Winston Wolf Posted February 6, 2009 Share Posted February 6, 2009 financial assets like CDOs, paper supposed to have a value, but which banks cant now sell as nobody else wants them. Exchanging their debt for cash? So the bank get rid of potantially toxic debt and get cash to re- lend? Where does the Govt get the money to do this? er do they just print it? And then like share dilution it must devalue the pound and push up import prices? Sorry for all the questions. Quote Link to comment Share on other sites More sharing options...
Winston Wolf Posted February 7, 2009 Share Posted February 7, 2009 "bump" Will someone enlighten me re the question above. Thanks Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 7, 2009 Share Posted February 7, 2009 Exchanging their debt for cash? So the bank get rid of potantially toxic debt and get cash to re- lend?Where does the Govt get the money to do this? er do they just print it? And then like share dilution it must devalue the pound and push up import prices? Sorry for all the questions. they either borrow it by issuing bonds (gilts) which are auctioned by the central bank or raise it through taxation. Government has no money of its own. Quote Link to comment Share on other sites More sharing options...
Harry Sacks Posted February 7, 2009 Share Posted February 7, 2009 "bump"Will someone enlighten me re the question above. Thanks Firstly, the government can't print any money. That is one of the fundamental faults with our monetary system. Our government runs an annual deficit of approx £30 billion. They raise the (to spend on stuff like worthless mortgage derived instruments) extra money by drawing bonds which are auctioned and sold to whoever will buy them. They are offered at a yield commensurate with current expectations for IR, but the yield will be determined by the price realised at auction. If there is no interest from the traditional buyers, pension funds, etc, then the central bank can create the money in exchange for these new bonds. The problem with doing this is that the rest of the market gets wind and loses confidence in the currency, sells it, and makes it worth less and ultimately worthless. IMO this is the likely scenario. Quote Link to comment Share on other sites More sharing options...
Methinkshe Posted February 7, 2009 Share Posted February 7, 2009 Firstly, the government can't print any money. That is one of the fundamental faults with our monetary system. Our government runs an annual deficit of approx £30 billion. They raise the (to spend on stuff like worthless mortgage derived instruments) extra money by drawing bonds which are auctioned and sold to whoever will buy them. They are offered at a yield commensurate with current expectations for IR, but the yield will be determined by the price realised at auction. If there is no interest from the traditional buyers, pension funds, etc, then the central bank can create the money in exchange for these new bonds. The problem with doing this is that the rest of the market gets wind and loses confidence in the currency, sells it, and makes it worth less and ultimately worthless. IMO this is the likely scenario. Yes, this is received wisdom, with which I agree. But do you think it is possible for governments through manipulation and/or withholding of relevant statistics, or any other device, for that matter, to keep the bond market uniformed for long enough to create money without immediately sparking off inflationary expectations? Quote Link to comment Share on other sites More sharing options...
Harry Sacks Posted February 7, 2009 Share Posted February 7, 2009 Yes, this is received wisdom, with which I agree.But do you think it is possible for governments through manipulation and/or withholding of relevant statistics, or any other device, for that matter, to keep the bond market uniformed for long enough to create money without immediately sparking off inflationary expectations? Yes. I guess it depends how scared the market is. Yields are low not just because of IR expectations but fear of putting the money anywhere else. At the moment it seems to be a race to devalue all currencies. However, this won't be fully realised until the bond market sells off - potentially devastating. Quote Link to comment Share on other sites More sharing options...
Mixle Posted February 7, 2009 Share Posted February 7, 2009 Hi All, Injin, I've been lurking HPC for years and find your posts very interesting. If as you say, credit is given in exchange for a signature, then how can credit card companies reduce or remove this credit ("credit limit"), after the transaction? Is it because the contract is invalid in the first place, or...? Thanks, Mixle Quote Link to comment Share on other sites More sharing options...
