Best of the Week
Most Popular
1.BrExit Looks Set to Win EU Referendum, Final Opinion Polls Give LEAVE Lead Over REMAIN - Nadeem_Walayat
2.BrExit Morning - New Dawn for Britain, Independence Day! - Nadeem_Walayat
3.LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - Nadeem_Walayat
4.BrExit to Save Europe from Climate Change Refugee Migration Apocalypse - Nadeem_Walayat
5.Trading BrExit - Stocks, Bonds, Sterling, Opinion Polls, Bookmaker Odds and My Forecast - Nadeem_Walayat
6.EU Referendum Latest Opinion Polls Show LEAVE Halting REMAINs Surge - Nadeem_Walayat
7.Gold And Silver – Insanity Is World “Norm.” Keep Stacking! - Michael_Noonan
8.Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - Nadeem_Walayat
9.Gold And Silver: Security, And BREXIT - Michael_Noonan
10.BrExit Vote - "The Trend is Set" -- And What You Should Pay Attention to Next - EWI
Free Silver
Last 7 days
Forecasts, Commentary & Analysis on the Economy and Precious Metals - 1st July 16
Italian Banks & Moving The Risk During Crisis - 1st July 16
Gold's Final Warning of Impending Monetary Collapse - 1st July 16
China Can and Will Confiscate Gold When it Suits Them! - 1st July 16
Carney Sparks More RISK ON Market Trades - 1st July 16
Gold, Silver Reaction Following Brexit, Central Bank Desperation Never More Evident… - 1st July 16
Stock Market Rally is Wearning Thin - 1st July 16
UK Interest Rate Cut to 0.25% Imminent and More QE Money Printing - 1st July 16
Michael 'Little Finger' Gove Slays Boris 'Baratheon' Johnson in Game of Thrones for Next Tory PM - 30th June 16
Gold, Silver, Bonds and Stocks Path Towards Inflation - 30th June 16
Stock Market SPX Rally Nearing its End as DB Gets Slammed - 30th June 16
Brexit & The Precipice - 30th June 16
Gold and Silver Precious Metals Bull Market Update - 30th June 16
14 Signs the World Is on the Verge of Generational Chaos - 30th June 16
BrExit Stock Market Upwards Crash as FTSE Recovers 100% of Friday Plunge - 30th June 16
Stock Market Rally Runs Out of Steam - 29th June 16
Rapid Growth:The Financial Trends Of Online Gaming - 29th June 16
FTSE and Sterling Brexit Trading, Deconstruction of the EU Referendum Result - 29th June 16
Stock Market Bounce May be Over - 28th June 16
Stock Market Meltdown Likely to Drive Gold Towards $1,500 - 28th June 16
Brexit Victory over the EU Globalists - 28th June 16
Brexit Psyop: Greenspan Falsely Blames the Brits for the Crash and Chaos to Follow - 28th June 16
Greenspan Calls Brexit a ‘Terrible Outcome’ as Euro Area Tested - 27th June 16
Stock Market SPX Below Mid-Cycle Support - 27th June 16
Best Holidays for Summer 2016 - 27th June 16
Another Stocks Bear Market? - 27th June 16
BBC EU Referendum Result Highlights - YouGov, Markets, Bookmakers, Pollsters ALL WRONG! - 26th June 16
Investors Map Post-Brexit Strategies Amid Global Market Upheaval - 26th June 16
Gold Price Weekly COT Update - 26th June 16
First the UK, then Scotland ... then Texas? - 26th June 16
Stocks Bear Market Resumes or Just More Noise - 26th June 16
Gold And Silver: Security, And BREXIT - 25th June 16
Dow, Euro & Brexit Recap - 25th June 16
Resistance Holding Gold Stocks after Brexit - 25th June 16
Venezuela vs. Ecuador (Chavismo vs. Chavismo Dollarized) - 25th June 16
Gold, Silver And PM Stocks Summer Doldrums Risk - 24th June 16
Here’s Why China “Economic Hard-Landing” Worries Are Overblown - 24th June 16
Jubilee Jolt: Markets Crash, Gold Skyrockets as Britain Takes Brexit - 24th June 16
BrExit Morning - New Dawn for Britain, Independence Day! - 24th June 16
LEAVE Wins EU Referendum - Sterling and FTSE Hit Hard, Pollsters, Bookies and Markets All WRONG! - 24th June 16
Trading BrExit - British Pound Plunges, FTSE Stock Futures Slump on LEAVE Shock Referendum Win - 24th June 16
EU Referendum Shock Results Putting BrExit LEAVE in the Lead Hitting Sterling Hard - 24th June 16

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Market Volaility

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.


© 2005-2016 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

Catching a Falling Financial Knife