The Gilts Thread

[FreeTrader]

thats another point we always look at our own country very negatively (rightly so). but as you say greece and italy get away with borrowing like madmen. japans borrowing is at 200% of gdp? i think we started off at 40% and rapidly rising? not something im comfortable with . but it is ot zimbabwe as many would like you to think

I meant to reply to this earlier and got distracted.

One thing worth keeping in mind when you constantly hear that Japan has outstanding govt liabilities of nearly 200% of GDP is that these are gross liabilities. The situation looks somewhat different when you consider net liabilities.

The Japanese government owns a number of agencies that hold financial assets that have been bought during its support programs, and these agencies also own Japanese Government Bonds. These assets offset its liabilities, and also reduce the interest burden. The same thing holds for other countries, all of whom own various offsetting assets.

Although the figures aren't always comparable, this is arguably a far more relevant metric for comparing debt levels amongst nations and also assessing the sustainability of a country's fiscal position.

The point is however that this doesn't make Japan's situation look pretty – it still has liabilities approaching 100% of GDP, and these liabilities are rising very rapidly. Rather it counteracts the argument used by many that the US and the UK can afford to rack up high government debt because Japan has managed to survive with debt over four times as high.

Here's a table from an OECD Excel file (from Outlook 85, downloadable from this page) which shows net govt liabilities. Japan is forecast to go over 100% of GDP in 2010, with the US hitting 69% and the UK 61%.

I'm posting the gross liability table as well for comparison purposes.

Edit: look at the difference between the UK and Norway on a gross and net basis.

Edited August 7, 2009 by FreeTrader

[three pint princess]

Looking at the RBS release on their accounts they mentioned valuing RMBS by the spread on Government Debt

The RMBS of Dutch and Spanish

originated mortgages guaranteed by those governments are valued using the credit spreads of the

respective government debt and certain assumptions made by the Group, or based on observable prices

from Bloomberg or consensus pricing services.

http://www.investors.rbs.com/common/downlo...cement_FULL.pdf

How do we untangle the Government backing , that which used to be a vague promise to back someone like Freddie and Fannie is now explicit. So how do banks who lent money or purchased

the ResidentialMBS or CMBS work out the risk when something like CDS will show a large gap for instance, between the risk of the UK Government defaulting and RBS defaulting. Yet there must be money to

be made on the spread on the Asset purchase facility.

It's almost as if the Governments are trying to force money through the system just based on the return.

[Toilet-Currency]

Great tables FreeTrader- thanks.

I've been looking at the Bank's fan charts. As per post @988, there must be something lurking in the quarterly inflation report that provided cover for the QE increase. But looking at the CPI fan charts from the previous quarterly reports, we "should" be sub 1% on the CPI by now - which we presuably are not.

Also, the width of the fan that sits above the 2% target increased from Feb to May reports. Since the onset of the crisis, CPI has remained consistently higher than the centre part of the fan. (Well what are the odds of that)?

Sooner or later, it will be no use the BofE claiming that they expect inflation to trend lower in the longer term, if an ever-greater section of the fan sits above the 2% target even as growth falls below their forecasts. What then?

Change the inflation target?

Strip out food and energy?

Continue with QE without the cover of below-target CPI?

We all know that there is no truly "independent" monetary policy but the August report may tell how blatant Merv will be in placing politics/growth ahead of the BofE's responsibility to target CPI.

May fan charts

http://www.bankofengland.co.uk/publication...rt/ir09may5.pdf

[FreeTrader]

I've been looking at the Bank's fan charts. As per post @988, there must be something lurking in the quarterly inflation report that provided cover for the QE increase. But looking at the CPI fan charts from the previous quarterly reports, we "should" be sub 1% on the CPI by now - which we presuably are not.

Also, the width of the fan that sits above the 2% target increased from Feb to May reports. Since the onset of the crisis, CPI has remained consistently higher than the centre part of the fan. (Well what are the odds of that)?

Sooner or later, it will be no use the BofE claiming that they expect inflation to trend lower in the longer term, if an ever-greater section of the fan sits above the 2% target even as growth falls below their forecasts. What then?

Change the inflation target?

Strip out food and energy?

Continue with QE without the cover of below-target CPI?

