The Gilts Thread

[Ash4781]

any action post inflation report ?

edit:chart 5.4, and 5.5 , 5.6 look interesting. 5.6 in particular.

http://www.bankofengland.co.uk/publication...rt/ir09aug5.pdf

Edited August 12, 2009 by Ash4781

[FreeTrader]

any action post inflation report ?

Prices went up (yields fell) after the report was released.

The biggest move has been at the short end, likely due the Bank's view that inflation will generally be below target over the next couple of years. That suggests short-term IRs will remain low for some time.

edit:chart 5.4, and 5.5 , 5.6 look interesting. 5.6 in particular.

http://www.bankofengland.co.uk/publication...rt/ir09aug5.pdf

What they don't show on those charts is the forward curve beyond 3 years or so. Back in 2005 the market just saw 2.5%-3% inflation for 25 years into the future. Now it sees inflation rising to 4% over the next 10 years and then staying between 4 and 5% for a decade or more after that.

In other words investors don't see any immediate inflationary pressure, but longer term inflation expectations have risen. It's not surprising considering the Bank is being so vague about an exit strategy for QE.

Remember that the Bank of Japan gave clear criteria for the ending of QE and unwound the policy once that criteria had been met. Not so the BoE. As a consequence I don't think many investors seriously believe we'll be seeing the majority of its gilt holdings sold back into the market.

[grumpy-old-man-returns]

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

yep,

too late for the majority though.

[grumpy-old-man-returns]

In other words investors don't see any immediate inflationary pressure, but longer term inflation expectations have risen. It's not surprising considering the Bank is being so vague about an exit strategy for QE.

that's because they don't plan to ever stop it.

thanks for the quality info & evaluation as always FreeTrader. As someone else commented I would love to see you (& a couple of others in your bracket) throwing questions at Swervy Merv today.

on a seperate note this must be painful for Merv as I think he is a very clever bloke, but obviously his morals/ethics will go down in history the same as the rest of the swindling fookers.

Edited August 12, 2009 by grumpy-old-man-returns

[Democorruptcy]

What they don't show on those charts is the forward curve beyond 3 years or so. Back in 2005 the market just saw 2.5%-3% inflation for 25 years into the future. Now it sees inflation rising to 4% over the next 10 years and then staying between 4 and 5% for a decade or more after that.

Do you think interest rates will go up then as they should? Or will they decide that inflation targeting isn't a good idea and blame the recession on it. Then they won't have to put rates up and just rob savers even more.

[libspero]

any action post inflation report ?

This graph is quite telling.. but nothing we didn't already know.

[bill still]

Wow, this is an eye opener.

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.

[Timm]

Wow, this is an eye opener.

Thanks bill, I'd missed that exchange. Perhaps I can return the favour by pointing out Traktion's next post (my bold):

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!

I've been groping my way to a similar ideal for some weeks. (Hence my Basel II thread etc). I'm not sure if it is galling or encouraging to find others on the forum had already thought of it, and that you did 15 years ago!!! Anyway, I might as well share why I was thinking along these lines: I was trying to work out why Gordon Brown is behaving like a man with a crusade, when to everyone else he looks like a sad, failed loser. Is it just possible that this was his great socialist plan, to wrest at least some power from the banks and end boom and bust?

I know, it's a crazy idea, but I like crazy ideas.

[Timm]

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.

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....

Is there any milage in suggesting that there were other reasons that the effective reserve ratios might have tightened, with the adoption of new banking regulations in the last few years that require greater disclosure?

EDIT: If Traktion's figures are right, my Basel II idea was an utter non starter. Have we really increased the base money supply by about 500%*?

*450% or 550% depending if you take the QE total approved or the total spent.

Edited August 12, 2009 by Timm

[bill still]

Well thanks for the encouragement. MM pretty much fell on deaf ears, but it's sold better and better for the last 3.

I'm hoping this new film will make the topic more accessible #1 because it's half MM's length.