Winston Wolf Posted February 7, 2009 Share Posted February 7, 2009 they either borrow it by issuing bonds (gilts) which are auctioned by the central bank or raise it through taxation.Government has no money of its own. Thanks.... I understand but this leads me to another question, If they borrow today for example a billion what interest rate would they offer? I am suspecting it is pretty paltry and not worth the risk. What happens if no one wants the gilts at the rates offered? Are they then forced to up it? I wouldnt lend GB PLC any money or at least it would be at a very high apr% So if it pans out like it surely will they are going to pay more for thier borrowing so then how can they keep the BOE their rate so low? Is this just a simple case of bad business borrow at X and lend out at x - 5%? Aka they will be broke if they carry this on for very long? Your answers are very much appreciated. Quote Link to comment Share on other sites More sharing options...
Harry Sacks Posted February 7, 2009 Share Posted February 7, 2009 (edited) Thanks.... I understand but this leads me to another question,If they borrow today for example a billion what interest rate would they offer? I am suspecting it is pretty paltry and not worth the risk. What happens if no one wants the gilts at the rates offered? Are they then forced to up it? I wouldnt lend GB PLC any money or at least it would be at a very high apr% So if it pans out like it surely will they are going to pay more for thier borrowing so then how can they keep the BOE their rate so low? Is this just a simple case of bad business borrow at X and lend out at x - 5%? Aka they will be broke if they carry this on for very long? Your answers are very much appreciated. The IR they offer on bonds depends on the maturity date and will reflect the current yield curve. The actual yield will be realised only when the the bond is sold. If there are no buyers, the BoE can step in and buy at the offered yield. The government are not forced to "up" the yield. The market sets the yield. The BoE maybe forced to "up" IR if inflation rises beyond target or its forecasts for inflation look high. However, the subtleties of the Governors utterances maybe sufficient to change the yield curve temporarily. Edited February 7, 2009 by dom Quote Link to comment Share on other sites More sharing options...
uncle rogi Posted February 7, 2009 Share Posted February 7, 2009 ok fine, QE is being done and the gilts are being sold to fund it etc, however what happens when the gilts do not sell ?do the assets being bought with the proceeds of the gilt sales not get bought in which case are institutions vunerable to default/collapse etc then does the force majeur aspect of goverment kick in and result in getting the BOE to print money to buy the gilts on the assumption that the little bit of true inflation just created will be justified due to the systemic risks of not keeping the asset buying program in operation ? and so forth you follow me here...the systemic risk in one direction is deflationary spiral domino effect etc but the other is hyperinflation/a collpase in confidence of sterling....is it not.. this is the path we are concerned with as some of us belive that this is the plan to default via inflation not deflation because either way the system will collapse see the mises quote in injins signature for details.....only the inflation option buys more time and is seen to be "doing something" to the general uninformed masses who dont know QE from QI (or even what QI is lol) the thing is here at this point the historical similarities are getting a little unsettling do you not think ? notice how the main points of the text above relate to things outside the control of economists which EDM either ignores(like this post) or makes fun of (calling people "internet nuts") , interesting,replying to this post is dipping your toe in geopolitics but that wont kill you EDM it might just shed some light on your political and moral beliefs/convictions. Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 7, 2009 Share Posted February 7, 2009 Hi All,Injin, I've been lurking HPC for years and find your posts very interesting. If as you say, credit is given in exchange for a signature, then how can credit card companies reduce or remove this credit ("credit limit"), after the transaction? Is it because the contract is invalid in the first place, or...? Thanks, Mixle credit issued to a consumer with a credit card usually is repayable on demand if you break a contract term. same with a mortgage. Credit limit, ie how much the bank is prepared to risk with you is set by the bank. Quote Link to comment Share on other sites More sharing options...