We all know that there is no truly "independent" monetary policy but the August report may tell how blatant Merv will be in placing politics/growth ahead of the BofE's responsibility to target CPI.

May fan charts

http://www.bankofengland.co.uk/publication...rt/ir09may5.pdf

Well spotted TC.

The mid-range of their projection for CPI in Q1 2010 is around 1.5%, but as lufc was alluding to in #991, it looks like we're going to be closer to 3% than 2% (to hit 1.5% CPI needs to fall nearly 1% over the next six months, and that's despite the coming rise in VAT). Once again there's a fair chance we'll be outside the Bank's 90th percentile within a few months of the forecast (amazing how many times that happens isn't it?).

I'm trying to keep an open mind on this until we get the Inflation Report next week because I'm figuring they must have some info that will enable them to justify the QE expansion in the face of a coming CPI spike. Maybe though we'll just get Merv sitting there and assuring everyone that even though inflation will go well over target in the short term, the MPC is more concerned with the longer-term outlook, and estimates of the output gap suggest that there are still significant weaknesses in the UK economy which require stimulatory monetary measures to counteract.

(Sheesh, I'm even beginning to sound like him. I can be Merv...)

"...but I can absolutely assure you that the MPC is fully committed to maintaining price stability, and we will not hesitate to take whatever measures are needed to ensure that the inflation target is met over the longer term."

I agree with you, it's all beginning to sound rather thin and unconvincing, and you've got to wonder how long the gilts market will buy it. I'm not sure that they will be able to change the remit though or change the target measure. You only get to lose your credibility once, and it can take a generation to get it back (if ever).

Re Mervyn and politics, I'm somewhat ambivalent about this. It seems to me he has a strong motive for supporting Cameron because the Tories are proposing to give the BoE significant extra powers. I'm not sure what he stands to gain from giving the economy a short-term pump to see Labour re-elected. Of course he may have been outvoted on the latest QE extension.

[As an aside, don't you just love it in chart 5.1 where they make it look as though their past GDP projections were smack on target. Classic. Those guys have got no shame.]

[MOP]

[As an aside, don't you just love it in chart 5.1 where they make it look as though their past GDP projections were smack on target. Classic. Those guys have got no shame.]

Pathetic.

[redwing]

[As an aside, don't you just love it in chart 5.1 where they make it look as though their past GDP projections were smack on target. Classic. Those guys have got no shame.]

Nice aside. There was a post on here a couple of weeks back showing their May 2008 GDP projection against ONS outcome which showed just how wrong their forecasting was.

I think table 5.2 is also quite interesting. It shows GDP growth expections for Q2 2010. Whilst their central prediction is for around +1%, the distribution of probabilities is not quite normal; there is quite a skew to the negative, so that -4% is as likely as +3%. Are they hedging their bets? The most positive outcome is 2% above the mean and the worst is 5% below the mean.

[Traktion]

Ok, so the monetary base was about £50bn before the crisis. After this round of QE, it will be about £225bn - over 4 times larger. We have moved M4 (@ £1.5tr) from being over 30 times M0, to being only a little over 6 times. This is putting the power of money creating back in the hands of the government and away from the private banks.

This money is just replacing gilts which we would have had to pay interest on with gilts which we don't. This money is then being used to replace the contracting money supply (M4) in the economy.

How will this cause inflation? If we tighten up the bank reserve ratios in lock step, we well simply replace credit with debt free, interest free money. With the reserve ratios increased, the banks will lose the power to cause booms/busts, inflation/deflation and we will end up with a more stable money supply.

However, it is key that the bank reserve ratios are tightened up at the same time. If the government doesn't do this, the banks will start multiplying this new base money up and potentially (ie. if they find a bubble to lend into) causing massive inflation.

The whole system of selling gilts at interest is nuts anyway. We don't need interest to allow future productivity to be borrowed for today by our governments - it just costs more with interest being syphoned off. The sooner everyone wakes up to this, the better a chance we have of cutting these private bankers out of controlling the money supply.

[FreeTrader]

Ok, so the monetary base was about £50bn before the crisis. After this round of QE, it will be about £225bn - over 4 times larger. We have moved M4 (@ £1.5tr) from being over 30 times M0, to being only a little over 6 times. This is putting the power of money creating back in the hands of the government and away from the private banks.