It is not galling to me at all. Do you know how lonely it's been out there on the convention and talk show circuit arguing endlessly with goldbugs who can't even get right what the US Constitution says about money creation and value? When Ellen Brown came on the scene I rejoiced. When I heard of this forum, I rejoiced. You have crazies here like Injin and the other anarchists, but you also have a bunch of well informed folk.

Now, about Brown. This is total news to me. I really know so little of your situation in Britain. Help me. Apparently BoE is issuing debt free money? How? Since when? Is that an effect of the nationalization?

bill

Thanks bill, I'd missed that exchange. Perhaps I can return the favour by pointing out Traktion's next post (my bold):

I've been groping my way to a similar ideal for some weeks. (Hence my Basel II thread etc). I'm not sure if it is galling or encouraging to find others on the forum had already thought of it, and that you did 15 years ago!!! Anyway, I might as well share why I was thinking along these lines: I was trying to work out why Gordon Brown is behaving like a man with a crusade, when to everyone else he looks like a sad, failed loser. Is it just possible that this was his great socialist plan, to wrest at least some power from the banks and end boom and bust?

I know, it's a crazy idea, but I like crazy ideas.

[Guest Daddy Bear]

Thanks bill, I'd missed that exchange. Perhaps I can return the favour by pointing out Traktion's next post (my bold):

I've been groping my way to a similar ideal for some weeks. (Hence my Basel II thread etc). I'm not sure if it is galling or encouraging to find others on the forum had already thought of it, and that you did 15 years ago!!! Anyway, I might as well share why I was thinking along these lines: I was trying to work out why Gordon Brown is behaving like a man with a crusade, when to everyone else he looks like a sad, failed loser. Is it just possible that this was his great socialist plan, to wrest at least some power from the banks and end boom and bust?

I know, it's a crazy idea, but I like crazy ideas.

I was trying to work out why Gordon Brown is behaving like a man with a crusade, when to everyone else he looks like a sad, failed loser. Is it just possible that this was his great socialist plan, to wrest at least some power from the banks and end boom and bust?

No......

[bill still]

I don't know about you guys, but over here in the past couple of years, "reserve ratios" are a joke. Nothing can be relied upon. And think of it, throttling in reserve ratios for real would have a direct effect on the bottom line of commercial banks. They will fight to the end to prevent this. Such a fight happened in 1832-36 when Prez. Andrew Jackson killed the 2nd Bank of the US.

Are reserve ratios really being reduced? To what? From 10-to-1, to what?

Is there any milage in suggesting that there were other reasons that the effective reserve ratios might have tightened, with the adoption of new banking regulations in the last few years that require greater disclosure?

[Timm]

Well thanks for the encouragement. MM pretty much fell on deaf ears, but it's sold better and better for the last 3.

I'm hoping this new film will make the topic more accessible #1 because it's half MM's length.

It is not galling to me at all. Do you know how lonely it's been out there on the convention and talk show circuit arguing endlessly with goldbugs who can't even get right what the US Constitution says about money creation and value? When Ellen Brown came on the scene I rejoiced. When I heard of this forum, I rejoiced. You have crazies here like Injin and the other anarchists, but you also have a bunch of well informed folk.

Now, about Brown. This is total news to me. I really know so little of your situation in Britain. Help me. Apparently BoE is issuing debt free money? How? Since when? Is that an effect of the nationalization?

bill

UK Quantitative Easing is money free of debt. I don't think it's connected with nationalisation.

http://www.housepricecrash.co.uk/forum/ind...howtopic=122428

[The Spaniard]

UK Quantitative Easing is money free of debt. I don't think it's connected with nationalisation.

http://www.housepricecrash.co.uk/forum/ind...howtopic=122428

No commercial bank would find it worthwhile to issue debt-free money, so I would say that nationalisation is a pre-requisite.

