Jump to content
House Price Crash Forum


  • Posts

  • Joined

  • Last visited

About A.steve

  • Rank

Profile Information

  • Location

Recent Profile Visitors

2,034 profile views
  1. The reason you don't think I addressed your point is that you have assumed a completely different (and much less relevant) interpretation of 'nominal risk free assets'. You are right when you argue that safe assets are matched by cash injections to banks... but you have been mislead if you think that a low risk (or nominal risk free) asset (such as a Gilt) and cash are equally appropriate assets to meet investor/saver objectives. The former has a yield (which, at least, used to be somewhat determined by market forces) while the latter puts one in the position of hoping for benevolence from a commercial bank. The former may have the state as a counter-party (so works for larger sums and sums held by institutional investors on behalf of customers) whereas the latter has limits to government support to mitigate counter-party risk. Obviously, you could argue that counter-party risk remains with the state... which is, in some sense, true... but... if your own state defaults (and a state with a sovereign central bank will never be forced to do this) then you have a lot of other worries beyond money. [Yeah - odd font... I wrote my last reply off-line.]
  2. I stated "NOMINAL risk free" - I did not suggest that assets couldn't be stolen. Thieves can steal anything they put their mind to. A very long time ago, we used precious metals as a store of value. Once weights and measures were established, a unit of silver was always going to be worth a unit of silver. Sure, it might buy more or less other stuff in future, but it was a measurement that could be made and about which one could reason arithmetically. One needs a stable (and uncomplicated) mechanism of measurement in order to facilitate sentient economic engagement. You seem focused on the idea that safe debt instruments should not be produced from thin-air, by government, as a crisis response. The reality is that they've done the exact opposite. Almost a £1-tn in safe investable instruments have been withdrawn from the market... and warehoused on the BoE balance sheet. This drives up the price of (even moderately) 'safe' assets to a level at which risible yields/interest rates render the time-value of money a moot idea (which is dangerous.) The risk adverse creditor who, eventually, gets paid... maybe they don't want to speculate the modest sum they now have on the incumbent whale-scale debtors? Perhaps they would prefer safe monetary instruments (which, previously, had been abundantly available at relatively sensible prices) – but, now, access to such instruments is more difficult… and access at “fair”-value is now impossible. The interests of the at-scale speculators are maximally supported by withdrawing the safest monetary instruments from circulation. Now, not only do those speculators find themselves gambling on risky investments, but so, too, does everyone else. Those approaching retirement hold riskier assets than they might otherwise have held; this effect knocks-on… until everyone is invested in something riskier than they would prefer (and which a free-market would provide) while the portfolios of the reckless are buoyed up – providing them with an improved opportunity to exit risky positions with big profits… leaving the risk to those who would have preferred no exposure. To bring it back to HPC, I know of at least one house which is not on the market (at least partly) because the risk of holding cash while looking for a suitable new home seems much greater than the cost of retaining and maintaining an empty house. The absence of confidence in money, as a store of value, is crippling the economy. It is preventing price discovery for assets. It is damaging productivity and generating dissatisfaction across society. It is skewing judgement about which loans are sensible – and which are not. This will result in more bad debts and a generally deteriorating economic situation. It is now global, too – there’s no escape for anyone. For (financial) asset price discovery to work, you need not only the option to invest – but, also the option not to invest. A contorted market sends contorted signals.
  3. I could have responded to most of your post... but the above phrase is sufficient. I disagree. Nominal risk free assets were the norm before fiat currency. Today, I think, fiat is less certain than many people once thought it to be. Whatever the case, I'd still argue that there needs to be a belief in some mechanism for measurement of value in order for the economy/society to function. If fiat is to mediate transactions in our economies, then there need to be risk-free assets... or all of reality becomes farcical.
  4. I think I appreciate your perspective... though I am not in complete agreement. I accept that the way in which the money supply is managed has huge systemic effects. I am sceptical about the idea that it is beneficial to remove low-risk financial assets from the market when risk appetite looks set to change. While I can appreciate distaste at the idea that some spiv may speculate recklessly into a bubble - then exit every position to some safe asset before a crash... modestly restricting access to safe assets will not prevent this. What it will prevent is ordinary investors sending clear market signals. It will artificially inflate the value of lacklustre investments. Perhaps this will be a "good thing" - in that it may prevent bankruptcy of otherwise viable businesses... but, it is a double-edged sword - as it will simultaneously perpetuate non-viable businesses that tie-up otherwise valuable resources/assets and result in economic inefficiency to the detriment of all. If we reject free trade of assets in a market... then we will be in a real mess... without an effective market, there can be no price discovery. Without price discovery, there can be no coherent asset valuations. Without coherent asset valuations, there can be no credible collateral. Without credible collateral, the financial system stops appearing credible. When that happens, you're looking at currency collapse and economic devastation. While this will affect those with the greatest nominal wealth the most in absolute nominal terms, the devastation would be felt most by the 'ordinary' people.