This money is just replacing gilts which we would have had to pay interest on with gilts which we don't. This money is then being used to replace the contracting money supply (M4) in the economy.

How will this cause inflation? If we tighten up the bank reserve ratios in lock step, we well simply replace credit with debt free, interest free money. With the reserve ratios increased, the banks will lose the power to cause booms/busts, inflation/deflation and we will end up with a more stable money supply.

However, it is key that the bank reserve ratios are tightened up at the same time. If the government doesn't do this, the banks will start multiplying this new base money up and potentially (ie. if they find a bubble to lend into) causing massive inflation.

The whole system of selling gilts at interest is nuts anyway. We don't need interest to allow future productivity to be borrowed for today by our governments - it just costs more with interest being syphoned off. The sooner everyone wakes up to this, the better a chance we have of cutting these private bankers out of controlling the money supply.

Yeah, the idea of raising the reserve ratio rather than unwinding QE is definitely an option (some might argue that this is what QE is all about). AliveAndKicking put this forward as a rationale very early in the thread. I seem to recall this was an exit strategy discussed in the WSJ a few weeks ago for the Fed as well.

[Traktion]

Yeah, the idea of raising the reserve ratio rather than unwinding QE is definitely an option (some might argue that this is what QE is all about). AliveAndKicking put this forward as a rationale very early in the thread. I seem to recall this was an exit strategy discussed in the WSJ a few weeks ago for the Fed as well.

I have slowly learning about how the monetary system works and it is conclusion I arrived a few weeks back (I posted elsewhere about it too). To my astonishment, I realised Bill Still suggested the same idea in Money Masters about 15 years ago!

My only worry is that the reserve ratios will not be tightened up, but we must educate people that QE + high reserve ratios is the most desirable result of all. I just hope that the BoE and the treasury are in some way ahead of the game and looking out for us, rather than the bankers. I live in hope!

IMO, we should tighten them right up to full reserve banking and consign this whole lunatic episode in banking to room 101! I will be watching carefully for any moves on the reserve ratio front - if it starts to tighten, we may be on to something!

[Toilet-Currency]

As an aside, don't you just love it in chart 5.1 where they make it look as though their past GDP projections were smack on target. Classic. Those guys have got no shame.

It's all in the small print - fetch the microscope!

Another funny thing is in the May report, the word 'commodity' appears 5 times and always in conjunction with 'falls' or 'lower'. Those guys should start a fund

My problem with the current policy (not just QE, but the low base rate too) is that it is insanely cheap and easy for anyone (not just banks) to finance a punt on the stock & commodity markets, but not very cheap or easy to get a business loan. Lack of separation between retail and investment banking means that capital markets businesses of the latter are crowding out real economy lending of the former.

I know this has been said many times before on the site but just thought I'd add it to the (eminently sensible) ideas about reserves.

[Democorruptcy]

I meant to reply to this earlier and got distracted.

One thing worth keeping in mind when you constantly hear that Japan has outstanding govt liabilities of nearly 200% of GDP is that these are gross liabilities. The situation looks somewhat different when you consider net liabilities.

The Japanese government owns a number of agencies that hold financial assets that have been bought during its support programs, and these agencies also own Japanese Government Bonds. These assets offset its liabilities, and also reduce the interest burden. The same thing holds for other countries, all of whom own various offsetting assets.

Although the figures aren't always comparable, this is arguably a far more relevant metric for comparing debt levels amongst nations and also assessing the sustainability of a country's fiscal position.

The point is however that this doesn't make Japan's situation look pretty – it still has liabilities approaching 100% of GDP, and these liabilities are rising very rapidly. Rather it counteracts the argument used by many that the US and the UK can afford to rack up high government debt because Japan has managed to survive with debt over four times as high.

Here's a table from an OECD Excel file (from Outlook 85, downloadable from this page) which shows net govt liabilities. Japan is forecast to go over 100% of GDP in 2010, with the US hitting 69% and the UK 61%.

I'm posting the gross liability table as well for comparison purposes.

Edit: look at the difference between the UK and Norway on a gross and net basis.

Looking at the countries with a "-" it struck me that from what I can remember they seem to be the same countries I saw in a report about pay inequality by country last week but I cannot remember where I saw it or I would have posted the link. Anyone else know it?