[Timm]

No commercial bank would find it worthwhile to issue debt-free money, so I would say that nationalisation is a pre-requisite.

Are you are pointing out that the BoE is not a commercial bank?

I took it that billstill was referring to the more recent nationalisation of NR and near nationalisation of RBS etc.

PS. Is the Fed not easing in the same way as the BoE?

[The Spaniard]

Are you are pointing out that the BoE is not a commercial bank?

I took it that billstill was referring to the more recent nationalisation of NR and near nationalisation of RBS etc.

PS. Is the Fed not easing in the same way as the BoE?

Yes I was, because I thought that Bill was referring to the 1946 nationalisation of the BoE, though he might have been referring to RBS etc. now you mention it.

Does the Fed issue any debt-free money? I thought that every dollar was debt-based(?)

Anyone know for sure?

[bagsos]

One of the things I have looked into not too deeply and not really got very far is who owned the BoE when it was nationalised? Any answers?

[bill still]

No, I meant BoE nationalization -- was it in the 1940s?

Are you are pointing out that the BoE is not a commercial bank?

I took it that billstill was referring to the more recent nationalisation of NR and near nationalisation of RBS etc.

PS. Is the Fed not easing in the same way as the BoE?

[bill still]

Yes, every dollar everywhere is debt based.

Yes I was, because I thought that Bill was referring to the 1946 nationalisation of the BoE, though he might have been referring to RBS etc. now you mention it.

Does the Fed issue any debt-free money? I thought that every dollar was debt-based(?)

Anyone know for sure?

[bill still]

My understanding --- and I hesitate to put it out here among such knowledgeable folk -- is that there were originally shares sold in 1694. Those shareholders were never revealed. How that transmuted down thru the years I cannot imagine.

In the US, The Fed is owned by every member bank and consequently every member bank's shareholders.

One of the things I have looked into not too deeply and not really got very far is who owned the BoE when it was nationalised? Any answers?

[Timm]

No, I meant BoE nationalization -- was it in the 1940s?

Whoops. My bad.

Yes, every dollar everywhere is debt based.

Wow. We really are out on a limb in the UK then.

My understanding --- and I hesitate to put it out here among such knowledgeable folk -- is that there were originally shares sold in 1694. Those shareholders were never revealed. How that transmuted down thru the years I cannot imagine.

(...)

The history of the BoE is a riddle wrapped in an enigma contained within a wotnot that has sent many men mad.

I have never seen conclusive evidence that it ever was properly nationalised, but most* accept that it was.

*of those that considered the question and remained sane, as opposed to those who never thought much about it

[yellerkat]

The history of the BoE is a riddle wrapped in an enigma contained within a wotnot that has sent many men mad.

Questions asked in the House, 6 May 1941: Hansard LINK:

Mr. Stokes

Mr. Speaker, in view of the fact that the Chancellor of the Exchequer is not clear on this point, may I ask you whether there is any means by which a Member of Parliament can extract the information for which I have asked?

§ Mr. Speaker

I am afraid I cannot answer that question.

[Timm]

Questions asked in the House, 6 May 1941: Hansard LINK:

*wry smile*

From the same Hansard page:

55. Mr. Stokes asked the Chancellor of the Exchequer whether he will introduce legislation to compel the Bank of England to prepare and print every six months, a list of the holders of its share capital, together with a supplementary list showing the beneficial owners thereof, and to make such lists available for the inspection by any member of the public, gratis, at the bank's premises within ordinary business hours?

Sir K. Wood No, Sir.

Sir Kingsley Wood is the largely forgotten inventor of the PAYE system. I have no idea why he died early. Kingsley Wood is most notorious for a response made to Leo Amery MP in late 1939, during the so called phoney war, when asked why the RAF, rather than just scattering leaflets could not incendiary bomb sizeable arms dumps known to be hidden in the Black Forest, which was very dry after a hot summer. A shocked Wood responded:

http://www.nationalreview.com/derbyshire/d...rint101601.html[/url] ']Are you aware it is private property? Why, you will be asking me to bomb Essen [the home of major arms manufacturer Krupp] next!.

