigmen Win Again - 16th Dec 14
Crude Oil Price Epic Blowout - 16th Dec 14
Asian Stocks Markets: Sand In The Gears Of The Bull Market - 16th Dec 14
U.S. Dollar Trend Forecast 2015 - Video - 16th Dec 14
Silver Price Bottom? - 15th Dec 14
Gold Price Base Building Bullish Pattern - 15th Dec 14
Stock Market Probable Pop-n-Crash Today - 15th Dec 14
Stock Market Time for a Bounce - 15th Dec 14
Stock Market Euphoria: The Mother of All Ponzi Schemes - 15th Dec 14
Gold - The Weight of Time as Trend - 15th Dec 14
U.S. Dollar Collapse? USD Index Trend Forecast 2015 - 14th Dec 14
The Rushing Stocks Bear Market and How to Prepare - 14th Dec 14
Gold and Silver Dreaming of a White Christmas - 14th Dec 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Dramatic Stock Market Selloff

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.


© 2005-2014 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