Does this mean that it's the CEO's, city boys and banksters who have sucked all the wealth out of the countries with the highest debt?

[Toilet-Currency]

Looking at the countries with a "-" it struck me that from what I can remember they seem to be the same countries I saw in a report about pay inequality by country last week but I cannot remember where I saw it or I would have posted the link. Anyone else know it?

Does this mean that it's the CEO's, city boys and banksters who have sucked all the wealth out of the countries with the highest debt?

Surely the negatives are countries with large surpluses, social funds or sovreign wealth funds (e.g. Norway) which exceed gross government debt (in the narrowest sense)?

[FreeTrader]

I had a quick look today at the last BoE Inflation Report and I noticed that I was wrong when I mocked the BoE for apparently selectively revising their past GDP projections on their fan chart. I should have read the small print.

I think Toilet-Currency gently hinted that I may have made a mistake, but I missed it, so it's only right that I apologise to the BoE guys for slighting them unjustifiably. Mea culpa.

[daedalus]

I have slowly learning about how the monetary system works and it is conclusion I arrived a few weeks back (I posted elsewhere about it too). To my astonishment, I realised Bill Still suggested the same idea in Money Masters about 15 years ago!

My only worry is that the reserve ratios will not be tightened up, but we must educate people that QE + high reserve ratios is the most desirable result of all. I just hope that the BoE and the treasury are in some way ahead of the game and looking out for us, rather than the bankers. I live in hope!

IMO, we should tighten them right up to full reserve banking and consign this whole lunatic episode in banking to room 101! I will be watching carefully for any moves on the reserve ratio front - if it starts to tighten, we may be on to something!

Ah. But *effective* reserve ratios (or capital ratios to be precise) have tightened.

Formerly, a large part of bank credit multiplications was done through various forms of securitisation, or other financial engineering, largely in order to allow banks to lend at thinner ratios than regulations would otherwise allow.

With the collapse of the securitisation market, banks have had to revert to on-balance sheet lending which does, intrinsically, involve more capital. i.e. Tighter reserve ratios.

This is largely why the shortage of credit has occured. And so the QE isn't an entirely mad way of compensating for this. Of course, if securitisation were to come back in a big way, that might let the cat out of the bag....

[shedfish]

US bond auction cancelled today

[drrayjo]

US bond auction cancelled today

Linkumpoops?

[shedfish]

Linkumpoops?

just on Bloomberg TV - no link yet

[Democorruptcy]

Are they often cancelled or should I be gripped by fear?

[drrayjo]

Are they often cancelled or should I be gripped by fear?

They are in India...

http://economictimes.indiatimes.com/Market...how/4869531.cms

[yellerkat]

Cancelled then completed according to ZeroHedge. LINK.

Today, at 11:00am, the Fed was supposed to close an OMO Purchase of 17 Cusips, with maturities ranging from 2026 to 2039. The original auction was Cancelled according to the NY Fed website. The auction was subsequently completed with a 20 minute closing time delay.

[Har Fast]

Looking at this piece on FT Alphaville re BoE purchases of corporate (rather than Govt) bonds, it's stated that

6. The recent rally in credit indices has coincided with fewer bonds being offered, culminating in no bonds being offered in any auction during the week ending 31st July. As the amount offered has declined it is not a surprise that purchases by the Bank in recent weeks have come almost to a standstill, with a grand total of one bond bought over the past three weeks, amounting to £3m nominal.

So the extended QE funds look like they will flow almost exclusively into gilts. To a cynic, it's getting more and more transparent...

Edited August 11, 2009 by Har Fast

[ccc]

Surely the negatives are countries with large surpluses, social funds or sovreign wealth funds (e.g. Norway) which exceed gross government debt (in the narrowest sense)?

That is what I was thinking..

[Toilet-Currency]

So the extended QE funds look like they will flow almost exclusively into gilts. To a cynic, it's getting more and more transparent...

To be fair, there is bound to be a liquidity preference for gilts. That is why the corporate element was always a tiny fraction of the total QE. Buying £50bn of corporates is easier said than done- especially if they are serious about selling them again!

[MOP]

Cancelled then completed according to ZeroHedge. LINK.

WTF is that all about?

[ccc]

WTF is that all about?

Maybe some of that magic money bought them......