Some sentences have been copied.

[FreeTrader]

Do you think interest rates will go up then as they should? Or will they decide that inflation targeting isn't a good idea and blame the recession on it. Then they won't have to put rates up and just rob savers even more.

If you had asked Mervyn King that question today at the Inflation Report press conference he'd have told you forcefully that the BoE was committed to holding inflation to the 2% target and that market expectations were currently overestimating future inflation rates.

The problem for the BoE (and many other central banks) is that the tough posturing that we've seen in speeches and other communications over the past few years has turned out to be empty rhetoric. Personally I don't think this has been disingenuous conduct on the part of the CBs – I think they really meant what they said – but when confronted with reality they have backed off from their former hard-line stance on the grounds of political pragmatism.

The issue of moral hazard is perhaps the primary example. When Timothy Geithner (now US Treasury Secretary) was at the Fed he was considered an absolute hawk prior to the 2007 crunch. Donald Kohn, currently Fed Vice-Chairman, was very much in the same mould. Both repeatedly stated that the Fed recognised that unsound practises were proliferating in the financial system, and they warned that the Fed would not provide support to those institutions that were taking on undue risk. The fundamental consideration of moral hazard dictated that the Fed should allow institutions to fail if they had made bad decisions. Over here, Mervyn King and others made much the same argument.

And what happened? They bailed out the banks with little more than a murmur of protest. All that past lecturing and moral posturing proved to be...well, I'm looking for a sophisticated phrase here, but let's call it what it was...complete bullsh!t.

As a consequence, there's far more suspicion now about the willingness of central banks to make a stand against their political masters. The plain fact is that the events over the past couple of years have shown the CBs to be puppets of vested interests (primarily political) rather than independent guardians of monetary stability.

I watched the BoE press conference today and perhaps for the first time felt I was looking at the emperor without his clothes, particularly when Mervyn King dodged the question of monetisation of government debt (and he looked extremely cagey when he did so). Many others on this site have been seeing this for quite some time, so I'm arguably very naïve and I'm definitely late to the party. Nevertheless it disturbs me that I have finally lost both my respect for, and my trust in, the officials of the Bank of England.

This doesn't mean to say that we will get raging inflation over the next few years. I still feel that they are fighting forces that are beyond their control. Nevertheless I do now feel that the BoE does not have the interests of UK citizens at heart. It has the interests of the UK Government at heart, an entirely different franchise.

[As an addendum I'm sure most of you saw today the issue re JP Morgan and the 'inadvertent' mixing of client funds with proprietary funds ,which is now under investigation by the FSA. I could tell you a very interesting story about this, not relating to JPM but to a well-known UK institution. Unfortunately I'm bound under legal settlement to not disclose the nature of the incident. All I would say is that you should not assume that securities or monies held in UK custodial accounts actually exist. Of course, they normally exist when you demand them. But what happens if for some reason the institution concerned can't get its hands on the security concerned, even though it is legally meant to be holding it under FSA rules? And does the FSA actually care if that firm is in breach of those rules unless you threaten to take the issue public? Hmm, now therein lies a very educational tale...]

[bill still]

What do you mean out on a limb in the UK?

I was talking about the Fed. It is totally debt based.

About the nationalization, I was talking to my wife about at dinner tonight. I just can't see how it could be completely nationalized. That would mean

-- to me -- BoE would no longer be in control of monetary targets, the Parliament would be.

Whoops. My bad.

Wow. We really are out on a limb in the UK then.

The history of the BoE is a riddle wrapped in an enigma contained within a wotnot that has sent many men mad.

I have never seen conclusive evidence that it ever was properly nationalised, but most* accept that it was.

*of those that considered the question and remained sane, as opposed to those who never thought much about it