Winston Wolf Posted February 7, 2009 Share Posted February 7, 2009 The IR they offer on bonds depends on the maturity date and will reflect the current yield curve. The actual yield will be realised only when the the bond is sold. If there are no buyers, the BoE can step in and buy at the offered yield. The government are not forced to "up" the yield. The market sets the yield. The BoE maybe forced to "up" IR if inflation rises beyond target or its forecasts for inflation look high. However, the subtleties of the Governors utterances maybe sufficient to change the yield curve temporarily. Ok please stay with me whilst i follow this through as it is new to me. Either the gilts are bought externally (will have to be offered at a decent rate) or the BOE step in and give the govt the money. Where does the BOE get its money? Presumably it has a reserve and also makes money by lending it out. That means to me simply the reserve will go down because they arent going to make any money lending it out at the current rates... is this correct? And as a consequence of the gilts not being bought it will put in headlights that there is zero confidence in GB plc. everyone will sell pounds and the currency will devalue horrendously..... inflation will go really high along with interest rates. Quote Link to comment Share on other sites More sharing options...
Methinkshe Posted February 7, 2009 Share Posted February 7, 2009 credit issued to a consumer with a credit card usually is repayable on demand if you break a contract term. same with a mortgage. Credit limit, ie how much the bank is prepared to risk with you is set by the bank. Somehow, I don't think Mixle is looking for the orthodoox answer but rather for the Injin answer which - tbh, has merit - if one is sufficiently armed to argue the case. Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 7, 2009 Share Posted February 7, 2009 Ok please stay with me whilst i follow this through as it is new to me. Either the gilts are bought externally (will have to be offered at a decent rate) or the BOE step in and give the govt the money. Where does the BOE get its money? Presumably it has a reserve and also makes money by lending it out. That means to me simply the reserve will go down because they arent going to make any money lending it out at the current rates... is this correct? And as a consequence of the gilts not being bought it will put in headlights that there is zero confidence in GB plc. everyone will sell pounds and the currency will devalue horrendously..... inflation will go really high along with interest rates. the Bank of England can freely exchange gilts for cash ( current account). normally the gilts are exchanged by financial institutions and are backed by debt. Paying cash to the government directly means the issued cash (current account) is debt free and in theory, valueless. Quote Link to comment Share on other sites More sharing options...
Winston Wolf Posted February 7, 2009 Share Posted February 7, 2009 (edited) the Bank of England can freely exchange gilts for cash ( current account). normally the gilts are exchanged by financial institutions and are backed by debt.Paying cash to the government directly means the issued cash (current account) is debt free and in theory, valueless. Thanks, so in effect they act as a middleman between the govt and the financial institutions? If the financial institutions dont buy from the BOE then the BOE runs down its current account? Edited February 7, 2009 by Mr Grumpy Quote Link to comment Share on other sites More sharing options...
Mixle Posted February 7, 2009 Share Posted February 7, 2009 credit issued to a consumer with a credit card usually is repayable on demand if you break a contract term. same with a mortgage. Credit limit, ie how much the bank is prepared to risk with you is set by the bank. Let us assume that no contract terms are broken and no purchases are made with the credit. Somehow, I don't think Mixle is looking for the orthodoox answer but rather for the Injin answer which - tbh, has merit - if one is sufficiently armed to argue the case. I am indeed! Though not arguing any cases. I sure would like to comprehend what on earth is going on. Quote Link to comment Share on other sites More sharing options...
Methinkshe Posted February 7, 2009 Share Posted February 7, 2009 (edited) Let us assume that no contract terms are broken and no purchases are made with the credit.I am indeed! Though not arguing any cases. I sure would like to comprehend what on earth is going on. Well, Injin bats so far from left field that he comes around and meets the rest of us in the middle and behind the back! Edited February 7, 2009 by Methinkshe Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 7, 2009 Share Posted February 7, 2009 Thanks, so in effect they act as a middleman between the govt and the financial institutions?If the financial institutions dont buy from the BOE then the BOE runs down its current account? the bank of england exchanges promises to pay for the gilt. they are the originators of the IOUs (money) They needent stock any as one of their tasks is to convert assets into money. The money is created when the exchange is made. Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 7, 2009 Share Posted February 7, 2009 Let us assume that no contract terms are broken and no purchases are made with the credit.I am indeed! Though not arguing any cases. I sure would like to comprehend what on earth is going on. I dont understand the question. The bank can cancel an unused card any time it likes, it can drop, or raise the credit limit any time it likes. remember, the credit they issue is not money, its credit, and money is only needed to settle the borrowers "swipes" Quote Link to comment Share on other sites More sharing options...
