Best of the Week
Most Popular
1.Gold Price Crash Through Key Support, Crude Oil in Freefall - Clive_Maund
2.Marc Faber Warns Japan's Bond-Buying Program is a Ponzi Scheme - Bloomberg
3.Silver Price and Powerful Forces - DeviantInvestor
4.Stocks Bear Market Catastrophe as Stocks Flash Crash to New All Time Highs - Nadeem_Walayat
5.Marc Faber Warns Not to Hold Any Gold in the U.S. - GoldCore
6.U.S. Housing Market San Francisco at Critical Mass - Harry_Dent
7.Global Scramble For Silver - Coins “Hard To Get,” “Premiums Likely To Jump” - GoldCore
8.Major World Stock Market Indices Analysis: SPY, QQQ, DAX, FTSE, CAC, HSI - Michael_Noonan
9.Japan's kaput?! - Axel_Merk
10.Tesco Empire Strikes Back, £5 off £40 Discount Voucher Spend Explained, Exclusions Warning! - Nadeem_Walayat
Last 5 days
Gold Price 2015 - 22nd Nov 14
Stock Market Medium Term Top? - 22nd Nov 14
Is the Gold And Silver Golden Rule Broken? - 22nd Nov 14
Malaysia's Subsidy and Budget Deficit Conundrum - 22nd Nov 14
Investors Hated Gold at Precisely the Wrong Time: What About Now? - 22nd Nov 14
Gold and GLD ETF Selloff - 22nd Nov 14
Currency Wars, the Ruble and Keynes - 21st Nov 14
Stock Market Investor Sentiment in The Balance - 21st Nov 14
Two Biotech Stocks Set to Double on One Powerful Catalyst - 21st Nov 14
Swiss Gold Poll Likely Tighter Than Polls Suggest - 21st Nov 14
Gold's Volatility and Other Things to Watch - 21st Nov 14
Australia Stock Market and AUD Dollar Analysis (ASX200 and AUDUSD) - 21st Nov 14
New Algae Research May Have Uncovered an “Energy Forest” Under the Sea - 21st Nov 14
The Cultural and Political Consequences of Fiat Money - 20th Nov 14
United States Social Crisis - No One Told You When to Run, You Missed the Starting Gun! - 20th Nov 14
Euro-Zone Tooth Fairy Economics, Spain Needs to leave the Euro - 20th Nov 14
Ebola Threat Remains a Risk - New Deaths in Nebraska and New York - 20th Nov 14
Stock Market and the Jaws of Life or Death? - 20th Nov 14
Putin’s World: Why Russia’s Showdown with the West Will Worsen - 20th Nov 14
Making Money While The World Burns - 20th Nov 14
Why This "Quiet Zone" Is Now Tech Stocks Biggest Profit Sector - 20th Nov 14
My Favorite Stock McDonalds Just Got Kicked Off My “Buy” List - 19th Nov 14
European Economies in Perpetual State of Shock, What's Scarier Than Deflation? - 19th Nov 14
Breakfast with a Lord of War and Nuclear Weapons - 19th Nov 14
The U.S. Economy’s Ebb and Flow - 19th Nov 14
What You Need to Know Before Investing in Alibaba - 19th Nov 14
Forget About Crude Oil Price Testing 2009 Low - 19th Nov 14
What Blows Up First? Part 5: Shale Oil Junk Bonds - 19th Nov 14
Bitcoin Price Did We Just See an Important Slump? - 18th Nov 14
How to Profit From Oversold Crude Oil Price - 18th Nov 14
Stock Valuations Outrunning Profits Growth - And the Band Played On - 18th Nov 14
ECB Buy Gold Bullion? Japan's Monetary Policy Dubbed "Ponzi Scheme" - 18th Nov 14
Gold, Silver, Crude and S&P Ending Wedge Patterns - 18th Nov 14
How High Could USD/JPY Go? - 18th Nov 14
On Obama and the Nature of Failed Presidencies - 18th Nov 14
Globalism Free Trade Immigration Connection - 18th Nov 14
An Epiphany From Hell - Buy Gold and Silver - 18th Nov 14
Too Difficult to Get a U.S. Home Loan - 18th Nov 14
Has the Gold Bear Trap Been Set - 18th Nov 14
Gold Price and Miners Soar on Huge Volume - 17th Nov 14
Cameron Says Second Global Economic Crash is Loomin, Japan in Recession - 17th Nov 14
How to Play the Stock Market 2014 Year-End Rally - 17th Nov 14
What The Fed Has Wrought, Who Needs Wage Earners Anyway? - 17th Nov 14
Stock Market Indexes Fluctuate Along Record Levels - Will Uptrend Continue? - 17th Nov 14
Stock Market Trend Deceleration Tends To Precede Corrections - 17th Nov 14
Stocks Bull Market Set to Continue After Consolidation - 17th Nov 14
The World Is Run By Fools, And We Let Them - 17th Nov 14
Gold Price Golden Bottom? - 17th Nov 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

Gold Report 2015

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