Thursday, Mar 12, 2009
Running from gilts
Spectator: How Brown plans to borrow more money than the market would ever let him
An extremely small chart showing that private UK and non-UK investors are getting out of UK gilts. Only the nationalised banks are buying them, and the BoE of course. It would seem that the government can maintain the nominal price of gilts and push the nominal yield down to zero, but they can't alter a falling real price and by implication a negative yield(overall). Over the last year European, American, Japanese et al, have made real losses holding UK debt. This is a devaluation in all but name. So, printing money does effect the value of that already existing....fancy that.
Posted by stillthinking @ 11:44 AM (484 views) Add Comment
3 Comments
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1. stillthinking said...
What will happen is that although the BoE hide the real price, the real price is actually adjusting all the time, and given that nominal yields are zero, there is only one direction to go.
So as time goes on, the "should be" yield will increase and the "shoudl be" price will go down. All this happening in the background. The only way to maintain the illusion will be to continue purchasing gilts until -all- government debt is monetised. Otherwise, should the BoE ever stop then there will be an immediate correction and price shock. Another point is that this destroys for the casual observer the ability to find out the real rate of inflation as calculated by hundreds of analysts, because it isn't reflected in pricing.
I don't see that Brown can be believed as he asks for global cooperation, as these actions are tantamount to exporting deflation, hardly pulling together.
There is also the possibility that we will arrive in a situation where this policy cannot stop, because the government would be unable to sustainably(or believably) fund borrowing requirements. Which must have been the pickle Mugabe eventually arrived at. That there is still a year to go until the election is a really bad stroke of luck, as irrespective of who wins, Brown must continue this charade until then, and a year is a long time.
2. uncle tom said...
There is every prospect that this will lead to a run on Gilts.
The stock market is really very cheap now, and although many listed companies are feeling squeezed at the moment, most of them will gradually re-build their margins (fuelling inflation) and yield very healthy PE's.
That realisation could see a flight of cash from Gilts to equities, as happened in the mid seventies, when Healey had to call in the IMF
3. jackas said...
The BoE should be arrested for market abuse for their actions in the gilts markets.
Nothing makes sense any more.
Look at the monkey.