  5. While, I agree, the numbers are all huge... £20bn would seem to be a tiny drop in the ocean of commercial bonds. I wasn't aware that the BoE accepted "commercial paper" - I hadn't expected them to accept anything except the best collateral... and, it seems to me, commercial paper should be considered less robust than a bond. It also suggests that the BoE may be picking and choosing which issuers of debt need their debt service costs reduced by market intervention. If that is happening, it would definitely be politically significant.
  6. I associate recessions - e.g. early 90s, or following the 'global financial crash' of ~2008 - with reduced risk appetite among investors... causing capital to flow into safer alternatives - for example... into government bonds. The Idea I'm suggesting is the exact opposite. Rather than there being reduction in risk-taking, causing a slowing of economic activity - resulting in all the things we associate with a recession... Perhaps... by taking the safe investments off the table, the BoE has had a systematic influence - that has driven investment into riskier instruments than would otherwise have been bought... and, perhaps, that that indicates a particular type of failure will emerge as a consequence.
  7. I'm pleased to find interest in discussing such topics... where even vague measurements often remain elusive. I wonder where the journalist (quoted at the head of this thread) obtained the £875bn figure? While 34% is a smaller proportion of the available pool of 'completely safe' gilts... I have assumed that this means that there's £800+bn that would otherwise have been invested in gilts - that now funds riskier investments. Perhaps this isn't necessarily the case (perhaps there's been a ~£800bn contraction in non-central-bank balance sheets)? I still think the effects of having such a large proportion of gilts out-of-circulation could cause serious consequences. I'm less clear exactly what those consequences might be - or what objective measurements might help gain a better understanding.
  8. If £875bn is 20-25% of UK gilts, this would imply a total of between £3.5tn and £4.375tn. This is larger is larger than the figure I had previously understood for the UK national debt (£2.2tn). The hypothetical crisis about which I pontificated was not a traditional "sovereign debt crisis" (where there is inadequate demand for fresh government debt). The sort of crisis I had in mind was sort-of the opposite... where, investors find that they have taken more risk than they would have otherwise done... because the supply-side of investment opportunity is skewed towards higher risk. Obviously, I don't have any clear description of how any such scenario might play out.)
  9. Hmmm... Do you believe those figures? (They surprised me...) Sure, I expected that the BoE would have a lot of government debt on its balance sheet - but I had anticipated *much* more corporate debt. The practise announced as being “QE” involved “doing the twist” as Bernanke put it… buying long-dated low-risk commercial debt in order to reduce the rate of curvature of the yield curve – i.e. reduce the rate of increase of the rate of return with respect to increasing maturity. I had anticipated that a significant proportion of the QE instruments would need to be non-sovereign – in order to avoid a significant spread emerging between longer-term sovereign and longer-term commercial yields. When the US started QE, they announced an initial scale of $675bn – if I remember correctly… and assume that figure had grown in subsequent rounds. I can’t find a note of the scale of initial QE for Britain… but I’d have expected QE scale to be roughly proportional to GDP, or population, or something like that. My absolute minimum expectation was ~£100bn commercial debt – and I’d not have been surprised at a much larger figure. Having £875bn sovereign debt on the BoE balance sheet is significant because it suppresses interest rates – but I feel that it is much less significant than private sector debt would be. Given BIS rules, sovereign debt is the easiest to warehouse in the shadow banking system. Consider Cuthbert-Worknottle – a well-connected ambitious aristocrat: Cuthbert could launch a leveraged investment fund and use it to buy UK sovereign debt... which he could finance at face-value using short-term commercial bank loans to a single-purpose limited liability company. It seems plausible that commercial banks would fund his venture (at very low rates of interest) and that Cuthbert might be motivated by potential recognition... in elite circles... making him prepared to run the operation without expecting big profits. It wouldn’t need much capital... as sovereign debt is the soundest of collateral instruments… Cuthbert might even be granted a banking licence. If this were to happen… there might be no sovereign debt left on the Central Bank balance sheet… however, the real economy would, likely, remain unaffected. Yields would only actually rise if yield expectations rise – and that’s only realistic if it also seems likely, to key-players, that the BoE would not intervene should yields rise in future. There being ‘Only £20bn’ corporate debt on the BoE balance sheet suggests, to me, a much deeper question: Which legal entities have this extraordinary support for their commercial debt? Is it debt from commercial banks – like RBS? Is it debt from some other close-to-government organizations? What proportion of the outstanding debt, of any individual private-sector debtor, is on the BoE balance sheet? A further question that this news made me consider concerns something I’m going to call “financial stability” – though I’m unclear if I mean the same by those words as central bankers. [Insert-half-baked-disclaimer here…] I always thought that there needed to be a range of financial assets in order meet the structure of investor demand… so, for example, a young investor might choose extremely risky speculative options