Winston Wolf Posted February 7, 2009 Share Posted February 7, 2009 (edited) the bank of england exchanges promises to pay for the gilt. they are the originators of the IOUs (money) They needent stock any as one of their tasks is to convert assets into money. The money is created when the exchange is made. Stay with me Bloo thanks. Scenario other financial institutions buy the gilts from BOE is the following basically correct? Please change where applicable. 1. Assets be they financial or other (say owned by RBS for want of a better company) sold to government for money. 2. Govt raises money by offering gilts which they exchange for IOU's (money) from BOE. 3. BOE converts gilts into money via other Financial institutions giving BOE money to honour the IOU's issues to govt Scenario other financial institutions dont want to buy the gilts. How are they then enticed to buy the gilts? or what then happens if no takers? Edited February 7, 2009 by Mr Grumpy Quote Link to comment Share on other sites More sharing options...
Luke Skywalker Posted February 7, 2009 Share Posted February 7, 2009 A bail-out would mean that credit has been priced correctly in relation to cash and that overall prices will remain stable.A default would mean that credit has been mispriced relative to cash and that overall prices will strengthen. Neither scenario results in hyperinflation when inflation is a description of prices, not the supply of narrow money... What's "narrow money" please? Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 7, 2009 Share Posted February 7, 2009 Stay with me Bloo thanks.Scenario other financial institutions buy the gilts from BOE is the following basically correct? Please change where applicable. 1. Assets be they financial or other (say owned by RBS for want of a better company) sold to government for money. 2. Govt raises money by offering gilts which they exchange for IOU's (money) from BOE. 3. BOE converts gilts into money via other Financial institutions giving BOE money to honour the IOU's issues to govt Scenario other financial institutions dont want to buy the gilts. How are they then enticed to buy the gilts? or what then happens if no takers? 1. I dont think the gov buys financial assets in the context of money creation. It creates gilts for sale, and the value of these is derived from the lieklyhood of taxpayers to fulfil the contract at end of term. 2. the money would come from the pruchasers of the gilts 3. Gilts are as good as cash (current account) and the BoE will gladly exchange. Scenario.....a desparate government may resort to printing, as did the confederate states in the civil war, the bonds they sold to financiers becoming worthless, so they printed, making the confederate dollar worthless, as an example. course, THEY had a war to finance. Quote Link to comment Share on other sites More sharing options...
Winston Wolf Posted February 7, 2009 Share Posted February 7, 2009 Scenario.....a desparate government may resort to printing, as did the confederate states in the civil war, the bonds they sold to financiers becoming worthless, so they printed, making the confederate dollar worthless, as an example. course, THEY had a war to finance. They can print (devaluation) or raise the yield on the gilt which will result in higher taxes.... is that corect? Quote Link to comment Share on other sites More sharing options...
Mixle Posted February 7, 2009 Share Posted February 7, 2009 I dont understand the question. The bank can cancel an unused card any time it likes, it can drop, or raise the credit limit any time it likes.remember, the credit they issue is not money, its credit, and money is only needed to settle the borrowers "swipes" I do apologise. I have a very limited grasp of the matter myself. Credit is created from the borrower's promise to pay. Why does a credit card company get to determine the amount of credit ("credit limit")? How can the amount be spontaneously changed by bank? The borrower did not promise to pay the newly set amount. Quote Link to comment Share on other sites More sharing options...
Bloo Loo Posted February 7, 2009 Share Posted February 7, 2009 I do apologise. I have a very limited grasp of the matter myself.Credit is created from the borrower's promise to pay. Why does a credit card company get to determine the amount of credit ("credit limit")? How can the amount be spontaneously changed by bank? The borrower did not promise to pay the newly set amount. the limit is just that, a limit, so will be determined by a number of factors about the borrower, age, income, debt defaults and so on. The borrower is contracted to repay what he borrows, plus interest if any, by a set minimum before certain time points. Quote Link to comment Share on other sites More sharing options...
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