City Am Calls Repayment Of Qe A Load Of ********

[spyguy]

Sorry but it's all very legal, and very likely once the UK government get to the point of issuing fewer new bonds due to lower borrowing. Its has a number of advantages beyond the ones already listed.

1) The BOE has been purchasing bonds of 10 years or less, so removing them means that the UK government will not have to issue bonds to cover the near term repayments.

2) Any increase in the interest that the UK Government has to pay on new bonds after pulling this stunt will be less that the likely increase seen if the £350B of bonds were placed back in the market.

3) It will stop all the reports about how much money the bankers will make if the BOE trys to resell these bonds.

If Lab wins the next election this is a 100% cert as the market will raise the cost of borrowing just because it's Lab. If the Lib/Con win I would say 75% chance.

The BoE is a private bank.

If they did this it would be a default.

[goldbug9999]

Will never happen the BOE is privately owned doing the above would seriously affect the living standards of the owner`s of the BOE

It would affect everyones living standard when the markets crucify the pound and the price of everything we import rockets.

[57percent]

Here's my 2p.

(Caution advised, I am NOT a banker.)

The only reason we haven't seen Weimar-type inflation thus far is because the QE cash has been largely confined to the banking system. The commercial banks have returned much of it to the BoE whence it originated, where it earns a notional 0.5% on deposit.

The commercial banks are profit-seeking enterprises. Since the original QE cash showed up as a liability on their balance sheets (transaction deposit?) they were obliged to generate assets on the other side of the ledger, or risk failure. They also expect QE to be reversed.

As the BoE reverses QE, so the commercial banks will draw down their deposits with the Bank and exchange them for the superior yield of 'risk-less' gilts. ~3.0% on the 20 yr ain't much but it's way better than 0.5%.

If the BoE doesn't reverse QE then the banks will go in search of yield elsewhere, releasing up to £325bn of new money into the economy proper. This has the potential to be wildly inflationary, to say the least.

I'm with the others, I don't think this is the case.

The main benefit is to the government whose lending costs would be much higher if they had to rely on a real market.

The banks gain a small amount as part of the whole transaction, plus there's then a lot more narrow money in the system to eventually fill the banks reserves allowing for a tidier deleveraging of banking risk.

We've avoided larger inflation (much to my surprise), because the deleveraging of debt is happening almost as quick as they're printing money. No-one wants to lend and no-one wants to borrow which is very deflationary.

If they don't reverse QE, then at some stage, once in recovery, we will get the inflation. But this might be delayed for a long, long time with much stricter banking rules and capital requirements.

[easy2012]

I don't know squat about central banks but I can read a balance sheet, and if there are £325,000 million deposits from other banks on the Bank of England's balance sheet, they they are hiding them very, very well - this is the balance sheet from the Bank's 28 February 2011 financial statements the column heading I've trimmed off is £m. You can find the financial statements here

One assumes that the zombies have all got this stuff on deposit with each other. It was a solvency crisis - no one would lend to UK banks apart from the UK government. I would assume that they can't get their hands on any cheap funding apart from by lending to each other in a kind of suicide pact. That's why ISA rates are climbing. I read somewhere, I forget where, that LIBOR is so fictitious now that trading desks just go onto MoneySavingExpert and compare ISA rates to see the real cost of funding for their competitors.

IMO the zombies yield chasing days are over, these days the yield chasers come to them. And, to bore people again with my pet theory, when the yield chasers do come Merv chases them off by firing up his money printing machine

QE to Feb 2011 was £200bn so the balance sheet more or less reflects that (£150bn bank + £50bn others (probably government/DMO) )

The £50bn announced sometimes mid last year and £75bn annouced a few months back (not yet finished implementing).

When you get the Feb 2013 annual report, you will see the full £325bn..

[Bland Unsight]

QE to Feb 2011 was £200bn so the balance sheet more or less reflects that (£150bn bank + £50bn others (probably government/DMO) )

The £50bn announced sometimes mid last year and £75bn annouced a few months back (not yet finished implementing).

When you get the Feb 2013 annual report, you will see the full £325bn..

Noted. Thanks. These balance sheet items were only £20bn in 2007, so it figures.

Just scanning the BoE website, (I realise their analysis may be tendentious), and read this:

Is the extra money created by QE simply hoarded by the banks?

The asset purchase programme was explicitly designed to go around the banking system, not through it. In 2009, we initially avoided buying shorter-dated gilts since these were the gilts that banks tended to hold. But in fact, at the time we started QE, UK banks in total owned only around £25bn of gilts. We purchased £200 billion of gilts! Spencer Dale (13 December 2011)

Is the whole MSM narrative about the banks ending up with money from QE overdone, or do bondholders play pass the parcel till the zombies end up with deposits at the BoE paying 0.5% and the non-zombie bondholders have whatever they want - i.e. is this the market churn that has people complaining about the bond markets extracting an economic rent on all these bond transactions?

(Apologies for the earlier nonsense about suicide pacts - unless we now include the BoE in the pact!)

[R K]

Forgiving the debt would would cause rampant inflation. As a big saver I would make a bigger real loss on my savings than I would save nominally in tax.