for pension investments… because loosing a substantial proportion of 5 years’ pension savings (with 40 years returns and savings yet to happen) would be less of a catastrophe than losing a substantial proportion of 45 years of saving – just before retiring. Given that senior generations are said to be more risk adverse, and also said to hold the vast majority of the capital… I would have expected plenty of demand for low-risk investments… including sovereign debt… but this doesn’t seem likely to be a good assessment... if so substantial a portion of the national debt sits on the BoE balance sheet. I would like to find out: Does this BoE balance sheet mean that senior generations’ pensions are not (to the same extent as one might have traditionally expected) invested in super-low-risk instruments? If so, does this mean that this demographic might be on the hook to accept big losses if there were to be a substantial correction in equity prices (or the commercial bond market)? If so, does this mean that a big asset-price correction (even if not in real-estate) should seem a real possibility? I still cling to the M0,M1,M2,M3,[M4] model of ‘types of money’… with M0 being base-money… and M3/M4 being broad-money. Broad money expands (and perhaps contracts) most readily. Broad money requires active management of the risks associated with debts - while narrow money requires far less. While M0 – as a statistic - was broken by BoE policy changes in 2006… it has a the closest relationship with sovereign debt – while M3/M4 are least closely related. Does holding sovereign debt on the BoE balance sheet actually starve the financial system of something analogous to M0? Could this, by itself, be enough to trigger another crisis?
  10. You claimed that it is not possible to force someone to borrow. Several people commented. My comment takes a higher-level perspective. There is no meaningful distinction between someone being forced and to something... and a situation in which someone does the same something because they perceive it necessary for reasons that independent observers fail to properly appreciate.
  11. This statement fundamentally fails to appreciate what money is. I'd be prepared to go so far as to say that mortgage payments can't be made without belief. Furthermore, the right beliefs (by the right parties) are probably also sufficient.
  12. While I recognise the erudite debate between the labels 'coerced' and 'forced'... I think a more interesting debate would deal with the harder philosophical question: Is it possible to coerce or force anyone to borrow? Perhaps, if the borrower is not adamant that they are freely entering into the arrangement, the arrangement has no legitimacy? If the agreement has no legitimacy, then neither does the debt. So... how might we establish that the arrangement was one sought by the borrower and willingly entered into? Do we have to demonstrate that the borrower had 'Free Will'? If so, then we're in a heap of trouble... How could we ever even begin to reason about whether such a thing as 'Free Will' even exists? Might we all be nothing more than meaty machines reacting to our environment? Whenever I think about this, I find myself struggling to justify the western premise that debt must be absolute/real. Sure, we'd be in a sorry state if feckless "borrowers" felt they were entitled to just keep anything they borrowed. Similarly, however, I think we're in a mess if the lender takes no meaningful risk when making a loan. Neither extreme seems satisfactory. If debts were not 'absolute', but placed symmetric responsibility on the lender and borrower, then - maybe - we'd see far fewer loans and far more sensible asset prices. Sure, such a change would 'destroy' vast swathes of 'capital' - but... maybe... this 'capital' was only an illusion in the first place? Perhaps I am barking up the wrong tree... but it feels, to me, that the problem we face may be that the complexity of contemporary contracts, in practise, likely leaves many of them completely unenforceable. If this is the case, then banks can not determine their own solvency - let alone make good decisions to guide a vibrant economy; individuals can't effectively trade assets and the free-market economy will, as a consequence, be incapable of meeting anyone's requirements. To make matters worse, I strongly suspect that the institutions of law, order and justice are wholly incapable of dealing with any of the epic mess that now permeates our entire reality.
  13. You don't need a buying class with limitless income... as debt service costs can be arbitrarily low. You need a successive generations who can be coerced to accept ever greater debt. You also need a financial system willing to provide credit to these debtors at sufficiently low cost that their perpetual debt can appear sound on bank balance sheets. All you need is sufficiently widespread belief. The only question that really matter is this: When will sufficiently many people stop believing - and, if/when that happens... what will be the next narrative?
  14. I agree that we ended up with the hardest possible Brexit. I do not, however, lay responsibility for that exclusively at the door of those who voted to leave the EU. We all enabled lunatics to run the asylum. National elections followed the referendum.
  15. I can only agree about this (potentially) being important news. I noticed Reuters reporting, yesterday, saying that the Right had lost out in these 'local'? 'regional'? elections. I also have the feeling that the electorate may be losing faith in the system we label as being democratic. I find it far harder to predict what the outcome would be. When the Church started to lose its absolute dominant position - at around the time of the Enlightenment - we saw the rise of the secular state. I suspect that - driven by mismanagement of the global financial system - we might be witnessing (from a perspective a little too close to get a clear picture) a similarly epic change.
  • Create New...

Important Information

We have placed cookies on your device to help make this website better. You can adjust your cookie settings, otherwise we'll assume you're okay to continue.