Could you explain your reasoning?

As a big saver you'd have made an even bigger real loss on your savings if your bank had defaulted on you wouldn't you?

[easy2012]

Noted. Thanks. These balance sheet items were only £20bn in 2007, so it figures.

Just scanning the BoE website, (I realise their analysis may be tendentious), and read this:

Is the whole MSM narrative about the banks ending up with money from QE overdone, or do bondholders play pass the parcel till the zombies end up with deposits at the BoE paying 0.5% and the non-zombie bondholders have whatever they want - i.e. is this the market churn that has people complaining about the bond markets extracting an economic rent on all these bond transactions?

(Apologies for the earlier nonsense about suicide pacts - unless we now include the BoE in the pact!)

+1 for quoting source and facts (doesn't always happen here...)

The issue is that there is only 1 place to keep the electronic money, that is at BoE and only licensed banks (and Debt Management Office DMO)) has an account there, so the credits always go back at BoE.

What BoE meant was that it would buy gilts directly from the market (from pension fund, banks, individuals etc) and hence 'bypass' the bank (not really, as the cash of the sale are deposited back into the bank immediately). Rubbish really.

The effect is that there are more BoE electronic money - some (as I do) call this blatant money printing, some call this QE (or whatever).

The rent extraction is due to BoE pre-announced the QE, then the dealers go out to buy the target bonds and hence front run the BoE and the flock them off to BoE at a higher price.

[scepticus]

The rent extraction is due to BoE pre-announced the QE, then the dealers go out to buy the target bonds and hence front run the BoE and the flock them off to BoE at a higher price.

That front-running has been going on since the beginning when OMO started being used to control interest rates. There is not really any difference between QE and OMO, apart from scale and intensity.

Because they (OMO and QE) do indeed represent an arbitrage as you point out, and arbitrages are eventually removed by arbitrageurs, the outcome must eventually be one of zero arbitrage, which is where we are approaching now. Once all the bonds are gone, there will be no arbitrage left. A consequence of this is that the CB won't be able to control nominal interest rates.

This arbitrage has been present in spades since the 70s, and the secular decline in interest rates since then (plus the rise of shadow banking) are the visible effects of that arbitrage being removed by markets, despite so called regulation to keep the structure in place. Antal Fekete wrote a good paper about this, which is linked from a blog post of mine on this subject, way back when I started the blog:

http://liminalhack.wordpress.com/2010/11/03/ireallydonotseethesignal/

Ultimately, a non zero nominal interest rate in a fiat economy (especially one equipped with very powerful and interconnected IT), is a case of deliberately engineered arbitrage that cannot easily persist when faced with a market economy and/or a highly connected citizenry. When the world financial economy was genuinely anchored by gold the scarcity of that gold created a similar arbitrage, which was in turn worked around by the issuance of credit and paper gold, a process which started in earnest in the early 18th century. Now we are not anchored by gold it is not possible in the long run to create an anchor from nothing by declaring that numbers in a central bank computer are somehow scarce, because clearly they are potentially unlimited in quantity. Scarcity CAN be created by the inability to create additional credit, which is precisely what happens at the zero lower bound, due to the fact additional credit-worthy borrowers cannot be located.

ZIRP and peak credit thus represents a no-arbitrage solution to the equations of the fiat money economy, or at least it will do when there are no more coupon paying government bonds having implicit insurance provided by a printing press.

[Bland Unsight]

The issue is that there is only 1 place to keep the electronic money, that is at BoE and only licensed banks (and Debt Management Office DMO)) has an account there, so the credits always go back at BoE.

OK - thank you. I'd forgotten that the individual banks contra off all their debit/credit positions with the other licensed banks and it all swills through to the BoE as net movements. Can you recommend a decent technical book on this? (My accounting knowledge is rusty but I passed all the exams back in the day...). The key thing that I'd forgotten is that all the electronic money lives in the BoE, (as of course, on reflection, it must - their ledgers just show who, in theory, has an electronic pound coin.)

The rent extraction is due to BoE pre-announced the QE, then the dealers go out to buy the target bonds and hence front run the BoE and the flock them off to BoE at a higher price.

Thanks.

ZIRP and peak credit thus represents a no-arbitrage solution to the equations of the fiat money economy, or at least it will do when there are no more coupon paying government bonds having implicit insurance provided by a printing press.

Is the assumption under this theoretical framework that the solution is a place where the world economy can continue to exist? Or is it a kind of 1/x as x --> 0 "solution". (Shameful arrow, but what can you do!)

\rightarrow

Edited April 13, 2012 by ChairmanOfTheBored

[Bland Unsight]

http://liminalhack.wordpress.com/2010/11/03/ireallydonotseethesignal/

Thanks for the link.

[Bland Unsight]

Is QE the central bank version of the joke where the robber tries to take a hostage by putting the gun to his own head and saying, "Nobody move or this sucker gets it!"

Only it will work because the claim our creditors have on our present and future wealth only has substance because of the relative soundness of our money.

Looks to me like a nice piece of game theory by the ladies and gentlemen of the Bank, but what do I know

Edited April 15, 2012 by ChairmanOfTheBored